Local Investment Diversification is the Key to Leapfrog Somaliland’s economy: Why & how it matters?

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Could the stereotyped local investment in Somaliland lead to a lower yield of return of investments (RoI) and a period of economic stagnation due to a lack of diversity in our local investments? Could the local investments be regulated or guided to maximize our microeconomy?

 

Preface

It’s customary to ignore the critical role that the Microeconomy branch of economics plays in the overall well-being and growth of the general economy of a country. Due to oversights, we usually tend to rhetorically emphasise only the Macroeconomy branch while studying the performances of the economy and forget the vital role that microeconomy has in the general economy. Microeconomics studies individuals and business decisions, focusing on supply and demand and other forces that determine price levels, profits, making it a bottom-up approach in the economy. In Somaliland, the microeconomy,  it is here in this bottom-up level that falters. The Microeconomy of Somaliland needs to be studied carefully and with quick remedies “Local Investors behaviour and practices” instead of just fixated on the Macroeconomics that addresses the government’s economic decisions. The sage adage had it “Save the Pennies; the pounds will look after themselves” comes to mind here; therefore, fixing the microeconomy branch of Somaliland first will lead to a healthy bottom-up economy that will improve the overall economy.

 

Somaliland, a nation that has been autonomous and independent for 30 years but has yet to be known as a sovereign nation, has, by all means, defied the odds and has become one of Africa’s fastest-growing democracies and managed its economy well thus far,  despite its limited assistance from its international counterparts. Endowed with potentially rewarding abundant natural resources like marine resources, livestock, hydrocarbons, mineral resources, and limited yet sizeable agri-able lands has potential for diversification of local investments. Equally so, Somaliland is blessed with the proximity to the landlocked 120 million populace of landlocked Ethiopia. Money is a coward! Yet the Somaliland local investors should note having secure borders and the prosperous dry port of Tog-Wajaale as a trading hub, improved macroeconomic management by the government, stability, and peace. These are comforting prerequisites for nationals to diversify their local investment and exploit their potential microeconomy wealth fully by looking beyond the repetitive and copycat niche investments into hotels, shops and import trades.

It is widely speculated by many economists and researchers that our global economy is stagnating, and there seems to be uncertainty and uneasiness about our future—these trends all pally more to countries that depend on selling few products overseas. Prices of minerals and other essential goods that are exported by many developing countries have declined sharply. This case certainly applies to Somaliland, which has only on inter-export of livestock and solely rely on their pastoral livestock-based economy. Many countries, especially those in Africa, have suffered setbacks and stunts to their economic growth due to their lack of economic diversity. This leads to the urgent need to devise diversification strategies that can deliver positive and sustained growth, create a job-intensive economy, and move away from today’s limited mainstream income sources to generate robust and sustainable development.

Economic diversification is the process of shifting and moving an economy away from a single source of income source towards multiple sources from several sectors and markets. This process has been applied to many developed nations who see this as a strategy to boost economic growth, foster development, and be more resilient to external shocks and vulnerabilities. An over-reliance on a single source of economic activity is hurtful to the national economy. The United Nations, an intergovernmental organisation aiming to foster growth and sustainability among nations, has strongly advised many countries, especially Africa, to diversify their economies.

Over the past few decades, Sub-Saharan Africa has achieved high economic growth rates while making significant social progress (Why Africa must shift from dependence to diversification, Now, 2018). However, this progress has not been sustained for long periods in most of those African nations. The uncertainty of Covid-19 and the plunge of the oil prices and various essential commodities have left many African States economies vulnerable. It is easy to focus on the macroeconomy, but what is worrying and more challenging to diagnose is the ‘microeconomics’ of economic diversification, and this is what we will take a look at in this thesis. The industry, firms, and individuals that make up the microeconomy shall be closely inspected and monitored to look for opportunities to diversify domestic output for higher productivity growth.

 

Somaliland’s Economy and the Need to Diversify.

The most reliable sources of income for Somaliland are remittances from locals working abroad and primary production such as livestock and agriculture, which account for a bulk of their GDP estimating to be around $2billion as of 2019 (Wikipedia). Despite having vast proven natural resources, there has been limited to no capitalisation of their extractive industry. An opportunity to join the regions economic superpowers is within our grasp, and we are letting it go to waste. That can be an avenue Somaliland could consider going and following the model set by our Middle Eastern counterparts who successfully extracted their natural resources. However, they realised that these resources are finite and have reduced their dependence on their extractive sector by expanding into exports, tourism, and other sectors, successfully steering the ever-present and looming resource curse.

Solely relying on remittances and livestock is not sustainable. This has led our nation to experience macroeconomic instabilities because of the over-reliance on external demands, remittance from abroad, and extreme weather conditions such as droughts which negatively affect our livestock. It is also important to note that Somaliland is still reeling from the effects of the Covid-19 outbreak, just like most nations. The tourism sector suffered massively in particular since Somaliland did not develop its tourism industry. Many local investors have spent fortunes building many state-of-art hotels and resorts costing hundreds of millions of Dollars, and luxurious and state of the art hotels and resorts are announced all the time. The numbers of 3-star and 4-star beds available in Hargeisa alone are many, and the supply surpasses the demand. Yet, the room-filling rates for our hospitality industry are their lowest ever, and one wonders if those local investors carried out proper market research before stereotyping their valuable investments into blocks of cement beyond the market needs?

Investing in hotels and resorts is the onset of the rich tourism and business hosting resurgence but must be aligned with a more comprehensive and calculated national program. Sure it is the government’s responsibility, and its relevant ministries need to ensure that those patriotic local investors efforts bear fruit and are rewarded with a faster return of investment (RoI), avoiding locking up their limited investment into cement and mortar. With little to show for it, the hospitality industry in Somaliland has experienced a surge in investments with little to no returns so far; however, we hope that the Berbera Economic Corridor (BEC) and the excellent business bonanza anticipated will reward those local investors shortly.

It’s human nature; when things go wrong, mainly in the economic growth, we look for a scapegoat and blame the government.  Alas, comes the cause for concern in Somaliland, which seems to be the boom of local shops/supermarkets, the rise of hotels, Qaat kiosks and the lack to see better alternatives. Many have decided to take the easy route and build shops that all supply the same commodities. Many of these shops occupy near one another, and it seems to be a waste of infrastructure and space. The same thing happens with the hotels, where one after another, it seems to fill up the city along with the multiple Qaat kiosks alongside the roads.

A bigger worry also stems from the fact that despite our over-reliance on livestock, we cannot make our local milk and rely on foreign milk products such as ‘Al-Marai’ and ‘Al-Ain’ many more.  Why be blessed with cows, camels, goats, and sheep, then fail to take advantage and instead gulp milk from the Arabian deserts? Why not just create our manufacturing plant that produces a constant supply of dairy products. HATS OFF! Kudos to the local “SBI” company and management, which has the Coke and the Lis dairy plants, is a successful microeconomy story. In this bottom-up approach, the local investment diversified and broke away from the stereotyped trend. SBI, although winning the race, yet is not enough to supply our ever-growing population of 4 million and still to rise. We need to diversify into more manufacturing plants producing a range of essential commodities such as flour, wheat, packaging, fodder for livestock, professional transportation fleet that participated in the Berbera Economic Corridor and stop the over-reliance on imports. This could certainly pave the way for a more ‘job intensive’ society and save our foreign exchange.

Many developing nations have overcome this obstacle of relying on a single market by its strategic expansions. A prime example can be seen by how Chile operates. Chile, located in western South America, has achieved a diversified economy by exporting more than 2,800 different commodities (World Bank). The World Bank is working with several countries to help them achieve greater economic diversification. Perhaps, a piece of solid advice for Somaliland is to begin contacting them for immediate support if it genuinely aims to reach the heights of many developed nations. The positive does remain for Somaliland who managed to build the strategic port of Berbera with the aim and objective of enhancing productive capacity and acting as a port hub for the Horn of Africa. This will lead to a ‘trade expansion’ that will act as a catalyst for growth by creating new jobs and serve as a trade hub that will likely allow us to handle a volume of transactions.

 

Final Thoughts and Recommendations

Economic diversification will be a game-changer for Somaliland’s financial future, and its importance cannot be undermined. Everyone should know that this cannot happen overnight. It will require patience, long-term planning, coordinating between the government and its relevant ministries of Somaliland, and building on its existing endowments. The process of shifting to multiple income streams remains elusive in most African countries; some still make progress and shall be seen as an example to follow for Somaliland. Let us take a look at Mauritius, a small nation located in East Africa that has defied all odds and has transformed its economy from a sugar dependent into a central financial services hub, a booming tourism sector, textiles, clothing, etc. (Why Africa must shift from dependence to diversification, Now,2018). Many other countries In Africa, such as Rwanda and Kenya, have managed to withstand the effects of Covid-19. Various alternatives remain present for Somaliland, such as livestock byproducts, transiting transportations to Ethiopia,  mining and energy, financial services, manufacturing, agribusiness, and textiles for diversification.

Economic diversification is inseparably linked to economic development, improved social status, poverty reduction, and increased jobs, mainly because Somaliland has almost a 65% youth population that is rapidly rising and eager to work. As such, the government must take the necessary actions to ensure that there is a future. No single method can fully promote an orderly process of structural change but a collection of many. As such, we lay down some key points/strategies that Somaliland and its local investors’ could deploy.

  • Let the government and its relevant ministries devise design public investments and enforce effective policy reforms to support a more diverse economy.
  • Relevant local investment regulator to regularly hold local investment forums to showcase open investment sectors and opportunities.
  • Offer local investment incentives like lands, technical assistance, tax exemption and knowledge transfer to stop the duplication of local investment resources, so diverse economy.
  • More investments in skills, infrastructure, institutions, and education are vital so that the ever-growing youth in Somaliland can have the necessary tools to succeed in their entrepreneurship passion.
  • Adopt a progressive approach in all the economic strategies and policies of the government and have a 360-degree view of the microeconomy and macroeconomy branches of the economy regularly.
  • Engage in integrating new technologies, which will lead to a reduction in transports and communication costs.
  • Imperative for our Somali race to conduct feasibility study/market research on all new projects and industries and avoid the bad habits of throwing rare and hard-earned monies into try-n-see projects.
  • Shift to a more results-based financing scheme where the government could reward and lend financing to ministries, agencies, and industries that support the implementation of economic diversification reforms.
  • Health Care and Medical sector, like advanced hospitals and diagnosing clinics, is yet an excellent investment sector that will bring medical tourism to Somaliland and mainly from the Somali inhabited regions.
  • The greenhouse based agro-business is in its infancy in Somaliland and is a sector awaiting significant investment and will sure reward with a bumper harvest of return of investment (RoI).
  • Higher education that is professionally developed and with award-winning curriculum programs is yet another venue for investment since most of the existing higher education institutions in the region miserably failed to produce graduates with the market required knowledge and skills.
  • As a local investor, avoid investing in the over-invested sectors with no apparent value-added proposition that you will bring in. Also, never invest without market research, feasibility studies and business plans.

Jointly co-authored by young brothers Mohd Feysal Hawar and Mohamoud Feysal Hawar, both Oil and Gas Management Graduates, specialising in Oil and Gas Fiscal Regimes, Oil and Gas Economists, Trainers & Consultants on all the Extractive Fiscal Regimes.

Mohamed Feysal HawarExtractive Resources Economist (Upstream Petroleum & Mining Economist )

BBA (Hons) Oil and Gas Management.

mohd.f.yusuf@gmail.com

 

Mohamoud Feysal Hawar

Extractive Resources Economist (Upstream Petroleum & Mining Economist )

BBA (Hons) Oil and Gas Management.

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