The Federal Government of Somalia (FGS) has recently started financial reform initiatives aimed at increasing domestic revenue. The government commenced the collection of two types of tax: income tax and sales tax. Income tax collection — 6% on salaries between $200 and $800; 12% on salaries between $800 and $1500 and 18% on salaries above $1500 — was started for the employees working with some private companies and international non-governmental organizations operating in Somalia. A 5% sales tax has been introduced in hotels in Mogadishu. The ministry of finance has also changed the traditional lump sum approach for the taxation of imported goods, and levied a 5% sales tax on commodities other than basic necessities imported at the Port of Mogadishu.
The Law Number 5, issued on November 5, 1966 is the legal base of the income tax (wages and salaries of public and private employees). Also Law Number 2, issued January 7, 1984, which amended the law of 5th November 1966, is the base for the sales tax. However, the recent attempt to collect sales tax has not gone down well with the business community in Mogadishu. Bakara market, the biggest market in the country, was closed for a number of days in protest against the sales tax. Businesspeople complained that first the 5 percent rate is too high; second, the government levied the sales tax on commodities before they are sold; and third, the tax is not applied nationwide. The minister of finance defended the tax in several media appearances, explaining the fairness of the rate, and the importance of the taxation for the government’s self-sufficiency and improvement of public services.
The Federal Government of Somalia’s 2018 budget estimation indicates a deficit of 43% (or $118.6 million), which it hope to address by increasing internal revenue through taxation. Yet the primarily driver for financial reform efforts is to secure relief of Somalia’s decades-old international debt, through the International Monetary Fund (IMF)’s Heavily Indebted Poor Countries (HIPC) Initiative designed to help poor countries clear arrears. The latest IMF staff-monitored program (SMP) has duly acknowledged Somalia’s commitment to economic and financial institutional reforms.
There are a number of challenges that any ambitious financial reform initiative in Somalia would inevitably encounter. First, a comprehensive tax collection system is not well-understood, especially since the country experienced more than two decades of chaos and without regular taxation. The majority of the Somalis in the country have little understanding about the purpose and different types of taxation. Ill-focused civic education in schools and universities are partly to be blamed for this ignorance. Nonetheless, this highlights the need for a comprehensive campaign educating the public about the intricacies of taxation.
Second, public services have been poorly delivered by successive governments in Somalia. And the current budget for social services is not sufficient to meet the complex demands for basic public services. Government services such as security, education, health, and infrastructure have been rudimentary at best in some regions and almost nonexistent in others. The majority of citizens have become used to providing their own security, health, and education without government support. The legitimate question that comes to citizens’ minds is what the government is going to offer in return for the tax, the answer to which is not yet clear.
Third, there is a discussion over tax collection in Mogadishu alone when there is no unified fiscal policy in the country. The federal system of governance added a layer of complexity to the taxation system. Resource sharing arrangements are also not clear. Currently, different regional authorities have different approaches and rates for the collection of domestic revenue. Citizens in Mogadishu query why the federal government tax regime is only concentrated in Mogadishu.
Finally, there is a suspicion of misappropriation of public funds, and many are worried about where the money collected would end up. Transparency International’s corruption perception report released in February 2018 indicates that Somalia has retained its position as the most corrupt nation in the world — even below South Sudan and Syria. Many citizens are understandably doubtful that the money collected will be managed properly.
Two considerations for the government
For the FGS to implement successful financial sector reforms and improve the domestic revenue generation, two critical steps need to be taken.
First, significant improvements in transparency in both budgeting and public spending are required. The government should explain how the money collected in the form of tax will be spent and accounted for. Citizens are rightly interested to know how the money is spent. Transparency in public expenditure could significantly improve the public trust in the government. When Ngozi Okonjo-Iweala became minister of finance in Nigeria in 2003, she started to release the government budget every month in the interests of transparency. Citizens in Nigeria were keen to know what was happening with their money. A similar approach could be taken in Somalia and in Mogadishu in particular.
Second, the federal government has to outline the quid pro quo of regular taxation. If the government is prioritizing security, it has to illustrate to the public how the tax collection will improve the security in general, and in Mogadishu specifically. The government should also outline how other vital public services such as public roads, clean water, education, and healthcare are prioritized. The tax collection should be complemented with the improvement of public services.
Citizens and taxpayers have to understand that the payment of tax is obligatory and the engine of the government functions. Failure to pay tax implies that citizens have no right to make the government accountable to the public, and that Somalia will remain financed by foreign taxpayers. For the general public to get better government services, they have to pay the mandatory tax while demanding transparency and better social services. Payment of tax would put citizens in a strong position to make the government accountable to them, and work in their interests.
The Somali Public Agenda