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TheGlobalObservatory.org: Can Somalia Find the Debt Relief Necessary for Development?

Posted by: Berhane Habtemariam

Date: Wednesday, 12 July 2017

Can Somalia Find the Debt Relief Necessary for Development?

With economic growth gathering pace, Somalia’s capital Mogadishu is considered a beacon of hope for the fragile post-conflict state. New businesses, returning diaspora, and an energetic younger generation all contribute to growing prosperity and confidence. But this optimism, directly tied to the private sector and Somalia’s celebrated entrepreneurial spirit, is somewhat superficial considering the massive structural and infrastructural challenges that must be addressed to grow the economy in a sustained, robust manner.

Historical debt is a critical factor stifling this development. Somalia is beholden to $5.1 billion of external debt and, in the foreseeable future, has few prospects to pay it back. While progress has been made in rebuilding Somalia after two decades of civil war, it remains one of the poorest nations in the world, languishing at the bottom of most United Nations indicator tables. Debt, in particular to international financial institutions like the International Monetary Fund (IMF), restricts Somalia from borrowing for large-scale projects that can produce generational change or facilitate new revenue streams.

In May 2017, President Mohamed Abdullahi Mohamed, commonly known as Farmaajo, raised the debt issue in a speech at the high-level London Somalia Conference. He is quoted as saying: “we have now developed a well-defined, milestones-based roadmap to arrears clearance and normalization of relations with the IFIs [international financial institutions].” The president pledged to “personally follow” the process. At the same conference, UN Secretary-General António Guterres said Somalia’s debt issue was not just economic and financial but also “a moral question.”

A Dictator’s Ghost

Most of Somalia’s debt is linked to ousted military dictator Siad Barre, who in the 1970s and 1980s went on a spending and borrowing spree for weapons and infrastructure vanity projects. Money came easily when playing off competing Soviet Union and United States Cold War rivalries and by promoting Somalia’s Islamic identity to Arab League nations. But the collapse of the Barre regime in 1991 and its resulting civil war led to the destruction of all government institutions and the economy. Now, nearly 30 years later, with the war economy lingering, Somalia is one of the three last nations in the world, alongside Sudan and Eritrea, to still not meet conditions for debt relief under a World Bank and IMF initiative known as Heavily Indebted Poor Countries (HIPC), which aims to ensure no poor country faces a debt burden it cannot manage and can address its development needs. It is a two-step process requiring specific criteria and benchmarks to be met before the debt is cancelled and new development-focused lending is permitted.

Somalia’s debt relief process started in in April 2013, once the IMF officially recognized the federal government, which had been formally established less than a year before, after an extended transitional period. It has slowly developed over time; in February 2017, for example, “significant progress” had been made with identifying Somalia’s external debt statistics. The federal government and IMF have agreed upon a second, more ambitious “staff-monitored program” that aims to help Somalia’s economic reconstruction efforts and focuses on reforms to strengthen macroeconomic policy management, economic governance, and institutional capacity. The Central Bank of Somalia is also planning to re-introduce its own currency to reduce the reliance on US dollars.

Such steps, albeit basic, are necessary to establishing an environment that positions the government as a stable and reliable partner prepared for the HIPC process. Farmaajo and the federal government now need to prioritize and approve related legislation; for example, one important milestone will be passing a bill that aims to regulate the telecommunications sector, an already booming industry estimated to be worth a $1 billion a year, mostly from the informal “mobile money” market.

The government will also need to crack down on rampant corruption, especially in the public tendering process. It also needs to develop a poverty reduction strategy and demonstrate a good track record of economic and financial management, including in public financial management. In the Somali context, this development relies heavily on the powerful business elite, or trading community, to acknowledge, accept, support, and encourage the difficult transition of formalizing the economy.

Revenue collection is critical for the government in general but also for starting to service debt that is a requirement to proving a good track record in the eyes of international financial institutions. At present, Somalia’s economy relies on diaspora remittances, humanitarian assistance, billions of dollars in international grants, and some limited foreign investment. The federal government only collects revenue in the range of 1-2% of the country’s $5.95 billion gross domestic product, whereas other countries in the region collect on average about 13%. At the same time, Somalia’s federal member states collect revenues via their informal methods and structures; for example, the main income for the Jubaland authority is from its Kismaayo port. The South West State administration recently announced the appointment of private security contractor Erik Prince’s Frontier Services Group as a partner to their “Free Zone Investment Authority” initiative, which is touted to create jobs and stabilize the economy.

The Road to Debt Relief

As Farmaajo said in London, the federal government has met some of the international financial institutions’ requirements and is committed to the debt relief process. However, progress is haphazard and often gets lost in international or regional politics and a lack of inter-government coordination that has different ministries mired in misplaced or competing priorities.

Despite the goodwill, or general belief that debt relief is critical for Somalia’s development, key international partners still need to fully embrace the process. It is clear there is momentum for this to happen. On June 27 this year, the UN’s Special Representative in Somalia, Michael Keating, tweeted about a “great exchange” with the World Bank and IMF country representatives on the steps needed for Somalia to qualify for debt relief. This echoed comments from IMF Somalia country representative Samba Thiam in early 2017 that there is a “general willingness” and it was a “good prospect” that creditors would, in time, write off Somalia’s debt.

Responsibility ultimately lies with Somalia and its representatives to meet the necessary criteria. Government performance is critical. And, while the Somali federal government is working to meet the requirements for debt relief, the business community needs to embrace the transformation toward a better regulated and legislated market. In order to achieve this formalization of economic activity, however, Somalia will need more than willing businessmen. It will require the technical know-how to build up economic institutions—many of which depend on development of new technology—such as a business register, licensing, and tax collection.

The next four years will be critical in shaping Somalia’s economic path to recovery. It will be a long process, but if the building blocks are positioned correctly, and the foundation to formalize an economy is established, debt relief could propel the country into a new era of prosperity.

Ilya Gridneff is a Senior Researcher at Sahan Research, Nairobi.

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