## 1somea2020003 - EXECUTIVE SUMMARY ## Source details **Canonical URL:** [1somea2020003 - EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2020/english/1somea2020003.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1somea2020003.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1somea2020003.pdf.json) --- ### Opportunity and reform progress - Somalia "has an historic opportunity" to move from decades of conflict and fragility toward poverty reduction and inclusive growth by rebuilding core state capabilities through sustained political, economic and institutional reforms undertaken since 2016. - The 2012 Provisional Constitution established a federal political structure, including a parliament, the Federal Government of Somalia (FGS) and the Federal Member States (FMS). - Authorities completed the second review under the fourth Staff-Monitored Program (SMP IV), endorsed by IMF Executive Directors in July 2019 as meeting the standards of an Upper Credit Tranche arrangement. - Political milestones: two peaceful parliamentary and presidential elections (late 2012 and early 2017); President signed new Electoral Act supporting reforms underpinning upcoming elections (late 2020 or early 2021). ### Poverty, social conditions, and vulnerability (key findings) - "Almost 70 percent of Somalis live on less than US$1.90 a day in purchasing power parity terms." - Poverty and demographics: - Poverty (% below poverty line)* = 69 ; Year = 2017 - Population growth estimated at 2.8 percent per year. - Adult literacy rate (Age 15+) (%) = 50 ; Year = 2017 - Female literacy rate (Age 15+) (%)** = 41.7 ; Year = 2017 - Net primary enrollment rate (Age 6-13) = 33 ; Year = 2017 - Under-five mortality (per 1,000)*** = 121.5 ; Year = 2018 - Life expectancy at birth (years)*** = 56.7 ; Year = 2017 - Incidence of HIV (per 1,000 uninfected population ages 15-49)*** = 0.04 ; Year = 2018 - Non-monetary deprivations: - Almost nine of 10 Somali households are deprived in at least one dimension of poverty—monetary, electricity, education, or water and sanitation. - Nearly seven of 10 households suffer in two or more dimensions. - About one third of the non-poor is within 20 percent from the poverty line (vulnerable). - Women and youth: - Women have lower literacy and educational attainment across groups. - Youth unemployment estimated at 74 percent. - Shocks and resilience: - Severe droughts in 2017 and 2019; 2016–17 drought caused damages and losses estimated at US$3.25 billion, displaced 926,000 people, and left more than half the population in need of humanitarian assistance. - Limited public/private insurance and access to finance amplify shock impacts. - Authorities implementing Recovery and Resilience Framework (RRF) and developing a social registry (proposed Completion Point trigger). ### Macroeconomic performance and reform track record - Revenue and fiscal: - Domestic revenue mobilization increased by over 70 percent since 2016 to 4.6 percent of GDP in 2019. - No domestic arrears accumulation since 2016. - Growth and inflation: - Real GDP growth: 2.8 percent in 2018; 2.9 percent in 2019. - Inflation averaged 3.1 percent in 2019. - Current account deficit widened to 12 percent of GDP in 2019 from 10 percent in 2018. - Fiscal 2019 outcomes: - FGS domestic revenue for 2019 = US$230 million (2018 = US$183 million). - Tax revenues increased by US$16 million or 11 percent; non-tax revenues increased by US$31 million or 68 percent. - Expenditures: US$315 million (relative to US$341 million projected). - Estimated fiscal surplus for 2019 = US$24 million (includes US$10 million ear-marked for 2020 and US$0.5 million for domestic arrears payments). - Institutional and policy advances: - Introduction of sales and excise taxes; establishment of large- and medium-taxpayers’ office. - Implementation of Somalia Financial Management Information System (SFMIS). - Establishment of Intergovernmental Fiscal Forum (IGFF). - Strengthened Central Bank of Somalia capacity and expanded mobile money oversight. - New AML/CFT law and Anti-Corruption Act enacted. - Progress on national accounts, balance of payments, CPI, and monetary statistics. ### Planned reform priorities (selected) - Fiscal: Implement Revenue Act and Customs Reform Roadmap; enact Extractive Industry Tax Law; finalize model Production Sharing Agreement; deepen fiscal federalism. - Financial: Implement Financial Sector Reform Roadmap; deepen supervision; complete CBS organizational transition; prepare for MENA-FATF Mutual Evaluation Assessment in 2024. - Governance: Establish Anti-Corruption Commission; approve and publish National Anti-Corruption Strategy (NACS). - Inclusive growth and resilience: Develop National Water Resource Strategic Plan; pass Somali Standards and Quality Control Bill; establish national digital ID. - Statistics: Prepare Statistical Action Plan with priority to develop production-based GDP estimate. ### Public external debt situation and arrears (key statistics) - FGS public and publicly guaranteed external debt (end-2018): - Total nominal: US$5.3 billion. - Net present value (NPV): US$5.2 billion. - Arrears: US$5.0 billion (about 95.8 percent of external debt in arrears). - After full application of traditional debt relief, Somalia’s NPV of debt estimated at US$3.7 billion at end-2018, equivalent to 344.2 percent of exports of goods and services. - DRA estimate of additional debt relief needed to reach HIPC threshold (150 percent of exports): US$2.1 billion in end-2018 NPV terms; implied common reduction factor (CRF) = 56.4 percent. - As of March 9, 2020, creditors representing 76 percent of the NPV of eligible debt have committed to provide their share of debt relief under the HIPC Initiative. - Creditor shares (nominal terms, end-2018): - Multilateral creditors: 28.9 percent of total debt stock. - Liabilities to IDA, IMF and the AfDB: 18.5 percent of total external debt. - AMF: 5.4 percent. - AFESD: 3.5 percent. - IFAD, OFID and IsDB combined: 1.5 percent. - Paris Club creditors: 57.8 percent of total nominal debt at end-2018. - Non-Paris Club official creditors: estimated 13.3 percent of total external debt. ### HIPC, MDRI, and IMF beyond-HIPC assistance (findings and projections) - Somalia meets requirements to reach Decision Point under HIPC Initiative. - Somalia adopted Ninth National Development Plan 2020-24 (NDP9) as Poverty Reduction Strategy. - Arrears clearance: - Somalia cleared arrears to IDA and AfDB; agreed approach to clear IMF arrears. - Somalia’s arrears to IDA were cleared on March 5, 2020 through a bridge loan repaid with proceeds of a Development Policy Grant (DPG). - On reaching Completion Point: - Somalia would qualify for MDRI debt relief from IDA and African Development Fund (AfDF) and for beyond-HIPC assistance from IMF. - MDRI from IDA and AfDB "could amount to US$113.5 million in end-2022 NPV terms" (alternative estimate cited elsewhere: US$116.6 million in end-2022 NPV terms: IDA US$96.8 million; AfDB Group US$19.8 million). - Somalia has no debt eligible for MDRI relief from the IMF. - IMF would provide beyond-HIPC assistance through cancellation of portion of pre-Decision Point financing not already covered by HIPC debt relief. - IMF budgetary cost estimates for Somalia’s debt relief: - HIPC-related cost estimated at SDR 136 million (equivalent to US$189.1 million) in end-2018 NPV terms. - Beyond-HIPC cost estimated at SDR 105 million (equivalent to US$146 million) in end-2018 NPV terms. - IMF HIPC assistance amounts to US$189.1 million in end-2018 NPV terms; US$5.7 million represents cost of PRGT interest subsidization. ### Macro-debt outlook after assistance (projections and scenarios) - With HIPC, MDRI and beyond-HIPC assistance: - NPV of debt-to-exports ratio projected to decline from 491.1 percent in 2018 to 55.8 percent in 2027 and 41.9 percent in 2038 (baseline DRA projections also cite NPV-to-exports ratios falling to 127.9 percent conditional HIPC 2018 baseline). - Debt service-to-exports ratio expected to initially increase after Completion Point (resumption of payments and arrears rescheduling) then decrease gradually to 1.9 percent in 2038. - Illustrative timing assumption: Decision Point in March 2020 and Completion Point by March 2023. - Sensitivity analysis (three scenarios: baseline, climate shock, security shock): - Baseline: NPV debt-to-exports declines to 55.8 percent in 2027 and 41.9 percent in 2038; debt service-to-exports peaks at 2.0 percent in 2027 then decreases to 1.9 percent in 2038. - Climate shock: NPV debt-to-exports ~32 percentage points higher than baseline just before Completion Point; narrows to ~10 percentage points through 2029 and ~8 percentage points in long term; long-term NPV debt-to-exports ~49.5 percent. - Security shock: Medium term NPV debt-to-exports ~7 percentage points higher than baseline; long term ~27 percentage points higher and increasing. - DSA projections (selected): - 2018 NPV of total debt: 5,227.9 (US$ million). - 2018 NPV of debt-to-exports ratio: 491.1 (percent of exports). - After conditional enhanced HIPC assistance and multilateral arrears clearance: NPV of debt-to-exports ratio (conditional HIPC, 2018 baseline) = 127.9 (percent). - PV of PPG external debt-to-GDP (selected): 2018: 110.9; 2019: 105.2; 2020: 74.9; 2029: 38.0; 2039: 18.2. - PV of PPG external debt-to-exports (selected): 2018: 467.6; 2019: 461.4; 2020: 331.7; 2029: 180.2; 2039: 88.5. - PPG debt service-to-exports (selected years): 2021: 14.3; 2022: 21.7; 2023: 20.2; 2029: 6.5. - Public sector debt (percent of GDP, selected): 2018: 112.8; 2019: 108.9; 2020: 74.6; 2029: 40.5; 2039: 24.1. ### Program and external support arrangements - IMF members have mobilized necessary financial resources to cover IMF’s costs of HIPC and beyond-HIPC debt relief; Somalia eligible to access Fund resources once it clears IMF arrears. - A new three-year Fund-supported financing arrangement (blend of ECF and EFF) recommended to strengthen fiscal and financial institutions and support NDP9 priorities. - World Bank Group CPF for Somalia (FY19–FY22) initiated IDA financing through exceptional pre-arrears clearance grants (PACGs) of US$140 million per year in FY19 and FY20. - Reengagement and Reform Development Policy Grant (DPG), approved February 27, 2020, facilitated clearance of Somalia’s arrears of US$359 million using IDA arrears clearance set-aside; with IDA arrears cleared, Somalia regained access to full range of World Bank Group instruments and qualified for IDA18 Turnaround Regime (TAR) and access to IDA19 Turnaround Allocation (TAA) subject to conditions. ### Decision Point conditions met and Completion Point triggers (selected) - Conditions addressed or in process for Decision Point: - Satisfactory track record under IMF- and IDA-supported programs (SMP completion). - Clearing arrears to World Bank and AfDB; agreeing approach to clear IMF arrears. - Adoption of satisfactory Poverty Reduction Strategy (NDP9). - Agreement on Completion Point triggers with IMF and IDA staffs. - Selected Floating Completion Point triggers: - Poverty reduction strategy: Satisfactory implementation for at least one year of full poverty reduction strategy (Annual Progress Report). - Macroeconomic stability: Maintain macroeconomic stability via satisfactory implementation of 3-year ECF-supported program. - PFM: Publish at least two years of audited financial accounts of FGS; issue regulations to implement PFM Act on debt, public investment, natural resource revenue management. - Domestic revenue: Adopt and apply single import duty tariff schedule at all ports. - Governance: Enact Extractive Industry Income Tax Law; Ratify UNCAC. - Debt management: Publish at least four consecutive quarterly debt reports; monthly debt-service projections for 12 months; annual principal payment projections for at least next five years; key portfolio risk indicators. - Social sectors: Establish national social registry; joint national health sector strategy; joint education roles agreement between FGS and FMS. - Growth/structural: Enact Electricity Act and issue supporting regulations; issue Company Act implementing regulations on minority shareholder protection. - Statistics: Publish at least two editions of "Somalia Annual Fact Book". - Feasibility: IMF and IDA staffs consider Completion Point by March 2023 feasible though faster than average HIPC experience; mitigants include sustained reform commitment and technical assistance. ### Arrears clearance modalities and creditor treatment (selected) - Debt reconciliation completed jointly by IMF, World Bank, and authorities in July 2019; authorities provided near 100 percent reconciliation with creditor data for multilateral and official bilateral debt. - Nominal public and publicly-guaranteed external debt (end-2018): Total US$5.3 billion; NPV US$5.2 billion. - Arrears clearance: IDA arrears cleared on March 5, 2020 via bridge loan repaid with DPG proceeds; AfDB arrears cleared on March 5 through Transition Support Facility (TSF) operation (UA 88.15 million ≡ US$122.6 million). - Paris Club: Somalia expected to receive exceptional debt restructuring treatment; comparable treatment sought from non-Paris Club bilaterals. - Paris Club modalities noted: stock-of-debt reduction under Naples terms for pre-cutoff non-ODA debt (67 percent), rescheduling terms for pre-cutoff ODA debt, Cologne flow operations for remaining eligible Paris Club debt. - IFAD debt service of about $1.5 million due during interim period assumed to be paid. - Multilateral debt due to multilaterals expected to decline from US$1,431.6 million (end-2018 NPV) to US$407.2 million at Completion Point; US$843.1 million of relief via arrears clearance. ### Fiscal implications and interim period effects - Somalia has not been servicing external debt; after arrears clearance government must resume debt service. - DRA estimates debt service payments will average US$14.9 million annually during calendar years 2020–22 in enhanced HIPC and multilateral arrears clearance scenario. - Resumption of debt servicing will reduce fiscal space for development spending but anticipated increase in external aid and expanded fiscal resource envelope expected to mitigate impact. - FGS lacks program budget classification; intends to monitor HIPC resources using existing administrative and economic classifications and project-level coding. ### Debt management capacity — findings and recommendations (selected) - Legal and institutional framework: - PFM law enacted December 2019 defines borrowing authority, guarantees, and reporting; Minister has sole authority to borrow within Parliament-established ceilings. - 2020 Budget Appropriation Act commits FGS not to borrow domestically or from abroad except limited advances for liquidity. - Indicative SMP targets: zero ceiling on contracting new domestic debt and zero ceiling on contracting/guaranteeing new nominal external non-concessional borrowing. - DMU capacity: - DMU established December 2015; staff: one director and three staff (one front office, two back-office). - Computerized debt management system (CS-DRMS) installed; IT system procured. - Capacity gaps: need strengthening of middle and back office, investment in hardware, training, secure data backups, disaster recovery plan. - Medium-term strategy: - Future borrowing should be based on medium-term debt management strategy consistent with debt sustainability. - Clearance of arrears and full delivery of HIPC and MDRI at Completion Point could permit resumption of highly concessional borrowing for reconstruction and development. ### Debt Sustainability Analysis (DSA) — summary conclusions - Total public debt US$5.3 billion or 113 percent of GDP at end-2018—nearly all external. - Baseline (traditional debt relief only): external and public debt indicators remain in debt distress; public debt unsustainable; total debt stock would decrease to about 70 percent of GDP (still above 30 percent threshold for weak-capacity countries). - Alternative (full delivery of HIPC, MDRI, beyond-HIPC): debt indicators improve dramatically; forward-looking debt judged sustainable under full-delivery scenario. - Risk ratings: - Risk of external debt distress: In debt distress - Overall risk of debt distress: In debt distress - Granularity in the risk rating: Sustainable - Data weaknesses: short national accounts series, gaps in balance-of-payments, trade estimates reliant on third-party data; these constrain macro analysis and stress-test interpretation. - Key numeric DSA figures (selected and preserved): - Total stock of debt outstanding at end-2018: US$5.3 billion - Nearly all in arrears: US$5.0 billion - Composition of end-2018 external debt: Principal: $2.0 billion; Unpaid interest: $1.3 billion; Late interest or fees: $1.7 billion - Domestic debt stock (end-2018): US$68.8 million (1.5 percent of GDP) - Of $191 million not in arrears: $31 million (AfDF) and $160 million (IDA) - Projected spike in debt service if Completion Point not reached in 2023: around $180 million. ### Risks and policy implications - Major risks: - Weak security and political tensions (notably FGS–FMS and national elections). - Vulnerability to climate shocks (droughts, floods, locusts). - Data and capacity constraints. - Even after full debt relief, Somalia remains highly vulnerable to climate and security shocks that can materially slow growth, depress exports, and rapidly increase debt burden indicators under stress scenarios. - Policy recommendations: - Deliver full eligible debt relief at HIPC Completion Point to render debt sustainable in a forward-looking sense. - Strengthen debt management institutions and capacity (DMU staffing, CS-DRMS operations, backups, recovery procedures). - Maintain prudent fiscal policy, deepen domestic revenue mobilization, and maximize grants and concessional financing during interim period. - Monitor and mitigate vulnerability to shocks and ensure effective use of public spending for poverty reduction and inclusive growth. _Executive Summary prepared by the Staffs of the International Monetary Fund and the International Development Association._ ### EXECUTIVE SUMMARY ### 1somea2020003 - EXECUTIVE SUMMARY ### Opportunity and reform progress - Somalia "has an historic opportunity" to move from decades of conflict and fragility toward poverty reduction and inclusive growth by rebuilding core state capabilities through sustained political, economic and institutional reforms undertaken since 2016. - The 2012 Provisional Constitution established a federal political structure, including a parliament, the Federal Government of Somalia (FGS) and the Federal Member States (FMS). - The authorities have demonstrated sustained commitment to reforms, completing the second review under the fourth Staff-Monitored Program (SMP IV), which was endorsed by IMF Executive Directors in July 2019 as meeting the standards of an Upper Credit Tranche arrangement. ### Poverty and social conditions (key findings) - "Almost 70 percent of Somalis live on less than US$1.90 a day in purchasing power parity terms." - Economic growth is "barely keeping up with population growth, estimated at 2.8 percent per year." - Poverty is deep and geographically and socially concentrated: particularly in rural populations and among internally-displaced people (IDPs). - "Almost nine out of 10 Somali households are deprived in at least one dimension of poverty—monetary, electricity, education, or water and sanitation—and nearly seven out of 10 households suffer in two or more dimensions." - Women and youth face "particular challenges." ### Public external debt situation and arrears (key statistics) - FGS public and publicly guaranteed external debt was estimated at US$5.3 billion at the end of 2018 in nominal terms (equivalent to US$5.2 billion in net present value (NPV) terms), including US$5.0 billion in arrears. - After full application of traditional debt relief mechanisms, Somalia’s NPV of debt is estimated at US$3.7 billion at end-2018, equivalent to 344.2 percent of exports of goods and services. - The DRA estimates the amount of debt relief needed to bring Somalia’s NPV of debt-to-exports ratio down to the HIPC threshold of 150 percent at US$2.1 billion in end-2018 NPV terms, implying a common reduction factor of 56.4 percent (compared to 54.4 percent in the Preliminary Document). - As of March 9, 2020, creditors representing 76 percent of the NPV of eligible debt have committed to provide their share of debt relief under the HIPC Initiative. ### HIPC, MDRI, and IMF beyond-HIPC assistance (findings and projections) - Somalia meets the requirements to reach the Decision Point under the HIPC Initiative. - Somalia has adopted its Ninth National Development Plan 2020-24 (in September 2019) as its Poverty Reduction Strategy. - Somalia has cleared its arrears to the World Bank and African Development Bank (AfDB), and agreed an approach to clear its arrears with the IMF. - Completion Point triggers have been agreed with IDA and IMF staffs to promote stronger public financial management, improved governance, enhanced delivery of social programs, private sector-led growth and resilience. - On reaching the Completion Point: - Somalia would qualify for MDRI debt relief from IDA and the African Development Fund and for beyond-HIPC assistance from the IMF. - MDRI from IDA and AfDB would cancel all remaining claims to Somalia and "could amount to US$113.5 million in end-2022 NPV terms." - Somalia has no debt eligible for MDRI relief from the IMF. - The IMF would provide beyond-HIPC assistance through cancellation of the portion of the pre-Decision Point financing that is not already covered by HIPC debt relief. - IMF budgetary cost estimates for Somalia’s debt relief: - HIPC-related cost estimated at SDR 136 million (equivalent to US$189.1 million) in end-2018 NPV terms. - Beyond-HIPC cost estimated at SDR 105 million (equivalent to US$146 million) in end-2018 NPV terms. ### Macro-debt outlook after assistance (projections) - With HIPC, MDRI and beyond-HIPC assistance, Somalia’s NPV of debt-to-exports ratio is projected to decline from 491.1 percent in 2018 to 55.8 percent in 2027 and 41.9 percent in 2038. - The debt service-to-exports ratio is expected to initially increase after the country reaches the HIPC Completion Point—mainly due to the resumption of regular payments and arrears rescheduling—but decrease gradually thereafter to 1.9 percent in 2038. - Sensitivity analysis in the DRA indicates that, after full debt relief, Somalia’s debt would remain below the relevant HIPC threshold even under a temporary climate shock, but would be "highly vulnerable to a significant deterioration in the security situation." ### Program and external support arrangements - IMF members have mobilized the necessary financial resources to cover the IMF’s costs of HIPC and beyond HIPC debt relief for Somalia as referenced above; Somalia will be eligible to access Fund resources once it clears its arrears to the IMF. - A new three-year Fund-supported financing arrangement, to be supported by the Extended Credit Facility (ECF) and Extended Fund Facility (EFF), is described to strengthen fiscal and financial institutions and support the priorities of NDP9. - The World Bank Group’s Country Partnership Framework (CPF) for Somalia (FY19–FY22) was developed to position Somalia for the HIPC process and initiated IDA financing to Somalia for the first time since 1991 through exceptional pre-arrears clearance grants (PACGs) of US$140 million per year in FY19 and FY20. - The Reengagement and Reform Development Policy Grant (DPG), approved on February 27, 2020, facilitated the clearance of Somalia’s arrears of US$359 million, using funds from the IDA arrears clearance set-aside. With arrears to IDA cleared, Somalia regained access to the full range of World Bank Group financing instruments and qualified for IDA18 Turnaround Regime (TAR) funds and access to an IDA19 Turnaround Allocation (TAA) subject to conditions. ### Decision Point conditions met and next steps - The Executive Boards of the IMF and IDA discussed the preliminary HIPC document in February 2020 and confirmed eligibility for HIPC assistance based on PRGT-eligibility, IDA-only status, reform track record, and debt indicators exceeding HIPC thresholds after traditional relief. - Key conditions to reach the Decision Point that have been addressed or are in process include: - Satisfactory track record under IMF- and IDA-supported programs (SMP completion). - Clearing arrears to the World Bank and AfDB, and agreeing an approach to clear arrears with the IMF. - Adoption of a satisfactory Poverty Reduction Strategy (NDP9). - Agreement on a set of Completion Point triggers with IMF and IDA staffs. - The paper presents the DRA and the proposed structure and magnitude of HIPC assistance, coordination of Completion Point triggers, an assessment of debt management capacity, and a full Debt Sustainability Analysis (DSA) under the Debt Sustainability Framework for Low-Income Countries. _Executive Summary prepared by the Staffs of the International Monetary Fund and the International Development Association._ ### 8. Somalia has an historic opportunity to turn the page on decades of conflict, fragility ### 8. Somalia has an historic opportunity to turn the page on decades of conflict, fragility ### Opportunity and recent political progress - The 2012 Provisional Constitution established a federal political structure, including a parliament, the Federal Government of Somalia (FGS) and the Federal Member States (FMSs). - Somalia successfully undertook two peaceful parliamentary and presidential elections—in late 2012 and early 2017. - Reforms underpinning the upcoming elections in late 2020 (or early 2021) are on track now that the President has signed the new Electoral Act. - Sustained political, economic and institutional reforms were supported by four consecutive SMPs, EU and World Bank financing, and extensive technical assistance, and have succeeded in rebuilding core state capabilities. ### Poverty and social indicators (summary findings) - Poverty: 69 percent of Somalis live on less than US$1.90 a day in purchasing power parity terms (Table 1). (Indicator: Poverty (% below poverty line)* = 69 ; Year = 2017) - Population growth: estimated at 2.8 percent per year. - Adult literacy rate (Age 15+) (%) = 50 ; Year = 2017 - Female literacy rate (Age 15+) (%)** = 41.7 ; Year = 2017 - Net primary enrollment rate (Age 6-13) = 33 ; Year = 2017 - Under-five mortality (per 1,000)*** = 121.5 ; Year = 2018 - Life expectancy at birth (years)*** = 56.7 ; Year = 2017 - Incidence of HIV (per 1,000 uninfected population ages 15-49)*** = 0.04 ; Year = 2018 - Sources: *Somali Poverty and Vulnerability Assessment; ** Authors' estimation using HFS2017; *** WDI. ### Non-monetary deprivations and vulnerability - Almost nine of 10 Somali households are deprived in at least one dimension of poverty—monetary, electricity, education, or water and sanitation. - Nearly seven of 10 households suffer in two or more dimensions. - About one third of the non-poor is within 20 percent from the poverty line (vulnerable to falling into poverty). - Urban/rural differences: - Somali cities tend to have lower monetary poverty and better services than rural areas, except Mogadishu where poverty is higher than the national average. - Urban areas other than Mogadishu have poverty rates around 10 percentage points lower than the national average. - City outcomes: cities still struggle with hunger, high absolute poverty of 64 percent, nonmonetary poverty of 41 percent. ### Women, youth, and labor market - Women across all population groups have lower literacy and educational attainment. - Youth unemployment: an estimated 74 percent of youth are unemployed, contributing to fragility and recruitment risks for spoiler groups. ### Household shocks and resilience - Households are vulnerable to natural disasters, epidemics, and household-level shocks (injury, death, unemployment). - Recent extreme events: severe drought in 2017 and 2019; 2016–17 drought caused damages and losses estimated at US$3.25 billion, displaced 926,000 people, and left more than half the population in need of humanitarian assistance (cited example). - Poorer households are more likely to experience multiple shocks; limited public and private insurance and limited access to finance magnify impacts. - Authorities steps: implementation of the Recovery and Resilience Framework (RRF); development of a social registry (a proposed Completion Point trigger); IDA financing through Somalia Shock-Responsive Safety Net for Human Capital project. ### Post-conflict macroeconomic and structural reform track record - Domestic revenue mobilization increased by over 70 percent since 2016 to 4.6 percent of GDP in 2019, reflecting improvements in tax administration and new tax measures. - No domestic arrears accumulation since 2016. - GDP growth estimated at 2.8–2.9 percent in 2018–19, supported by telecom, trade, construction, and financial sectors. - Reform support includes IMF SMPs, World Bank support, IDA PACGs, MPF grants, AfDB, DFID (PFM and customs modernization), and EU budget support focusing on domestic revenue mobilization, PFM, intergovernmental fiscal relations, law enforcement, and education. - Key institutional and policy advances: - Introduction of sales and excise taxes and establishment of a large- and medium-taxpayers’ office. - Implementation of the Somalia Financial Management Information System (SFMIS). - Establishment of the Intergovernmental Fiscal Forum (IGFF). - Strengthened capacity at the Central Bank of Somalia and expanded regulatory oversight to the mobile money sector. - New AML/CFT law enacted. - Anti-Corruption Act enacted. - Progress on national accounts, balance of payments, CPI, and monetary statistics. ### Planned/ongoing reform priorities - Fiscal: - Implement the Revenue Act and the Customs Reform Roadmap. - Issue regulations to support the newly enacted PFM Act and complete quality assurance of the SFMIS. - Develop an action plan to strengthen the capacity of the debt management unit. - Enact the Extractive Industry Tax Law and issue regulations to support the Petroleum Act; finalize the model Production Sharing Agreement (PSA) ahead of issuing any oil exploration licenses. - Deepen fiscal federalism and revise expenditure assignment guidelines. - Financial: - Implement the Financial Sector Reform Roadmap. - Deepen financial sector supervision and improve the payment system. - Complete transition to the new CBS organizational structure. - Strengthen AML/CFT operational and legal framework; complete National Risk Assessment; prepare for the MENA-FATF Mutual Evaluation Assessment in 2024. - Governance: - Establish the Anti-Corruption Commission following the Anti-Corruption Law. - Approve and publish the National Anti-Corruption Strategy (NACS). - Inclusive growth and resilience: - Develop the National Water Resource Strategic Plan. - Pass the Somali Standards and Quality Control Bill and establish the Somali Bureau of Standards. - Establish a national digital ID to help improve private sector access to credit. - Statistics: - Prepare a Statistical Action Plan with a priority to develop a production-based estimate of GDP. ### Medium-to-long-term macroeconomic outlook and projections (selected figures) - Recent growth and inflation: - Real GDP growth: 2.8 percent in 2018; 2.9 percent in 2019. - Inflation averaged 3.1 percent in 2019. - Current account deficit widened to 12 percent of GDP in 2019 from 10 percent in 2018. - Fiscal 2019 outcomes: - FGS domestic revenue for 2019 = US$230 million (2018 = US$183 million). - Increase in tax revenues of US$16 million or 11 percent; non-tax revenues increased by US$31 million or 68 percent (largely from IATA over-flight fees). - Expenditures: US$315 million (relative to US$341 million projected). - Estimated fiscal surplus for 2019 = US$24 million, which includes US$10 million ear-marked for use in 2020 and US$0.5 million for domestic arrears payments. - Growth projections: - Growth expected to gradually accelerate to a peak of close to 5.5 percent by 2027, before settling to a long-term average of around 4.8 percent. - Per-capita growth to reach about 2 percent over the long-run (from about -0.4 percent in 2016–18). - This long-run growth rate would be about 1.3 percentage points higher relative to a scenario without debt relief. - Trade and external flows: - Exports expected to grow; trade deficit remains large as imports pick up to support growth. - Short- to medium-term financing of the trade deficit expected from higher grants and remittances; longer-term financing to shift from grants to concessional debt and greater FDI. - Inflation projected broadly stable at below 3 percent. - Fiscal resources and arrears: - Fiscal resource envelope expected to increase reflecting higher aid and domestic revenue mobilization. - Expenditure control expected to improve; no new domestic or external arrears anticipated. ### Risks to the outlook - Significant risks tied to Somalia’s fragility: - Weak security. - Political tensions, particularly between FGS and FMS and surrounding the upcoming national elections. - Vulnerability to climate shocks (e.g., droughts, floods, locusts). - Mitigating factors: - Strong international support. - Authorities’ drive to build resilience and enhance political dialogue. - Authorities’ demonstrated capacity to implement difficult reforms under four successive SMPs. ### Table 2 (selected numerical projections, percent of GDP unless otherwise noted) - Real GDP growth (annual): 2016 = 2.9 ; 2017 = 1.4 ; 2018 = 2.8 ; 2019 = 2.9 ; 2020 = 3.2 ; 2021 = 3.5 ; 2022 = 3.7 ; 2023 = 3.9 ; 2024 = 4.2 ; 2025 = 4.6 - Inflation (CPI, e.o.p.): 2016 = 1.2 ; 2017 = 6.1 ; 2018 = 3.2 ; 2019 = 3.1 ; 2020 = 3.0 ; 2021 = 2.5 ; 2022 = 2.2 ; 2023 = 2.2 ; 2024 = 2.2 ; 2025 = 2.2 - Revenue and grants: 2016 = 4.1 ; 2017 = 6.0 ; 2018 = 5.7 ; 2019 = 6.8 ; 2020 = 9.5 ; 2021 = 10.8 ; 2022 = 12.4 ; 2023 = 13.6 ; 2024 = 10.8 ; 2025 = 11.5 - of which: Grants: 2016 = 1.4 ; 2017 = 2.8 ; 2018 = 1.8 ; 2019 = 2.2 ; 2020 = 5.0 ; 2021 = 6.0 ; 2022 = 7.2 ; 2023 = 7.7 ; 2024 = 4.2 ; 2025 = 4.1 - Total expenditure: 2016 = 3.3 ; 2017 = 5.3 ; 2018 = 5.7 ; 2019 = 6.3 ; 2020 = 9.1 ; 2021 = 9.5 ; 2022 = 10.4 ; 2023 = 11.7 ; 2024 = 13.1 ; 2025 = 13.7 - Purchase of non-financial assets: 2016 = 0.3 ; 2017 = 0.1 ; 2018 = 0.2 ; 2019 = 0.3 ; 2020 = 0.8 ; 2021 = 0.9 ; 2022 = 1.1 ; 2023 = 1.4 ; 2024 = 1.8 ; 2025 = 1.9 - Overall balance, net: 2016 = 0.0 ; 2017 = 0.0 ; 2018 = 0.0 ; 2019 = 0.6 ; 2020 = 0.0 ; 2021 = 0.1 ; 2022 = 1.7 ; 2023 = 1.7 ; 2024 = -2.3 ; 2025 = -2.2 - Public debt (percent of GDP): 2016 = 122.9 ; 2017 = 116.6 ; 2018 = 112.8 ; 2019 = 107.4 ; 2020 = 74.6 ; 2021 = 71.3 ; 2022 = 67.9 ; 2023 = 10.3 ; 2024 = 12.2 ; 2025 = 13.9 - Current account balance (percent of GDP): 2016 = -9.4 ; 2017 = -9.8 ; 2018 = -10.3 ; 2019 = -11.9 ; 2020 = -12.3 ; 2021 = -12.5 ; 2022 = -12.5 ; 2023 = -12.7 ; 2024 = -14.5 ; 2025 = -14.8 - Trade balance (percent of GDP): 2016 = -74.4 ; 2017 = -86.7 ; 2018 = -84.8 ; 2019 = -86.6 ; 2020 = -88.9 ; 2021 = -89.3 ; 2022 = -90.2 ; 2023 = -86.6 ; 2024 = -81.5 ; 2025 = -78.1 - Exports of goods and services (percent of GDP): 2016 = 25.2 ; 2017 = 22.6 ; 2018 = 23.7 ; 2019 = 22.8 ; 2020 = 22.6 ; 2021 = 22.3 ; 2022 = 22.4 ; 2023 = 22.4 ; 2024 = 22.3 ; 2025 = 22.1 - Imports of goods and services (percent of GDP): 2016 = 99.6 ; 2017 = 109.2 ; 2018 = 108.5 ; 2019 = 109.4 ; 2020 = 111.5 ; 2021 = 111.6 ; 2022 = 112.6 ; 2023 = 109.0 ; 2024 = 103.7 ; 2025 = 100.2 - Remittances (percent of GDP): 2016 = 32.5 ; 2017 = 31.5 ; 2018 = 31.3 ; 2019 = 31.9 ; 2020 = 32.4 ; 2021 = 32.7 ; 2022 = 32.9 ; 2023 = 32.1 ; 2024 = 31.3 ; 2025 = 30.4 - Grants (percent of GDP): 2016 = 33.3 ; 2017 = 46.1 ; 2018 = 43.9 ; 2019 = 43.5 ; 2020 = 44.9 ; 2021 = 44.9 ; 2022 = 45.6 ; 2023 = 42.4 ; 2024 = 36.1 ; 2025 = 33.4 - FDI (percent of GDP): 2016 = 7.9 ; 2017 = 8.2 ; 2018 = 8.6 ; 2019 = 9.0 ; 2020 = 8.9 ; 2021 = 9.0 ; 2022 = 9.1 ; 2023 = 9.3 ; 2024 = 9.6 ; 2025 = 9.8 - External debt (percent of GDP): 2016 = 121.1 ; 2017 = 115.1 ; 2018 = 111.3 ; 2019 = 106.0 ; 2020 = 73.3 ; 2021 = 70.1 ; 2022 = 66.8 ; 2023 = 9.4 ; 2024 = 11.4 ; 2025 = 13.2 - Market exchange rate (SOS/USD, e.o.p.): 2016 = 24,005 ; 2017 = 23,605 ; 2018 = 24,475 ; 2019 = 26,015 *International Monetary Fund. ### 24. On September 26, 2019, the Cabinet approved a new NDP covering 2020–24. NDP9 is a ### NDP9 and Debt Relief and Possible HIPC and MDRI Assistance ### NDP9: development strategy and JSAN assessment - On September 26, 2019, the Cabinet approved a new NDP covering 2020–24 (NDP9). - NDP9 is described as a comprehensive and nationally owned strategy for poverty reduction and inclusive growth that builds on progress under NDP8 (2017–19). - The strategy is informed by a detailed analysis of drivers of poverty: political fragility, conflict, insecurity and lawlessness, and climatic shocks. - The authorities submitted NDP9 to IDA and the IMF on October 15, 2019, to fulfill the HIPC Initiative’s poverty reduction strategy requirement. - A Joint Staff Advisory Note (JSAN) was prepared and shared with the Executive Boards in March 2020; main JSAN points are summarized below. ### JSAN findings on preparation and content - Development process: - NDP9 was developed through a highly consultative, participatory process ensuring full country ownership. - Public consultative meetings included civil society, private sector representatives, FGS and FMS ministries, national and state parliamentarians, members of the judiciary, and development partners. - Staffs find the document transparently incorporates input received during consultation rounds. - Strategic pillars of NDP9: - (1) Inclusive and Accountable Politics; - (2) Improved Security and the Rule of Law; - (3) Inclusive Economic Growth (including increased employment); - (4) Improved Social Development. - Six cross-cutting policy priorities integrated across pillars: - (i) gender, human rights and other kinds of social equity; - (ii) resilience of households, communities and the government; - (iii) Somalia’s environment and its natural resources; - (iv) durable solutions to long term displacement; - (v) interface between humanitarian and development planning; - (vi) governance. - The JSAN commends the authorities for presenting a comprehensive strategy to reduce poverty. ### Implementation arrangements and gaps - NDP9 includes an implementation arrangement framework with associated risks and a strategy to fill large data gaps. - Implementation approach is based on three guiding principles: multi-dimensional, preserving national ownership, and demonstrating progress against one or more NDP9 indicators. - Key gaps noted by JSAN: - NDP9 lacks a costing and financing plan for the proposed interventions. - The macroeconomic and fiscal framework underlying NDP9 is outdated. - Actions underway: - Authorities revised the macroeconomic and fiscal framework to incorporate the anticipated impact of reaching the HIPC Decision Point; this was agreed with the IMF in the context of the new program. - Authorities are developing cost estimates for specific interventions under NDP9 and expect to complete them by mid-2020—in time to inform the next budget. - Authorities are preparing a new aid policy aimed at enhancing alignment between donor projects and NDP9. - Reporting: - Authorities will report adjustments to NDP9 and progress in implementing NDP9 in Annual Progress Reports. - Updating NDP9’s macroeconomic and fiscal framework and providing costing and financing would enable staffs to treat NDP9 as a full poverty reduction strategy for Completion Point requirements. - IDA and IMF staffs will submit JSANs on these annual reports to the Boards to provide feedback and evidence for the floating Completion Point trigger (satisfactory implementation of a poverty reduction strategy for at least one year). ### Debt reconciliation and external debt structure (end-2018) - Debt reconciliation: - DRA based on reconciliation of public and publicly-guaranteed external debt data at end-2018 provided by authorities and creditors. - Reconciliation completed jointly by IMF, World Bank, and authorities in July 2019. - Information provided by authorities on multilateral and official bilateral debt was reconciled close to 100 percent with creditor data. - According to authorities, no commercial debt is outstanding. - Nominal public and publicly-guaranteed external debt of the FGS at end-2018: - Total: US$5.3 billion (nominal terms). - Net present value (NPV) terms: US$5.2 billion. - Creditor shares (nominal terms, end-2018): - Multilateral creditors: 28.9 percent of total debt stock. - Liabilities to IDA, IMF and the AfDB: 18.5 percent of total external debt. - Arab Monetary Fund (AMF): 5.4 percent. - Arab Fund for Economic and Social Development (AFESD): 3.5 percent. - IFAD, OFID and IsDB combined: 1.5 percent. - Paris Club creditors (United States, Russia, Italy major creditors): 57.8 percent of total nominal debt at end-2018. - Non-Paris Club official creditors (Algeria, Bulgaria, Iraq, Kuwait Fund for Arab Economic Development, Libya, Romania, Saudi Fund for Development, Serbia, United Arab Emirates): estimated 13.3 percent of total external debt. - Arrears: - As of end-2018, about 95.8 percent of Somalia’s external debt was in arrears. - Stock of external arrears: US$5.0 billion. - Arrears to multilateral creditors: US$1.3 billion. - Arrears to bilateral claimants: US$3.7 billion. - Arrears to the World Bank and the U.S. made up the largest shares of arrears to multilateral and bilateral creditors, respectively. ### HIPC Initiative eligibility and assistance estimates (end-2018 basis) - Somalia qualifies for debt relief under the HIPC Initiative’s “export window” based on end-2018 data: NPV of debt-to-exports ratio exceeds the 150 percent benchmark. - Estimated NPV of debt at end-2018 before traditional debt relief: US$3.7 billion, equivalent to 344.2 percent of exports of goods and services. - Amount of additional debt relief needed to reach HIPC threshold (150 percent of exports): US$2.1 billion in end-2018 NPV terms. - Implied common reduction factor (CRF): 56.4 percent. - Proportional burden sharing implication (NPV terms): - Multilateral creditors’ assistance: US$0.8 billion. - Bilateral and commercial creditors’ assistance: US$1.2 billion. - Aggregate NPV figures (Table 4, end-2018 NPV terms): - Debt outstanding (NPV terms end-2018) (A): 3,664.5 - Debt outstanding post-HIPC (B): 1,596.9 - Reduction of the NPV of debt due to HIPC (A-B): 2,067.6 - (as percent of exports) A: 344.2 ; B: 150.0 ; A-B: 194.2 - Multilaterals: A 1,494.3 ; B 651.2 ; Reduction 843.1 - Bilateral: A 2,170.2 ; B 945.7 ; Reduction 1,224.5 - Memorandum item: Exports 1/ = 1,064.6 - Creditor commitments and coverage: - Most multilateral creditors have committed to provide their share of HIPC debt relief. - Paris Club creditors have provided necessary financial assurances; some key non-Paris Club official bilateral creditors have provided necessary financial assurances. - Creditors representing 76 percent of the NPV of eligible debt have committed to deliver their share of HIPC debt relief. ### Illustrative HIPC and MDRI assistance scenarios and creditor-specific amounts - Illustrative timing assumption: Somalia reaches Decision Point in March 2020 and Completion Point by March 2023. - IDA: - Assistance under HIPC Initiative and the MDRI amounts to US$425.8 million in end-2018 NPV terms. - This is equivalent to a reduction of 88.9 percent of the NPV of debt to IDA at end-2018. - IDA delivered 80.1 percent of this relief through the concessional element of an arrears clearance operation to be concluded ahead of the Decision Point and entirely financed with grants. - IDA has delivered its full share of HIPC debt relief through arrears clearance and will not provide additional HIPC debt relief through debt service reduction after Decision Point approval, based on the estimated share of IDA debt relief. - Remaining relief would be provided through MDRI relief at Completion Point. - IMF: - IMF HIPC assistance amounts to US$189.1 million in end-2018 NPV terms. - Of this, US$5.7 million represents the cost of the subsidization of PRGT interest. - After Decision Point approval by the IMF and World Bank Boards, IMF would provide HIPC interim assistance on IMF-related obligations falling due prior to Completion Point, subject to Somalia maintaining satisfactory progress under the new 3-year arrangement. - These obligations would mainly include GRA charges related to credit outstanding on the EFF arrangement; a portion would relate to charges due on Somalia’s pre-Decision Point arrears that would not become due until after the Decision Point. - AfDB Group: - Assistance amounts to US$75.6 million in end-2018 NPV terms and has been entirely delivered through an arrears clearance operation. - Other multilateral creditors: - Assistance would amount to US$308.2 million in end-2018 NPV terms based on the CRF; assumed delivered through cancellation or concessional rescheduling of arrears to commence at Completion Point. - Paris Club creditors: - HIPC assistance estimated at US$938.9 million in end-2018 NPV terms after application of traditional debt relief. - Assumed modalities include a Cologne flow operation on eligible debt and a stock-of-debt operation at Completion Point; specific rescheduling and reduction terms described for pre-cutoff ODA and non-ODA debt. - Non-Paris Club official bilateral creditors: - Preliminary offers of debt relief have been secured from some key creditors. - HIPC assistance allocated to these creditors estimated at US$285.6 million in end-2018 NPV terms. ### External arrears clearance strategy and recent developments - Somalia has made substantial progress in reaching understandings with key creditors on arrears clearance. - Nearly all official external debt was in arrears at end-2018, including to IDA, IMF and the AfDB Group. - Somalia has cleared its arrears to IDA and the AfDB, agreed an approach to clear its arrears to the IMF, and plans for clearing arrears to other multilateral creditors are in an advanced stage. - Consistent with HIPC methodology, the grant element embedded in arrears clearance operations of multilateral creditors is counted toward the creditor’s contribution to HIPC debt reduction. - Specific actions: - Somalia’s arrears to IDA were cleared on March 5 2020 through a bridge loan provided by a bilateral donor. Somalia used the proceeds of a Development Policy Grant (DPG) to repay the bridge loan. This portion of the DPG was financed with an exceptional allocation from the IDA arrears clearance set-aside. - Arrears to the IMF are expected to be cleared with the support of a bilateral donor. - A new three-year Fund-supported arrangement, with a blend of financing from the ECF and EFF, has been recommended to the Executive Board of the IMF for approval. - Notes on modalities and timing: - Negotiations on Somalia’s debt to Paris Club creditors planned by end-March 2020; some non-Paris Club creditors invited to join. - Following Decision Point, arrears of pre-cutoff non-ODA debt would receive a stock-of-debt reduction under Naples terms (i.e., 67 percent), with the remainder rescheduled over 23 years with a 6-year grace period. - Arrears of pre-cutoff ODA debt would be rescheduled over 40 years with a 16-year grace period. - A Cologne flow operation would be applied to the remaining eligible Paris Club debt. - IFAD debt service of about $1.5 million due during the interim period is assumed to be paid. *Source: INTERNATIONAL MONETARY FUND (excerpts).* ### 39. Somalia cleared arrears to the AfDB Group on March 5 through an operation under the ### Somalia cleared arrears to the AfDB Group on March 5 through an operation under the framework of the Transition Support Facility (TSF). ### Arrears clearance and reengagement with AfDB - Donors’ resources were used to clear Somalia’s arrears to the AfDB Group, estimated at UA 88.15 million (equivalent to US$122.6 million), including payment due through 30 June 2021. - The clearance of arrears and the lifting of sanctions will enable full reengagement between the AfDB and Somalia. ### Progress with other multilateral creditors - As of March 5, 2020: IFAD, OFID and IsDB—representing 1.5 percent of the NPV of the total debt stock—have confirmed willingness to provide debt relief in the context of the HIPC Initiative. - The AMF accounts for 5.5 percent of the NPV of the total debt stock and has extended a preliminary proposal on clearance of Somalia’s arrears to be discussed in its upcoming Annual Meetings. - Communication with the AFESD is ongoing. ### Paris Club and bilateral creditor treatment - Somalia is expected to be accorded an exceptional debt restructuring treatment by the Paris Club, beyond the standard Naples and Cologne terms. - Somalia will seek comparable treatment from all its non-Paris Club bilateral creditors. ### Expected multilateral debt stock and debt service after relief - Somalia’s debt due to multilateral creditors is expected to decline from US$1,431.6 million (in end-2018 NPV terms) to US$407.2 million at the Completion Point. - Most debt relief—US$843.1 million in end-2018 NPV terms—would be provided through clearance of Somalia’s arrears; the remainder through restructuring the residual debt on concessional terms. - Future debt service payments to multilaterals would increase from an average of US$10.2 million a year prior to debt relief, to US$20.8 million a year after debt relief. - Delivery of MDRI and beyond-HIPC relief at the Completion Point would offset most of this increase. - During calendar years 2020-22 (roughly the interim period), debt service to IDA, IFAD, and AfDB together is estimated to average US$14.9 million annually, or 5.5 percent of projected fiscal revenues. ### IDA, AfDB and grant financing post-arrears clearance - Following the Decision Point, IDA will provide strong support consistent with Somalia’s risk of debt distress and the IDA grant allocation framework. - Post arrears clearance, Somalia qualifies for support from the IDA18 TAR and access to an IDA19 TAA that will provide grant financing for an expanded portfolio. - IDA will maintain strongly positive net flows to Somalia. The AfDB is also expected to provide additional grant financing to strengthen Somalia’s ability to meet cash flow needs post-arrears clearance, including resumption of debt service. ### MDRI and beyond-HIPC assistance - On reaching the Completion Point, Somalia would qualify for MDRI debt relief from IDA and the AfDF covering all outstanding debt disbursed prior to end-December 2003 and end-December 2004, respectively, and still outstanding at the institutions’ implementation dates. - If Somalia reaches the Completion Point by March 2023, preliminary estimates indicate that MDRI debt relief could amount to US$116.6 million in end-2022 NPV terms: - IDA: US$96.8 million - AfDB Group: US$19.8 million - The country has no debt eligible for MDRI relief from the IMF. - The IMF would provide beyond-HIPC assistance through cancellation of the portion of the pre-Decision Point financing not already covered by HIPC debt relief, including initial disbursement under the new IMF arrangement and financing disbursed immediately after Somalia clears its arrears to the IMF and before the HIPC Decision Point. - Most Paris Club official creditors are expected to cancel 100 percent of their claims against Somalia after it reaches the Completion Point, amounting to about US$783 million in end-2023 NPV terms. ### Expected impact of debt relief and sensitivity analysis - Simulations conducted under three scenarios (baseline, climate shock, security shock) test sustainability of Somalia’s external debt after conditional HIPC, MDRI and bilateral beyond-HIPC assistance. In all simulations, debt indicators are fixed to after conditional HIPC, MDRI and bilateral beyond-HIPC assistance. - Baseline scenario (assumptions in Box 2): - NPV of debt-to-exports ratio gradually declines to 55.8 percent in 2027, and then to 41.9 percent in 2038. - Debt service-to-exports ratio peaks at 2.0 percent in 2027, then decreases to 1.9 percent in 2038 (long-run average). - Climate shock scenario (lower export level affecting livestock and agriculture): - NPV of debt-to-exports ratio deteriorates sharply—about 32 percentage points higher than baseline just before the assumed Completion Point. - Deterioration narrows to around 10 percentage points through to 2029, and to 8 percentage points in the long term, with the NPV of debt-to-exports ratio around 49.5 percent in the long term. - Security shock scenario (permanently lower growth from deteriorated security): - Medium term: NPV of debt-to-exports is, on average, about 7 percentage points higher than baseline. - Long term: NPV of debt-to-exports is, on average, about 27 percentage points higher than baseline and on an increasing trend. ### Key macroeconomic assumptions underlying the DRA (baseline) - Annual real GDP growth: increase gradually from 2.9 percent in 2019 to a peak of 5.4 percent in 2027; subsequently long-term growth around 4.8 percent. - CPI Inflation: projected about 2.2 percent annually over the long-term, linked to US inflation. - Grants: expected to increase sharply to a peak of about 6.7 percent of GDP in 2023 before a gradual decline. - Concessional borrowing (fiscal deficit): projected to range between about 1.5 and 2.7 percent of GDP in the five years after DP (2024-2029). - Domestic revenue (FGS): projected to gradually increase from 4 percent of GDP in 2019 to over 6.5 percent in 2029. - Domestic borrowing: scenario assumes no domestic borrowing. - Official borrowing: limited concessional borrowing at terms comparable to standard IDA terms. - External sector: current account deficit projected to remain elevated, averaging about 13 percent between 2019 and 2029. Remittances and grants currently 32 and 44 percent of GDP, respectively, and will gradually decline as FDI and concessional borrowing increase. - The three-year historical average exports of goods and services is used for the NPV of debt ratios, while the current year export of goods and services is used for the debt service ratios. ### Triggers for the Floating Completion Point (selected) - Poverty reduction strategy implementation: Satisfactory implementation for at least one year of Somalia’s full poverty reduction strategy, evidenced by an Annual Progress Report submitted to IDA and the IMF. - Macroeconomic stability: Maintain macroeconomic stability as evidenced by satisfactory implementation of the 3-year ECF-supported program. - Public financial and expenditure management: - Publish at least two years of the audited financial accounts of the Federal Government of Somalia. - Issue regulations to implement the Public Financial Management Act’s provisions on debt, public investment, and natural resource revenue management. - Domestic revenue mobilization: Adopt and apply a single import duty tariff schedule at all ports in the Federal Republic of Somalia. - Governance, anti-corruption, and natural resource management: Enact the Extractive Industry Income Tax Law; Ratify the United Nations Convention Against Corruption (UNCAC). - Debt management: Publish at least four consecutive quarterly reports outlining the outstanding stock of general government debt; monthly debt-service projections for 12-months ahead; annual principal payment projections (for at least the next five years); and key portfolio risk indicators. - Social sectors: Establish a national social registry; FGS and FMS Ministers of Health adopt a joint national health sector strategy; FGS and FMS Ministers of Education adopt an agreement defining roles on curriculum and examinations. - Growth/structural: Enact the Electricity Act and issue supporting regulations; Issue Company Act implementing regulations on minority shareholder protection. - Statistics: Publish at least two editions of the “Somalia Annual Fact Book”. ### Feasibility and monitoring - IMF and IDA staffs’ baseline assumption: achieving the Completion Point by March 2023 appears feasible, though somewhat faster than average HIPC experience; risks around timing (notably weak capacity) are mitigated by sustained reform commitment and technical assistance from IMF, World Bank, and partners. - Triggers are embedded in the broader framework of policy reforms supported by Fund, World Bank, and other partners and are aligned with conditionality in EU budget support, IMF SMPs, and World Bank operations to ensure complementary and mutually reinforcing measures. *Source: IMF staff report excerpt (content unit: 1somea2020003).* ### 54. During the interim period, the direct effect of debt relief on the FGS budget will lead ### During the interim period, the direct effect of debt relief on the FGS budget will lead ### Direct fiscal impact: debt service payments - Somalia has not been servicing external debt to any of its creditors; after arrears clearance, the government must resume paying debt service. - The DRA estimates that debt service payments will average US$14.9 million annually during calendar years 2020–22 (roughly the interim period) in a scenario of enhanced HIPC assistance and multilateral arrears clearance. ### External aid, fiscal space, and spending priorities - The resumption of debt servicing payments will represent a drain on the fiscal space available for development spending. - The impact will be mitigated by the anticipated increase in external aid once Somalia has normalized relations with the IFIs, and overall, the fiscal resource envelope is expected to expand. - Securing the effective use of public spending for poverty reduction and inclusive growth is a key objective of the HIPC Initiative. - The authorities will continue efforts to strengthen the programming, management and control of public expenditures, and to improve service delivery in key sectors. - Technical assistance from IDA, IMF, AfDB and other partners will continue to be needed to strengthen public financial management capacity. ### Monitoring resource use and public financial management arrangements - The FGS does not have a budget classification by program or a fully functional budget classification; the authorities intend to monitor the use of resources made available by the HIPC Initiative using existing mechanisms. - Existing budget and accounting classifications allow monitoring of budget allocations and expenditures along two dimensions: - (i) administrative (ministries, departments and agencies) including development projects; and - (ii) economic (expenditure types). - Spending data can also be presented following a sectoral classification with broad categories resembling functions (such as education and health), which is prepared using estimates from the administrative classification. - In the absence of a program budget, projects can be individually coded within the administrative classification to allow recording and reporting on project expenditures. *Source: 1somea2020003 - 54.* ### 57. This paper presents an assessment of Somalia’s qualification for assistance under the ### This paper presents an assessment of Somalia’s qualification for assistance under the Enhanced HIPC Initiative ### Qualification and Decision Point - Executive Directors’ questions sought: - Do Executive Directors agree that Somalia qualifies for assistance under the Enhanced HIPC Initiative and do they recommend approval for the Decision Point? - Floating Completion Point: - Do Directors agree that the HIPC floating Completion Point will be reached when the triggers in Box 3 have been met? - Debt relief will be provided unconditionally only when the Completion Point triggers have been met and satisfactory assurances of other creditors’ participation under the enhanced HIPC Initiative for Somalia have been received. ### Amount and delivery of assistance - Total amount of assistance under the Enhanced HIPC Initiative estimated to reduce the NPV of debt-to-exports ratios to the threshold of 150 percent: - US$2.1 billion in end-2018 NPV terms. - Composition of that US$2.1 billion (end-2018 NPV terms): - IDA contribution through the grant element of its recent DPO in support of Somalia’s arrears clearance: US$341.2 million. - IMF provision: US$189.1 million. - Interim IMF assistance question: - Do IMF Directors agree that the IMF should provide interim assistance of SDR 2.4 million between the Decision and Completion Points in line with existing guidelines? ### Debt composition and estimated costs by creditor group (selected figures) - Nominal Stock and NPV as of end-December 2018 (Table 6 highlights): - Total nominal debt stock: 5,255.4 (US$ million). - NPV of debt (total, end-2018 baseline): 5,227.9 (US$ million). - Major creditor-group shares (end-2018, selected): - Multilateral nominal: 1,520.3 (US$ million) — 28.9 percent of total. - World Bank nominal: 501.0 (US$ million) — 9.5 percent of total. - IMF nominal: 335.1 (US$ million) — 6.4 percent of total. - Bilateral and commercial nominal: 3,735.0 (US$ million) — 71.1 percent of total. - Paris Club nominal: 3,037.6 (US$ million) — 57.8 percent of total. ### External debt sustainability indicators and trajectories (selected highlights) - NPV of total debt (end-2018 baseline and projections, Table 9): - 2018 NPV of total debt: 5,227.9 (US$ million). - Projected NPV of total debt path (selected years): 2019: 5,211.3; 2023: 5,147.8; 2028: 5,553.0; 2038: 6,010.9 (US$ million). - NPV of debt-to-exports and other baseline indicators (Table 10, selected): - 2018 NPV of debt-to-exports ratio: 491.1 (in percent of exports). - 2018 NPV of debt-to-GDP ratio: 110.7 (in percent). - 2018 NPV of debt-to-revenue ratio: 2,850.3 (in percent). - After traditional debt relief (selected indicators, Table 10): - NPV of debt-to-exports ratio (post-traditional relief, 2018 baseline): 344.2 (in percent). - NPV of debt-to-GDP ratio (post-traditional relief, 2018 baseline): 77.6 (in percent). - After conditional enhanced HIPC assistance and multilateral arrears clearance (selected indicators, Table 10): - NPV of debt-to-exports ratio (conditional HIPC, 2018 baseline): 127.9 (in percent). - NPV of debt-to-GDP ratio (conditional HIPC, 2018 baseline): 28.8 (in percent). ### Debt service projections and impacts of relief (selected figures) - Total external debt service (existing debt) before traditional debt relief (Table 8, selected): - 2019 total: 22.4 (US$ million). - 2028 total: 15.7 (US$ million). - After traditional debt relief (Table 8, II. After traditional debt relief): - Total debt service in 2023: 183.7 (US$ million). - Debt service-to-exports ratio (selected years): 2019: 7.9; 2023: 13.2; 2028: 4.4 (in percent). - After enhanced HIPC assistance and multilateral arrears clearance (Table 8, IV. Debt Service after HIPC and MDRI Assistance): - Total debt service (selected): 2023: 149.0 (US$ million); 2028: 51.8 (US$ million). - Debt service-to-exports ratio (selected): 2023: 10.1; 2028: 2.6 (in percent). - Reductions (memorandum in Table 8): - Reduction in debt service as a result of traditional debt relief mechanisms (selected cumulative): -68.0; -68.5; -69.3; -167.8 (US$ million) in early years shown. - HIPC initiative assistance and multilateral arrears clearance (selected): 21.9; 9.0; 5.4; 3.5; -73.1 (US$ million) as presented in the table. ### Sensitivity analysis and shock scenarios (Figure 5 and Tables) - Scenario types modeled (after conditional enhanced HIPC assistance and multilateral arrears clearance, MDRI, and bilateral beyond HIPC): - Baseline scenario. - Climate shock. - Security shock. - Example projected impacts (Figure 5 format—NPV of debt-to-exports and debt service-to-exports): - NPV of Debt to Exports (in percent of exports) shows divergent paths under baseline, climate shock, and security shock across 2019-2037. - Debt Service to Exports (in percent of exports) similarly varies across scenarios with higher peaks under shocks. ### Delivery modalities and timing (selected procedural points) - Multilateral creditors start delivering HIPC assistance through the arrears clearance process, beginning: - January 2023 for the IMF, World Bank and the AfDB (as noted in the document’s assumptions). - Paris Club and other official bilateral creditors: - Assumed to provide Cologne flow rescheduling on eligible debt during the interim period and the remainder of their share of relief after the completion point (assumed delivery in January 2023 in scenarios). - MDRI and IDA interaction (Table 12, Table 13 highlights): - Projected stock of IDA credits outstanding at implementation date: 106.8 (US$ million). - Debt stock reduction on eligible credits due to MDRI: 106.8 (US$ million). - IDA debt service relief under the MDRI and HIPC covers 100.0 percent in initial periods as presented. ### IMF-specific delivery and timing (Table 13 highlights) - Total IMF assistance under the HIPC Initiative: - Estimated at US$189.1 million in end-December 2018 NPV terms. - Of this amount, US$5.7 million represents the concessional element associated with subsidization of PRGT Interest during interim period; remaining balance US$183.4 million will be provided as a grant toward debt relief under the HIPC Initiative. - IMF instruments and projected drawdowns (selected): - Interim assistance deposits into Somalia’s Umbrella Account shown in the drawdown schedule. - Debt relief provided at Completion Point (on stock basis in cash terms): 343.0 (US$ million) total comprising HIPC assistance 183.8 and Beyond-HIPC 159.2 (Table 13). *Source: Federal Government of Somalia (FGS) authorities and IMF staff estimates and projections as presented in the document.* ### 21. The current interest mechanism ensures that rates would rem ### 21. The current interest mechanism ensures that rates would remain at zero for as long as global rates are low ### Interest assumptions and related notes - The IMF reviews interest rates for all concessional facilities under the PRGT every two years. - Remaining GRA charges and interest on Trust Fund and SAF falling due after the date of decision point are considered in calculations. (Footnote reference preserved in source.) - The remaining IMF's grant HIPC assistance would be disbursed into the member's Umbrella Account after the assumed completion point in March 2023, which is reflected in the calculation of interest. - Estimated interest earnings on: - (a) amounts held in the member's Umbrella Account; and - (b) up to the completion point, amounts committed but not yet disbursed, are based on assumed SDR interest rates which are gradually rising to 1.27 percent in 2029 and beyond; actual interest earnings may be higher or lower. - Associated with the stock of arrears at arrears clearance and the first disbursement of new credit under the ECF. ### Paris Club Official Bilateral Creditors' delivery of debt relief (table highlights) - Table 14 describes creditor-by-creditor delivery of debt relief under bilateral initiatives beyond the HIPC Initiative, with creditor entries indicating percentages of Pre-cutoff Date Debt and Post-cutoff Date Debt for ODA and Non-ODA and whether relief is provided as flow or stock. - Selected creditor entries and exact notations as reported: - Australia: HIPCs 100 100 100 100 2/2/2/ - Austria: HIPCs 100-100- Case-by-case, flow Stock - Belgium: HIPCs 100100 3/100-100 flow Stock - Canada: HIPCs 100100100100100 flow Stock - Denmark: HIPCs 100100 4/100100 4/100 flow Stock - France: HIPCs 100100100-100 flow 5/Stock - Finland: HIPCs 100- 6/100- 6/-- - Germany: HIPCs 100100100100 7/100 flow Stock - Italy: HIPCs 100100 8/100100 8/100 flow Stock - Japan: HIPCs 100100100--Stock - Netherlands, the: HIPCs 100 9/100100-90-100 flow 9/Stock - Norway: HIPCs 10/10/11/11/-- - Russia: HIPCs S- 12/-12/10019/ 100 19/20/ -Stock - Spain: HIPCs 10010013/100100 13/-Stock - Sweden: HIPCs --14/100--Stock - Switzerland: HIPCs - 15/-15/10016/-100 flow 16/ Stock - United Kingdom: HIPCs 100100100100 17/100 flow 17/ Stock - United States 18/HIPCs 100100100100100 flow Stock - Source: Paris Club Secretariat. - Table notes preserve creditor-specific rules, cut-off dates, and explanatory footnotes (2 through 20) as presented in the source. ### HIPC Initiative: Status of country cases (December 2019) — key figures and outcomes - Table 15 reports target NPV of debt-to-exports and debt-to-revenue levels, Decision Point and Completion Point dates, and NPV reduction amounts in millions of U.S. dollars (present value) for countries that reached completion point under the enhanced framework (36 cases listed). - Selected country entries and exact figures preserved: - Afghanistan: Decision Point Jul. 07; Completion Point Jan. 10; NPV reduction: 150 582 446 136 76 51 - Benin: Decision Point Jul. 00; Completion Point Mar. 03; NPV reduction: 150 265 77 189 24 84 31 - Bolivia: original framework Sep. 97 Sep. 98 225 448 157 291 29 54 14; enhanced framework Feb. 00 Jun. 01 150 854 268 585 55 140 30 - Burkina Faso: original framework Sep. 97 Jul. 00 205 229 32 196 22 91 27; enhanced framework Jul. 00 Apr. 02 150 195 35 161 22 79 30; topping-up Apr. 02 150 129 16 112 14 61 24 - Burundi: Aug. 05 Jan. 09 150 833 127 706 28 425 92 - Cameroon: Oct. 00 Apr. 06 150 1,267 879 322 37 176 27 - Congo, Democratic Rep. of: Jul. 03 Jul. 10 150 7,252 4,618 2,633 471 854 82 - Cote d'Ivoire: Mar. 09 Jun. 12 250 3,109 2,398 711 39 413 24 - Ethiopia: enhanced framework Nov. 01 Apr. 04 150 1,275 482 763 34 463 47; topping-up Apr. 04 150 707 155 552 26 369 31 - Ghana: Feb. 02 Jul. 04 144 250 2,186 1,084 1,102 112 781 56 - Liberia: Mar. 08 Jun. 10 150 2,739 954 1,421 730 374 90 - Mozambique: original framework Apr. 98 Jun. 99 200 1,717 1,076 641 125 381 63; enhanced framework Apr. 00 Sep. 01 150 306 194 112 18 62 27; overall entry 2,023 1,270 753 143 443 - Uganda: original framework Apr. 97 Apr. 98 200 3,023 347 73 274 69 160 20; enhanced framework Feb. 00 May 00 150 656 110 546 91 357 37; combined entry 1,003 183 820 160 517 - Zambia: Dec. 00 Apr. 05 150 2,499 1,168 1,331 602 493 63 - Footnote 1/ explains the calculation: "This is calculated as the NPV amount of assistance divided by NPV of debt, which is the common reduction factor. The NPV amount of assistance is calculated as the reduction of the NPV of debt after traditional debt relief that is necessary to bring the NPV of debt to exports to the threshold level of 150 percent or the NPV of debt to revenue to 250 percent." - Sources: IMF and World Bank Board decisions, completion point documents, decision point documents, preliminary HIPC documents, and staff calculations. ### Annex I — Somalia: Debt management capacity (findings and recommendations) - Legal and institutional framework: - The PFM law, enacted in December 2019, defines authority to borrow, issue guarantees and recording, reporting and auditing requirements. - The PFM law gives the Minister sole authority to borrow and issue guarantees within the ceilings and terms established by Parliament in the annual appropriation act. - Borrowing from sub-national governments and state-owned enterprises requires explicit written authorization by the Minister of Finance. - Issuance of guarantees by sub-national governments is subject to legislation of sub-national government finances which has not yet been adopted. - The PFM law mandates annual publication of the list of newly contracted loans and outstanding external and domestic debt and the stock of arrears, and requires internal and external annual audit of financial statements. - Debt ceilings and policy constraints: - The 2020 Budget Appropriation Act commits the Federal Government of Somalia not to borrow domestically or from abroad, with the exception of limited advances for liquidity purposes. - Indicative targets under the IMF Staff-Monitored Program define: - (i) a zero ceiling on contracting of new domestic debt, and - (ii) a zero ceiling on contracting or guaranteeing of new nominal external non-concessional borrowing. - Following clearance of arrears to IDA and the IMF and approval of an IMF financing program, Somalia will be subject to the Bank’s Non-Concessional Borrowing Policy, its successor Sustainable Development Finance Policy, and the IMF’s Debt Limit Policy. - Institutional structure and capacity: - All debt-related activities are conducted by the Debt Management Unit (DMU) of the Federal Ministry of Finance, established in December 2015. - The DMU conducts reconciliation of the debt database, monitors accumulation of external and domestic arrears and publishes annual debt bulletins reporting external PPG debt at year end. - The DMU composition: one director and three staff members (one for front office operations and two for the back-office). - Domestic public debt does not exist beyond accumulation of government arrears given nascent domestic financial institutions and local capital markets. - The Domestic Arrears Management Committee (DAMC) validates domestic arrears; the DMU is the secretariat. - Data and systems: - Authorities have reconstituted almost entirely their external debt database through outreach to external creditors. - Computerized debt management system established: CS-DRMS installed and an IT system procured that supports the CS-DRMS. - Debt recording capacity is improving, but still weak. - Capacity gaps and priorities: - Staff capacity should be enhanced, particularly in the middle and back office functions, to enable regular reporting of detailed statistics on external and domestic debt stock and debt service. - Investment in hardware is needed to ensure CS-DRMS is used in real time to record all external and domestic debt. - Training staff to use the software should be a priority. - The African Development Bank is assisting the government in several areas, but major software upgrades are prevented by lack of financing. - Operational risks: - The DMU has no secure data backups and no disaster recovery plan. - Loss of key staff and destruction of facilities would substantially reduce capacity and set back debt reconciliation. - Cloud-based secure data backups and a recovery procedure should be a priority of capacity-building activities. - Medium-term strategy recommendation: - Any future borrowing should be based on a medium-term debt management strategy consistent with debt sustainability. - Clearance of arrears, HIPC interim debt relief followed by full delivery of HIPC and MDRI debt relief at the completion point will significantly reduce external debt and could permit resumption of borrowing at highly concessional terms for reconstruction and development. ### Debt Sustainability Analysis (DSA) — summary findings - Total public debt is US$5.3 billion, or 113 percent of GDP at end-2018—nearly all of which is external. - Baseline scenario (traditional debt relief delivered in early 2020 at the HIPC Decision Point): - Somalia’s external and public debt indicators would remain in debt distress, and public debt would be unsustainable. - The total debt stock would decrease to about 70 percent of GDP, still well above the 30 percent threshold for countries like Somalia with weak capacity to manage debt. - The baseline forecast indicates substantial and sustained breaches of: - the PV of external debt-to-exports indicative threshold, - the PV of external debt service-to-exports threshold, and - the debt service-to-revenue threshold. - Alternative scenario (contingent on full delivery of the HIPC Initiative, MDRI, and beyond-HIPC assistance at the Completion Point): - Somalia’s debt indicators would improve dramatically to a manageable level following Completion Point. - In a forward-looking sense, Somalia’s debt is judged as sustainable under the full-delivery scenario. - Risk ratings and approvals: - Risk of external debt distress: In debt distress - Overall risk of debt distress: In debt distress - Granularity in the risk rating: Sustainable - Application of judgment: No - Approved by Thanos Arvanitis (IMF, MCD) and Maria Gonzalez (IMF, SPR), and Marcello Estevão (IDA) - Prepared by the staff of the International Monetary Fund (IMF) and the International Development Association (IDA). - Date on final page: March 12, 2020 *Source: IMF staff and IDA staff material contained in the provided chapter.* ### 1. Public debt data coverage is limited to the central government. The coverage of public debt ### 1somea2020003 - 1. Public debt data coverage is limited to the central government. The coverage of public debt ### Public debt coverage and scope - Public debt data coverage captured by the Debt Sustainability Assessment (DSA) is near complete and limited to the central government. - No government guaranteed debt, no known liabilities of state-owned enterprises or subnational governments, and no public-private partnerships (Text Table 1). - Domestic public debt does not exist beyond the accumulation of government arrears. - Default settings are applied to the DSA contingent liability stress test; no other tailored stress tests are applicable to Somalia. - External debt for the DSA is defined on a residency basis. - Reasons for deviations from default settings: No PPPs exist in Somalia. ### Debt-carrying capacity and thresholds - Somalia’s debt-carrying capacity is classified as Weak. - Classification guided by a composite indicator score determined by the World Bank’s CPIA, real GDP growth, import coverage of foreign exchange reserves, remittances as percent of GDP, and growth of the world economy. - DSA uses the October 2019 vintage of the WEO and the 2018 CPIA. - Latest available composite indicator score for Somalia: 0.867 (Text Table 2). - Country details: - Country: Somalia - Country Code: 726 - Debt Carrying Capacity: Weak - Final Classification based on current vintage: Weak - Composite indicator score (displayed): 0.87 and 0.57 in table context ### Composition and evolution of public and external debt - Total stock of debt outstanding at end-2018: US$5.3 billion, of which nearly all is in arrears (US$5.0 billion). - Debt stock revision: upward revision at end-2018 by US$0.6 billion relative to preliminary DSA, mainly due to upward revision of bilateral Paris Club creditor debt. - Breakdown of total external debt (end-2018): - Principal: $2.0 billion - Unpaid interest: $1.3 billion - Late interest or fees: $1.7 billion - Creditor composition (Text Figure 1): - Paris Club creditors: 58 percent - Multilaterals: 29 percent - Non-Paris Club bilateral creditors: 11 percent - Domestic debt: 1.5 percent of GDP represents central government arrears (stock estimated at US$68.8 million, end-2018). - Of the $191 million not in arrears, $31 million and $160 million are obligations to the African Development Fund and the International Development Association, respectively. ### Data weaknesses and limitations - National accounts data: relatively short time series (six years) based on expenditure estimates from household survey data. - Substantial gaps in balance-of-payments data, including on current account flows. - Trade estimates: based on third-party data and augmented by Port of Mogadishu data. - Secondary transfers: derived from third parties and cross-checked with improving Somali data. - Direct investment data: derived from the real sector file; an FDI survey is due for launch. - Data weaknesses significantly constrain macroeconomic analysis and limit significance of standardized stress test results in the LIC-DSF. - Short historical series and severe structural breaks complicate application of standard DSA stress tests. ### Medium- and long-term macroeconomic assumptions - Fragility context: - Somalia is a fragile state vulnerable to security and climate shocks; long civil war degraded economic and human capital. - Frequent climate shocks directly impact agricultural activities, which account for the bulk of economic activity. - Recent performance: - Positive real growth rates of about 2.5 percent (2013–18), below population growth of 2.9 percent, indicating falling real per capita incomes. - Realism tools and caveats: - Some realism tools inoperable due to data gaps (e.g., public investment-growth nexus). - Fiscal multipliers for Somalia likely weak due to underdeveloped financial system and conservative revenue projections. ### Baseline scenario assumptions and policy context - Baseline uses the medium-term macroeconomic framework underpinning the new IMF arrangement and long-term assumptions consistent with normalization of relations with creditors and HIPC comparators (Text Table 4). - Growth assumptions: - Growth forecast to pick up modestly from 2022, peak at around 5.4 percent in 2027, and settle to a long-run average of 4.8 percent. - Economy assumed to remain fully dollarized (low inflation, no adverse nominal exchange rate movements). - Fiscal policy: - Near term: prudent fiscal policy; fiscal stance expected to remain broadly in balance with limited access to new debt and no accumulation of new domestic arrears. - Revenue mobilization: introduction of sales and excise taxes and establishment of a large- and medium-sized taxpayers’ office expected to be critical. - Medium-term financing: government expected to maximize grants and seek external financing on concessional terms. - Illustrative assumption: starting in 2024, central government undertakes moderate deficit financing with the overall deficit (including grants) projected to average about 2.0 percent of GDP per year, financed through external concessional borrowing. - External sector: - Non-interest current account deficit expected to remain highly negative and large. - Trade deficit largely financed by official grants and remittances; residual assumed to be met by foreign direct investment. - Export growth assumption: conservative at 5.7 percent per year through 2029. - Import growth assumption: 3.6 percent per annum. - Baseline assumption on debt relief and borrowing: - Baseline assumes full delivery of traditional debt relief, no new borrowing over the interim period, and application of Naples terms by all bilateral creditors at the HIPC Decision Point in the first half of 2020. - Baseline does not include relief from the HIPC Initiative or MDRI. ### Alternative scenario (full debt relief) and implications - Alternative scenario incorporates full impact of multilateral arrears clearance, interim debt relief, HIPC, MDRI and beyond HIPC debt relief. - Assumes Somalia reaches the HIPC Completion Point in early 2023 — estimated to provide an additional stock reduction of external debt of about 50 percent of GDP relative to the baseline. - Under full HIPC, MDRI, and beyond-HIPC delivery at completion point, all debt burden indicators would be significantly below thresholds from 2023, consistent with achieving a moderate risk rating at the Completion Point. - Risk: delay in reaching Completion Point could compromise restructuring assumptions and lead to projected spike in debt service obligations to around $180 million if Completion Point is not reached in 2023; creditors may be asked to provide additional assistance to forestall new accumulation of external arrears. ### External debt sustainability and stress test findings - Baseline debt distress assessment: - Somalia remains in debt distress in the baseline scenario despite full delivery of traditional relief and a financing gap to be met through HIPC interim assistance. - PV of external debt-to-GDP and PV of external debt-to-exports remain well above respective thresholds throughout forecast period. - Debt service-to-exports and debt service-to-revenue remain above thresholds across the horizon. - Forward-looking view: debt could be considered sustainable if all outstanding arrears are treated under debt restructuring agreements soon after Somalia reaches the HIPC Decision Point. - Standardized stress tests: - Reveal considerable vulnerabilities; most debt indicators deteriorate substantially under temporary shock scenarios. - Most serious shock across indicative thresholds concerns non-debt flows, emphasizing high dependence on external aid. - External debt service-to-revenue ratio experiences large breaches under all shock scenarios, highlighting liquidity risks during HIPC interim period. - The LIC-DSF standardized tests generate a financing gap assumed to be filled by accumulation of new debt; in practice, Somalia has no access to formal debt financing, so additional financing needs would be expected to be accommodated through lower fiscal expenditures, lower imports, or higher grants. - Severe data weaknesses could bias simulation results (e.g., exports may overestimate informal flows; GDP estimates may not capture fast-growing sectors such as telecommunications and services). ### Key numeric figures and projections (preserve source precision) - Total stock of debt outstanding at end-2018: US$5.3 billion - Nearly all in arrears: US$5.0 billion - Upward revision in debt outstanding at end-2018: US$0.6 billion - Composition of end-2018 external debt: - Principal: $2.0 billion - Unpaid interest: $1.3 billion - Late interest or fees: $1.7 billion - Creditor shares: - Paris Club creditors: 58 percent - Multilaterals: 29 percent - Non-Paris Club bilateral creditors: 11 percent - Domestic debt stock (end-2018): US$68.8 million (1.5 percent of GDP) - Of $191 million not in arrears: $31 million (AfDF) and $160 million (IDA) - Growth history and projections: - Real growth about 2.5 percent (2013–18) - Population growth: 2.9 percent (2000–2017 basis in note) - Growth forecast: peak at around 5.4 percent in 2027; long-run average 4.8 percent - Macroeconomic projection indicators (Text Table 4; percent or values preserved as in source): - GDP growth (percent): 2018: 2.8; 2019-24: 3.4; 2029: 3.5; 2039: 3.5 (table also shows alternative series 2.8, 3.6, 5.0, 4.7) - GDP deflator (percent): 2018: 1.8; 2019-24: 2.0; 2029: 2.0; 2039: 2.0 - Non-interest current account deficit 2/: 2018: 8.2; 2019-24: 3.7; 2029: 2.6; 2039: -1.6 (other series 10.3, 11.5, 7.4, 6.9) - Primary deficit: 2018: 0.0; 2019-24: -0.3; 2029: -0.4; 2039: -0.1 (other series -0.1, -0.5, 1.2, -0.7) - Exports: 2018: 25.9; 2019-24: 26.7; 2029: 26.8; 2039: 26.6 (other series 23.7, 22.5, 21.1, 20.6) - Revenues and grants: 2018: 5.7; 2019-24: 7.9; 2029: 10.1; 2039: 13.0 (other series 5.7, 10.7, 12.7, 13.3) - Grants (of which): 2018: 1.8; 2019-24: 2.8; 2029: 2.4; 2039: 1.9 (other series 1.8, 5.5, 3.5, 2.5) - Projected debt service spike if Completion Point not reached in 2023: around $180 million (Text Figure 2) - Projected debt service series 2020-2029 illustrated in Text Figure 2 (values shown on chart axis from 0 to 200 USD millions) *Source: Somali authorities and IMF staff estimates (from the DSA text provided).* ### 13. Even after the full delivery of debt relief, Somalia remains highly vulnerable to climate and ### 13. Even after the full delivery of debt relief, Somalia remains highly vulnerable to climate and ### Climate shock - A climate shock would sharply slow Somalia’s critical agricultural sector, with spillovers on overall activity and exports. - Humanitarian inflows would partly mitigate these impacts, but the transient disruption would lead to a temporary slowdown in growth to around 1 to 1.5 percent and delay the projected rise in fiscal revenues and exports. ### Severe security shock - A severe security shock would test public and donor confidence in Somalia’s nascent institutions. - A protracted slowdown would occur as government and private investment plans are shelved, and overall growth would be negative on a per-capita basis (around 1.5 percent on average over the projection). - The lack of investment would contribute to flat export growth in nominal terms. - Under this scenario, debt burden indicators would increase rapidly toward their respective thresholds, as concessional borrowing reaches around $400 million per year to bridge the financing gap. - This favorable financing assumption helps to initially contain debt service relative to exports, but the debt service-to-revenue (excluding grants) also quickly accelerates toward the threshold, highlighting Somalia’s relatively limited buffers due to its narrow domestic revenue base. ### Public debt sustainability - Indicators of public debt are largely indistinguishable from the indicators for external debt. - The PV of total public debt-to-GDP would be well above the benchmark, with serious breaches under the various stress scenarios. - The conclusions with regards to external debt sustainability are relevant also for public debt sustainability, given that there is no market for domestic debt and the existing stock of domestic debt is limited to a small stock of government arrears. - As in external debt sustainability, under the alternative scenario debt burden indicators improve significantly and drop below their respective thresholds. ### Conclusion - Even after full delivery of debt relief, Somalia remains highly vulnerable to climate and security shocks that can materially slow growth, depress exports, and rapidly increase debt burden indicators under stress scenarios. *Source: 1somea2020003 - 13. Even after the full delivery of debt relief, Somalia remains highly vulnerable to climate and* ### 15. Somalia’s external public debt and overall public debt remain in distress under the baseline ### 15. Somalia’s external public debt and overall public debt remain in distress under the baseline ### Main findings - Somalia’s external public debt and overall public debt remain in distress under the baseline scenario, but in a forward-looking sense overall debt is judged as sustainable contingent on the full delivery of eligible debt relief at the HIPC Completion Point. - Even with a baseline that assumes full delivery of traditional debt relief, external debt burden indicators remain well above their indicative thresholds, emphasizing the need for debt relief. - Debt relief under the HIPC Initiative, MDRI, and beyond-HIPC assistance would dramatically improve Somalia’s external debt situation and bring debt to a manageable level such that it can be judged sustainable in a forward-looking sense. - The inclusion of domestic debt does not materially impact the analysis. - Even after full debt relief, Somalia is expected to remain highly vulnerable to shocks, underscoring the importance of strengthening debt management institutions and capacity over the medium term. ### Key sustainability indicators and projections (selected) - PV of PPG external debt-to-GDP ratio: - 2018: 110.9 - 2019: 105.2 - 2020: 74.9 - 2021: 71.3 - 2022: 65.9 - 2023: 60.7 - 2024: 56.0 - 2029: 38.0 - 2039: 18.2 - PV of PPG external debt-to-exports ratio: - 2018: 467.6 - 2019: 461.4 - 2020: 331.7 - 2021: 319.0 - 2022: 294.7 - 2023: 271.2 - 2024: 251.3 - 2029: 180.2 - 2039: 88.5 - PPG debt service-to-exports ratio (selected years): - 2021: 14.3 - 2022: 21.7 - 2023: 20.2 - 2024: 18.6 - 2025: 17.2 - 2029: 6.5 - PPG debt service-to-revenue ratio (excl. grants) (selected years): - 2021: 72.0 - 2022: 100.1 - 2023: 86.3 - 2024: 71.5 - 2025: 58.6 - 2029: 25.7 - 2039: 12.5 - Gross external financing need (Million of U.S. dollars): - 2019: 77.8 - 2020: 164.8 - 2021: 270.4 - 2022: 381.2 - 2023: 384.2 - 2024: 384.6 - 2025: 487.0 - 2026: 489.0 - 2029: 551.9 ### Public sector debt indicators (selected) - Public sector debt (in percent of GDP): - 2018: 112.8 - 2019: 108.9 - 2020: 74.6 - 2021: 70.8 - 2022: 65.3 - 2023: 59.7 - 2024: 55.8 - 2029: 40.5 - 2039: 24.1 - PV of public debt-to-GDP ratio: - 2018: 112.3 - 2019: 106.6 - 2020: 76.2 - 2021: 72.5 - 2022: 67.1 - 2023: 61.8 - 2024: 57.0 - 2029: 38.7 - 2039: 22.6 - PV of public debt-to-revenue (excl. grants) ratio (selected): - 2018: 1963.1 - 2019: 2693.3 - 2020: 1696.4 - 2021: 1495.3 - 2022: 1282.9 - 2023: 1060.3 - 2024: 871.0 - 2029: 419.6 - 2039: 210.2 ### Key macroeconomic assumptions (selected) - Real GDP growth (in percent): - 2018: 2.8 - 2019: 2.9 - 2020: 3.2 - 2021: 3.5 - 2022: 3.7 - 2023: 3.9 - 2024: 4.2 - 2029: 5.0 - 2039: 4.2 - GDP deflator in US dollar terms (change in percent): 1.8 (2018), 2.1 (2019), 2.0 (2020–2029), 2.0 (2039) - Effective interest rate (percent): - 2018: 0.0 - 2019: 1.4 - 2020: 1.4 - 2021–2025: 2.0 (selected) - 2029: 1.4 - Growth of exports of G&S (US dollar terms, in percent): - 2018: 10.0 - 2019: 1.0 - 2020: 4.2 - 2021: 4.4 - 2022: 6.0 - 2023: 6.0 - 2024: 5.9 - 2029: 6.7 - Growth of imports of G&S (US dollar terms, in percent): - 2018: 4.0 - 2019: 6.6 - 2020: 6.6 - 2021: 5.7 - 2022: 6.7 - 2023: 2.6 - 2024: 1.0 - 2029: 4.9 - Government revenues (excluding grants, in percent of GDP): - 2018: 3.9 - 2019: 4.0 - 2020: 4.5 - 2021: 4.8 - 2022: 5.2 - 2023: 5.8 - 2024: 6.5 - 2029: 9.2 - 2039: 6.7 - Aid flows (in Million of US dollars): - 2019: 89.2 - 2020: 147.9 - 2021: 321.2 - 2022: 328.4 - 2023: 418.6 - 2024: 477.7 - 2025: 433.1 - 2026: 452.3 - 2029: 454.1 - Nominal GDP (Million of US dollars): - 2018: 4,721 - 2019: 4,958 - 2020: 5,218 - 2021: 5,507 - 2022: 5,827 - 2023: 6,179 - 2024: 6,570 - 2029: 9,299 - 2039: 17,984 ### Impact of HIPC, MDRI, and beyond‑HIPC assistance (selected scenario comparisons) - Under the Alternative Scenario "With HIPC, MDRI and beyond-HIPC assistance" (Table 3, PV of debt-to-GDP): - 2019: 105.2 (same as baseline for 2019) - 2020: 41.1 - 2021: 39.4 - 2022: 36.2 - 2023: 7.4 - 2024: 8.3 - 2025: 9.0 - 2026: 9.3 - 2027: 9.5 - 2028: 9.4 - 2029: 9.5 - Under that scenario, PV of debt-to-exports and debt service ratios likewise fall sharply relative to the baseline (see sensitivity tables for exact year-by-year values). ### Stress tests and sensitivity analysis (selected) - The most extreme stress tests and tailored tests were run; stress tests include shocks such as: - Real GDP growth shocks - Primary balance shocks - Exports shocks - One-time 30 percent nominal depreciation - Combination B1–B5 - Combined contingent liabilities - Selected sensitivity outcomes (PV of PPG external debt-to-GDP, Table 3 baseline vs. selected tests): - Baseline 2024: 56.0 - B6 (one-time 30 percent nominal depreciation) 2024: 57.5 - B4 (Other flows) 2024: 107.9 - C1 (Combined contingent liabilities) 2024: 68.1 - Debt service-to-exports ratio (baseline vs. Alternative Scenario A2 with HIPC/MDRI): - Baseline 2021: 14.3; A2 2021: 1.4 - Baseline 2022: 21.7; A2 2022: 1.4 - Baseline 2023: 20.2; A2 2023: 1.3 - Public debt sensitivity (Table 4) shows similar marked improvements under A2 (With HIPC, MDRI, and beyond-HIPC). ### Policy implications and recommendations - Delivery of full eligible debt relief at HIPC Completion Point is critical to render Somalia’s overall debt sustainable in a forward-looking sense. - Debt relief (HIPC Initiative, MDRI, and beyond-HIPC assistance) is necessary to bring external debt burden indicators down to manageable levels. - Strengthen debt management institutions and capacity over the medium term to reduce vulnerability to shocks and to manage remaining debt sustainably even after relief. - Continue monitoring vulnerability to shocks (security, climate, commodity price, and other flows) given persistent high susceptibility even after debt relief. *Source: Country authorities; and staff estimates and projections.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1somea2020003.pdf_