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Critical Steps that brought Somalia back to the World Bank Credit Queue

Mohamed Dubo

Somalia completed a tough reform journey meant to place it back into the good books of the international lenders after three decades of staying in the cold.

“We had brought in all the federal member states to work on this, we had to pass the greatest number of laws and increase revenues in tax collection as benchmark and we even had reform the Somalia National army including registering them afresh We also had to cancel dozens of contracts that had not gone through the required process. It has not just been a difficult journey but a positive and unifying factor for our government,”

Hassan Ali Khaire , Somalia Prime Minister.

“The decision paves the way for the full resumption of operations so the World Bank Group can provide the strongest possible support to Somalia’s efforts toward economic and social recovery, This milestone is the result of several years of close cooperation with the Federal Government, and we now look forward to taking our relationship to the next level with deeper and broader financial and technical support from across the Bank Group,”

Axel van Trotsenburg, World Bank Managing Director of Operations.

The final breakthrough moments began in February when the World Bank Group Board of Executive Directors began the final steps to normalize its relations with the Federal Government of Somalia (FGS) after thirty years.

The move which had targeted to open up opportunities for Somalia to access concessional financing from the World Bank’s International Development Association (IDA) and to work closely with all arms of the World Bank Group to attract investment that will support the country’s stability and development were noble ones.

World bank executives were evidently excited after the February 27th meeting with the Bank’s Managing Director of Operations Axel van Trotsenburg terming the move historic and the beginning of Somalia’s steps back to the path of financial freedom.

“The decision paves the way for the full resumption of operations so the World Bank Group can provide the strongest possible support to Somalia’s efforts toward economic and social recovery. This milestone is the result of several years of close cooperation with the Federal Government, and we now look forward to taking our relationship to the next level with deeper and broader financial and technical support from across the Bank Group,” Mr van Trotsenburg said.

The World Bank Board’s decision to reengage Somalia was based on the government’s strong record of fiscal, political, social, and economic reforms in recent years according to the global lender.

Somalia which has been on a long road to reform has rolled out fiscal management pans which now covers revenue mobilization, budgeting, procurement, auditing, and cash management, as well as accountability over Public Financial Management.

The country has also focused strong attention to building core monetary and financial sector governance institutions, establishing the basic legal foundations for a market economy, and introducing reforms in strategic sectors including telecommunications, banking, and energy.

Economic policy reforms, such as the recently enacted Public Financial Management Law and the Company Law seemed to have softened the world bank stance and boosted the belief that the country was fast improving public financial management and revenue generation.

“Somalia has made important reforms and has demonstrated a strong commitment to staying the course,” said Hafez Ghanem, Vice President for Africa, the World Bank. “These reforms lay the foundation for sustained poverty reduction and better lives for the Somali people, and open the door to private sector investment that can create jobs and drive the economy forward.”

Hafez Ghanem, Vice President for Africa, the World Bank.

The reforms continue to strengthen the government’s capability to provide critically needed services in health and education to the Somali people and build a framework for the competitive private sector that can create jobs, particularly for Somalia’s youth.

There are huge gaps in education and youth unemployment in the country that has been through years of civil war and ravaging famines with a huge impact on its economy.

The federal government has facilitated consultations on a new National Development Plan, outlining the country’s priorities so that investments can be made in the most critical areas.  

The reopening of the credit lines would definitely cause concerns for possible misuse of the funds with little data and other critical disclosures available within the government’s financial structures.

IMF Photograph/Eugene

H.E. Abdirahman D. Beileh, Minister of Finance of the Federal Republic of Somalia knew that just well and committed to transparency after the February announcement

“This is a recognition of the ambitious reforms to which this government remains committed, to bring transparency and accountability into Somali institutions, and to revive the economy. We are grateful to the Bank for the support they have already provided to help the country reach this point and we look forward to planning a new phase of investments to deliver the poverty reduction goals of the National Development Plan,”

Abdirahman D. Beileh, Minister of Finance of the Federal Republic of Somalia

“This is a recognition of the ambitious reforms to which this government remains committed, to bring transparency and accountability into Somali institutions, and to revive the economy. We are grateful to the Bank for the support they have already provided to help the country reach this point and we look forward to planning a new phase of investments to deliver the poverty reduction goals of the National Development Plan,” Mr. Beileh said.

It is the February decision that laid the groundwork for Somalia to access World Bank Group financing for federal and state government projects under the International Development Association (IDA), private sector debt and equity investments through the International Finance Corporation (IFC) and political risk insurance provided by the Multilateral Investment Guarantee Agency (MIGA) to facilitate foreign direct investments.

The World Bank was closely involved in helping Somalia walk back to the lending queue. The bank gave Somalia over $250 million in IDA Pre-Arrears Clearance Grants to accelerate the country’s progress on key reforms and on delivering basic services and financial inclusion to its people.

The Somalia Multi-Partner Fund, which includes funding from Denmark, the European Union, Finland, Italy, Norway, Sweden, Switzerland, the United Kingdom, and the United States, was crucial in laying the foundations to re-establish basic country systems.

The next step that followed was the preparation of the new IDA financing proposals aimed at providing rapid response to households impacted by recent droughts and flooding, reducing poverty by delivering social protection to over 200,000 women with children under 5, improving education and healthcare, boosting water and electricity supply, and investing in other critical infrastructure projects.

A week after the World Bank board’s move, the Federal Government of Somalia cleared its arrears to the International Development Association (IDA), completing the process of normalizing its financial relationship with the World Bank Group.

With the clearance, Somalia fully re-established its access to new resources from IDA and paved the way to receive debt relief under the Heavily Indebted Poor Country (HIPC) and Multilateral Debt Relief Initiative (MDRI) to promote growth and recovery over the coming years.

Mr. Van Trotsenburg in his congratulatory message to the government termed the move a critical milestone and said Somalia had laid the foundation for long term economic and social recovery.

Somalia managed to clear the arrears after receiving a $365.9 million bridge loan from the Norwegian government as part of a comprehensive plan for arrears clearance that also included the International Monetary Fund (IMF) and the African Development Bank.

“I am pleased that Norway is contributing in a smart and constructive way to Somalia’s efforts to reengage with the international community, clear arrears, and restore access to concessional funding from IDA. I am also pleased that this important step paves the way for Somalia to receive deep relief on its remaining debt,” 

Ine Eriksen Søreide, Minister of Foreign Affairs of Norway.

The support would also be extended to the private sector as Somalia works with the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA).

IDA remains one of the largest sources of funding for fighting extreme poverty in the world’s poorest countries with its zero- or low-interest loans and grants to countries for projects and programs that boost economic growth, build resilience, and improve the lives of poor people around the world.

With nearly 70 percent of Somalis living on less than $1.90 per day, these investments will help improve the lives of millions of the country’s most vulnerable people and strengthen the systems needed for better livelihoods and a more stable future.

The normalization of relations with the World Bank Group also paves the way for Somalia to receive debt relief under the Heavily Indebted Poor Country (HIPC) and Multilateral Debt Relief Initiative (MDRI) programs to promote growth and recovery over the coming years, a critical move in relieving the heavy burden Somalia has carried for years.

The education reform is among the key starting points for the country’s economic prospects since the countries human capital foundation remains wobbly with the weak education system.

While it is estimated that 10 to 30 percent of differences in Gross Domestic Products (GDP), per capita, is attributed to differences in human capital, Somalia is far from solidifying its human capital contributor -the education system.

The world bank in its latest economic update for the country reveals that 3 million Somali children are estimated to be out of school and only half the population is literate.

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