The African Continental Free Trade Area (AfCFTA) offers potential opportunities for Somaliland’s economy, even though it is not likely to be part of the AfCFTA in the short to medium term.
The potential opportunities are:
first, Somaliland could address domestic non-tariff barriers to trade by aligning its laws and policies with those of the AfCFTA protocols.
Second, increased alignment and higher continental income could generate a demand-pull effect on export sectors in which Somaliland has a comparative advantage.
Third, a more aligned trade framework and a strengthened trade position could pave the way for Somaliland to enter into bilateral trade agreements with its main trade partners.
The AfCFTA And The Berbera Corridor: Opportunities For And Potential Impact On Somaliland’s Economy
Adria Rius Rodriguez
ODI: Supporting Investment and Trade in Africa
Table of contents
The African Continental Free Trade Area (AfCFTA) offers potential opportunities for Somaliland’s economy, even though it is not likely to be part of the AfCFTA in the short to medium term.
The potential opportunities are, first, Somaliland could address domestic non-tariff barriers to trade by aligning its laws and policies with those of the AfCFTA protocols. Second, increased alignment and higher continental income could generate a demand-pull effect on export sectors in which Somaliland has a comparative advantage. Third, a more aligned trade framework and a strengthened trade position could pave the way for Somaliland to enter into bilateral trade agreements with its main trade partners.
Through the Berbera Corridor project, trade integration could result in a dramatic increase in the volume and value of the Port’s operations, which could contribute greatly to Somaliland’s economic development.
About the publication
The publication has been funded under the Rapid Research Window, as part of the
Supporting Investment and Trade in Africa (SITA) program, funded by the UK Foreign, Commonwealth and Development Office (FCDO). All views are those of the authors and are not the responsibility of ODI or UK FCDO.
This report acknowledges Dr. Saad, Minister of Finance of Somaliland, for active participation in the roundtable where this report was presented.
This report also gives thanks to Dirk Willem te Velde, Director of the SITA program, for reviewing this publication.
About the author
Adria Rius Rodriguez was a consultant for ODI at the time of writing this report and is currently a Ph.D. candidate at the UCL Institute for Innovation and Public Purpose.
Table 1. Imports by product category, 2020
Table 2. Top 10 imported products, 2020
Table 3. Top 10 (non-livestock) exported products, 2020
Table 4. Action to address non-tariff barriers
Table 5. Types of trade passing through Wajaale
Table 6. Summary of strengths, challenges, opportunities and risks: the AfCFTA and the Berbera Corridor project
Table 7. Renewed business licenses by quarter and license type, 2020
Table 8. Action by area and ministry as available on ministry websites
Figure 1. Government budget, sources of revenue, 2020 (%)
Figure 2. Exports of sheep and goat, 2019, 2020 (heads)
Figure 3. Exports of (a) camels and (b) cattle, 2019, 2020 (heads)
Figure 4. (a) Berbera Corridor, (b) Berbera Port and Economic Zone
Figure 5. Complexity/impact matrix of proposed objectives
|AfCFTA||African Continental Free Trade Area|
|ARSO||African Organization for Standardization|
|BPA||Berbera Ports Authority|
|BRLS||Business Registration and Licensing System|
|CIF||customs, insurance and freight|
|CoC||Chamber of Commerce|
|COMESA||Common Market for Eastern and Southern Africa|
|CSD||Central Statistics Department|
|DP World||Dubai Ports World|
|ESL||Ethiopian Shipping and Logistics Services Enterprise|
|FDI||foreign direct investment|
|GDP||gross domestic product|
|GoSL||Government of Somaliland|
|ICT||information and communication technology|
|IPR||intellectual property rights|
|ISO||International Organization for Standardization|
|MoFD||Ministry of Finance Development|
|MoIID||Ministry of Investment and Industrial Development|
|MoPND||Ministry of Planning and National Development|
|MoTRD||Ministry of Transport and Roads Development|
|MoTT||Ministry of Trade and Tourism|
|NDP||National Development Plan|
|Norfund||Nordic Horn of Africa Opportunities Fund|
|OIE||World Organization for Animal Health|
|QCC||Quality Control Commission|
|ROO||rules of origin|
|SEZ||special economic zone|
|SME||small and medium enterprise|
|SOMIPO||Somaliland Intellectual Property Office|
|SPS||sanitary and phytosanitary standards|
|SRS||Somali Regional State|
|UAE||United Arab Emirates|
|UNCTAD||United Nations Conference on Trade and Development|
|UNECA||United Nations Economic Commission for Africa|
|USD||United States dollar|
|WTO||World Trade Organization|
Somaliland gained independence in 1960 and formed a union with Somalia in the same year, to make up the Somali Republic. After 31 years, in 1991, Somaliland unilaterally declared independence from Somalia, at the outbreak of the civil war that ousted Somalia’s president, Siyad Barre, from power. Since then, Somaliland has used its de facto sovereignty to build a stable institutional and political setting that allows for peaceful conflict mediation. Elections have been held with success at the local, parliamentary and presidential levels since the approval of the constitution in 2001. Presidential elections are expected in 2022, and the House of Elders is expected to be renewed in 2023. Albeit with some changes over time, Somaliland’s hybrid power structure (customary, institutional, religious) continues to define its economic and social life.
Somaliland’s economy, while resilient, is characterized by large remittance inflows sustaining a largely import-dependent household and private consumption. An important share of the country’s exports remains dominated by a few products (livestock), exported to a few countries (in the Gulf), during a certain period of the year (the Hajj festival). In 2020, gross domestic product was nearly $3 billion and the government budget was equivalent to $287 million. Import duties accounted for approximately 41% of the government’s total revenue. Expenditure is focused on the security, governance and economic sectors. The government runs a balanced budget policy and has limited room for monetary policy interventions, as well as limited access to international financial markets.
With respect to trade, at the domestic level, while a comprehensive trade policy framework is still under development, there exists a series of laws, regulations and policies that shape the environment within which trade takes place. In fact, progress has been made in recent years to upscale efforts to enhance the trade-related regulatory framework, and important laws such as the Customs Law (03/2016), the Investment Act (99/2021) and the Special Economic Zones Law (93/2021) have been approved. Imports and exports are governed by the tariff schedule, with a simple average tariff rate of 22%. At the international level, Somaliland’s unrecognized status limits its options for entering into bilateral and multilateral agreements.
Against this backdrop, the African Continental Free Trade Area (AfCFTA) offers potential opportunities for Somaliland’s economy. Although Somaliland is not part of the African Union and, consequently, is likely not to be part of the AfCFTA in the short to medium term, there are different ways in which the country could benefit from the AfCFTA. First, Somaliland can address domestic non-tariff barriers to trade by aligning its laws and policies with those of the AfCFTA protocols. Second, increased alignment and higher continental income could generate a demand-pull effect on export sectors in which Somaliland has a comparative advantage. Third, a more aligned trade framework and a strengthened trade position could pave the way for Somaliland to enter into bilateral trade agreements with its main trade partners.
The last area – namely, Somaliland entering into bilateral trade agreements within the context of the AfCFTA – probably represents the most likely scenario in the short and medium term.
In recognition of this, this report undertakes an in-depth analysis of what is currently the most tangible trade integration project in Somaliland: the Berbera Corridor. The Berbera Corridor is an infrastructure and logistics project connecting Berbera Port in Somaliland with the capital of Ethiopia, Addis Ababa, spanning a total of 937 km. In Somaliland, the Corridor has three key components: Berbera Port; the road connecting Berbera and Addis Ababa; and the border town of Wajaale. The Port is currently operated by Dubai Ports (DP) World, which in 2016 entered into a joint venture with the Government of Somaliland and committed $442 million to the upgrading of the Port’s infrastructure. Since then, the Port and the Berbera Corridor have witnessed remarkable progress, especially in 2021.
By looking into the Berbera Corridor project, this report provides insights into the current situation of Ethiopia–Somaliland trade and highlights how trade integration could result in a dramatic increase in the volume and value of the Port’s operations, which, in turn, has the potential to contribute greatly to Somaliland’s economic development. First, logistics firms are set to witness a dramatic increase in the demand for their services. Second, the Corridor will create thousands of direct and indirect jobs across the economy. Third, it could promote dynamic comparative advantages by supporting local industries to connect with both local suppliers and regional markets. Fourth, fiscal revenue could increase thanks to an increased tax base resulting from higher domestic incomes and profits, which could potentially compensate for a decrease in import tax revenues.
The latter responds to important concerns over potential customs revenue losses. As noted above, 41% of Somaliland’s government budget comes from import tariffs and a further 8% from export taxes and port duties. Under a potential trade agreement with Ethiopia, Somaliland would forego import taxes levied on goods originating in Ethiopia: it would lose the import tax levied on goods that arrive in Somaliland through Berbera Port and are subsequently re-exported to Ethiopia and, also, on goods that transit from Ethiopia to Berbera and are exported to a third country thereafter, such as much of the livestock trade. Import tax revenue collected at Wajaale and Kalabaydh customs accounted in January–June 2020 for 22% of total customs revenue, while customs revenue from goods that are currently subject to export/import customs duties at Berbera and would otherwise qualify as transit goods is unclear.
In this context, this report highlights some of the main risks and challenges of the project, arguing that, to realize these benefits, Somaliland should strive for balanced trade agreements, which can take several forms (e.g. a transit agreement, a preferential trade agreement, a simplified trade regime, a transport agreement, among others). Furthermore, it will need to be able to manage potential conflicts that could arise as a result of the changes that the project will make to local power balances. Also, an appropriate policy framework that can set a direction for the country’s trade strategy will be critical. Finally, the domestic private sector will need to be able to stand up to the challenge, especially if regulations limit the extent to which foreign companies can operate in Somaliland’s logistics sector market.
Considering the latter two issues as particularly crucial for trade integration projects under the AfCFTA and for the Berbera Corridor in particular, the report identifies key constraints facing the public and private sectors, and the capabilities they will need to develop to ensure the realization of trade facilitation efforts. It considers private sector capabilities to link with regional markets; retain and train personnel; provide adequate financial and insurance services; and reach a ‘critical mass’ of firms that can meet the new demand for logistics services. From the point of view of the public sector, capabilities will need to be developed in the areas of research, policy formulation and implementation, especially in the agencies that will be most involved in trade integration processes.
Stemming from the above, the report draws a set of recommendations with proposals for action:
Support targeted public and private sector efforts towards the removal of non-tariff barriers. The AfCFTA provides a great opportunity for Somaliland to address non-tariff barriers to trade by aligning its customs procedures with those of the AfCFTA. Such measures will address currently outstanding gaps in the areas of customs procedures; technical standards and sanitary and phytosanitary standards; and rules of origin. In addition, and in relation to Phase II potential commitments, Somaliland can address its currently underperforming intellectual property rights regime. Support in these areas can target different components, be it through the development of specific laws and regulations, preparing targeted policies, establishing dedicated agencies, ensuring alignment with the AfCFTA protocols or supporting the implementation of specific measures.
Promote the development of private sector capabilities in sectors where Somaliland has a comparative advantage. The AfCFTA is likely to increase continental incomes and could generate a demand-pull effect on Somaliland’s export sectors, become a source of foreign direct investment and help diversify Somaliland’s export markets towards African countries. Somaliland can take advantage of the fact that it is already competitive in a number of sectors in which it has an advantage based on the country’s existing resources, which are currently underutilized, such as fisheries, gums and resins, energy and tourism. However, action is needed to enable these sectors to unleash their potential. Targeted action could address long-term sustainability issues faced by the frankincense sector; lack of infrastructure development in the case of tourism; promotion of small and medium enterprises (SMEs) in the fisheries sector; or the financing of renewable energy projects.
Support public and private sector efforts to address key private sector external constraints. The private sector faces two major cross-cutting challenges: access to finance issues and high energy costs. The report highlights the role of banks but also remittance companies in the financial sector, in addition to insurance companies, which are set to play an important part in the context of the Berbera Corridor. Related to the recommendation above, energy costs are a long-standing issue in Somaliland and, although a few renewable energy projects have been implemented in recent years, the country may need to step up more effectively on this issue. Actions could include assessing banks’ client bases and instruments so as to understand the presumable shortage of credit supply currently existing in the economy; enhancing the efficiency of remittance companies; analyzing the capacity of current insurance companies to engage with increased trade transit; and supporting efforts to find alternative options to enhance energy access and cheap electricity prices through projects that engage with emerging firms in the oil and renewable energy value chains.
Support the development of private sector capabilities in the sectors that will be most critical to the Corridor. Potential trade integration projects such as an Ethiopia–Somaliland trade agreement present opportunities for Somaliland’s domestic sectors. In particular, the logistics sector is likely to be one of those that will benefit the most from the Berbera Corridor project; the manufacturing sector will also benefit, by tapping into regional value chains. However, firms in these sectors need to be able to stand up to the challenge and show appropriate levels of performance. In this respect, it is recommended to take action to upscale private sector capabilities in those sectors that are likely to be critical to the Corridor. Specific projects could include supporting the development of certificate programs that deliver training to logistics services companies; targeting in-house training programs at addressing skills gaps in critical areas, such as engineering, accounting or management, and ensuring employee retention; or promoting the export capabilities of key industrial enterprises with high potential for linking with regional value chains.
Support public sector efforts to develop appropriate trade data management systems. In tandem with the development of private sector capabilities, Somaliland needs to upscale the capabilities of its public sector. The report identifies the current state of trade data as an important obstacle to analyzing and estimating the potential impact of trade integration projects. It notes that different agencies report different data, that there is no published data that captures the country of origin of imported products and that current valuation methods are unreliable. It is recommended to make efforts to overcome the challenges to trade facilitation that this poses. Action could be directed towards developing an online trade statistics portal; enhancing trade data collection and early-stage management practices; supporting internal data analysis and reporting practices in key ministries; and supporting efforts to integrate trade data across ministries.
Support public sector efforts to increase research capabilities targeted at undertaking diagnostic studies. The report also identifies that the key ministries have so far not undertaken any studies to generate much-needed evidence to inform policy. Efforts could be targeted at supporting studies on the current state of the industries sector and/or the hurdles currently facing trade actors such as transport, clearance and shipping companies. At the same time, key ministries, and the Central Statistics Department in particular, ought to undertake regular surveys as part of their remit to monitor and promote the sectors for which they are responsible. This would require, for instance, establishing the right infrastructure to undertake regular SME, enterprise or informal sector surveys. Efforts along these lines would also ensure knowledge codification within the key ministries and the long-run sustainability of trade-related policies.
Support public sector capabilities in policy formulation and implementation. In addition to being able to undertake the appropriate diagnostics, Somaliland’s key agencies must be able to formulate and implement trade-related policies. In this respect, these agencies would benefit from enhancing in-house expertise in specific trade-related areas, as well as from improving their overall capacity to formulate and implement trade reforms, not least those related to obligations to which Somaliland will be subject under any potential trade agreement. With a view to emphasizing ownership, cross-agency coordination and consultation with stakeholders, Somaliland would benefit from support on policy formulation; thematic-specific technical support with reference to industrial and trade policy measures; and support on monitoring and evaluation practices. Such tasks could be coordinated with or support the current efforts of the Somaliland Civil Service Institute.
From the viewpoint of development partners and in recognition of the limited size of Somaliland’s administration, the report proposes options for facilitating the implementation of projects aimed at meeting the abovementioned objectives. Proposed options range from the establishment of Centers of Excellence to upscale research capabilities in targeted areas, to the establishment of a ‘policy development facility’ that can support key government agencies in policy formulation by providing technical assistance and diagnostic studies. These insights draw on examples of projects undertaken in neighboring African countries as well as on projects that have been implemented recently in Somaliland. Ideally, the provision of such services from outside the government would be temporary and conducted in coordination with public sector authorities so as to ensure that, in the medium term, the latter can take over such tasks.
Finally, the report proposes a tool to help map proposed objectives based on their complexity and potential impact. Objectives are plotted in a diagram under four areas: (1) complex and high impact, (2) complex and low impact, (3) simple and low impact and (4) simple and high impact. The matrix should be understood as a tool rather than a definite classification of objectives, given that the potential complexity of achieving these objectives depends on project design, as argued above. It is also highlighted that objectives may present (temporal) interdependencies, meaning that it will be necessary to consider how best to sequence such objectives.
Finally, based on the above analysis, and with a specific focus on the Berbera Corridor, which enables proposition of more precise action, given that this is currently the most tangible trade-related project in Somaliland, the report suggests prioritizing three key actions: (1) creation of a trade data portal, (2) development of the Somaliland Trade Policy and (3) conducting an assessment of the logistics sector through a one-off baseline survey-based study undertaken in collaboration with the Central Statistics Department or the Ministry of Trade and Tourism.
The African Continental Free Trade Area (AfCFTA) aims at creating a common African market with the free movement of goods, capital and labor. It was established in March 2018 with the signature of the Protocols on Trade in Goods, Trade in Services and Rules and Procedures on the Settlement of Disputes. Trade under the AfCFTA started in January 2021 and, by October 2021, except for Eritrea, all African countries had signed the agreement and 38 had submitted their instruments of ratification. Boosting intra-African trade is set to increase continental incomes, reduce poverty, promote industrialization and create millions of jobs.
Somaliland is a non-recognized but de facto country in the Horn of Africa. It is not a member of the African Union (AU) thus it is not part of the AfCFTA. However, this will not prevent Somaliland from benefiting from the opportunities that the AfCFTA will bring to the continent. As this report argues, Somaliland can reap the benefits of the AfCFTA by (1) reducing domestic non-tariff barriers (NTBs) by aligning its laws and policies with those of the AfCFTA protocols, (2) increasing exports to African neighbors, and, based on the former two, (3) engaging in bilateral negotiations with its main trade partners on the continent. The latter refers to what currently constitutes the most promising and tangible trade integration project in the country, the Berbera Corridor.
Within this context, this report investigates the main opportunities for and potential impact of the AfCFTA on Somaliland’s economy. While acknowledging that the AfCFTA can become a key instrument to alleviate institutional bottlenecks and NTBs, the discussion focuses on the Berbera Corridor as a case study of potential trade integration processes between Somaliland and its neighbors in the context of the AfCFTA – which is the most probable scenario for Somaliland in the short and medium term given its unrecognized status. More weight is also given to trade in goods over investment, services or competition, first because of data is more readily available on Somaliland’s trade patterns and second because there is more clarity on what is expected from AfCFTA members, provided in the Annexes to the Protocol on Trade in Goods.
As a result of this investigation, the report proposes potential actions to both facilitate trade in the region and ensure Somaliland realizes the benefits of the AfCFTA and the Corridor. The study’s methodology consists of qualitative research using secondary data sources drawn from grey and academic literature. The analysis of the potential entry points is developed using a public-private sector capabilities framework. Looking at the Berbera Corridor using this approach, which recognizes private and public sector actors as key agents in the development of trade integration projects, will hopefully allow for the identification of actions of high-impact potential. Results are combined with AfCFTA-specific insights.
The structure of the report is as follows. The first two sections set the stage by introducing Somaliland’s political settlement and economy (Section 2) and its trade profile (Section 3). Subsequently, the report discusses how Somaliland can benefit from the AfCFTA, focusing on the potential opportunities for and impacts of the Berbera Corridor on Somaliland’s economy. Section 5 investigates the constraints facing Somaliland’s public and private sectors and the capabilities they may need to develop to realize the benefits of the Corridor. Section 6 formulates a set of recommendations. Section 7 outlines the limitations of the study. Section 8 concludes.
Somaliland gained its independence in 1960 and formed a union with Somalia in the same year, to make up the Somali Republic. After 31 years, in 1991, Somaliland unilaterally declared independence from Somalia, at the outbreak of the Somali Civil War that ousted President Siyad Barre from power. Somaliland’s declaration of independence was followed by a relatively fragile period of 10 years marked by a series of month-long peace conferences. This concluded with the approval of the Somaliland constitution in 2001, followed by a series of elections at the district (2002), presidential (2003) and parliamentary (2005) levels. That Somalilanders have been able to make cross-clan compromises, design a new state apparatus that has enjoyed popular support and avoid the entrenchment of clan militias and warlords by pursuing an effective process of demilitarization is considered a truly exceptional achievement (Bradbury, 2008; Lewis, 2008).
Somaliland has a presidential system with a tripartite governance structure with executive, legislative and judicial branches. It has two legislative chambers, the House of Representatives and the Guurti, or House of Elders. Presidential elections have occurred three times (2003, 2010, 2017), and there have been a total of three local council elections (2002, 2012, 2021) and two parliamentary elections (2005, 2021). The Guurti has not been elected ever since members were first appointed. The constitution limits the total number of political parties to three in an attempt to promote cross-clan alliances. Currently, the three parties represented in parliament are Kulmiye, Waddani and UCID. Kulmiye won the 2017 presidential elections but ceased to be the party with most seats in parliament in the May 2021 parliamentary elections. These elections were won by Waddani (31 seats), followed by Kulmiye (30 seats) and UCID (21 seats), thus opposition parties currently have considerably more weight than the ruling party.
The role of the Guurti deserves special mention. The House of Elders is composed of clan elders elected as representatives of the main clan-families of Somaliland and has a key role in mediating clan cleavages. The fact that the Guurti has not been renewed since it was first formed in 2002 means that, when sitting parliamentarians have passed away, new elders have been appointed through alternative means. This, in addition to the perceived stability of the current political regime, could potentially be decreasing the perceived usefulness of this political body. However, this trend is likely to be reversed in 2023, when elections to the House of Elders are expected to be held. The formal inclusion of the clan system in the institutional structure of the country through this hybrid parliamentary system has proved highly effective in giving the state the required legitimacy and contributing to peace and stability. The role of clans in Somaliland’s political, economic and social life cannot be overstated. Somaliland has three main clan-families: the Isaaq (center, including Hargeisa), Dir (north) and Darood (east). Although there are political implications to being part of the same clanfamily, clan-families do not act as united corporate groups, since they are too large and their members too scattered. Instead, the most binding social group is the sub-clan level, called the ‘primary lineage group’, and, more specifically, the subsequent sub-clan level, called the ‘dia-paying group’, which is the most basic jural and political unit in Somaliland society. Members of the same dia-paying group share costs and risks. The groups are led by ‘ministers’, or akils (delegates of the clan elder). Members contribute to their dia-paying group through monthly or annual payments. At the same time, the clan provides members with financial and material support as well as mechanisms to engage with other clans. As such, the clan system is a key social safety net and customary insurance system, which at the same time is crucial to the security, peace and stability of the country (Lewis, 1994).
The third layer of power, aside from institutional and clan-based politics, is religion. Somaliland is virtually 100% Muslim, and practicing other religions in the country is strictly prohibited.
Indeed, Islamic Law, or Sharia, is integrated into Somaliland’s constitution. Religious practices are strictly followed and play a key role in defining individual and collective behavioral standards. Sheikhs, or Islamic scholars, have influence over the activities that are carried out in the country, and have at times opposed certain government policies. The role of religion in the country often has economic implications. The clearest example is the reluctance of the Government of Somaliland (GoSL) to allow Western-type commercial banks to operate in the country, as opposed to Islamic banking.
The political influence that these three layers of power (institutional politics, the clan system and religion) have over society is also represented in the country’s hybrid legal system, which is a combination of Somali customary law (her), Sharia norms and statutory law. In practice, Shariah law is applied in instances related to personal relations (e.g. marriage law). Customary law is used in disputes traditionally regulated by cross-clan norms, such as conflicts or accidents involving members of different clans. Statutory law is applicable in instances of serious offenses as well as more complex legal cases. However, generally speaking, legal disputes go first through customary law procedures; if clan elders cannot reach an agreement, the case moves to the courts and goes through the formal procedure (MoTT, 2013).
Acknowledging the political economy of Somaliland is important when designing policy interventions. Day-to-day life is influenced by decisions taken in the clan, institutional and religious spheres, and, although this is outside the scope of this report, policy interventions that take these aspects into account are more likely to succeed. As such, this report makes some mention of these power layers, and Somali clans in particular, where appropriate.
With a population of approximately 3.8 million people, Somaliland has a gross domestic product (GDP) of nearly $3 billion and a GDP per capita of $700 (current prices), one of the lowest in sub-Saharan Africa (MoPND, 2017; CSD, 2020). According to estimates by the Central Statistics Department (CSD), in real terms GDP increased by 15.6% between 2012 and 2020. The largest component of GDP, from the demand side, is household expenditure. Private investment, government expenditure and exports account for a small share of total GDP. Livestock is the main sector in terms of sectoral GDP contribution, followed by wholesale and retail trade and real estate. Imports play a very important role in the economy and have an estimated value over GDP of 45%. Given the lower level of exports in relation to imports, foreign currency supporting household expenditure often comes through remittances, which were valued at as much as $1.4 billion in 2020, possibly making Somaliland one of the most remittance-dependent countries in sub-Saharan Africa. Foreign aid is also an important contributor to the economy and in 2019 totaled $194 million (MoPND, 2017; MoFD, 2019a, 2021a).
The Somaliland-born diaspora, estimated at 150,000–200,000 people but probably larger, plays an important role in not only supporting household income but also small and medium enterprise (SME) financing (World Bank, 2016). The Food Security and Nutrition Analysis Unit (2012) found that 45.4% of surveyed firm managers had received remittances in their households, a percentage that increased in the case of large firms (60.3%). Similarly, successful businesspeople are more likely to send relatives abroad, thus reinforcing remittance inflows. Some prominent countries of origin of these remittances are the UK, the US, the UAE, Sweden, Saudi Arabia, Djibouti and Canada (Majid, 2017). In light of the importance of the diaspora for Somaliland’s economy, there is a dedicated Diaspora Department at the Ministry of Foreign Affairs and International Cooperation.
Therefore, imports sustain an important part of household consumption, and only a limited set of products are produced domestically. The backbone of the economy is the livestock sector, primarily undertaken by the still large nomadic community (34% of Somaliland’s population), and consisting of sheep, goats, camels and cattle. A few other primary goods are produced in the country. Crop production is limited, although there are some farming enterprises growing vegetables and fruits. There are also some small-scale fishing activities taking place, although resources are still largely underutilized. Also, Somaliland hosts minerals and oil reserves. Finally, for a long time Somaliland has been exporting frankincense, a valued product in international markets (MoPND, 2017).
Manufacturing is scant, although there certainly are some local manufacturing companies producing a limited set of goods, such as detergent, fiberglass, foam, paint, furniture, shampoo, beverages and water bottles. Manufacturing caters mainly to the local market and does not compete in regional/international markets. In fact, given the informal nature of livestock activities, undertaken by nomad pastoralists, and the relative lack of industrial activities, most new business registrations fall within the services sector and range across a wide range of business types, including accounting, consultancy and hospitality. According to the Ministry of Planning and National Development (MoPND) (2017), wholesale retail and trade services are the second main sector in the country and account for 21.9% of GDP.
Regarding economic policy, the non-recognized but sovereign status of Somaliland has implications for its policy space in terms of both monetary and fiscal policy. With respect to the former, Somaliland issues its own currency, the Somaliland shilling. It has a Central Bank tasked primarily with the control of inflation and most importantly with ensuring the stability of the exchange rate between the Somaliland shilling and the US dollar, which has remained at approximately SLS 8,500/USD 1 for the past two years. With the US dollar widely accepted and used, the country operates a de facto dollarized system. This sheds light, however, on the limited room for monetary policy GoSL has at its disposal (MoFD, 2021a).
The dollarization of the economy may have been aided, at least in part, by what has become a substantial penetration of mobile money payment systems, put in place by the two main telecommunications companies in the country, Telesom and Somtel (Dahabshiil Group). The two mobile payment systems, Zaad and Dahab, provide payment and store of value functions, and are used by a substantial part of the population. Importantly, Zaad/Dahab offices accept payments and money deposits at the counter in both shillings and US dollars. Once the money is in their phone account, users are able to exchange shillings into dollars or vice versa immediately and at a low fee. Mobile payment methods are accepted in most urban shops and by most services, such as markets, supermarkets, taxis, restaurants and petrol stations (Bradbury et al., 2021).
With respect to fiscal policy space, Somaliland runs a balanced budget policy, determined largely by GoSL not being able to borrow from international financial markets. In 2020, the tax-to-GDP ratio was nearly 10% and the annual budget was equivalent to $287 million. A total of 41% of 2020 state income came from import tax revenues alone and the Customs Department of the Ministry of Finance Development (MoFD) collected 75% of total government revenue (MoFD, 2021c). Other revenue sources are taxes on goods and services (13%) and taxes on public sector workers’ payroll (3%) (Figure 1). With respect to expenditure, in 2020 Somaliland allocated over 30% of its budget to security, followed by governance, economic, education and health. This distribution reflects the country authorities’ recognition of the ‘peace dividend’ that Somaliland reaps as a result of its enduring stability (MoFD, 2020a, 2021a).
Figure 1. Government budget, sources of revenue, 2020 (%)
Somaliland is a fairly open economy with a merchandise trade-to-GDP ratio of over 70%. In 2020, imports were valued at $2 billion and exports at $275 million, resulting in a trade deficit of nearly $1.7 billion. Food imports are an important component of the import basket and were estimated to account for as much as 43% of the total 2020 import value (Table 1). Imported foods include basic items such as cooking oil, vegetables, rice and beans. Other widely imported goods are fuel, vehicles, building materials and pharmaceutical products. Machinery and equipment, consumer goods and furniture are also common. In terms of single import items, by total imported value, the top five products are diesel, petrol, khat and clothes (children’s and stitched) (Table 2).
Khat consumption deserves special mention. Khat is a leafy green plant containing stimulant components causing excitement, loss of appetite and euphoria. It is widely consumed in Somaliland by adult men and mainly produced in the Ogaden region of Ethiopia, which is inhabited by Somalis, most primarily from the Darood clan. It is imported into Somaliland in pickup cars every day. While the importation of khat provides the government with substantial tax revenues, it also results in a severe foreign exchange drain and is often a trigger of health issues. However, curbing khat consumption is particularly challenging. During the outbreak of Covid-19 in March 2020, GoSL attempted to curb its consumption, yet measures had to be lifted as a result of contestation by merchants and consumers (Somali Affairs, 2020).
|Table 1. Imports by product category, 2020|
|Value (%)||Duty (%)|
|Fuel & transportation||1,732||188||10%||12%|
Note: * Includes khat, cigarettes, tobacco, and medicines.
Source: MoFD (2021d).
Table 2. Top 10 imported products, 2020
|Product||Unit/measure||Quantity||Value (SLS billion)||Duty (SLS billion)|
Source: MoFD (2021d).
Ethiopia and Somalia are two of Somaliland’s most important trade partners. Goods come through various customs. In the case of Somalia, imports come primarily through Laascaanod customs, in Sool region, as well as by plane through Hargeisa Airport. In the case of Ethiopia, goods pass mainly through Wajaale. Neighboring countries are not, however, the only important trade partners of Somaliland. Imports from China, the UAE and India are also prominent, through Berbera Port. Data from MoFD indicates that the top five countries of origin of containers arriving in Berbera are India (10,416), the UAE (8,705), China (7,545), Turkey (5,909) and Saudi Arabia (3,166). Djibouti, Kenya and Egypt fall within the top 15 countries and accounted for a total of 2,070 containers in 2020 (Abdi, 2021; MoFD, 2021d).
Highly competitive imports from countries like China are having an effect on the Somali social fabric. A survey undertaken by the Ministry of Trade and Tourism (MoTT) in 2020 highlighted how the Tumaal, a minority clan whose members are primarily small-scale blacksmiths producing household items in urban centers, were suffering from low-price competition from Chinese products (MoTT, 2021a). While the clan-based system acts as a very effective social safety net, when the impact hits a large part of the community, the clan’s ability to pool resources to sustain those in most need is substantially reduced and this can jeopardize the subsistence of the clan itself.
With respect to exports, Somaliland is known for its comparative advantage in exporting sheep and goats, camels and cattle. However, the export of livestock is highly concentrated to a few countries and a specific period of the year (Figure 2). Sheep and goat exports are particularly dependent on demand from Saudi Arabia during the Hajj festival, for which in pre-Covid times up to 3 million Muslims traveled to Mecca. In fact, Somaliland grows the black-headed berberi sheep, which is preferred to other types of sheep (MoTT, 2013). This pattern explains the comparatively lower level of exports experienced in 2020, owing to restrictions on the number of pilgrims allowed to travel to Mecca. Other important destinations are Yemen, Oman and the UAE.
Figure 2. Exports of sheep and goat, 2019, 2020 (heads)
Camels and cattle are the other two key livestock exports. Camels fetch a substantially higher unit price and have an important value in Somali social life. As an illustration, what one clan must pay another clan as compensation for having murdered someone from the latter’s clan is valued in camels. Trade in camels and cattle is less volatile (Figure 3). In terms of value, in 2020 exports of sheep and goats were valued at $78 million, cattle at $53 million and camels at $38 million, for a total of $170 million (61% of total exports).
Figure 3. Exports of (a) camels and (b) cattle, 2019, 2020 (heads)
Apart from the above, Somaliland exports other goods that fall primarily within the category of primary products. These include frankincense, myrrh and gums (foox, malmal, xabag), gold, watermelons, some vegetables and fish. Processed or manufactured products include powder soap, Ethiopian flatbread (injeera/daafi) and hides and skins, among a few others (Table 3). Somaliland also exports various types of scrap, including batteries, copper and aluminum scrap. It is worth highlighting that available data indicates that the export basket has not changed significantly in the past decades. In 2020, the total value of non-livestock exports was $104 million. Most recorded exports pass through the Berbera customs (MoFD, 2021c, 2021d).
Table 3. Top 10 (non-livestock) exported products, 2020
|Product||Unit||Quantity||Unit price ($)||Value ($)|
|Ethiopian injera||bag of 50 kg||324,250||147.00||47,664,750|
|Sorghum||bag of 50 kg||126,898||9.50||1,205,531|
Source: MoFD (2021d).
GoSL gives trade an important role in the country’s economic growth and job creation objectives. However, in recognition of the import dependence to which it is subject, and of the large trade deficit it currently runs, the National Development Plan (NDP) II (2017–2021) acknowledges international trade both as a challenge to be addressed and as an opportunity. Trade-related goals are integrated into the NDP II Economic Sector objective, aligned with Sustainable Development Goal 17. GoSL aims at increasing the overall exports to GDP share by 10% as well as reducing the imports to GDP share by 20%. As potential interventions, GoSL takes a strategic export-import policy that aims at promoting and diversifying exports through export promotion and increased local value addition, while also substituting imports by promoting local production catering to local demand for basic goods.
In terms of trade in services, the NDP II identifies certain services sectors as key to the development of the country, most notably tourism, finance, insurance, transport and information and communication technology (ICT). It envisages tourism accounting for 2% of the country’s GDP, improved infrastructure in key tourist sites, an increased number of financial institutions operating in the country, increased capacity for air freight transport, improved transport infrastructure, enhanced e-government services and an improved ICT skills base. The NDP II also indicates a need to develop dedicated policies for each of these sectors, although the relevant ministries have seemingly not yet published these strategies. Action to develop these sectors should result in Somaliland increasing its trade in services position in the region.
Within this context, the current administration has a mandate to elaborate a national trade policy, as well as related policies such as a national industrialization policy and a national transport policy. The relevant laws/regulations should be drafted and presented to the parliament/cabinet for approval. The main ministry tasked with the design, consultation and implementation of such a trade policy and related laws/regulations is MoTT. However, although MoTT has made progress in advancing the enabling environment agenda and promoting private sector development, to date there has been limited success in the elaboration of the policy. The development of this policy has been a national priority since at least the first NDP (2012–2016) (MoPND, 2011).
In addition, unlike the situation for its neighbors, lack of recognition for Somaliland makes it challenging for the country to enter into bilateral and multilateral trade agreements. This notwithstanding, Somaliland has been able to gradually strengthen its diplomatic and strategic ties by signing memoranda of understanding and through other mechanisms with Kenya, the UAE, Taiwan and Ethiopia (UNCTAD, 2016; Collins, 2021). Stronger diplomatic relationships can promote foreign direct investment (FDI) as well as trade. Indeed, Somaliland has already been able to attract investment from several foreign companies, including Dubai Ports (DP) World, Coca-Cola, FedEx, Genel Energy, DHL, Shura and CAT.
In the absence of trade agreements with other countries, imports and exports are governed by GoSL’s tariff schedule. Tariffs are designed to heavily tax goods that fetch a relatively high price and are imported often into the country, such as motor vehicles and khat, while some staple goods and fuels are subjected to much lower tariff rates. Some of the most heavily taxed and highly imported goods are passenger cars (90%), cigarettes (80%), khat (65%) and creams, shampoos and perfumes (50%). Meanwhile, some of the most highly imported, low-tax products are kerosene (5%), wheat (7%) rice (7%), cement (10%) and medical products (10%). At the same time, capital and input goods, such as trucks and concrete mixers, are subject to relatively lower taxes (15% and 10%, in this case). Taking all tariff chapters together, the simple (unweighted) average tariff rate is 22% (MoFD, 2020b).
In addition to the above, the fact that there is currently no national trade policy does not mean that trade in Somaliland operates in a vacuum or that there are no laws shaping the environment within which trade takes place. In fact, the parliament has been effective in approving laws and regulations that influence directly or indirectly international trade, including:
- the Companies Regulation, under the Companies Law (August 2021)
- the Licensing Act (Law No. 98/2021)
- the Special Economic Zones Law (Law No. 93/2021)
- the Insurance Agency Law (Law No. 92/2021)
- the Law on the Registration of Commercial Companies at the Duty Free Zones (Law No. 96/2021)
- the Investment Act (Law No. 99/2021)
- the Somaliland Ports Agency Law (Law No. 94/2021)
- the National Insurance Act (Law No. 92/2020)
- Regulation No. 03/2019 to enforce the Customs Act No. 73/2016
- the Companies Law (Law No. 80/2018)
- the Revenue Act (Law No. 72/2016)
- the Customs Act (Law No. 73/2016)
The Customs Act (Law No. 73/2016) and the Regulation to enforce the Customs Act are the primary instruments in the regulation of international trade. The Customs Act provides the overarching legal framework. It includes provisions on rules of origin (ROO), customs valuation, import and export procedures, duties and exemptions, and appealing mechanisms, among others. The Regulation provides further nuance to these provisions. They are both developed by MoFD, which is in charge, through the Customs Department, of customs procedures and the tax collection thereof. The Revenue Act (Law No. 72/2016), which provides MoFD with the necessary legal powers for the collection of customs duties, complements these laws.
The Somaliland Companies Law (Law No. 80/2018), the Companies Regulation and the Licensing Act (Law No. 98/2021) form the legal basis for the operation of businesses in Somaliland. These include provisions establishing the main requirements to be followed by all companies as well as those that are/will be involved in the Berbera Corridor, such as importers/exporters or clearance agents. In this respect, businesspeople are required to register their business with MoTT and subsequently apply for the relevant license. Currently, registration and licensing of businesses must take place either at MoTT headquarters in Hargeisa or online. The in-person procedure normally lasts no longer than three days. Depending on the type of business activity, specific requirements may differ. In the case of exporters/importers, they must be Somaliland nationals.
Regulatory and licensing procedures can represent a mechanism for GoSL to use to regulate the activity of those agents who are, or will be, part of the Berbera Corridor ecosystem and might be one of the instruments used to regulate trade in services. Furthermore, the effort to modify requirements and costs for business registration and licensing can target other agents who will be indirectly involved in the Corridor, such as manufacturers. GoSL is aware of the potential this policy tool has and, for instance, in an attempt to promote private sector activity, firm creation and formalization of existing businesses, MoTT lowered the cost of business registration by 50% in January 2021 (Somaliland Chronicle, 2021). In addition to regulating who can legally operate service activities linked to the Berbera Corridor, and under which conditions, and those related to trade in services, parliament has recently passed the Insurance Agency Law (Law No. 92/2021) and the National Insurance Act (Law No. 92/2020). This responds to the need to develop an enabling legal framework that can accommodate the demand for insurance products by the companies operating in the Corridor.
Companies may also be requested to obtain a permit from the relevant line ministry. This is the case for investments in the country by either locals or foreigners (or joint ventures), regulated under the Somaliland Investment Act (Law No. 99/2021). The Act seeks to incentivize private investment while bringing predictability for investors. Investors who obtain the Investment Certificate, which requires a minimum investment of $100,000, are granted a 100% tax exemption on profits for the first five years, and 100% duty exemptions on the import of capital goods and raw materials. The regulation also sets out the rules for the employment of foreign staff, grants foreign investors the same treatment as domestic investors, allows for profit repatriation and protects against uncompensated expropriations. The Act is part of the implementation of the Somaliland Investment Policy, approved in 2019 (MoIID, 2019).
Related to the above, Somaliland has recently laid down the necessary legal basis for the establishment of special economic zones (SEZs), which paves the way for the development of the Berbera Economic Zone. The SEZ Law (Law No. 93/2021) provides for the creation of the SEZ Authority, with exclusive regulatory jurisdiction over all SEZs and tasked with submitting SEZ proposals to the president, and managing the establishment of new SEZs, including the issuance of permits and the coordination of SEZ developers and users. The law is aligned with the provisions of the Investment Act, thereby granting SEZ companies profit and dividend tax exemptions, authorizing profit repatriation and unlimited currency exchange and, indeed, granting import and export tax exemptions. With a view on the operationalization of Berbera Port, apart from the SEZ Law, parliament has passed the Law on the Registration of Commercial Companies at the Duty Free Zones (Law No. 96/2021) and the Somaliland Ports Agency Law (Law No. 94/2021).
In sum, Somaliland is import-dependent for much of its consumption and exports only a limited set of products, mostly accounted for by livestock, raw materials and natural resources. In addition, one of its main exports, sheep and goats, is concentrated at a particular time of the year and among a handful of buyers. The resulting merchandise trade deficit is $1.7 billion. Within this context, the NDP II clearly recognizes the importance of international trade to promote prosperity and sustainable growth, but GoSL has still not designed a comprehensive trade strategy, and it struggles to strike deals with neighboring countries because of its unrecognized status. This said, trade does not operate in a vacuum, and several trade-related laws, regulations and policies have recently been approved and shape the existing legal framework within which trade operates.
Against this backdrop, the next section explores the opportunities that the AfCFTA and the Berbera Corridor can bring to Somaliland’s economy.
The AfCFTA aims to boost intra-African trade, industrialization and investment. Ultimately, the objective is for Africa to operate under a common market with the free movement of goods and services, capital and labor. The AfCFTA negotiations have been structured into two main stages. Phase I regulates the provisions that cover trade in goods, trade in services and the settlement of disputes. Phase II concerns investment, intellectual property rights (IPR), competition policy and digital trade. Phase II negotiations are ongoing. The AfCFTA foundational agreement, with the first three protocols, was signed in March 2018 by 44 countries, and as of October 2021 had been signed by a further 10 countries and ratified by a total of 38. Trade under the AfCFTA officially started in January 2021 and is applicable to those countries that have deposited their instruments of ratification.
Under Phase I, countries are expected to remove trade tariffs for 90% of product categories over a period of five years (10 years for least developed countries). Out of the remaining 10% product lines, 7% shall be considered sensitive goods and should be liberalized over a period of 10 years (13 years for least developed countries). Finally, countries can exclude 3% of product categories from tariff reductions (AU, 2018a). In addition, trade liberalization consists not only of lowering/removing tariffs, which in many African countries are already low given their participation in one or more regional trade agreements but also of fostering trade by removing NTBs. Regulations related to NTB such as sanitary and phytosanitary (SPS) measures are incorporated in the Annex of the 2018 AfCFTA Agreement (AU, 2018b).
Following the implementation of these measures, boosting trade is expected to promote inclusive growth through various mechanisms. First, spurring intra-African trade, which is more intensive in manufacturing than is extra-African trade, is likely to promote industrial development through the emergence of regional value chains. Second, it can enhance food security by unleashing intra-African agricultural trade, currently underexploited as a result of high tariff rates, NTBs and poor infrastructure. Third, more vibrant intra-regional trade is estimated to create millions of jobs annually. Fourth, it can address gender inequality, as trade is expected to expand in key female labor-intensive industries. Finally, it can increase the competitiveness of small-scale enterprises (UNECA, 2020). Indeed, the World Bank (2020) estimates that, under the AfCFTA, continental income could increase by 7% and intracontinental exports by over 81% by 2035.
In the case of Somaliland, the country’s unrecognized status critically determines its capacity to benefit from the AfCFTA. In this respect, the options for Somaliland to formally enter into multilateral agreements seem, in principle, limited, and indicate that, in the short term, it will not be eligible to formally join the AfCFTA. AfCFTA membership explicitly requires state parties to be members of the AU, and so far the AU has not voted in favor of Somaliland’s recognition (Peace and Security Council Report, 2020). A possible alternative would be accessing AfCFTA privileges through Somaliland’s official status as part of Somalia, but this is not likely to be practical, given the lack of cooperation between the two governments. In this respect, there is no evidence that Somaliland currently benefits from preferential treatment by countries with which Somalia has trade agreements, such as in the case of Common Market for Eastern and Southern Africa (COMESA) members. Finally, if Somaliland unilaterally abides by the AfCFTA protocols, it is unclear to what extent African countries would apply reciprocal treatment to Somaliland without first formalizing trade relations through bilateral agreements.
In the event that Somaliland is able to join the AfCFTA, an often-cited challenge is the high dependence of GoSL’s revenue on customs duties. As Section 2 outlined, 41% of Somaliland’s budget comes from import tariffs. This is an anomalous situation in comparison with other African countries’ government budgets. For African countries, the average share of tariff revenue coming from imports is less than 10%. For neighboring countries, the figure is 13.9% for Ethiopia and 6.9% for Kenya (World Bank, 2016, 2021b). Thus, while this risk is not considered particularly concerning in most estimates, which predict average revenue losses could be less than 1.5% for 49 out of 54 countries, the case of Somaliland may merit special attention (World Bank, 2016; UNECA, 2020; UNCTAD, 2021). Moreover, and in contrast with other countries, Somaliland would most probably not be able to effectively borrow funds from abroad to compensate for temporary revenue losses.
There are three arguments that could help address these concerns. First, since Somaliland is not dependent solely on intra-African trade for its customs revenues, the impact of lowering tariffs with these countries could be cushioned by tariffs against imports from non-African countries. In this case, the percentage of customs revenue collected by customs other than Berbera, and therefore susceptible to being foregone through trade integration with other African countries, was 32.8% during the first six months of 2020 (MoFD, 2020a). Second, the bulk of Somaliland’s imports is concentrated in a few products, and GoSL could use the 7% and 3% buffers to protect revenue from taxes on these goods for a longer period of time while the country finds a suitable compensation mechanism. Third, an overall increase in both trade volumes and values could partly compensate for some of these losses, and/or the savings that would accrue to traders and households could revert back into the treasury through an increased tax base.
Should these concerns be overcome, implementing the AfCFTA protocols could bring important benefits to Somaliland’s economy. Given the high tariff rates Somaliland’s customs authorities currently apply, liberalization of trade in goods could contribute to increase food security, facilitate access to basic goods such as pharmaceutical products and reduce SMEs’ intermediate input costs. In this respect, while Somaliland’s import tariffs imposed on basic food items are low in relation to other product lines, in absolute terms these are still considerable (approximately 10%), and important foodstuffs, such as frozen chicken, fruits and vegetables, and items such as shampoo face higher tariffs, of between 35% and 50%.
In addition, the trade-in services protocol will offer Somaliland the opportunity to source highly capable firms to operate in sectors that are currently underdeveloped, and that will be critical in the implementation of some of its trade integration projects, such as the Berbera Corridor. Furthermore, Somaliland will benefit from the fact that the AfCFTA is likely to increase FDI flows within the continent. Somaliland has a series of high-potential export sectors in which increased investment would result in enhanced competitiveness and productivity levels.
Importantly, even in the likely event that, in the short and medium term, Somaliland does not join the AfCFTA, this will not necessarily imply that the country cannot take advantage of the momentum being built around the AfCFTA to boost trade. More concretely, the ways in which Somaliland could benefit from the AfCFTA are structured here into three areas: (1) reducing domestic NTBs by aligning laws and policies with those of the AfCFTA protocols, (2) targeting opportunities for products and services with high export potential and (3) entering into bilateral trade agreements.
In particular, it is posited that a strengthened trade position through an AfCFTA-aligned regulatory and policy framework (Section 4.2) and increased export potential (Section 4.3) will facilitate Somaliland entering into bilateral agreements with its neighbors, the latter probably being the most realistic scenario in the short and medium term. Based on this, Section 4.4 explores the main opportunities and challenges regarding processes of trade integration between Somaliland and its main trade partners in the context of the AfCFTA by focusing on the case of the Berbera Corridor. This is currently the most tangible trade integration project in the country and the one with the greatest potential to harness the momentum built around the AfCFTA. Results are integrated into a strengths, challenges, opportunities and risks-type diagram (Table 6).
The AfCFTA negotiations will result in the harmonization of trade facilitation measures, substantially reducing NTBs. With a focus on the Protocol on Trade in Goods, for which the Annexes have been published, this section looks into three often-cited sources of NTBs to trade by enquiring whether Somaliland has (1) relevant legislation in place, (2) developed targeted policies and (3) established a designated public authority. Reference is made to the AfCFTA agreement provisions and to potential alignments. The areas under review are customs procedures, ROO, and technical and sanitary and phytosanitary standards. Table 4 provides a summary. Beyond NTBs to trade, Somaliland may also need to step up action to prepare for the implications of Phase II protocols. As an illustration, the section comments on the current state of the IPR regime in Somaliland.
With respect to customs procedures, in accordance with available information, these shall not be excessively burdensome. MoFD has developed detailed provisions on import and export processes in Regulation No. 03/2019 under the Customs Act (Law No. 73/2016). The Regulation is comprehensive and covers a wide range of trade-related matters, including customs valuation, ROO, customs declaration procedures, relevant documentation and simplified procedures, among others. In some cases, provisions draw on existing COMESA and World Trade Organization (WTO) protocols.
In terms of implementation, in 2018 MoFD introduced a relatively simple Goods Declaration Form, to be used for both import and export procedures. Apart from goods declaration, traders must attach supporting documentation, which includes invoices, a packing list, a business license number and export licenses/authorizations. Once these are accepted, customs authorities proceed to the valuation and classification of goods and complete the Single Administrative Document, which identifies the duties to be paid. Upon payment, goods shall be released. MoFD is also planning to introduce an online Customs Management System that traders will use to submit the required documentation before the goods reach Somaliland customs. In addition, the Regulation sets out options for applying for authorization to file simplified declaration forms provided certain conditions are met.
With respect to quality standards and SPS, in 2010 the government established the Quality Control Commission (QCC), and in 2014 parliament approved the Quality Control Commission Act (Law No. 68/2014). The QCC develops standards, issues certificates and promotes quality assurance, metrology and testing. The agency is also tasked with inspecting imports and exports. In 2021, the QCC inaugurated a new lab and, with support from TradeMark East Africa, launched 16 new standards to support local industries to reach regional markets in the oilseeds, edible fats, cereals, pulses, livestock and beverages sectors. According to its 2020– 2024 Strategic Plan, the QCC plans to develop more standards in the food, horticulture, pharmaceutical, fuel and construction sectors; streamline inspection procedures with international standards; and deliver private sector training programs on the adoption of standards and application for certificates (QCC, 2020).
The AfCFTA provisions on technical barriers to trade and SPS (Annexes 6 and 7) strengthen the importance of harmonizing measures across African countries based on international standards and guidelines, not least by promoting state parties’ participation in the work of the International Organization for Standardization (ISO), the African Organization for Standardization (ARSO) and the World Organization for Animal Health (OIE), among others. Generally speaking, the AfCFTA Agreement mandates members to comply with the WTO Technical Barriers to Trade Agreement. Endeavoring to align quality control and standards procedures with those of the AfCFTA would ensure greater harmonization with Somaliland’s neighboring countries and their national implementation strategies, ultimately facilitating access to regional markets while ensuring the quality of imported products. According to QCC (2020), Somaliland is not a member to any of the abovementioned organizations.
A third area that requires attention is that of ROO. ROO are a set of criteria used to determine the country of origin of a product. In Somaliland, the Customs Act (Law No. 73/2016) determines that goods originate in a country if they have been (1) wholly produced or (2) substantially transformed in that country. Whereby preferential trade terms have been granted, the Act commands exporters to present a Certificate of Origin, issued by the competent authority. In practice, however, no evidence has been found on the issuance of Certificates of Origin in Somaliland and, according to the Goods Declaration Form and MoFD (2021e), exporters are currently not required to indicate the country of origin of their products. While this may owe to the limited nature of exports and the lack of trade agreements with other countries, Somaliland will need to put in place the relevant competent authorities and ROO certificate procedures so as to be able to benefit from greater trade integration projects in the region.
Also, current acts and regulations do not specify the circumstances and mechanisms that would grant products the consideration of being ‘sufficiently worked or processed’ so as to be awarded a Certificate of Origin. Somaliland could draw on AfCFTA’s efforts to harmonize ROO procedures by aligning its own certificate requirements with the four types of conditions specified in Annex II of the AfCFTA Agreement: value added; non-originating material content; change in tariff heading; and specific processes. Similarly, Somaliland customs could adopt AfCFTA’s Certificate of Origin, Origin Declaration Form and Supplier/Producer’s Declaration, which member states are also expected to integrate into their customs procedures.
Table 4. Action to address non-tariff barriers
|NTB area||Customs procedures||Standards and SPS||ROO|
|Laws and regulations in place||Customs Act (Law No. 73/2016), Regulation 03/2019||Quality Control Commission Act (Law No. 68/2014)||Customs Act (Law No. 73/2016), Regulation 03/2019|
|Policies formulated||Insufficient/undetermined||QCC 2020–2024 Strategic Plan||Insufficient/undetermined|
|Dedicated agency established||MoFD Customs Department||QCC||Insufficient/undetermined|
|Moderate||Probably insufficient||Probably insufficient|
As mentioned at the beginning of this section, beyond NTBs and in relation to Phase II negotiations, a further area that will require attention by Somaliland authorities is that of IPR. Despite acknowledgment of IPR in Article 16(2) of the Somaliland constitution (‘the law shall determine the rights to authoring, creating and inventing’), Somaliland does not yet have an IPR law. The ministry tasked with this responsibility is MoTT, whose annual plan for 2020 outlines a work plan to deliver the IPR law; however, this has still not reached parliament (MoTT, 2020a). This does not necessarily mean that trademarks and inventions are not registered or that there are flagrant IPR infringements. In practice, MoTT has a functioning Somaliland Intellectual Property Office (SOMIPO) and inventors often rely on the publication of cautionary notices in both Somali and English newspapers (MoTT, 2021d). However, this area warrants action if Somaliland aligns IPR regulations with the upcoming AfCFTA Protocol on IPR.
In light of the above, the AfCFTA protocols provide an excellent opportunity for not just aligning existing laws and policies but also establishing regulations that are so far non-existent. In this respect, Somaliland can draw both from the AfCFTA protocols and annexes and from neighboring countries’ AfCFTA implementation strategies. Harnessing the benefits of harmonized trade-related instruments will require Somaliland to take action to alleviate NTBs by addressing existing gaps in the legal framework, enacting targeted policies, establishing dedicated agencies and ensuring implementation. In consequence, on the one hand, alignment with state-of-the-art AfCFTA provisions should greatly facilitate trade with partners even under current circumstances (non-recognition). On the other, better alignment with these instruments should facilitate both a hypothetical membership of Somaliland in the AfCFTA and Somaliland’s current and potential bilateral trade negotiations with African countries.
The increase in continental incomes as a result of expanded intra-African trade could generate a demand-pull effect on Somaliland’s export sectors and become a source of FDI. Moreover, much of Somaliland’s exports is destined for Gulf countries; exports to African countries are limited to a few products and to Horn of Africa neighbors. Therefore, the AfCFTA, through increased demand for African goods and services, could present Somaliland with an opportunity to strengthen and diversify its trade position on the continent. Furthermore, opportunities will only be greater if Somaliland aligns its laws and policies with those of the AfCFTA protocols, as discussed in Section 4.2. In this respect, in the short and medium term, GoSL can complement these actions with efforts to tap the vastly underused potential of products in which it has a strong comparative advantage. Here, we offer an overview of these.
First, Somaliland is endowed with vast fish resources, with an estimated average annual value of potential fish catch of $32 million, approximately 11% of 2020 export value (MoTT, 2013; MoFD, 2021d). The World Bank (2016) indicates that only 3,000 tons of fish are fetched locally out of a potential catch of 180,000–200,000 tons. Local demand is weak because fish consumption is not particularly popular in Somaliland: people have a strong preference for camel, sheep, goat or cattle meat over seafood and fish. Fish is normally caught by small-scale fishers using rudimentary fishing equipment and small boats. Supply lines delivering fish to the hinterland are in place but do not often reach other countries, as the analysis of trade exports in Section 3.1 showed. Hence, trade facilitation could help boost fish production and exports towards Somaliland’s neighbors such as Egypt, Kenya, Ethiopia and Sudan, which in 2019 imported $564, $22.3, $1.6 and 0.$53 million in fish and crustaceans, respectively. Total African imports of fish accounted for $4.4 billion in 2019 (Observatory of Economic Complexity, 2022).
Second, Somaliland has a comparative advantage in the production of gums and resins. These are harvested from trees that grow mostly in Sanaag region. Resin and gum trees, and especially the Boswellia tree (frankincense resin), grow in only a limited number of regions in neighboring Ethiopia, Puntland and Yemen, and in a few Asian countries. However, GoSL does not have a policy or regulation in place for the promotion of these products, and they currently suffer from overharvesting. In fact, the long-term unsustainability of tapping practices has been intensified by an increase in market demand, resulting in an increase in the average frankincense resin price per kg from $1 to $6–9 (Hargeisa market) (DeCarlo et al., 2020). Being able to exploit these resources also requires infrastructure investments in Sanaag region to allow the produce to be exported more effectively. While these products are mostly sold to European markets, Somaliland could use the opportunity of the AfCFTA to first regulate and standardize the market and second diversify towards African consumers. This could also help alleviate interregional economic imbalances.
Third, Somaliland is thought to have important oil reserves and plenty of potential for wind and solar energy. As per the former, in December 2021, Genel Energy signed a farm-out agreement to explore and potentially extract 5 billion barrels of prospective resources. Regarding renewable energy, Somaliland is particularly well endowed with wind resources, especially in the coastal regions, with speed potential between 30 and 45 GWh/km2. Solar energy is also abundant: together with Puntland, Somaliland has one of the highest daily averages of total solar radiation in the world. Some renewable energy projects have already been implemented in parts of Somaliland. In June 2021, German-based DHYBRID installed 8 MW of solar power generation capacity connected to Berbera’s electric grid (Varley, 2021). In 2014, the United Nations Development Program and the Ministry of Health joined forces in installing solar panels at Burco Hospital, which reportedly covered 75% of the hospital’s electricity demand. Now that the costs of onshore wind turbines and solar PV installations have decreased dramatically, investment in these areas is particularly attractive. This could become an important source of FDI inflows that, together with infrastructure improvements and an enabling regulatory environment, could help create a renewable energy hub in the region (Coolidge and Poplack, 2016).
Fourth, Somaliland’s tourism potential is clearly underexploited. The country is home to Laas Geel, a very well-preserved series of cave paintings dating from 3,000–8000 BC that are acclaimed as one of the most important archaeological sites in the Horn of Africa, as well as the al-Qiblatayn mosque in Zeilac, one of the oldest mosques in Africa. Similarly, Taleex is one of the best-preserved Dervish-era structures. Berbera and Sheikh have well-established tourist attractions, including snorkeling activities in the case of the former. Yet again, infrastructure is weak, there is no tourism policy and the government struggles to attract potential tourists despite what the country has to offer. While some African tourists have been visiting the country in the past three years, numbers are still low and, in fact, most tourists come from either the US or Europe (MoTT, 2021b). A greater appetite for intra-African tourism combined with rising incomes could boost African visitor numbers to Somaliland. This is especially relevant now, when tourists from the Global North are visiting only in low numbers as a result of the Covid-19 pandemic.
The strengthened position of these sectors, occurring through increased demand from African countries, could be used to promote value chain development through (Hirschman-like) linkage effects. Fish products can be processed into canned fish, frozen fish, fish oil and dry fish. Frankincense and myrrh can be made into oil, which normally fetches high prices in end markets. In the case of renewable energy, the sector would trigger, at the very least, domestic activities in the repair and maintenance sector and ideally in other, more advanced, manufacturing activities. Tourism promotion would help upgrade Somaliland’s hospitality, insurance and passenger transport sectors. Such developments would be in line with the AfCFTA’s key objective of promoting industrial development through diversification and regional value chains.
Before ending this section, it is important to recognize that the analysis above hinges on the assumption that, as a result of the AfCFTA, African countries will experience real income gains. In this respect, the World Bank (2020) calculates that, under the AfCFTA, neighboring Ethiopia, Kenya and Egypt could experience real income increases of 9%, 11% and 7%, respectively, by 2035. At the same time, the United Nations Economic Commission for Africa (UNECA) (2020) estimates that AfCFTA reforms could lead to increases in exports and imports totaling $176 million for Ethiopia, $256 million for Kenya and $18 million for Djibouti. However, estimates are sensitive to changes in the underlying assumptions of the models.
For instance, the World Bank (2020) calculates that, if removing NTBs does not benefit nonAfCFTA countries, continental gains could decrease to 1.2%. Therefore, gains from the AfCFTA and particularly increased trade with AfCFTA members are not necessarily guaranteed.
This notwithstanding, even in the case that the AfCFTA does not have a significantly positive impact on incomes, there is room for Somaliland to enhance the competitiveness of the abovementioned sectors, especially fisheries, gums and resins, and tourism, and to strengthen its trade position in the region through such a supply-side approach. In turn, as argued in Section 4.2., a strengthened trade position and a regulatory and policy framework that is well aligned with that of the AfCFTA provisions will facilitate Somaliland’s trade integration efforts with its main trade partners.
A concrete perspective can be gained by looking into the Berbera Corridor. Given that Ethiopia is Somaliland’s main trading partner on the continent, together with Somalia and Djibouti, analyzing the Berbera Corridor project and its implications in greater detail offers a useful case study for future trade integration projects within the context of the AfCFTA.
The Berbera Corridor is a transport and infrastructure project connecting Ethiopia’s Addis Ababa with Somaliland’s Berbera Port. In total, the Corridor spans 937 km and passes through the main cities of Addis Ababa–Harar–Jigjiga in Ethiopia (696 km) and Wajaale–Hargeisa– Berbera in Somaliland (241 km). In Somaliland, the Corridor has three key components: Berbera Port, the road infrastructure connecting Berbera and Wajaale and the Wajaale Ethiopia–Somaliland border. The project is framed within a larger country-wide strategy to promote trade and economic development, which includes the establishment of SEZs.
Figure 4. (a) Berbera Corridor, (b) Berbera Port and Economic Zone
Berbera has been a trade hub since pre-colonial times and has historically played an important role in Somali pastoralist trade networks. The first road from Berbera to Harar was built during the Italian invasion of British Somaliland in 1940. During the post-colonial period, the Port saw significant development as a result of investments by the Soviet Union first and the US thereafter. During this period, the Port was already channeling as much as 60% of Somalia’s exports, primarily livestock herded by Somalis hailing from the Isaaq and Darood clans in northern Somalia (today’s Somaliland) and today’s Somali Regional State (SRS) of Ethiopia. Clans would control part of the trade routes and levy ‘taxes’ in exchange for protection. After independence in 1991, ensuring the Port could continue operating and controlling its revenue was key to the creation of Somaliland’s state apparatus (Stepputat and Hagmann, 2019).
Since the 2000s, GoSL has identified Berbera Port as a potential source of economic development. However, difficulties in raising capital in international financial markets have precluded the government from upgrading the Port’s facilities. The most decisive event in changing this trend has been the joint venture signed between DP World and GoSL in 2016, creating DP World Berbera. In March 2018, it was announced that the Ethiopian government (Ethiopian Shipping and Logistics Services Enterprise (ESL)) would join the venture by buying 14% shares from DP World and 5% from GoSL, making the final shares between DP World, GoSL and ESL 51%, 30% and 19%, respectively. DP World started operating the port in January 2017.
Under the agreement, DP World will operate and develop Berbera Port for a period of 30 years, which entails an investment of $442 million in the establishment of a multi-purpose port facility and a free economic zone close to the Port. Land ownership will be in the hands of the Somaliland Ports Authority. Furthermore, GoSL will receive an annual retribution of $5 million plus 10% of port-generated revenue from handling services. Other parts of the agreement include Dubai building a four-star hotel in either Hargeisa or Berbera, as well as the road from Berbera to Wajaale, and granting Somalilanders favorable migration terms to be able to work in the UAE. By striking this deal, apart from upscaling operations in the Port and contributing to operationalizing the Berbera Corridor, Somaliland hopes to strengthen its case for international recognition.
The establishment of the Corridor responds as much to economic as to geopolitical motives. Ethiopia is eager to diversify its main source of imports, Djibouti’s Doraleh Port, which accommodates virtually all of Ethiopia’s maritime traffic (UNCTAD, 2018). In this respect, under the agreement to join DP World Berbera, Ethiopia estimates that it will divert around 20% of its international trade flows from Djibouti to Berbera, thus guaranteeing the commercial viability of the project (Government of Ethiopia, 2016). On the other hand, at the time of the agreement, the UAE had strengthened ties with Eritrea against Ethiopian interests, and the latter sought to convince the UAE to shift investment and diplomatic relations from Eritrea towards Berbera/Somaliland (Ramani, 2021). This coincided with a row between a senior Emirati diplomat and a high-rank Djibouti military officer, leading the Djibouti government to attempt to renegotiate the DP World 30-year concession (2006–2036) to operate Doraleh Port.
In 2018, the Djibouti government appropriated DP World’s shares of the joint venture and terminated the concession (Reuters, 2021).
Despite the momentum built around the Corridor in 2016, little progress was made in terms of infrastructure development during the period 2016–2018. It was only in 2018–2019 that investments started to materialize. As of now, substantial progress has been made in the development of both the Port and the Berbera–Wajaale road. The latest developments include the inauguration of a new container terminal that increases annual container capacity from 150,000 to 500,000 20-foot equivalent units, which concludes the first investment phase; the partnership between DP World and the UK’s CDC to invest $1.7 billion in three ports in Africa, Berbera being one of these; the launch of construction works for the Hargeisa bypass in May 2021; and the inauguration in November 2021 of the renovated Berbera International Airport as well as progress in upgrading the 140 km road between Wajaale and Berbera. Furthermore, as DP World proceeds to implement Phase 2 investments, the Port will see an extension of the quay to 600 m and seven more ship-to-shore gantry cranes (Donelly, 2021).
In 2020, the total number of containers arriving at the Port was 47,374, with an average of 3,978 containers per month. The arrival of containers in 2020 was slightly lower than in 2019 (-4%), most probably because of the Covid-19 pandemic. The arrival of containers has increased dramatically in comparison with 2002 when the Port handled an annual volume of only 5,532 containers. With respect to ships, a total of 354 vessels called at the Port in 2020, similar to the 353 recorded in 2019, and most of these carried bulk food and containers. In both 2019 and 2020, arrivals were relatively stable throughout the year (MoFD, 2021d). These figures primarily reflect the result of investments in hard infrastructure, and the amount of cargo arriving at the Port is expected to grow in light of the latest developments, outlined above. With respect to soft infrastructure aspects, progress has not been so encouraging. Indeed, challenges related to trade facilitation are particularly relevant, primarily because of the lack of a comprehensive trade agreement between Somaliland and Ethiopia that could encourage action to address tariff and non-tariff barriers. With respect to tariff barriers, tariffs in Somaliland and Ethiopia are relatively high in comparison with other countries in the region (MoFD, 2020b; World Bank, 2021b).
In addition, Ethiopia’s attempts to clamp down on informal cross-border trade have often been accompanied by the introduction of NTBs. In the 1990s and early 2000s, Somaliland residents were allowed to trade in the SRS, in particular in the trade hubs of Hartasheikh and Jigjiga. At the same time, much of the livestock that was exported through Berbera came from the SRS, crossing the border through informal routes and avoiding Ethiopian customs authorities (Devereux, 2010). As mentioned, the approach to what was a de facto open-border policy changed in the late 2000s. Since then, Ethiopia has increased the number of customs posts at key border points and has made it virtually impossible for Somaliland residents to trade in the SRS. At the moment, only trucks with an Ethiopian plate, operated by traders who are Ethiopian nationals and who hold a Letter of Credit, can trade in Ethiopia (Kefale, 2019; Abdi and Hagmann, 2020).
On the other hand, Somalilanders living in the SRS are allowed by Somaliland authorities to cross the border and buy goods coming from Berbera and arriving in Wajaale. However, some of the trade related to SRS residents returning from Wajaale with goods to be sold in the SRS occurs through informal means, allegedly to avoid paying the high import taxes collected at Ethiopia’s customs posts but also as a result of the abovementioned NTBs. Also, it is likely that goods imported through Berbera and destined to be sold in Ethiopia have already paid (Somaliland) import taxes at Berbera Port and are, in fact, being re-exported (Kefale, 2019; Abdi and Hagmann, 2020).
Table 5. Types of trade passing through Wajaale
|Several (pasta, electronics, clothing, vehicles, others)||Third country||Ethiopia
|Formal in Berbera
Mostly informal in Wajaale
|Somalilander, Ethiopian SRS|
|Several (pasta, electronics, clothing, vehicles, others)||Third country||Somaliland||Berbera||Formal||Somalilander|
|Very limited (fruits, vegetables, scraps)||Somaliland||SRS||Wajaale||Formal and informal||Somalilander, Ethiopian SRS|
|Several (vegetables, electronics, clothing, vehicles, others)||SRS||Somaliland||Wajaale||Formal and informal||Mostly Ethiopian SRS,
|Undetermined||SRS||Third country (transit)||Wajaale
|Formal and informal in Wajaale
Formal in Berbera
|Ethiopian SRS, Somalilander|
|Livestock||SRS||Somaliland||Wajaale and others||Mostly informal||Ethiopian SRS, Somalilander|
|Livestock||SRS||Third country (transit)||Wajaale and others Berbera||Mostly informal in Wajaale and others
Formal in Berbera
|Ethiopian SRS, Somalilander|
Notes: 1 Lists of products indicative only. 2 Ethiopian nationals are normally Somalilanders relatives of other Somaliland nationals based in Wajaale. It is likely they also hold Somaliland citizenship.
Source: Compiled from Kefale (2019), Abdi and Hagmann (2020), Abdi (2021).
At this stage, it is important to differentiate between transit goods and traded goods that originate in either Somaliland or Ethiopia. Most of the trade dynamics described above apply to transit goods – that is, goods that are either sold by Ethiopians with the sole purpose of being exported to third countries through Berbera or goods that are imported by Somaliland-based traders with the sole purpose of reselling them in Wajaale to Ethiopian importers, normally from the same sub-clan, who will then sell the goods in the SRS. With respect to goods originating in either Somaliland or Ethiopia, the former’s exports to Ethiopia are limited to a handful of goods. On the other hand, Somaliland imports a significant variety and volume of presumably Ethiopian-made goods, including cars, trucks, clothes and electronics, among others (Kefale, 2019; Abdi and Hagmann, 2020; Abdi, 2021).
Against this backdrop, one of the key instruments to resolve this situation is indeed bilateral trade and transit negotiations between Somaliland and Ethiopia. Given the importance of transit goods in total bilateral trade, negotiations could start by agreeing on a bilateral treaty on transit goods. In this respect, a transit agreement was signed in March 2016, but recent evidence indicates that the situation may not have changed significantly (Stepputat and Hagmann, 2019). Related to the latter, trade facilitation can also be promoted through a more tailored simplified trade regime agreement, which would support small-scale traders and reduce informal trade at the border by easing trade regulations. In addition, action that is more tailored to goods originating in Somaliland would require signing a trade agreement proper that would regulate tariff and non-tariff measures (Conley, 2017).
Within this context, a strategic approach to trade on the Berbera Corridor project could bring unprecedented value to Somaliland. The fact that Berbera Port may capture 20% of Ethiopia’s export and import flows would mean in and of itself a dramatic increase in the Port’s operations. Related to the short term, the World Bank (2016) has estimated that Djibouti’s share in Ethiopian cargo could decline by 10–15% in five years, starting in 2021. With respect to Berbera Port, handled volumes could rise from 3 million tons in 2016 to 18.1 million in 2050, with compounded annual growth rates for container, general cargo and dry bulk volumes that could reach 8.7% (2016–2030), 3.8% (2030–2040) and 2.7% (2040–2050). CDC Group estimates that by 2035 investments in the Port could create additional trade equivalent to approximately 27% of Somaliland’s GDP.
Somaliland can benefit from this additional trade in various ways. The services sector is poised to reap much of the potential benefit through transport and logistics operations. The main activities that will be promoted are those by forwarders, clearance agents, shipping agents, ship suppliers and road transport companies. Moreover, port activities undertaken by stevedores and cargo survey companies will also likely be in high demand. In addition, establishment of Berbera Economic Zone near the Port could generate a cluster of manufacturing activities with the potential to increase exports and foreign exchange revenues. While the domestic manufacturing sector could face greater competition as a result of the increased volume of goods arriving in the country, the infrastructural developments of the Corridor should allow Somaliland’s manufacturing industry to tap into regional value chains. With respect to the treasury, the overall increase in output should increase the country’s tax base and potentially allow for greater tax revenues. Despite low profit and income tax rates (6% and 12.3%, respectively), the increase, in absolute terms, in economic activity should generate new sources of revenue. On the other hand, the treasury could also reap benefits by taxing services provided by the Port’s operations. Moreover, if GoSL increases its capacity to collect taxes, the overall benefits could be larger. In this respect, MoFD (2021a) reported an annual increase in domestic revenue collection of 12.3% in 2020 (including a 190% increase in profit tax collections).
In a similar vein to what was introduced in Section 4.1, a potential agreement to facilitate trade along the Corridor that entails tariff reductions should reduce costs for households and SMEs. Given that imports of foodstuff and other basic items account for an important share of total imports, reduced prices would increase overall consumer welfare while improving food security and reducing poverty levels. Similarly, access to medicines, which featured as one of the top 10 imported products in 2020, should also be eased. In addition, reduced input costs for SMEs could improve efficiency and facilitate access to capital goods with technology that could potentially increase productivity levels. The latter is especially relevant for informal industries and SMEs, which do not necessarily benefit from import and profit tax rebates granted by the Somaliland Investment Act (Law No. 99/2021). This notwithstanding, the potential impact would be significantly lower compared with a situation whereby Somaliland is considered an AfCFTA member (Section 4.1), given that a significant part of its imports comes from other regional (e.g. Egypt, Kenya) and extra-regional (e.g. China) economies.
The increased demand for both qualified and unqualified labor holds the potential to increase employment and reduce labor market informality, which in turn should also result in greater revenues for the state. Importantly, the Special Economic Zones Law (Law No. 93/2021) and the Somaliland Investment Act (Law No. 99/2021) have specific clauses on local labor content requirements that expect companies to employ 100% of low-skilled workers and 70% of semi-skilled workers from the local labor force. These measures should help push forward job creation dynamics within the country and make it possible to capitalize on the 53,000 indirect jobs that the expansion of the Port will create (CDC, 2021). The increased efforts towards formalization, such as the newly developed online Business Registration and Licensing System (BRLS), will help ensure companies abide by the existing tax regime, although for the state to collect income tax revenue further efforts may be needed.
Realization of these benefits is not necessarily guaranteed, however. Indeed, the capacity of the local private sector to respond to such demand-induced effects and the nature of any potential agreements between Somaliland and Ethiopia may ultimately determine the extent of these benefits. For instance, with respect to transit good treaties, Somaliland may need to ensure that at least part of the demand for new freight and transport services is not overtaken by more capable companies headquartered in Djibouti or Ethiopia. In parallel, Somaliland should ensure its local logistics companies have the necessary competitive edge to compete and meet the new demand for their services. Indeed, as of now, only nationals can obtain an import and export license at MoTT, which virtually shelters the sector from foreign competition. Hence, the extent to which such provisions are maintained or not in future agreements and the overall ability of GoSL to shape the market to its advantage will be important.
A note of caution in relation to the trade agreements and the potential loss of government revenue is also warranted. Given that Ethiopia is one of Somaliland’s main trading partners in the region, these concerns are akin to those detailed elsewhere. More specifically, with a trade and transit agreement with Ethiopia, Somaliland would lose the import tax it currently levies on goods imported from Ethiopia, especially khat, and on goods re-exported to Ethiopia, and probably the export tax levied in Berbera on goods that transit from Ethiopia to Berbera and then to a third country. According to MoFD (2020a), revenue collection from Kalabaydh and Wajaale accounted for approximately 22% of January–June 2020 customs revenue, while the Berbera customs post contributed 67%. A trade agreement could jeopardize revenue collected at Kalabaydh and Wajaale, while the share of goods that is currently subject to duty at Berbera and that would otherwise qualify as transit goods is unclear.
Unlike with the AfCFTA, however, by negotiating the agreements bilaterally Somaliland has greater room for adapting the treaties to its interests, and can use this window of opportunity to find alternative funding mechanisms that can compensate for potential revenue losses. For instance, given the vast volume that is expected to be diverted from Doraleh to Berbera Port, a levy on road traffic, or port operation services, might be explored as a compensation mechanism. An alternative option with a less targeted impact on the Corridor’s efficiency would be to use other instruments such as the value-added tax, which, according to PKF (2017), stands at 6% (fixed rate). Finally, aligned with the AfCFTA protocols, Somaliland might attempt to exclude khat imports from liberalization as a type of ‘sin tax’.
Also, it is worth noting that these agreements and the development of the Port itself are likely to change the existing power balances in the borderlands. In the case of Berbera, for instance, the Port’s operations were formerly managed by the Berbera Ports Authority, a state-owned agency with direct access to the Presidency. BPA had maintained important formal and informal ties with local authorities and had been making donations to the city’s mosques, schools and community leaders and the municipality for nearly two decades. Hence, the takeover of BPA’s Port operations by DP World met with strong opposition from the local population. The latter perceived the central government to be gaining influence in the city at the expense of the dominant local clan (Issa Muse) and to the benefit of the clan of then President Sillanyo (Habar Jalo), who had struck the deal with DP World (Musa and Horst, 2019; Ahmed and Stepputat, 2020). After initial discontent, there have been instances of support from the local population to the project (Somaliland Sun, 2018).
Further to the three abovementioned conditions key to realizing the benefits of the Berbera Corridor – that is, (1) ensuring appropriate trade deals, (2) strengthening the domestic private sector and (3) managing changes in local/regional power balances – GoSL will need a comprehensive trade strategy that can provide a direction to the country’s efforts to maximize the gains from trade. Moreover, successful implementation of the measures incorporated in the trade agreements will require the budgeting, planning and operationalization of specific projects, and the national trade strategy should provide a framework and coherent plan for these actions to take place. In addition to trade policy, successful operationalization of the Corridor requires the development of related strategies such as a national transport policy and an industrialization policy.
In sum, assuming that, in the short and medium term, Somaliland is not able to formally join the AfCFTA, it is likely that the AfCFTA will offer opportunities for Somaliland in three main areas. First, Somaliland can leverage the fact that customs procedures will be harmonized across Africa, following suit and promoting action towards the establishment and alignment of trade facilitation measures. Second, the country can take advantage of trade facilitation efforts and increased incomes on the African continent, using the demand-pull effect for the vastly untapped potential of its export-oriented sectors. Building on the former two factors, the AfCFTA can pave the way for bilateral trade agreements between Somaliland and its main trade partners, with the Berbera Corridor as the most tangible case in point. In order to maximize these opportunities, Table 6 highlights how Somaliland needs to be aware of and act in coherence with the strengths, challenges, opportunities and risks associated with the AfCFTA and the Berbera Corridor projects.
Table 6. Summary of strengths, challenges, opportunities and risks: the AfCFTA and the Berbera Corridor project
|Peace and stability
Privileged geographical location
Recent diplomatic accomplishments and conducive geopolitical environment
Effective regulatory action in recent years
Ample regulatory and policy space
Comparative advantages in export-oriented sectors with vast underexploited potential
Potential for dynamic comparative advantages in domestic manufacturing and services sectors
|Non-recognized status precludes progress towards addressing tariff barriers to trade through trade agreements
Lack of overarching policy framework
NTBs; gaps at the domestic level
Weak harmonization of some laws and rules (or implementation thereof) with international standards
Government revenue over dependent on customs duties Limited access to international financial markets
Limited state capacity to undertake research, situational analyses, design and policy implementation efforts
Long-standing structural challenges faced by private firms; energy cost, access to finance, skills shortages
|Increased exports: diversification of export markets and export basket, aligned with NDP II objectives
Increased volume of imports (especially transit goods)
Increased government revenues through a larger tax base and ability to enact/modify direct and indirect taxes
Job creation (low, mid, high-skilled)
Increased demand for logistics and business (finance, accounting, insurance) services
Potential for tapping into regional value chains
Alignment with international trade regulatory standards Improvement of hard infrastructure
Increased consumer welfare, potential increase in food security
Reduced cost of intermediate inputs, especially for SMEs Hopes for country recognition
|Unbalanced trade agreements
Substantial government revenue loss
Competition from more capable foreign service companies Competition from cheaper goods imports against local manufacturers
Distortion of existing power balances with impact on local/regional stability
Finally, this section has identified action at four complementary levels as critical to maximize the benefits of the Corridor: ensuring appropriate trade deals, managing changes in local/regional power balances, strengthening the domestic private sector and developing a comprehensive policy framework. The next section focuses on the latter two.
Extending the analysis in Section 4 and focusing on the Berbera Corridor, this section contends that public-private sector capabilities are fundamental to successfully address the two main priorities identified above: strengthening the domestic private sector and developing a comprehensive policy framework. Recognizing that the AfCFTA provides an excellent opportunity for removing NTBs and strengthening bilateral trade relations between Somaliland and its trade partners, this section follows from Section 4.4. in that it focuses on the Berbera Corridor as a case study of the impacts and opportunities of Somaliland’s participation in trade integration projects.
The capabilities framework builds on the work of scholars studying the growth of the firm and trying to understand how businesses diversify, compete and acquire new competitive advantages (Penrose, 1995). With reference to economic development, the term has been widely used at the micro, meso and macro levels in the form of, for instance, firm capabilities for innovation (Cirera et al., 2020), countries’ technological capabilities (Lall, 1992) and sectoral productive capabilities (Mondliwa et al., 2021). At the micro level, further work has advanced the resource-based view of the firm by looking into how firms develop dynamic capabilities in response to changing environments (Teece et al., 1997). More recently, the latter has been combined with theories on the role of the state to argue for a public sector that is capable of leading and setting the direction of economic development in instances whereby socio-political considerations rather than technical fixes are most critical (Kattel and Mazzucato, 2018).
Taking these insights as a starting point, but using the concept ‘capabilities’ in its broadest sense (e.g. organizations’ ‘knowledge, experience, and skills’ (Richardson, 1972)) and from a meso/sectoral perspective, the following lines advance knowledge of the constraints facing Somaliland’s public and private sector actors and the capabilities they might need to acquire in order to maximize the benefits of the Berbera Corridor.
For Somaliland to both benefit from and facilitate the effective development of the Corridor, it is critical that the companies whose services will be in high demand have the necessary capabilities to adjust and grow accordingly. This applies to both logistics and manufacturing sector companies. On the one hand, if Somaliland does not allow foreign companies to undertake import/export activities, as indicated in Section 4.4., it needs to ensure local traders can stand up to the challenge. On the other hand, for Somaliland to be able to retain a larger share of value within the country, manufacturing companies need to be able to tap into and compete in regional markets.
Logistics firms set to reap the gains of increased trade are those involved in the shipping, forwarding, clearance and road transportation sectors. To attempt to assess the number of formal active companies in the logistics sector, Table 7 presents the number of renewed licenses by license type in 2020. According to the Licensing Act (Law No. 98/2021), licenses should be renewed on an annual basis, thus it is assumed that companies that renew their license are both active and compliant with the existing laws, two conditions that will be required from logistics companies operating in the Corridor. As Table 7 indicates, the largest group of companies that renewed their license in 2020 were those engaged in import and export activities. However, these companies do not necessarily undertake trade and logistics operations themselves, but normally act as the supplier (producer) or consumer (retailer).
Table 7. Renewed business licenses by quarter and license type, 2020
Type of license
Source: Adapted from MoTT (2021b).
Apart from importers and exporters, the data shows that 36 clearance companies renewed their license in 2020. Renewed business licenses for shipping companies totaled 25. To complement these figures, data has been consulted on new firm registrations. Newly registered clearance companies numbered 47 in 2019 and 38 in 2020, while new shipping firms totaled 14 and 7, respectively (MoTT, 2020a, 2021a, 2021b). These two figures indicate that the number of logistics companies that are set to benefit from the Corridor’s investments and are operating legally in the country may be limited. This thus raises questions regarding the capacity of the sector as a whole to meet the demand for logistics services. From this it follows that the increase in trade volumes will need to be met through either (1) a substantial increase in the number of firms, (2) wide formalization of informal logistic firms and/or (3) the growth of existing firms.
A similar rationale applies to industrial companies. Table 7 shows that only 44 industries renewed their license in 2020. These industries are probably those that benefit from the privileges granted by the Investment Act (Law No. 99/2021) through profit tax rebates and import duty exemptions. MoTT introduced in 2019 a new criterion to classify industries into three ‘grades’ based on their capital investment. Companies with capital investments greater than $450,000 obtain Grade A, Grade B is given to companies with capital investments of $250,000–$450,000 and industries with investment levels below $250,000 receive Grade C. Based on the industries that were registered and had requested import tariff exemptions, the total number of active industries in the country increases to 63 (MoTT, 2021a). Among these industries, 33 are classified into Grade A, 28 into Grade B and 1 into Grade C.
These industries produce a limited set of goods in certain areas, including water bottling, construction materials, foam, plastics, furniture, beverages, dairy products, salt, shampoo, steel, fiberglass and hides, among a few others (MoTT, 2021a). Matching this information with the export data presented in Section 2 suggests that, except for soap and skins, none of the products produced by local industries ranks among the top 10 commodity exports, suggesting that these mostly cater to the local market. Simply put, most of the most prominent industrial companies in Somaliland are not currently competing in international/regional markets. The hard and soft infrastructure actions under development as part of the Berbera Corridor project will make it easier for these companies to connect with regional markets. Yet action might be needed to help these firms attain the necessary level of capabilities to compete in local, regional and international markets.
Despite the need to guarantee that firms can successfully respond to the new demand, there seem to be no instruments or plans to ensure that firms and managers develop the required level of capabilities. Filling this gap, Somaliland has a few financial and non-financial institutions that provide business development services, including training and technical assistance. These include the Nordic Horn of Africa Opportunities Fund (Norfund, in conjunction with Shuraako), Innovate Ventures, KIMS Microfinance and HarHub (MoTT, 2021a). The Chamber of Commerce (CoC) is also expected to be able to support firms in their ventures, although as of now efforts may be required to scale up CoC activities. Except for Norfund and the CoC, the remaining organizations support small-scale companies and newly created enterprises. As the country proceeds into trade integration with neighbors, the services of these organizations will be in high demand and could be used as catalyzers of private sector capabilities development. This notwithstanding, their remit may need to be widened so as to account for established medium-sized and large enterprises operating in various sectors.
Partly, enhancing firm performance requires understanding the growth constraints that most private sector organizations often face. According to the World Bank (2012, 2016), the most cited constraint is poor access to finance. World Bank (2012) found that only 2% of businesses applied for a loan or credit line during 2012, while out of those that did not apply only 6.5% reported that they did not have need of a loan. At the time of the survey, the main items being financed were building supplies and trading goods through murabaha and musharaka financing. While the sector has definitely improved its performance in the past years, at the time of writing there were only four banking institutions in Somaliland (Dahabshiil, Dara Salaam, Premier, Amal), and it is likely that lack of finance continues to constrain business growth. Complementing the banking system, as introduced in Section 2.2, are remittance companies, which also service murabaha and musharaka products, hence run financial operations beyond traditional family transfers; some of these have a considerable client base (World Bank, 2016).
In addition, and related to the Port operations, insurance services may be limited too, with only five registered insurance companies operating in Somaliland: Takaful Insurance of Africa, Horn of Africa Takaaful, Som Takaaful, Amana Insurance and East Africa Insurance. All but the latter two, for which available information is limited, offer insurance products that cover for the loss of maritime and inland cargo and are based in Hargeisa. Some have started in Somaliland relatively recently, such as Horn of Africa Insurance, which was founded in 2018.
The insurance sector is supervised by the National Insurance Authority and regulated by the National Insurance Act (Law No. 92/2020). Through its establishment, Somaliland has formalized some of the basic requirements that insurance companies must meet, such as minimum capital requirements.
The opportunities arising from the Corridor suggest that, while following solvency and liquidity requirements, banks may need to take a more entrepreneurial role by facilitating finance either to existing firms seeking to expand or to new firm creation. This is particularly relevant since, as Table 7 shows, it is likely that the expansion of the Corridor will require a substantial increase in the number of firms operating in the country. Insurance services will be essential to implementing any transit or trade agreement, since they are expected, for instance, to supply the appropriate customs guarantees. In the case of comprehensive guarantees, the Customs Act (Law No. 73/2016), Section 90 Article 3a, indicates that this should be carried out by companies established in Somaliland.
A second recurrent constraint is skills shortages. The World Bank (2016) reports that there is a widespread need for all types of skills, and firms often import foreigners for highly skilled positions and technical or mechanical tasks. Firms indicated accounting and finance, market and trade information, and management as the occupations for which it was most difficult to find workers. Interviews also highlighted that turnover tended to be high for most locally hired workers, which may be linked to the somewhat surprising finding that firms encounter difficulty in finding unskilled workers. In this respect, it is worth noting that the Special Economic Zones Law (Law No. 93/2021) expects that 70% of semi-skilled and 100% of unskilled jobs are filled by local workers, which is also in line with the Investment Act (Law No. 99/2021). Therefore, for companies to be able to successfully operate while complying with regulations and creating job opportunities, there is a need to promote skills programs that target those occupations that will be in most demand. In this respect, there is scope for companies offering in-house training and skills programs as well as developing mechanisms aimed at employee retention.
A final constraint facing the private sector that is mentioned often is high electricity costs. Somaliland has historically had one of the most expensive electricity prices in the world, which disproportionally affects micro-enterprises, which are in some cases left without electricity access (Coolidge and Poplack, 2016; World Bank, 2016). In Hargeisa, firms source electricity from the private sector, in most cases in the form of diesel generators. In addition, Somaliland’s electricity sector is highly reliant on fuel imports and, as highlighted in Section 2, fuel is one of the top 10 imported products into the country. This makes the private sector vulnerable to price volatility and has pushed MoTT to issue monthly caps on the retail price of fuel and to closely monitor its evolution (MoTT, 2021e). In light of the complexity and long-term nature of establishing electric grid infrastructure, decentralized renewable energy options and solar power in particular could be scaled up as a complementary measure.
Finally, while these three issues are normally related to external constraints to firm growth, this should not prevent firms from taking appropriate action to overcome these constraints to the extent possible. Also, this highlights how public-private cooperation will be critical to enhance firm performance. In this sense, private sector development is dependent on effective public sector intervention in key areas such as investing in infrastructure (electricity system, transport costs) or successfully negotiating trade agreements. On the other hand, GoSL is dependent on firms investing in the development of the necessary capabilities to effectively respond to an unprecedented demand for their services, to be able to effectively link with regional markets and to develop mechanisms that allow for employee retention and in-house skills development.
As Section 4.4 emphasized, it is key to have in place a comprehensive and well-articulated policy framework that can provide direction to the government’s approach to trade and help in prioritizing efforts and designing and implementing projects aimed at the promotion of trade and the reduction of trade barriers. This would call first and foremost for a national trade strategy. Meanwhile, GoSL has not yet published at least two further policies that will be necessary for Somaliland to maximize the gains of the Berbera Corridor: a national industrialization policy and a national transportation policy. There are many reasons why these strategies are still under development, and it ought to be noted that lack of action on these matters does not mean GoSL has not acted swiftly on other issues. Nevertheless, one reason why action has been limited may relate to a public sector capabilities gaps in three areas: research, policy formulation and implementation.
Research here refers to data collection and management and report writing aimed at producing evidence to inform policy. As such, this is part of the ‘diagnostics’ phase of any policy formulation process. In this respect and in relation to the trade policy, according to the CSD (2020), ‘the Customs Authorities only collect data on 25% of total trade transactions.’ At least two ministries collect trade data: MoFD (Customs Department) and MoTT. MoFD appears to have better capacity to collect and process data and works with Sahal Technology in several customs. MoTT has published trade data only in MoTT (2020b). The CSD reports trade figures as well. Apart from potential import/export underreporting, which is not unusual in the region, it seems clear from the statistics reports of these agencies that there are at least two further issues.
First, trade values are likely to be significantly underestimated. Product valuation has often relied on a Customs Valuation Book that structures goods into HS categories and assigns fixed unit US dollar prices to each product. However, unit values are known to be lower than real figures, and few adjustments are made to the book from year to year. This also means that monthly price fluctuations cannot be captured. Furthermore, US dollar prices are revalued to SLS using an exchange rate set by the government and that may not capture the real exchange rates. Second, there seems to be a certain lack of coordination between ministries, and each agency reports different trade volumes and values; for instance, MoTT reported an import volume of 98,000 sheep and goats during the first quarter of 2020, whereas MoFD reported 146,094. MoFD (2021d) reported a 2020 import value of $2 billion, against $1.3 billion reported in CSD (2020), with both agencies using different valuation methods.
Understandably, this situation hampers GoSL’s ability to properly undertake situational analyses of current trade patterns in Somaliland and, more importantly, to generate estimates of the potential impact of different policy options and/or assessments of the full implications of trade agreements, be it a potential transit agreement with Ethiopia, a free trade agreement or the AfCFTA. This is compounded by Somaliland not being included in international trade databases such as UN Comtrade, which otherwise would allow for data validation mechanisms based on matching Somaliland’s trade data with that of its trade partners. While it may be unrealistic to expect Somaliland to have, in the short term, a state-of-the-art trade data collection and processing management system, there is seemingly ample room for improving the current state of trade data, not least given that the regular publication of import and export statistics that follow international standards, such as use of HS classification codes, is a requirement of the AfCFTA Agreement (Annex III, Article 3.2a) (AU, 2018a).
Related to the ability to collect and treat data, the key government agencies involved in the Berbera Corridor have published only scant analyses on the sectors under their remit. This may indicate low capabilities in not just collecting data but also analyzing and using such information. In this respect, the CSD has never published a business enterprise survey, the Ministry of Investment and Industrial Development (MoIID) has not published any industrial enterprise surveys and MoTT has not undertaken any micro-firm surveys of traders, logistics companies or similar. In effect, this means that relevant agencies have limited codified knowledge about these activities. While there is probably a wealth of tacit knowledge in such organizations, the lack of knowledge codification can result in important project stoppages after organizational reshuffles. Most importantly, this indicates that the key agencies in charge of developing the policies that are central to the success of the Berbera Corridor do not have systematic assessment mechanisms to undertake either baseline or ex-post studies on the state of the industrial, transport and trade sectors.
If the two former aspects refer to the importance of building capabilities that allow GoSL to undertake much-needed diagnostics, a third important capability that the public sector would benefit from strengthening is that of policy formulation. The MoTT 2019 Annual Progress Report (MoTT, 2020a) points to plans for the development of two sectoral policies: a national trade policy and a national industrialization policy. The Annual Strategic Plan for 2020 gave policies specific timelines and organized them across the relevant actors. All of them were expected to be finalized by the end of 2020 (MoTT, 2021c). However, as of now, it seems that the policies are still under development. Considering that these policies are of high priority to current developments in the country and have already been scheduled in NDPs, progress could be promoted by increasing capacity in the design and formulation of economic policies.
Further to formulation, capabilities to put in place the necessary planning and implementation frameworks will be key to the realization of Somaliland’s ambition to realize and benefit from trade integration projects. In this respect, ministries’ strategic plans show strong ambition, with MoFD planning to undertake a total of 83 projects from 2019 to 2023 (MoFD, 2019b) and the Ministry of Transport and Roads Development at least 43 between 2018 and 2024 (MoTRD, 2018), while the MoTT (2020c) planned 34 projects to be completed in 2020 alone. While it is challenging to assess the exact degree to which projects have been implemented, available information indicates that some of these strategies have had to be postponed; indeed, MoFD identifies in various instances poor implementation as a key weakness of the ministry (MoFD, 2019b). Strong implementation capabilities, followed by the appropriate monitoring and evaluation frameworks, need to be in place so as to ensure that commitments taken in any potential trade agreements are materialized in policies and specific projects.
As an illustration of key government agencies’ action on key areas, and complementing the preceding paragraphs, Table 8 displays outputs by area and ministry as available on each respective website. It is important to note that both MoTT and MoIID only have one policy under implementation each. Both MoFD and MoTT have shown important capacity to develop laws and regulations, whereas MoPND and MoIID have been less active on this front. Only MoFD has an active strategic plan, while all but MoIID had an annual work plan for the year 2020 or 2021. Similarly, all but MoIID have engaged in publishing reports.
Table 8. Action by area and ministry as available on ministry websites
|Ministry||Laws and regulations||Policies||Research, reports||Annual work plan (last)||Strategic plan (last)|
|MoFD||Special Economic Zones
Law (Law No. 93/2021)
Regulation No. 03/2019 to enforce the Customs Act No. 73/2016 (2019)
Customs Act (Law No.
|MoPND||Somaliland Statistics Act (Law. 60/2013)||
NDP II (2017–2021)
|MoTT||Licensing Act (Law No.
Companies Act (Law No.
Companies Regulation, under the Companies Law
|Micro, Small and
|MoIID||Investment Act (Law No. 99/2021)||National Investment Policy (2019)||–||–||–|
In this regard, strengthening public sector capabilities will help GoSL advance trade agreements and trade integration with partners in two complementary ways. On the one hand, negotiating trade agreements requires evidence-based situational analyses that help parties understand their strengths and weaknesses, technical knowledge to delineate potential scenarios and estimates to comprehend the implications of each scenario. On the other hand, once an agreement has been reached, it is necessary to establish concrete implementation plans, as is the case with the AfCFTA’s implementing commitments. The greater the extent to which commitments are implemented, the higher the potential for trade facilitation.
Finally, since the Corridor is a project that cuts across the remit of multiple public sector agencies, it is important to identify those that are likely to play a greater role in designing the appropriate policies and spearheading agreements. Agencies that could play an important role include those responsible for the treasury (MoFD, which hosts the Customs Department), development planning programs (MoPND, which hosts the CSD), trade policy (MoTT), investment and industrial development (MoIID) and transport policy (MoTRD). As non-ministerial agencies, the BPA and the QCC are also expected to play an important role. Finally, the Presidency’s leadership will be critical in moving this project forward.
This report has outlined the opportunities for and potential impact on Somaliland’s economy of trade integration projects under the AfCFTA, with a focus on the Berbera Corridor. It has argued that Somaliland can take advantage of the AfCFTA by (1) aligning policies to abide by the AfCFTA protocols, with a specific focus on NTBs, (2) promoting export sectors into new African markets and (3) entering into bilateral trade agreements. As a cross-cutting theme, and based on the case of the Berbera Corridor, the report has outlined how effectively capitalizing on these opportunities requires action at two main levels: strengthening the domestic private sector and developing a comprehensive policy framework. By analyzing these aspects from a capabilities perspective, Section 5 looked into some of the constraints facing public and private sector actors.
Combining insights from Sections 4 and 5, the following addresses the main objective of the report and describes areas of action that can guide interventions aimed at implementing the AfCFTA protocols, facilitating trade and promoting economic development in Somaliland. The first two components are related to more general AfCFTA implementation and adoption areas (Sections 4.2, 4.3), while the remaining guidelines draw specifically on the analysis of Sections 4.4 and 5.
Support targeted public and private sector efforts towards the removal of NTBs. The lack of progress in facilitating trade agreements with neighboring countries should be taken as an opportunity to, in the meantime, ensure that Somaliland is ready to effectively implement trade facilitation commitments attached to potential trade agreements. Action on this area can target outstanding NTBs or misalignments between the AfCFTA protocols and measures as they currently stand in Somaliland (e.g. the IPR regime). Action should combine support to the relevant public sector agencies through private sector training and awareness-raising campaigns. Specific action could aim to:
- support GoSL efforts to develop an online customs management system that allows for the digitalization of trade customs procedures and facilitates import and export processes
- assist the QCC’s objectives as defined in its 2020–2024 Strategic Plan, most notably by supporting action to enhance inspection capacity, introduce new standards and align standards with those of international organizations (ISO, ARSO, OIE)
- support efforts to establish and implement ROO procedures with a particular focus on options for adopting and streamlining AfCFTA ROO certificates and forms and
- assist the relevant agencies to draft an IPR law that can accommodate for the AfCFTA Protocol on IPR (under negotiation) and enhance the function of SOMIPO.
Promote the development of private sector capabilities in sectors where Somaliland has a comparative advantage. Section 4.3 argued that the AfCFTA is poised to raise continental incomes and create regional value chains. In addition, enacting trade facilitation measures that ensure the harmonization of customs procedures and other potential barriers to trade with those of the AfCFTA members is likely to help Somaliland reach regional markets. These two mechanisms could result in a demand-pull effect over sectors in which Somaliland already has a comparative advantage and could help it diversify its export markets. These actions could be taken directly with the private sector, by supporting the Somaliland CoC, or in conjunction with the relevant ministries. Specific action could aim at:
- promoting SME capabilities in the fisheries sector, combined with improved supply chain infrastructures
- promoting environmentally sustainable practices in the frankincense sector while supporting formalization of companies along the value chain
- assisting private sector tourism enterprises in attracting intra-African tourism and
- financing renewable energy projects
Support public and private sector efforts to address key private sector external constraints in both sectors where Somaliland has a comparative advantage and sectors that will be critical to the Corridor. The report has highlighted that most firms face two major challenges: issues with access to finance and high energy costs. It has also highlighted how remittance companies play an important role in the money lending business by offering murabaha and musharaka financing, and the expected importance of insurance companies for the functioning of the Corridor. Similarly, energy and in particular electricity costs have been a long-standing issue in Somaliland. A few renewable energy projects have been implemented in recent years, and Somaliland may need to explore these options if it is to achieve cheap energy access in the short and medium term. In the context of the Berbera Corridor, action could aim to:
- assess banks’ client base and instruments so as to understand the presumable shortage of credit supply currently existing in the economy
- enhance the efficiency of remittance companies and improve engagement between the Somaliland diaspora and the local business community
- assess the capacity of current insurance companies to engage with increased trade under the Berbera Corridor project and
- support efforts to find alternative options to enhance energy access and cheap electricity prices by assisting or coordinating projects that engage with emerging firms in the oil and renewable energy value chains.
Support the development of private sector capabilities in the sectors that will be most critical to the Corridor. Related to the above, Section 5 argued that, for Somaliland to benefit from integrated trade regimes, the capabilities of the private sector need to be strengthened and the main constraints private firms face addressed. In the case of the Corridor, this applies to the services sector: local logistics companies need to be able to respond to the increased demand for their services. And the manufacturing sector: industrial enterprises must be able to connect with African markets and nurture dynamic comparative advantages. Specific action could aim at:
- supporting the development of certificate programs that deliver training to logistics services companies expected to be operating along the Corridor
- targeting in-house training programs addressing specific skills gaps and employee retention in industrial enterprises and
- export capacity promotion through workshops with key industrial enterprises with high potential for linking with regional value chains.
Support public sector efforts to develop appropriate trade data management systems. According to the CSD (2020), Somaliland could be analyzing only 25% of trade data, and for the most part valuation is unreliable. Supporting the development of appropriate trade data management and reporting systems could help GoSL estimate the potential impacts of trade policies. Importantly, enhanced trade data should also allow for more granular information about trade patterns, including trade partners, product origin and appropriate valuation, information on which to date is seemingly not available. Transparent and readily available trade statistics are also part of the AfCFTA Agreement (Annex III, Article 3.2a) (AU, 2018a). Specification could aim at:
- developing an online trade statistics portal that ensures at least that collected data is analyzed and the statistical nomenclatures stated in the AfCFTA are followed (e.g. HS convention)
- assisting efforts to increase the amount of data that is to be collected and treated by improving customs posts infrastructure in regions other than the most important
- supporting internal data management practices in key ministries, exploring the potential for full digitalization and
- supporting efforts to integrate data across the relevant ministries.
Support public sector efforts to increase research capabilities to undertake diagnostic studies. Limited capacity within GoSL to undertake survey-based research projects to extract information from the private sector limits its ability to formulate evidence-based policies. In-house research teams with strong analytical capabilities are needed to facilitate this. Because GoSL has not conducted such studies for a long time, there is an important knowledge gap on the current situation of various sectors. Codifying knowledge and systematically analyzing the constraints facing particular sectors is a priority if GoSL is to legislate and develop policies to adequately support these sectors. Specific capacity-building could target the delivery of:
- one-off survey-based studies; in the context of the Berbera Corridor, and with a focus on situational analyses, these include a logistics agents survey, a clearance agents survey, an industrial enterprise survey and an informal sector survey and
- regular enterprise surveys, including enterprise surveys, micro, small and medium enterprise surveys, industrial sector surveys and service firm surveys.
Support public sector capabilities in policy formulation and implementation. Trade-related agencies would benefit from technical support on policy formulation and implementation. Importantly, action here could entail long-term engagements that deliver training designed to meet specific objectives that go beyond the publication of a particular policy. Most notably, priority should be given to policy ownership, consensus-building through consultation with stakeholders, coordination across ministries and realistic project plans, as these are likely to increase the chances of successful implementation. Focus could be put on development of the trade, industrialization and transport policies. Training should be coordinated with/support the current efforts of the Somaliland Civil Service Institute. Specific action could aim at training and engagement on:
- the policy formulation cycle
- key trade-related concepts and a policy toolkit
- key industrial-related concepts and a policy toolkit and
- implementation plans, including monitoring and evaluation practices.
The interventions above highlight the need to support Somaliland’s public and private sectors so that they are able to deliver the outputs deemed necessary for Somaliland to benefit from and facilitate trade. With a specific focus on action aimed at delivering outputs that would normally fall within the remit of the public sector, and yet in recognition that building public sector capabilities in the short term may not always be possible, there are different alternatives that development partners may consider.
Support to data-enhancing efforts, and in particular the development of an online data portal, could be achieved through projects coordinated by development partners in conjunction with the relevant ministry/government agency and delivered in partnership between local and foreign companies. There is a successful precedent already here, in the development of the Somaliland online BRLS. This project is managed by the World Bank/International Finance Corporation in tandem with MoTT, and the software solution is delivered by a foreign and a local company. Through this project, MoTT staff have received training and the project has enhanced communication and coordination between MoTT and other relevant ministries (MoF, Attorney General, Ministry of Interior) (MoTT, 2021f).
The BRLS model could be replicated in the development of an online trade data portal. Delivery of such a project could also focus on improving customs infrastructure (especially in less well-staffed customs posts), providing statistics training, enhancing the quality and security of trade data and building capacity to inform policy. It could also provide an opportunity for enhancing cooperation between the CSD, MoFD and MoTT statistics teams, all of which are currently collecting and using trade data differently. An online solution for customs procedures could also be included in this effort.
Another option, linked to the need to support public sector research capabilities, would be to launch Centers of Excellence that have a clear remit to generate evidence to inform policy. This should be done either through or in close coordination with the CSD, so as to avoid duplication of efforts. It should also engage local universities. Here, there is the precedent of the World Bank’s Eastern and Southern Africa Higher Education Centers of Excellence Project, which built partnerships across universities and scaled up research capacity in different priority areas. In Somaliland, the approach could be based on fostering skills in statistics and data management for policy development.
Also, in terms of research outputs, there have been instances of development partners coordinating one-off research projects that have generated evidence about Somaliland’s economy, such as the World Bank’s Somaliland Enterprise Survey 2013. The often-mentioned limitation of this approach, however, is lack of ownership and limited involvement of government agencies, which disincentives the development of research capacity within ministries. In this regard, an alternative approach would be to provide targeted support to the statistics teams of the relevant ministries. As is evident from ministerial annual work plans, ministries in principle give high priority to data efforts (e.g. MoFD, MoPND, MoTT annual or strategic plans) and have dedicated research and statistics teams. Projects that aim at both training and upscaling these teams’ capabilities, and that have a clear objective, might be considered. This could be done in collaboration with the CSD.
With respect to policy development, development partners could provide support by creating Special Purpose Entities that can complement government action in critical areas. An example is the UK Foreign & Commonwealth Development Office-funded Policy Development Facility in Nigeria, implemented by DAI Consultancy. The Policy Development Facility is a rapid response facility set up to support key government agencies in designing and implementing policies. It does so by providing technical assistance and diagnostic studies, among other things. A second, more ambitious, high-level approach would be to support the creation of a policy unit that could provide advice directly to the president and that would be charged with developing prime ministerial policy proposals.
When approaching interventions, development partners should align their proposals with ministerial work plans, which are normally developed annually. For 2021/22, some of the most relevant ministries for the development of the Corridor have either developed annual work plans or have three- to five-year strategic plans under implementation (MoTT, MoPND, MoFD). Finally, 2022 will be critical for policy-making in Somaliland as the country prepares itself for the development of the NDP III, led by MoPND in coordination with all other relevant ministries. The NDP III preparations require the development of situation analyses and the delineation of specific projects under newly specified objectives. Close collaboration between development partners and government agencies at this point in time hold great potential.
Finally, in order to help priorities objectives, Figure 5 below maps objectives in a two-scale matrix that distinguishes between level of complexity and potential impact. Complexity is understood as the potential difficulty of pursuing that specific objective and is ranked according to the number of actors involved, the period of time required and the need for technical expertise. Impact refers to potential to facilitate trade and harnessing the opportunities of trade integration projects. It maps objectives as laid out in Section 6.1, which address action to facilitate trade through both the AfCFTA and the Berbera Corridor. The scale is relative, so that objectives are not necessarily ‘simple’ but ‘less complex’. The same logic applies to the impact potential scale. Objectives are colored based on the primary stakeholder (public, private, public-private), although it is important to recognize that most projects would require some degree of collaboration between public and private actors.
Following this line of argument, objectives that can be achieved through one-off short-term actions, such as export promotion workshops or a survey-based study of the industrial sector, have been considered less complex. On the other hand, supporting efforts to establish and implement ROO procedures would potentially be more complex as this requires specialized knowledge and collaboration between private and public sector actors. In terms of impact, however, the latter may not have as much potential as other interventions since its effectiveness is also contingent on progress to address other NTBs.
Based on this, the matrix places objectives in four quadrants: (1) complex and high impact, (2) complex and low impact, (3) simple and low impact and (4) simple and high impact. Objectives in quadrant 1 include, for instance, supporting the oil and renewable energy value chain so as to reduce energy prices, developing key economic policies (e.g. the trade policy) and supporting the CSD and relevant ministries to undertake regular trade-related surveys. Quadrant 2 is concerned with actions such as assisting the QCC, supporting the frankincense sector and working on ROO efforts. Quadrant 3 includes export capacity promotion and the establishment of certificate programs for logistics firms. Targets in quadrant 4 are most of those related primarily to the private sector, such as supporting SMEs in fisheries and tourism, as well as one-off critical research outputs such as a trade sector survey.
Therefore, in terms of prioritizing action, simple and high-potential objectives could be prioritized over other objectives, such as simple and low-potential targets. For example, development of a study that can shed light on the current state of the clearance and forwarding sector would be a one-off, relatively simple research project with high impact potential because it would directly inform the trade policy while also support trade negotiations. It would therefore be prioritized over, for example, development of an IPR law, given that the latter’s impacts on trade and FDI flows at this stage are probably lower and more uncertain.
It is worth noting that there currently exist (temporal) interdependencies between objectives. On the one hand, it may be necessary to meet certain objectives first before others. It may be best to focus, for example, on the improvement of customs posts infrastructure before attempting to implement an online customs management system across all customs in the country. On the other hand, some objectives could be pursued together; for example, developing a trade data portal and improving data management systems within the relevant ministries could go hand in hand. Third, projects can be virtually unrelated; for example, ensuring sustainable commercialization of gums and resins would be unconnected to the development of certificate programs for logistics firms.
Focusing on the Berbera Corridor, which is currently the most tangible project in the short and medium term, and accounting for objectives’ potential impact, complexity and interdependencies, three actions that could be prioritized are as follows:
- Development of an online trade data portal: This could follow a model similar to that of the BRLS. Its primary objective would be to ensure regular management and reporting of trade data. Processes should be put in place to ensure coherence with AfCFTA requirements (e.g. use of HS codes) as well as that the data has a high enough level of detail to be useful for policy-making. Throughout the process, the project could help address current inconsistencies between how trade data is collected and reported across the CSD, MoFD and MoTT. Working on this could also include the improvement of customs infrastructure in less-developed customs posts. This project would contribute to developing the trade policy while also making it possible to estimate the impact of trade agreements.
- Development of a Somaliland trade policy: It has been argued throughout this report that lack of progress on trade facilitation owes partly to the lack of a comprehensive trade strategy. The report has also indicated that limited public sector capabilities may have contributed to the delay in preparing such a policy. A project to support policy development efforts that result in the preparation of the country’s trade policy would entail a framework under which the relevant ministries can pursue specific (AfCFTA aligned) actions to ease tariff and non-tariff barriers to trade. A project of this nature could be delivered through engagement with MoTT, by providing technical capacity and support to diagnostic studies. Development partners might explore the option of establishing temporary agencies to support policy development, along the lines of the Policy Development Facility in Nigeria.
- Assessment of the logistics sector through a one-off baseline survey study undertaken in collaboration with the CSD or MoTT: This report has identified the logistics sector as a strategic sector in ensuring Somaliland benefits from the Berbera Corridor. It has also highlighted that meeting new demand will require (1) a substantial increase in the number of firms, (2) wide formalization of informal logistic firms and/or (3) the growth of existing firms. A baseline study of the logistics sector would verify these arguments while at the same time exploring the extent to which existing large firms could meet new market demands. In coordination with the CSD or MoTT, this project would generate evidence on Somaliland’s business sector’s ability to provide efficient services along the Corridor and to potentially compete with foreign firms. This could, in turn, inform trade negotiations. Additionally, in a subsequent step, there could be scope for fostering a project aimed at developing a certificate program for logistics firms operating in the Corridor.
Figure 5. Complexity/impact matrix of proposed objectives
Evidence for this report is based on secondary data sources drawn from grey and academic literature. On certain issues (e.g. degree of policy implementation), information availability is limited. This can make it difficult to assess whether in certain cases there is a lack of implementation of particular projects/policies or a lack of reporting. Meanwhile, as noted in Section 5.1, government agencies tend to report different data figures, and there is only limited evidence on the potential income effects of the Berbera Corridor or the AfCFTA, suggesting that more research is needed in this direction. Nevertheless, this report has made efforts to triangulate data sources so as to validate the data used and to ensure the information presented is as reliable as possible, and that any potential data inaccuracies do not affect the main conclusions.
Somaliland is at a crossroads. In recent years, the country has made significant progress on multiple fronts. It has passed relevant laws and regulations, achieved important diplomatic milestones, continued to hold peaceful elections and experienced remarkable foreign investment in the country’s projects, most notably into the Berbera Corridor. At the same time, Somaliland still faces structural weaknesses that limit its socioeconomic progress. Its export basket has remained concentrated in a few products and export markets, the government’s budget is still reliant on import duties, remittances play a crucial role in supporting the local economy and local production is limited and mostly directed to local markets. While trade is seen as an engine for development, and several trade-related laws have recently been approved, a comprehensive trade strategy has not yet materialized, and trade continues to operate under relatively high customs tariffs.
The AfCFTA potentially offers opportunities to address these issues through trade promotion, facilitation and integration. While the current unrecognized status of Somaliland critically determines the extent to which it can directly benefit from the AfCFTA, the country still has ample room for deepening trade relations with neighboring countries. In particular, the Berbera Corridor stands as the most promising trade integration project in the country, and provides insights into what will happen with Somaliland entering into bilateral agreements within the context of the AfCFTA, a likely scenario in the short and medium term. Both the Corridor and the AfCFTA could promote export diversification, help Somaliland companies tap into regional value chains, increase demand for local logistics firms, create jobs and reduce consumption costs of basic goods as well as of intermediate capital inputs, among others.
Helping ensure that the benefits of Somaliland’s trade integration projects are realized requires action aimed at improving domestic private and public sector capabilities. Action can range from supporting key agencies’ data management systems (e.g. publishing regular trade data, promoting digitalization) to fostering the capabilities of both the sectors that will be most involved in the Corridor (e.g. development of certificate and training programs for logistics firms) and those set to benefit from broader AfCFTA demand-pull effects (e.g. promoting Somaliland as a tourist destination). It is hoped that targeted, effective action in these areas will help ensure that trade facilitation efforts bear fruit and that Somaliland maximizes the significant potential benefits of the AfCFTA and the Berbera Corridor.
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 Somaliland is here referred to as a ‘country’ for simplicity and in recognition of its de facto sovereignty. However, it officially remains a state of the Federal Republic of Somalia.
 NTBs are defined here as ‘policy measures other than ordinary customs tariffs that can potentially have an economic effect on international trade in goods, changing quantities traded, or prices or both’ (UNCTAD, 2019).
 Somalia has yet to ratify the AfCFTA agreement and is in the early stages of the World Trade Organization (WTO) accession process. It joined COMESA in 2018 but as of 2020 Somalia’s exports were not subject to COMESA free trade agreement rules (Tralac, 2020).
 This notwithstanding, there is a significant share of containers arriving at Berbera Port from Egypt, Djibouti and Kenya.
 The main AfCFTA scenario assumes that the reduction in NTBs will facilitate trade with non-AfCFTA countries. This is because many NTBs do not discriminate by products’ country of origin. For instance, streamlining customs procedures benefits all trade partners regardless of whether they are part or not of a prevailing trade agreement.
 The UAE was also meant to build a military base in Berbera, but the plan was abandoned in 2019.
 The UAE officially dismantled its base in Eritrea in 2019.
 Near Wajaale. Kalabaydh customs post is where khat imports are recorded (Ahmed, 2020). Out of the 22% of total customs revenue, 20.8% were collected at Kalabaydh and less than 2% in Berbera.
 It must be noted that the total number of companies engaged in such activities is likely to be significantly higher if unregistered companies or registered companies that do not renew their licence are accounted for.
 Further research is needed to assess the extent to which existing large firms could meet this new demand.
 Although the parliament passed the Central Bank Law (Law No. 54/2012) and the Islamic Bank Law (Law No. 54/2012) in 2012, there has been resistance to a potential Commercial Bank Law.
 ‘Takaful’ refers to a Sharia-compliant type of insurance service.
 According to Sahal Technology’s website, it covers customs in Berbera, Wajaale, Kalabaydh, Zeila and Hargeisa Airport.
 This valuation system is akin to the one defined by the Brussels Definition of Value (market, fictional value) and contrary to the valuation system adopted by the WTO Agreement on Implementation of Article VII (1994) following the Tokyo Round Valuation Code (transaction value). The latter has been adopted by the AfCFTA Agreement (Annex II) (AU, 2018b). Both approaches are provisioned for in the Somaliland Customs Act (Law No. 73/2016). Efforts are ongoing to improve valuation and MoFD (2020) expects to start using CIF values.
 MoTT was formerly the Ministry of Trade, Industries and Tourism.
 Figure 5 should be interpreted as a tool rather than a defining classification of objectives given that, as Section 6.2 shows, potential complexity and impact are dependent on project design.
 These actions can be used as instruments that make use of objectives’ complementarities and simultaneously pursue more than one target.
Readers are encouraged to reproduce the material for their own publications, as long as they are not being sold commercially. ODI requests due acknowledgment and a copy of the publication. For online use, we ask readers to link to the original resource on the ODI website. The views presented in this paper are those of the author and do not necessarily represent the views of ODI or our partners.
How to cite: Rodriguez, A, R. (2022) The AfCFTA and the Berbera Corridor: opportunities for impact on Somaliland’s economy. ODI Report. London: ODI
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