The International Monetary Fund has agreed to delay the deadline, by at least three months, for Somalia’s credit facility in a move which could free up the country’s access to budgetary funding from external lenders.
The decision, which requires the IMF Board’s approval to be implemented, came after senior staff of the lender met with new President Hassan Sheikh Mohamud alongside other Somali top government officials this week.
The IMF, at staff level, said they had reached an agreement with the federal government on the second and third reviews of the Extended Credit Facility (ECF), a crucial privilege given to Somalia to tap into external lenders as long as the government continues with governance reforms.
This facility had been facing threats of total cut-off as IMF had given up to May 17 this year. It would have meant more revenue shortfalls.
According to the IMF, failure to meet the ECF conditions, and hence a cut-off, would heighten economic risks for Somalia.
“Near-term risks include the evolution of the pandemic, prolonged drought or new climate shocks, resurgence of desert locust infestation, security risks, and additional pressures on international food and energy prices,” the lender said in a statement.
“Shortfalls or delays in disbursement of budget support grants would also create risks for the budget and the programme.”
Somalia’s government had, two weeks ago, asked the IMF to delay its intended cut-off deadline on a key credit facility after it failed to conduct elections on time.
Finance Minister, Dr Abdirahman Duale Beileh, and the Governor of the Somali Central Bank Abdirahman Mohamed Abdullahi jointly asked the IMF to extend the deadline to August 17, 2022, three months from the deadline the lender had given Mogadishu.
“In view of the automatic expiration of the ECF (extended credit facility) engagement on May 17, 2022, we hereby request a delay of three months in the automatic expiration of the ECF arrangement through August 17 2022,” they wrote in a letter dated April 28 to IMF Managing Director Ms Kristalina Georgieva.
“The additional three months will provide enough time for the new administration to confirm the policies, reform agenda and conditionality that will underpin the ECF programme for the next 12 months.”
But Somalia did manage to complete presidential elections on May 15, just two days before the deadline. The officials, however, argue that the new President will need at least three months to settle in and adjust to the reform programme as demanded by IMF.
Somalia was on March 25, 2020 granted the Extended Credit Facility, which the IMF Board routinely approves for countries with protracted balance of payments problems. It is meant to support low-income countries, especially those emerging from conflict but are heavily indebted.
The programme was part of the Heavily Indebted Poor Countries (HIPC) Initiative, which would cut the country's debt to $557 million from $5.2 billion, as long as it completed certain reforms, including tame corruption, raise local revenues and pass laws on good governance as well as hold timely elections.
Somalia would also gain from the three-year $395.5 million in financial assistance to help reforms.
But as elections, initially planned for March 2021, dragged on, IMF in March this year warned it could terminate the programme.
It said that lack of a proper government would risk the country’s budgetary support from the IMF and delay debt relief programmes.
IMF had indicated that Somalia needs to continue changing its legal regimes, including having a payroll system, eliminating ghost workers, institution electoral laws, boost local revenue collections and fight corruption.
On Thursday, IMF’s Laura Jaramillo, the Assistant to the Director in the IMF’s Fiscal Affairs Department who led the mission to Somalia, said the reform programme “remains on track with continued progress on key reforms, including on domestic revenue mobilisation, strengthening public financial management, deepening of CBS (banking supervision) capacity, and enhancing governance.”
“Support from development partners, both on financing and capacity development, is essential for the successful implementation of the authorities’ economic and structural reform strategy,” she said.
The lender said Somalia has managed to preserve its macroeconomic stability, in spite of the Covid-19 pandemic, largely because it was able to initially access the Special Drawing Rights in 2021 under the ECF.
The country’s economic growth is expected to rise in 2022 by 2.7 percent “driven by private consumption, supported by remittances,” according to the IMF projections.
But as the country battles Al-Shabaab and imports costly food items, its inflation could also rise to 8.5 percent.