Somalia has 99% of $2bn debt cancelled in major boost to fragile recovery

Somalia has 99% of $2bn debt cancelled in major boost to fragile recovery

Faisal Ali
Source: TheGardian, Friday March 15, 2024

The Paris Club, a collection of some of the world’s wealthiest creditor nations, has announced the cancellation of 99% of Somalia’s debt, in a major boost as the country continues its fragile economic recovery from an ongoing three-decade conflict.

In a statement released by the Paris Club, which is run by senior officials from the French Treasury, Somalia’s creditors, including the US, UK, Russia, Norway, and Japan, announced the cancellation of $2bn owed to club members as of January 2023.
The Paris Club said part of the debt would be waived on a “voluntary and bilateral basis” between individual countries that Somalia had borrowed from and the rest under the Heavily Indebted Poor Countries Initiative (HIPC), an IMF and World Bank scheme to support poorer countries with unsustainable debt levels.

In a post on X, formerly Twitter, Somalia’s finance minister, Bihi Eged, said: “Achieving full debt relief will transform Somalia’s future and allow our government to create fiscal space for basic public services.” Somalia’s information minister, Daud Aweis, said on X that the agreement marked a “big milestone in the country’s journey to financial recovery”.

Kristalina Georgieva, the managing director of the IMF, also welcomed the breakthrough, calling it a “major stride towards economic development and poverty reduction” for Somalia.

The British ambassador to Somalia, Mike Nithavrianakis, said the UK, one of Somalia’s lenders, was ready “to honour our commitment to full debt relief”.

Somalia qualified for debt cancellation under the HIPC last December, making it eligible for up to $4.5bn of debt relief and beginning the normalisation of its relations with international financial markets after three decades of exclusion.

The HIPC initiative helps countries that are laden with debt to restructure their budgets, improve transparency and target poverty reduction, in preparation for debt relief.

The decision by the Paris Club represents the first major step toward financial normalisation for Mogadishu following the HIPC programme.

Welcoming the December completion of the HIPC programme in a column for the Guardian, the country’s president, Hassan Sheikh Mohamud, said: “Somalia’s debt relief journey was no simple task; it took nearly a decade, three different administrations, two presidents and four finance ministers to attain debt relief from the boards of the World Bank and IMF on 13 December.”

“Debt relief,” he said, “is just the beginning of real change for Somalia.”

The majority of Somalia’s debt was accumulated during the years of Siad Barre’s military dictatorship, which collapsed in 1991, with interest accruing on the loans since then.

Uweis Abdullahi Ali, an economist at the Heritage Institute, a Mogadishu-based thinktank, said the debt relief “is a big achievement for Somalia and allows [it] to begin re-engaging with credibility with international financial markets”.

Ali added that although Mogadishu was now able to access a wider array of concessional loans, grants and more financial instruments to help finance delivery of public services, the government should strengthen its ability to domestically generate revenue.

“The government should prioritise the new fiscal space for expanding essential services such as education and health and other productive investments that will bear fruit to the domestic economy.”