Issue No 603

Published 11 Oct 2023

Somalia's political economy and debt relief

Published on 11 Oct 2023 12:50 min

Somalia's political economy and debt relief

 
Somalia's Gross Domestic Product (GDP) growth flatlined in 2022 at just 1.7%, down from 2.9% in 2021, as crushing drought, perennial insecurity, and inflation bit. Growth has recovered somewhat this year, estimated to be 2.8% in 2023 and slightly higher in 2024, largely attributable to improved rainfall and a relatively strong domestic private sector. While inflation dropped from 6.8% in 2022 to 4.2% in 2023, the economy remains highly susceptible to global energy and food price fluctuations. Somalia's dependence on imported oil and grain has seen it particularly negatively impacted by the ongoing Russian invasion of Ukraine.
 
Two prospects for 2024, however, are raising hopes of greater internal investment and regional tradeFirst, the completion of the International Monetary Fund's (IMF) Heavily Indebted Poor Countries (HIPC) Initiative will relieve a significant portion of Somalia's debt burden. The IMF has already slashed Somalia's external debt from over USD 5 billion to USD 3.3 billion, and by the end of 2023 will reduce it further to USD 557 million. The relief will mostly come from the African Development Bank, the IMF, the World Bank, and nearly two dozen members of the Paris Club. The hope is that by reducing Somalia's debt payments, it might better invest in poverty reduction and expand limited government services.
 
Second is Somalia's expected ascension to the East African Community (EAC) as its 8th member. Negotiations at the end of August 2023 have paved the way for a final decision by the regional body's Heads of State Summit in November. Democracy, rule of law, and good governance are all enshrined in the EAC's constitution, though their application is haphazard across the member states. The primary importance of the EAC is economic, with Somalia expected to join a common market of largely duty-free trade. But the country lags far behind its East African neighbours' development. The German Foreign Ministry has estimated that if Somalia is to reach a similar development level in "the foreseeable future," the country needs "growth rates of 10% or more."
 
The nature of Somalia's political economy starkly contrasts with neighbouring countries like Ethiopia, however. Massive state-stimulated growth like Ethiopia's 'developmental state' will not be unlocked by the ascension to the EAC and debt relief. Instead, since 1991, Somalia has provided a case study of how services and growth can develop in the absence of a central government, as a "functional failed state," as Ken Menkhaus termed it. State collapse has not meant economic collapse in Somalia; indeed, in the absence of a central state, several industries have flourished. Dynamic companies like Hormuud, the country's major telecommunications company, have partially filled the gap in basic services, acting as a de facto bank by distributing salaries. But the overwhelming dependence of livelihoods on agriculture, particularly livestock raising, has made Somalia extremely vulnerable to the climate crisis and external shocks.
 
Reforms that have enabled Somalia to access the HIPC Initiative seek to shift this dependence and create an environment more conducive to investment. Several laws have been passed to mobilise support for industries like fishing. The relationship between Somalia's government and the business sector has historically been strained, with attempts to centralise authority over the country's economy coming up against strong structural impediments.
 
Most significant is the outsized nature of external funding in Somalia's political economy, particularly remittances and various forms of international aid. Over USD 1 billion reaches Somalia in remittances yearly, estimated to be more than humanitarian and developmental aid combined. An estimated 40% of Somali households receive some form of remittance, and they finance roughly 80% of start-ups in the country. This has left the Federal Government of Somalia (FGS) just one, admittedly significant, economic actor and service provider among many in a chaotic political economy.
 
The deregulated market still dominates basic services like education and healthcare; for many Somalis, the FGS plays no discernible role in their lives. While the alleviation of Somalia's debt may begin to shift this dynamic, there is still little sign that the FGS is capable of independently filling the country's vast services vacuum. Government revenue is largely limited to tariffs imposed on imports where the federal and regional governments, such as the Port of Mogadishu, can exert a presence. With the FGS unable to sustain itself and fully provide for its citizens, Somalia’s external debt will likely continue to rise rapidly in the coming years.
 
Joining the EAC and the HIPC relief will not immediately usher in the economic investment and infrastructure development the country desperately needs. They are, however, important steps for Somalia. If funds can be freed up from debt repayments in 2024, the FGS should seek to better empower the country's Federal Member States and local communities to support themselves. Top-down development in Somalia has proven itself a misnomer, with international aid often inadvertently reinforcing the country's inequalities. In 2024, livelihood diversification and empowerment must be the economic priority of the FGS and Somalia’s international partners if they want to break the country’s cycle of debt and dependence.

By the Somali Wire team

To continue reading, create a free account or log in.

Gain unlimited access to all our Editorials. Unlock Full Access to Our Expert Editorials — Trusted Insights, Unlimited Reading.

Create your Sahan account Login

Unlock lifetime access to all our Premium editorial content

You may also be interested in

Issue No. 959
Mogadishu on the Edge: The Danger Has Not Passed
The Somali Wire

Two days of heavy clashes (3–4 June) in the Somali capital, Mogadishu, between federal troops and opposition-aligned forces have underscored both the fragility of the city’s security environment and the volatility of electoral politics. Although relative calm has since returned to the two hardest-hit districts - Hawl Wadaag and Abdiaziz - and mediation efforts have intensified, tensions remain high, fuelling fears of renewed armed skirmishes. Credible reports of mass clan militia mobilisation on the edges of Mogadishu speak to a conflict that is widening. The militarisation of politics and elite fragmentation over the electoral process have shattered a core assumption: that Somali leaders will ultimately step back from the brink to negotiate a way forward. Consequently, the country is entering a perilous phase in which domestic factions alone cannot resolve the impasse, making neutral, external mediation a necessity.


10:12 min read 08 Jun
Issue No. 958
Deni and the Tough Road Back to Mogadishu
The Somali Wire

Puntland President Sa'id Abdullah Deni is unofficially in the race for the federal presidency of Somalia. By most accounts, the regional leader is running again and this explains his re-engagement with Mogadishu after a three-year hiatus. Driven by shifting electoral dynamics, Deni’s decision to re-engage with the centre forces him to confront a radically altered political landscape in Mogadishu. Under President Hassan Sheikh Mohamud (HSM), the federal government has rewritten the rules of Somali politics, altering the institutional framework and consolidating executive authority.


8:08 min read 03 Jun
Issue No. 128
The US Eritrea Pivot – Opportunities, Risks, Dilemma
The Horn Edition

A flurry of media reports in recent months suggest the US and Eritrea could be inching towards a potential deal to reset decades of frosty relations and a partial lifting of American sanctions imposed in 2021. The news of discreet talks between the two sides, mediated by Egypt, was initially reported by the influential Washington Post newspaper in April 2026 and have since been partially confirmed by official sources.


34:56 min read 29 May
Issue No. 957
How Somalia's South West Vote Went South
The Somali Wire

On 10 May, the Federal Government of Somalia (FGS) unilaterally conducted its contentious 'one-person-one-vote' (OPOV) electoral model in South West State (SWS), directly overriding opposition demands for a negotiated, consensus-based framework. Crucially, the very laws underpinning these OPOV elections are themselves deeply contested: the electoral framework was created following a rushed revision of Somalia’s constitution that many federal member states and opposition groups rejected. The vote, exclusively managed by the National Independent Electoral and Boundaries Commission (NIEBC), saw localised polling in 13 districts and across 126 poll centres and 276 stations. While 376,212 citizens were registered, actual turnout reached 132,430 voters - a participation rate of approximately 35.2% - with 128,276 valid ballots cast and 4,154 deemed spoilt/invalid. The electoral outcome, unsurprisingly, solidified a decisive mandate for Hassan Sheikh Mohamud’s Justice and Solidarity Party (JSP); the governing party secured an absolute majority of 51 out of 95 contested legislative seats, comfortably outpacing its closest rival, Sharif Hassan Sheikh Aden’s Ururka Horumarka, which claimed 14 seats.


17:12 min read 27 May
Issue No. 956
The Perils of a Grey Transition
The Somali Wire

The Federal Government of Somalia (FGS) has effectively entered a 'grey transition' - a deeply fraught and hotly-contested interregnum that could upend decades of state-building and foment greater instability. By utilising the March 2026 constitutional amendments to extend his presidential mandate until May 2027, Hassan Sheikh Mohamud (HSM) has effectively plunged the fragile Horn of Africa state into a profound period of severe internal strain and legitimacy crisis. This legalistic manoeuvre has roiled domestic politics and put Western partners of Somalia in a difficult spot. If Somalia's Western allies concede to HSM's fait accompli without extracting concessions from him on a negotiated settlement, they are likely to embolden Hassan Sheikh.


0 min read 20 May
Issue No. 955
Averting Disorder: The Case for External Mediation in Somalia
The Somali Wire

Somalia is entering one of the most dangerous political periods in its recent history. An unprecedented convergence of unresolved constitutional disputes, contested electoral arrangements, rising tensions between federal and regional actors, and the growing politicisation of state security institutions has pushed the country towards a potentially destabilising impasse.


0 min read 14 May
Issue No. 127
Total War in the Horn of Africa
The Horn Edition

'Give Peace a Chance' was the title of a 1969 single written by John Lennon, recorded during his famous honeymoon 'bed-in' with Yoko Ono. Capturing the counterculture sentiments of the time, it was adopted as an anthem of the anti-Vietnam War movement in the following decade. Thirty years later, a provocative inversion of the title-- 'Give War a Chance'-- was adopted in a well-known Foreign Affairs article by Edward Luttwak in 1999, in which he argued that humanitarian interventions or premature negotiations can freeze conflict, resulting in endless, recurring war. Luttwak contended that war has an internal logic, and if allowed to 'run its course', can bring about a more durable peace.


27:16 min read 30 Apr
Issue No. 954
The Malian Mirror
The Somali Wire

A foreign-backed president, a besieged capital city, and a jihadist movement affiliated with Al-Qaeda-- this time not Somalia, but Mali. Late last week, Jama'at Nusrat al-Islam wal-Muslimin (JNIM), the transnational Salafist-jihadist group in Mali, stormed across much of the country's north, as well as entering Bakamo and assassinating the defence minister. The coordinated offensive-- in conjunction with the Tuareg separatist movement, the Azawad Liberation Front (ALF)-- has left the military junta reeling, and forced the withdrawal of their Russian allies from a number of strategic towns.


10:18 min read 29 Apr
Issue No. 329
Washington eyes Asmara
The Ethiopian Cable

Last week, a bombshell Wall Street Journal article revealed that Washington was exploring a reset in relations with Eritrea, with US envoy for Africa Massad Boulos having met privately with senior regime officials in Egypt. Any normalisation of ties now appears to be on ice, with the reaction to Boulos's meetings — facilitated by Egypt — having been met with short shrift. But the episode speaks to broader issues about American foreign policy in the Horn and the accelerating reconfiguration of the Red Sea political order, which will not go away simply because this particular overture may have stalled.


0 min read 28 Apr
Scroll