Investing in Somaliland- Is it Dubai 20 Years Ago?

Somaliland. Not Somalia. Somaliland has been an independent region of Somalia proper for more than 20 years. Yet, most Westerners do not associate the former British protectorate with 20 years of independence and stability but rather with the instability and chaos of Mogadishu (which is not part of Somaliland if you did not know).As I crossed the Somaliland border by land, I was quickly reminded of the Kurdistan part of Iraq. In similar fashion, Kurdistan is not far from Baghdad but bears little resemblance to the chaos of the Iraqi capital city. Further, Somaliland similarly bears little resemblance to Mogadishu. Rather it looks like Dubai 20 years ago. The construction and economic activity seemed out of place in Dubai 20 years ago, but now it is the norm and the epicenter of the booming Middle Eastern financial sector.

Somaliland: Emerging Economy in the Face of Contradiction

Due to the lack of official recognition internationally, Somaliland still suffers from the international tradeA tailor sews the Somaliland flag, which was introduced in 1996. CC Image courtesy of Alfred Weidinger at Fotopedia.

embargo imposed on Somalia. Still, Somalians have made a name for themselves as Africa’s most skilled traders. As keen businessmen working within constrained parameters, Somalians are a driving force in Africa’s informal market.

Sitting down with the Somaliland Central Bank Governor Abdi Dirir, you learn quickly how informal the Somaliland economy is. “The GDP of the Somaliland economy is possibly $1.5 billion,” said Mr. Dirir. In response to my speculation that the Somaliland economy could range from $3 to $4 billion, the governor easily replied “it is possible.” The movement of money throughout the Somaliland economy is a misnomer for modern day economic growth. If you are looking for commercial banks and “visa accepted here” signs, you will be highly disappointed.

According to the Governor, the Somalian Schilling maintains a stable exchange rate except for the minor fluctuations that occur when the diaspora visit this territory usually at the same time for a holiday week. During this time, a huge influx of Somalians brings U.S. dollars into the economy, creating a minor boost in the dollar supply. To say informality characterizes this economy would simply be an understatement.

From Traders to Entrepreneurs

Entrepreneurship is the second best characterization of the Somaliland economy. If you ask a local Somalian to introduce you to some local entrepreneurs, he will ask if you are staying for a couple weeks. A short visit will not do the country justice.

Somaliland is a country of more than 20 newspapers, more than 15 universities, and several telecom operators. For a republic that has around 4 million inhabitants, these types of numbers are both impressive and concerning. In the world of media, newspapers come and go as the best ones rise to the top and the defunct ones disappear. As one local Somalian described the situation, one day a guy is a newspaper entrepreneur and the next day he is pitching you on a new agribusiness idea.

In the world of education, starting a new university may seem as easy as a hobby in Somaliland. Yet, in reality, it is an area of opportunity where the local population is starving for increased education. At the same time, it is another manifestation of a growth opportunity for government regulation. As the government begins to implement a quality standard around education, the number of universities should shrink and the quality of graduates should improve. Despite all the challenges in sectors, such as news media and education, optimism must be taken from the current situation.

“Free enterprise is Somalia,” according to the Minister of Planning Dr. Sa’ad Ali Shire, “because the prior circumstances of the country required the private sector to do a lot of work.” The private sector effort in creating modern day Somaliland can never be fully appreciated. “It is the private sector building this country,” added the minister. Calling Somaliland the emerging Silicon Valley for its creativity may be an overstatement today but give it time.

Booming Telecom

The Somaliland telecommunication industry is a beacon of the championed free enterprise system in Somaliland. Six telecom operators populate the bandwidth of Somaliland. Some telecom experts speculate that mobile penetration could be as high as 35 to 40 percent as of January 2013. The amount of companies and the accompanying penetration rates are a stark contrast to the estimated 3 to 5 percent penetration rates at the turn of the century. Telesom is the biggest player in the market with more than 85 percent of the mobile subscriber market and the only firm with significant market power. SomTel is the second largest operator with a rapidly growing number of internet users. The presence of multiple operators, despite the imbalance in market share, has made Somaliland one of the cheapest mobile phone environments in the world.

And that’s just one example. Next week we’ll look at the challenges facing the booming telecom industry, and dive into mobile banking, and the import/export business in Somaliland, which is centered around Port Berbera.

Mobile Banking Before Bricks and Mortar

To further understand the growing strength of the Somaliland telecommunications industry, consider the banking industry in Somaliland. Somaliland is the epitome of the African informal market. You can ultimately pay with Ethiopian Birr, Euros, U.S. Dollars and any other exchangeable currency while in Somaliland. Local money changers will sit on the side of street with stacks of local currency ready to exchange with passersby. As one visiting British tourist stated it, this type of easy on-the-street bartering could not exist in most Western countries where crime would likely wipe out such culture. Yet, this is life in Somaliland.

More surprising to the average observer in Somaliland is that most transactions require no cash. Somaliland has completely lept over the brick and mortar stage of banking. Most transactions can be accomplished through Zaad – a money transfer system provided through Telesom. Almost everyone in the country has a Zaad account particularly because it makes transactions a simple two second interaction. Once you add credit to your account, you can use your phone for anything, from paying for your gas at a station, to buying a Coke at a small roadside stall. This type of quick exchange is something the West will not see for years.

While mobile banking may be the de facto banking system of Somaliland, the recent Central Banking Act passed by the Somaliland Parliament opens the door to commercial banking in the near future. “Commercial banks should arrive in 3 months,” says Somaliland Central Bank Governor Abdi Dirir. “Come invest, the commercial banks will make investing easier.” He speaks to the obvious complication of investing in a country where currently you would have to carry the investment money in a suitcase or transfer via a mobile phone. Commercial banks and a lax tax system will surely help investment. For those who can swallow risk, there is huge opportunity to be had. As Minister of Planning, Ali Shire characterizes the situation, “investors need to just come see what is happening and they will be sold.”

The Port of Berbera

On the way out of Hargeisa, travelers by plane must take a 3-hour bus to Berbera to get to Somaliland’s only functional airport. Upon arrival in Berbera, the majestic coastline grabs your attention. The presence of numerous ships at sea perplexes those with a Mogadishu-perspective of Somaliland.

Somaliland has a coastline to the north along the Gulf of Aden that covers more than 850 km (over 520 miles). The Somaliland Administration through the Berbera Port Authority (BPA) owns and operates the Port of Berbera. The former Soviet Union built the port as a military base and a challenge to the influence of the U.S. and its allies in the Horn of Africa in the 1960s. When the regime of General Mohamed Siad Barre cut ties with the former Soviet Union, the U.S. assumed control of the port as its new military base in the 1980s. The former Soviet Union originally constructed 300 meters (nearly 330 yards) and the United States added 330 meters (361 yards). Today, the port has a storage capacity of one million tons and can accommodate more than 1,000 ships per year depending on length and size of the ships.While the Port of Berbera is only mere reflection of the Djibouti ports, it presents a strategic and potentially attractive alternative to the Djibouti corridor to the Horn of Africa. As the Horn of Africa, particularly Ethiopia and Sudan, takes off economically, import-export corridors and sea routes will become ever more important. The Djibouti corridor serves as Ethiopia’s primary access to the sea such that any congestion in Djibouti means a 3 to 6 month delay for Ethiopian commerce. While the Djiboutian government prioritizes the expansion of its ports, the expansion of the ports still cannot outpace the long-term growth of the economies in the region. Additionally, the Djiboutian custom taxes and duties will not decrease anytime soon.

The expansion of the Port of Berbera could cost more than $65 million. Ali Omar Mohamed, in charge of the Port of Berbera, recently stated that he imagines the port becoming 20 meters (22 yards) deep compared to its current 11.5 to 12 meters depth. At 20 meters, the port could accommodate the world’s largest container ship, weighing 300,000 tons. The port currently only accommodates 35,000 tons. While the expansion of the port may seem a pipe dream to many Western observers, it is very much a documented expectation for the future of the Somaliland. Just take a look at the National Develop Plan (2012 – 2016) for Somaliland. Still, attracting private investors into the port remains an ongoing process.

 When Somalia is Somaliland

“There is great hope for Somaliland,” says Minister Ali Shire, “but more private investment is needed.” Investment in Somaliland carries its risks and rewards. The minister and the rest of the returning Somalians diaspora believe in the long-term rewards outweighing the benefits. Walking around Hargeisha, commercial capital of Somaliland, will make you preach the same thing.

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Kurt Davis Jr. is a Senior Associate with Schulze Global Investments in its Ethiopia office. He is a private equity professional and early business/start-up consultant with experience in Sub-Saharan Africa and North Africa, Asia, Europe and United States. He is an avid traveler who has been to 60+ countries throughout the world in search of new investment opportunities, new people, and a better understanding of the world.

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