LONDON, UK — A shutdown of US development aid this year has directly harmed Somalia’s economy, depressing sales and squeezing the government’s fragile tax base, a senior Somali banker said Tuesday.
The halt in funding from the US Agency for International Development (USAID) rippled through markets faster than officials anticipated, according to Hodan Osman, president of the Somali Development and Reconstruction Bank.
“In Somalia, it really impacted our GDP,” Osman told the Financial Times Africa Summit in London. She said the cuts weakened collections of consumption taxes that Mogadishu heavily relies on.
Washington halted most foreign assistance in January as part of a sweeping review, with USAID subsequently stopping aid implementation. The move, part of a broader US policy pivot, has disrupted development programs globally. For Somalia, the timing is particularly damaging, coming just over a year after the country achieved a significant milestone.
After decades of conflict and instability, Somalia reached the Heavily Indebted Poor Countries (HIPC) Completion Point in December 2023.
The achievement unlocked $4.5 billion in debt relief, slashing the country’s external debt from 64 percent of GDP in 2018 to below six percent, according to the International Monetary Fund (IMF). The milestone was intended to normalize relations with international partners and attract new investment.
‘Severe impact’
Osman said the US aid cuts have quickly undermined that progress, creating a shock that moved through supply chains and shop floors.
“It also had a severe impact just on the economy alone that we weren’t really thinking about,” Osman said.
Somalia’s economy is highly exposed to swings in external finance. Grants and aid support the national budget and fund parts of the private sector. When those dollars disappear, traders cut orders, contractors delay projects, and households reduce purchases.
This chain reaction feeds directly into monthly tax receipts.
The strain threatens a recent run of fiscal improvements. Somalia’s finance ministry reported that domestic revenue rose 12 percent to $369 million in 2024, aided by better compliance and new sales taxes.
A five percent sales tax introduced across Mogadishu last year helped broaden the tax base. However, it also made the government’s budget more sensitive to the exact kind of spending slowdown the aid cuts have caused.
While domestic revenue has grown, it remains one of the lowest in the world as a share of the economy, forcing reliance on external support.
Outlook darkens
International lenders have echoed Osman’s concerns, warning that weaker aid flows are darkening Somalia’s economic outlook.
The IMF said this month that Somalia’s near-term prospects have softened due to cuts in foreign aid and climate shocks. The Fund now projects growth of 3.0-3.25 percent for 2025–2026, a significant drop from an estimated 4.1 percent in 2024.
The World Bank, in a recent report, also attributed a projected slowdown in 2025 primarily to “increased aid uncertainty.”
Somali authorities have asked the IMF to augment access under their current program to help protect social spending from the budget squeeze.
Humanitarian agencies report parallel pressures. The World Food Programme (WFP) has flagged a sharp fall in donor funding this year. The WFP warned that reduced contributions are pushing millions of people into emergency levels of hunger in several countries, including Somalia.
According to the UN, 6.9 million people in Somalia required humanitarian assistance in 2024. Aid groups warn that scaling back operations increases household stress and reduces the discretionary spending that powers the economy, reinforcing the drag Osman described.
Policy challenge
For policymakers in Mogadishu, the challenge is twofold: stabilizing demand in the short term while keeping long-term reforms on track.
Officials say they will continue efforts to widen the tax net, digitize payments, and improve customs. They acknowledge, however, that such reforms take time to yield significant revenue. In the meantime, the government must manage cash flows carefully to avoid arrears and protect priority services.
Investors at the London summit said there is still appetite for Somali projects in logistics, telecoms, and energy, provided policy momentum holds and security conditions improve.
Osman, who has been courting private capital for small and medium-sized enterprises, argued that blended-finance tools can help bridge the current gap while concessional flows reset.
The US policy shift is still playing out. Reports last month indicated the administration plans to redirect portions of foreign aid toward “America First” priorities.
For fragile states like Somalia, clarity over future US support—which totaled $1.18 billion in fiscal year 2023, including over $880 million from USAID—will be critical for budget planning into 2026.
Osman’s message was blunt: the loss of US development dollars is an economic shock, not just a line-item cut.
“We saw it immediately in activity and revenues,” she said. “That wasn’t fully anticipated.”