Fiscal Decentralization in Somalia

Executive Summary

This paper examines Somalia’s emerging intergovernmental fiscal architecture, compares it with international experiences from Germany, Ethiopia, Kenya, and Nigeria, and proposes a phased reform agenda to strengthen Fiscal Decentralization.

The objective is to empower Federal Member States (FMS) and local governments while preserving national unity, fiscal discipline, and accountability.

Purpose and Scope

The study aims to:

Review Somalia’s current fiscal decentralization framework.
Compare Somalia’s system with international fiscal federalism models.
Identify institutional and legal gaps.
Develop a practical reform roadmap for strengthening intergovernmental fiscal relations.

Methodology

The study adopts a qualitative policy analysis approach based on:

Review of Somali laws and fiscal regulations.
Analysis of national budget documents.
Review of donor and development partner reports.
Comparative analysis of international fiscal decentralization literature.

The content analysis focuses on:

Legal frameworks.
Revenue assignments.
Intergovernmental transfer systems.
Institutional arrangements.
Fiscal decentralization practices.

Key Findings

1. Legal and Institutional Framework

Somalia’s fiscal decentralization system remains underdeveloped.

Key observations include:

The country continues to rely on ad hoc Finance Ministers’ Fiscal Forum communiqués.
There is no comprehensive Fiscal Federalism Act.
Institutional arrangements remain largely informal.
Fiscal coordination mechanisms require legal codification.

2. Revenue Assignments

Revenue generation remains uneven across Federal Member States.

Key findings include:

Own-source revenues are concentrated in port-owning states.
Inland states have significantly weaker revenue bases.
Local governments have very limited autonomous taxation powers.
Revenue disparities contribute to unequal service delivery.

3. Intergovernmental Transfer System

Since 2021, Somalia has implemented a formula-based transfer system allocating 40% of on-budget donor grants to Federal Member States and the Banadir Regional Administration (BRA).

The allocation formula includes:

57% based on equal distribution.
15% based on revenue performance.
15% based on expenditure management.
10% based on external audit performance.
3% allocated through a fiscal-gap adjustment mechanism.

Although implementation has improved:

The system remains heavily donor-dependent.
Transfer volumes remain too small to fully address horizontal fiscal inequalities.

International Lessons

Comparative analysis provides several useful lessons for Somalia.

Germany

Germany demonstrates the importance of:

Constitutional protection for fiscal equalization.
Predictable revenue-sharing arrangements.
Strong intergovernmental coordination.

Ethiopia

Ethiopia illustrates how:

Block-grant formulas can balance fiscal need and performance.
Transparent allocation mechanisms improve equity.

Kenya

Kenya demonstrates that:

County-level discretionary funding strengthens local service delivery.
Greater fiscal autonomy improves local accountability.

Nigeria

Nigeria highlights the risks of:

Fragmented revenue-sharing systems.
Unclear expenditure responsibilities.
Weak coordination across levels of government.

Policy Recommendations

The paper proposes several priority reforms.

1. Enact a Fiscal Federalism Act

The legislation should:

Clearly define revenue assignments.
Establish borrowing rules.
Create a rules-based intergovernmental transfer system.

2. Expand the Vertical Revenue Pool

Key recommendations include:

Allocate a share of domestically collected income taxes to Federal Member States.
Activate this mechanism once domestic revenue exceeds US$400 million.

3. Strengthen Horizontal Equity

The transfer formula should incorporate additional indicators, including:

Population size.
Poverty levels.
Public service coverage.
Existing fiscal performance measures.

4. Institutionalize an Intergovernmental Fiscal Commission

The Commission would:

Replace the current ad hoc Fiscal Forum.
Publish annual fiscal performance scorecards.
Resolve disputes regarding transfer allocations.
Strengthen fiscal coordination.

5. Empower Local Governments

Local governments should receive greater fiscal autonomy through:

Authority to collect property taxes.
Authority to issue business licenses.
Dedicated capacity-building grants.
Improved financial management support.

6. Improve Donor Coordination and Transparency

Priority actions include:

Align donor financing with the national transfer formula.
Publish transfer data regularly in Somali and English.
Improve transparency and citizen oversight.
Strengthen accountability in resource allocation.

Conclusion

Somalia has made important progress toward Fiscal Decentralization, particularly through the introduction of a pilot intergovernmental transfer formula.

However, significant challenges remain, including:

The absence of a comprehensive legal framework.
Continued dependence on donor financing.
Limited revenue autonomy for local governments.
Persistent regional fiscal inequalities.

Drawing on international experience from Germany, Ethiopia, Kenya, and Nigeria, the paper proposes a practical 2025–2027 reform roadmap aimed at transforming Somalia’s current informal fiscal arrangements into a predictable, equitable, transparent, and accountable fiscal decentralization system that strengthens both local governance and national cohesion.