Issue No. 521

Somalia is using almost its entire gross domestic product (GDP) to pay off a staggering national debt of USD 5.2 billion. According to the Borgen Project, a non-profit advocating for those living on USD 1.25 a day,  it is estimated that about 96% of the country’s GDP goes to debt repayment. The issue of debt forgiveness has gained increased attention in recent years, with various stakeholders calling for the cancellation or restructuring of Somalia's external debt. 
 
Fortunately, Somalia's significant economic progress has led it to qualify for the Heavily Indebted Poor Countries (HIPC) Initiative. As a result, the country began to receive interim relief on its debt in late March 2020. Reducing debt is crucial to the fight against poverty, as it enables governments to spend more on social services that benefit its most vulnerable citizens. 
 
The country's economy has been severely affected by years of armed conflict, piracy, and terrorism, which have led to loss of life and property, as well as the displacement of millions of people. In 2020, approximately 80% of Somalia’s workforce was engaged in agriculture. Struggling markets, crippling drought, and the past few years’ locust infestation have resulted in 7 out of 10 Somalis living below the poverty line of USD 1.90 per day, as estimated by the Borgen Project. The situation has also worsened due to global increases in food prices since the start of Russia’s war against Ukraine. 
 
Despite these formidable obstacles, Somalia's leadership has implemented new economic strategies that are making it into a viable trading partner, particularly with its neighbours. As a result, Somalia can now approach its goal of debt relief. Both the World Bank and the International Monetary Fund (IMF) have acknowledged Somalia's achievements and started the HIPC certification process, which will allow the nation to lessen its debt load, focus on growing its economy, and offer social services to its people. 
 
The IMF authorised a debt reduction plan for Somalia in March 2021, which will result in the cancellation of USD 1.3 billion of debt. The debt relief package was part of the IMF's Catastrophe Containment and Relief Trust (CCRT), established to provide debt relief to countries affected by catastrophic events such as natural disasters or public health emergencies. This was a significant step forward for Somalia; it demonstrates that international creditors are willing to support the country's efforts to address its debt burden. 
 
Somalia has also received debt relief from other creditors. In 2020, the Paris Club of Creditors agreed to cancel USD 1.4 billion in debt owed by Somalia. Debt relief was granted after Somalia met conditions, including adopting a reform programme to improve the country's fiscal sustainability.
 
Further debt relief will enable Somalia to bring about lasting change for its citizens; it could reduce its debt from USD 5.2 billion at the end of 2018 to USD 557 million as reported by the Guardian in March 2020. As Somalia progresses towardstability and development, normalising relations with the international community will allow it to access new financial resources. Debt forgiveness will allow Somalia to free up resources and invest in critical sectors such as education, healthcare, infrastructure, and job creation. It will also improve the country's credit rating, making it easier for Somalia to access affordable financing in the future. Debt forgiveness provides an opportunity for Somalia to break the cycle of debt and dependence, to take ownership of its economic future.
 
However, the road to debt forgiveness for Somalia is fraught with obstacles. One of the worst is the lack of a stable and effective government that can negotiate with creditors and implement economic reforms to improve the country's fiscal sustainability. Despite the current administration’s efforts, Somalia has been in a state of political turmoil for decades, with weak central government authority, and much of the country is still controlled by local militias and armed insurgents. The federal government’s sources of domestic revenue are, as yet, still confined to Mogadishu and its environs, and it still has little or no capacity to influence Somalia’s macro-economic trajectory.
 
Corruption, a major issue in Somalia's government is another major obstacle. Somalia has had difficulty attractinginvestment and obtaining debt forgiveness because of endemic corruption. This has weakened public confidence and fostered an environment of impunity that has allowed corrupt officials to avoid punishment.
 
The security situation in Somalia remains precarious as well. The lack of security hinders economic growth and makes it challenging for international investors to do business. Until the government succeeds in pushing out the majority of Al-Shabaab fighters, the country remains hostage to violence and insecurity which deter political stability and economic growth.
 
Another obstacle to debt reduction is the lack of accurate data on the country's debt profile, making it difficult for creditors to assess the country's debt. The debt profile of Somalia is further complicated by the fact that a considerableportion of Somalia’s debt is in arrears, a sign that the government has been unable to pay its debts for a considerable period of time.
 
Last, Somalia does not yet have a debt resolution mechanism in place to negotiate with its creditors. This means that Somalia must rely on ad hoc negotiations with each creditor, which can be time-consuming and ineffective.
 
Despite some positive advances in debt reduction, the government of Somalia still struggles to manage its debt load. To be eligible for further debt forgiveness, Somalia must make substantial changes -- to improve security, develop the federal government’s institutions beyond Mogadishu, complete the architecture of fiscal federalism, reduce corruption and sustaineconomic growth. And these reforms will not be successful without political stability, effective governance, significant investment in infrastructure and job creation.