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Somalia to rejoin global financial system after securing debt-relief deal

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Wednesday December 13, 2023

Somalia is set to receive significant relief of its international debts, allowing a country battered by civil war, terrorism and near economic bankruptcy to rejoin the global financial system after an absence of some 30 years.

Total relief of $4.5bn, to be announced on Wednesday under the IMF’s Heavily Indebted Poor Countries initiative, would slash Somalia’s debt as a proportion of gross domestic product from 65 per cent to about 6 per cent. This marks what the IMF has called “a major milestone” in the revival of one of the world’s most troubled nations.

The Horn of Africa nation shattered into clan warfare after the fall of the communist government of Mohamed Siad Barre in 1991 and a failed US attempt to stabilise the country. This ended with the 1993 shooting down of three US helicopters in what became known as the Black Hawk Down incident.

For the past 15 years, successive governments in Mogadishu, which have held only tenuous sway over a divided country, have been fighting an Islamist insurgency led by the al-Shabaab militant group. Thousands have died in raids and explosions, while the militants have also launched attacks on neighbouring countries, including in Kenya in 2013 when 71 people died in an assault on Nairobi’s Westgate mall.

The current government of Hassan Sheikh Mohamud, who returned as president for a second stint in 2022, claims to have made progress in suppressing al-Shabaab, but now faces one of Somalia’s worst droughts in living memory.

Officials close to Sheikh Mohamud said the debt-relief deal would be a turning point and was an endorsement of the administration’s progress in tackling the country’s deep-seated economic and political problems.

Conclusion of debt relief would allow Somalia to access concessional loans, a senior official in the president’s office told the Financial Times this week. A $100mn three-year IMF programme concluded last month would ensure continued progress with economic reform, eventually paving the way to sustained growth, he said.

“It’s a huge weight off Somalia’s back and enables them to focus on other economic priorities, to tackle poverty and provide jobs,” said Ahmed Soliman, a researcher at the Chatham House think-tank in the UK, of the debt-relief package. “You can’t achieve physical security without working towards the country’s economic prosperity.”

The IMF and the World Bank’s International Development Association approved the debt write-off after Somalia reached so-called completion point following the implementation of 13 out of 14 requirements related to expenditure, tax collection, governance, statistics and poverty alleviation.

As part of the deal, bilateral creditors have written off $3bn in debt. Russia, which propped up the Siad Barre government in the 1970s and 1980s, granted Somalia debt relief of $684mn in July.

The debt-relief process, which has taken nearly a decade, has spanned three administrations and marks the thawing of relations with an international community that has for 30 years treated Somalia as a dangerous trouble spot. The UN Security Council this month lifted a 32-year embargo on arms shipments to the government in Mogadishu.

The IMF and World Bank launched the HIPC initiative to cut the debt of poor highly indebted countries in 1996 and most of the 39 eligible countries had received substantial debt write-offs by the early 2000s. Following the Somalia deal 20 years later, Eritrea and Sudan are the only eligible countries yet to complete the process.

FINANCE

Somalia’s stars align as it secures $4.5bn debt relief from lenders

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Somalia has secured a $4.5 billion debt write-off from global lenders, marking the culmination of a decade-long process of negotiations and reforms.

The nation, which is just settling into the East African Community (EAC) after its admission two weeks ago, has been exempted from debt repayment under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative.

The move by multilateral and bilateral lenders, including the World Bank, International Monetary Fund (IMF), significantly reduces the country’s debt to $600 million from a high of $5.2 billion, according to the World Bank.

Somalia’s external debt has now declined to less than six percent of GDP, from 64 percent in 2018.

A huge chunk of the debt relief has been made available by commercial creditors ($3 billion), followed by multilateral creditors ($573.1 million), World Bank’s International Development Association ($448.5 million), IMF ($343.2 million) and African Development Fund ($131 million).

The HIPC initiative was created by the IMF and World Bank in 1996 to allow all creditors to provide debt relief to the world’s poorest and most heavily indebted countries to reduce economic constraints inflicted by the debt-servicing burden.

The landmark announcement on Somalia’s debt forgiveness will be made in Washington DC on December 13 after the Bretton Woods institutions boards complete the approval process.

Somalia becomes the 37th country to reach the HIPC completion point, after Sudan and Zimbabwe fell by the wayside.

Somalia’s HIPC discussions started 10 years ago, under the current President Hassan Sheikh Mohamud, and the country has remained on the reform path despite political headwinds along the way.

World Bank country manager for Somalia Kristina Svensson, who spoke to The EastAfrican on Thursday, said Mogadishu’s commitment to reforms has been “remarkable”.

“There has been a lot of political challenges within Somalia, but this thing (principles of HIPC), they have held it quite high,” she said.

The debt write-off presents an historic opportunity for Mogadishu to turn the page after three decades of conflict, fragility and state fragmentation, and embark on the path of economic reconstruction, poverty reduction and inclusive growth.

It is expected to unlock concessional and climate financing for the nation, revive investor confidence in the economy and restore correspondent banking to bolster cross-border transactions and integration into the global financial system.

Mogadishu lost its correspondent banking relationships in 2014 on concerns of money laundering and terrorism financing, but in March this year its central bank began enforcing the use of international bank account numbers (Iban) by commercial lenders as part of financial sector reforms aimed at integrating the nation into the global payments system.

To achieve the HIPC completion point, the country was required to fulfil three key conditions: Maintaining macroeconomic stability and showing a reform track record; completing the HIPC completion point triggers; and renegotiating its debts with multilateral and bilateral creditors.

Somalia did well on all fronts considering its fragility, says the World Bank.

It has demonstrated great commitment towards the reform process by remaining on track with the IMF programme for the past three and half years, undergoing six reviews under the fund’s Extended Credit Facility (ECF) Programme.

The authorities have achieved 13 of the 14 HIPC Completion point triggers, except the customs harmonization trigger between Kismayu, Mogadishu and Bosaso, which was not achieved mainly because of lack of agreement on tariffs due to failure by the warring camps to reach a political settlement.

These HIPC completion point triggers are about state building and involve intergovernmental agreements around education, health, customs and economic growth.

Somalia renegotiated debt relief agreements with 76 percent of the creditors and a few of those are ongoing.

“This is satisfactory for them (Somalia) to achieve debt relief,” said Ms Svensson. “Both the World Bank and IMF as well as other international partners have been essential to providing technical assistance to support the achievement of these triggers.”

Over the past few weeks, Somalia has achieved huge milestones in its struggle towards socioeconomic and political liberation.

For instance, it received admission as an eighth member of the EAC, and the United Nations lifted its arms embargo, allowing Mogadishu to arm its police and military forces.

The World Bank is pushing it to continue implementing key reforms in debt management and take appropriate measures to enhance economic growth and domestic revenues to avoid sliding back into debt distress.

“We need to celebrate this moment but it is also important to signal that these reforms need to continue. Somalia needs to learn how to manage debt and obviously avoid getting back into debt distress,” said Ms Svensson

Invest in growth

“The second point is on growth and revenues. They need to invest in growth, they need to grow other sectors other than just the livestock sectors which they are very dependent on today and they need to create an enabling environment for the private sector to thrive.”

Somalia has the lowest domestic revenues to GDP in Sub-Saharan Africa, at three percent.

“There is strong commitment from the authorities to increase revenues but this has to be one of the major reforms going forward,” said Ms Svensson.

In March 2020, IMF and WB determined that Somalia had taken the necessary steps to begin receiving debt relief under the enhanced HIPC Initiative.

Bihi Iman Egeh, Somalia’s Finance Minister, told The EastAfrican that the decisions to write off its debt and lift the arms ban will enable Somalia attract investors.

“Infrastructure investment is a key priority for Somalia to achieve its ambitions of economic growth. Our government has continued to improve the investment environment with laws and policies,” Egeh said on Friday. “We are working on finalizing a competitive PPP law too and these we hope would attract Foreign investors going forward.”

“We are still actively fighting international terrorism and our ability to generate more domestic revenue and purchase more sophisticated weaponry will only strengthen our fight for peace and security at home, in the region, and abroad,” added the minister.

“Furthermore, with economic growth, we aim to create jobs and invest in basic public services to create more opportunities for our people. ”

Additional reporting by Aggrey Mutambo

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