By Merlin Linehan
Somaliland is a breakaway nation on the Horn of Africa, officially part of Somalia and never recognized by any other state it has been effectively independent since the civil war that engulfed Somalia over 20 years ago with its own government and administration based in the capital Hargeisa. While the rest of Somalia was engulfed in violence and chaos Somaliland remained relatively unscathed, but its lack of official status and close association with a failed state has made it very difficult to attract overseas capital.
This appears to be changing as the construction of a new port in Berbera and the prospect of a new Emirati military base in the country point to an exciting new start for the country as it starts to attract foreign investment and recognition. But the uncertain legal environment for investors, lack of a functioning banking system, widespread poverty and a largely agriculturally based economy are all major problems which cannot be easily overlooked. Below I take a look at the prospects and pitfalls around investing in Somaliland.
I was lucky enough to speak with the intrepid Alex Goldfarb who works for the Firestarter Group which aims to reverse the top-down model of philanthropy through its projects and coined the phrase social alpha to describe the impact of the group’s work in amplifying the social return on investment of a charitable contribution. He lives and works in Somaliland on a project which aims to supply fish to the capital Hargeisa which is just 3 hours from the coast.
However, the problem is not the supply of fish which Somaliland has an abundance of including healthy catches of yellowfin tuna, mackerel and the highly popular kingfish, despite the efforts of other fishing fleets to plunder its largely guarded coastline. The challenge is keeping the fish cool in the country’s searing heat when the cost of electricity is relatively high. Despite these hurdles, Alex’s venture has successfully supplied fresh fish to shops, hotels and individuals at a competitive price.
The use of electricity bills as proof of credit has allowed Alex’s venture to provide credit to small businesses, an innovative solution as cash flows can be difficult to prove in a society without a formal banking system. The promise of cheap solar power and batteries should eventually bring the price of electricity down to a reasonable level, which in turn will cut the price of fish even further.
Like most African countries Somaliland also has ties with China, I discussed the presence of Chinese businesses with the enterprising Brandon Emmerich who works for Granite Peak Advisory, a firm that interprets the often murky world of Chinese economic and financial data – a fluent Mandarin speaker he met Chinese oil workers as well as a few entrepreneurs on his travels in the country, he also intriguingly came across some Chinese people who had moved to the country precisely because of its obscurity perhaps fleeing trouble at home? The presence of China National Petroleum Corporation who are prospecting for oil in Somaliland is no surprise Chinese natural resource firms are renowned for their fearlessness and ability to operate pretty much anywhere.
For most prospective international investors Somaliland remains out of touch, the only way to invest there is go to the country and place funds into property or a business, which right now is largely the preserve of the diaspora community who have returned full or part time in growing numbers. Some believe the returning diaspora have driven up property prices too high in the capital, but they are also investing in the country with money made overseas. There are growing signs that outsiders from across Africa and beyond are interested in the country with events like this investment forum looking to attract funds into the critical job creating SME sector.
But as yet there are no ETFs that cover the country, there is a Stock exchange but foreigners cannot yet invest in it and for most Somaliland is off the radar. However, years of relative obscurity have not dampened the countries entrepreneurial zeal with many ideas bubbling under the surface and anyone who travels there is likely to finds business opportunities. Areas like media, healthcare, fast moving consumer goods, light manufacturing and logistics are all thought to be the most promising sectors.
Somaliland is synonymous with entrepreneurship “Free enterprise is Somalia,” according to the Minister of Planning Dr. Sa’ad Ali Shire, “because the prior circumstances of the country required the private sector to do a lot of work.” The private sector effort in creating modern day Somaliland can never be fully appreciated”.
The Port of Berbera is currently undergoing a Dubai backed refurbishment which will transform into one able to handle serious container traffic. This development could well be the shot in the arm Somaliland needs with the port close one of the world’s major shipping channels in the Red Sea, it could become a major conduit for goods from Ethiopia to the rest of the world offering competition to neighboring and increasingly congested Djibouti.
Despite these investments, Somaliland remains very a poor sub-Saharan African economy with all the problems this entails, widespread poverty, a lack of decent infrastructure and even the specter of drought in parts of the country are just some of its problems. But in other respects, society is more advanced than the west, for example, payments for nearly all transactions are done by phone, using a system similar to the famous M-Pesa system in Kenya. Phone payments have largely replaced the cumbersome wads of cash that were formerly used and bypassing the need or debit cards in what is a largely unbanked economy.
Many visitors to the country are concerned about security – this is a well-founded fear in the case of Somalia where despite massive improvements in terms of stability the country still suffers regular terrorist attacks, but Somaliland is different and has long been more stable and safe than its southern neighbor.
If Somaliland can build on its success and become more open to foreign investment and provide a stable environment for enterprise there is no reason the country cannot become an increasingly attractive destination in years to come.
Merlin Linehan has worked in development finance within Eastern Europe and Asia and spends much of his time investigating the risks and opportunities that are created by the ongoing expansion of Chinese businesses that invest overseas in emerging markets.
