Executive Summary

Somalia has an historic opportunity to turn the page on decades of conflict, fragility and state fragmentation, and embark on a trajectory towards poverty reduction and inclusive growth. For over two decades, Somalia has experienced protracted conflict and fragility, the collapse of rule of law, institutions, basic public services and the social contract, resulting in the impoverishment of millions. 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 sustained political, economic and institutional reforms undertaken since 2016 have succeeded in rebuilding core state capabilities.

Despite these improvements, poverty remains pervasive. Almost 70 percent of Somalis live on less than US$1.90 a day in purchasing power parity terms, and economic growth is barely keeping up with population growth, estimated at 2.8 percent per year. Poverty is deep particularly in rural populations and 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.

Without a solution to its unsustainable debt situation, Somalia will not be able to finance essential poverty-reducing expenditure and its development needs. FGS public and publicly guaranteed external debt was estimated at US$5.3 billion at the end of 2018 in nominal terms, including US$5.0 billion in arrears. (This corresponds to US$5.2 billion in net present value (NPV) terms.)

A preliminary Debt Relief Analysis (DRA) shows that Somalia qualifies for debt relief under the HIPC Initiative’s “export window” based on end-2018 data. After full application of traditional debt relief mechanisms, the country’s NPV of debt is estimated at US$3.5 billion at end-2018, equivalent to 328.9 percent of exports of goods and services. The amount of debt relief needed to bring Somalia’s NPV of debt-to-exports ratio down to the HIPC threshold of 150 percent is estimated at US$1.9 billion in end-2018 NPV terms. This implies a common reduction factor of 54.4 percent.

Staffs expects that Somalia could reach the Decision Point by the end of March 2020. As Somalia has already submitted its Ninth National Development Plan 2020–24, adopted in September 2019, to meet the requirement of developing a poverty reduction strategy, reaching the Decision Point is subject to (i) continued satisfactory performance under the fourth IMF Staff Monitored Program; (ii) clearance of its arrears to its multilateral creditors (AfDB, IDA and the IMF); and (iii) an agreement on appropriate Completion Point triggers to be included in the Decision Point document. In addition, for the IMF to provide disbursements of interim assistance, satisfactory financing assurances from Somalia’s other creditors must be received regarding the exceptional assistance they will provide under the HIPC Initiative.¹ Commitments from IMF member countries to provide the financing necessary for the IMF’s share of debt relief would also need to be in place at the Decision Point, with the actual delivery of debt relief in the interim period and at the Completion Point dependent on securing the necessary financing.

On reaching the Completion Point, Somalia would qualify for MDRI debt relief from IDA and the AfDF and for beyond-HIPC assistance from the IMF. MDRI from IDA and AfDB would cancel all remaining claims to Somalia. MDRI debt relief could amount to US$116.6 million in 2022 NPV terms. Somalia has no debt eligible for MDRI relief from the IMF. At the Completion Point the IMF would provide beyond-HIPC assistance through cancellation of the portion of the pre-Decision Point financing that is not already covered by interim relief; this would include the first disbursement under the ECF and EFF-supported arrangement.

With HIPC, MDRI and beyond HIPC assistance, Somalia’s NPV of debt-to-exports ratio is projected to decline from 491.7 percent in 2018 to 57.0 percent in 2027 and 41.5 percent in 2038. The debt service-to-exports ratio is expected to initially increase after the country reaches HIPC Completion Point—mainly due to the resumption of regular payments and arrears rescheduling—but decrease gradually thereafter to 1.9 percent in 2038. Somalia remains highly vulnerable to climate shocks and a deterioration in the security situation.

Approved By

Thanos Arvanitis and Yan Sun (IMF) and Hafez Ghanem and Ceyla Pazarbasioglu (IDA)