Abdirashid Duale is CEO of Dahabshiil, the largest international payments firm in the Horn of Africa and one of its largest private employers. He explains why Somalia economy has been buoyant despite huge challenges and, with an increase in foreign investment, why the country may have crossed the tipping point to a much better future.
As we move into 2013, many Somalis are looking to the future with growing confidence. The new sense of hope is perhaps best illustrated by the number of migrants returning home, particularly to Mogadishu, after many years abroad. A rising trend of inward investment is boosting the attractiveness of the Somali territories as a place to do business, and opening up the possibility of new trade links with the rest of the world.
The Somali economy has been remarkably buoyant over the last two decades despite many challenges. The livestock trade, worth an estimated $1bn a year, remains the mainstay and continues to perform well. According to recent figures, 95% of all goat exports and 52% of sheep exports from the whole of East Africa pass through the two northern Somali ports of Berbera and Bossasso. Somali camels are highly prized throughout the region, and hundreds of thousands of them are sold each year to buyers in the Middle East – principally for the annual Hajj festival.
The continued strength of this trade is of course essential, but the last 20 years have also seen the emergence of new sectors which have flourished thanks in no small part to foreign direct investment (FDI). The remittance industry has grown rapidly in tandem with the global spread of the Somali diaspora. Mobile telecoms has prospered too, similarly driven by the urgent need to keep relatives in contact across long distances. Stiff competition between telecoms operators has resulted in mobile services that are among the cheapest and most reliable in the world. Following the more recent security gains in Mogadishu a construction boom is now under way, with diaspora money flooding in as more and more migrants return home.
Remittances the bedrock
Underpinning all this has been the steady inflow of remittance finance. Somali expatiates send hundreds of millions of dollars back home each year – an essential and reliable source of capital that far exceeds what the Somali territories receive in international aid. According to Reuters, annual FDI to Africa is around $43bn, or 3.6% of Africa’s total GDP. The rate of return on foreign investment is estimated to be higher in Africa than in any other developing region. Last year the UN predicted that FDI could increase over the next two years to as much as $100bn, or 8.4% of current overall GDP.
The role of the diaspora in this process is crucial. Many of those who left the Horn of Africa 20 to 30 years ago established careers for themselves in the Middle East, Europe and North America. As their earnings grew, so did remittance flows back to the region. Diasporaled investment in new industries has been a central driver of economic growth ever since. Remittance funding, therefore, has kept the Somali economy active and growing. Almost half of Somali companies are diasporaowned, and according to the UK’s Department for International Development (DfID), 80% of start-up capital comes from migrants. Dahabshiil has been the point of entry for the bulk of this inflow for many years, and we have seen at close quarters the powerful effect it has had on growth and development. The spread of mobile technology has facilitated this process, allowing for quick and straightforward cash transfers as well as enabling those abroad to keep track of asset prices and to monitor investments.
There is much discussion these days of the ‘leapfrog’ effect of bypassing the redundant copper wire phase of telecommunications and moving straight to high-tech mobile services. There is certainly no doubt that throughout East Africa the benefits of rapidly improving mobile services are being felt across the private sector. The Somali territories are no exception. Continued diversification is essential if the Somali economy is to achieve sustainable growth and to develop the resilience necessary to withstand shocks like the drought of 2011. To reach that stage of development there must be significant inward investment, most notably in infrastructure. There is a long way to go in this area but conditions are now favourable and important first steps have been taken.
Turkey in particular has been quick to provide targeted, proactive development aid to Mogadishu – beginning work on a new airport terminal, repairing roads and building new hospitals. Starting in March last year Turkish Airlines flights are now passing through Mogadishu, ending more than 20 years of isolation.
Private investors from Turkey were among the first to see the commercial opportunities during the early stages of Mogadishu’s recovery, and in many ways they led where others followed. The difference in the city between then and now is readily apparent, with different nationalities and – most importantly – with Somalis from across the diaspora arriving to play their part in a Somali-led rehabilitation of the capital. As well as new infrastructure, Somalis need better trade links with the rest of the world to enable nascent sectors such as manufacturing – currently serving the domestic market – to access the global marketplace. As with infrastructure development, FDI will be essential to this aspect of the recovery. The manufacturing and energy bases are beginning to emerge, but both need large-scale investment before the foundations can be laid for meaningful export growth.
Oil exploration intensifies
This will come: the confirmation of the presence of oil in Puntland last year prompted the arrival of a number of foreign companies eager to be the first into the new zone. The Canadian firm Horn Petroleum Corporation has now acquired significant interests, and other companies will follow as the region continues to stabilise. In Somaliland, UK-listed Genel Energy and Ophir Energy and Australialisted Jacka Resources are now beginning to explore for oil.
As well as these onshore finds there are also large offshore oil fields to be explored. The consensus within the global oil and gas industry is that there will be a large infrastructure requirement for offshore East Africa over the next few years.
Stronger governance will be necessary to ensure that ordinary Somalis benefit from these resources, but there is no doubt that these are hugely exciting discoveries which could mark a genuine turning point in the Somali territories’ development. Closer economic ties with the rest of the world are essential to fostering the trade relations that will be necessary for what is still a largely informal, agrarian economy to mature. Trade links, particularly in livestock, with neighbouring East African and Middle Eastern countries are centuries old. More recently, horizons have broadened to include Asian powerhouses such as India and China. As international relations continue to develop, the prospect of trade with rich-world countries in Europe and North America will become a real one.
The growing optimism throughout the Somali territories is not misplaced. Despite inevitable setbacks, the overall progress we have seen since August 2011 has been remarkable and points increasingly to a new chapter in the Somali story As reconstruction began in earnest last year there was talk of a ‘tipping point’ beyond which there will be too much for Somalis to lose for them to risk a return to the instabilities of the past. The arrival in recent months of new investors and entrepreneurs; the emergence of dynamic, knowledge-based industries; and the first steps towards a regionally competitive energy sector are all immensely encouraging signs. That elusive tipping point may be nearer than we realise.