In recent years, Somalia’s economy has grown steadily but with ongoing fluctuation. The country’s real GDP decreased by 2.4 percent in 2022, following a 3.3 percent growth the previous year. These numbers show Somalia’s economic recovery from the COVID-19 pandemic, which caused the country’s GDP to decline in 2020. While the rate of growth slowed in 2022, there were several significant factors influencing GDP dynamics. One important factor is the significant importance of remittances and government transfers, which lead to total national expenditure exceeding GDP by almost 60%. Furthermore, GDP components such as household consumption spending and capital formation shaped Somalia’s economic environment. This blog post dives into these components and their significance for the country’s economic growth.
The main component of Somalia’s GDP is household final consumption expenditure, which is expected to rise by 5.2 percent in 2022. It is crucial to note, however, that household spending exceeds 100 percent of GDP, indicating a reliance on imports to meet a considerable share of consumption needs. This dependency on imports is primarily owing to inadequate indigenous production capacity. Non-food products grew at the fastest pace among the sub-components, while food and housing grew with population growth. Notably, a survey of household budgets was undertaken in 2022, resulting in a more thorough gauge of spending levels and offering light on consumption patterns.
However, the Government’s final consumption expenditure accounts for only 7.3 percent of GDP. nevertheless, it will expand at a 7.7 percent annual rate in 2022, continuing a trend of growing its percentage of GDP over the years. The increase in government spending reflects the government’s attempts to improve public services and infrastructure. However, to meet the demands for these improvements, Somalia primarily relies on imports.
Moreover, capital formation, which includes investments in construction, equipment, and machinery, will be the fastest-growing component of GDP in 2022, with a 34.1 percent growth rate. This expansion was driven by the construction boom, as well as significant investment in equipment and machinery. Since construction materials and capital equipment are mostly imported, the spike in capital formation needed a considerable increase in imports. Although exports of products and services increased by 13.7 percent, imports increased by 20.2 percent more than exports. Due to low domestic production capability, import expansion is mostly funded by remittances and grants.
Meanwhile, the GDP deflator, a measure of domestic production price change, increased by 3.4 percent in 2022, significantly less than the previous year. While the deflator takes into account the consumer price index, it does not include imports, which may result in disparities with the headline CPI. It’s worth noting that deflators are influenced by changes in GDP composition and can be more difficult to evaluate than price indices. Notably, the food industry experienced the fastest price rises in 2022. The GDP estimate has been changed, with the base year shifted from 2016 to 2022, to reflect the most recent year’s price structure and provide a more representative representation of current conditions.
To conclude, Somalia’s GDP growth in 2022 showed signs of recovery and resilience despite moderate growth rates. The composition of GDP revealed the importance of household consumption expenditure, government spending, and capital formation in driving economic progress. However, Somalia’s heavy reliance on imports to meet consumption and investment needs poses challenges, requiring sustained efforts to enhance domestic production capacity. The incorporation of the 2022 Somalia Integrated Household Budget Survey (SIHBS) and ongoing statistical improvements by the Somali National Bureau of Statistics (SNBS) will provide valuable data sources for future GDP estimates. The country must leverage these improvements, strengthen data collaborations, and continue pursuing economic diversification and self-sufficiency to foster sustainable and inclusive economic growth in the years to come.
Samira Abdulkadir, Assistance Editor, SBR
