BY: Mohamed Mukhtar Ibrahim
Somalia’s political problems are usually discussed in terms of conflict, elections, federalism, constitutional disputes, and security. These are all important. But underneath many of them is a less visible question: money.
Who collects revenue? Who controls ports, airports, and customs? Who receives transfers? Who pays for government institutions? Who benefits from public spending? And, perhaps most importantly, who has enough money to exercise political power independently?
A new revenue and expenditure analysis by Laasfort Consulting Group and the Somali Dialogue Platform suggests that Somalia has made significant progress in building its public finances. Domestic revenue has increased substantially, and financial-management systems have improved. But these gains have exposed a deeper problem: Somalia is trying to run a federal political system without a fully agreed federal fiscal system. This is not simply an accounting problem. It is increasingly a political problem.
More revenue, but not enough to run the state
Somalia’s domestic revenue has increased dramatically over the past decade. Federal domestic revenue reached about $404 million in 2025, compared with approximately $69 million in 2013. That is a major improvement in the state’s ability to raise its own resources. But the figure looks different when compared with what the government actually spends. Federal Government expenditure was about $971 million in 2025. Domestic revenue therefore covered only around 42 percent of federal expenditure. The remainder depended on external financing.
This gap matters politically. A government that depends heavily on external resources has less freedom to determine its own spending priorities. At the same time, international partners are encouraging Somalia to finance more of its own institutions and services gradually. The direction is therefore becoming clearer: Somalia is expected to become more financially self-reliant as external assistance becomes less predictable.
The IMF has also projected a substantial decline in grants over the coming years, increasing the importance of domestic revenue. This means that the question of money is moving closer to the center of Somalia’s political future.
Federalism is also a fight over revenue
Somalia’s fiscal problem cannot be solved simply by improving tax collection. For more than a decade, the Federal Government and Federal Member States have struggled to agree on who has the authority to collect particular taxes, how to share revenues, and how to manage major economic assets.
The Provisional Constitution did not clearly define the division of revenue raising powers and resource sharing responsibilities. As a result, successive governments have attempted to resolve these questions through political negotiations.
This is why taxation in Somalia is about much more than taxation. A port is an economic asset, but it is also a source of political power. An airport, border crossing, road, or natural resource can generate revenue that gives an administration greater independence from another level of government. This helps explain why apparently technical disagreements over customs systems can become political disputes.
Puntland and Jubaland, for example, have important ports and therefore significant domestic revenue sources. Other states have much smaller revenue bases and depend more heavily on transfers and grants. The differences are substantial. In 2025, Puntland financed approximately 84 percent of its expenditure from domestic revenue, while Southwest financed only about 20 percent.
This creates an uneven federation. States with stronger independent revenue sources have greater fiscal autonomy. States with weaker revenue bases have stronger reasons to seek transfers from the Federal Government. As a result, the federation’s fiscal structure also shapes its members’ political bargaining power.
The competition for revenue is reshaping the economy
Somalia does not only have a problem of collecting too little tax. It also faces different authorities competing over the same economic activity. Different administrations impose different customs, income, and sales taxes. Traders and businesses therefore have incentives to consider where they import goods, register businesses, and conduct transactions.
The revenue analysis suggests that tariff differences can divert trade away from Mogadishu and reduce federal customs revenue. For businesses operating across several parts of Somalia, the experience can resemble operating across several different tax jurisdictions. This has an economic cost. Businesses face additional administrative requirements and uncertainty. But it also has a political consequence.
Every administration has an incentive to protect its own revenue base. As a result, a customs dispute can become a federalism dispute. A disagreement over tax collection can become an argument about political authority. The competition is therefore not simply over money. It is also over who has the right to control economic activity.
The state collects money, but what does it provide?
There is another problem. The report estimates that around 98 percent of domestic revenue is absorbed by operational spending, while the Federal Government wage bill alone reached about $371 million in 2025. This leaves limited fiscal space for visible public investment in roads, schools, health facilities, water systems, and other public goods. That creates a difficult political cycle. Citizens and businesses are asked to pay more taxes. But when they do not see clear improvements in services, their willingness to comply can weaken. Government officials interviewed for the analysis acknowledged this problem. Taxpayers increasingly ask a simple question:
What does the government provide in return for my taxes?
This is the beginning of a fiscal contract. People are more likely to accept taxation when they can see where their money goes and believe that government is providing something in return. Where taxes are seen mainly as payments that finance government salaries and administration, resistance to taxation becomes easier to understand.
Somalia therefore faces a paradox:
The government needs more revenue to provide better services, but it may need better services to persuade citizens to provide more revenue.
The informal economy limits the tax base
Somalia’s economic structure makes this even more difficult. The report cites International Finance Corporation analysis indicating that informal employment accounts for about 91 percent of employment. A large proportion of economic activity therefore takes place outside the formal systems through which governments can easily identify businesses, measure income, and collect taxes. This means the formal economy carries a disproportionate share of the fiscal burden.
Unequal enforcement also creates problems. Larger businesses may negotiate tax liabilities, while smaller businesses can face more immediate demands from tax authorities.
The solution is therefore unlikely to be simply higher tax rates. Somalia needs to expand the tax base by encouraging business formalization, investment, productive employment and economic growth. Otherwise, increasing the tax burden on the existing formal economy may eventually become counterproductive.
Remittances show another side of Somalia’s political economy
One of the most interesting developments is the changing role of remittances. Data from money transfer businesses compiled by the Central Bank show recorded inflows increasing from approximately $2.8 billion in 2019 to $6.8 billion in 2025. Business-related transfers alone rose sharply, reaching about $2.5 billion in 2025.
Remittances are usually discussed as money sent by Somalis abroad to support their families. But their economic role is much larger. They finance household consumption, imports, and increasingly business activity. Because Somalia imports a large share of what it consumes, remittances also indirectly support government revenue through customs and other trade taxes.
The chain is important:
diaspora money → household and business spending → imports → customs and sales taxes → government revenue.
This means the Somali diaspora is not simply supporting households outside the state system. Its financial flows are also indirectly supporting the formal economy and government revenue. The stability of formal remittance channels is therefore not only a financial services issue. It is part of Somalia’s wider political economy.
Aid cuts reveal how large the fiscal gap really is
The decline in international assistance is also revealing the true scale of Somalia’s financial challenge. In 2024, off budget humanitarian assistance was approximately $961 million, while off budget development assistance was around $1.1 billion. Together, these resources exceeded Federal Government expenditure.
This illustrates how much of Somalia’s social and economic system operates outside the government budget. When these resources decline, the government cannot simply replace them through taxation. The report estimates that funding gaps in four areas—food security, nutrition, health, and cash assistance—alone amounted to approximately $488 million in 2025.
That figure is larger than Somalia’s entire annual domestic revenue. This is why the debate about “state affordability” needs to be more realistic.
The question cannot simply be how Somalia replaces every dollar of declining aid with domestic taxation. The harder question is what the Somali state can realistically afford to finance, what it should finance privately, what state institutions should deliver, and where international support will remain necessary.
The political settlement has a fiscal foundation
This brings the issue back to politics. Somalia can continue improving digital customs systems, tax registration, financial-management systems and tax laws. These reforms can increase state capacity, and Somalia has already demonstrated that progress is possible. But technical reform cannot answer the political question:
Who gets the money?
If the Federal Government collects more revenue, how much should remain at the center? If states collect revenue from ports, airports and other economic assets, how much should be shared nationally? How should transfers be calculated? Should poorer states receive more? Who pays for nationally important services? And how should these arrangements be protected from changing political interests?
These are questions of fiscal federalism. Accountants alone cannot resolve them.
Somalia therefore needs two agreements to develop together.
First, a political agreement on fiscal federalism. The Federal Government and Federal Member States need predictable rules for revenue collection, expenditure responsibilities, transfers, and the sharing of revenues from major economic assets.
Second, a stronger fiscal contract with citizens. Taxation needs to become more closely connected to visible and useful public services.
Without the first, federalism will continue to generate disputes over money. Without the second, expanding taxation will remain politically and economically difficult.
Somalia’s real political question
Somalia has made genuine progress in raising domestic revenue. The country collects far more today than it did a decade ago. But the increase has also exposed the limits of the current political and fiscal arrangements. The central problem is no longer simply that Somalia lacks enough money.
It is that money is connected to political authority. Who controls revenue has greater autonomy. Who receives transfers has different incentives. Those who control ports and customs have economic leverage. And citizens who pay taxes increasingly want to know what they receive in return. This means Somalia’s political settlement cannot be separated from its fiscal settlement.
The country can continue increasing revenue without resolving these questions. But if the underlying disagreements over who collects, who spends, and who benefits remain unresolved, additional revenue may create new areas of political competition rather than solve existing ones.
Somalia’s next stage of state building therefore requires more than raising taxes. It requires agreement on how the country collects, shares, and spends money. That may be one of the most important political questions facing Somalia today.