Somalia inches closer to full debt relief in IMF review
Thursday May 25 2023
The Executive Board of the International Monetary Fund (IMF) has completed a crucial review that could lead to full debt relief, allowing Mogadishu back into eligibility to borrow for development projects.
It is the latest step of several over the past five years, in which Somalia has to go through economic performance examination by IMF, generally referred as IMF Staff Monitoring Performance (SMP).
Until this year Somalia had gone through a series of SMPs, commonly labelled as SMP I, SMP II, SMP III and SMP IV.
Each time, Somalia reached an agreement with IMF through the SMPs that work via structural benchmarks (SBs) and indicative targets (ITs) meant to focus on enhancing the financial sector reform.
This year, an IMF team, led by Ms Laura Jaramillo, conducted discussions with the Somali authorities in Nairobi on March 7-14, 2023 and reached a staff-level agreement on the fifth review under the Extended Credit Facility (ECF) arrangement. It is the first under President Hassan Sheikh Mohamud’s government which came to office a year ago.
Somalia was represented by its ministers of finance and planning, the governor of the central bank and a galaxy of other officials.
The Board’s statement indicated that the completion of the (fifth) review enables the immediate disbursement of about $ 9.4 million, bringing Somalia’s total disbursement under the Extended Credit Facility (ECF) and the Extended Fund Facility (EFF) to about US$ 386.1 million) over 7 years of continuous assessment.
IMF underlined significant progress being made by the Somali government despite multiple challenges.
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“Notwithstanding significant climate, security, and political challenges, the Somalia authorities remain committed to economic reforms and the Highly Indebted Poor Countries (HIPC) process with the aim of building resilience, promoting inclusive growth, and reducing poverty,” IMF said in a statement.
The agency added that programme performance has been broadly satisfactory and the HIPC Completion Point, a stage granting full debt relief, appears achievable by the last quarter of 2023.
This is good news for Somalia as this critical financial institution appreciated the achievement over the years through the agreements that lead to Decision Point in 2020 and the possibility of attaining a Completion Point by the last quarter of this year.
IMF commended the (Somali) authorities being committed to advancing fiscal and institutional reforms, and normalising relations with all external creditors.
The agency noted that sustained efforts are needed to strengthen domestic revenue mobilisation to make room for priority spending, while containing discretionary expenditure pressures.
“Improvements are ongoing on public financial management (PFM), including on payroll integration,” the statement indicated.
Some crucial areas of PFM improvement were indicated. “It will be important to continue to implement reforms to improve Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) and strengthen governance and transparency, including on procurement and concessions,” IMF reiterated.
Somalia’s banking sector, including the central bank, were re-established just a decade ago. Now the IMF says the institutions’ rebuilding must continue to include efforts to weed out illicit flow of finances and corruption, among other good corporate governance principles.
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“Continued strengthening of Central Bank of Somalia institutional capacity and financial sector reforms are welcome and should continue,” the agency valued.
To clear a debt amounting to $5 billion, Ms Jaramillo suggested, authorities must continue the steady progress toward the ultimate state known as HIPC Completion Point.
“Impressive achievements include the recent approval by (Somali) Parliament of several key pieces of legislations, including the Electricity Act, the Extractive Industries Income Tax Law, the Data Protection Law, the Targeted Financial Sanctions Law, the Digital ID System Law, the Investment and Investor Protection Act, and the Federal Law on Fisheries,” Jaramillo stated.
“The authorities reached debt relief agreements with most Paris Club members and the Kuwait Fund for Arab Economic Development (KFAED) and continue to seek agreements with other bilateral creditors.”
IMF officials particularly noted the importance of the role in the exercise of Somalia achieving debit relief.
“Contributions from Somalia’s partners to the Somalia Country Fund are critical to ensure smooth delivery of IMF technical assistance to support the goals of the ECF-supported program and the HIPC Initiative.”
On March 25, 2020, Somalia first attained the HIPC Decision Point, which allowed partial settlement of its debt, most of which had been borrowed before the civil war in 1991 and remained unpaid for three decades.