In an unprecedented move on 13 December, the IMF and World Bank confirmed a landmark $4.5bn debt reduction for Somalia, signaling a major stride in the nation’s decade-long reform efforts. This achievement, ratified during the Paris Club creditors’ meeting, underscores the international community’s acknowledgment of Somalia’s rigorous economic reform and governance improvements.
On 13 December last year, a joint press release was made public by the IMF and World Bank, stating that Somalia’s debt is now reduced by $4.5bn. This was reaffirmed in principle by the Paris Club meeting of creditors during our negotiations on 13 March 2024 in Paris, which saw overwhelming recognition of Somalia’s reform gains and delivery over a decade. This was significant because about two-thirds of Somalia’s overall debt relief is being provided by Paris Club members.
The debt treatment Somalia received is around 90% of all its external debts. This means the majority of Somalia’s external debts which closed it off from the international financial institution for over three decades were lifted by major creditors. We are also actively engaged in positive dialogue and negotiations with the remaining creditors for which we are hopeful of a settlement.
Renewal and stability
Such is a remarkable story of national determination, commitment and strong partnerships that gives one of the most fragile nations in the world a fresh opportunity for socio-economic renewal and stability at a time of national and global challenges, including the fight against Al-Shabaab and responding to the disproportionate impact of climate change.
Somalia is the 37th nation to benefit from the Highly Indebted Poor Countries Initiative (HIPC) process. It achieved this enormous and historic debt relief package through the successful implementation of rigorous economic reforms.
The HIPC process was established in 1996 by the World Bank, IMF, and other multilateral, bilateral and commercial creditors to ensure the poorest countries are not overcome by unmanageable debt burdens.
Simply put, if a nation is experiencing extreme debt distress and is unable to pay its creditors, its debts can be reduced through supervised reforms mainly by the IMF as in the case of Somalia, and direct negotiation with creditors. The purpose of the entire exercise is to address the critical macroeconomic, social and political issues that created this difficult situation in the first place. The hopeful assumption is that if this happens, there is less chance of the country returning to debt in future.
Somalia implemented over 90 structural reforms since 2016 with the IMF alone, but these were also accompanied by many more complementary ones with the World Bank and the European Union. All these helped to strengthen domestic revenue mobilisation, public financial management, good governance and institutional capacity.
High public expectations
These reform efforts will continue and be deepened under a new three-year Successor Programme with the IMF and the Somali government. However, to continue with our track record of reform success, our government and partners must maintain the same level of momentum to ensure the overarching objective of poverty reduction, stronger institutions and economic growth are attained at the end of the programme in an environment of high public expectations for job creation, a slowing global economy and cyclical recurrent climatic shocks.
Somalia’s economic reform success story is written by Somalis in Somalia but with the assistance of all our major international partners – the main international financial institutions, bilateral donors and multilateral organisations and bodies as well as our creditors.
Somalia is one of the rare good news at a troubled time in international politics and economics because of the collective effort of all. However, it is important to remember what made Somalia’s engagement with all its national and international partners so successful were continuous open and honest dialogue, an ability to challenge all partners to see and understand the government’s perspective and an appreciation for Somalia’s particular socio-economic, political and security challenges as well as the ongoing fight against international terrorism.
What is remarkable is that despite the wide-ranging challenges faced by Somalia in the implementation of the economic reform programme, not once did the process regress or stop. Somalia uniquely completed the HIPC process to attain debt relief in one go without any setbacks despite its existing fragility. The main reason for this was the commitment of successive governments to de-politicise the economic reforms and to create a national narrative of common ownership and responsibility for its success.
Paying taxes
This was matched by the mobilisation of the population, especially the business community, to register as official enterprises and pay taxes in a transparent and accountable way to ensure the government’s policy and operational priorities are financed. Some of these businesses, large and small, had not paid taxes to any government for decades. Some were not even registered as businesses either.
These direct actions have increased government domestic revenue year-on-year and support from donors and the International Financial Institutions with the World Bank projects now surpassing $2bn and the African Development Bank allocation also increasing. All these led to the Somali Parliament passing the first billion-dollar budget since the collapse of the state in 1991.
Despite the good news of debt relief delivered by almost a decade of hard work and strong partnerships, Somalia remains fragile. The challenge remains avoiding returning to high unsustainable debt (like the majority of HIPC beneficiary countries did) by growing the economy, managing future debts better and raising the tax-to-GDP ratio above the existing 3% which is currently among the lowest in the world.
The other challenge remains to build on the macroeconomic stability that exists today, despite the ongoing fight against international terrorism at home. This, as well as the high-security sector spending it necessitates, eats into development spending on social protection and human capital needed to build long-term sustainable peace.
Moreover, Somalia’s current weak domestic revenue and debt-carrying capacity will continue to pose difficulty for policy response options to global challenges it contributes least to, like climate change, but disproportionately suffers from or investing in the enabler of growth like education, health and infrastructure. In this regard, there must be more global burden sharing with fragile post-conflict states like Somalia to make available more flexible financing for development, including continued access to grant financing for development investments by the International Financial Institutions. If sustainable development is to be truly achieved, it must be together as a community of nations.
Looking forward, the Somali government’s clear plans to benefit from its strategic location, its abundant untapped natural resources, its historic membership of the East African Community and its entrepreneurial people, including a vast successful diaspora, create the possibility of hope for prosperity through trade and investment.