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

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

Monday December 11, 2023

World bank Country Manager for Somalia Kristina Svensson. PHOTO | COURTESY

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 harmonisation 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 finalising 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

IMF and World Bank Announce US$4.5 billion in Debt Relief for Somalia

December 13, 2023

WASHINGTON, DC: The Executive Boards of the International Monetary Fund (IMF) and the World Bank’s International Development Association (IDA) have approved[1] the Heavily Indebted Poor Countries (HIPC) Initiative Completion Point for Somalia, which provides total debt service savings for the country of US$4.5 billion.[2] Following HIPC Completion Point, Somalia’s external debt has fallen from 64 percent of GDP in 2018 to less than 6 percent of GDP by end 2023. This debt relief will facilitate access to critical additional financial resources that will help Somalia strengthen its economy, reduce poverty, and promote job creation.

Debt service relief has been provided by the IMF (US$343.2 million), IDA (US$448.5 million), African Development Fund (ADF) (US$131.0 million), other multilateral creditors (US$573.1 million), as well as by bilateral and commercial creditors (US$3.0 billion). Bilateral creditors include members of the Paris Club, creditors from the Arab Coordination Group, and other official bilateral creditors.

Somalia’s debt relief process has been nearly a decade of cross governmental efforts spanning three political administrations. This is a testament to our national commitment and prioritization of this crucial and enabling agenda,” said Somalia’s President, H.E. Hassan Sheikh Mohamud.For Somalia to move forward in the positive economic direction we all needed, we had to reform our laws, systems, policies, and practices. Reaching the HIPC Completion Point is the fruit of these reforms. When my government committed to the reform program nearly a decade ago, this was the result we envisaged.

Somalia’s reform journey has been a true national process culminating in the remarkable success of determined economic reform implementation despite external challenges such as painful regular climatic shocks and the ongoing fight against international terrorism. We are proud to have reached the HIPC Completion Point,” said Somalia’s Minister of Finance, H.E. Bihi Iman Egeh.Through our enabling reforms, we have consistently raised domestic revenue, strengthened public financial management, improved good governance and central banking operations, and enhanced the capacity of our national institutions. We will build on these successes going forward.

The Executive Directors of both institutions determined that Somalia has made satisfactory progress in meeting the requirements to reach the HIPC Completion Point. Somalia has implemented a poverty reduction strategy for at least one year and maintained a track record of sound macroeconomic management as evidenced by the satisfactory implementation of the Extended Credit Facility (ECF) supported program (see IMF Press Release No. 23/437). This performance was achieved despite Somalia having to face the global Covid-19 pandemic, prolonged and severe drought, a desert locust infestation, the impact of external shocks on food supply and prices, and significant security risks. Somalia maintained steadfast progress on structural reforms and implemented thirteen of fourteen floating Completion Point triggers, including on public financial and expenditure management, domestic revenue mobilization, governance, social sectors, and statistics. The IMF Executive Board granted a waiver for the adoption and implementation of a single import duty tariff schedule at all ports.

Somalia has made significant strides in rebuilding its economy and institutions after a devastating civil war. Reaching the HIPC Completion Point is a testament to the Somali authorities’ strong and sustained policy and reform efforts over the past years, despite numerous challenges, as well as the strong support from international partners,” said the IMF’s Director for the Middle East and Central Asia, Jihad Azour. “The Completion Point is a momentous achievement that restores debt sustainability and over time offers access to new external financing to support inclusive growth and poverty reduction. Maintaining sound macroeconomic policies and sustaining the reform momentum remain critical after the Completion Point for Somalia to reap the full benefits of the debt relief.

“Reaching the HIPC Completion Point is a historic milestone for which the Somalia Government deserves full credit,” said the World Bank Vice President for Eastern and Southern Africa, Victoria Kwakwa. “Somalia has implemented critical reforms in support of pro-poor growth, poverty reduction, better public financial management and debt management. These reforms establish the conditions for the effective use of irrevocable debt relief to support the people of Somalia. Deepening structural reforms after the Completion Point will be critical to boost private sector growth and create fiscal space to invest more in human development and infrastructure in support of inclusive and resilient growth.”

The Somali authorities remain firmly committed to sustaining the reform momentum post-HIPC to build resilience, promote inclusive growth, and reduce poverty. The World Bank and IMF will continue working together to provide the technical assistance and policy guidance the authorities need to achieve these goals. The IMF will continue its engagement with Somalia in the context of the new three-year IMF financial arrangement as well as capacity development support sponsored by the Somalia Country Fund. The World Bank has agreed on a new five-year Country Partnership Framework with Somalia focused on continuing support to state and institution building, infrastructure and jobs, human capital, and resilience. The current World Bank portfolio in Somalia stands at US$2.3 billion spanning human capital development, access to energy, and action against cyclical climatic shocks such as floods and drought.

Debt service savings of US$4.5 billion incorporate debt relief of about US$4.2 billion under the Enhanced HIPC Initiative, US$115.1 million under the Multilateral Debt Relief Initiative (US$96.4 million from IDA and US$18.7 million from ADF), US$164.3 million under beyond-HIPC debt relief from the IMF, and commitments from Paris Club creditors to provide beyond-HIPC debt relief to cancel most of their outstanding claims.

The Heavily Indebted Poor Countries (HIPC) Initiative

In 1996, the World Bank and IMF launched the HIPC Initiative to create a framework in which all creditors, including multilateral creditors, can provide debt relief to the world’s poorest and most heavily indebted countries to ensure debt sustainability, and thereby reduce the constraints on economic growth and poverty reduction imposed by the unsustainable debt service burdens in these countries. Somalia is the 37th country to reach Completion Point under the HIPC Initiative.

The Multilateral Debt Relief Initiative ( MDRI)

Created in 2005, the aim of the MDRI is to further reduce the debt of eligible low-income countries and provide additional resources to help them reach their development objectives. Under the MDRI, three multilateral institutions—the World Bank’s IDA, the IMF, and the African Development Fund—provide 100 percent debt relief on eligible debts to qualifying countries, at the time they reach the HIPC Initiative Completion Point.


For the IMF: Angham Al Shami, [email protected]

For the World Bank:

In Washington:** Daniella van Leggelo-Padilla, [email protected]

In Nairobi: Vera Rosauer, [email protected]

[1] The IDA Executive Board met on December 12, 2023, and the IMF Executive Board met on December 13, 2023.

[2] This value is in nominal terms and refers to the dollar value of the stock of arrears accumulated at end-2022 and forgiven debt service over a period of time, based on end-2022 exchanges rates.