HomeReportsBureau of Economic and Business Affairs2019 Investment Climate Statements...Somalia

# 					2019 Investment Climate Statements: Somalia			

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													Executive Summary											

                -  Executive Summary 
                -  1. Openness To, and Restrictions Upon, Foreign Investment   
                -  2. Bilateral Investment Agreements and Taxation Treaties   
                -  3. Legal Regime   
                -  4. Industrial Policies   
                -  5. Protection of Property Rights   
                -  6. Financial Sector   
                -  7. State-Owned Enterprises   
                -  8. Responsible Business Conduct   
                -  9. Corruption   
                -  10. Political and Security Environment   
                -  11. Labor Policies and Practices   
                -  12. OPIC and Other Investment Insurance Programs   
                -  13. Foreign Direct Investment and Foreign Portfolio Investment Statistics   
                -  14. Contact for More Information   

## Executive Summary

Somalia had been without a functioning government for most of the last three decades. The country was torn apart by clan based warfare that destroyed  political, social and economic institutions. The central government collapsed in 1991 and after a decade of lawlessness, international diplomatic efforts were re-energized and in 2000 Djibouti hosted a political conciliation process that led to the formation of Transition Federal Government (TFG), which then had to battle an Islamic movement.  The remnant of that struggle, al-Shabaab, proves to be the biggest threat to a stable Somalia today. 

Somalia moved from a transition government to a globally recognized government in September 2012, after a new president was elected within the country for the first time since 1991.  In another successive peaceful transfer of power the current government was elected in 2017, and has pursued an aggressive policy of fiscal reform. Despite continued progress, the country still faces serious security challenges and political uncertainty.  The leadership of the federal government and federal member states are in constant political tussle that limits efforts at state building while al-Shabaab remains a threat to stability and security. 

Generally, the government has a positive attitude toward direct foreign investment, however, the current investment climate requires improvement before being ready foreign investment.  Formal economic activity is largely restricted to Mogadishu and the other regional capitals that are under the control of the federal government or regional administrations. Corruption is rife in all government sectors and civil courts are largely nonfunctional.  Transparency International’s perception index ranked Somalia as the most corrupt country in the world again for 2018. Somalia’s external debts stands at USD 8 billion USD and the country has not serviced its debt since the fall of the central government in 1991.

Despite this, there has been a positive economic trend over the past couple of years.  According to the IMF, economic growth has rebounded, inflation has slowed and the trade deficit has narrowed.  Accordingly, data through November 2018 show domestic revenue reached USD 161 million, 31 percent higher than the same period in 2017, and the overall cash fiscal position showed a surplus of USD 8 million, according to the IMF.  Economic sectors such telecommunication, agriculture and construction have experienced steady growth in the recent years. Further, Somalia’s government is inviting bids for an upcoming offshore hydrocarbon licensing round.

The IMF is currently helping Somalia reach debt relief under the Heavily Indebted Poor Countries (HIPC) program, under which Somalia has been performing well and meeting benchmarks.  If the country continues its track record of reform and sound economic policies, it is on track to reach the critical Decision Point for debt relief in early 2020. This will make the country eligible to obtain financing from international financial institutions and to avoid the country slipping back to arrears. 

*Table 1: Key Metrics and Rankings*

							1. Openness To, and Restrictions Upon, Foreign Investment					

**Policies towards Foreign Direct Investment**

The Government of Somalia at the federal and regional level has a positive attitude towards foreign direct investment (FDI).  However, due to political tension, sporadic attacks from insurgency groups, a lack of transparency and widespread corruption in sectors of government Somalia currently remains an unfavorable place for direct foreign investment.

The country passed an Investment Law in 2015 on the promotion and protection of foreign investments.  According to the Somali Chamber of Commerce and Industry, the law aims to offer favorable incentives to foreign investors such as tax advantages and guarantees against expropriations.  Under the law, priority is given to foreign investments in the areas of agriculture, livestock, fishing, mineral resources, and industrial activities. More information can be found here http://moci.gov.so/en/investment-law-2/ http://moci.gov.so/en/investment-law-2/  

**Private Ownership and Establishment**

There are no laws in place currently that deal with the right to private ownership and limits on foreign control. 

**Other Investment Policy Reviews**

There has not been a third-party investment review undertaken in Somalia. 

The FGS is not a member of World Trade Organization (WTO) or the Organization for Economic Cooperation and Development.  In August 2017, Somalia communicated its intent to join the WTO and has since been working through the accession stages including formation of the technical team to lead the negotiations and preparing the Memorandum on the Foreign Trade Regime. 

The FGS rejoined the Common Market for Eastern and Southern African Community (COMESA) in July 2018.  As a member, Somalis is required to undertake several institutional, policy, and regulatory reforms to meet COMESA free trade protocols and to trade with its member countries. 

The FGS has also applied for East African Community (EAC) membership and is now awaiting the submission of the verification report by the EAC Secretariat before the next Heads of State Summit, scheduled in early 2020, for a decision.  It is highly likely the EAC will approve Somalia to be the seventh member, and this will open up the opportunity for Somalia to formalize trade with its neighbors and allow easy movement of Somali citizens to other EAC member states through acquiring the common EAC passport.

**Business Facilitation**

The Ministry of Commerce and Industry recently launched a one-stop shop business registration website. This will reduce time and costs for registering a business in Somalia.  However, the online registration will only be helpful if necessary laws and regulations, such as the Company Law, are in place. The Company Law is currently before parliament for approval. 

World Bank ranked Somalia 190 out 190 in its 2018 Ease of Doing Business survey.

**Outward Investment**

The Somali government does not have a policy that promotes or incentivizes outward investment.

							2. Bilateral Investment Agreements and Taxation Treaties					

Somalia does not currently have bilateral investment or taxation treaties with United States or any other country. 

							3. Legal Regime					

**Transparency of the Regulatory System**

Somalia’s regulatory system is largely nonexistent. The country’s 2012 provisional constitution is currently under review.  Many business, taxation, and investment regulations remain from the pre-1991 government and are often ignored or not enforced. 

**International Regulatory Considerations**

Somalia is a member of Inter-Governmental Authority on Development (IGAD) and recently obtained provisional membership in the Common Market for Eastern and Southern Africa (COMESA) with a number of conditions to fulfill before resuming full membership.  Somalia is a member of Arab League and Organization of Islamic Cooperation (OIC). Somalia is not a member of the World Trade Organization (WTO).

**Legal System and Judicial Independence**

The law derives from four sources, including the Italian and British legal systems, customary xeer principles, and Islamic law.  The majority of citizens rely primarily on customary dispute resolution (xeer), Sharia courts and local imams, or private mediators to resolve most disputes.  The provisional constitution establishes a judiciary system that is independent of the executive and the legislature, however, the necessary laws to operationalize this structure are not in place and the legal system revolves around the executive.  Somalia’s legal system is based in Islamic law which includes mechanisms for addressing commercial disputes. However, due to the prolonged absence of a functioning central government and judicial system, businesses and individuals often resort to Somali customary law.  This informal system provides a framework for settling disputes, including business disputes, through clan and religious leaders. 

**Laws and Regulations on Foreign Direct Investment**

No laws or regulations related to foreign direct investment are currently in place. The Ministry for Commerce and Industry is working on these laws and there is limited information on regulating foreign direct investment. 

**Competition and Anti-Trust Laws**

Competition and Anti-Trust laws do not exist in Somalia.  Local business disputes are informally settled through the intervention of traditional elders. 

**Expropriation and Compensation**

Somalia is still rebuilding from decades of lawlessness and the legal and regulatory environment is still unsophisticated. There are no laws or acts that define how government or authority can expropriate private properties.  However, the provisional constitution states, “The state may compulsorily acquire property only if doing so is in the public interest. Any person whose property has been acquired in the name of the public interest has the right to just compensation from the State as agreed by the parties or decided by a court.”  Many government-owned properties ended up in private hands illegally after the 1991 collapse of the central government and the current government has now indicated an interest in repossessing these properties.

**Dispute Settlement**

*ICSID Convention and New York Convention*

Somalia is not a party to the convention on the settlement of investment disputes between States and Nationals of other States, known as the International Centre for Settlement of Investment Disputes (ICSID), or the New York Convention of 1958.

*Investor-State Dispute Settlement*

The government has limited capacity to enforce laws or settle disputes domestically. Members returning from the diaspora, though they operate as Somali businesses rather than foreign entities, own many businesses in Somalia.  Some of the basic laws that would provide the foundation for investor-state dispute settlement, such as the proposed company law, are yet to be enacted and the government is not a signatory to any internationally binding treaty or investment agreement to arbitrate investment disputes.  The government has no bilateral investment treaty or free trade agreement with an investment chapter with United States. There have been no investment disputes involving U.S. persons or other foreign investors for the past 30 years. 

*International Commercial Arbitration and Foreign Courts*

Somalia government is not signatory to any convention and local courts have limited capacity to enforce dispute resolutions arbitrated by them.  Domestically, people normally resort to a local council of elders and clan elder, or religious leader to settle disputes. In some instances, people seek out al-Shabaab and other outlawed groups to intervene in dispute resolution locally.

**Bankruptcy Regulations**

Somalia has no bankruptcy laws. 

							4. Industrial Policies					

**Investment Incentives**

There are no formal investment incentives available to foreign investors and the government does not issue grants or jointly finance foreign direct investment projects. There are no laws or acts that support investment incentives or grants to foreign investors.  However, informal and ad hoc tax exemptions are used as investment incentives. The Director of Revenue at the Ministry of Finance is legally the authority for granting them, but in practice ministers and often the Prime Minister have offered tax exemptions to foreign investors. 

**Foreign Trade Zones/Free Ports/Trade Facilitation**

There are no laws or policies that designate any area as a free trade zone or area with special tax treatment.  Somaliland is in the process of finalizing a free trade zone around the Port of Berbera, funded jointly by the Somaliland government and UAE-based DP World. 

**Performance and Data Localization Requirements**

The Somali government does not mandate local employment. There are no laws inhibiting foreign investors or foreign employees.  Currently there are few foreign companies operating in Somalia and those that do that are mostly based within the confines of the secure compound surrounding Mogadishu’s airport.  Most of these companies are contracted by either the government or other international organizations to undertake infrastructure and security-related projects. DP World operates in Somaliland and Puntland to implement port expansion projects in those regions.  

							5. Protection of Property Rights					

**Real Property**

When the government collapsed in 1991 there was widespread conflict over land, land-grabbing by warlords, and huge displacement of local populations, especially in southern Somalia.  While there is more security in Somaliland, the movement of internally displaced persons within the region and the return of refugees from outside the country has also contributed to significant land disputes.

The various systems used to manage land are complex and include customary rules and traditions used by Somalia’s clan-based society, Western style laws from the periods of colonization by the Italian and British, remnants of the authoritarian rule of the Barre regime, and Islamic law and tradition.  While there have been no federal efforts to catalogue property ownership and title land, some Federal Member States have made efforts to document land ownership for the purposes of taxation. In addition, land within the major cities, including Mogadishu, is generally documented for taxation purposes. There are no specific regulations regarding land leases or acquisition by foreign investors. 

The national legal framework related to land tenure is largely limited to Article 26 of the provisional constitution which states:

(1) Every person has the right to own, use, enjoy, sell, and transfer property; and

(2) The state may compulsorily acquire property only if doing so is in the public interest. Any person whose property has been acquired in the name of the public interest has the right to just compensation from the State as agreed by the parties or decided by a court.

The autonomous state of Somaliland has a more advanced land tenure legal framework and dispute mechanisms. The Somaliland legal framework addresses urban land management, agricultural land ownership, urban land dispute resolution, and civil procedures for hearing property disputes. 

**Intellectual Property Rights**

There are no laws protecting or enforcing intellectual property rights (IPR).  The Ministry of Commerce and Industry is currently drafting an IPR law and is in the process of formalizing the Somalia Bureau of Standard (SBS) as the enforcement authority for any future IPR laws. There are no official reports on seizures of counterfeit goods, but the perception is that almost all the goods coming into the country are counterfeit. The government has no capacity to seize or track counterfeit goods entering the country. 

							6. Financial Sector					

**Capital Markets and Portfolio Investment**

Somalia has no structured financial system.  It also does not have any form of portfolio investment financial products in the market.  The country has no stocks, government bonds, or corporate bonds. 

**Money and Banking System**

For the last two decades there has been no functioning banking system in Somalia.  Instead, there were informal money transfer systems known as hawalas that allowed the diaspora to transfer money to, from, and within Somalia.  The Central Bank of Somalia (CBS) was re-established in 2009 and is slowly developing the capacity to oversee the licensing and supervision of the money-transfer businesses and commercial banks.  The CBS has registered 7 hawalas and 11 banks to provide financial services. Five of the banks are newly licensed as of April 2019. 

Most Somalis do not have access to formal bank services due to the lack of available branches in many parts of the country as well as difficulty for many Somalis to obtain acceptable forms of identification to open up bank accounts.  There is limited data or information regarding the operations and assets of these privately owned banks and the CBS has no capacity or competency to regulate them to the required standards. At this time no foreign banks or any branch of a foreign bank operate in Somalia, however the Central Bank licensed an Egyptian bank in April 2019 but it is not operational. 

In addition, a few Kenyan banks have recently shown interest in setting up operations in Somalia and are currently undertaking market assessments.

Somalia’s financial risk profile remains high due to legitimate concerns about money laundering and terrorism financing.  The maturity of the financial system is stymied by the lack of any national identification, creating challenges for banks and money transfer services to verify client identity.

**Foreign Exchange and Remittances**

*Foreign Exchange*

While the official currency for Somalia is the Somali shilling, there is very limited use of the currency in the country’s dollarized economy.  In addition, a significant portion of day to day transactions are conducted through phone-based mobile money managed by the telecommunications sector.  According to the IMF, almost all the current shilling notes in Somalia are counterfeit since the CBS has not issued any new notes since 1991. There is no restriction or limitations in converting or repatriating funds associated with outside investment. The shilling is volatile and fluctuates rapidly against the dollar.  Since there is no government agency which determines monetary policy at this time, the exchange rate is set by several currency traders located in Mogadishu’s Bakara market. The government is planning major reforms in 2019 and 2020 for the CBS and is seeking to reintroduce, in very limited supply, a modernized shilling.

*Remittance Policies*

There are no remittance policies in place at the moment.

**Sovereign Wealth Fund**

There are no sovereign wealth funds or any other state-owned investment fund.

							7. State-Owned Enterprises					

There are no fully or partially state-owned active enterprises in Somalia.

**Privatization Program**

The government does not own any business entity, therefore there are no state-owned entities to privatize. The World Bank has supported development of a public-private partnership law but parliament has not yet acted on the draft law. 

							8. Responsible Business Conduct					

There are no laws or regulations that encourage corporate social responsibility or define responsible business conduct.

							9. Corruption					

The provisional constitution criminalizes several forms of corruption that include abuse of office, embezzlement of funds, and bribery, however there is no legislation  that would allow the government to charge and prosecute cases of corruption. Somalia’s procurement legislation has provisions to address potential conflicts of interest in awarding government contract, but enforcement is lax.  Corruption is rampant in all sectors of government, particularly government procurement. Transparency International (IT) ranks Somalia 180 out 180 in its 2018 perceptions of corruption index.

Somalia’s current government has waged a campaign against public corruption and graft, resulting in high profile dismissals and arrests over the past two years.  However, without a robust asset declaration mechanism, an updated penal code, and a functioning criminal justice system, including police and prosecutorial services, very few penalties exist for corrupt activities.  Efforts to create a national anti-corruption are underway, but moving slowly.

Legislation on government procurement was passed in 2015 and officially, all government contracts must go through an open tender process unless they meet specified conditions for limited competition.  However, in practice this has been slow to be implemented and lucrative contracts are still awarded based on close relationships and favors. Moreover, the FGS has not yet established a Procurement and Concessions Board as required in the Procurement Act, which makes it difficult to ensure transparency and accountability in government procurement activities.  An interim Procurement Board is in place, but meets irregularly. 

- https://mof.gov.so/public-procurement  

*Resources to Report Corruption*

Currently there is no central agency or office where whistleblowers can report corruption. There is no legal framework to protect whistleblowers. The FGS has not established an Office of the Ombudsman, as provided for in the provisional constitution. In December 2018, the Ministry of Justice and Judiciary Affairs signed a Project Initiation Plan (PIP) with UNDP to help the government strengthen its institutions to fight corruption and promote accountability. This also includes a plan to set up a National Anti-Corruption Commission and develop the necessary laws.

							10. Political and Security Environment					

Somalia has a long history of political and clan-based violence that destroyed the basic state institution that supports economic development.  Most of Somalia’s infrastructure was destroyedduring the 30 years of civil war and violence.  While pockets of stability are slowly growing, Somalia remains an insecure environment.  Attacks by al-Shabaab, ISIS, regional militias and others can impact individuals and businesses throughout the country.  The U.S. State Department advises U.S. citizens against traveling to Somalia.

							11. Labor Policies and Practices					

Somalia is emerging from three decades of political instability and economic hardship that destroyed government institution, hence hard data to analyze the current labor market in Somalia is lacking.  According to the UNICEF 2017, 75 percent of the population is under the age of 30 with 67 percent youth unemployed. There is a mismatch between the skills the youth possess and the requirement of the labor market. 

The International Labor Organization (ILO) is currently in the process of completing the first survey of Somalia’s labor force.  Most labor is unskilled and the majority of Somalis work in the informal sector or agriculture. All sectors of Somalia’s economy lack capacity due to the lack of skills and education in the potential workforce.  

There have been some international projects to improve vocational training, but these reach a small portion of the workforce.  The private sector, most notably the major telecommunications companies, maintain their own training programs in order to meet the needs of their workforce. Somalia current does not have a formal labor or employment policy that would limit the hiring of foreigners.  There are currently no formal labor laws, so there are no restrictions on how the private sector meets its labor needs. There is no social safety net policy. 

Past conflicts between the government and labor unions resulted in a formal complaint to the ILO in 2018.  Since the filing of that complaint, the government has stopped limited the activities of the labor unions and has worked cooperatively with the labor union umbrella organization to draft labor policies and codes. 

The ILO established an office in Mogadishu in 2018 to address the significant gaps between Somalia’s labor practices and international standards.  In February 2019, Somalia’s government, with the support of the ILO and the labor unions, finalized work on a draft employment policy and updated labor codes.  This work is expected to conclude in 2019 and is aimed at providing stability and clarity to employers and investors. 

							12. OPIC and Other Investment Insurance Programs					

OPIC currently does not fund any projects in Somalia. There are no active agreements in Somalia.

							13. Foreign Direct Investment and Foreign Portfolio Investment Statistics					

*Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy*

*Table 3: Sources and Destination of FDI*

Data not available.

*Table 4: Sources of Portfolio Investment*

Data not available.

							14. Contact for More Information					

Shella BiallasEconomic/Commercial OfficerU.S. Mission to SomaliaEmail: Biallassa@State.gov

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### On This Page

                    -  Executive Summary 
                    -  1. Openness To, and Restrictions Upon, Foreign Investment   
                    -  2. Bilateral Investment Agreements and Taxation Treaties   
                    -  3. Legal Regime   
                    -  4. Industrial Policies   
                    -  5. Protection of Property Rights   
                    -  6. Financial Sector   
                    -  7. State-Owned Enterprises   
                    -  8. Responsible Business Conduct   
                    -  9. Corruption   
                    -  10. Political and Security Environment   
                    -  11. Labor Policies and Practices   
                    -  12. OPIC and Other Investment Insurance Programs   
                    -  13. Foreign Direct Investment and Foreign Portfolio Investment Statistics   
                    -  14. Contact for More Information   

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