Reality check for region as Somalia joins EAC

President Mohamud reiterated what he had said at the 22nd summit last year — that Somalia is not just joining a bloc, but a “family of nations with one people, one destiny and united by shared goals and visions.”

To Mogadishu, the admission into the region’s trading bloc, which is rated the fastest growing and the most integrated on the continent, represents a “beacon of hope for a future full of possibilities and opportunities,” marking its comeback into the international scene as it joins its first-ever regional economic bloc on the continent.

“Somalia’s accession to the East African Community is mutually beneficial for both the bloc and my country,” said President Mohamud.

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“We bring to the table our rich culture, heritage, and a strategic location with a coastline of more than 3,000 kilometres, the longest in mainland Africa, untapped resources and a young, vibrant, and entrepreneurial population, ready to engage with the region, and the world at large,” he said.

President Mohamud expressed commitment to hasten the practical implementation of the EAC Treaty, to allow his country to fully enjoy the economic benefits of the bloc, a task which remains uncompleted for two of the latest entrants, South Sudan and the Democratic Republic of Congo, more than six years after joining the grouping in Juba’s case.

“We’re committed to reforming our institutions, enhancing our infrastructure, and creating an environment conducive to trade and investment in Somalia. We recognise the challenges ahead, but are confident in our ability to overcome them through cooperation, and shared expertise of this great region,” the Somalia leader said.

Adulsalaami Omer, Somalia’s special envoy to the EAC, to whom Mogadishu owes its successful admission into the bloc, told The EastAfrican that it will take them at most three years to fully harmonise their customs with the region’s, unlike the other new entrants, who have not been able to do so years later.

Mr Omer, who terms their admission a “major victory” said they will spend the next two to three years negotiating “special permissions to do certain things” to ensure their change of customs laws has a minimal impact on the country’s fiscal space. The region’s heads of state have also expressed optimism following Mogadishu’s accession into the bloc, and they seem to be hell-bent on continuing the expansion of the region, and Somalia may not be the last to join.

Tanzania’s President Samia Suluhu Hassan said she was happy to see Somalia join the club, saying the Horn of African country is an “important partner and we will continue working together with them.” Kenya’s William Ruto lauded Mogadishu’s success in joining the bloc, saying: “We now have an extra 15 million people or thereabout, who will become members of this great family.”

“As I congratulate Somalia, let me congratulate the other seven members of this great organisation. EAC is today the most integrated and progressive economic community in our continent,” President Ruto said.

Burundi’s President Evariste Ndayishimiye, who handed over to his South Sudanese counterpart Salva Kiir as the chair of the summit, also said he was “happy” that Somalia was integrated into the bloc, lauding the government and the people of Somalia for the milestone.

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Rwanda and DRC, through their prime ministers, also commended Somalia for its entry into the bloc.

From an economic perspective, Somalia’s membership expands the EAC’s market size and creates new trade opportunities. With its strategic location on the Indian Ocean coast, Somalia could serve as a crucial gateway for EAC, and to global markets.

“Through Somalia’s strategic position, the Community will benefit significantly through increased movement of goods, services and people across the bloc in addition to expanding intra-regional trade in the already established Somali businesses in the region,” said President Sheikh Mohamud.

“Somalia’s long Indian Ocean Red Sea route that links Africa to the Arabian Peninsula is a vibrant economic zone. The exploitation of Somalia’s blue economy resources such as fish and the expansive coastline would boost the regional economy.”

Its GDP is estimated at $11.5 billion, more than South Sudan’s, for example, even though they have similar populations and challenges.

Its real output has been growing steadily over the years and is projected by the International Monetary Fund (IMF) to grow by at least 2.8 percent this year, before accelerating to 3.7 percent next year, from last year’s 2.4 percent.

Its GDP per capita has also been steadily rising, from $531 in 2015, to $667 in 2022, and is forecast to continue rising.

John Bosco Kalisa, East African Business Council CEO, says Somalia’s entry is good for everyone and that the region’s private sector will immensely benefit from it. “Widening the EAC is very paramount because it creates a business case, in terms of production, in terms of consumption, and in terms of investment,” Mr Kalisa told The EastAfrican.

With an estimated population of 17 million, it is expected to lift the bloc’s population to over 300 million, providing a huge consumer market for regional businesses.

The expansion of the regional bloc increases EAC’s competitiveness for foreign direct investment by offering an attractive trade area.

“Entrepreneurs in Somalia will have greater opportunities for investment, easing some of the social and economic pressures that have come with its isolation,” says South Africa-based Institute for Security Studies.

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Somalia’s accession to the bloc is expected to be economically beneficial for the country and its immediate neighbours as a result of the EAC Customs Union. These gains include a reduction in tariff and non-tariff barriers and integration into future infrastructure projects that boost trade and reduce transport costs by linking EAC partner states.

Somalia is also expected to benefit from the EAC's regional infrastructure projects such as roads, railways, and energy networks.

According to the EAC Secretariat, the 3,000km EAC coastline will enable EAC member states to tap into Somalia’s blue economy. Since the collapse of the Mohamed Siad Barre regime in 1991, Somalia’s cross-border trade with neighbouring countries has declined largely as a result of insecurity.

But ISS argues that while there are many benefits to joining the EAC, the depth of Somalia’s security problems raises critical questions about the bloc’s readiness and capacity to ensure peace, security and regional stability.

IMF, however, says Somalia has made considerable progress in rebuilding its economy and institutions by implementing wide-ranging reforms to help strengthen key economic and financial policy institutions.

This progress is paving the way for Somalia to reach the Heavily Indebted Poor Countries Completion Point this December, at which point the country is expected to receive debt relief and move toward fully normalising relations with its key creditors.

Despite the progress, Somalia faces significant challenges, including those stemming from economic, social, security and climate risks.

Somalia has already fallen into debt distress and its economic growth is insufficient to reduce widespread poverty and address large social needs, including creating jobs for the youth, with close to 70 percent of the population living on less than $1.9 a day.

By February this year, an estimated 8.3 million Somalis were affected by the drought — more than half of the population.

And now floods have killed close to 100 people, with almost two million people affected, the country's Cabinet said on Thursday.

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Somalia, like other countries in the Horn of Africa, is battling torrential rains and flash floods just as it emerges from a drought that pushed millions to the brink of famine.

The government earlier this month declared a state of emergency over the flood disaster, which has driven about 700,000 people from their homes, submerging whole neighbourhoods and farmland, and destroying bridges.

The Cabinet said in a statement Thursday after a briefing by the National Disaster Management Agency that about 96 people have lost their lives and almost two million have been affected.

"The federal government of Somalia is carrying out efforts to assist people who were affected by the floods and the cabinet has appealed to the humanitarian agencies and the Somali public to help those affected," it said.

According to the IMF, sustained efforts are needed to strengthen domestic revenue mobilization to make room for priority spending, while containing discretionary expenditure pressures.

The country is expected to continue implementing reforms to strengthen the financial system and improve Anti-money laundering/Combating the Financing of Terrorism (AML/CFT) and strengthen governance and transparency, including procurement and concessions. “Timely financing and capacity development support from development partners is essential for the successful implementation of the authorities’ reform strategy,” according to the IMF.

Its financial sector continues to develop, though challenges abound.

While reported capital adequacy and liquidity ratios for banks remain sufficient, several smaller banks faced losses last year.

However, the upgrade to Somalia's airspace by the International Civil Aviation Authority in January 2023 signals greater safety and efficiency, which is expected to facilitate an increase in air traffic, according to the IMF.

Despite the suitable economic conditions which appear relatively stable and only improving with time, Somalia’s monetary policies may not perfectly fit with the Common Market Protocol or align with the single-currency dream.

With a fixed exchange rate regime, the Somali shilling has been stable against the dollar, even as other currencies in the region depreciate, but it is barely used in the economy. The country is dollarised, as it is the US dollar that is used in most transactions.

Somalia’s customs policies are also currently not aligned with EAC’s common external tariffs, which set only four bands for taxation of goods imported from outside the bloc. Although Somalia’s external rates are also capped at 35 percent, it taxes several commodities higher than EAC does, which means it will have to cut some taxes to fully integrate into the community.

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Seeing that the country’s revenues cover over 90 percent of its fiscal expenditure, the tax cuts could potentially harm its revenue flows, limiting its ability to maintain its low fiscal deficit standard.

Abdulsalami Omer, Somalia’s special envoy to the EAC, told The EastAfrican that joining the region’s Customs Union will certainly mean slashing some of the taxes they charge on imports from foreign countries, which will significantly impact their revenues, but maintains that they’ll benefit more than lose and that this won’t happen overnight.

“There’ll be a discussion of it, and every country has to ask for time and special permissions to do certain things. So, we’re looking at two to three years to negotiate all these things,” Mr Omer said. “The first part is to put the infrastructure in place, which is really the easy part, the second part is, how will it work, and how do you recover from the revenue losses?”

Nonetheless, Mr Omer is optimistic that Somalia’s entry into the EAC will significantly help bring it back to the “international scene,” and address the country’s internal security challenges.

“Somalia has been away from the international scene and the African scene for a very long time. For us to start the comeback of Somalia internationally from our neighbours is a major victory,” he said.

He also expresses confidence that their admission into the EAC will help address their security situation which has for years riddled their development.

“The type of security situation that Somalia is facing is not something that is specific to Somalia. It’s an international thing, a regional thing, and I think the Somali security will improve with us being part of the community,” he said.

Despite the enthusiasm for Somalia joining the EAC, the road ahead is bumpy.

"Somalia should also begin the integration process on the ground through the large population of Somalis spread across East Africa doing business and making a livelihood,” said Simon Kaheru, vice-chair of the East African Business Council.

While joining the EAC could provide the country with an opportunity to fix its integration bottlenecks as a nascent country born from prolonged strife, Somalia needs political and security anchors to free resources for its development.

“The fact that our governments have already worked together to create a peaceful atmosphere there and between the countries in the region has helped and we have already improved trade relations between ourselves, so the next step should be both inevitable and easy,” said Kaheru.

As a first step to enjoying the benefits of the Customs Union, Somalia’s adoption of the EAC Common External Tariff (CET) entails both costs and benefits requiring careful study given prevailing production and consumption patterns.

Free movement of persons, capital, services and labour under the Common Market will require that Somalia enhances its internal immigration, security and labour to international standards.

By Vincent Owino, James Anyanzwa and Luke Anami