WHY DEBT RELIEF IS IMPERATIVE FOR SOMALIA'S ECONOMIC REVIVAL

 

 

History of Somalia’s Debt

Somalia is in the process of recovering from the aftermath of a prolonged civil war that lasted for over two decades, resulting in widespread devastation to the nation's people, economy, institutions, and infrastructure. The country is gradually making strides in rebuilding its economy and essential institutions, aiming to shift from a state of fragility to one of stability. The upcoming hurdles are significant and demand considerable financial, economic, and technical dedication and assistance. In the 1970s, the growth of foreign debt outpaced export earnings, reaching nearly 4 billion shillings. Part of this debt was from developed nations like the then Soviet Union (US$115 million), China (US$87.4 million), Bulgaria, Russia, and Germany. In March 1984, the government formally agreed to the conditions of a new IMF protracted credit amounting to US$183 million, which was set to span three years.

From mid-2015 onward, the Federal Government of Somalia initiated efforts for debt restructuring and cancellation, guided by a sequence of programs supported by the IMF. The government's steadfast commitment to these IMF programs has resulted in significant benefits, including the establishment of international confidence and a notable rise in donor grants dedicated to vital reform initiatives. However, the external public debt reached around $5.3 billion (107% of GDP) by December 31, 2019, with nearly 96 percent in arrears. This indicates that a significant portion of the debt has come due, and the Somali government has faced challenges in servicing or repaying it on schedule.  In 2020, IMF and the World Bank have concluded that Somalia has met the required criteria to initiate the process of obtaining debt relief through the improved Heavily Indebted Poor Countries (HIPC) Initiatives. This relief is poised to significantly benefit Somalia, enabling a substantial reduction in its debt from US$5.2 billion to US$557 million, paving the way for enduring positive transformations for its citizens. 

The Somalia government under leadership of President Hassan Sheikh Mohamud continue advancing in negotiations regarding the terms of a debt restructuring with other major multilateral lenders such as the Arab Monetary Fund and Islamic Development Bank. International partners have indicated support for International Fund for Agricultural Development (IFAD) arrears clearance and HIPC debt relief. With economic initiatives being implemented and the economic trajectory Somalia is on under the current regime of President Hassan Sheikh Mohamud have made most developed countries and international lenders to consider taking the IMF route of offering debt relief to Somalia. For instance, in July 2023, Russia granted a relief on debt worth $684 million. In addition, international lenders have also promised to offer debt relief to Somalia.

Reasons why Somalia should be Granted Debt Relief

Debt relief is a component of a broader initiative aimed at meeting the developmental requirements of less affluent nations. To effectively alleviate poverty, the extra funds resulting from debt reduction must be allocated to initiatives that specifically enhance the well-being of impoverished populations. Debt relief holds immense significance for countries like Somalia, grappling with economic instability and social upheaval. This essay delves into the importance of debt relief for Somalia, shedding light on the adverse consequences of overwhelming debt burdens. We will explore how the alleviation of debt can catalyze sustainable development, improve social services, and foster economic growth in Somalia. Somalia, plagued by political instability and a prolonged civil war, has continued to accumulate significant external debt. This heavy burden has obstructed the country's path towards stability, sustainable development, and progress. Hence, debt relief emerges as a crucial measure to uplift Somalia from its current predicament. Here are the reasons why a debt relief should be granted to Somalia:

1. Economic Revitalization: Somalia's debt relief is vital for its economic revitalization. The country's external debt, estimated to be around $5.3 billion, is stifling its capacity to attract investors, implement effective fiscal policies, and promote economic growth. Such crippling debt burdens severely impede government expenditure on critical sectors like education, healthcare, and infrastructure development. An essential example is the diversion of funds towards debt repayment, leaving insufficient resources to address pressing social needs and spur economic productivity.

2. Poverty Reduction and Social Services: Debt relief for Somalia can significantly contribute to poverty reduction and improved social services. As debt obligations lessen, the government can allocate a greater share of its budget towards poverty alleviation programs, social safety nets, and enhancing health and education services. By redirecting financial resources to support these areas, poverty and inequality levels will decrease substantially, widening access to education, healthcare, and basic amenities for the Somali population. This, in turn, will foster human development and pave the way for a brighter future.

3. Enhanced Governance and Stability: Reducing Somalia's debt burden will also bolster governance and stability within the country. When a significant portion of the national budget is consumed by debt repayments, governments are often forced to resort to unsustainable measures to generate revenue or cut expenditure, leading to increased corruption and weakened institutions. Debt relief enables the government to concentrate on strengthening governance structures, reinforcing the rule of law, and implementing economic reforms. By relieving fiscal pressure, debt relief creates a conducive environment for effective governance, political stability, and institution building.

4. International Engagement and Foreign Direct Investment: A debt-free Somalia will present an inviting prospect to the international community, paving the way for increased engagement, foreign direct investment, and economic cooperation. Debt relief signals a commitment towards fiscal responsibility, which in turn, encourages international organizations, donors, and investors to assist Somalia's economic development. A clear example of this can be observed in the beneficial impact of debt relief on countries like Mozambique and Zambia, where increased investor confidence led to sustainable economic growth, new job opportunities, and improved infrastructure.

Rebuilding Infrastructure and Macroeconomic Stability: Somalia's infrastructure has been severely damaged due to years of conflict. Debt relief can provide the necessary financial resources to invest in rebuilding critical infrastructure such as roads, ports, and energy facilities. Improved infrastructure can contribute to economic development by facilitating trade, attracting investments, and creating job opportunities. Reducing the debt burden can contribute to macroeconomic stability. High levels of debt can lead to economic imbalances and vulnerabilities. Debt relief would allow the government of Somalia to implement sound fiscal policies without the pressure of servicing large debt obligations, promoting economic stability and sustainability.

Strengthening Governance and Building Institutions: Another critical aspect of debt relief is its potential to strengthen governance structures and institutions within Somalia. The government can allocate resources towards building transparent and efficient administration systems, enhancing accountability mechanisms, and improving service delivery. Strong governance is essential for the realization of the Centennial Vision 2060, as it ensures the effective implementation of development programs and the proper allocation of resources. By utilizing debt relief, Somalia could invest in capacity-building initiatives, training civil servants and public officials. This would enhance their operational efficiency and improve governance across various sectors, contributing to lasting development.

Conclusion

Debt distress is challenging for any country, but its impact becomes particularly severe when a nation, such as Somalia, is already in a fragile state and incapable of meeting its obligations to creditors. Nevertheless, by persistently engaging in economic and financial reforms throughout Somalia and raising awareness among the Somali people about the significance of these reforms for their future, coupled with the abundant resources within the country, we can envision a future where Somalia is free from the burden of debt. Debt relief can provide a significant boost to Somalia's economic revival, it should be complemented by effective governance, transparent financial management, and ongoing efforts to build a stable and secure environment for economic activities to thrive. The importance of debt relief for Somalia cannot be overstated. By alleviating the burden of external debt, Somalia can redirect resources towards vital sectors, improving social services, fostering economic growth, and strengthening governance structures.

Furthermore, it paves the way for international engagement and foreign direct investment, providing a substantial kickstart for the country's economic revival. Investors, seeking the economies of scale that the regional market provides, would be more willing to invest in Somalia, knowing that they can operate efficiently across borders. Somalia's untapped natural resources, including oil and gas reserves, could also entice foreign investors who seek to participate in the growing regional energy sector. By diversifying its economy through FDI and reducing its dependency on a single sector, Somalia can promote lasting and sustainable economic development.

Debt relief represents a crucial step towards achieving stability, prosperity, and sustainable development in Somalia. It is imperative that the international community, stakeholders, and financial institutions cooperate to alleviate Somalia's debt and empower it to chart a path towards a brighter future. Debt relief offers Somalia the opportunity to address its economic challenges and align its ambitions with the Centennial Vision 2060. By redirecting resources towards critical sectors, Somalia can revive its economy, reduce poverty, and foster social development. Moreover, debt relief can enhance governance structures, thereby ensuring the efficient implementation of development programs. As Somalia progresses towards a sustainable economic development.

By

Abdullahi M Hassan ( Yabarow)