Somalia’s business environment may offer significant market opportunities for investors, but challenges remain. Key challenges include:
- Corruption and weak governance
- Security risks and terrorist threats
- Uncertainty related to the political environment
- Uncertainty related to regulatory and taxation systems
- Lack of enforcement and protection of property and intellectual rights
- Low public sector investment
According to Transparency International’s Global Corruption Perception Index 2022, Somalia ranked 180 out of 180 countries (with 180 being the most corrupt). Allegations of corruption surrounding large government contracts are often reported. Other governance issues include weak regulatory and judicial systems and weak enforcement of contracts and agreements.
Security challenges exist across the country, limiting accessibility to most of rural Somalia. Among these security challenges is the presence of the terrorist group al-Shabaab which—due to the threat of violence and extortion—limits economic and commercial activity in some areas outside of major cities. Other parts of the country, especially the northern regions—including Somaliland and Puntland—have historically been relatively more accessible but are not immune from significant security concerns. Terrorist groups use extortion and illegal taxation to collect money and benefits from businesses and individuals. Due to prolonged conflicts in the country, businesses often face operational difficulties, particularly from threats by armed groups that may also include local militias.
Somalia has weak public institutions that continue to affect its perceived political stability. The country adopted a federal system of government, and its constitution is still considered provisional. The division of federal and state-level authorities is unclear and sometimes contested, including for authorities related to fiscal policy, trade regulations, and other business-related policies. The governance structures are considered weak and evolving, especially in enforcing local laws and regulations, where local judiciary and formal dispute resolutions mechanisms are typically poorly developed. The country’s financial sector is nascent, with international scrutiny regarding the application of know-your-customer and other shortfalls regarding international compliance standards. Trade and business relationships are mostly informal, and trust and networks are primarily used in business relationships and transactions. The lack of correspondent banking relationships with money-center banks remains a constraint in transferring funds into Somalia. While the Central Bank of Somalia has made progress in inter-bank transfers with local banks, a deficit of international correspondent banking relationships remains a challenge to conducting businesses.
Due to a lack of quality control and standards enforcement, cheap, substandard, or counterfeit goods are often imported. Somalia continues to re-establish formal ties with the World Intellectual Property Organization (WIPO) but has not yet fully implemented intellectual property laws. Lax or non-existent enforcement of intellectual property rights (IPR) on electronics, movies, videos, and software applications makes some U.S. firms reluctant to export these goods and services to Somalia. Without solid import regulations, standards, and enforcement, counterfeit and uncertified products are imported in the country, particularly from China.
Somalia’s business environment remains challenging, especially for foreign direct investment. There are few foreign owned investments in the country, though this is changing in multiple sectors, with energy, logistics, infrastructure, transport, health, and education now attracting several joint ventures. FDI inflows were estimated at $455 million in 2021 with annual growth of six to nine percent. The Somalia diaspora community continues to invest in Somalia, representing the largest percentage of the FDI.