Somalia’s economic freedom remains unrated due to a severe lack of reliable data caused by ongoing political instability. The last time Somalia was fully graded and ranked was in the 2000 Index when it received a score of only 27.8.
Violence and political unrest have prevented Somalia from developing a coherent and coordinated domestic marketplace. The central government controls only part of the country, and formal economic activity is largely relegated to urban areas like Mogadishu. Progress toward economic normalization is continuing as the government takes back more land from the rebels.
Lack of central authority makes the rule of law inconsistent and fragmented, with different militias, authorities, and tribes applying varying legal frameworks. Traditional customs, like Sharia law, have become more entrenched. Corruption remains high, and a lack of transparency and formal bookkeeping means that government revenues are easily embezzled. Establishment of government control and security will be vital for fostering broad-based economic freedom based on consistent rules and regulations.
Somalia has been in chaos since the collapse of the Siad Barre regime in 1991 and the subsequent civil war. When a U.N. humanitarian mission’s mandate ended in 1995, the transitional government was forced to rely on the African Union’s peacekeeping mission to protect civilians. A provisional constitution was passed in August 2012, and Hassan Sheikh Mohamud was elected president in September. The Islamist terrorist organization al-Shabaab remains a potent threat. There was an upsurge in attacks by maritime pirates off the coast in 2013 and 2014. Somalia’s GDP and living standards are among the lowest in the world. The population is dependent on foreign aid. Economic growth is slowly expanding beyond Mogadishu, which has been recovering since al-Shabaab retreated to rural areas in 2011. In September 2014, the leader of al-Shabaab, Ahmed Abdi Godane, was killed in a U.S. airstrike; he was replaced by Ahmed Omar.
Somalia is tied with North Korea and Afghanistan for last place among 177 countries in Transparency International’s 2013 Corruption Perceptions Index. According to a 2013 U.N. Monitoring Group report, government officials used the central bank as a “slush fund,” with an average of 80 percent of withdrawals made for private purposes. There is no functioning national judicial system.
Somalia’s central government lacks the ability to administer taxes or provide basic services effectively. Little effective fiscal policy exists, although some duties and taxes are collected. Most government expenditures are financed through aid. Warlords and militias continue to collect levies from the population, particularly in the south of the country.
Institutional shortcomings, including absence of the rule of law, severely impede any meaningful and sustained economic activity. A functioning formal labor market is nearly absent, and much of the labor force is employed in the informal sector. Despite almost nonexistent national governance, the informal agricultural, financial, and telecommunications sectors have prospered without subsidies.
Violence in Somalia has deterred international trade and investment flows. Political instability, an outmoded regulatory environment, and inadequate infrastructure continue to suppress development of the financial sector, which has been under reconstruction following the civil war. A large portion of the population remains outside of the formal banking sector, and access to credit remains severely inadequate.