From Scientific Socialism to "IMF-ism," 1981-90

Somalia Table of Contents

Its socialist program in disarray and its alliance with the Soviet Union lost in the wake of the 1977-78 Ogaden War, Somalia once again turned to the West. Like most countries devastated by debt in the late 1970s, Somalia could rely only on the nostrums of the IMF and its program of structural adjustment.

In February 1980, a standby macroeconomic policy agreement with the IMF was signed, but not implemented. The standby agreements of July 1981 and July 1982 were completed in July 1982 and January 1984, respectively. To meet IMF standards, the government terminated its policy of acting as the last-resort employer of all secondary school graduates and abolished its monopoly on grain marketing. The government then prepared a medium-term recovery program consisting of a public investment program for 1984-86 and a phased program of policy reforms. Because the International Development Association (IDA) considered this program too ambitious, the government scaled down its projects, most notably the construction of the Baardheere Dam, which AID had advised against. The government abandoned its first reform program in 1984. In March 1984, the government signed a letter of intent accepting the terms of a new US$183 million IMF extended credit facility to run for three years. In a Somali Council of Ministers meeting in April, however, this agreement was canceled by one vote, as the soldier-ministers chafed at the proposed 60 percent cut in the military budget. The agreement also called for a further devaluation of the shilling and reductions in government personnel.

A new crisis hit Somalia in June 1983. The Saudi Arabian government decided to stop importing Somali cattle, and this ban soon was expanded to include sheep and goats. Saudi officials claimed that rinderpest had been detected in Somali livestock, making them unsafe. Cynics pointed out that Saudi businessmen recently had invested in Australian ranches and were seeking to carve out an export market for their product. In any event, the ban created a large budget deficit, and arrears on debt service started to accumulate. A major obstacle to expanding livestock and other exports was Somalia's lack of communications infrastructure: good roads and shipping facilities as well as effective telecommunications and postal services. Lack of banking facilities also posed a problem. Somalia could not easily avoid the medicine of structural adjustment.

In March 1985, in negotiations with the Paris Club (the informal name for a consortium of eighteen Western creditor countries), Somalia's debt service schedule was restructured, and the government adopted a reform program that included a devaluation and the establishment of a free market for foreign exchange for most private transactions. In November 1985, in conjunction with the Consultative Group of Aid Donors, a technical body of the Paris Club, the government presented its National Development Strategy and Programme with a revised three-year investment program. Western aid officials criticized this program as too ambitious. In June 1986, the government negotiated an agricultural sector adjustment program with IDA. In September 1986, a foreign exchange auction system was initiated, but its operation encountered severe difficulties because to its complete dependence on external aid. Many exchange rates applicable to different types of transactions consequently came into existence.

AID prepared a second-stage project report in 1986 that renewed the call for privatization. It praised the government for permitting the free importation of petroleum products, but chided the Somalis for not yet allowing the free marketing of hides and skins. AID put great pressure on the government, especially by means of lobbyists, to take action on legislation to permit private banking. To encourage the private sector further, AID was prepared to fund the Somali Chamber of Commerce if the Somali government would allow it to become an independent body. The 1986 report went beyond privatization by calling for means of improving the government's revenue collection and budgetary control systems. Building a government capable of collecting taxes, making policy reforms, and addressing fiscal problems became the new focus. Along these lines, AID encouraged the elimination of civil service jobs. As of in 1985, although 5,000 civil servants had been dismissed AID felt that 80 percent of the civil service was still redundant. AID officials, however, urged pay raises for those in useful jobs.

Somalia's Five-Year Plan for 1987-91 largely reflected the international pressures and incentives of the IMF and AID. Privatization was written into the plan, as were development projects that were smaller in scale and more easily implemented. By 1988 the government had announced implementation of many IMFand AID-encouraged structural adjustment policies. In regard to foreign exchange, the government had taken many intermediate steps that would lead to the merger of the pegged and market rates. As for banking, legislation had been enacted allowing private banks to operate. In public finance, the government had reduced its deficit from 10 to 7 percent of GDP, as had been advised, but acknowledged that the increased taxes on fuel, rent, and sales had been only partially implemented. A value-added tax on fuel imports remained under consideration, but the tax on rental income had been increased and the sales tax raised from 5 to 10 percent. The government continued to procrastinate concerning public enterprises, holding only informal discussion of plans to liquidate unprofitable enterprises.

The IMF corrected some of the worst abuses of the socialist experiment. With the devaluation of the shilling, the real cost of foreign grain became apparent to consumers, and the relative price of domestic grain rose. Rectifying prices induced a 13.5 percent increase in agricultural output between 1983 and 1985. Inflation was tamed as well, falling from an annual rate of 59 percent in 1980 to 36 percent in 1986. World Bank officials used these data to publicize the Somali success in structural adjustment.

The overall picture was not that encouraging, however. Manufacturing output declined, registering a drop of 0.5 percent per annum from 1980 to 1987. Exports decreased by 16.3 percent per annum from 1979 to 1986. Moreover, the 0.8 percent rise in GDP per annum from 1979 to 1986 did not keep up with population growth. World Bank estimates put Somalia's 1989 gross national product at US$1,035 million, or US$170 per person, and further estimated that between 1980 and 1989 real GNP per person had declined at 1.7 percent per year.

In the period from 1987 to 1989, the economic results of agricultural production were mixed. Although corn, sorghum, and sugarcane were principal crops, livestock and bananas remained major exports. The value of livestock and banana exports in 1989 (the latest year for which data were available in May 1992) was US$26 million and US$25 million, respectively. Livestock, consisting primarily of camels, cattle, goats, and sheep, served several purposes. The animals provided milk and meat for domestic consumption, and livestock, hides, and skins for export.

As a result of the civil war in many areas, the economy deteriorated rapidly in 1989 and 1990. Previously, livestock exports from northern Somalia represented nearly 80 percent of foreign currency earned, but these exports came to a virtual halt in 1989. Shortages of most commodities, including food, fuel, medicines, and water, occurred virtually countrywide. Following the fall of the Siad Barre regime in late January 1991, the situation failed to improve because clan warfare intensified. Statistical data were minimal, however, for the period from 1990 onward.

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Source: U.S. Library of Congress