Key Questions on Somalia

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What does the Decision Point mean and why is it important for Somalia?

On March 25, 2020, the Executive Boards of the International Monetary Fund (IMF) and the World Bank's International Development Association (IDA) agreed that Somalia has reached the Decision Point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative, becoming the 37th country to receive such debt relief. This is a significant step for Somalia towards debt sustainability, enhanced growth, and poverty reduction.

The Decision Point means that Somalia’s debt will be reduced from US$ 5.2 billion at end-2018 to US$3.7 billion in net present value (NPV)terms.[1] If Somalia sustains its commitment to reform, it is expected to reach the HIPC Completion Point in three years, when its debt will be significantly further reduced to US$557 million in net present value terms (NPV).

It also means that Somalia will immediately normalize its relations with the international community, allowing it to gain access to new financial resources from development partners to help accelerate growth, improve social conditions, and raise millions of its population out of poverty. Importantly, at this critical juncture, it provides access to development partners’ full range of instruments to deal with the impact of the global COVID-19 pandemic.

Reaching this milestone has taken a lot of hard work and effort, not just by the Somali authorities — who have shown incredible commitment to reform under some very difficult circumstances, but also by its donors. This was a truly global effort with more than 100 countries, including many low-income countries, contributing financial resources that will be used to clear Somalia’s current debt to the IMF once it has reached the HIPC Completion Point. We are very grateful to our membership for their strong support for this effort.

(see Figure 1).

Figure 1: Somalia’s Debt

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[1] The net present value tries to capture the economic value of the debt, and could be considered the price that would be paid if the debt obligation were sold in the market. In particular, the longer-maturity the debt, the lower the NPV as payments that are due many years in the future have little value today.

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What happens next? What more does Somalia need to do to get the full amount of debt relief?

The next milestone will be Completion Point, where Somalia will receive the full amount of HIPC debt relief committed to at Decision Point. At that point, the NPV of debt is expected to be less than 10 percent of GDP,

To reach Completion Point, Somalia will need to:

1. Establish a further track record of good performance under an IMF program;
2. Implement its Poverty Reduction Strategy for at least one year; and
3. Implement the other key structural reforms agreed at Decision Point—the “floating Completion Point triggers”. These include additional efforts to ensure public resources are used effectively and to the benefit of all the Somali people, and efforts to promote stronger economic growth that will lead to more jobs.

It is expected that, at the Completion Point, Somalia’s debt will have been reduced to sustainable levels (see Figure 1).

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How will the global COVID-19 pandemic affect Somalia?

The global COVID-19 pandemic poses a new risk to the outlook for Somalia. It is a fast-evolving situation that will have has both human and economic implications.

The authorities have taken swift action to contain any outbreak, including restricting large meetings and gatherings; shutting schools and universities; and closing the airports to international travel. Somalia is being supported by the World Health Organization and the UN to help address the potential health-related consequences, and is also receiving technical support from Italy in these efforts. Nevertheless, given the weak health infrastructure, any significant outbreak would prove extremely challenging to address.

We are working with the authorities to help them assess the potential economic impact of the pandemic, which will depend on the extent and duration of the shock. Exports, remittances, and investment flows are all likely to be negatively affected. Domestic government revenues are also likely to fall leading to challenges for the authorities in following through on planned expenditures.

Overall, strong support from the international community will be critical in helping Somalia address and minimize the impact of the shock.

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Somalia has a new arrangement with the IMF. What is the purpose of that?

• On March 25, the IMF Executive Board approved a new three-year arrangements under the Extended Credit Facility (ECF) and the Extended Fund Facility (EFF) for Somalia. The new arrangement will help guide the authorities’ reform priorities as Somalia moves from the HIPC Decision Point to the Completion Point and catalyze concessional donor financing. It will support the authorities as they implement Somalia’s National Development Plan to build greater economic resilience, promote higher and more inclusive growth, and reduce poverty.

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Why does Somalia need debt relief?

With support from international partners and sustained commitment to economic reform, Somalia has made significant progress towards rebuilding and stabilizing its economy. Specifically, Somalia’s fiscal position has strengthened, and financial stability reforms are also deepening. Having reached the Decision Point, Somalia’s debt will be irrevocably reduced from US$ 5.2 billion at end-2018 to US$3.7 billion in net present value (NPV)terms.

Despite this progress, poverty is widespread with almost 70 percent of the population surviving on less than $1.90 a day. And Somalia remains very vulnerable to climate shocks (such as the recent locus invasion) and security shocks, with over 2 million people internally displaced. Current levels of growth will not support a significant reduction in poverty. Per-capita GDP growth has been negative or flat over the past few years (see Figure 2).

Figure 2: Somalia’s GDP

Debt relief under the HIPC Initiative is critical for Somalia to access more development aid to support more rapid growth and poverty reduction.

Importantly, by clearing its arrears to key institutions, Somalia has now normalized its relations with key development partners, opening access to the full range of resources that will help it address the emerging risks posed by the global COVID-19 pandemic.

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What is the Heavily Indebted Poor Countries PC Initiative (HIPC)?

In 1996, the World Bank and IMF launched the HIPC Initiative to create a framework in which all creditors, including multilateral creditors, can provide debt relief to the world's poorest and most heavily indebted countries to ensure debt sustainability, and thereby reduce the constraints on economic growth and poverty reduction imposed by the unsustainable debt-service burdens in these countries. 

To date, 37 HIPC countries, including Somalia, have reached their decision points, of which 36 have reached the completion point (including Liberia, which did so on June 29, 2010).