An Empirical Analysis of Development Aid

And Domestic Revenue Performance

Presenter: Mr. Hussien JIMALE

 Contents
• Background analysis of
Official Development
Assistance (ODA) in Somalia

• Overview of Domestic
Revenue Mobilization in
Somalia

• Empirical Evidence of ODA

and Domestic Revenue
Performance

• Strategies for increasing aid

effectiveness and domestic
revenue performance
Official Development Assistance (ODA)
• ODA promotes economic development &
welfare of developing countries.

• Military and enforcement aspects are not

included in ODA.
 Why Donors Give Aid?

Political Motivations Economic Motivations

 Overview of aid flows in Somalia

Somalia received US$ 1.9 billion in official development

assistance (ODA) in 2019,
Figure 1: ODA trends in Somalia, 2010 – 2019
Somalia highly depends on aid and remittances
Financial Flows in Somalia
Aid by donor
Development aid by partner
Share of humanitarian aid by donor
Humanitarian aid by partner
 Use of SDRF funds

Donors increased their contributions to the

SDRF Funds in 2019 to US$ 225 million,
compared with US$ 190 million in 2018.
Aid by NDP pillar
Aid by NDP pillar
Aid by location
 Overview of DRM
• The civil war destroyed Somalia’s tax administration
system.

• The institutions to collect and manage public

resources is central to the recovery process.

• Improved domestic revenue = home-grown

development finance
 Historical Context

External flows into Somalia undermined revenue collection by

crowding out domestic fiscal capacities.
 Legal Framework

Outdated legislation with poor enforcement

Lack of Fiscal Federalism framework

 Tax on rental income

The legal basis stems from Act Number 5, issued November 5,

1966. ratified by the council of ministers in 2015.
Tax rates on wages and salaries

The legal basis stems from Act Number 5, issued

November 5, 1966.
Tax rate on Business Income

The legal basis stems from Act Number 5, issued November 5,

1966.
 Tax on Sales

The legal basis stems from Act Number 2, issued January 7, 1984. The
schedule was approved by the Council of Ministers in 2015.
Revenue Performance since 2012
Domestic Revenue Performance since 2012
2018 Budget
 The Importance of Domestic Revenue
• Key reliable financial source for achieving national
development goals.

• Increases the social contract between citizens and

their government

• Increasing domestic revenue will reduce the

dependence on foreign aid
 ODA and Domestic Revenue

• What is the role of ODA in Domestic Revenue

Performance?

• Empirical Evidence from Sub-Saharan Africa?

 Regional flow of ODA

Regional Flows of ODA

60000000000

50000000000

40000000000

30000000000

20000000000

10000000000

0
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20

ODA East Asia &Pacific ODA Europe & Central Asia ODA Latin America & Carribean ODA SSA

Source: World Bank Database, 2017

 Per capita GDP growth in the World by Regions

Per Capita Growth of GDP in World Regions

30000

25000

20000

15000

10000

5000

0
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20

RGDP East Asia & Pacific (current US$) RGDP Europe & Central Asia
GDP Latin America & Carribean RGDP SSA

Source: World Bank Database, 2017

Empirical Evidence of ODA and Domestic
Revenue
Panel Random Effect Model
Empirical Evidence of ODA and Domestic
Revenue
 Aid Ineffectiveness

Misallocation of Lack of Good

Resources Governance

Corruption

Breaking the
Aid Dependency
Social Contract
 Constraints
Dealing with “Hard to Tax” Sectors
Narrow revenue base
Poor Administration Capacity
Insecurity and Political Instability
Corruption
Incomplete Transition to the Federal System
Outdated Laws and Poor Enforcement
 The Necessary Reforms DRM

 Demonstrating links between tax revenue and

service delivery.
 Broaden the tax base and keep the tax rate low
 Focus on taxes that are easiest to administer and
collect.
 Automate the tax administration
 Harmonize taxes between FGS and FMS
 Hiring senior technical staff
 Combat corruption