Somalia’s Debt Relief: A perfect pathway to sustained poverty reduction.

The history of Somalia’s debt can be traced back to the revolutionary government led by Mohamed said Barre in the period 1970s to 1980s. Most of the external debt was used to finance for military weapons,

infrastructure and to adjust the balance of payments. However, Due to unplanned and excessive borrowing made by the former regime, a huge amount of debt was amassed with accrued debt services, since 1991, Somalia has not taken any loans, the country’s external debt has not changed significantly throughout the years except some adjustments made on accrued interest and currency-related adjustments .

After the collapse of the central government in 1991, the outbreak of the civil war caused much destruction of the government institution and deteriorated the economic situation of the country. To that date, Somalia is beholden to $5.1 billion of external debt and in the foreseeable future, the Somali government will be unable to pay back its debt by its own resources. So far, Chine China has provided Somalia with full debt cancellation on its share and some arrear clearance to Multilateral Organizations like IMF, World Bank and African Development Bank.

As the IMF country report No 18/212 reveals, the Somali’s major external creditors are categorized into three groups namely Paris club including the United States, Italy, France, Russia, Japan, United Kingdom, Spain, Netherland, Denmark and Norway ,and counts 53.8% of the Somalia’s debt, while Non-Paris club such as United Arab Emirates, Kuwait, Saudi Arabia, Iraq, Bulgaria, Libya, Romania, Algeria and Serbia which have 13.4% of the total share, the remaining amount is own by a multilateral organization like African Development Bank Group, ADB, ADB fund, IMF, World bank, OFID-OPEC Fund for International Development, Arab Monetary Fund, Islamic Development Bank, and Arab Fund for Economic.& Social, International Fund for Agricultural Development(IFAD) and Nigerian Trust Fund .

The United States holds $1.1 billion of Somali’s debt (22%) of the total share and it is the largest creditor while the majority of the remaining of debt holds by international monetary (7%) fund, World Bank (11%), France (9%), and Italy (13%). Until now, arrears to multilateral organization such as Word Banka, IMF, and African Development Bank were cleared.

Arrears clearance to World Bank has made on March 5 through bridge finance from the government of Norway, whereas arrears to the African development bank were also cleared on march 5 with the help of bridge financing from the government of United Kingdom and contributions from European Union and finally, IMF share was cleared on march 25, through bridge financing provided by the government of Italy.

Now, nearly 30 years later, with enormous efforts of nation-building and institutional reform programs, Somalia is one of the three nations in the world, alongside Sudan and Eritrea that still strives to meet conditions for debt relief under World Bank and IMF initiative known as Heavily Indebted Poor Countries (HIPC).

Multilateral Institution such as the IMF and World Bank have set benchmark and criterion for the countries entitled the initiative of the heavily indebted poor countries (HIPCs) framework in 1996 where all creditors along with multilateral creditors give debt relief to the world’s poorest and most heavily indebted countries to reduce the constraints they face on economic growth and poverty reduction imposed by the debt-service burden, and to ensure that no poor country faces a debt burden it cannot manage and can address its development needs.

The debt relief framework requires a two-step process that has specific criteria and benchmarks to be met before the debt is canceled and new development-focused lending is permitted. The first phase is the decision point whereas the second phase is the completion point.

As of March 2019, the debt reduction package Under the HIPC initiative recognized that 39 countries are eligible or potentially eligible for the HIPC initiative. So far 36 countries have been approved and received full debt relief at the stage of post-completion point, 30 of them in Africa by providing to them $76 billion in debt-service relief over time,

Moreover Somalia, Eretria, and Sudan were the only few countries that are at Pre-Decision point stage at that date, However, the meeting on February 12 and 13 by IMF and World bank’s the Executive Boards deemed that Somalia is eligible for assistance under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative. Moreover, on March 25, 2020 IMF and World Bank revealed that Somalia is the 37th country to reach the decision point under the HIPC initiative.

Somalia’s debt relief movement was started in April 2013 but it was slowly improved, after 2017 a significant progress had been made, the current federal government led by his excellence president Mohamed Abdullahi farmajo had made an unfathomable and tremendous effort toward achieving and securing Somali ‘s debt relief mission. In his remarkable speech at high-level London Somalia Conference, President Farmaajo had mentioned that his administration has developed a comprehensible and milestone-based roadmap aimed at arrears clearance as he pledged that he will personally follow the process.

Furthermore, the federal government and IMF have fully agreed on their commitment to a staff monitored program that aims to help Somali for their effort in economic reconstruction and policy reforms to strengthen macroeconomic policy management, economic intuitions, and necessary structural reforms.

Moreover, following the IMF Executive Board discussion on Somali debt relief on February 12, 2020, IMF managing Director Kristalina Georgieva highlighted that Somali is now eligible for debt relief under the Enhanced HIPC Initiative as a result of its sustained commitment to key economic and financial reforms under consecutive staff-monitored programs with the IMF.

The debt Cancelation could push the country into a new era of prosperity as it unlocks access to the needed resources from international financial institutions to strengthen the economy, support to improve the social condition and reduce extreme poverty. With this clearance, Somalia will able to re-established its access to new resources from International Development Association (IDA) and discover the way to get debt relief under the Heavily Indebted Poor Country and Multilateral Debt Relief Initiative to support its growth and economic recovery for the coming years.

Considering the fragile fiscal positions of the federal government with an extremely narrow domestic revenue mainly from custom duties from airport and seaport, and budget constraints to finance its development project, the government’s capacity to carry out basic functions of governing in providing security and economic opportunity to generate sustainable employment for Somalis, reconstruction of infrastructure, health and education is very challenging, hence the need to finance the country’s infrastructure, development agenda and to promote inclusive growth through accessing new resources from international Development Association and Multilateral Debt Relief Initiative is unquestionable.

Moreover, Debt relief is one of the efforts which is aimed at low-income countries to address the development needs of the society and their debt level is maintained over time. The reason behind debt relief is that poor countries use the additional money to spend on poverty reduction programs, particularly the plan of debt relief is closely linked to poverty reduction strategy that outlines the government intervention and policies need to curb the poverty in the country since the unused and free resources will be used to implement programs that benefit the poor and thereby releasing resources for development spending, including poverty reduction programs that raise millions of people out of poverty, hence, clearing Somali’s debt will serve as poverty reduction strategies as the additional money will spend on poverty alleviation programs.

The extreme poverty that exists in Somalia leads to a hunger, starvation and high malnutrition rates, and according to an IMF report in January 2020, nearly 70 percent of Somali’s population live extreme poverty on less than US$1.90 a day measured in purchasing power parity. In addition to that 90 percent of Somali households are in need of electricity, education, water, and sanitation, thus, debt relief for Somalia is key to inclusive economic growth and poverty alleviation strategies through addressing the needs of the country’s most vulnerable people.

Under eligibility for the HIPC initiative, Countries will able to spend more on health and education then they spent on debt services, this seems to reveal that debt relief drives the whole effort to increase public spending to social programs. Hence, Somali’s debt relief will discover the way for Somalia to get grants and loans to invest in education, health, roads, and ports. With the advantage of restricted conditions for debt relief, Somali will like to implement poverty reduction strategies paper (PRSP).

Additionally, canceling Somalia’s debt gives it an opportunity to send more children back to schools and it is a way of moving approaches to end extreme poverty .A lot of spending package will go to social services, the citizens will get a high-quality education, healthcare, and housing facilities ,employment opportunities and infrastructural improvement such as roads, airports . Another benefit for debt relief is that Somalia can attract international investments such as Foreign Direct Investments (FDIs) and increase capital inflows this will create more jobs for its people and leads prosper future for Somalis.

Conclusion and Recommendations

Considering the weak fiscal capacity and lack of revenue mobilization with an extremely narrow domestic revenue, the government’s capacity to generate sustained employment for Somalis people and to raise millions of vulnerable people out of poverty is a very difficult job , thus the need to finance the country’s development agenda and to promote inclusive economic growth through accessing new resources from international Development Association and Multilateral Debt Relief Initiative is undeniable, the debt relief is so critical for the fight against the extreme poverty in the country since the unused and free resources will be used to implement programs that benefit the poor
Likewise, to reach the completion point, the Federal Government must continue its commitment for the economic reforms including poverty reduction strategy and building inclusive economy, promote good governance, improve its debt management, and set sound record system of the country’s economic and financial transaction ,implement good tax system to improve domestic revenue and fight on rampant corruption. While the federal government is doing well to meet the requirements for debt relief, the federal member states must also work with the federal government for achieving this milestone.

Mustaf Abshir Ali
Macro-Fiscal Specialist