Somalia’s economic freedom remains unrated due to a severe lack of reliable data caused by the country’s ongoing political instability. The last time Somalia was fully graded was in the 2000 Index when it received a score of only 27.8.
The 2013 Index included Somalia for the first time since 2001. Over the past decade, prolonged political instability and lawlessness have wracked Somalia and ruined the country’s prospects for long-term investment and economic development. Economic collapse has resulted in massive human migrations, and much of the population lives in conditions of severe poverty.
The territory under the federal government’s control has gradually expanded. However, progress toward economic normalization and recovery remains severely impeded by continuing security threats. In the absence of an effectively functioning central government, numerous armed groups and militias control different parts of the country. Although local authorities or elders sometimes enforce laws based on traditional customs, Islamic Sharia law has become more entrenched since 2009.
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 Federal Government was forced to rely on the African Union’s peacekeeping mission to Somalia to protect civilians. A new provisional constitution was passed in August 2012, and the end of the TFG mandate in September led to the establishment of the Federal Government of Somalia. Somalia’s economy is based largely on agriculture and livestock herding, which account for 60 percent of GDP. The population is dependent on overseas remittances and foreign aid. However, economic growth is slowly expanding from Mogadishu, which has been in recovery since the terrorist group Al-Shabaab retreated to rural parts of Somalia in 2011. The African Union peacekeeping force continues to conduct operations against al-Shabaab.
Corruption in Somalia is rampant. A U.N. report could not account for 70 percent of revenues to Somalia between 2009 and 2010. There is no functioning national judicial system. Authorities in Mogadishu administer a mix of Sharia law and traditional justice. In areas controlled by al-Shabaab, some people convicted of theft or other minor crimes have been flogged or have had their limbs amputated, usually in public.
Somalia lacks an effective central government and administration that can provide basic services and collect taxes. Although some duties and taxes are collected, there is little effective fiscal policy in place. Most of the federal government is financed through aid. Militias and warlords continue to collect levies from the population, particularly in the southern portion of the country.
Political instability, an outmoded regulatory environment, and inadequate infrastructure significantly deter the formation and operation of businesses. The labor market is dominated by the agricultural sector and informal hiring practices. Despite almost nonexistent national governance, Somalia’s informal agricultural, financial, and telecommunications sectors have flourished without subsidies.
Violence in Somalia has been a deterrent to international trade and investment flows. The government is working to update its laws to attract foreign investment. In October 2012, a new Islamic banking bill was signed into law, paving the way for private commercial banks to start operating in the country.