What can Somalia do to qualify for the removal of the heavy debt burden on its shoulders and get the freedom to grow?
Somalia has various economic challenges hindering its quick recovery into rapid growth. One such setback is its heavy debt burden. The country accumulated substantial debt in the Cold War era, and as at the end of 2014, the total external debt had reached an estimated US$5.3 billion (or 93 per cent of its GDP), largely in arrears. Relations with international creditors were frozen in the late 1980s when the country’s financial policies slipped out of control. Because of significant arrears on past debt-servicing obligations, the lack of a fully functional national government, and the unstable security situation, Somalia neither borrowed nor serviced its public debt after the 1990s. Decades of conflict significantly reduced Somalia’s ability to pay its external debts.
The billions owed to multilateral and bilateral creditors include a US$1.5 billion that belong to international financial institutions, mainly the World Bank, the IMF, and the Arab Monetary Fund. Of this amount, US$1.2 billion is accumulated arrears.
Somalia also owes US$3.8 billion to bilateral creditors, accrued during the Cold War era. Out of this, US$2.3 billion is mainly owed to Paris Club members (particularly the United States, the United Kingdom, the Russian Federation, France, Italy, and Japan). The remaining US$1.5 billion belong to non-Paris Club countries (including the United Arab Emirates, Saudi Arabia, and China).
Based on a preliminary assessment, Somalia lacks the ability to service its debt in the medium term. The federal government that is working to return the country on a path of peace and growth after decades of violent conflict is yet to establish an effective taxation regime.
Presently, Somalia’s formal financial sector is strained with lack of financial intermediation. This constrains business growth, as businesses are forced to use their own funds or borrow from friends and family members to expand. The scenario perpetuates elite capture, as only people with resources or access to resources remain in a position to invest.
Somalia is thus one of the world’s poorest countries at the moment. Extreme income poverty is prevalent throughout the country. Based on the findings of the 2013 Somaliland Household and Enterprise Survey, a household needs about US$1 per adult per day in urban Somaliland and about US$0.9 per adult per day in rural Somaliland to meet basic needs. Households living on less than these amounts are considered poor.
Poverty rates in rural and urban Somaliland are 37 per cent and 30 per cent respectively. Only 26 per cent of 15 to 55 year-olds in rural Somaliland and 33 per cent in urban Somaliland are employed (wage or self-employment).
Given these, does the country qualify for debt relief? If so, what can it do to have the heavy debts removed from its shoulders so that it may gain the freedom to grow?
In a report titled “Transition Amidst Risks”, the World Bank declares that Somalia indeed qualifies for debt relief plans, but the state has to first fulfil certain conditions. The global lender nonetheless paints an optimistic future for Somalia.
“As one of the world’s poorest countries, Somalia is eligible for the Heavily Indebted Poor Countries (HIPC) Debt Relief Initiative. Arrears to external creditors have blocked access to international financial resources to finance reconstruction. Somalia is working with its development partners to resolve the debt problem and exploring ways to qualify for relief under the HIPC Initiative. After reaching the HIPC Completion Point, it would be eligible for additional debt relief under the Multilateral Debt Relief Initiative (MDRI) from the World Bank and African Development Bank (AfDB), and Beyond-HIPC Relief from the IMF,” a section of the World Bank report reads.
“As one of the world’s poorest countries, Somalia is eligible for the Heavily Indebted Poor Countries (HIPC) Debt Relief Initiative. Arrears to external creditors have blocked access to international financial resources to finance reconstruction”
World Bank Report
To reach the Decision Point, Somalia will have to reconcile its external debt data with creditor claims and put a debt management system in place. Somalia and its creditors must therefore reconstruct the debt database that was destroyed during the 20-plus years of civil war. It must also rebuild the debt management capacity that was lost during the years when there was no functioning government.
In addition, the Federal Government of Somalia is expected to develop a poverty reduction strategy through a participatory process. It must also commit to public financial management reform, build a track record of policy performance monitored by the World Bank and IMF, undertake a programme of structural and social reforms endorsed by the World Bank and IMF, generate satisfactory economic performance, and be able to make payments to the IMF and World Bank to meet its new obligations.
The country, whose economic activity is estimated to have expanded by 3.7 per cent in 2014 through growth in agriculture, construction and telecommunications, would get a major boost from a debt relief by her major creditors.
Consumer price inflation was 1.3 per cent. For 2015, IMF had projected real growth at 2.7 per cent and inflation was to remain subdued at about four per cent.
With modest progress on the security front and an absence of drought, medium-term annual growth should be about five per cent. Nevertheless, growth will remain inadequate to redress poverty and gender disparities.
The Central Bank of Somalia (CBS) faces challenges in building financial sector supervision due to technical and human resource constraints. The economy is predominantly ‘dollarised’ and cash is scarce, particularly in lower denominations. Somali banknotes are not readily available, creating problems for the poorest.
High public expenditures and low revenues have contributed to persistent fiscal deficits, which have largely been financed by printing money. This has resulted in high money supply growth and contributed to inflationary pressures. The Central Bank of Somalia, with the assistance from the AfDB, World Bank and IMF, is in the process of improving its capacity to conduct monetary policy and regulate the financial sector.
The 2014 current account deficit is estimated at US$644 million (11.3 per cent of GDP). Trade consists mostly of exports of livestock to Gulf Cooperation Council countries and imports of foodstuffs from neighbouring countries and the Indian sub-continent.
The trade and income deficits were US$2.6 billion and US$450 million respectively, partially covered by remittances of US$1.3 billion and other transfers of US$1.1 billion. The deficit was financed by foreign direct investment of US$434 million, especially in telecommunications, electricity, and hotels, and donor capital transfers of US$150 million.
Nicholas Kay, a British diplomat, was the UN secretary general’s special representative to Somalia from mid-2013 to December 2015. He says the stability of governance is key to the possibilities of the country meeting its potential economic growth.
“Steady political progress ahead of a planned presidential vote this year, holds a key role to these tenuous gains, which may not be consolidated unless the focus switches to debt relief and kick starting the economy,” he says.
During his tenure as the former head of the UN mission in Somalia, the Horn of Africa country sought to fine-tune its federal system, which is meant to take some of the sting out of the clan rivalries that have poisoned politics for more than two decades and complicated the war against militants.