Enhanced Heavily Indebted Poor Countries (HIPC) Initiative-Decision Point Document

Abstract

Enhanced Heavily Indebted Poor Countries (HIPC) Initiative-Decision Point Document

Introduction

1. This paper presents an assessment of Somalia’s eligibility for assistance under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative.1,2 The assessment is based on a joint HIPC debt relief analysis (DRA)3 conducted by IMF and IDA staffs and the Somali authorities, following a data reconciliation mission in July 2019. The Executive Boards of the IMF and IDA discussed the preliminary HIPC document for Somalia on February 12 and 13, respectively. On these occasions, Directors confirmed that Somalia is eligible for assistance under the HIPC Initiative in view of its status as a Poverty Reduction and Growth Trust (PRGT)-eligible and IDA-only country, its overall track record of reforms, and its external debt indicators being above the relevant HIPC Initiative threshold after taking into account the debt relief provided under traditional debt-relief mechanisms. Directors also indicated that the country could reach the Decision Point provided that it: (1) completes satisfactorily the second review under the fourth Staff-Monitored Program (SMP); (2) clears its arrears to World Bank, AfDB, and IMF, and agrees a strategy to clear arrears to other multilateral creditors; and (3) agrees a set of appropriate completion point triggers with IMF and IDA staffs.

2. This paper builds on the Preliminary HIPC Document. The macroeconomic framework reflects the policy framework underlying the proposed three-year Fund-supported program. The debt relief analysis (DRA) remains largely unchanged, but some of the underlying debt data has been updated to reflect new information from creditors. In addition, this paper presents an assessment of debt management capacity in Somalia (Annex I) and a full Debt Sustainability Analysis (DSA) under the Debt Sustainability Framework for Low-Income Countries (Annex II).

3. The DRA reveals that, after traditional debt relief mechanisms are applied, Somalia’s debt burden expressed as the net present value (NPV) of debt-to-exports ratio is 344.2 percent at the end of December 2018—significantly above the HIPC Initiative threshold.4 Possible HIPC debt relief is estimated at US$2.1 billion in end-2018 NPV terms, with a common reduction factor (CRF) of 56.4 percent (compared to 54.4 percent in the Preliminary Document). Debt relief under the HIPC Initiative and the Multilateral Debt Relief Initiative (MDRI) would help accelerate progress toward the Sustainable Development Goals (SDG).

4. This paper is organized as follows. The second section provides background information on Somalia’s eligibility for assistance under the HIPC Initiative, including the country’s recent progress in the political and economic areas, and planned policy reform agendas. The third section discusses the country’s medium- to long-term macroeconomic framework and its poverty reduction strategy. The fourth section summarizes the DRA and presents the magnitude of HIPC assistance, including the apportionment of this assistance across Somalia’s creditors. The fifth section outlines reforms that will serve as Completion Point triggers. The final section presents issues for discussion by Executive Directors.

Background and Eligibility for HIPC Initiative Assistance

A. PRGT and IDA Status

5. Somalia is eligible for support from the IMF under the Poverty Reduction and Growth Trust and from the World Bank as an IDA-only country (Box 1).

6. Somalia has demonstrated sustained commitment to implementing economic and financial reforms in the context of four consecutive Staff-Monitored Programs (SMPs). The Somali authorities have completed satisfactorily the second review under the fourth SMP (SMP IV), which was endorsed by IMF Executive Directors in July 2019 as meeting the standards of an Upper Credit Tranche arrangement. IMF members have mobilized the necessary financial resources to cover the IMF’s costs of HIPC and beyond HIPC debt relief for Somalia, which are estimated at SDR 136 million (equivalent to US$189.1 million) and SDR 105 million (equivalent to US$146 million) in end-2018 NPV terms, respectively.5 This would qualify Somalia for access to a new three-year Fund-supported financing arrangement once arrears to the Fund have been cleared. This three-year program, to be supported by the Extended Credit Facility (ECF) and Extended Fund Facility (EFF), will further strengthen fiscal and financial institutions, and will aim to support sustained growth and the priorities outlined in Somalia’s Ninth National Development Plan (NDP9).

7. The World Bank Group’s Country Partnership Framework (CPF) for Somalia (FY19– FY22) was developed with the objective of positioning Somalia for the HIPC process.6 The CPF focuses on strengthening Somali institutions to deliver services and on restoring economic resilience and opportunities. It builds on a record of steadily improving country performance achieved under the 2013 Interim Strategy Note, which was supported by the Multi-Partner Fund (MPF).7 The current CPF 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 FY20.8 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 its arrears to IDA cleared, Somalia regained access to the full range of World Bank Group financing instruments.9 Following arrears clearance, Somalia also qualified for funds from the IDA18 Turnaround Regime (TAR) for the remainder of FY20 and access to an IDA19 Turnaround Allocation (TAA) for FY21-FY23 to support an expanded program of grant financing.10

Requirements to Reach the Decision Point under the HIPC Initiative.

Three countries remain potentially eligible for debt relief under the HIPC Initiative: Eritrea, Somalia and Sudan. The HIPC Initiative is a rules-based framework that has been effectively closed to new entrants since 2011. The three “ringfenced” countries are those that (i) are IDA-only and IMF PRGT-eligible; (ii) met the indebtedness criteria at end-2004 and end-2010; and (iii) might wish to avail themselves of debt relief under the HIPC Initiative.1/

The key steps needed for these countries to reach the Decision Point are:

  • Establishing a satisfactory track record of strong policy performance under IMF- and World Bank-supported programs. Qualifying IMF programs include a staff-monitored program (SMP) with Upper Credit Tranche (UCT) conditionality.

  • Clearing arrears to the IMF, the World Bank, and the African Development Bank, and clearing or preparing a plan to clear arrears to the remaining external creditors.

  • Preparing a satisfactory (full or interim) Poverty Reduction Strategy (PRS), or similar document, reflecting a broad-based consultation, including with civil society

  • Agreeing a set of floating Completion Point triggers with IDA and the IMF.

  • Having debt indicators that, after traditional debt relief, are above the HIPC Initiative thresholds. This assessment should be made using the most recent data for the fiscal year immediately prior to the expected Decision Point.

1/ See “Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI)—Statistical Update, 2019”.

B. Background, and Political and Poverty Developments

8. 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. Starting in the early 2000’s Somalia has seen multiple (often flawed, failed or externally driven) attempts to broker peace among factions and establish a sustainable governance framework that provides the basis for stability and development. The breakthrough 2012 Provisional Constitution established a federal political structure, including a parliament, the Federal Government of Somalia (FGS) and the Federal Member States (FMSs). Somalia has also successfully undertaken 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. Although much remains to be done to stabilize the country and secure a lasting political settlement, the sustained political, economic and institutional reforms undertaken supported by four consecutive SMPs, EU and World Bank financing, and extensive technical assistance, have succeeded in rebuilding core state capabilities.

9. Poverty remains pervasive in Somalia. Almost 70 percent of Somalis live on less than US$1.90 a day in purchasing power parity terms (Table 1), and economic growth lags behind population growth, estimated at 2.8 percent per year.11 Poverty incidence is almost uniformly high in Somalia—poverty rates in Mogadishu, rural areas, internally displaced populations (IDPs) and nomads are all higher than the national average. The only exception is urban areas other than Mogadishu where the poverty rate is around 10 percentage points lower than the national average, possibly reflecting smaller concentrations of IDPs and, in some cities, less exposure to conflict. Poverty is deep particularly in rural populations and IDPs. The average distance to the poverty line for the poor in these two groups is more than one third of the poverty line.

Table 1.

Key Poverty and Social Indicators

article image
Sources: *Somali Poverty and Vulnerability Assessment; ** Authors’ estimation using HFS2017; *** WDI.

10. Somali households suffer non-monetary deprivations as well. Almost nine of 10 Somali households are deprived in at least one dimension of poverty—monetary, electricity, education, or water and sanitation—and nearly seven of 10 households suffer in two or more dimensions. In addition, a significant group of non-poor are vulnerable to falling into poverty. About one third of the non-poor is within 20 percent from the poverty line.

11. Somali cities tend to have lower monetary poverty and better services than rural areas. The only exception is Mogadishu, where, as discussed above, poverty is higher than the national average. In contrast, many other cities have not had to cope with constant and large influxes of IDPs. Cities consistently provide better access to services—except for land and housing—and more stable income than rural areas. Despite better conditions in cities, however, they still struggle with hunger, high absolute poverty of 64 percent, nonmonetary poverty of 41 percent, and ensuring universal access to services. There is also some regional disparity in the provision of services, with Mogadishu and North East and North West cities providing better access to services compared to Baidoa, Kismayo, and central urban areas.

12. Women and youth face special challenges. Women across all population groups have lower literacy and educational attainment. An estimated 74 percent of youth are unemployed, which contributes to the underlying drivers of fragility, as spoiler groups such as Al-Shabab exploit constrained economic opportunities. This situation stresses the urgency of continued support to economic reforms that will promote inclusive growth and meaningful jobs for women and the youth.

13. Somali households are especially vulnerable to shocks, including natural disasters and epidemics, as well as to household-level shocks such as injury, death, or unemployment. Successive droughts and heavy rains—such as the severe drought in 2017 and 2019 —have taken a large toll on the country, aggravating the humanitarian challenges. Poorer households are more likely to experience more than one type of shock. The impact of shocks is magnified when a household experiences several shocks simultaneously. The persistent cycle of shocks increases Somalis’ vulnerability to future shocks as there is limited public and private insurance and access to finance. The authorities are taking steps to reduce Somalia’s exposure to shocks and reduce their impact, including through the implementation of their Recovery and Resilience Framework (RRF) and development of a social registry (a proposed Completion Point trigger), which will improve delivery of post-disaster assistance.12 Ongoing security challenges also represent a significant risk to households. The successful completion of the ongoing Constitutional Review process, together with other efforts to strengthen federalism and inclusive politics, including the authorities’ commitments under the Mutual Accountability Framework (MAF), will support greater peace and security in Somalia.13

C. Post-Conflict Macroeconomic and Structural Reform Track Record

14. Despite the challenging environment, progress on reform and policy implementation has been good and sustained reforms have translated into economic results (Figure 1). Domestic revenue mobilization has improved, albeit from a very low base—increasing by over 70 percent since 2016 to 4.6 percent of GDP in 2019, reflecting improvements in tax administration and new tax measures. At the same time, expenditures have been kept in check and there has been no domestic arrears accumulation since 2016. Although agriculture continues to be hit by adverse weather conditions, economic activity has been supported by the telecom, trade, construction, and financial sectors, with GDP growth estimated at 2.8–2.9 percent in 2018–19.14 These reforms have been supported by consecutive IMF SMPs and World Bank support, underpinned by IDA PACGs and MPF grants.

Figure 1.
Figure 1.

Progress on Economic Policy Reforms1/

Citation: IMF Staff Country Reports 2020, 086; 10.5089/9781513538327.002.A001

1/ The World Bank’s Recurrent Cost and Reform Financing projects (RCRF) have been financed from the Multi-Partner Fund and IDA pre-arrears clearance grants.

15. In addition to the coordinated support from the Bank and Fund, reforms have been supported by other development partners.15 This includes ongoing support from the African Development Bank (AfDB); the UK Department for International Development (DFID), particularly in the areas of public financial management (PFM) and customs modernization, and the EU, with their budget support program focusing on domestic revenue mobilization, PFM, intergovernmental fiscal relations, law enforcement, and education. Broader support from the international community is anchored by the Somalia Partnership Forum and associated MAF.16

16. With the support of the international community, the authorities’ strong commitment to reforms and policy implementation has seen significant progress in key areas. As discussed in the Preliminary HIPC document, highlights include a significant increase in domestic revenue mobilization, including due to the introduction of sales and excise taxes, and the establishment of a large- and medium-taxpayers’ office; enhanced PFM, including due to the implementation of the Somalia Financial Management Information System (SFMIS); progress on fiscal federalism, including the establishment of the Intergovernmental Fiscal Forum (IGFF); a strengthening of capacity at the Central Bank of Somalia and an expansion of regulatory oversight to the mobile money sector; a stronger anti-money laundering/combatting the financing of terrorism (AML/CFT) framework, including with the enactment of a new AML/CFT law; efforts to improve governance and reduce the risk of corruption, including the enactment of an Anti-Corruption Act; and progress on developing key statistics (such as national accounts, balance of payments, CPI, and monetary statistics).

17. Although progress has been significant, the authorities are committed to an ambitious reform agenda, including to support NDP9. Critical work will continue in fiscal federalism, fiscal and debt policy and management, data and statistics, monetary policy, financial sector regulation, and governance and anti-corruption in the years ahead, including within the framework of future IMF programs and WB operations. Achieving these objectives will be challenging given the ongoing limitations on resources, as well as important capacity constraints and aid absorption bottlenecks.

18. Planned reforms focus on the following key areas and will continue to be supported by technical assistance and other support from Somalia’s development partners.

  • Fiscal: The authorities aim to increase domestic revenues further, including by implementing the recently enacted Revenue Act and the Customs Reform Roadmap. They also plan to undertake further efforts to strengthen PFM, including by issuing key regulations to support the newly enacted PFM Act and completing a quality assurance of the SFMIS. They will also develop an action plan to strengthen the capacity of the debt management unit They also plan to enact the Extractive Industry Tax Law and issue regulations to support the implementation of the Petroleum Act, and will finalize the model Production Sharing Agreement (PSA) in line with this legal framework ahead of issuing any oil exploration licenses. They will continue working to deepen fiscal federalism, including by revising the current set of expenditure assignment guidelines as the authorities move forward with implementing the Revenue Act

  • Financial: The authorities will continue implementing the Financial Sector Reform Roadmap, including further efforts to deepen financial sector supervision, and structural reforms to improve the payment system. They will complete the transition to the new CBS organizational structure, and continue strengthening the AML/CFT operational and legal framework. The authorities will also work towards completing their National Risk Assessment and preparing for the MENA-FATF Mutual Evaluation Assessment in 2024.

  • Governance. To improve governance and fight corruption, the authorities will follow-through on the new Anti-Corruption Law by establishing the Anti-Corruption Commission. They will also approve and publish their National Anti-Corruption Strategy (NACS).

  • Inclusive growth. To bolster the foundations for sustained inclusive growth and improve the resilience to climate shocks, the authorities will develop the National Water Resource Strategic Plan, pass the Somali Standards and Quality Control Bill and establish the Somali Bureau of Standards. They will also move forward with plans to establish a national digital ID, which will also help improve the private sector’s access to credit.

  • Statistics. The authorities will prepare a Statistical Action Plan to underpin further improvements in statistical capacity. Key priorities will include the development of a production-based estimate of GDP.

Medium-to Long-Term Strategy and Prospects

A. Macroeconomic Outlook

19. Economic activity remains stable. Real GDP growth is expected to remain at 2.9 percent in 2019 (from 2.8 percent in 2018). Spring drought conditions contributed to low cereal production in southern Somalia, while higher-than-normal rainfall in the Autumn led to flooding. While adverse climate events aggravated human displacement, the related humanitarian assistance facilitated higher food imports, mitigating the impact on food insecurity and growth. Fall rains suggested improved conditions for early 2020, but the impact of the recent locust invasion and the potential impact of Covid-19 makes the near-term outlook less certain. Inflation averaged 3.1 percent in 2019 as better food supply and lower transport costs eased pressures on food prices in the second half of the year. The current account deficit widened to 12 percent of GDP in 2019 from 10 percent in 2018, reflecting the increase in imports supported by humanitarian aid.

20. Fiscal outcomes for 2019 reflects continued strong performance. FGS domestic revenue for 2019 reached US$230 million compared to US$183 million in 2018. This reflected both an increase in tax revenues (of US$16 million or 11 percent), and a sharper increase in non-tax revenues (US$31 million or 68 percent), mostly due to the commencement of payments by the International Air Transport Association of over-flight fees. Expenditures remained below projections (US$315 million relative to US$341 million), resulting in an estimated fiscal surplus for 2019 of US$24 million, which includes US$10 million ear-marked for use in 2020 and US$0.5 million for domestic arrears payments.

21. Growth is expected to become more resilient on the back of broad-based reforms and increased access to resources for development spending on reaching the Decision Point (Table 2). Overall, growth is 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. This would imply a long-run growth rate about 1.3 percentage points higher relative to a scenario without debt relief, with per-capita growth to reach about 2 percent over the long-run (from about -0.4 percent in 2016–18).17 The growth outlook will be supported by higher consumption and increased contributions of export and investment. Although exports are expected to grow in line with broader economic activity, the trade deficit will remain large as imports pick-up to support growth, with an expected shift in composition from food to investment goods as investment in resilience improves food security. Over the short to medium term, the trade deficit will be financed by higher grants and remittances. However, over the longer-term, grants are expected to decline and be gradually replaced with concessional debt and greater flow of foreign direct investment (FDI) as the business environment improves. Inflation is projected to remain broadly stable at below 3 percent, in line with international prices.

Table 2.

Somalia: Selected Economic and Financial Indicators, 2016–2025

article image
Sources: Somali authorities; and Fund staff estimates and projections.

Budget data for the Federal Government of Somalia. Fiscal operations are recorded on a cash basis. GDP data cover the entire territory of Somalia.

Assumes application of HIPC debt relief and interim HIPC assistance from the Decision Point, and MDRI and “beyond-HIPC” relief at Completion Point.

Includes FGS grants held abroad.

Primarily desposits at commercial banks. Data does not yet include balances held with MNOs.

22. The fiscal resource envelope will increase to reflect higher aid and domestic revenue mobilization over the medium-term. Expenditure will remain in check, and cash management and expenditure control are expected to improve and there will be no new domestic or external arrears.

23. Risks to the outlook are significant and reflect the drivers of Somalia’s fragility—weak security, political tensions, particularly between FGS and FMS and surrounding the upcoming national elections, and vulnerability to climate shocks.18 These risks are mitigated by strong international support, together with the authorities’ drive to build resilience and enhance political dialogue. In addition, the authorities’ capacity of implementing difficult reforms as evidenced in the context of four successive SMPs mitigates overall risks to future program implementation.

B. The Poverty Reduction Strategy

24. On September 26, 2019, the Cabinet approved a new NDP covering 2020–24. NDP9 is a comprehensive and nationally owned strategy for poverty reduction and inclusive growth that builds on the progress under NDP8, which covered 2017–19. The strategy is informed by a detailed analysis of the drivers of poverty, which include 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) has been prepared and shared with the Executive Boards in March 2020 for their information. Main points from the JSAN are as follows.

25. IDA and IMF staffs note in the JSAN that NDP9 was developed through a highly consultative, participatory process that has helped ensure full country ownership. The authorities held a series of public consultative meetings with civil society, private sector representatives, FGS and FMS ministries, national and state parliamentarians, members of the judiciary, and development partners. Staffs find that the document transparently incorporates input received during consultation rounds.

26. The strategic interventions of NDP9 focus on four pillars: (1) Inclusive and Accountable Politics; (2) Improved Security and the Rule of Law; (3) Inclusive Economic Growth (including increased employment); and (4) Improved Social Development. Considering the country’s fragility and the challenges to deal with security, climate shocks and federalism, each pillar integrates six critical cross-cutting policy priorities to achieve the development goals set forth in the NPD9, notably (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; and (vi) governance. The JSAN commends the authorities for presenting such a comprehensive strategy to reduce poverty.

27. NDP9 includes an implementation arrangement framework with associated risks and strategy to fill large data gaps. The implementation approach of NPD9 is based on three guiding principles—multi-dimensional, preserving national ownership, and demonstrating progress against one or more NPD9 indicators.

28. The JSAN notes that NDP9 lacks a costing and financing plan for the proposed interventions, and that the macroeconomic and fiscal framework underlying NDP9 is outdated. The authorities have subsequently revised the macroeconomic and fiscal framework to incorporate the anticipated impact of reaching the HIPC Decision Point on the outlook for revenues, expenditures and growth. This has been agreed with the IMF in the context of the new program. The authorities are currently developing cost estimates for specific interventions under NDP9 and expect to complete them by mid-2020—in time to inform the next budget. Recognizing that Somalia will continue to depend on external financing, the authorities are preparing a new aid policy aimed at enhancing alignment between donor projects and NDP9.

29. The authorities will report on these adjustments to NDP9, and the progress in implementing NDP9 in Annual Progress Reports. Updating NDP9’s macroeconomic and fiscal framework and providing information on costing and financing would enable staffs to treat NDP9 as a full poverty reduction strategy for the purposes of meeting Completion Point requirements. Staffs of IDA and the IMF will submit JSANs on these annual reports to the Boards that provide feedback on the evolution of NDP9 and results from its implementation. These JSANs will provide the source of evidence when Somalia achieves the floating Completion Point trigger requiring satisfactory implementation of a poverty reduction strategy for at least one year.

Debt Relief and Possible HIPC and MDRI Assistance

A. Debt Reconciliation Status

30. The DRA below is based on the reconciliation of public and publicly-guaranteed external debt data at end-2018 provided by the authorities and creditors.19 The reconciliation process was completed jointly by the IMF, World Bank, and the authorities in July 2019. Information provided by the authorities on multilateral and official bilateral debt was reconciled close to 100 percent with creditor data.20 According to the information provided by the Somalia’s authorities, no commercial debt is outstanding.

B. Structure of External Debt

31. At end-2018, the public and publicly guaranteed external debt of the FGS was estimated at US$5.3 billion, in nominal terms (Table 3). This corresponds to US$5.2 billion in net present value (NPV) terms. Multilateral creditors account for 28.9 percent of the total debt stock in nominal terms, with liabilities to IDA, IMF and the AfDB constituting 18.5 percent of total external debt. Other multilaterals with substantial claims on Somalia are the Arab Monetary Fund (AMF) (5.4 percent), and the Arab Fund for Economic and Social Development (AFESD) (3.5 percent). The International Fund for Agricultural Development (IFAD), the OPEC Fund for International Development (OFID) and the Islamic Development Bank (IsDB) hold claims amounting to a combined share of 1.5 percent of total debt. Paris Club creditors, with the United States, Russia, and Italy as the major creditors, account for 57.8 percent of total nominal debt at end-2018. Non-Paris Club official creditors are Algeria, Bulgaria, Iraq, Kuwait Fund for Arab Economic Development, Libya, Romania, Saudi Fund for Development, Serbia, and United Arab Emirates, accounting for an estimated 13.3 percent of total external debt.21

Table 3.

Nominal Stocks and Net Present Value of Debt by Creditor Groups

(as of end-2018)

article image
Sources: Federal Government of Somalia (FGS) authorities and staff estimates and projections.

Includes arrears.

Discount rates applied are the average Commercial Interest Reference Rates published by the OECD over the 6-month period prior to December 2018. The discount rate for the SDR is calculated using the CIRR published by the OECD for all SDR basket currencies except the Chinese yuan. The OECD does not publish a CIRR for the Chinese yuan, therefore it is calculated based on the Chinabond yield curve for bonds with a 7-year maturity increased by 100 basis point, per the standard CIRR methodology. This amounted to 4.5 percent for the 6-month period prior to December 2018.

Assumes a stock-of-debt operation on Naples terms at end-December 2018; and comparable action by other official bilateral creditors on eligible debt (pre-cutoff and non-ODA).

Other multilaterals include AFESD, IFAD, IsDB, and OFID.

Paris Club cutoff date is October 1, 1984.

32. As of end-2018, about 95.8 percent of Somalia’s external debt was in arrears. The stock of external arrears stood at US$5.0 billion, of which US$1.3 billion was owed to multilateral creditors and US$3.7 billion to bilateral claimants. Arrears to the World Bank and the U.S. made up the largest share of arrears to multilateral and bilateral creditors, respectively, as of end-2018.

C. Possible Assistance Under the HIPC Initiative

33. Somalia would qualify for debt relief under the HIPC Initiative’s “export window” based on end-2018 data, i.e., its NPV of debt-to-exports ratio exceeds the benchmark of 150 percent.22 After full application of traditional debt relief mechanisms, the country’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.23

34. The amount of additional 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$2.1 billion in end-2018 NPV terms. This implies a common reduction factor (CRF) of 56.4 percent. Based on proportional burden sharing, multilateral creditors’ assistance would amount to US$0.8 billion, and bilateral and commercial creditors’ assistance to US$1.2 billion (in NPV terms) (Table 4, Figure 3). Most multilateral creditors have committed to provide their share of debt relief under the HIPC Initiative. In addition, Paris Club creditors have provided the necessary financial assurances, as well as some key non-Paris Club official bilateral creditors have provided the necessary financial assurances. In total, creditors representing 76 percent of the NPV of eligible debt have committed to deliver their share of HIPC debt relief.24

Table 4.

HIPC Initiative Assistance under a Proportional Burden Sharing Approach

(in millions of US$, unless otherwise indicated)

article image
Sources: Federal Government of Somalia (FGS) authorities and staff estimates and projections.

Assumes a stock-of-debt operation on Naples terms at end-December 2018; and comparable action by other official bilateral creditors on eligible debt (pre-cutoff and non-ODA).

Three-year historical average of exports of goods and non-factor services (years of 2016–2018).

Figure 2.
Figure 2.

Composition of Stock of External Debt at End- 2018 by Creditor Group

Citation: IMF Staff Country Reports 2020, 086; 10.5089/9781513538327.002.A001

Sources: Federal Government of Somalia (FGS) authorities and staff estimates and projections.
Figure 3.
Figure 3.

Somalia: Potential Costs of the HIPC Initiative by Creditor1/

Citation: IMF Staff Country Reports 2020, 086; 10.5089/9781513538327.002.A001

Sources: Federal Government of Somalia (FGS) authorities and staff estimates and projections.1/ Including the costs of the delivery of traditional debt relief by bilateral creditors.

35. The illustrative scenarios below on the delivery of HIPC Initiative debt relief assume Somalia reaches the Decision Point in March 2020 and its Completion Point by March 2023 (Figure 3).25

  • IDA assistance under the HIPC Initiative and the MDRI amounts to US$425.8 million in end-2018 NPV terms, which is equivalent to a reduction of 88.9 percent of the NPV of debt to IDA at end-2018.26 IDA has 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.27 Through the clearance of arrears, IDA has delivered its full share of HIPC debt relief and will not provide additional HIPC debt relief through debt service reduction after the approval of the Decision Point, based on the estimated share of IDA debt relief. The details of IDA’s assistance in nominal values are provided in Table 12. The remaining relief would be provided through MDRI relief at Completion Point.

  • IMF HIPC assistance amounts to US$189.1 million in end-2018 NPV terms, of which US$5.7 million would represent the cost of the subsidization of PRGT interest28 After the Decision Point is approved by the Boards of the IMF and World Bank, it is expected that the IMF would provide HIPC interim assistance on IMF-related obligations falling due prior to Somalia reaching the 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. However, a portion of these obligations would relate to charges due on Somalia’s pre-Decision Point arrears to the Fund that would not become due until after the Decision Point (Table 13).29

  • AfDB Group’s 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. Creditors are assumed to provide debt relief through cancellation or concessional rescheduling of arrears, to commence at Completion Point.30

  • Paris Club creditors are assumed to provide their share of HIPC debt relief through a Cologne flow operation on eligible debt (i.e., a 90 percent NPV reduction on pre-cutoff non-Official Development Assistance (ODA) debt and a 100 percent rescheduling on highly concessional terms on pre-cutoff ODA debt) after Somalia reaches its Decision Point, with the remaining HIPC assistance delivered through a stock of debt operation at the Completion Point.31,32 The HIPC assistance is estimated at US$938.9 million in end-2018 NPV terms, after the application of traditional debt relief.

  • Regarding the non-Paris Club official bilateral creditors, the authorities have already approached and secured a preliminary offer of debt relief from some key creditors; it is expected that Somalia will approach the full set of non-Paris Club bilateral creditors to request comparable terms to those provided by the Paris Club members once those terms have been confirmed.33 The HIPC assistance allocated to these creditors is estimated at US$285.6 million in end-2018 NPV terms.

Table 5.

Coordination of Policy Conditionality

article image
Source: IMF and IDA staff.
Table 6.

Nominal Stock and Net Present Value of Debt as of end December 2018, by Creditor Groups

article image
Sources: Federal Government of Somalia (FGS) authorities and staff estimates and projections.

Includes Arrears

Discount rates applied are the average Commercial Interest Reference Rates published by the OECD over the 6-month period prior to December 2018. The discount rate for the SDR is calculated using the CIRR published by the OECD for all SDR basket currencies except the Chinese yuan. The OECD does not publish a CIRR for the Chinese yuan, therefore it is calculated based on the Chinabond yield curve for bonds with a 7-year maturity increased by 100 basis point, per the standard CIRR methodology. This amounted to 4.5 percent for the 6-month period prior to December 2018.

Assumes a stock-of-debt operation on Naples terms at end-December 2018; and comparable action by other official bilateral creditors on eligible debt (pre-cutoff and non-ODA).

Paris Club cutoff date is October 1, 1984.

Special Action Credits (SAC) provided by the European Economic Community (EEC) member states according to the 21/12/1978 Council decision n°79/195 EEC are bilateral loans for which IDA acts as administrative agent. As of November 1, 2005, all Paris Club SAC creditors (Belgium, Denmark, Germany, France, Italy, The Netherlands and the United-Kingdom) have decided to classify these credits as bilateral creditor loans and cancel their them at Completion Point.

Table 7.

Discount and Exchange Rate Assumptions as of end-December 2018

article image
Sources: OECD; and IMF, International Financial Statistics.

The exchange rates are expressed as national currency per U.S. dollar at end-December 2018.

Discount rates applied are the average Commercial Interest Reference Rates published by the OECD over the 6-month period prior to December 2018. The discount rate for the SDR is calculated using the CIRR published by the OECD for all SDR basket currencies except the Chinese yuan. The OECD does not publish a CIRR for the Chinese yuan, therefore it is calculated based on the Chinabond yield curve for bonds with a 7-year maturity increased by 100 basis point, per the standard CIRR methodology. This amounted to 4.5 percent for the for the 6-month period prior to December 2018.

Per the data provided by Russia, the amounts of indebtedness denominated in Soviet rubles are converted into US dollars at the official Gosbank USSR exchange rate of 0.6 Soviet ruble per 1 US dollar. This is consistent with the past HIPC cases.

The IsDB, AfDB Group and AMF use the Islamic dinar (ISD), African currency unit (UAC) and Arab accounting dinar (AAD) respectively, which are all linked to the SDR (ISD 1=UAC 1=AAD 3=SDR 1) and use the same discount rate as the SDR.

Table 8.

External Debt Service, 2019–381/

(In millions of U.S. dollars, unless otherwise indicated)

article image
article image
Sources: Federal Government of Somalia (FGS) authorities and staff estimates and projections.

All external debt statistics correspond to public and publicly guaranteed debt.

Includes only scheduled debt service on current maturities and does not include projected penalty interest on arrears.

Other multilaterals include AFESD, AMF, IFAD, IsDB, and OFID.

The projected debt service is based on PRGT/GRA arrangements in the amount equal to the stock of arrears at arrears clearance, plus a new PRGT credit of 30 percent of quota under the 14th General Review which will be disbursed in 7 installments. Interest obligations do not include net SDR charges and assessments.

Reflects debt service on the projected borrowing needed to close the fiscal gap which assumes lending from IDA and new PRGT borrowing above that required for IMF arrears clearance.

Shows the external debt situation after the full use of traditional debt-relief mechanisms (hypothetical stock-of-debt operations on Naples terms) by Paris Club creditors that includes treatment of debt stock in arrears, and assumes at least comparable treatment from other official bilateral creditors.

Paris Club and other official bilateral creditors are assumed to provide a Cologne flow rescheduling on eligible debt during interim period ‘and the remaining of their share of relief after of the completion point (i.e. in January 2023) through stock-of-debt reduction. Multilateral creditors start delivering HIPC assistance through the arrears clearance process. This starts at January 2023 for the IMF, World Bank and the AfDB. Other multilaterals are assumed to clear their arrears (as at the completion point date of March 2023).

Includes beyond-HIPC assistance to the remaining outstanding debt stock associated with the arrears clearance. The IMF does not have outstanding MDRI-eligible debt. The last of the MDRI-eligible debt was repaid in FY2014, and the MDRI Trusts were liquidated in 2015.

Paris Club creditors deliver, through voluntarily bilateral initiatives, additional debt relief beyond the HIPC Initiative after the completion point (assumed to be delivered in January 2023). Details on the modalities of the delivery are presented in Table A10.

Exports of goods as defined in IMF, Balance of Payments Manual, 6th edition, 2009. Refers to fiscal year exports.

Revenues are defined as central government revenues, excluding grants.