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Debt relief as Somalia begins to reap from reforms

Somalia now returns to the path of stability and development after nearly 30 years outside the international financial system and the immediate normalization of its relations with the international community will re-open access to critical additional financial resources to strengthen the economy, help improve social conditions, raise millions out of poverty, and generate sustainable employment for Somalis.

Egal M. Abdiwali

Barely a month after Somalia re-established its relations with the global credit lines lead by the World Bank, the country’s debt is now set for a slash after the International Monetary Fund approved almost $5bn of assistance.

The global financial institutions in a joint statement praised Somalia’s efforts at economic reform, allowing it to qualify for a debt relief programme and reintegrate into the global economy after nearly 30 years.

Through the heavily indebted poor countries initiative, Somalia’s debt will be reduced from $5.2bn to $557m over three years.

Somalia had to commit to a range of broad economic reforms, including strategies for reducing poverty and building an inclusive economy, and improve its governance and debt management.

The IMF and World Bank recently called for creditors to suspend debt repayments from the world’s 76 poorest countries to allow them to prepare for the challenges posed by Coronavirus.

Somalia which is to hold its first democratic elections since 1969 got the backing of the United Nations, the African Union and the European Union (EU) who welcomed the debt relief as a way of helping Somalia build its economy.

“The government will have more resources for social services; banks and businesses will have easier access to credits and investments,” the EU’s ambassador to Somalia, Nicolas Berlanga, wrote recently.

The United Kingdom and the European Union have also cleared arrears on loans amounting to $122.55 million that Somalia owed the African Development Bank (AfDB).

The two creditors were following Somalia’s long journey towards completing three Staff Monitored Programs (SMPs) of the International Monetary Fund (IMF), a process that began six years ago.

A fourth SMP, running from May 2019 to July 2020, is still underway with the first review of the program having been completed in September last year. The program named SMP IV focused on further efforts to mobilizing revenues, strengthening public financial management, enhancing financial sector stability, and strengthening compliance with the framework for combatting the financing of terrorism.

The two reliefs were among the first major reliefs for Somalia with the Minister of Finance Abdirahman Beileh delighted by the development that now adds fuel to the country’s economic engine that has been idle for decades.

“The settlement of the arrears of Somalia to the African Development Bank is a new beginning for us in Somalia. We stuck with our reforms, we were persistent, and it has paid off,” the minister was quoted in the joint stamen released by the Africa-based lender.

AfDB President Akinwumi Adesina said the clearance of Somalia’s arrears reflected the power of partnerships and consensus-building.

According to the Bank, its current portfolio in Somalia totals $135 million, spanning operations in agriculture, water and sanitation, transport, social and energy sectors, and capacity building for several others of the economy.

The reliefs come after the International Monetary Fund (IMF) and the World Bank’s International Development Association determined that Somalia had taken the necessary steps to begin receiving debt relief under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. Somalia is the 37th country to reach this milestone, known as the HIPC Decision Point.

The debt relief is expected to help Somalia irrevocably reduce its total burden from US$5.2 billion at the end-2018 to US$557 million in net present value terms (NPV) once it reaches the HIPC Completion Point in about three years’ time.

Somalia now returns to the path of stability and development after nearly 30 years outside the international financial system and the immediate normalization of its relations with the international community will re-open access to critical additional financial resources to strengthen the economy, help improve social conditions, raise millions out of poverty, and generate sustainable employment for Somalis.

“The government will have more resources for social services; banks and businesses will have easier access to credits and investments,”

Nicolas Berlanga, EU ambassador to Somalia

World Bank Group President David Malpass said the resumption of regular financing to Somalia is an important landmark that will spur economic and social progress for the country.

Somalia has already committed to maintaining macroeconomic stability; implementing a poverty reduction strategy; and putting in place a set of reforms focused on fiscal stability, improving governance and debt management, strengthening social conditions, and supporting inclusive growth in order to reach the HIPC Completion Point.

The World Bank and IMF have also committed to continuing working together to provide the technical assistance and policy guidance the authorities need to achieve these goals, including in the context of the new, three-year IMF financial arrangement.

The World Bank is, in addition, considering another range of new IDA focused on immediate relief for communities impacted by flooding, the locust invasion as well as preparing for the fast-moving threat of COVID-19.

The new IDA financing proposals which are under preparation should be ready in the coming months as it aims at 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.

At the start of the HIPC process, Somalia’s public- and publicly guaranteed external debt was estimated at US$5.2 billion in NPV terms. The application of traditional debt relief mechanisms reduces this debt to US$3.7 billion.

Additional debt relief under the enhanced HIPC Initiative is estimated at the US $2.1 billion in NPV terms. Of this amount, US$843 and US$1,225 million is projected to be provided by official multilateral and bilateral creditors, respectively.

By the end of March, the Paris Club of creditor nations agreed to restructure Somalia’s debt, including immediately canceling $1.4 billion owed by the Horn of Africa country.

The HIPC initiative which has turned out to be Somalia’s saving grace was launched in 1996 by the, the World Bank and the IMF to create a framework in which all creditors, including multilateral creditors, can provide debt relief to the world’s poorest and most heavily indebted countries to ensure debt sustainability, and thereby reduce the constraints on economic growth and poverty reduction imposed by the unsustainable debt-service burdens in these countries. 

To date, 37 HIPC countries, including Somalia, have reached their decision points, of which 36 have reached the completion point.

Debt Relief Journey

In 2012 the new Federal Government of Somalia (FGS) embarked on ambitious reforms to re-establish institutions for economic governance. The authorities have been reconstructing the core laws, regulations, and policies for taxation and management of public spending; financial inclusion, integrity, and stability; a competitive environment for business.

Between 2013 and 2016, Somalia’s real GDP averaged 2.9 percent, inflation averaged about 1 percent, and the budget deficit averaged less than 0.1 percent of GDP.

The changes in tax policies and improved tax administration helped to diversify central government revenue away from heavy reliance on customs duties and other trade taxes resulting in a 29 percent growth in revenue from taxes and other domestic.

The additional revenue enabled the FGS to increase spending to 5.7 percent of GDP. FGS transfers to the Federal Member States (FMS) and other subnational governments increased slightly—from 9 percent of spending in 2017 to 11 percent according to the World Bank analysis.

The reforms helped Somalia prove its commitment to reforms and boosted its chances of being re-admitted to the credit lines and receiving the current debt reliefs.

Journey Ahead

By 2021 domestic revenue collection is projected to approach 5 percent of GDP. This will create opportunities for public investments in much-needed infrastructure and social services—notably education—that can rebuild human capital in Somalia.

This may not be a smooth ride though, concerns over security, weather and climatic shocks, and political uncertainty remain rife in an election year and the threat by the COVID-19 pandemic ravaging the whole world now. The authorities which have been building a track record of reform the areas of revenue mobilization, expenditure control, and financial sector regulation will also add to the headwinds should they slow down.

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