An antidote for Somaliland to avoid the prevailing resource curse that is generally associated with developing countries, especially in Africa!
Jointly co-authored by Mohd Faisal Hawar and Mohamoud Faisal Hawar, both Oil and Gas Management Graduates, specialized in Oil and Gas Fiscal Regimes, Oil and Gas Economists,Trainers & Consultants on all the Extractive Fiscal Regimes. Both are currently attached to the Ministry of Energy and Minerals of Somaliland, as Internship – junior Upstream Petroleum Economist / Advisers.
Generally speaking, the exploitation of natural resources through direct engagement with the extractive industry and foreign investments for any country should be an opportunity to develop the local economies, augment the national welfare and social services for the local citizens of both today and those of tomorrow.
Although this is a very rare and never repeating opportunity, most of the developing nations miss such great opportunity and fail miserably to convert the exploitation of natural resources wealth into long-lasting economic boom and sustainable social development, instead ALAS! it ends up to become the undesired and avoidable, what is commonly known these days as the “Resource Curse” that we will thoroughly examine in this thesis and the ones to follow in the near future, In Shaa Allah.
It has been nearly three decades since Somaliland got its independence from the rest of Somalia in 1991. Somaliland has gone through many changes relating to its political maturity, stable and all-inclusive governance, fiscal, social, technological advancement and even on the economic development aspects. But it still has a lot more room to grow and achieve in the near future.
Somaliland’s neighbors to the north the Yemeni peninsula, to the west the Somali State of Ethiopia have all discovered vast amounts of oil deposits on their land with great commercial and economic values. Sharing with the same geological structure and extended reservoir basins, Somaliland is sure poised to witness a major oil and gas discoveries in the country with huge commercial and economic rewards anytime sooner. However, in the most likely event of such oil discovery soon, the million-dollar question still remains; how do we best utilize this inevitable natural resource wealth and what are our plans to avoid the resource curse?
It has always been argued that oil benefits any nation that discovers it in their soils. While this usually holds true, it is influenced by how well the nation is well prepared in advance, so to sanely manage such blessedly wealth. Although Somaliland’s upstream petroleum exploration programs are still in their earliest stages and phases with promising signs, yet the recent major oil & gas discoveries in the nearby regions tilt the uncertainty and possibility equation of oil discovery in Somaliland to favorably positive and therefore
it’s just a matter of time and with great upstream exploration programs to let us join the blessed league of nations with commercial hydrocarbons. Furthermore, the bright side to such speculation is that most experts in the oil industry do agree that the country has high potentiality for oil and gas discoveries, sure in commercial quantities.
Some scholars in the economic and social development domain argue that oil discoveries in the region will lead to a resource curse as the prevailing corruptions in Africa, the lack of strong financial institutions and lack of sane public finance governance will allow the greed of the higher hierarchy of the society and leadership will benefit the most by fully controlling such a wealth. We could all recall what Saddam Hussien did to the reserves of Iraq and similarly what Gaddafi did in Libya, wherein both cases the
presidential palaces were also the de-facto central bank of the county. Therefore making Oil discovery and its associated immediate resource wealth surge as a case of gloom and doom, instead of positively a case of a boom that could benefit the country’ s societies at large.
The great news is however that a number of countries have successfully managed their natural resource wealth in order to support their economic growth and reduce poverty which in turn will raise the standard of living of their own people. In fact, many countries have not only lost this opportunity and squandered the wealth of their new resources, but their economic performance has actually worsened and shown negative behaviors, leading to what is now commonly called “the resource curse”.
This brings us to here our homeland in Somaliland ‘How do we avoid such a looming and daunting resource curse?’ We are all aware of the dangers of the resource curse, that is also referred to as to the “Paradox of Plenty”, it refers to countries with an abundance of natural resources and yet tends to have less economic growth or might have worse development outcomes than those countries with fewer natural resources. Associated with the resource curse is also a term known to many as the “Dutch Disease” whereby it is the negative consequences arising from the spike in the value of a nation’s currency due to the increase in the development of a specific sector and a decline in other sectors. Hopefully, the newly resource-rich de-facto state of Somaliland faces the risk of having both problems and therefore to avoid all the public institutions, policies, civil societies and citizens must all cooperate and get prepared in advance.
Somaliland in many ways is very lucky to arrive late to the discovery of oil and gas fields since the country need to prepare itself institutional wise, develop its national workforce for this demanding and technically complex industry, and put in place all the needed laws and legislative prior the oil boom overruns us. The country is on the verge of joining the league of oil-producing nations in the near future, according to the country’s minister of energy and minerals. “Drilling starts next year,” said Minister Hon. Jama Mohamoud Egal in 2018. Fast forward to 2019, seismic operations for two blocks have been completed showing
promising results. “I have all reasons to believe we are going to get positive results from the data analysis,” he said on October 20 while addressing students at the University of Hargeisa on the chances of the country striking oil.
With such very assuring facts, Somaliland needs to be aware that the exploitation of natural resources has often come with economic mismanagement, growing inequality, corruption, political instability and conflict when mismanaged by weak fiscal regulations, corruption, secrecy. In the modern era, there are examples both of countries that have translated their respective resource wealth into human development and those who have not managed to do so and paying the price.
Through effective governance and sound, long-term planning countries such as Somaliland can avoid the effects of the resource curse, provide quality services, such as education and healthcare to its citizens.
Governments need to understand that resources such as oil are non-renewable resources, eventually, revenue flow will decrease over time. Governments should ensure future generations also benefit through savings or investments in human infrastructure capital. There are no second chances. Effective anti-corruption measures should be taken into consideration decades earlier in order to ensure no deal or award ever comes under scrutiny.
This objective can only be achieved if the government is transparent with the wider public. For transparency to be effective, information from the government must be relevant, accessible, timely and accurate year s prior to major resource discoveries.
Successful management of the resources requires tough institutions to implement a resource-based development strategy in order to manage the term know as Dutch Disease. To avoid this, the country should prepare itself to transform resource inflows of natural resources into tangible investments such as roads, electricity, agro-livestock, infrastructure and also higher and quality education for youth, etc. There is a strong case to be made when making sure at least a considerable amount of the natural resource wealth is converted into human capital so the current citizens may benefit through higher living standards as well as not speculating any corruption that may occur through the higher-ups.
Another major factor to consider when discussing how to avoid the resource curse is economic diversification, as examples can be seen from the likes of Malaysia that have developed their agriculture and Emirates that have developed their tourism sector which has brought almost $18.7 billion alone in 2016. These sectors can become competitive and will help create economies not only relying on one resource as well as being able to withstand any shocks.
The challenge remains for Somaliland on how the current, as well as the future generations of the society, could all benefit from resource wealth, and this is not a task undertaken after discovery but better done in advance. The government should prepare for any environmental damage that may occur as a result of resource exploitation. Sound investment schemes are often considered and included during the early discussion stages, how much investment programs into the country would benefit future generations. Normally what most government institutions do is that they save large shares normally in the range between 30% to 60% abroad while the country is currently improving its capital infrastructure. Many countries such as Norway, Kuwait, and Botswana have funds to ensure future generations do not remain ignored.
The parting sage advises and antidote for our article and to provide possible guidelines and a recipe for success for Somaliland and to all the region’s governments so to manage the natural resource wealth of their nations, letting to convert such wealth to a sustainable economic and social development, the following could be considered:
• Rolling out of foolproof management and fiscal policies for all-inclusive, effective and efficient the exploitation of natural resources.
• A good tax design for this non-renewable and ever depleting natural resources, so to ensure appropriate
government revenue collection and at the same time adequate incentives for the investors.
• Most importantly, a well-equipped national revenue administration and monitoring institutions so to ensure those revenues natural resources are collected wholly;
• Equally important, great public expenditure management institutions, sound national wealth management, and auditing practices, so to ensure that the sudden spike-gains of revenues are converted to permanent
benefits for the country, and to carefully manage the risk the resource wealth poses to the wider economy.
• Devise exhaustive and well planned sustainable natural resource exploitation policies, fiscal regimes and
programs that balance and aligns the ever-challenging and ever -competing for three faces of the natural.
• Lastly but not the least, to put a prudent and aggressive national workforce development plan so that the nation becomes self-reliance in all the complex and technical issues involved in the exploitation of natural resources.
Avoiding the resource curse is not simple; the above-referred risks combined have the potential to arouse the “Dutch Disease”. Only time will tell whether the discovery of oil will serve to ensure that the region’s resources will be exploited to the benefit of its people and to ensure that there is an improving standard of living in our societies at large.
Oil is a depleting resource which if we are lucky, can only be used for a short period in our history. If we use them wisely, it will change the course of our future. A significant amount of upstream petroleum exploration is now progressing in Somaliland, therefore this should be coupled with national wide preparation, awareness, and involvement.
Public finance institutions must be awakened to participate, and moreover, the likes of the environmental ministry and the ministry of water resources must also take their early seats in this daunting journey so to ensure that the drilling activities belonging to the upstream sector does not come at the expense of the local community where their land and water table on which they rely on is not impacted, and in general, the misuse of this natural resource should not leave us poorer than we were before discovering it and may cause a regressive instead of a progressive economy.
The authors, young graduate brothers, Mohamed (22 Yrs old) and Mohamoud (21 Yrs old) are currently attached to the Ministry of Energy and Minerals of Somaliland, and could be reached at:
Mohamed Feysal Hawar.BBA (Hons) Oil and Gas Management, Internship – Junior Upstream Petroleum Economists /Advisers Cum Advisers at the Somaliland Ministry of Energy and Minerals (MOEM)firstname.lastname@example.org
Mohamoud Feysal Hawar, BBA (Hons) Oil and Gas Management.Internship – Junior Upstream Petroleum Economists /Advisers Cum Advisers at the Somaliland Ministry of Energy and Minerals (MOEM) email@example.com