The IMF and the World Bank on Wednesday said Somalia had taken the necessary steps to begin receiving debt relief, a key move that will allow the Horn of Africa country to lower its $5.2 billion in external debt to around $557 million. 

The decision will immediately normalise Somalia’s relations with the world after 30 years outside the international financial system, the International Monetary Fund and the World Bank’s International Development Association said.

Somalia’s Paris Club creditors—including the United States, Russia, Italy and France—are expected to make a decision on debt relief for Somalia by the end of March, they said in a joint statement.

The announcement by the IMF and the World Bank will send a powerful signal to Somalia’s Paris Club and non-Paris Club creditors about the country’s future and the intense reform efforts it has undertaken over the past eight years.

Somalia, with a population of 15 million, is the 37th country to reach this “Decision Point” under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative.

The decision comes at a critical time for Somalia, which is grappling with the coronavirus outbreak, a recent desert locust swarm and is gearing up for elections later this year.

“Debt relief will help Somalia make lasting change for its people by allowing its debt to be irrevocably reduced from $5.2 billion at end-2018 to $557 million in net present value terms (NPV) once it reaches the HIPC Completion Point in about three years’ time,” the bank and the fund said.

The IMF said its Executive Board also approved a new three-year $395 million financing arrangement for Somalia under its Extended Credit Facility (ECF) and Extended Fund Facility (EFF).

The World Bank was also considering a range of new IDA instruments to help Somali communities impacted by flooding, the locust invasion and prepare for the coronavirus threat.

That programme would support Somalia’s implementation of its “ambitious reform agenda and catalyse concessional donor financing,” the IMF said.

Normalisation of relations with the international community will re-open Somalia’s access to critical additional financial resources to strengthen the economy, help improve social conditions, raise millions out of poverty, and generate sustainable employment for Somalis, the IMF and World Bank said.

“We welcome Somalia’s efforts to restore stability, engage with creditors, and adopt a poverty reduction strategy,” said World Bank Group President David Malpass. “Resumption of regular financing to Somalia is an important landmark, and we look forward to further economic and social progress.”

IMF Managing Director Kristalina Georgieva congratulated Somalia for the intense efforts that had laid the foundation for inclusive economic growth, but underscored the need for Somali authorities to sustain and implement their reforms.