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State building and state legitimacy in countries emerging from fragility are inseparable from the idea of social contract. In countries where the youth only know statelessness, building a new social contract from the ground up becomes imperative.

What can citizens legitimately expect from the state? Should the state provide only the basics¡ªsecurity and social order¡ªor also broader public goods and services like infrastructure, clean water, public health, and education? The answers to these questions are linked to what is affordable.

A new publication ¡°¡±, building on engagement with a wide range of stakeholders and insights from surveys, outlines key state-building challenges and evidence-based options to address them, but also the difficult choices for Somalia to consider.

Somalia has made significant progress on its state-building journey since 2012, emerging from over three decades of being considered a failed state and submerged in an armed conflict.  It has adopted a provisional constitution and established a federal structure.

But what type of state can Somalia afford in the medium term, given its low revenue base and reliance on external grants? How can Somalia enhance its domestic revenue and deliver public services to increase trust in the state and reinforce its legitimacy and fiscal bargain?

Enhancing Domestic Revenue Mobilization

Somalia faces substantial challenges in achieving state affordability, with its domestic revenue-to-GDP ratio at a mere 2.5%, among the lowest globally. Its low revenue base and heavy reliance on official development assistance (ODA) for nearly half of its expenditures constrain the state's ability to provide essential services. Somalia's service provision falls far below even the minimalist role of the state. Projections based on resource constraints reveal sobering realities.

According to our estimates, by 2030, with current revenue trends, Somalia can only afford to provide free primary and secondary education and basic health services to 25% of its population. Reaching 50% coverage would require intensified efforts to increase domestic revenue to at least 9% of GDP, while reaching basic service provision for 100% of its population will require domestic revenue of at least 15% of GDP.

Recent domestic revenue mobilization efforts show promising signs, with projections indicating a potential increase in the domestic revenue-to-GDP ratio to 4.5% by 2030. As the book sets out, to achieve sustainable revenue enhancement, Somalia must expand the tax base, implement a progressive income tax, align customs legislation with the East African Community protocols and standards, deepen reforms in indirect taxation (including excise taxes), and finalize tax harmonization and revenue-sharing arrangements across the federation. Addressing challenges voiced by large taxpayers, such as tax competition between formal authorities and between informal and formal authorities, will be necessary. Improvements in tax administration, simplification and consolidation, and effective taxpayer communication and education are critical for boosting tax morale and compliance among both businesses and citizens. Any tax policy and administration reforms should consider potential adverse socio-economic implications. Building trust and improving tax compliance is vital for long-term revenue growth.

Better Service Delivery

On the delivery side, Somalia¡¯s capacity for service delivery in a federal framework still has significant gaps. While Somali citizens generally prefer public facilities, the reality on the ground often forces them to turn to private or traditional providers, as public services are often unavailable. A collaborative approach involving all tiers of government and partnerships between state and private providers could enhance the individual comparative advantage towards better service delivery and a collective effort to strengthen the social contract.

Supporting a more predictable and sustained level of ODA will require incorporating increasing portions of ODA into the national budget for enhanced coordination and efficiency of service delivery. Developing justice services is one important dimension. To maximize decentralization benefits, it is essential to address capacity gaps at the local level, ensure community participation in service prioritization, develop robust systems for intergovernmental transfers¡¯ utilization and reporting, and ensure decentralization fosters effective and efficient delivery rather than an expansion of administrative payrolls at sub-national levels.

These recommendations are not meant as direct instruction for action but should rather be considered as evidence-based policy options that require broad stakeholder engagement and discussion to inform Somalia's Centennial Vision of 2060, addressing a realistic path for developing the state¡¯s role in service delivery and strategies for strengthening the social contract between citizens and the government.

Figure 1: Medium-term scenarios based on the different levels of public services coverage and resource envelope projections