Somalia and IMF Staff reach Staff-Level Agreement on the Second and Third Reviews of the Extended Credit Facility

Economy, Development & Health Economy, Development & Trade
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https://www.imf.org/en/News/Articles/2022/05/19/pr22160-somalia-and-imf-staff-reach-staff-level-agreement-on-reviews-of-extended-credit-facility

May 19, 2022

End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF’s Executive Board for discussion and decision.

Washington, DC: An International Monetary Fund (IMF) team, led by Laura Jaramillo, concluded virtual discussions with the Somali authorities and reached a staff-level agreement on the second and third reviews of the Extended Credit Facility (ECF) arrangement. This agreement is subject to approval of the IMF’s Executive Board.

At the conclusion of the discussions, Ms. Jaramillo issued the following statement:

“Somalia has been subject to multiple shocks, including COVID-19, climate shocks, and surge in commodity prices. As of May 13, 2022, only 8.7 percent of the population had been fully vaccinated, mainly due to lack of vaccine access. Somalia is also facing prolonged drought conditions that worsened since 2021. Pressures on food security have been compounded by the increase in global food and energy prices.

Notwithstanding these shocks, Somalia has preserved macroeconomic stability, supported in part by the IMF’s 2021 General SDR Allocation. Real GDP growth was estimated at 2 percent in 2021, given the recovery in household consumption. In the face of significant revenue shortfalls (including because budget support grants were on hold until elections were completed), the authorities intensified expenditure prioritization and financed the overall deficit of 1.1 percent of GDP with cash balances and SDRs.

Growth is expected to pick up modestly in 2022, but risks are elevated. Growth of 2.7 percent would be driven by private consumption, supported by remittances. However higher international food and fuel costs will dampen economic activity and will bring inflation to 8.5 percent in 2022.The fiscal deficit is expected to narrow to 0.6 percent of GDP, as revenues and budget grants recover. Near-term risks include the evolution of the pandemic, prolonged drought or new climate shocks, resurgence of desert locust infestation, security risks, and additional pressures on international food and energy prices. Shortfalls or delays in disbursement of budget support grants would also create risks for the budget and the program.

The 2022 budget is aligned with the ECF objectives and the medium-term fiscal framework. While domestic revenue collection will be supported by the implementation of 2022 budget measures, external budget support remains crucial. Expenditure will continue to be carefully prioritized, with a modest increase in social spending, keeping the deficit at 0.6 percent of GDP. The authorities continue to advance reforms on domestic revenue mobilization, including customs modernization and increasing revenue collection from the telecom sector. Public financial management has been strengthened, including improvements in reporting of aggregated FGS and FMS fiscal accounts. Issuance of the PFM Regulations and payroll integration are key. The authorities are also working towards harmonizing the legal framework for the extractive industries and refining the tender process to promote competition.

The CBS continues to advance institutional reform. The new National Payment System is a major milestone, and the two largest mobile money operators were granted licenses in 2021. The CBS should continue to enhance its supervisory capacity and monitor the financial system closely. Continued capacity building across all stakeholders is needed to improve AML/CFT compliance.

The government continues to make headway in the HIPC debt relief process. The authorities reached debt relief agreements with most Paris Club members, and continue to seek agreements with other creditors. Further progress on reforms is needed to achieve the HIPC Completion Point Triggers on a timely basis.

Timely support from development partners, both on financing and capacity development, is essential for the successful implementation of the authorities’ reform strategy. Contributions from Somalia’s partners to the Somalia Country Fund are also needed to ensure smooth delivery of IMF technical assistance to support the goals of the ECF-supported program and the HIPC Initiative.

The mission would like to thank our counterparts for a constructive and fruitful dialogue. Meetings were held with the President of the Federal Republic of Somalia, the Minister of Finance, the Central Bank Governor, other government officials, development partners, and representatives from private sector and civil society.”

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IMF Executive Board Concludes 2022 Article IV Consultation and Fourth Review of the Extended Credit Facility for Somalia

December 7, 2022

Somalia is currently facing a severe food crisis. Sustained support from international partners is needed for the immediate humanitarian response and to build resilience over time to climate shocks in order to prevent food crises in the future.
Program performance has been satisfactory, and the reform momentum has been maintained. Steady progress under the HIPC process would lay the ground for the Completion Point to be achieved in late 2023.
To promote inclusive growth, further efforts are needed to build resilience to climate shocks, advance implementation of the national development plan, and promote financial deepening, while maintaining fiscal sustainability.

Washington, DC: On December 5, 2022, the Executive Board of the International Monetary Fund (IMF) completed the fourth review of the Extended Credit Facility (ECF) arrangement for Somalia. The Board’s decision enables the immediate disbursement of SDR 7 million (about US$ 8.9 million), bringing Somalia’s total disbursement under the Extended Credit Facility (ECF) and the Extended Fund Facility (EFF) to SDR 278.4 million (about US$ 393.2 million).

Somalia’s ECF arrangement was originally approved by the Executive Board on March 25, 2020 (see Press Release No. 20/105) as part of a three-year blended arrangement under the ECF and the EFF, which involved access of SDR 252.86 million (155 percent of quota) under the ECF and SDR 39.57 million (24 percent of quota) under the EFF. As the full amount of the EFF arrangement was made available on approval and drawn at the first purchase, the EFF arrangement lapsed immediately. The ECF arrangement supports the implementation of the authorities’ National Development Plan and anchors reforms between the HIPC Decision and Completion Points.

Executive Board Assessment [1]

Executive Directors agreed with the thrust of the staff appraisal. They welcomed the Somali authorities’ commitment to economic reforms and the HIPC process, notwithstanding the challenges arising from an acute food crisis. They called for continued efforts by the authorities and sustained support from international partners to address the humanitarian crisis and reduce climate vulnerability to prevent food crises in the future.

Directors positively noted that performance under the program has been strong and commended the authorities’ steady progress under the HIPC process that is laying the ground for the Completion Point to be achieved in late 2023. They encouraged the authorities to continue with the timely implementation of the remaining HIPC Completion Point Triggers and to finalize debt relief agreements with all creditors.

Directors praised the implementation of reforms to raise domestic revenues and called for further efforts on tax policy and administration reforms, including customs modernization and the new income tax law. Directors commended the improvement in public financial management and encouraged further progress on payroll integration and fiscal transparency. Such efforts are needed to ensure medium-term fiscal sustainability given Somalia’s very low tax ratio amid large development needs, and the expected shift to concessional financing at the Completion Point.

Directors appreciated the continued reforms to strengthen the central bank’s governance and legal frameworks, including implementation of IMF Safeguards recommendations. They recommended further bolstering the central bank’s financial regulation and supervision capacity.

Directors noted that important steps have been taken on governance. They encouraged continued efforts to address ML/FT risks and ensure the enactment of the Targeted Financial Sanctions Law. Directors stressed the importance of finalizing the legal framework for the extractive industries, developing better control of government lands and real estate, and implementing the National Anti-Corruption Strategy.

Beyond the HIPC Completion Point, Directors stressed the need for further reforms to promote inclusive growth. These include building resilience to climate shocks, advancing implementation of the national development plan, and promoting financial deepening and inclusion, while maintaining fiscal sustainability. Directors noted that support from development partners is important for the successful implementation of the authorities’ reform strategy, including continued

IMF CD support and financing from partners for the Somalia Country Fund.

It is expected that the next Article IV consultation with Somalia will be held in accordance with the Executive Board decision on consultation cycles for members with Fund arrangements.