Somalia faces a growth squeeze as international aid ebb slows recovery
Somalia’s recent economic gains now face a stark test: a sharp drop in development assistance from major donors that, according to the country’s finance minister, has reduced projected growth from roughly 4% in 2024 to nearly 1% in 2025. That slowdown is not simply a statistical wobble. It is a signal that Somalia’s fragile, donor-dependent development model is colliding with new global priorities and domestic limits to revenue generation.
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From aid-led recovery to revenue-driven ambition
Over the past few years Mogadishu has pushed a policy pivot that many international development agencies long urged: strengthen public financial management, reform tax systems and build institutions that can collect and allocate domestic resources more effectively. The government’s efforts to digitize and automate tax collection appear to be paying off — domestic revenue is reported to have risen by more than 80% over three years, and the national budget expanded by about 24% between 2024 and 2025.
Those are real achievements, particularly against a backdrop of decades of state fragility. The finance ministry points to a notable reallocation of priorities: the share of domestic revenue devoted to education has risen from 3% to 10% in three years. The government also says it is refining how it deploys external support — favoring targeted, outcome-driven programs over broad, untargeted packages.
Why donor retrenchment matters
Yet the improvements in revenue collection must be seen in context. Somalia’s tax base remains narrow, the informal economy large, and the state’s reach uneven across territory. Donor funding has not only filled budgetary gaps; it has underpinned key services, infrastructure projects and humanitarian relief in areas where the central government’s capacity is still limited. When that external financing recedes, the result is immediate: planned investments stall, fiscal buffers thin and growth projections slide.
International aid flows are volatile worldwide. Competing crises, shifting donor priorities and tighter budgets in some rich countries have reduced the predictability of development assistance. For fragile states such as Somalia, which are simultaneously trying to consolidate peace, expand basic services and attract investment, unpredictability in external finance severely complicates medium-term planning.
Risks to social sectors and stability
A financing gap at this juncture carries policy trade-offs. The government says it is prioritizing education, health and social protection — sensible choices for human capital and state legitimacy — but sustaining those commitments while revenues still climb from a low base will be difficult without either faster domestic mobilization, fresh financing mechanisms or renewed donor support.
There are also political and security implications. Economic stagnation or cutbacks in services can heighten grievances in communities and make it harder for the state to extend governance. Conversely, successful revenue mobilization and visible improvements in education and health could expand the social contract and create a virtuous cycle of compliance and investment.
Paths forward: realistic choices and tough reforms
There are several complementary avenues Somalia and its partners can pursue to narrow the financing gap and sustain development momentum:
- Deepen tax reform and broaden the base. Automation and digitization are important first steps, but expanding the taxable base — bringing parts of the informal economy into formal channels and improving customs administration — is essential.
- Improve revenue-to-service feedback. Citizens are likelier to accept taxation if they see reliable, transparent delivery of services. Strengthening budget transparency and local accountability can support compliance.
- Leverage private and diaspora finance. Remittances and diaspora investments have long been lifelines; blended finance instruments could attract more private capital to infrastructure and small business growth if risk frameworks and regulation improve.
- Seek adaptive donor engagement. Donors should shift more funding toward capacity-building and predictable, multi-year programs that support institutions rather than only short-term projects that are vulnerable to reprioritization.
- Address security and governance bottlenecks. Improving the business environment and rule of law will be central to attracting domestic and foreign investment.
Questions donors and Somalis must confront
The present moment poses uncomfortable but necessary questions. Will international partners sustain investment in fragile states when global crises compete for attention? Can Somalia convert early gains in revenue collection into a durable revenue base without stalling essential services? How quickly can reforms translate into broader private-sector growth that generates jobs and taxable income?
The answers will shape more than next year’s GDP figure. They will determine whether Somalia can move from a cycle of emergency-driven spending to a steadier trajectory of state-building and inclusive economic growth. The finance ministry’s numbers point to progress; the drop in donor support reveals the narrow margins within which that progress must now be defended and accelerated.
What is clear is that neither domestic reform nor international generosity alone will be sufficient. The challenge is to make them mutually reinforcing — using predictable, targeted external support to buy time for reforms that expand the domestic resource base and cement public trust in state capacity.
By Ali Musa
Axadle Times international–Monitoring.
