August 08, 2008 - 14:50
Somaliland livestock exports, the Saudi businessman and the Somaliland    

Traders: A rapid economic appraisal

The current dispute between some of the livestock traders and the government on how best to support and regulate the Somaliland livestock exports needs to be analysed in its wider economic implications. Somaliland can not afford to lose the Saudi market and those who are involved in resolving this dispute has to examine with rigour the prevailing conditions in the Somaliland livestock export industry before the government signed the agreement with the Saudi businessman. And look at the impact the agreement in question had the performance of the livestock industry in terms of the number of animals exported, movement of prices and value of local currency and the extra income that the producers and people of Somaliland received. I intend to provide an over view of some of the benefits of the export agreement with Mr Al-jabiri below.

Somaliland is heavily dependent on the livestock sector

Somaliland’s economy is heavily affected by its arid and semi arid climate and the mainstay of the economy has long been nomadic pastoralism. No other country in Africa is so reliant and the fortunes of so many of its people depend on livestock production. According to a recent World Bank report, about 60 percent of Somaliland’s GDP and employment is related to livestock production and trade. The government of Somaliland is heavily dependent on Livestock export which provides as much as 80 % of its tax revenue. Historic data provided by the UNDP also shows in 1997, Somaliland’s livestock exports was estimated to be around US $ 120.8 million which accounted for more than 80 % of the total foreign exchange earnings of the country.

Livestock export industry is highly vulnerable to external market shocks

The Saudi market has always been the most profitable and the single most important external market for Somaliland livestock. At the time this agreement was signed Somaliland Livestock exports were subject to a Saudi Ban. The frequent bans not only illustrates the vulnerability of the Somaliland livestock export economy to external market shocks but they also resulted in considerable economic loss in the marketing chain and had a strong negative impact on foreign currency earnings and fiscal revenues in Somaliland which put enormous strain on the government budget . A devaluation of the Somaliland Shilling against the US dollar that has reduced household purchasing power, while the price of imported cereals has increased. Exporters take huge risk and at times actually sustain huge losses while exporting their stock to Saudi Arabia and often complain about the unfair advantage that marketing agents and buyers in Saudi Arabia has over them. Exporters used to send their livestock to Saudi Arabia without any price guarantees and were often forced to take what the market offers. They point out the absence of any supporting structures such as Letters of Credit which act as a price guarantor or stabilizer by spelling out the quality and the price of the livestock prior to export. Exporters would then receive the stated price as long as the livestock meet the conditions stipulated in the L/C. While In Yemen, traders are paid in Yemeni Riyals or goods (biscuits), the settlement of transactions are often delayed (as much as three months) and can result in traders incurring a financial loss due to currency fluctuations and inflation, as they have to convert the Yemeni Riyals into dollars.

There was a dire need to support the livestock export industry

At the end of 2006, the magnitude of the decline in the livestock exports during the preceding five years became apparent as the industry only managed to export annually during the period 2001 to 2006 only about a third of the annul average during the 1994 to 2000 period. Leaving the industry to its devices and hoping that somehow it will get out of this deep decline was not an 1 option as the consequences appeared to be utterly bleak and due to the strategic importance of this sector to the people of Somaliland. It appeared to the government of the day and to a significant proportion of major players in the industry that the situation would only get worse unless drastic remedial action is taken.

The government secures an export guarantee deal

It is widely reported in the local press and on the internet that at the beginning of last year the government of Somaliland signed a five year fixed FOB price contract with a Saudi Livestock importer to purchase 2 million heads of Somaliland livestock per year at $36 per head at Berbera port In return, the Saudi businessman, Mr Al-Jabir has agreed to invest and build a $5 million livestock quarantine and resting station and disease control facilities at Berbera which is expected to improve animal health and certification systems to a level that can satisfy the conditions attached to lifting the Saudi livestock ban.

Producers of agricultural commodities in the developing countries would love to see their government negotiate and help them to win a long term contract from major importers of their produce let alone the only importer as is the case with Somaliland livestock exports. The contract in question appears to provide a stable and guaranteed price for the livestock exports, hence the future income stream of the more than 60 percent of the population and government’s single most important tax revenue and foreign exchange earnings of the country. The less then enthusiastic response on the part of some exporters, sections of the press and the opposition parties to the this agreement, leads one to wonder if this agreement is ahead of its time and the country is not yet ready a regulatory regime to correct free market externalities.

Exporters of those commodities that show high inter and intra seasonal unpredictable price and quantity variation work very hard to get an agreement that would provide their economies with stable and predictable future income streams. It makes great deal of financial sense to fix the export price [in the income =Price X quantity equation]. As the price is the variable that one can exert more control over as opposed to the body condition of the export animals which depend on the vagaries of nature. Hindsight is a wonderful thing but competent negotiators often base their asking prices with the information available to them at the time when the deal is struck and their assessment of the likely future movement of the price. If the market prices rise above the agreed price, as is currently seen through out the world, and if the rise in price is not transitory then the supplier is likely to be worse off by agreeing to the fixed price in the first place. The converse would hold true, where the world prices fall below the agreed fixed price, then the supplier would be better off by agreeing to the fixed price in the first place.

Somaliland has undoubtedly benefited from the this agreement

The Somaliland export market is seen by many commentators as a well organized and remarkably efficient in handling, purchasing and the transport of livestock and the redistribution of imported commodities. Further more research conducted by the World Bank recently shows that producers are receiving between 85 and 92 percent, of the fob price. This is extremely good deal for the producers and it dispels the widely held concerns about oligopolistic practices by livestock exporters.

While negotiating this agreement, the government of Somaliland to their credit has managed to a get a price (US $34 per head in 2007) which is higher than the average price/head for the previous five years which according to FSAU (march 08) was US $ 27. The economy as a whole and in particular the pastoral sector has, as a result of this agreement received about US $ 11.5 million more than what it would have received if the price per animal remained at the same level that prevailed during the previous five years. And as mentioned above, since the traders pass nearly 90% of the FOB price per animal to the producers, one can confidently state that the 60 % of the population of Somaliland that are directly engaged in raising the exported livestock received about 2 US $ 10 million more in revenue in 1997 which is the year the agreement in question came into affect.

As the following chart shows Somaliland livestock exports through the port of Berbra in 2007 was 1,633,794 heads. This represents and increase of colossal 31 percent on the previous year. And last year - the year the government has signed the agreement also saw the highest number of livestock exports from port of Berbara for the past seven years.

Total number of animals exported

2001---less than 200,000
2002---400,000
2003--- around 700,000
2004---1,000,000
2005---1,200,000
2006---less than 1,200,000
2007---more than 1,600,000

Source: FSAU (Berbera port livestock exports, 1994 –current) , www:/fsausomalia.org

Somaliland Shilling gained nearly 10 percent in value against the US dollar in 2007, which is the year the agreement with Mr Al-Jabiri came into effect. The stability of the currency of a small open economy like Somaliland where almost everything is imported profoundly affects the standard of living of the population. The appreciation of the Somaliland shilling clearly shows that there was a strong demand for the products (livestock) denominated in shillings and is remarkable as it clearly demonstrates the purchasing power of the shilling and the real income of the population has increased as a result of the agreement in question.

Somaliland shilling gained value from 100% in January 2007 to around 92% in December 2007 according to data from the FSAU, Market data, 2007 www:/fsausomalia.org

Some of the livestock traders expressed concerns about the agreement

Some of the livestock traders has argued that giving the sole export rights of the single most important product in the Somaliland economy to the Saudi importer was unfair and it has played havoc on the country’s economy in particular in both the export and the domestic livestock markets. They also argued that this agreement has denied their constitutional rights to engage in free trade to maximise their profits. Further more, the traders has argued that the agreed price is too low and that they can obtain a better deal else where, hence the government should get out of this rather disastrous and ill-conceived agreement and allow traders to freely export their livestock to Saudi Arabia .

The Government listens, and re-negotiates the agreement with the Saudi importer

In response to the concerns raised by some of the livestock traders and others the government has re-negotiated the agreement it has entered with the Saudi businessman. And on 18.07.08, Dr Idiris Ibrahim Abdi, the Somaliland minister of livestock , announced That Mr Al-jabiri has agreed [1] to increase the FOB price per animal from US $ 36 to US $ 42 and during Ramadan –Haj season the price per animal will again go up $45 [2] to supply essential food items to the Somaliland at cost price to increase the supply of the these commodities in the domestic market, hence lower their price and affordability [3] the livestock quarantine facility at Berbara to be completed within a five month period. The ownership of this facility will remain in the hands of the Somaliland government. This is a truly remarkable achievement on the part of the current administration. Especially when one considers the fact that Saudi Arabia – the single most important market for Somaliland livestock exports placed an embargo on our exports and lifting the ban proved a hard nut to crack for the people of Somaliland.

It would be a terrible mistake and a disservice to the people of Somaliland if the parliament, guurti and opposition parties fails to recognise this incredible achievement and the huge benefits that accrued to the Somaliland economy and throws the baby with bath water by placing unnecessary and dogmatic obstacles (free market) to the successful implementation of this highly lucrative deal.

It is hard to square the facts outline above with blunt and often plainly wrong press statements that the opposition parties has been releasing lately. I will use the following as an illustration: In June 23, 2007 the Somaliland times carried a press statement attributed to a group of 20 MPs from Somaliland parliament. The MPs claimed that the government is bent on serving the interest of few individuals and not promoting the interest of the many and the agreement it signed with Al-jabiri is a danger to the people of Somaliland.

To support the above allegations which are devoid of facts the MPs put forward the following points to show the inadequacies of the agreement in question.

1. Livestock which used to go through port of Berbera for export has dwindled immensely ever since this deal with Al-Jabiri, and Somaliland livestock currently are diverted to other ports, like Bosaso and Djibouti. This is not supported by the available evidence, livestock export has not dwindled as the MPs would like us to believe but through the Al-jabiri agreement Somaliland has exported a record number of livestock, the highest for seven year and 30 percent more than the previous year [FSAU, March 2008] 4

3. Those people who used to rear livestock for their livelihoods and those who used to buy their livestock are in a pitiful state as a result of the sharp drop in livestock supply and demand prices.

Again this is not supported by the available evidence, the export price offered under the agreement in question was higher then the average price for the previous five years by more than US $ 7, and since 30 % more animals were exported during the year in question, no one can dispute that the livestock sector as a whole has enjoyed higher income in 2007 than any year during the five year period preceding the year the agreement came into force.

4. The port of Berbera is close to going out of business because for the past three months Al-Jabiri has only managed to ship 36,000 heads of goats and sheep. How on earth, therefore, will Al-Jabiri ship 2 million heads of livestock per year, as stated in the ministry of livestock agreement with Al-Jabiri.

This is again utterly untrue statement, if only the MPs could have waited until the end of the accounting period, they would have realised that Berbera has seen a decline in the business it handles before the agreement was reached with the Saudi business man and not because of him and the available data supports the proposition that the agreement has actually saved the port of Berbera from a further decline by shipping through it 30 % more animals then previous year and more than any given year during the previous seven years.

The people of Somaliland would be better served if the MPs and others including the press base their press statements and newspaper articles on hard facts and well thought out arguments that is grounded in evidence obtained from reliable sources. The agreement is question has clearly provided significant economic benefits to the majority of the population and would only need tweaking and realignment with future price movements rather then a cancellation.

M. Mohamed Isse
London, August 2008
BSc Agricultural Economics, MSc Agricultural Economics, University of Reading, England
Email: mohamed.isse@yahoo.co.uk

References

1. FSAU, Market data, 2007 www:/fsausomalia.org
2. FSAU (Berbera port livestock exports, 1994 –current) , www:/fsausomalia.org
3. Somaliland times, Issue 283 / 23rd June 2007
4. World Bank (Jan 2006), Somalia, from resilience towards recovery and development