REQUEST FOR EXPRESSIONS OF INTEREST

AFRICAN DEVELOPMENT BANK

REGIONAL DEVELOPMENT AND BUSINESS DELIVERY OFFICE, EAST AFRICA (RDGE)

Khushee Tower, Longonot Road, Upper Hill     P. O. Box 4861 – 00200, Nairobi, Kenya.el : (+254-20) 2998352 Fax: (+254-20) 271 2938

Website : www.afdb.org; E-mail : [email protected] and [email protected].

Brief Description of the assignment : DEVELOPING A COMPETITIVE FINANCIALSECTOR TO DRIVE THE ECONOMY POST COVID-19 IN SOMALIA

Place of assignment : Mogadishu, Somalia and partly virtual

Period of assignment : November 2020 – May 2021

Expected start date of the assignment : November 2020

Last date for expressing interest : 16th October 2020

Expression of interest to be submitted to : [email protected] and copy [email protected]

Any questions/ clarifications needed to be addressed to : [email protected] and [email protected].

Further details are as below.

TERMS OF REFERENCE

DEVELOPING A COMPETIIVE FINANCIAL SECTOR TO DRIVE THE ECONOMY POST COVID-19 IN SOMALIA

GENERAL INFORMATION

Services/Work Description : Conduct a diagnostic study to inform reforms to strengthen the Central Bank’s regulatory framework, supervisory capacity, and modernization of the payment systems.

Type of the Contract: Individual Consultants
Expected Duration: Six (6) person months: November 2020 – May 2021
Expected Start Date: November 2020
I. Background

Update on recent economic developments :

Somalia remains trapped in a low and volatile growth situation resulting in pervasive poverty. Growth averaged 2.7% during 2015-2019, which is lower than the average growth in population of 2.9%. Private consumption, which accounts for about two thirds of GDP is the leading growth driver on the demand side but boosting capital investments is necessary to lift growth, reduce poverty and support economic diversification. During the 2016-2019 period, government expenditure averaged less than 6% of GDP, while net exports were about -62%, with gross investments accounting for about 14% of GDP, which is not enough to cover the country’s significant reconstruction needs.

The Central Bank of Somalia (CBS) has limited control over the exchange rate and the supply of the Somali Shilling as printing of counterfeit notes by private actors is very common. Consequently, Somalia’s de facto currency is the USD, which is used for most transactions including mobile money payments. Inflation receded to 5.1% and 4.4% in 2018 and 2019 respectively following improved food supply. Despite the expected fall in aggregate demand due to reduced economic activity, inflation is projected to spike to 6.3% in 2020 in the worse-case scenario, compared to the pre-COVID-19 projection of 3% due to supply shortages following contraction of imports.

Implementation of the HIPC completion point reforms requires zero-cash fiscal balances to avoid payments arrears and debt accumulation. To achieve this, while responding to the COVID-19 impact, the international community has pledged to support Somalia such that any revenue losses due to COVID-19 will be fully offset and additional resources to shield the vulnerable population from the effects of the pandemic will be provided to finance an expanded social protection program. The mid-year fiscal report points to less than targeted customs and sales taxes by end of 2020 and this is happening at a time when increased spending on health care programs and transfer to Federal member States (FMS) and Benadir Regional Administration (BRA) are putting more fiscal pressure on the Government.

Somalia’s external balance position reflects an unsustainable structural challenge of an undiversified economy that is vulnerable to internal and external shocks. The current account deficit stood US$409 million in 2019 (8% of GDP), mainly financed by remittance from diaspora and FDI. Exports of livestock, which accounted for 57% of total exports in 2013 have declined to about 27% in 2018 due to the 2017 ban by Saudi Arabia, the country’s largest export for livestock.

Somalia’s public debt declined to 55% of GDP following the clearance of its arrears with the Bank, World Bank and the IMF and interim debt relief from the Paris Club creditors in March 2020. However, the country remains in debt distress as its 55% debt to GDP ratio is above the sustainable 30% threshold for low-income countries. Somalia has since embarked on implementing an IMF Extended Credit Facility program that is expected to lead to full debt relief by 2023/24, subject to satisfactory performance.

The economic outlook is overshadowed by the COVID-19 crisis despite reengagement with the international financial institutions (IFIs). Somalia health systems are weak, containment measures have reduced consumer demand and investor sentiment has turned negative due to the uncertainty related to the pandemic, while disruptions in global supply chains are constraining supply. Preliminary projections indicate that real GDP growth will contract by 3.3% under the baseline scenario where COVID-19 is contained by the third quarter of 2020 and by 5.4% under the worse-case scenario if COVID-19 persists to the end of 2020. A partial rebound to 1.1% and 0.3% is expected under the baseline and worst-case scenarios respectively in 2021. The Consumer Price Index (CPI) on food and non-alcoholic beverages peaked at 132.03 in May but has since declined to 125.6 in July 2020, suggesting a positive response to government’s targeted and temporary tax relief on essential food imports from April to July 2020 and this has been extended by another three months.

Update on the Financial Sector

Somalia’s financial sector is nascent, and intermediation is limited. Total sector assets are equivalent to about 5.4% of GDP; credit to the private sector is about 2.3% of GDP, although growth has been rapid over the past two years. Banks provide a mix of Islamic and conventional financial products. Demand for credit is primarily generated to pay for imports, followed by real estate and from households. The coverage of conventional banking services is limited to urban areas given the fragile security situation, constraining access to financial services for the sizable rural and nomadic population. At the same time, widespread use of mobile money (MM), which is estimated to have a penetration rate of 73%, and remittance inflows (over 20% of GDP), represent opportunities to increase inclusivity and broaden access to financial services. The use of to conduct cross-border transfers is growing and many Somalis hold balances in MM and with money transfer businesses (MTBs), in addition to traditional savings in banks.

The sector faces numerous constraints to greater financial stability and intermediation. There are considerable trust and information deficits. Financial institutions, including the Central Bank of Somalia (CBS), require additional capacity and improved governance, and the financial infrastructure (credit information, judicial, legal) is under-developed or non-existent. Individuals and businesses report that the main obstacles to accessing credit are unfavorable terms and conditions, and insufficient collateral. At the same time, risk aversion constrains bank lending, illustrated by a highly liquid system and the need for financial infrastructure. The payments system is under-developed: MM penetration is high but lacks inter-operability; settlement and clearance of inter-bank transactions at the CBS lacks scalability; and, international payments are largely transacted through MTBs that have lost or face the risk of losing correspondent banking relationships due to de-risking by international correspondent banks. These gaps inhibit efficient financial intermediation and robust economic growth.

The impact of Covid-19 to the banking sector is at an early stage as the first stage of lockdowns was announced in the third week of March 2020. In this regard, Q1 report of 2020 does not show any noticeable change in the credit to private sector and customer deposits. The nonperforming loans (NPL) is almost similar to the last quarter of 2019. COVID lockdown and travel restrictions have impacted mobile transfer business and almost depleted the cash-flow, constraining their ability to make payments as suspension of international and domestic flights affected the movement of cash into Somalia. Despite the underlying challenges on correspondent banking from banks, there is an indication that some businesses are shifting their fund transfer to the banking sector. The biggest obstacle to using this secure and traceable medium of payment, is the fact that remittances are logistically blocked in North America and Europe.

II Objective of the assignment :

The objective of the assignment is to support the Government of Somalia to generate rigorous analytical work to inform required financial sector development reforms, with emphasis on enhancing the central bank’s capacity to regulate and ensure focused financial sector contribution to post-COVID-19 economic recovery.

III. Scope of Work :

The African Development is seeking to recruit a team of consultants to support the Government of Somalia notably the Central Bank to undertake a financial sector diagnostic study to assess the impact of COVID-19. This study will identify gaps and develop a road map for establishing a competitive financial sector to increase access to credit for the private sector, notably business affected by the COVID-19 crisis. During the assessment, the team of experts will work with the Government officials and Central Bank team to address some of the weakness identified so as to immediately support design and implementation of reform measures to relax financial prudential regulations, develop banking regulations that meet international standards and strengthen supervisory capacity to preserve financial stability while supporting the post-COVID-19 economic recovery . This assignment will augment the knowledge work with hands-on advisory services to support the national authorities, particularly the Central Bank of Somalia (CBS) to implement the proposed reform actions.

The major tasks to be undertaken in the preparation of this analytical work comprise, among others :

  • Undertake a financial sector diagnostic study covering the following areas: (i) the stability and developmental contribution of the banking sector; (ii) potential for financial intermediation capabilities of commercial banks operating in Somalia; (ii) strengths and weaknesses of banking supervision; (iii) access to financial services (including development of nonbank financial intermediation); (iv) the legal framework for financial sector development; (v) payments and settlement systems; (vi) housing finance; (vii) development and regulation of the insurance sector; (viii) pensions; and (ix) systemic liquidity and the money and foreign exchange markets. The study will also examine the progress made in implementing Somalia’s financial sector road map, identify any remaining gaps and corresponding remedial actions ;
  • Provide hands-on advisory services and implementation support to the Central Bank of Somalia (CBS) in implementing the proposed organizational restructuring that was developed under the existing financial sector road map, notably :
  1. Supporting the improvement of banking supervision and mobile money (MM) and money transfer operators (MTBs) by ;
  2. developing regulatory and supervision polices that are in line with international best practices and strengthen risk-based supervision ;
  3. providing guidance on data integrity, notably by taking stock of all the in-house datasets within the Licensing and Supervision Department ;
  4. Regulatory and legal reform; work with the CBS team to review the existing financial institutions law and propose any gaps or required revisions ;
  5. Review the AML/CFT and propose required revisions to boost financial sector development.
  • Financial infrastructure for intermediation: Review and provide a specific road map for reforms that should be undertaken to guide: a) the development of the payment system, including guidance on internationally accepted standards and practices for the operation of the payment system, b) the development of payment system oversight and strategy, including regulations, instruments, methods, procedures and reporting requirements for the efficient monitoring and risk mitigation of the payment system, and c) collateral registry/ credit bureau, financial dispute resolution mechanism (bankruptcy/liquidation process etc.) and data protection ;
  • Prepare three reports, namely: (i) financial sector diagnostic (see 2.1); status of implementation of the central bank’s organizational restructuring and required complementary reforms to maximize the impact of the first-generation reform actions (see 2.2); and (iii) roadmap for development of financial intermediation infrastructure, with the main focus on the payment system, collateral registry/ credit bureau, financial dispute resolution mechanism (bankruptcy/liquidation process etc.) and data protection ;
  • Presentation of the proposed policy actions will reflect: (i) synergy—to ensure relevance and alignment of reform proposals with broader development goals; (ii) sequencing—prioritization to optimize developmental impact; and (iii) sustainability—integrating all stakeholders and development practitioners to generate lasting developmental results and transformation.

Deliverables :

The primary deliverables to be undertaken by the consultant during the period November 2020 – May 2021 will include :

  1. Inception Report capturing : (a) review of recent financial sector developments and the current status of implementation of the Financial Sector Road Map (b) methodology to be used in responding to the study questions (as presented in section II above); (c) the key stakeholders to be engaged in the preparation of the analytical work; and (d) and outline of the diagnostic study report ;
  2. Financial Sector Diagnostic study report ;
  3. Status report on the implementation of the central bank’s organizational restructuring and required complementary reforms to maximize the impact of the first-generation reform actions ;
  4. Roadmap for development of financial intermediation infrastructure, covering the operation and oversight of the national payment system, collateral registry/ credit bureau, financial dispute resolution mechanism (bankruptcy/liquidation process etc.) and data protection ;
  5. Presentation of the draft study reports at a workshop in Mogadishu or virtually for review and inputs to participants drawn from the Central Bank of Somalia, Ministry of Finance and other relevant government departments, the private sector and civil society; and
  6. Submission of final reports mentioned in ii – iv to RDGE.

Table 1: Deliverables and Timelines :

Activity Indicative
Timeline
Deliverable 1 (D1):
•  Inception Report capturing: (a) review of recent financial sector developments and the December
current status of implementation of the Financial Sector Road Map (b) methodology to 2020
be used in responding to the study questions (as presented in section II above); (c) the
key stakeholders to be engaged in the preparation of the analytical work; and (d) and
outline of the diagnostic study report;
Deliverable 2 (D2): January
•  Financial Sector Diagnostic study report; 2020
Deliverable 3 (D3):
•  Status report on the implementation of the central bank’s organizational restructuring and February,
required complementary reforms to maximize the impact of the first-generation reform 2021
actions

Deliverable 4 (D4) :

February,
• Roadmap  for  development  of  financial  intermediation  infrastructure,  covering  the
2021
operation and oversight of the payment system, collateral registry/ credit bureau, financial
dispute resolution mechanism (bankruptcy/liquidation process etc.) and data protection.
Deliverable 5 (D5):
• Presentation of the draft study reports at a workshop in Mogadishu or virtually for review April, 2021
and inputs.
Deliverable 6 (D6): May, 2021
•  Submission of final reports mentioned in D2 – D4.

Level of Effort :

Three individual consultants will be hired. Two national consultants will support the team leader who will be an international consultant and responsible for the overall quality of deliverables. The successful consultants will need to commit an effort equivalent to six (6) person months for this assignment.

DESIRED QUALIFICATIONS AND COMPETENCIES :

The individual consultants should be able to demonstrate professional, operational and academic competence in the field of banking and finance, macroeconomics, and economic growth, with experience of working with governments in developing countries, particularly transitional states. Individual candidates should be able to demonstrate the following academic qualifications and professional experience, at a minimum:

Academic qualification :

At least a Master’s degree or equivalent in Banking and Finance, economics, law, or related field. A PhD and knowledge of Islamic Banking are added advantages.

Experience :

  1. At least ten (10) years of progressive responsibility in the field of banking and finance, financial sector analysis ;
  2. Specific experience in relevant areas that include Banking, Central Banking, and structural transformation ;
  3. Experience in preparing diagnostic reports, policy analysis and roadmaps ;
  4. Excellent ability to communicate concise and persuasive economic analysis and policy advice in writing and orally ;
  5. Adequate knowledge of the macro and socioeconomic landscape and current dynamics of the Somali economy in terms of policy environment, opportunities, weaknesses and challenges.

REPORTING REQUIREMENTS :

The consultants will work under the leadership of the PIFD/RDGE Management. The Consultant shall report to the designated task manager in PIFD and to the Country Economist responsible for Somalia. Institutional arrangements for quality assurance will be made with other Bank Sector departments.

DUTY STATION :

Whereas the Lead Consultant could carry out most of the activities under this assignment without being present in Somalia, missions to Somalia (whenever possible) maybe required. The national consultant supporting the Lead Consultant will be based in Somalia.

REMUNERATION :

The proposed remuneration will be defined based on the consultant’s financial proposal in accordance with the Bank’s remuneration grid and budget availability. The cost should be inclusive of honorarium and reimbursable costs. Should the highest scoring consultant’s financial proposal exceed the budgeted amount, the consultant will be contacted for negotiations. If no agreement is reached, the next highest scoring consultant shall be contacted until a suitable financial proposal is achieved.