Somalia Secures Landmark $4.5bn Debt Relief From Global Lenders

Somalia has achieved a historic milestone securing a monumental $4.5 billion debt write-off from global lenders, a decade-long endeavour culminating in significant reforms.

The nation, freshly admitted into the East African Community (EAC) just weeks ago, has been granted exemption from debt repayment under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative.

Major multilateral and bilateral lenders, including the World Bank and the International Monetary Fund (IMF), have decisively slashed Somalia’s debt from a staggering $5.2 billion to a manageable $600 million, marking a substantial drop in external debt, now standing at less than six percent of GDP, down from 64 percent in 2018.

Notably, a substantial portion of the debt relief, totalling $4.5 billion, stems from various sources, with commercial creditors contributing $3 billion, followed by support from multilateral creditors, the World Bank’s International Development Association, IMF, and the African Development Fund.

The HIPC initiative, established in 1996 by the IMF and World Bank, aimed to relieve the burden on the world’s poorest and most heavily indebted countries, granting them much-needed financial respite from servicing crippling debts.

The official announcement regarding Somalia’s debt forgiveness is set to take place in Washington DC on December 13, following the final approval processes by the Bretton Woods institutions.

As the 37th country to achieve the HIPC completion point, Somalia’s journey towards debt relief commenced a decade ago under President Hassan Sheikh Mohamud’s administration, navigating political challenges while steadfastly pursuing reforms.

Kristina Svensson, the World Bank’s country manager for Somalia, lauded Mogadishu’s unwavering commitment to reform amidst political turbulence. She highlighted the significance of this debt write-off as an opportunity for Mogadishu to turn the page on three decades of conflict, fragility, and state fragmentation, aiming for economic reconstruction, poverty reduction, and inclusive growth.

This pivotal move is expected to unlock concessional and climate financing, reigniting investor confidence, reinstating correspondent banking, and fostering integration into the global financial system. The loss of correspondent banking relationships in 2014 due to concerns over money laundering and terrorism financing prompted Somalia’s central bank to enforce financial reforms, including the use of international bank account numbers (Iban) by commercial lenders.

To attain the HIPC completion point, Somalia fulfilled three critical conditions: maintaining macroeconomic stability, meeting HIPC completion point triggers, and renegotiating debts with multilateral and bilateral creditors.

Despite inherent fragility, Somalia showcased remarkable commitment to reforms, aligning with the IMF program for three and a half years, undergoing six reviews under the fund’s Extended Credit Facility (ECF) Programme.

While the country achieved 13 of the 14 HIPC Completion point triggers, the remaining issue pertains to customs harmonisation between Kismayu, Mogadishu, and Bosaso, linked to political settlement challenges between warring factions.

This achievement was facilitated by the renegotiation of debt relief agreements with 76 percent of creditors, bolstered by the crucial technical support from global financial institutions.

With Somalia achieving recent milestones—joining the EAC as its eighth member and the United Nations lifting its arms embargo—the World Bank advocates for sustained key reforms in debt management and robust measures to boost economic growth and domestic revenues, avoiding a resurgence into debt distress.

Finance Minister Bihi Iman Egeh views this decision as pivotal in attracting investors and prioritises infrastructure investment, nurturing an investor-friendly environment through legislative enhancements, including the anticipated competitive Public-Private Partnership (PPP) law.

Egeh underscores Somalia’s continued fight against international terrorism while emphasising the importance of economic growth in job creation and bolstering basic public services, aiming to elevate opportunities for its people.

This debt relief heralds a new era for Somalia—an era of economic revival and an ardent commitment to fostering growth and stability for its people, regionally and globally.