Challenges and opportunities of fiscal federalism implementation in Somalia

The concept of fiscal federalism has increasingly become popular throughout worldwide as a means to address various challenges associated with the management of state resources, the promotion of local development, and the assurance of effective service delivery.

Fiscal federalism involves the division of fiscal responsibilities and financial authority between the federal government and subnational entities to ensure efficient resource distribution, expenditure assignments and high-quality service provision.

This discussion is rooted in the principles of autonomy, decentralisation, and the active participation of regional governments in financial decision-making. The framework of fiscal federalism is especially relevant in Somalia, a nation that has faced a turbulent history characterized by conflict, the erosion of state authority, and ongoing state-building efforts.

This governance model seeks to strike a balance between central authority and regional autonomy. To effectively identify the guiding principles that govern resource distribution, revenue-sharing agreements, expenditure assignment and intergovernmental relations within the Somali federal system, it is essential to understand this conceptual framework. 

Fiscal federalism serves as a vital framework for governance, shaping the political, social, and economic landscapes of a country. In the context of Somalia, fiscal federalism holds significant importance in defining the nation's trajectory and influencing political balance, social cohesion, and economic stability.

It presents both challenges and opportunities as the country endeavors to establish a robust governance framework, foster economic development, and address local needs. However, implementing fiscal federalism in Somalia is a daunting task that even becomes more complex, particularly in light of its historical conflicts, challenges in state-building, and the need for economic reconstruction.

The on-going political instability and insecurity in various regions further complicate its implementation, potentially undermining effective fiscal federalism and disrupting cooperation between the federal government and regional states, thereby making coordinated fiscal policies difficult to achieve.  

The task of implementing fiscal federalism in Somalia is undoubtedly challenging but crucial for the country's state-building goals. A glimpse into Somalia's historical context reveals decades of political instability and civil unrest, which have significantly hindered efforts to achieve fiscal federalism.

Emergence of autonomous regions

In 1991, the regime of Siad Barre was overthrown, plunging Somalia into turmoil and making it one of the most unstable countries in the Horn of Africa. This subsequent power vacuum led to the emergence of autonomous regions and clans, each engaged in a continuous struggle for dominance.

Consequently, the state-building process has been lengthy and difficult, marked by the challenge of reconciling the establishment of a unified federal state with existing clan-based structures. The formation of federal member states and the ratification of the Federal Constitution in 2012 were crucial milestones along this journey.

The full implementation of a federal system of governance in Somalia offers numerous benefits that can enhance the stability, efficiency, and diversity of the nation. This form of government, defined by the division of powers between a central authority and regional or state governments, presents several compelling advantages.

Firstly, it enables localized policy solutions that can more effectively address the specific needs and priorities of different regions, thereby improving service delivery and increasing responsiveness to local communities.

Additionally, a decentralised fiscal framework can enhance accountability, as regional governments may be more attuned to the needs of their constituents. Citizens may experience improved access to government officials and greater opportunities to influence local governance.

Furthermore, fiscal federalism holds the potential for more equitable resource allocation towards development initiatives, infrastructure, and services that cater to the diverse needs of various regions. States would have the autonomy to develop their own revenue sources and tax policies that align with their unique economic contexts.

This can stimulate local economic growth and promote self-sufficiency, ultimately empowering regional administrations and fostering democratic governance through the decentralisation of decision-making. Such an approach can encourage local participation and strengthen institutional frameworks.

Conflicts over resource allocation

However, significant challenges lie ahead for the smooth implementation of fiscal federalism in the country. Effective fiscal federalism requires legal framework, strong coordination and cooperation between the federal government and the authorities of the member states.

Inconsistent policies and overlapping jurisdictions can result in inefficiencies and conflicts over resource allocation. Additionally, many member state governments may lack the institutional capacity and technical expertise necessary for effective financial management.

This encompasses difficulties in revenue collection, budgeting, and public financial management, which can impede their ability to provide essential services. Furthermore, building capacity poses another critical challenge, as many member states do not possess the institutional strength needed to effectively manage their fiscal affairs.

The challenges of implementing Somalia’s fiscal federalism are deeply intertwined with broader issues of stability and governance in a context marked by ongoing security concerns. These difficulties are further exacerbated by a lack of public awareness and participation, underscoring the importance of inclusivity in the fiscal policy-making process.

Additionally, the nation’s enduring clan affiliations and the legacies of war complicate efforts to establish a unified fiscal strategy. Understanding these social dynamics is essential for crafting fiscal policies that align with the country's unique societal framework.

Moreover, creating mechanisms for intergovernmental coordination poses significant challenges, especially in an environment where trust levels are low. Politically, numerous obstacles must be navigated, including the nascent state of federal institutions, power struggles between the federal government and its member states, and a rapidly evolving political landscape.

The absence of a clear and comprehensive legal framework governing fiscal federalism adds to the complexity, creating ambiguity around the powers and responsibilities of both federal and regional governments. This lack of clarity can lead to disputes over fiscal authority and resource allocation.

Address economic disparities

Additionally, Somalia's dependence on international aid presents another challenge to the development of a self-sustaining fiscal federalism. Such reliance on donor funding can distort local revenue-generating incentives and may result in conflicts of interest or misaligned priorities that do not reflect local needs.

Differences in resource endowments among regions, coupled with the influence of external actors, add layers of complexity to the economic landscape. The pressing need to address economic disparities within the framework of fiscal federalism is underscored by the various challenges faced by federal member states.

Although Federal Government improves domestic revenue collection and strengthens public financial management procedures, Somalia for instance, is heavily dependent on external aid, and its domestic revenue collection mechanisms are underdeveloped. This situation undermines the fiscal autonomy of regional governments, which are already grappling with some of the most severe humanitarian and climate crises.

Many regions in the Federal Member States (FMS) lack the expertise and resources necessary to effectively collect and manage revenue, plan and implement development projects, and provide essential services to their communities. Therefore, establishing a fair and transparent system for resource allocation is crucial to preventing conflicts. Effective fiscal federalism necessitates coordination and cooperation between the federal government and regional authorities.

In summary, although challenges such as political instability and weak institutional capacity present significant obstacles to effective fiscal federalism in Somalia, there are considerable opportunities for enhancing governance, improving responsiveness, and empowering local communities.

Establishing a cooperative relationship between federal and regional governments, along with strengthening institutional capacity, will be essential for maximizing the advantages of fiscal federalism in the country. Engaging all stakeholders including civil society, the private sector, and citizens is critical to ensuring meaningful participation in the fiscal policy-making process and holding government officials accountable.

Furthermore, investing in education and training programs to develop technical skills and financial management knowledge can help build capacity at the sub-national level, fostering economic growth and development. Overall, while implementing fiscal federalism in Somalia poses challenges, the potential benefits are substantial and can lead to a more stable, equitable, and prosperous future for the nation.

Saleiman S Umar is the Director General, Ministry of Finance, Federal Republic of Somalia