Drivers of domestic revenue mobilization in Somalia: Exploring the role of external grants and public expenditures

Abstract

The purpose of this paper is to examine the drivers of domestic revenue mobilization in Somalia by applying the autoregressive distributed lag model, where monthly data are used. The study assessed whether external grants reduce the incentive of the Somali fiscal authorities to mobilize domestic revenue and whether the operating expenditures significantly explain the domestic revenue mobilization effort more than other expenditures, including the expenditures on the social assistance benefits. The study found that external grants reduce the government’s incentive to enhance domestic revenue in the short and long run, and the operational expenditures are more significant for the domestic revenue mobilization effort than other expenditures, including the social assistance benefits. The study also found that COVID-19 has a significant negative impact on domestic revenue, as the pandemic hit Somalia, domestic revenue dropped by 8% in 2020, falling to approximately USD 211.2 million from USD 230.3 million in 2019. This study does not recommend the reduction or termination of the external grants since it is a critical support for Somalia’s state-building efforts. However, it recommends improvement in the quality of grant management procedures and urgent reconsideration of expenditure priorities by giving greater importance to development expenditures over recurrent expenditures.