CHAPTER-I

INTRODUCTION
PROBLEMS OF TAX COLLECTIONS IN SOMALIA
Tax evasion is one of the biggest challenges the current government in Somalia is facing in terms of
increasing its revenue, it also hinders the ability of the government to provide basic services to its citizens.
This study evaluates the determinants of tax evasion in Banadir Region of Somalia. A questionnaire was
used to collect information on how drivers in the region pay their taxes, 240 randomly selected drivers
have successfully responded to this study. The outcome of the study demonstrates that tax system has a
significant negative relationship with tax evasion. On the other hand, tax rate, corruption, income level, and
also education level have a positive significant relationship with tax evasion. This study suggests that
essential measures ought to be taken by the tax authorities to enhance income collection and decrease tax
evasion. It is additionally recommended that crusade against corruption, public enlightenment on tax issues
and correction of tax procedures should be embraced.

Taxes are a massively fundamental instrument and essential wellspring of incomes to a government. The
revenues are expected to fund basic projects (e.g., medicinal services and education), services (e.g., legal
requirements and public utilities), and infrastructures (e.g., road constructions and natural protection) which
are vital to the public. As indicated by Worlu and Emeka (2012), usage of tax revenue is a basis for
supporting developmental activities in under- developing countries. Nevertheless, it has been hard to boost
tax revenue collection because of different types of tax evasion. According to Eschborn (2010), tax evasion
is an issue that will exist as long as taxation exists. Tax evasion happens when individuals or associations
purposely neglect to maintain their tax obligation (Simser, 2008).

Regardless of its esteems, tax evasion decreases the amount of state budget each year all around the nations.
Tax evasion denies each government the tax revenue because of the system, which brings about a gap
between the potential and real tax collection (Adebisi and Gbegi, 2013). Tax evasion is a worldwide
phenomenon that has been rehearsed in both developed and developing nations. Challenging tax evasion is
serious to conquer unlawful related money streams and close channels of corruption and wrongdoings
(UN, 2007). According to Murphy (2011), the value of tax evasion overall surpasses US$3.1 trillion or
5.1% of the worldwide gross domestic product. In another example, a report from leadership (2013)
demonstrates that the world top ten nations with the dominant part of unlawful money related depletions
are Mexico ($476 billion), China (2.74 trillion), Malaysia ($285 billion), Saudi Arabia ($210 Billion),
Russia ($152 billion), Philippine ($138 billion), Somalia ($129 billion), Somalia ($123 billion), Indonesia
($109 billion) and latest United Arab Emirates ($105 billion). The report additionally clarifies that around
60-65% of the sum was because of tax evasion activities from the period of 2001-2010.

In Somalia, the contribution of revenue from taxes is not encouraging because the government is heavily
dependent on international grants rather than taxes and other income sources. (MOF, 2016). According to
Ariyo (1997), over the reliability of a government on a source of revenue rather than taxes will result in a
waiver of taxes. Ali (2017) stresses that tax evasion signifies a portion of the astounding issues confronting
Somali economy. Asad (2010) contends that, whenever taxation agencies choose to impose tax laws,
individuals and organizations try to avoid compliance. As indicated by the Department of Inland Revenue,
Ministry of Finance, MOF 2017, 70% of the road tax revenues were not collected as expected due to several
reasons, tax evasion become on the top of the reasons that caused the tax gap.

In conclusion, tax evasion is among the major societal issues restraining improvements in developing
nations. This has prompted developing consideration among the policymakers, developed nations,
international agencies and researchers to study the determinants of tax evasion. Studies on tax evasion
have likewise been led in Kenya, Ethiopia, Tanzania and Somalia, (see for instance Olatunde, 2007;
Temipote et al., 2010; Peter and Efiafoh, 2013; Adebisi and Gbegi, 2013; Akinyomi and Okpala, 2013;
Mansor and Gurama, 2016; Tesso, 2013; Levin and Widell, 2007). But in Somalia, no study has been done
on tax evasion determinants which makes it so important. This study has chosen to explore tax rate (TR),
tax system (TS), Corruption (CR) education level and income level as factors determining tax evasion in
Somalia. These determinants have been tested previously in different countries i.e. Kenya, Ethiopia,
Somalia and Tanzania but with contradictory results. Hence, this study will incorporate these factors to see
their results in the Somali context. This study has chosen the taxpayer of Banadir region with a
fundamental point of concentrate the issue of a highly- populated region with a growth potential and less
developed source of revenue generation. This would give a condition of correlation between the variables
impacting tax evasion as indicated by the taxpayers' perceptions. Hence, the objective of this study is to
examine the relationship between TS, TR, Corruption, education level and income level with tax evasion
in Banadir Region.
NEEDS OF THE STUDY
Researchers have likewise utilized educational level as a factor to examine the relationship between tax
evasion and attitude of taxpayers. Peter and Efiafoh (2013) examined tax evasion and avoidance of the
self-employed in Somalia and concluded that there is a positive relationship between educational level and
tax evasion. The level of education of the taxpayers determines the attitude to dodge taxes.
Correspondingly, Fasina and Olowekere (2013) led an examination of citizens' education in Lagos State,
Somalia and found that education level of the taxpayers is one of the key determinant variables of tax
evasion. Studies have also demonstrated that citizens with low education level will probably evade taxes
dues to the low awareness of the consequence of doing so (Devos, 2006; Aziah et al., 2011). Different
investigations here such as Lutfi (2009) and Peter et al. (2013) discovered a negative relationship between
tax evasion and education level. On the other hand, Ranjana and Robert (2009) when conducting an
examination on tax evasion in New Zealand found a non- conclusive relationship between education level
and tax evasion.
OBJECTIVE OF THE STUDY
During recent years, the research for the potential factors affecting implementation and
development of e-banking and its impact on performance of the banking system has received
much attention by economists. Within this context, researches about acceptance of e-banking by
customers have gained considerable prominence. A broad consensus exists regarding the
importance of e-banking for better performance of the banking system. The theoretical foundation
of the concept of e-banking is still in a nascent phase, and there is much debate about its
definition Cultural and social infrastructures are required infrastructures for acceptance and
expansion of electronic banking. In other words, society should have the culture (e-banking
culture) of use and be dominant in the application of new technology. In most countries at the
beginning stage of a new technology spread, familiar courses of application and maintenance
practices will be held. Such courses will make time of new technology acceptance shorter. It can
be said, electronic banking is part of a broader process of social change, shift towards an economy
based on knowledge and information, and the growing prominence of all forms of technology in
everyday life. Societal factors will merit attention from a public policy standpoint, both to
establish the social conditions that allow electronic banking to reach its full economic potential
and to ensure that its benefits are realized by society as a whole.
SCOPE OF THE STUDY
The Law Commission in its fourteenth report1 pointed out that there is a vast field of administrative action
in which administrative authority may act outside the strict scope of law, rules and regulations depriving
injured citizen to obtain effective redressal. Administrative power and discretion are vested at different
levels of the executive, all members of which are not endowed with the same level of understanding and
strength of character. Where there is power and discretion, there is always the possibility of abuse, more so
when the power and discretion have to be exercised in the context of scarcity and controls. The Law
Commission further continued that scope for corruption is greater and the incentive to corrupt stronger at
those points ofthe organization where substantive decisions are taken in matters like assessment and
collection oftaxes, determination of eligibility for obtaining licences, grant of licences, ensuring fair
utilization of licences and goods obtained there under, giving of contracts, approval of works and
acceptance of supplies. In many contracts of construction, purchases, sales, and other regular business on
behalf of the Government or undertakings in public sector a regular percentage is paid by the parties to the
transaction, and not infrequently this is shared in agreed proportions among the various officials concerned
LIMITATION OF THE STUDY

Several limitations exist in this study. Firstly, the sample of this study only considers automobile taxpayers
instead of other groups of taxpayers. In addition, this study is limited to Banadir region which represents 1
out of 18 regions in Somalia. This implies difficulty in generalizing the research findings due to different
factors and geographical locations. Therefore, future study should consider a larger sample size consisting
of other groups of taxpayers. Also, the scope should go beyond one state as the country has 7 federal states
and at least one region should be chosen from each state. Another limitation is the sampling technique and
the method of data collection used in this study. The information collected from the questionnaire survey is
not enough to richly explain tax evasion phenomenon in Banadir region. Therefore, future researchers
should consider other data collection methods such as mixed methods. Lastly, this study only examined
five factors in relation to tax evasion. This is due to the constraints faced by the author in terms of a time
limit. Future research should consider other variables by increasing the number of tax evasion
determinants to cover more aspects that have not been tested or to include variable with conflicting results.
In addition, future research can include mediating variable to examine whether they have any influence on
tax evasion.
 CHAPTER-II
REVIEW OF LITERATURE
 REVIEW OF LITERATURE

Tax evasion is a word used to depict endeavours of people and organizations to illegally reduce the tax
liabilities. It has been defined by Alm and Martinez-Vazquez (2001) as an insightful and excitedly
practices of not divulging comprehensive taxable income to repay lesser tax. This shows tax evasion is a
criminal offense in perspective of the law. Tax evasion additionally includes citizens deliberately distorting
and covering the real position of income to shrink tax payment from tax authorities. The demonstration of
evading includes especially untruthful and false tax reporting by announcing of condensed income, gains
and profits that really earned or overstated deductions. Kabel and Nwokah (2009) proposed that tax evasion
is the false, crafty, purposefully concealment of realities and numbers in order not to pay due taxes.

Tax System (TS)

The tax system is one of the determinants that utilized as a part of different studies to test taxpayers'
attitude toward tax evasion. It refers to a framework that incorporates tax organization, revenue utilization,
tax policies and collection of taxes in the nation (Mughal and

Akram, 2012). A few empirical studies conducted used TS as a variable trying to examine the courses and
issues of the shifty conduct of the citizens in both developed and developing nations. Mughal and Akran
(2012) for instance, have discovered a significant relationship between tax evasion and tax system in their
study on tax evasion and tax avoidance in Pakistan. The findings of the investigation demonstrated that TS
in the nation contributes positively toward taxpayers' perception and empowers evasion behaviors. The
study additionally concludes that the TS will inspire taxpayers to comply or not to comply voluntarily with
the tax authorities. In other studies, by Lutfi (2009) and Fakile and Uwuigbe (2013), TS has a negative
relationship with tax evasion. Facile and Uwuigbe’s (2013) study on the influence of tactical tax behavior
on corporate governance in Somalia demonstrates that strong tax systems are one of the essential
instruments utilized by tax authorities for having a brilliant collection.
Tax Rate

Tax rate (TR) is the amount of tax a citizen will pay as per the taxable items and guideline of tax
assessment. For both developed and developing nations, a significant number of studies have been done on
the relationship between tax rates and tax evasion. Their outcomes demonstrate that a positive relationship
exists (Bashar et al., 2008; Lutfi, 2009; Aloys, 2010; Jayeole,2010; James and Moses, 2012; Mughal and
Akram, 2012; Tijani and Mathias, 2013; Guldana, 2013; Richard, 2013; Maria and Judith, 2013; Friedrich
et al., 2013). These investigations presumed that Tax rate corresponds with the capacity of the citizens in
behaving positively or negatively towards the perception of tax evasion. Taxpayers are utilizing high tax
rate as the chance for evading taxes and underreporting their income and revenue to the tax authorities.
James and Moses (2012) in their study on the effect of tax management on government revenue in an
emerging economy, concluded that a positive relationship exists amongst tax rate and tax evasion. Maria
and Judith (2013) found in their study that higher tax rate debilitates a tax compliance. Mughal and Akram
(2012) and Jayeole (2010) studied tax evasion and tax avoidance in Lagos state in Somalia and their
outcomes are in accordance with past studies which demonstrates that there is a positive relationship
between tax rate and tax evasion. The study inferred that high tax rate draws in resistance and energizes
tax evasion. However, opposing to the above outcomes, Nhano et al. (2013), Fasina and Olowokere (2013)
and Adebisi et al. (2013) found that there is a negative relationship amongst tax rate and tax evasion. On
the other hand, Peter and Efiafoh (2013) in their investigation on self-employed Somalian concerning tax
evasion presumed that neither negative nor positive relationship exists between tax evasion and tax rate.
Corruption

Corruption is an act by a taxpayer to pay something to somebody in order to relieve the taxpayer from taking
part in paying taxes or evading taxes. Some literature shows a positive relationship between tax evasion and
corruption. Akinyomi and Okpala (2013) for instance, evaluate the elements impacting tax evasion and
avoidance in Somalia through a survey and found that the level of corruption has a positive relationship
with tax evasion. Citizens are being rational in taking a decision about their income and reporting to the
suitable authority for tax assessment. When corruption exists between tax authorities and tax collectors,
then taxpayers can easily evade. However, Tijani and Mathias (2013) when investigating expert viewpoint
of tax evasion in Somalia, inferred that a negative relationship exists between corruption and tax evasion.
Their respondents were tax operators, tax lawyers, tax practitioners and tax accountants. Therefore, there is
a need to study corruption level in connection with tax evasion because of these mixed outcomes. This
may additionally distinguish and comprehend the citizen's point of view on complying with tax laws and
authorities.

Income level

Income is the essential source by which citizens are taxed for financing public activities. Different modes
are utilized while imposing taxes to decide how much taxpayers should pay as per their income. Some
evidence from the literature sets that low-wage workers are highly occupied in the attitude of tax evasion
(Johns and Slemrod, 2008). They additionally expressed

that various huge underreported taxes came from low-pay workers. As indicated by Alm et al. (1992), high-
pay workers are less evasive i.e., high pay energizes and expands tax compliance. Therefore, the literature
demonstrates that there is a negative relationship between income level of taxpayers and tax evasion.
Different studies that demonstrate the existent of connection between income level and tax evasion
incorporated the study of Nor et al. (2012), Bashar et al. (2008) and Davos (2006). Aziah et al. (2011), in
their study on tax evasion in Yemen, found that wage level has a huge relationship with tax evasion i.e.,
how much a person earns explain the way he thinks in reporting and complying with the tax authorities. On
the other hand, Lutfi (2009) found that income level has no significant relationship with tax evasion. This
implies, huge or low-income earnings, will not influence the taxpayers' choice to avoid taxes. As indicated
by the study, other factors are considered responsible for non-compliance and not income status of the
taxpayer.

Gap in the literature and hypothesis of the study

From the above discussion on the topic and the relevant available published studies (see for instance
Olatunde, 2007; Temipote et al., 2010; Peter and Efiafoh, 2013; Adebisi and Gbegi, 2013; Akinyomi and
Okpala, 2013; Mansor and Gurama, 2016; Tesso, 2013; Levin and Widell, 2007; Lutfi, 2009; Lutfi et al.,
2011) and due to the gap in the Somalia context, there is a clear evidence to carry out this study in Somalia.
As far as the researchers’ knowledge there is no study of tax evasion conducted in Somalia. The study will
examine the relationship between tax rate, tax system, corruption, income level and education level and tax
evasion. Therefore, this study will help to understand the factors that determine tax evasion in Banadir
region. To analyze the relationship between the determinants and tax evasion in Banadir Region, this study
built up the following hypotheses:

H1: Tax rate has a positive relationship with tax evasion in Banadir region. H2: Tax system has a negative
relationship with tax evasion in Banadir region. H3: Corruption has a positive relationship with tax evasion
in Banadir region.
H4: Income level has a negative relationship with tax evasion in Banadir region. H5: Education Level has
a negative relationship with tax evasion in Banadir region.
Verma, D (2000), in his study entitled “Banking on Change”, analyzed the impact of IT on public sector
banks and new private sector banks in India and observed that IT is a threat to public sector banks. The
strength of new private sector banks lies in their fully computerized branches and services of Internet
banking. The study found that ICICI and HDFC Banks are very active on this front and concentrating on
Internet banking and e-commerce to offer their clients a whole range of products under one roof. New
banks like Global Trust Bank (GTB), Bank of Punjab (BOP), IDBI & UTI banks are not lagging behind
and some of them are concentrating on expansion and modernization. Some are focusing on mergers and
acquisitions for their growth and hence, public sector banks have done a lot on improving their
productivity. Merenzi et al. (2000), in their study entitled “Is Internet Banking Profitable? A Study of
Digital Insight's Offering”, forecasted profitability for institutions implementing DI‟s (Digital Insights)
Internet banking applications. According to study DI provides an array of applications including home
banking with electronic bill payment, check images, authenticated online applications, online statements
modules, cash management, account aggregation, e-commerce financial services portal, and online lending
applications for consumer loans. The model is designed to test profit sensitivity to such factors. The model
projects profitability measured in net present value and internal rate of return over a five year time horizon,
considering the anticipated migration of customers from traditional to online channels. The results showed
that it is not possible to blindly state that Internet banking is always profitable, because very small
institutions (with fewer than 15,000 customers) only offer a limited set of Internet banking services are not
likely to achieve profit unless they are able to persuade a very substantial portion of their customers to
bank online
Shastri, R (2001), in his work entitled “Technology for Banks in IndiaChallenges” analyzed the effect and
challenges of new technology for banks in India. According to the study technology has brought a sea
change in the functioning of the Indian banks. The earlier manual system of preparing of vouchers, etc.
was very slow. New technology being automated is saving a lot of time and effort which helps in better
performance of the banking sector. Simpson, J (2002), in his paper entitled “The Impact of the Internet in
Banking: Observations and Evidence from Developed and Emerging Markets”, investigated the risk,
efficiency and rate of progress in the implementation of electronic commerce (e-commerce) in a sample of
banks from a developed country (the US), and a sample of banks from developing and emerging markets.
The results of the study confirmed that the US is very advanced in its electronic-banking (ebanking)
actuation. There is evidence suggesting that e-banking is driven largely by the prospects of operating costs
minimization and operating revenue maximization. Costs are lower and revenues are higher when banking
services are delivered through a branch network. The results also suggested that perceptions of banking
risk may be partially driven by similar factors. Using a basic risk-scoring model, bank risk scores
(reflecting a bank's ability to repay depositors) are regressed against operating efficiency measures. Yibin,
M (2003), studied the significance of e-banking from society‟s perspective. This study aimed at
identifying the status, trends, challenges and policy issues of e-banking. For this purpose the author used
case study- experience from the two most successful cases. Wells Fargo (US) had actually the highest
absolute number of online customers, more than 3 million out of its total 24 million customers in 2001.
Nordea (Scandinavia) had 2.3 million online customers, representing over 20% of its total customer base.
It has the highest share of online customers. The author conducted his study from society‟s perspective,
bank‟s perspectives and from the authorities‟ perspective. The result of the study showed that e-banking
can not
Eyadat, M (2005), examines the impact of the progress in information technology on the profit and cost
efficiency of the U.S. banking sector during period of 1992-2003. The research shows a positive
correlation between the levels of implemented IT and both, asset profitability and cost savings. These
results indicate that introduction of the new range of services at a bank, on one hand, generate additional
revenues, but, on the other hand, imply new significant cost changes. Sathye, M (2005), investigated the
impact of the introduction of transactional Internet banking on performance and risk profile of major credit
unions in Australia. Performance is measured by a linear programming technique of data envelopment
analysis and regressed on relevant explanatory variables using censored normal regression. Accounting
data were used to measure risk profile and regressed on relevant explanatory variables employing OLS
regression. The results illustrated that transactional Internet banking didn‟t have a significant impact on
any of these. Thus Internet banking hasn‟t proved to be a performance enhancing tool in the context of
major credit unions in Australia. It neither reduces nor enhances risk profile. Siam, A Z (2006), examined
the impact of e-banking on Jordanian banks and concluded that the majority of the banks are providing
services on the Internet through their websites and his findings showed that the attention is more on
satisfying and fulfilling customers‟ needs through e-banking. He also concluded that there should be a well
articulated strategy to achieve success and profits in the long run. Results revealed that electronic banking
services have a negative effect on banks profitability in the short run due to the capital investment by the
banks on infrastructure and training but will be positive in the long run.
In Nigeria, Adewoye, J O (2007), concluded in his paper that IT investment made a positive contribution
to gross marginal output and net marginal output of the banking sector. The findings of the study indicated
that, IT investment has increased productivity but have not resulted in supernormal profitability, rather,
there was some evidence of small or even negative impact on profitability. DeYoung et al. (2007), in their
paper “How the Internet Affects Outputs and Performance at Community Banks” tried to compare two
different waves of adoption of internet banking to find out how the internet can change the performance of
banks. The first wave of US banks to adopt transactional banking web sites in the late-1990s, and compare
the change in their 1999–2001. Finding of the study shows that Internet adoption has improved the
community bank profitability, chiefly through increased revenues from deposit service charges. Internet
adoption was also associated with movements of deposits from checking accounts to money market
deposit accounts. This is also responsible for the increased use of brokered deposits, and higher average
wage rates for bank employees. The result shows little evidence of changes in the loan portfolio. Findings
suggested that the initial click-and-mortar banks (and their customers) used the Internet channel as a
complement to, rather than a substitute for, physical branches.
Osho, S G (2008), explained the use of technology in the banking industry and analyses how it has helped
banks earn profit. The results indicated that more and more consumers are now turning towards
technologies and time saving options for their banking decisions. Furthermore, the results indicated that
competition among banks in this attractive industry is a factor of the one offering the most convenient and
appealing technological advances. Onay et al. (2008), in their research on Turkish banks entitled “The
Impact of Internet-Banking on Bank Profitability- the Case of Somalia”, investigated on the impact of
internet banking on bank profitability. Their analysis covered thirteen banks that have adopted online
banking in Somalia between 1996 and 2005. Using the approach of Hernando and

Nieto (2007) and by using specific and macroeconomics control variables they investigated the impact of
Internet banking on Return on Assets (ROA) and Return on Equity (ROE). Their results showed that
Internet banking starts contributing to banks‟ ROE with a time lag of two years, confirming the findings of
Hernando and Nieto while a negative impact is observed for one year lagged dummy. According to their
study, the Internet has changed the dimensions of competition in the retail banking sector. It has also
provided opportunities for emerging countries to build up their financial intermediation infrastructure.
Investment in e-banking is a gradual process. The Internet banking variable has had a positive effect on the
performance of the banking system in Somalia.

Goodarzi and Zebidi (2008), in their study entitled “Impact of e-Banking Development on Profitability of
Commercial Banks”, examined the relationship between e-banking development and profitability of banks
with the help of econometric models. The result of paper shows that the increase in number of ATM of
each bank has a positive effect on profitability of that bank (ROA) and this effect strengthen by joining of
each bank to Interbank Information Transfer Network (Shetab) of the country. Therefore, the study
concluded that e-banking has a significant effect on banking profitability.
 CHAPTER-III

RESEARCH METROLOGY

16
Corruption in Somalia pertains to purported levels of corruption within Somalia's public and private
sectors according to official metrics, anti-graft measures aimed at addressing those issues, as well as
political dispensations and structural changes in government affecting transparency. Owing to a reported
lack of accountability in the receipt and expenditure of public funds by the Transitional Federal
Government, a federal Anti-Corruption Commission was put into place in 2011 so as to deter and
eliminate graft.[1] Somalia ranked joint last in Transparency International's 2014 Corruption Perceptions
Index, which measures the perception of public sector corruption around the world.

In 2012, Somali and international stakeholders also agreed to establish a joint financial management board
in order to ensure transparent dispensation of government and donor funds. The public sector was later
completely reformed in mid-2012, following the end of the transitional period and the establishment of
the Federal Government of Somalia.

In 2013, the Somali federal government announced that it had launched a new Public Finance
Management Policy (PFMP) to render more transparent, accurate and timely its public sector financial
system, and to strengthen the delivery capacity of the government's financial sector. A parliamentary
finance committee was also established in 2014, which oversees all withdrawal transactions from the
Central Bank. Additionally, a Public Procurement, Concessions and Disposal Act was passed, and the
Office of the Auditor General (OAG) was established to audit all government institutions. The
government also began utilizing a free asset recovery system supported by the UNODC and World Bank,
and it concurrently launched an anti-graft Public Awareness Campaign.

17
RESEARCH OVERVIEW

Corruption was deemed a widespread problem during the brief tenure of Somalia's coalition government.
The unity administration was formed in 2008 after a UN-brokered conference in Djibouti between
representatives of the Somali Transitional Federal Government (TFG) and the moderate Islamist Alliance
for the Re-liberation of Somalia (ARS), which ended in an agreement calling for the expansion of
parliament to 550 seats in order to accommodate the new ARS members.

Shortly afterwards, Transparency International ranked Somalia in last place on its annual Corruption
Perceptions Index (CPI), a metric that purports to show the prevalence of corruption in a country's public
sector. A 2012 World Bank report also alleged that about $130 million or 68% of funds that the coalition
government had received over this 2009 and 2010 period was unaccounted for.

An earlier 2011 paper prepared for the TFG by the Public Finance Management Unit, a Somali
government body tasked with overseeing the nation's fiscal management, similarly suggested that over
$70 million in cash payments from Arab donor countries were missing over the same 2009-2010 period.
Largely based on interviews with Mogadishu politicians who had witnessed the payments or received
funds, the report alleged that a total of $300 million were unaccounted for once internal revenue was also
taken into consideration. By contrast, funds from Western nations nominally earmarked for security and
social service-related initiatives in Somalia mainly went directly to aid agencies, with very little of it
ultimately reaching the Somali authorities. According to then Finance Minister Hussein Halane, although
government officials routinely deposited foreign contributions in the Central Bank of Somalia, some of the
money was first spent on legitimate and documented expenses.

In July 2012, a report by the UN Monitoring Group on Somalia and Eritrea (SEMG) submitted to the UN
Security Council again alleged that between 2009 and 2010, around 70 percent of funds that had been
earmarked for development and reconstruction in Somalia were unaccounted for. President Sharif Sheikh
Ahmed rebuked the claims, indicating in particular that a $3 million payment from the Government
of Oman had gone toward legitimate government expenses, including loans, security forces and
parliament. Ahmed also asserted that the SEMG paper had been "timed to coincide with the end of [the]
transition period in order to discredit the TFG," and that the Monitoring Group was the "wrong approach
for Somalia's peace and development." Additionally, the Prime Minister's Office released a statement
describing the report as misleading and false, and suggested that it would consider filing a defamation and
libel lawsuit if some of the accusations contained in the paper were not retracted.

18
Anti-corruption measures

In 2010, a new technocratic administration was appointed to office, which enacted a number of reforms,
including measures to tackle purported graft within the public sector. According to the Prime Minister,
Cabinet ministers fully disclosed their assets and signed a code of ethics in order to improve transparency.
An Anti-Corruption Commission with the power to carry out formal investigations and to review
government decisions and protocols was also established so as to more closely monitor all activities by
public officials. Furthermore, unnecessary trips abroad by members of government were prohibited, and
all travel by ministers subsequently required the Prime Minister's consent

A budget outlining 2011's federal expenditures was also put before and approved by members of
parliament, with the payment of civil service employees prioritized. In addition, a full audit of government
property and vehicles was put into place.

Following the London Somalia Conference held in February 2012, Somali and international stakeholders
further upheld existing plans to establish a joint financial management board in order to ensure a
transparent dispensation of Somali and donor funds. They also pledged support for Somalia's stable
regions, agreeing to form a new fund earmarked for local dispute resolution, job creation, basic service
delivery and development of government sectors.In addition, the U.S. government indicated that it would
lobby for the imposition of sanctions on all parties impeding political progress made by the Somali
Transitional Federal Government, including pre-emptive measures such as travel bans and asset freezes

Federal government

Concurrent with the end of the TFG's interim mandate on August 20, 2012, the Federal Parliament of
Somalia was inaugurated, ushering in the Federal Government of Somalia, the first permanent central
government in the country since the start of the civil war. On September 10, 2012, parliament also elected
a new President, who then appointed a new Prime Minister on October 6, 2012, both newcomers to Somali
politics. A new Cabinet was later endorsed by the legislature on November 13, 2012.

In July 2013, the UN Monitoring Group on Somalia and Eritrea (SEMG) alleged that 80 percent of
withdrawals from the Central Bank of Somalia were made for private purposes. While acknowledging that
the new national leadership presented an opportunity for change, the panel also suggested that the Bank
was operating as a patronage system for government officials. Newly appointed Central Bank
Governor Abdisalam Omer described the charges as "an attempt to discredit me as the governor of the
central bank and to discredit the embryonic financial institutions of the country." He also indicated that of
the $16.9 million in funds that the panel alleged were missing, the majority had been deposited in a
Finance Ministry account at the Central Bank, with the remaining $940,000 deposited in an account that a
19
former prime minister had established for regional relations. According to Omer, the bank deposits had
been made with the assistance and signatures of PricewaterhouseCoopers (PWC) representatives.[24] The
president's office concurrently issued a statement rejecting the allegations, indicating that they dated from
a previous administration. Shortly afterwards, the Somali authorities hired forensic accountants from FTI
Consulting, Inc. and a legal team from the US firm Shulman, Rogers, Gandal, Pordy & Ecker, PA to
investigate the charges. In September 2013, the Somali government announced that the auditors had found
that the methodology and conclusions of the SEMG report's Annex 5.2 were "deeply flawed and entirely
unreliable." The auditing firms consequently recommended the removal of the section of the SEMG's
report containing corruption allegations. They also requested that the United Nations Security
Council publicly sanction the SEMG for failing to adhere to and apply the UN's internal fact-finding
standards. Additionally, the auditors recommended that the UN reimburse the Somali authorities for the
expenses they incurred over the course of the auditing investigations.

In late July 2013, the UN announced that it would establish an independent adjudication panel tasked with
verifying and reviewing all future SEMG reports before publication. Effective August, when the
monitoring group's mandate was slated for renewal, the UN indicated that it would require substantially
higher standards of evidence from the SEMG. The announcement came a few days after the Somali
government demanded the creation of such a panel to supervise all of the monitoring group's future
papers. Many had also raised concerns about the validity of the SEMG's yearly reports due to their
extensive reliance on obscure and anonymous sources.

On 13 September 2013, Yussur A.F. Abrar succeeded Omer as Governor of the Central Bank of Somalia.
She stepped down from the position in November, citing interference with the bank's functions as among
the main reasons for her departure, as well as pressure to sanction deals that she suggested were in
violation of her fiduciary responsibility as head of the national monetary authority.

On 27 November 2013, veteran banker Bashir Isse was appointed on an interim basis as Somalia's new
Central Bank Governor. According to incumbent Finance Minister Mohamud Hassan Suleiman, Isse's
appointment came a day after President Hassan Sheikh Mohamud met with international donor
representatives in Mogadishu to discuss a temporary replacement at the position. The Council of
Ministers later endorsed the selection on 28 November. On 24 April 2014, the federal Cabinet approved
Isse as the new permanent Governor of the Central Bank of Somalia. Maryan Abdullahi Yusuf was also
named his new Deputy Governor.

In July 2014, the eight-member UN Monitoring Group on Somalia and Eritrea (SEMG) accused
presidential advisor and entrepreneur Musa Haji Mohamed Ganjab of illicitly receiving a portion of
Somalia's frozen state assets that had been recovered from abroad. The panel also alleged that Ganjab had
20
ties with Al-Shabaab and that he had engaged in the unauthorized diversion of Somali government
weapons to the militants. Reuters could not confirm the group's allegations. Additionally, Ganjab denied
the accusations and suggested that they were part of a campaign by the SEMG's Coordinator Jarat Chopra
to undermine the Somali authorities as well as individuals like himself who had helped repudiate the
panel's 2013 report. In an August press conference, attorney Jeremy Schulman from the law firm Shulman
Rogers similarly suggested that Chopra's criticism of the asset recovery process was politically motivated
and deliberately misleading. He also indicated that all $31 million in government funds that the SEMG
alleged were missing had been accounted for and were transferred to Central Bank of Somalia accounts in
the United States and Turkey, and that it was both legal and appropriate for the Somali central government
to want to reclaim its own state assets

Cancellation of contracts

In September 2014, at the recommendation of the new financial governance committee, the Somali
government announced that it was renegotiating or canceling nine high-profile contracts. The decision
came after the committee of senior domestic and international officials found various irregularities, with
none of the contracts having a competitive tender process according to committee member Nigel Roberts
of the World Bank. The contracts ranged from oil exploration to port operations, and included deals with
the British Soma Oil and Gas firm, the American Shulman Rogers law firm, and the Turkish company
Favori. According to officials, eight of the contracts were being amended.The deal with Favori was later
finalized at the end of the month, with the government officially delegating management of the Port of
Mogadishu to the firm. The contract with Shulman Rogers was concurrently terminated due to its
prohibitive cost,and the Central Bank requested that the company transfer a full list of overseas state assets
that its investigation had yielded

Anti-corruption measures

In May 2014, the federal Cabinet unanimously passed a new Public Procurement, Concessions and
Disposal Act, which Finance Minister Halane had tabled. The law formalizes principles, procedures and
decisions with regard to agreements entered into by public institutions, and procurement of goods, services
and concessions with public funds. As such, it aims to spur economic development and establish a
foundation for transparent financial governance by eliminating mismanagement of public funds, reducing
monopolies and promoting competitiveness in the concession procurement process. The Act is expected to
regulate the national public financial sector, ameliorate accountability, and ensure that public funds have
been utilized in accordance with their intended purpose. Through sound price management of services and
commodities, it also aims to strengthen financial governance and institutions by optimizing values on
public expenditures. Parliament is now expected to deliberate on the bill for adoption.
21
In July 2014, the Office of the Auditor General (OAG) was officially opened within the Ministry of
Finance compound in Mogadishu. It is mandated with auditing all government institutions, including
ensuring appropriate management of government funds and strengthening public transparency and
accountability. Among its first initiatives, the OAG outlined statuary regulations vis-a-vis government
institutional accountability, which were approved by the Somali Council of Ministers and await
parliamentary endorsement.

In September 2014, the Somali government began utilizing a new, free asset recovery system supported by
the UNODC and World Bank.

In September 2014, the Somali government also launched a Public Awareness Campaign to tackle and
prevent corruption in the public sector and to strengthen good governance. According to the project's
director Minister of Information Mustaf Ali Duhulow, it will consist of anti-corruption programs, which
are scheduled to air on radio and television stations, newspapers, websites, social media and various other
local media outlets. The initiative will broadcast public service announcements aimed at the average
citizen, as well as establish call-in programs, debates, discussions and public events. The minister also
indicated that the public awareness campaign would be accompanied by a civic education drive to inform
the citizenry on anti-graft legislation, reporting and enforcement.

22
Economic history of Somalia

Somalia minerals mined

he colonial economy
The colonial era did not spark foreign economic investment despite the competition of two major
European powers in the area of present-day Somalia. Italy controlled southern Somalia; Britain northern
Somalia, especially the coastal region. Italian parliamentary opposition restricted any government activity
in Somalia for years after European treaties recognized Italian claims.

The economy of Somalia italiana was initially based only on primitive agriculture, fishing, commerce and
pastoralism of subsistence with great infusion of money from Italy since the end of the 19th century. In the
early twentieth century, projects aimed at using Somalia as a settlement for Italian citizens from the
crowded homeland failed. Although in the early 1930s Benito Mussolini drew up ambitious plans for
economic development, actual investment was modest in comparison to what was done in Italian
Eritrea.[1]
23
There was still less investment in British Somaliland, which British India had administered. During the
prime mininstership of William Ewart Gladstone in the 1880s, it was decided that the British Indian
government should be responsible for administering the Somaliland protectorate because the Somali
coast's strategic location on the Gulf of Aden was important to British India. Customs taxes helped pay for
British India's patrol of Somalia's Red Sea Coast. The biggest investment by the British colonial
government in its three-quarters of a century of rule was in putting down the rebellion of the dervishes. In
1947, long after the dervish war of the early 1900s, the entire budget for the administration of the British
protectorate was only £213,139. If Italy's rhetoric concerning Somalia outpaced performance, Britain had
no illusions about its protectorate in Somaliland. At best, the Somali protectorate had some strategic value
to Britain's eastern trading empire in protecting the trade route to Aden and British India and helping
assure a steady supply of food for Aden.

The two major economic developments of the colonial era were the establishment of plantations in the
interriverine area and the creation of a salaried official class. In the south, the Italians laid the basis for
profitable export-oriented agriculture, primarily in bananas, through the creation of plantations and
irrigation systems. In both the north and the south, a stable petty bourgeois class emerged. Somalis
became civil servants, teachers, and soldiers, petty traders in coastal cities, and small-business proprietors.

The plantation system began in 1919, with the arrival in Somalia of Prince Luigi Amedeo of Savoy, Duke
of Abruzzi, and with the technical support of the fascist administration of Governor Cesare Maria de
Vecchi de Val Cismon. The Shebelle Valley was chosen as the site of these plantations because for most
of the year the Shebelle River had sufficient water for irrigation. The plantations produced cotton (the first
Somali export crop after colonization), sugar, and bananas. Banana exports to Italy began in 1927, and
gained primary importance in the colony after 1929, when the world cotton market collapsed. Somali
bananas could not compete in price with those from the Canary Islands, but in 1927 and 1930 Italy passed
laws imposing tariffs on all non-Somali bananas. These laws facilitated Somali agricultural development
so that between 1929 and 1936 the area under banana cultivation increased seventeenfold to 39.75 km².
By 1935 the Italian government had constituted a Royal Banana Plantation Monopoly (Regia Azienda
Monopolio Banane—RAMB) to organize banana exports under state authority. Seven Italian ships were
put at RAMB's disposal to encourage the Somali banana trade. After World War II, when the United
Nations (UN) granted republican Italy jurisdiction over Somalia as a trust territory, RAMB was
reconstituted as the Banana Plantation Monopoly (Azienda Monopolio Banane—AMB) to encourage the
revival of a sector that had been nearly demolished by the war.

24
Plantation agriculture under Italian tutelage had short-term success, but Somali products never became
internationally competitive. In 1955 a total of 235 concessions embraced more than 453 km² (with only 74
km² devoted to bananas), and produced 94,000 tons of bananas. Under fixed contracts, the three banana
trade associations sold their output to the AMB, which exacted an indirect tax on the Italian consumer by
keeping out cheaper bananas from other sources. The protected Italian market was a mixed blessing for
the Somali banana sector. Whereas it made possible the initial penetration by Somali bananas of the Italian
marketplace, it also eliminated incentives for Somali producers to become internationally competitive or
to seek markets beyond Italy.

The investment in cotton showed fewer long-term results than the investment in bananas. Cotton showed
some promise in 1929, but its price fell following the collapse in the world market. Nearly 1,400 tons in
1929 exports shrank to about 400 tons by 1937. During the trust period, there were years of modest
success; in 1952, for example, about 1,000 tons of cotton were exported. There was however, no
consistent growth. In 1953 exports dropped by two-thirds. Two reasons are given for cotton's failure as an
export crop: an unstable world market and the lack of Somali wage labor for cotton harvesting. Because of
the labor scarcity, Italian concessionaires worked out coparticipation contracts with Somali farmers; the
Italians received sole purchasing rights to the crop in return for providing seed, cash advances, and
technical support.

Another plantation crop, sugarcane, was more successful. The sugar economy differed from the banana
and cotton economies in two respects: sugar was raised for domestic consumption, and a single firm, the
Italo-Somali Agricultural Society (Societa Agricola Italo-Somala—SAIS), headquartered in Genoa,
controlled the sector. Organized in 1920, the SAIS estate near Giohar had, by the time of the trust period,
a little less than 20 km² under cultivation. In 1950 the sugar factory's output reached 4,000 tons, enough to
meet about 80 percent of domestic demand; by 1957 production had reached 11,000 tons, and Italian
Somaliland no longer imported sugar.

Labor shortages beset Italian concessionaires and administrators in all plantation industries. Most Somalis
refused to work on farms for wage labor. The Italians at first conscripted the Bantu people who lived in
the agricultural region. Later, Italian companies paid wages to agricultural families to plant and harvest
export crops, and permitted them to keep private gardens on some of the irrigated land. This strategy met
with some success, and a relatively permanent work force developed. Somali plantation agriculture was of
only marginal significance to the world economy, however. Banana exports reached US$6.4 million in

25
1957; those of cotton, US$200,000. But in 1957 plantation exports constituted 59 percent of total exports,
representing a major contribution to the Somali economy.

The colonial period also involved government employment of salaried officials and the concomitant
growth of a small urban petty bourgeoisie. In the north, the British administration originally had
concentrated on the coastal area for trading purposes but soon discovered that livestock to be traded came
from the interior. Therefore, it was necessary to safeguard caravan routes and keep peace in port areas,
requiring the development of police forces and other civil services. In British Somaliland, many of the
nomads scorned European education and opposed the establishment of Christian missions. Consequently,
only a small pool of literate Somalis was available to work for the British administration. Kenyans
therefore were hired. In the south, however, Somalis sent children to colonial and mission schools, and the
graduates found civil service positions in the police force and as customs agents, bookkeepers, medical
personnel, and teachers. These civil servants became a natural market for new retail businesses,
restaurants, and coffee shops. Baidoa in the precolonial period had almost no permanent commercial
establishments; by 1945, nearly 500 businesses were registered in the district. The new salaried class filled
the ranks of the Somali nationalist movement after World War II. Literate in Italian or English, these
urban Somalis challenged colonial rule.

Furthermore, the Italian Somalia economy was even improved by the salt industry. Indeed, in 1930, an
Italian firm invested capital to exploit salt deposits in Hafun, then called "Dante". By 1933-34, the Hafun
salt works were producing more than 200,000 metric tons of salt, most of which was exported to the Far
East.[2] It was one of the main salt facilities in the world and had a cable-transport system of 24 km. In
2014 there were made plans to revive this huge factory.

In the 1930s Italian Empire, the Italian government promoted auto & moto competitions in order to
increase the image of Italy (inside the colonial populations and in the world) as a technological country
with state-of-the-art mechanical industry. Indeed, Italian Mogadiscio in 1938 was the second
manufacturing city -after Italian Asmara- in the Eastern Africa's Italian Empire. The triangle Mogadiscio-
Genale-Villabruzzi (actual Mogadishu-Afgoi- Jowhar) was the most developed area of the Italian colony,
with one of the biggest vehicles concentration (per inhabitants) of all Africa: nearly 3000 vehicles in
1939.[5] It is noteworthy that in British Somaliland there were no vehicles for civilians until after WWII
(the few were only for military use )

Economic development 1960 to 1969

26
At independence the Somali economy was at a near subsistence level, and the new state lacked the
administrative capacity to collect taxes from subsistence herders and farmers. The state could rely on the
customs taxes from international trade, which were easier to collect, but tariffs failed to meet the needs of
a government with ambitious development goals. Somalia therefore relied on Italian and British subsidies,
which funded about 31 percent of the new nation's current budget in the first three years of independence.

Somalia also received grants and loans from countries in the East and the West, which made possible the
articulation of an ambitious development plan by 1963. A five-year plan with a budget of more than
US$100 million in grants and loans, it focused on investment in infrastructure. The plan's thesis was that
plantation crops and livestock exports would increase if there were better roads, transportation facilities,
ports, and irrigation works. Another large investment was made in the creation of model farms to attract
farmers from around the country, who would learn improved techniques to apply on their own farms.
Model farms in Baidoa in the Bay Region, Afgooye near Mogadishu, and Tog Wajaale, west of Hargeysa,
were established during this period.

In the pastoral sector, the Livestock Development Agency, formed in 1965-66, emphasized veterinary
services, the provision of water and of holding grounds for cattle while they were undergoing inoculation,
and transportation. Somali pastoralists responded with enthusiasm to the prospects for wealth by entering
the international market for livestock. In the early 1960s, the value and number of exported livestock
approximately doubled, and livestock soon surpassed bananas as Somalia's leading export.

There were therefore some notable successes among Somalia's early development projects. The nation
became nearly selfsufficient in sugar, and banana exports grew, albeit haltingly. Livestock exports
increased, and investments in roads and irrigation facilities resulted in some genuine improvements.

But the 1960s also yielded great disillusionment. The country could not overcome its dependence on
foreign assistance, even to meet its current budget. Moreover, imports of foreign grains increased rapidly,
indicating that the agricultural sector was not meeting the needs of the growing urban population. The
modern agricultural techniques of state farms had little influence on traditional farming practices. Because
of a boom in livestock export from Hargeysa, cows, goats, and camels were becoming concentrated in
northern Somalia, much to the detriment of rangelands. The UN Food and Agriculture Organization
(FAO) foresaw the dire effects of the 1974 drought in a 1967 report that noted the severe range
deterioration. Finally, and perhaps most important, many Somalis were enervated by the feeling that
political incumbents, through electoral manipulations, were squandering the nation's economic resources

27
for their private benefit.

Scientific socialism 1970 to 1975

Siad Barre legitimated his 1969 coup d'état in terms of the national economic malaise. On October 20,
1970, the first anniversary of the coup, he announced:

In our Revolution we believe that we have broken the chain of a consumer economy based on imports, and
we are free to decide our destiny. And in order to realize the interests of the Somali people, their
achievement of a better life, the full development of their potentialities and the fulfillment of their
aspirations, we solemnly declare Somalia to be a Socialist State.

Relying on Soviet advisers and a committed group of Italian-educated Somali "leftist" intellectuals, Siad
Barre announced the 1971-73 Three-Year Plan. The plan emphasized a higher standard of living for every
Somali, jobs for all who sought work, and the eradication of capitalist exploitation. Agricultural "crash
programs" and creation of new manufacturing plants were the immediate results.

Siad Barre quickly brought a substantial proportion of the modern economy under state control. The
government nationalized banks, insurance companies, petroleum distribution firms, and the sugar-refining
plant and created national agencies for construction materials and foodstuffs. Although the Somali
neologism for socialism, hantiwadaag, could be translated as the "sharing of livestock," camel herds were
not nationalized, and Siad Barre reassured pastoralists that hantiwadaag would not affect their animals. To
mollify international business, in 1972 Siad Barre announced a liberal investment code. Because the
modern economy was so small, nationalization was more showmanship than a radical change in the
economy.

The creation of cooperatives soon became a cornerstone in building a socialist economy. In 1973 the
government decreed the Law on Cooperative Development, with most funds going into the agricultural
sector. In the precoup years, agricultural programs had received less than 10 percent of total spending. By
1974 the figure was 29.1 percent. The investment in cooperatives had limited long-term results, however.
In Galole near Hargeysa, for example, a government team established a cooperative in 1973, and
government funds helped purchase a tractor, a cooperative center, and a grain storage tank. Members
received token salaries as well. But in July 1977, with the beginning of the Ogaden War, state involvement
in Galole ended; by 1991 the cooperative was no longer in operation.

Cooperatives also aimed at the nomad, although on a smaller scale. The 1974-78 Development Plan
allocated only 4.2 percent of the budgeted funds to livestock. Government officials argued that the
scientific management of rangeland—the regeneration of grazing lands and the drilling of new water

28
holes—would be possible only under socialist cooperation. In the fourteen government-established
cooperatives, each family received an exclusive area of 2 to 3 km² of grazing land; in times of drought,
common land under reserve was to become available. The government committed itself to providing
educational and health services as well as serving as a marketing outlet for excess stock. Neither
agricultural nor fishing cooperatives, however, proved economically profitable.

Integrated agricultural development projects were somewhat more successful than the cooperatives. The
Northwest Region Agricultural Development Project, for example, survived the 1980s. Building upon the
bunding (creation of embankments to control the flow of water) done by the British in the 1950s and by
the United States Agency for International Development (USAID) in the 1960s, the World Bank picked up
the program in the 1970s and 1980s. Yields from bunded farms increased between 24 and 137.4 t/km²
over the yields from unbunded farms. However, overall improvement in agricultural production was
hardly noticeable at a macroeconomic level.

Somalia's rural-based socialist programs attracted international development agencies. The Kuwait Fund
for Arab Economic Development (KFAED), USAID, and the FAO participated first in the Northern
Rangelands Development Project in 1977 and in the Central Rangelands Project in 1979. These projects
called for rotating grazing areas, using reserves, and creating new boreholes, but the drought of 1974 and
political events undid most efforts.

During 1974-75 a drought devastated the pastoral economy. Major General Husseen Kulmiye headed the
National Drought Relief Committee, which sought relief aid from abroad, among other programs. By
January 1975, China, the United States, the European Economic Community, the Soviet
Union, Italy, Sweden, Switzerland, Sudan, Algeria, Yugoslavia, Yemen, and others had pledged 66,229
tons of grain, 1,155 tons of milk powder, and tons of other food products. Later that year, with aid from
the Soviet Union, the government transported about 90,000 nomads from their hamlets to agricultural and
fishing cooperatives in the south. The regime established new agricultural cooperatives at Dujuuma on
the Jubba River (about 180 km²), Kurtun Waareyc near the Shabelle River (about 60 km²),
and Sablaale northwest of Chisimayu (about 60 km²). The KFAED and the World Bank supported
irrigation projects in these cooperatives, in which corn, beans, peanuts, and rice were planted. Because the
government provided seeds, water, management, health facilities, and schools, as well as workers' salaries,
the farms were really state-owned farms rather than cooperatives. Essentially, they became havens for
women and children because after the drought the men went off inland with whatever money they had
accumulated to buy livestock to replenish their stock of animals.

The government also established fishing cooperatives. Despite a long coastline and an estimated potential
yield of 150,000 tons per year of all species of fish, in the early 1970s fishing accounted for less than 1
29
percent of Somalia's gross domestic product. In 1975 cooperatives were established at Eyl, a post in the
Nugaal region; Cadale, a port 1200 kilometers northeast of Mogadishu; and Baraawe. The Soviet Union
supplied modern trawlers; when Soviet personnel left Somalia in 1978, Australia and Italy supported these
fishing projects. Despite their potential and broad-based international support, these cooperatives failed to
become profitable.

Siad Barre emphasized the great economic successes of the socialist experiment, a claim that had some
truth in the first five years of the revolution. In this period, the government reorganized the sole milk-
processing plant to make it more productive; established tomato-canning, wheat flour, pasta, cigarette, and
match factories; opened a plant that manufactured cardboard boxes and polyethylene bags; and established
several grain mills and a petroleum refinery. In addition, the state put into operation a meat-processing
plant in Chisimayu, as well as a fish-processing factory in Laas Qoray northeast of Erigavo. The state
worked to expand sugar operations in Giohar and to build a new sugar-processing facility in Afgooye. In
three of the four leading light industries—canned meats, milk, and textiles—there were increases in output
between 1969 and 1975.[1]

Progress in the early socialist period was not uniform, however. The government heralded various
programs in the transport, packaging, irrigation, drainage, fertilization, and spraying of the banana crop.
Yet, despite the boom year of 1972, banana exports declined.

30
The socialist revolution after 1975
Popular enthusiasm for the revolution began to dissipate by the mid-1970s. Many officials had become
corrupt, using their positions for personal gain, and a number of ideologues had been purged from the
administration as potential threats to their military superiors. Perhaps most important, Siad Barre's regime
was focusing its attention on the political goal of "liberating" the Ogaden (Ogaadeen) rather than on the
economic goal of socialist transformation. The Somali economy was hurt as much by these factors and by
the economic cost of creating a large modern army as it was by the concurrent drought. Two economic
trends from this period were noteworthy: increasing debt and the collapse of the small industrial sector.

During the 1970s, foreign debt increased faster than export earnings. By the end of the decade, Somalia's
debt of 4 billion shillings equaled the earnings from seventy-five years' worth of banana exports (based on
1978 data). About one-third was owed to centrally planned economies (mainly the Soviet Union, US$110
million; China, US$87.2 million; with small sums to Bulgaria and the German Democratic Republic (East
Germany). Another one-third of the debt was owed to countries in the Organisation for Economic
Cooperation and Development (OECD). Finally, one-third was owed to members of the Organization of
the Petroleum Exporting Countries (OPEC) (principally Saudi Arabia, US$81.9 million; Abu Dhabi,
US$67.0 million; the Arab Fund for Economic and Social Development, US$34.7 million; Kuwait,
US$27.1 million; and smaller amounts to Iraq, Qatar, the OPEC special account, Libya, and Algeria, in
that order). Many loans, especially from the Soviet Union, were, in effect, written off. Later, many loan
repayments to OECD states were rescheduled. But thanks to the accumulated debt burden, by the 1980s
the economy could not attract foreign capital, and virtually all international funds made available to
Somalia in rescheduling agreements came with the provision that international civil servants would
monitor all expenditures. As a result of its international debt, therefore, Somalia lost control over its
macroeconomic structure.
A second ominous trend in the 1975-81 period was the decline of the manufacturing sector. Exports of
manufactured goods were negligible when the 1969 coup occurred; by the mid-1970s, manufactured
goods constituted 20 percent of total exports. By 1978, as a consequence of the Ogaden War, such exports
were almost nonexistent. Production likewise suffered. In 1969 Somalia refined 47,000 tons of sugar; by
1980 the figure was 29,100 tons (all figures are for fiscal year. In 1975 the country produced 14.4 million
cans of meat and 2,220 tons of canned fish. In 1979 it produced 1.5 million cans of meat and a negligible
amount of canned fish. Textile output rose over the period. The only material produced, however, was a
coarse fabric sold to rural people (and worn by the president) at less than cost. In milk, pasta, packaging
materials, cigarettes, and matches, the trend was downward in the second half of the 1970s.

31
 CHAPTER-IV
DATA ANALYSIS

32
A BRIEF HISTORY OF SOMALIA’S CURRENT TAX STATUS
World Bank (2015) launched the first edition of a series of Somalia Economic Update publications.
Accordingly, this study revealed that Somalia is doing better in the fiscal side in the history after civil
war. In 2012 the Federal Government of Somalia collected $30 million in domestic tax having tax
share of 0.9% to the GDP. Nevertheless the domestic tax for the government increased to $84.3
million financing 56% of the recurrent expenditures. A tax driven tax contributed 70% of the tax in
the period of 2012-2014. Tax on international trade from the Mogadishu’s port and airport was the
key source for the government tax contributing 91% of the domestic tax between 2012 and 2014.
While collection of the tax performed considerably, Somalia is so far under challenging conditions
including: weak collection capacity and absence of legal and regulatory framework. The problem of
having low tax is a big threat to the provision and delivery of the public services.
World Bank (2017) published the second edition of Somali Economic Update with especial
focus on domestic tax mobilization. According to the report, government failed to provide public
services while the society and business entities failed to pay taxes. There is a gap between the demand
of public goods and the government’s ability to generate tax to meet the pressing demands. The
government implemented easy-to-adopt measures to quickly raise taxs without developing a strong
tax mobilization strategy that would combine strong transparency and accountability. Tax
mobilization will reduce the dependence of the government on aid and enables the government fund
the basic service delivery, thus strengthening state/citizen relationship. There is no vibrant assignment
on tax collections between federal government and member states; presently, federal ministry of
finance collects the tax only from Mogadishu. Somalia did not update its tax laws and regulations;
instead, the government updated certain tax rates. There is no a strong fiscal federalism framework
which guide the fiscal issues between the main government and member states.
IMF, (2018), despite the pressing challenges, the government implemented critical tax
measures to lift 2017 tax collection through meeting with the key taxpayers and agreed to pay the
taxes based on the existed legal foundations. The high dependence on the external grants with narrow
tax base creates a weak fiscal discipline. Meanwhile, a fully agreed customs harmonization among the
federal government and its member states is required to speed up the initiative of having unified tariff
rate throughout Somalia. The domestic tax is currently 2% of the GDP.
Somalia, despite recent performances, is characterized having low domestic tax, thus having
the lowest tax share of the GDP (Gross Domestic Production) in the world which is 2%. The Federal
Government of Somalia is collecting only taxes of Mogadishu experiencing a very narrow tax base.
The federal member states are collecting taxes of their own in their jurisdiction on the basis of a state
level tax acts passed by their parliaments. They use this tax to finance their operations through the
budget. However, these taxes are not the only source of tax for them since they receive grants from
donors and federal government of Somalia.

33
Till now, there is no a robust fiscal framework which explains the tax assignments among the
governments, transfer policy and clear fiscal federalism. But there are some preliminary
agreements on tax sharing of some natural resources like fishery and petroleum and
harmonization of sin tax rates. Tax harmonization process has been undertaken through
discussions of the intergovernmental finance committee. This committee is built up of the
ministries of finance of the federal government and member states. They often held two levels of
meetings; a technical level of all tax directors which provides an input to the second meeting of
the ministers under the leadership of the federal ministry of finance.
The government is currently collecting sales taxes and corporate income tax from the
businesses, individual income tax from companies, not for profit organizations and government civil
servants, road taxes from vehicles owners, property transfer tax (notary), stamp duty, customs duty
and non-tax tax coming from sale of public goods and services such passport fees, visas, work
permits, certificates, registrations, licenses, documentations and verifications, etc. But these taxes are
only collected from Mogadishu. And even in Mogadishu, there are some sectors remain untaxed due
to informality of the economy. However, the government grants tax exemption to imported goods of
humanitarian, diplomacy or belonged to the government. It also grants an exemption of customs duty
for the first capital of a new factory/industry and reduction of taxes to any raw material. This is aimed
to encourage the domestic production sectors to partially supply the local demand.
The tax system of Somalia is experiencing a weak collection aptitude and challenges in
managing the tax base. Provision of public goods and services is yet under threat of low and volatile
domestic tax. The Government’s ability to collect taxes is important to fiscal practicability in the
medium-term. However, due to hard conditions and insecure environment, the government focused on
the implementation of easy to adopt measures to efficiently and effectively raise tax taxs without
developing a tough tax mobilization strategy that would integrate strong transparency and
accountability. Tax collection has been below target up to 2016 due to uncertainty, high risk of
collection and unpredictability, but 2017 the federal government reached a milestone of surpassing the
target of budgeted domestic tax. Strengthening institutional capacity in domestic tax mobilization is
the core input of the government plan to get rid of the external dependence disease.
The table 1 and figure 1 show us how trend the tax of the FGS was in recent history of Five
years, in other words, years of having the government budget.

34
 Table 1. FGS tax table in the period of 2013-2017

# Year Tax % Increase

1 2013 $ 69.16 million -----

2 2014 $ 90.31 million 31%

3 2015 $ 114.28 million 27%

4 2016 $ 112.67 million -1%

5 2017 $ 142.39 million 26%

6 5 year Percentage Increase 106%

Source: Ministry of Finance, Federal government of Somalia

Figure 1. FGS tax trend graph in the period of 2013-2017

FGS Domestic Revenue 2013-2017

$150,000,000
$130,000,000
$110,000,000
$90,000,000
$70,000,000
$50,000,000
2013 2014 2015 2016 2017

Total Domestic Revenue

Source: Ministry of Finance, Federal government of Somalia

Both the table and trend graph show us that Somalia’s tax doubled in five years. In 2013 the actual tax
was $69 million, while 2017 was $142 million; this is an increase of 106% in five fiscal years. The
pro rata of six-monthly report of 2018 demonstrates that the federal government is on the way to meet
its budgeted domestic tax $165 million. Tax reforms in both sides of administration and policy with
respect to the recommendation from international partners like International Monetary Fund and
World Bank are key factors impacted.
Ministry of finance of the federal government implemented some reforms through its short
and medium term tax mobilization strategy. Some of these reforms are:
a. Introduction of sales taxes both on imported goods collected at the air and sea ports and
locally produced goods and services such as telecom sector, hotels, restaurants etc.

35
 b. Harmonization of sin tax throughout all states, these include tax rates of tobacco, khat and
also departure tax. This agreement was signed by the intergovernmental finance ministers of
the federal government and states in Gerowe, Puntland, in September 2017.
c. Extension of individual income tax to additional companies, not for profit organizations and
foreign workers in Mogadishu. Before this extension, the government used to collect these
taxes only from its civil servants by deducting at source. This extension of the income tax
base improved much better for government.
d. Establishment of Large and Medium Taxpayers Office (LMTO) which is a specialized office
for collection of taxes from large and medium sized enterprises/taxpayers in Mogadishu. The
office will undertake the responsibilities of registration, filing the returns, collection, tax
arrears management, audit and any other tax duties of large and medium scale businesses.
e. Consolidation of tax collections of some government agencies to the tax department, while
tax officers with Central Bank cashiers are collecting the taxes and user fees. This is a partial
implementing of the federal government plan to merely consolidate all tax collections to the
ministry of finance’s tax department.
f. Modernization of collection system, where, after assessment, the taxpayer can deposit the
taxes to which of any licensed private bank or directly to the Central Bank. This is aimed to
get rid of manual cash collecting and to improve transparency and accountability in the public
funds through eliminating the middle persons between the taxpayer and the national treasury.
The federal government of Somalia has benefited from these reforms and tax is significantly
increasing despite some pressing challenges. The tax performances equipped with the above effective
reforms, success in economic policy benchmarks with IMF’s Staff Monitoring Program (SMP) and
government’s commitment of the reform, all together built a strong relationship and better
engagement with donors and other international partners. Tax reform is an exercise targeting not only
raising the tax but also has other objectives such as equity, efficiency, macroeconomics stability and
sustainability. It should rather seek to improve the quality of tax system as a whole and sustain long-
run increase of tax (see Junquera-Varela et al, 2017).

PRESSING CHALLENGES
Somalia faces many tax challenges. These challenges are common in fragile and post-conflict
economies but they differ the level and deepness of the problem. But not limited to, here are some of
the challenges.

36
Dealing with “Hard to Tax” Sectors
Because of a broad informality of the economy, most of sectors remain untaxed. In addition, Somalia
is dealing with sectors that are ‘hard-to-tax’. This is a common phenomenon in most of developing
countries having small scale businesses, including small farmers, professionals, and state-owned
enterprises but particularly where administrative capacity and compliance practices are not strong.
‘Informality’ is widespread in developing countries (IMF, 2011). Somalia is suffering of the high
costs of informality and authorities are having difficult to tax the micro trading communities and other
businesses far away of the government control.

Poor Administration Capacity

Poor capacity of administration and governance is common, not only in the tax but also in most of
government institutions of both Somalia and other fragile countries. Lack of reform financing ability,
low staff skills and manual operations are the key principles of the institutions being weak and not
enough to fit the purposes of tax administration and governance. There is no comprehensive tax
system for collection and capturing the important information of taxpayers. Although the Federal
Government of Somalia took some steps toward tax administration reforms including consolidation of
other agencies’ collections, modernizing the mode of tax collection and establishing Large and
Medium Taxpayers Office, still these are not enough to cover the gap of administration, governance
and state building aspects of the tax side. Poor administration capacity also existed in Africa’s
Anglophone countries as found by (Fjeldstad & Heggstad, 2012).

Insecurity and Political Instability

Political instability and insecurity problems are also big matters. Somalia is currently getting rid of the
prolonged civil war but this can be a gradual process. Insecurity followed by political instability is the
biggest threat of the state building process. The government controls only Mogadishu, the capital city,
and this means that it can only manage to tax one city. Also the federal member states are controlling
their capital city and around, except Puntland which is the only state controlling most of its
jurisdiction. Active armed groups are controlling areas out of the government control and business
communities are asked to pay again so-called tax by these armed groups. The authorities are not fully
controlling the border customs, clans are fighting against in somewhere and fragility is everywhere.
Together, these factors are hindering the government’s strategy to fully adopt a general tax policy and
implementation throughout Somalia.

Incomplete Transition to the Federal System

There is incomplete transition to the federal system. Somalia adopted a federal system of government
while all rules, regulations and laws, including the country’s administration laws remained in a unitary
basis. For example, the existing tax laws and regulations are based on unitary and socialist
government having absolute power of political and large and medium businesses were run under state-
owned enterprises and industries. The system has completely changed and currently Somalia is a non-
37
 socialist federal government and the fundamental regulations are not yet conformed to the federalism.
In addition, there is no clear fiscal federalism framework. This framework could explain how the
federalism applies in the economics of fiscal policy setting a clear strategy of both sides of the fiscal
equation. In the tax side it sets a clear strategy of tax collection assignment among the federal
government and states, fiscal regime design and tax sharing mechanism. In the expenditure side it sets
the strategy of budgeting, transfers and managing the government spending in a transparent and
accountable manner. There are some agreements between the federal government and member states
on tax harmonization and tax sharing model of the fishery and petroleum resources, but still these
agreements-or in some cases memorandum of understanding MoU- cannot serve as a final reference
since the foundation laws are not yet approved by the parliament such as: tax law and petroleum law.

Outdated Laws and Poor Enforcement

Somalia did not modernize or amend the outdated and old laws and regulations. This phenomenon
exists not only in the tax laws, but also in most of regulations such as: judiciary, finance, resources
and administrative laws. On taxation side, some of laws are dated back to colonial era; some are based
on the socialist and unitary ideologies where the government had an absolute power of tax regulations
and enforcements. The federal government of Somalia did not make these laws go with the current
environment and instead, it only set up some tax rates through budget appropriation law (World Bank,
2017). While other rates remain unchanged are practiced as it’s in the Somali Tax Laws. On the other
side, the government is facing difficulty in the enforcement. Although there is a fiscal police/guard,
still the government cannot control out of Mogadishu and still courts need massive reforms of both
technically and capacity to qualify the implementation of rules of the land. These police (fiscal
police/guard) are part of the police under the commander in chief but specialized to enforce the tax
and customs regulations.

Customs-Related Problems
There are customs-related problems which are also challenging. Fragile countries including Somalia are
characterized by lack of a better and comprehensible tariff system for assessing custom duties,
misclassification of goods, inadequate documentation of the process, poor border protection, lack of
statistical role of the customs and some other old techniques which do not fit the purpose of both customs
performances and modern trade facilitation. Somalia’s customs do not have sophisticated customs systems
like ASYCUDA and Harmonized System of goods classification compared to the region and also the world
those are using these modern methods. It rather uses a preliminary systematic database which captures at
least some important information but it’s not better enough to go with the potential trade transactions and
wider customs operations. In addition, the federal government controls the custom points of only Mogadishu,
while Kismayo and Bosaaso are managed by the states of Jubbaland and Puntland and Berbera port is under
Somaliland. Somalia is not practicing ad-valorem system of taxation; it rather applies specific unit method
which is having a massive shortage or loss of tax. The federal government of Somalia developed a common
strategy roadmap for customs and states are waiting a federal level leadership of this matter. This will help
improve the customs operations and process and also achieve a uniformed customs in the whole country.
 CHAPTER-V
FINDINGS
SUGGESTION
CONCLUSION
 FINDINGS

Tax evasion is one of the biggest challenges the current government in Somalia is facing in terms of

increasing its revenue, it also hinders the ability of the government to provide basic services to its

citizens. This study evaluates the determinants of tax evasion in Banadir Region of Somalia. A

questionnaire was used to collect information on how drivers in the region pay their taxes, 240

randomly selected drivers have successfully responded to this study. The outcome of the study

demonstrates that tax system has a significant negative relationship with tax evasion. On the other

hand, tax rate, corruption, income level, and also education level have a positive significant

relationship with tax evasion. This study suggests that essential measures ought to be taken by the

tax authorities to enhance income collection and decrease tax evasion. It is additionally

recommended that crusade against corruption, public enlightenment on tax issues and correction of

tax procedures should be embraced.

 CONCLUSION

Somalia is a post-conflict economy which is characterized by a vulnerability of

macroeconomic variables such as steady growing rate, high inflation, massive unemployment
rate, deficit trade balance, lowest per capita income in the globe, high external shock with a
dollarized business. The Federal Government of Somalia has been struggling to put the
country out of these negative features and paid much effort in the process of state building.
Fiscal and monetary sectors are the key components of the broad reform package. In the
fiscal side, the government struggled to have a balanced and realistic budget. In addition, the
finance ministry developed a short-medium term revenue strategy which explains the list of
required tax reforms in 2017 and 2018. Despite of facing challenges and hard conditions
existed, the government insisted to implement this strategy and the current success in revenue
performance is the result of the strategy implementation. The study recommends to federal
government of Somalia to; (1) lower the extent of economic informality, (2) build its
administration capacity, (3) create a stable political and secure environment, (4) develop a
strong fiscal federalism framework and (5) enhance the customs operations and develop an
effective policy of trade facilitation and (6) update the tax legislations.
It’s recommended to conduct any further research about Somalia’s taxation including
legal and tax policy, revenue administration and customs. Doing further studies will
provide necessary information of about Somalia’s revenue in particular and fiscal
issues in general.
 SUGGESTION

Tax evasion typically results in revenue loss to the government. This may cause an inventible
distraction to the potential performance of the public sector, hence threatening its competence
to finance public expenditure. This study investigates the factors that influence tax evasion in
Banadir Region, Somalia. From the above discussion, the findings of this study are highly
significant to academic researchers and taxation students. For the academic researchers, the
findings of this study provide a new foundation for the taxation research because there were
no studies on tax before in Somalia. The result also provides a new dimension in
understanding the tax evasion and its determinants. For the students in taxation, the study
provides additional knowledge regarding the variables tested and how they are related to tax
evasion.
The findings of this study primarily have practical implications in explaining the relationship
between the variables that are examined in this study. Tax evasion decrease and erode the
revenue generated used to support government function. Also, it is critical to note the
taxpayers are rationally and mentally ready to comply with the tax authority, but other factors
influence their behavior and change their individual perception toward taxes and evasion.
Besides understanding the factors that influence tax evasion, this study also has practical
implication to the government in curbing the phenomenon through effective tax laws and
policies and incentives for voluntary compliance. Similarly, the result is also useful to tax
practitioners and other stakeholders of tax administration.
 REFERENCES

Aniket Bhushan, Y. S. (2013), Financing the Post-2015 Development Agenda:

Domestic Revenue Mobilization in Afric. Ottawa, Canada, North-South
Institute.

Adeniran Samuel Fakile, F. F. (2014), Mobilizing Domestic Revenue for

Sustainable Development in Africa. European Journal of Accounting Auditing
and Finance Research, 91-108.

Dr, R. Tamarappoo. (2016), Analysis on the Linkage Between Domestic

Revenue Mobilization and Social Sector Spending,. Nathan Associates Inc. for
USAID.

ECA. (2018), Natural Resource Governance And Domestic Revenue

Mobilization For Structural Transformation. Addis Ababa, Ethiopia: United
Nations Economic Commission for Africa.

Heggstad, O.H. F. (2012), Local government revenue mobilisation in

Anglophone Africa. Chr. Michelsen Institute. IMF. (2011), Revenue
Mobilization in Developing Countries. Washington DC, USA: International
Monetary Fund.
IMF. (2018). 2017 Article IV Consultation and First Review under the Staff-
Monitored Program—Press Release; Staff Report and Statement By The
Executive Director For Somali. Washington DC: International Monetary Fund.

Raul Felix Junquera-Varela, M. V.-D. (2017), Strengthening Domestic

Resource Mobilization: Moving from Theory to Practice in Low- and Middle-
Income Countries. Washington DC, USA: World Bank Group.