Horumar

Written by Suldan Mohamed

Somalia’s major debt accumulated immediately following the independence of the country in 1960. During the civilian government, funds were obtained to develop public investment programs (PIPs) and Balance-of-Payments (BoPs) support. However, following the toppling of the civilian government by the Somali military in 1969, large amounts of debt accumulated during this period also included military equipment and other technicalities that were utilised during Somalia’s attempted liberation of neighbouring Somali territories as well as supporting African liberation causes across the continent.

For instance, Somalia had a large debt owed to Russia which amounted to $678.6M accumulating during the close relationship between the socialist Somali government and the Soviet Union during the earlier periods of the Cold War. Similarly, Somalia owes over $1B to the US Government with the majority being owed to the Pentagon which again demonstrates the military interests behind the borrowing.

Following the military defeat faced by the Barre regime in 1978 against a coalition of forces that supported the Communist Ethiopian Derg regime including the former Somali ally, the Soviet Union, Somalia entered a period of economic turmoil due to the cost of the war. During the 1980s, Somalia faced difficulties servicing its debts which resulted in two rescheduling agreements in 1985 and 1987 with the Paris Club creditors.

Debt would continue to rise, reaching unsustainable levels in 1991 when national debt made up 277% of GDP in Somalia. This was likely a result of the political instability within Somalia as the government was focused on crushing opposition and maintaining power rather than stabilising the economy. The mere fact that the government failed to pay debts in 1985 when there was more stability in comparison to 1991 demonstrates the level of incompetency and lack of urgency at the heart of the Barre regime towards the end of its rule.

Reengagement under Hassan Sheikh Mahmoud

Somalia would not reengagement the international community for another 22 years following the creation of the Federal Government in 2012 led by President Hassan Sheikh Mahmoud.

However, despite attempts by the government to seek rectification regarding the major debt and the unfreezing of Somali assets abroad, this failed to occur until 2015 due to allegations of corruption and ungovernability of the country at that time.

For instance, during the early period of the Federal Government, it lacked any central system for payments for civil servants nor did the military have any biometric data to identify soldiers among other issues which were the basics to transparent financial governance needed to secure enough trust from multinational creditors as well as the major international organisations such as IMF and the World Bank.

Additionally, major scandals of corruption such as the 2013 resignation of Central Bank Governor Yussur Abrar only 7 weeks in office due to concerns regarding graft made matters worse. Abrar’s predecessor, Abdusalam Omer, quit in September of that year after U.N. monitors linked him to irregularities regarding millions of dollars withdrawn from the central bank. Omer denied the allegations.

This was made even worse by a UN report in 2014 which accused President Hassan Sheikh, a former Foreign Minister Fawzia Yusuf H. Adam and U.S. law firm Shulman Rogers of conspiring to divert Somali assets recovered abroad.

Nevertheless, by 2015 Somalia would eventually seek IMF assistance to formulate a strategy for future debt relief, emphasizing comprehensive reforms to prevent recurrence of debt challenges post-relief. An IMF Resident Representative was appointed to enhance collaboration and by May 2016, the Federal Government began engaged in informal IMF Staff Monitored Programs (SMPs), establishing a cooperative track record. These programs focused on implementing sound macroeconomic policies, enhancing institutional capacity, and fostering economic growth by strengthening governance, fiscal discipline, monetary policy implementation, and financial sector development.

The work began by President Hassan Sheikh during his final year in office was continued by President Farmaajo who helped reach major milestones during his 4-year tenure which excludes the final year between 2021 and 2022 as this was a period of political turmoil with PM Roble at the helm of a government which was focused on holding elections.

Debt Relief under Farmaajo Administration

The Farmaajo administration managed to complete four-12-month SMPs which provided the basis for a move to a formal IMF arrangement. This would result in the IMF’s Executive Board approving a three-year arrangement under the Extended Credit Facility (ECF) and the Extended Fund Facility (EFF) for Somalia in the amount of about $395.5 million.

The IMF-supported program aimed to facilitate the execution of the reform agenda, attract concessional donor funding, and achieve key objectives such as realizing the National Development Plan, enhancing economic resilience, promoting inclusive growth, and mitigating poverty. Notably, the approval of this arrangement marked Somalia’s complete reintegration into the international community and the global financial system.

When analysing the advancements achieved within this timeframe, let’s consider the period from 2013 to 2016 as an example. Somalia’s real GDP, on average, registered a 2.9 percent growth, inflation hovered around 1 percent, and the budget deficit averaged less than 0.1 percent of GDP. Post-2016, changes in tax policies and enhanced tax administration played a pivotal role in diversifying central government revenue, reducing heavy reliance on customs duties and other trade taxes. This strategic shift resulted in a remarkable 29 percent growth in revenue from taxes and other domestic sources.

The increased revenue empowered the Federal Government of Somalia (FGS) to elevate its spending to 5.7 percent of GDP. The FGS’s transfers to the Federal Member States (FMS) and other subnational governments experienced a modest uptick, rising from 9 percent of spending in 2017 to 11 percent in 2020, as per the World Bank’s analysis.

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

It is important to note that Somalia did NOT join the HIPC programme until 2020 following major achievements between 2016 and 2020.

Major milestones reached included:

• Arrears to the World Bank’s International Development Association (IDA) were cleared on March 5, 2020, with bridge financing from Norway, reimbursed through a Development Policy Grant.
• IMF arrears were settled on March 25, 2020, with bridge financing from Italy, reimbursed through frontloaded access under a new IMF financial arrangement.
• Arrears to the African Development Bank Group were cleared on March 2, 2020, with bridge financing from the UK and a contribution from the European Union, reimbursed through a Policy Based Operation Grant.

The biggest achievement reached up to this date is the cancellation of $1.4B debt owed by Somalia to the Paris Club Creditors under the so-called ‘Cologne terms’ agreement. Former Minister of Finance Dr Abdirahman Beileh held a successful meeting with all the respective Paris Club Creditors which enabled the slashing of the Somali national debt. The remaining debt is set to be written off via the completion of the HIPC programme which is set for Dec 13^th, 2023.

FYI, for those that do not know what the Paris Club is, a brief description is:

• A group of officials from major creditor nations aiming to coordinate sustainable solutions for payment difficulties faced by debtor countries. They offer debt treatment as debtor nations implement reforms to stabilize their macroeconomic and financial conditions.   

What Next?

Ultimately, Somalia would join the HIPC programme in March 2020 following major reforms that were approved by the IMF and World Bank. The three-year period under the programme is set to end now so what next for Somalia?

I believe Somalia will gain significantly from credits and grants from the International Development Association (IDA) funds which is dedicated to alleviating poverty by offering zero to low-interest loans (termed “credits”) and grants for programs fostering economic growth, reducing inequalities, and enhancing living conditions.

According to the IMF, IDA provides credits with minimal or zero interest charges, and repayments extend over 30 to 40 years. Over half of IDA countries receive their resources, either entirely or half, as grants with no repayment obligations, particularly benefiting low-income countries at higher risk of debt distress.

If we assess the recent advancements in the fund under IDA20 which concluded in December 2021, a new $93 billion financing package for IDA countries from 2022 to 2025 was pledged. Access to this substantial funding will empower Somalia to provide more funding for public infrastructure and projects as well as relief to both flood and drought victims while simultaneously developing new policies to counter national disasters.

Imagine a future where Somalia emerges from the shackles of debt distress, fostering poverty alleviation, youth employment, and much-needed development projects. That future is closer than you think if Somalia is governed with efficiency.