The President of Somalia, in defending the decision to impose a 5% tax on all digital transactions through merchants’ accounts, is either grossly misinformed or deliberately ignoring the catastrophic economic consequences of such a policy. This is the price you pay when you appoint individuals lacking education and experience to lead the Ministry of Finance. This is not merely a misguided tax; it is an economic dagger aimed directly at the heart of small businesses and the working poor of Somalia.
Small businesses and informal traders are the backbone of Somalia’s economy. These individuals, with limited resources, engage in activities such as selling goods at local markets, running small kiosks, or offering basic services like transportation and food vending. Unlike large corporations, these small businesses do not have the luxury of passing on costs to customers without significant repercussions.
The 5% tax is flat, meaning both small and large businesses are required to pay the same percentage on their digital transactions. This might seem fair on paper, but in practice, it is anything but. For a large corporation with high revenues, a 5% tax on digital transactions is a manageable expense, one that can be absorbed or passed on to consumers with minimal impact on overall profitability.
However, for a small business owner whose daily earnings might barely cover basic needs, a 5% tax on every transaction is devastating. It cuts directly into the already narrow profit margins that sustain their livelihood.
Faced with this new tax burden, small businesses will be forced to raise prices to compensate, making basic goods and services more expensive for consumers. In an economy where most people are already struggling with low incomes and high living costs, even a small price increase can significantly reduce consumer spending. As demand decreases, businesses will struggle to stay afloat, leading to closures and job losses.
The Somali economy desperately needs the energy and innovation of small entrepreneurs to grow. However, this tax discourages entrepreneurship by making it even harder for small businesses to survive, let alone thrive. The barriers to entry for new businesses will rise as potential entrepreneurs are deterred by the punitive costs of digital transactions, a critical aspect of modern business operations.
One of the key advantages of digital transactions is that they offer financial inclusion for those traditionally excluded from the formal banking sector. By taxing these transactions, the government is effectively discouraging the use of digital financial services, pushing people back into cash-based transactions that are less secure, less efficient, and less transparent. This regressive policy will hinder progress in expanding financial access to the broader population, particularly in rural areas where banking infrastructure is scarce.
Somalia has made significant strides in developing a digital economy, with mobile money services becoming a critical part of daily life. This tax, however, threatens to reverse those gains by making digital transactions less attractive to both consumers and businesses. If digital transactions decrease, the entire ecosystem—from telecom operators to fintech companies—will suffer, slowing down the pace of technological adoption and innovation in the country.
The President’s defense of this policy suggests a fundamental misunderstanding of its implications. The current Minister of Finance has likely misled the President into believing that this tax is a necessary revenue-generating measure without considering its broader economic impacts. While it is true that Somalia needs to expand its tax base and improve revenue collection, this cannot be done on the backs of the poor and small businesses.
What the Minister of Finance fails to grasp—or perhaps conveniently ignores—is that sustainable economic growth requires a supportive environment for small businesses, not one that suffocates them with burdensome taxes. By presenting this tax as a one-size-fits-all solution, the Minister is disregarding the stark differences in capacity between small businesses and large corporations, leading the President down a path that could have severe consequences for Somalia’s economy and social fabric.
This tax is not only unjust and economically harmful but also undermines the very foundation of Somalia’s nascent digital economy. It must be repealed immediately to prevent further damage. The government must engage in meaningful dialogue with business owners, economists, and parliament to develop a more equitable and effective tax policy that does not disproportionately harm the most vulnerable members of society.
If this tax is not repealed, the Somali government will be held accountable for the ensuing economic hardships and social unrest.
The people of Somalia deserve a government that understands their struggles and works tirelessly to improve their lives, not one that imposes policies that push them deeper into poverty and despair. The President must act now to correct this egregious mistake before it is too late.