Somalia’s national debt crisis

Somalia is currently on the road to recovery from a devastating 22 year civil war. Physical infrastructure has been destroyed, lives have been lost, and the living conditions have worsened to some of the worst in the world. Although the situation is improving, security issues and terrorist threats remain challenges to overcome. The current fragile state of Somalia’s security was reiterated only a few weeks ago where an attack in a restaurant in Somalia’s capital city Mogadishu left at least 17 civilians dead and more injured. The continuing support of the international community is proving vital to Somalia’s recovery. Somalia is indeed undergoing a process of rebuilding institutions and re-establishing relations with the international community.

An important aspect of re-integrating Somalia into the international community concerns Somalia’s national debt. Reducing Somalia’s national debt will ensure both that Somalia is not spending its fiscal budget on paying off debt and can therefore spend on rebuilding the country, and restore Somalia’s creditworthiness in the international community to ensure future borrowing capabilities. Somalia has an overall external debt of $2.9 billion as of 2014 according to the world bank (International Debt Statistics 2016) with the trend shown in Figure 1.

Figure 1. Somalia’s National Debt according to the International Debt Statistics published by the World bank in 2016.

The debt is broken down into long term debts, short term debts with expected repayments within 1 year (almost entirely made up of interest arrears in the case of Somalia), and IMF credit. However, according to an equally recent release (June 29, 2015) by the International Monetary Fund, this figure is as high as $5.3 billion, making 93% of GDP. The IMF breaks this down into: i) multilaterals: $1.5 billion, ii) Paris Club creditors: $2.3 billion and iii) Non-Paris club creditors: $1.5 billion.

A national debt as high as 93% of GDP is an extraordinary value for a country in Africa. To contextualise this number, a map of the debt to GDP ratio of all of Africa is shown in Figure 2 (courtesy of IMF). Of all countries in Africa, the only country that has a higher debt to GDP ratio than Somalia is Eritrea, astonishingly making Somalia only the 2nd most indebted country in Africa (!). This is by far not an acceptable state for a country recovering from decades of civil war. It is true that other more economically developed countries around the world do indeed have debt to GDP ratios above 100% such as the US with 104% and Japan with a staggering 264% in 2014, however it is more revealing to compare Somalia’s national debt to other African countries. It is therefore necessary to deal with Somalia’s national debt before it gets out of hand, and hampers the countries recovery process.

One possible immediate short term solution is debt relief under the Heavily Indebted Poor Countries (HIPC) initiative. This is an initiative launched by the IMF and world bank in 1996 with the aim of helping poor countries out of debt burdens that are difficult to manage. So far the initiative has provided some form of relief to 40 countries of which 33 are in Africa. Debt relief is not without conditions. According to the IMF, countries must commit to poverty reduction through policy changes and demonstrate a good track record over time. Partial debt relief is provided in the initial stages followed by full debt relief if a country can meet its commitments.

Figure 2. Debt to GDP ratio of countries in Africa. Somalia is astonishingly the 2nd most indebted country in Africa.

The issue with Somalia is that it has short term arrears (Figure 1) that need to be cleared before HIPC debt relief can start. Fortunately in 2014 the IMF and the World Bank established the Technical Working Group (TWG) on Somalia’s debt in order to help push forward the clearance of short term arrears in order to qualify for eventual debt relief.

The clearance of Somalia’s debt is indeed a possibility in view, however it will most likely be a long process of arrears repayment followed by economic recovery before Somalia can hope to be debt free. If debt clearance does indeed come from the HIPC, it must be acknowledged that this will most likely be a short term solution. Take the case of Sierra Leone as an example. Debt relief was indeed provided through the HIPC and MDRI (Multilateral Debt Relief Initiative) at a value of $1.6 billion in 2006 yet the level of debt immediately after the debt relief in the period 2009-2014 rose just as quickly as it rose in the period before the debt relief 2000-2005 shown in Figure 3. This gives a strong indication that the underlying problems in Sierra Leone are still present.

Somalia therefore needs to not only get debt relief through various international initiatives, but to also address the underlying problems of government corruption, infrastructure rebuilding, workforce training and so on in order to avoid being in a state of perpetual national debt.

Figure 3. Sierra Leone national debt and relief

Anwar Sharif Sufi Reservoir Engineer

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