Somalia: Debt Sustainability Analysis
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International Monetary Fund. Middle East and Central Asia Dept.
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Publication Date:
26 Mar 2020
eISBN:
9781513538327
Language:
English
Keywords:
ISCR; CR; debt; Somalia; government; MDRI debt relief from IDA; HIPC debt relief analysis; HIPC Completion point; IMF in Washington; HIPC decision point; arrears clearance; burden indicator; Debt relief; Arrears; Debt service; debt situation; sustainability framework; debt ratio; debt-carrying capacity; Stress testing; Debt sustainability; completion Point; reconciliation process
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Enhanced Heavily Indebted Poor Countries (HIPC) Initiative-Decision Point Document

Abstract

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

Public Debt Coverage

1. Public debt data coverage is limited to the central government. The coverage of public debt captured by the Debt Sustainability Assessment (DSA) is near complete. There is no government guaranteed debt, there are no known liabilities of state-owned enterprises or subnational governments, and public-private partnerships do not exist (Text Table 1). 1 Given the nascent state of domestic financial institutions and local capital markets, domestic public debt does not exist beyond the accumulation of government arrears. Default settings are applied to the DSA contingent liability stress test and no other tailored stress tests are applicable to Somalia. A reconciliation of external obligations has been finalized, and its findings have been incorporated into this DSA.2,3 External debt for the DSA is defined on a residency basis.

Text Table 1.

Somalia: Public Debt Coverage

article image

The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country’s public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE’s debt not guaranteed by the government is assessed to be negligible, a country team may reduce this to 0%.

Source: Somali authorities and IMF staff estimates.

2. Somalia’s debt-carrying capacity is classified as weak. This classification is guided by the composite indicator score, as determined by the World Bank’s CPIA, the country’s real GDP growth, import coverage of foreign exchange reserves, remittances as percent of GDP, and growth of the world economy. The DSA for Somalia uses the October 2019 vintage of the WEO and the 2018 CPIA. The latest available composite indicator score for Somalia is 0.867 (Text Table 2).

Text Table 2.

Somalia: Composite Indicator and Threshold Tables

article image
Note: Calculated based on the most recent WEO vintage (October 2019).

Background on Debt and Macroeconomic Data

3. Somalia’s public debt has increased over the last decades, although it has not contracted any new external debt since the late 1980s. The nominal level of indebtedness has risen steadily since 1991 reflecting the accumulation of arrears and late interest. The total stock of debt outstanding at end-2018 was US$5.3 billion, of which nearly all is in arrears (US$5.0 billion). This total debt stock reflects the findings of a debt reconciliation process supported by IDA and IMF staffs. The findings indicate an upward revision of the debt outstanding at end-2018 by US$0.6 billion relative to data reported under Somalia’s preliminary DSA, mainly due to an upward revision of bilateral Paris Club creditor debt that was not reported during previous debt data calls (Text Table 3).4

Text Table 3.

External Debt Revisions, end-2018

(USD millions)

article image
Sources: Somali authorities and IMF and World Bank estimates.

In line with the guidance for the joint Bank-Fund LIC DSF for Decision Point HIPC Initiative Documents, the HIPC Debt Relief Analysis and the LIC DSA for Somalia are consistent regarding the underlying macroeconomic framework and the debt data.

IMF Country Report No. 19/256

4. Nearly all of Somalia’s public debt is with official creditors. $2.0 billion is composed of principal, $1.3 billion is unpaid interest, and $1.7 billion is late interest or fees.5 Most is owed to Paris Club creditors (58 percent), followed by multilaterals (29 percent), and non-Paris Club bilateral creditors (11 percent) (see Text Figure 1). All domestic debt (1.5 percent of GDP) represents central government arrears.6

Text Figure 1.
Text Figure 1.

Composition of Reconciled External Debt Stock, end-2018

Citation: IMF Staff Country Reports 2020, 086; 10.5089/9781513538327.002.A002

Sources: Somali authorities and IMF and World Bank estimates.

5. Data weaknesses significantly constrain macroeconomic analysis, limiting the significance of the results provided by the standardized stress test in the LIC-DSF. The national accounts data contain only a relatively short time series (six years), which builds from expenditure-based estimates derived from household survey data. Substantial gaps are also present in balance-of-payments data, including on current account flows. Trade estimates are based on third-party data and augmented by data for the Port of Mogadishu. Secondary transfers data are also derived from third parties and cross-checked with Somali data, which is improving. Direct investment data are derived from the real sector file, but an FDI survey is due for launch in the near term.

Medium- and Long-Term Assumptions

6. Although macroeconomic conditions are slowly improving, Somalia is a fragile state that is very vulnerable to security and climate shocks. The long civil war significantly degraded Somalia’s economic and human capital. These fragilities are aggravated by frequent climate shocks that directly impact agricultural activities that account for the bulk of economic activity.7 Nonetheless, together with substantial international support, important efforts have been made in recent years to improve social and macroeconomic stability. Improving conditions have helped to ensure positive real growth rates of about 2.5 percent (2013–18), although this has still fallen short of Somalia’s 2.9 percent population growth, indicating falling real per capita incomes.8

Text Table 4.

Macroeconomic Projections

(percent of GDP, unless otherwise indicated)

article image
Sources: Somali authorities and IMF and World Bank estimates.

IMF Country Report No. 19/256

Excludes other current account flows related to debt relief.

7. The baseline scenario relies on the same medium-term macroeconomic framework that underpins the new IMF arrangement and the long-term assumptions consistent with normalization of relations with creditors, the impact of reforms, and the experience of other HIPC cases (Text Table 4). This macroeconomic framework is aligned to that underpinning the HIPC Debt Relief Analysis.

  • The consolidation of structural reforms under Somalia’s new World Bank Development Policy Operation and IMF arrangement, as well as a steady increase in human and physical capital investment, is expected to deliver a growth dividend. However, in view of Somalia’s persistent fragility and slowly materializing payoffs, it is expected that growth will rise only gradually and peak at a lower level than seen in other post-HIPC countries.9 As such, growth is forecast to pick up modestly from 2022 and peak at around 5.4 percent in 2027, and thereafter settle to a long-run average of 4.8 percent, although upside risks could materialize with improvements in security, deepening federalism, and positive regional spillovers. It is also assumed that the economy will remain fully dollarized, implying low inflation and no adverse nominal exchange rate movements.

  • Over the near term, macroeconomic stability is expected to be buttressed by prudent fiscal policy. The fiscal stance is expected to remain broadly in balance, given very limited access to new external or domestic debt financing and no accumulation of new domestic arrears, as required under the new IMF arrangement. Improved domestic revenue mobilization, including due to the introduction of sales and excise taxes, and the establishment of a large- and medium-sized taxpayers’ office, will be critical to generate the fiscal space required for significantly scaling up public investment. Over the medium-term, the government is expected to maximize grants and to seek external financing on concessional terms.10

  • The non-interest current account deficit is expected to remain highly negative and large. The trade deficit is expected to be largely financed by official grants and remittances. The residual current account balance is assumed to be met through foreign direct investment. Export growth assumptions are conservative at 5.7 percent per year through 2029, recognizing both the country’s fragility and latent potential. Import growth is slightly more constrained at 3.6 percent per annum. Increasing investment in domestic production will reduce imports of some consumption items (e.g. basic foodstuffs) as local production recovers, while imports of capital and investment goods should increase to support increasing investment.

8. The available realism tools suggest the macroeconomic assumptions of the baseline scenario appear realistic. As this document represents Somalia’s first full DSA, the realism tool comparing debt stocks and flows across DSA vintages is not yet applicable. Furthermore, the tool assessing the realism of the public investment-growth nexus is inoperable due to gaps in Somalia’s investment data. Other tools suggest that the planned fiscal adjustment is in the middle of the distribution, and although the tool warns about optimism in the growth path, it should be noted that fiscal multipliers for Somalia are likely to be weak given conservative projections of the impact of reforms supporting revenue mobilization and limited channels of transmission (e.g. via the underdeveloped financial system) (Figure 3).

9. The baseline scenario assumes full delivery of traditional debt relief. The scenario assumes no new borrowing over the interim period. Is also assumes the application of Naples terms by all bilateral creditors at the HIPC Decision Point in the first half of 2020.11 Consistent with the LIC DSF guidance note and the HIPC Debt Relief Analysis, the baseline does not include relief from the HIPC Initiative or MDRI.12 An alternative scenario is presented that incorporates the full impact of multilateral arrears clearance, interim debt relief, HIPC, MDRI and beyond HIPC debt relief. Somalia is assumed to reach 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.13

External Debt Sustainability

10. Somalia remains in debt distress in the baseline scenario, which assumes full delivery of traditional relief and a financing gap to be met through HIPC interim assistance. Under the baseline assumptions, both the PV of external debt-to-GDP and the PV of external debt-to-exports remain well above their respective thresholds throughout the forecast period. Debt service-to-exports and debt service-to-revenue also remain above the thresholds across the horizon. That said, in a forward-looking sense, Somalia’s debt could be considered sustainable, given the expectation that all outstanding arrears will be treated under debt restructuring agreements soon after Somalia reaches the HIPC Decision Point.

11. The standardized stress tests reveal that the evolution of Somalia’s external debt position is subject to considerable vulnerabilities and highlight the importance of debt relief. While the application of the standard DSA stress test to Somalia is complicated by the short historical data series as well as severe structural breaks, most debt indicators deteriorate substantially under temporary shock scenarios.14,15 The most serious shock for all indicative thresholds of external debt distress concern non-debt flows, which would worsen breaches emphasizing Somalia’s high dependence on external aid. Furthermore, the external debt service-to-revenue ratio experiences large breaches under all shock scenarios, highlighting liquidity risks during the HIPC interim period.

12. Somalia’s debt situation improves dramatically under the alternative scenario that assumes debt relief through the HIPC Initiative, MDRI, and beyond HIPC, underscoring that traditional debt relief alone is insufficient. Assuming full delivery of this additional debt relief at the completion point, all debt burden indicators would be significantly below their respective thresholds from 2023, consistent with achieving a moderate risk rating at the Completion Point. There are, however, risks around the timing of the HIPC Completion Point, and a delay could compromise the debt restructuring assumptions underpinning the alternative scenario. Given the projected spike in debt service obligations to around $180 million if the Completion Point is not reached in 2023, creditors may be asked to provide additional assistance to forestall a new accumulation of external arrears to official creditors (Text Figure 2).

Text Figure 2.
Text Figure 2.

Projected Debt Service, 2020–2029

(USD millions)

Citation: IMF Staff Country Reports 2020, 086; 10.5089/9781513538327.002.A002

Sources: Somali authorities and IMF and World Bank estimates.

13. Even after the full delivery of debt relief, Somalia remains highly vulnerable to climate and security shocks (Figure 4)

  • 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.

  • 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

14. 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

15. 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 scenario that assumes full delivery of traditional debt relief, external debt burden indicators remain well above their indicative thresholds. This emphasizes 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

Figure 1.
Figure 1.

Somalia: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2019–2029

Citation: IMF Staff Country Reports 2020, 086; 10.5089/9781513538327.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. Stress tests with one-off breaches are also presented (if any), while these one-off breaches are deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.
Figure 2.
Figure 2.

Somalia: Indicators of Public Debt under Alternative Scenarios, 2019–2029

Citation: IMF Staff Country Reports 2020, 086; 10.5089/9781513538327.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Figure 3.
Figure 3.

Somalia: Realism Tools

Citation: IMF Staff Country Reports 2020, 086; 10.5089/9781513538327.002.A002

Sources: Staff estimates
Figure 4.
Figure 4.

Somalia: Indicators of Public and Publicly Guaranteed External Debt under Country-Specific Alternatives Scenarios, 2019–2029

Citation: IMF Staff Country Reports 2020, 086; 10.5089/9781513538327.002.A002

Source: Country authorities and staff estimates
Table 1.

Somalia: External Debt Sustainability Framework, Baseline Scenario, 2018–2039

(in percent of GDP, unless otherwise indicated)

article image
Sources: Country authorities; and staff estimates and projections. 1/ Includes both public and private sector external debt. 2/ Derived as [r – g – ρ(1+g) + Ɛα (1+r)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, ρ = growth rate of GDP deflator in U.S. dollar terms, Ɛ=nominal appreciation of the local currency, and α= share of local currency-denominated external debt in total external debt. 3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes. 4/ Current-year interest payments divided by previous period debt stock. 5/ Defined as grants, concessional loans, and debt relief. 6/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt). 7/ Assumes that PV of private sector debt is equivalent to its face value. 8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 2.

Somalia: Public Sector Sustainability Framework, Baseline Scenario, 2018–2039

(in percent of GDP, unless otherwise indicated)

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Sources : Country authorities; and staff estimates and projections. 1/ Coverage of debt: The central government, central bank, government-guaranteed debt, non-guaranteed SOE debt. Definition of external debt is Residency-based. 2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections. 3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt. 4/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows. 5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question. 6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 3.

Somalia: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2019–2029

(in percent)

article image
Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Includes official and private transfers and FDI.

Table 4.

Somalia: Sensitivity Analysis for Key Indicators of Public Debt, 2019–2029

(in percent)

article image
Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.

1

Somalia’s general government debt stock excludes a Russian claim on a non-central government entity. The claim concerns special correspondent accounts at the Central Bank of Somalia totaling about $7.5 million (or 0.1 percent of GDP).

2

See Somalia—Enhanced Heavily Indebted Poor Countries (HIPC) Initiative Decision Point Document (March 2020, Country Report No. 20/XX).

3

Methodologically, the LIC DSA differs from the HIPC Debt Relief Analysis (DRA) in that it compares the evolution over the projection period of debt-burden indicators (based on single-year denominators) against policy-dependent indicative thresholds. In contrast, under a HIPC DRA, the debt burden indicators (based on three-year backward-looking averages of denominators) are compared to uniform thresholds in order to evaluate eligibility or to calculate HIPC debt relief as of a historical reference date. In addition, the results of the LIC DSA differ from the HIPC DRA because of two other methodological differences related to the definition of: (i) discount rates; and (ii) exchange rates.

4

The previously reported data for Somalia was compiled through via earlier data calls on Paris and non-Paris Club creditors, supplemented with information estimated from historical information in the International Debt Statistics system.

5

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.

6

Somalia’s stock of domestic debt (estimated at US$68.8 million, end-2018) reflects the accumulation government wage arrears to civil servants due to constrained resources and longstanding weaknesses in public financial management. No new arrears have been accumulated since end-2017, and the authorities are committed to gradually clearing these arrears in line with available resources.

7

In 2016–17, Somalia narrowly averted widespread famine. A drought led to large-scale food insecurity affecting more than six million people, or 40 percent of the population (see https://www.worldbank.org/en/results/2019/11/11/preventing-famine-in-somalia-by-supporting-sustainable-and-resilient-drought-recovery) . Real GDP growth declined from 2.9 percent in 2016 to 1.4 percent in 2017.

8

Derived from World Bank total population data for Somalia, 2000–2017.

9

Payoffs from infrastructure investment materializing only 5–7 years after the initial spending (and longer for social spending. Please see Annex I on medium- and long-term growth assumptions for additional details on HIPC comparators.

10

For illustrative purposes, starting in 2024, the central government is assumed to undertake moderate deficit financing, with the overall deficit (including grants) projected to average about 2.0 percent of GDP per year, which is financed through external concessional borrowing.

11

Under Naples terms, most low-income countries receive a reduction in eligible non-official development assistance (ODA) debt of 67 percent in net present value (NPV) terms. Pre-cutoff date ODA credits are rescheduled on interest rates at least as concessional as the original interest rates over 40 years with 16 years’ grace (30 years maturity with 12 years’ grace for 50 percent NPV reduction).

12

For the IMF, the MDRI Trust Fund is closed, but financing is being sought for beyond-HIPC relief.

13

See Appendix V in “Guidance Note on the Bank-Fund Debt Sustainability Framework for Low Income Countries,” (February 2018). While the guidance indicates that the only interim HIPC relief should be incorporated as a customized scenario, as in previous HIPC Decision Point cases such as Liberia (IMF Country Report No. 08/160) and Comoros (IMF Country Report No. 10/242), this analysis also presents full debt relief on HIPC terms.

14

The standardized tests embedded in the LIC-DSF generate a financing gap that is assumed to be filled by the accumulation of new debt. However, Somalia has no access to any formal debt financing. While the DSA assumes additional financing, in practice, any additional financing needs would be expected to be accommodated through lower fiscal expenditures, lower imports, or higher grants.

15

Somalia’s severe data weaknesses could bias the simulation results. For example, exports estimates derived from third-party sources may overestimate informal flows, while GDP estimates based on the household survey may not fully capture fast-growing sectors, e.g. telecommunications and services.

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Cover IMF Staff Country Reports
Somalia: Enhanced Heavily Indebted Poor Countries (HIPC) Initiative-Decision Point Document
Author:
International Monetary Fund. Middle East and Central Asia Dept.
Volume/Issue:
Volume 2020: Issue 086
Publisher:
International Monetary Fund
ISBN:
9781513538327
ISSN:
1934-7685
Pages:
68
DOI:
https://doi.org/10.5089/9781513538327.002
  • <sup><xref ref-type="fig" rid="RA02fig01">Text Figure 1.</xref></sup>
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    Text Figure 1.

    Composition of Reconciled External Debt Stock, end-2018

  • <sup><xref ref-type="fig" rid="RA02fig02">Text Figure 2.</xref></sup>
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    Text Figure 2.

    Projected Debt Service, 2020–2029

    (USD millions)

  • Figure 1.
    View in gallery
    Figure 1.

    Somalia: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2019–2029

  • Figure 2.
    View in gallery
    Figure 2.

    Somalia: Indicators of Public Debt under Alternative Scenarios, 2019–2029

  • <sup><xref ref-type="fig" rid="RA02fig05">Figure 3.</xref></sup>
    View in gallery
    Figure 3.

    Somalia: Realism Tools

  • <sup><xref ref-type="fig" rid="RA02fig06">Figure 4.</xref></sup>
    View in gallery
    Figure 4.

    Somalia: Indicators of Public and Publicly Guaranteed External Debt under Country-Specific Alternatives Scenarios, 2019–2029

Text Figure 1.

Composition of Reconciled External Debt Stock, end-2018
Text Figure 2.

Projected Debt Service, 2020–2029

(USD millions)
Figure 1.

Somalia: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2019–2029
Figure 2.

Somalia: Indicators of Public Debt under Alternative Scenarios, 2019–2029
Figure 3.

Somalia: Realism Tools
Figure 4.

Somalia: Indicators of Public and Publicly Guaranteed External Debt under Country-Specific Alternatives Scenarios, 2019–2029