Somalia’s Debt Relief: What Is Next – OpEd

The Heavily Indebted Poor Countries (HIPC) Initiative is a project of the World Bank and the International Monetary Fund. It was first launched in 1996 to assist poor countries in the management of their debts. The HIPC Project was further enhanced/supplemented in 2005 by the Multilateral Debt Relief Initiative (MDRI), which allows HIPC countries to receive 100 percent relief from debts owed to the IMF, the World Bank and the African Development Fund once they complete the HIPC process. Somalia has just completed the HIPC Process and received a debt relief in the amount of some US$ 4.5 billion with US$ 600 million remaining. It has yet to go the MDRI process.

The US$ 4.5 billion were distributed among commercial lenders (US$ 3 billion) Multilateral Creditors (US$ 573.1 million), the World Bank IDA (US$ 448.5 million), the IMF (US$ 343.2 million), and the African Development Fund (US$ 131 million), which reduces Somalia’s external debt to less than 6 percent of its GDP. This is generally viewed as a historic opportunity for Somalia in its reconstruction process after a long and devastating civil war, which still seems to have no end. Somalia is expected to have access to concessional financing from multilateral institutions as well as climate financing and boost investors’ confidence and expand the countries correspondent banking relationships.

Somalia is still a poor country and lives on handouts from many different sources including bilateral assistance from countries, multilateral institutions, and indeed, a small internal tax collection portfolio. The debt relief is a clear evidence that the country is on a tangible recovery tangent. The debt relief complements the recent lifting of the arms embargo that was placed on the country in 1992. It appears that the country has, indeed, enjoyed some fruity events in the past couple of months. It has become the 37th country to benefit from the project, which would allow it to pay less interest in the future. Note 31 of the 37 countries are African including countries like Ethiopia, Uganda, Tanzania, Rwanda, Ghana and others.

But here is the caveat! Somalia’s laws and constitution (Draft) are based on Islamic Shari’ah, which prohibits payment of interest. Would Somalia, which would definitely borrow funds, be financing itself on interest-bearing basis again or would it do so on Islamic basis? Note most of the debt that was relieved from the country was accumulated interest and not the actual borrowing or principal and was taken by a ‘socialist claiming’ government. Would the country finance itself through Islamic finance, even if it has to come from the World Bank or the IMF or the African Development Fund? This would, of course, require that such financiers pay for the cost of projects directly and would avoid funds being misused as is the case in any borrowings of many African countries, Somalia included.

Somalia’s debt is still outstanding, some US$ 600 million of it, and it would now be attracting interest and if not handled with care and quickly, could soon rise to the same US$ 5.2 Billion or more it was, just two days ago. Furthermore, Somalia would now be eligible to concessionally borrow some US$ 2.1 billion of which US$ 843 million would be from multilateral institutions and US$ 1,225 million would be from bilateral creditors. How this would be handled and on what basis, and for what projects and programs, would Somalia use these funds, is the question at hand. Somalia has not, as yet, published any of its intentions in this regard. But perhaps one of the projects for such financing should be the highway linking Zeila to Borama in Somalia, a financing already approved by the African Development Bank Group and may be other infrastructures. Would Somalia borrow or not borrow and how, remains the question using the Shakesperean philosophical logic of “to be or not to be” in the Hamlet.

Somalia is a fragile state, unable yet to control its total territory with parts of the country completely out of the control of the nation and seeking secession. It is further infested by terror groups, who are probably stronger than the Federal Government in Somalia and collect more taxes from the population. With a narrow tax collection base, the FGS remains constrained, and should they immediately start borrowing more funds from external sources, it would only add to its woes and more headaches in addition to the remaining external debt which the country has to service anyway. In this regard, Somalia should perhaps immediately apply for a total relief through the Multilateral Debt Relief Initiative (MDRI) of the World Bank and the IMF. 

Borrowing monies is easy but paying them back is not and, therefore, the Federal Government of Somalia should think many times over before it embarks on such a financing process. Perhaps, it should work on its sub-soil wealth to generate incomes such as the uranium deposits or the lithium and other salts and minerals of the country such as gold, iron ore, coal, tin and many others, or maybe borrow from local sources so that the debts remain inhouse.

Managing monies and finance requires skilled people, who know the intricacies of the business and Somalis, indeed, do have people who can handle engineered finance. The worst Somalia could do to itself is allow unqualified people to handle these issues which would plunge the country and future generations into a deep debt abyss, which would be difficult for the nation to extract itself from. The leadership of the country should realize and weigh the importance of how much effort they and those administrations before them, had to put, just to receive the HIPC debt relief, just concluded.

Debt distress is not something that is easy for an individual borrower, and it is worse for nations, which are expected to provide services to its populations and which they cannot, just because they have to service the debts borrowed earlier. It is bad when a nation cannot even have a correspondent relationship for its banking system because it cannot be trusted, and its imports have all to be on cash or collateral deposit basis.

One must note that Somalia, if it has to regain the trust of its people, should be spending on its health services, education, infrastructures and other developmental needs of the country. This could be better achieved through one’s own funds instead of borrowed funds from others, which would only burden the government more. 

Here the government would achieve economic growth, social and other developmental growth, without looking over its shoulders if a debt collector were around knocking on its doors, both front and backside. As noted earlier, using the assets of the country would be more appropriate such as building on its blue economy through international investors who should be investing their funds even if they have to borrow at their risks. This is all achievable and doable, provided the leadership of the country takes its responsibilities seriously and leaves behind the clan/nepotistic relationships that ruin many countries including Somalia.

The World Bank Group, the IMF and their associate companies like the African Development Bank Group have helped Somalia over the past decade, but one should not forget that it was these institutions that brought down the Somali government when they took over managing the economy of the country in the eighties of the last century. They are useful but Somalia, after this debt relief, should be keeping these institutions at arms length.

In a “Survey of the Impacts of IMF Structural Adjustment in Africa: Growth, Social Spending, and Debt Relief” in April 1999 by Robert Naiman and Neil Watkins, Research Associates at the Preamble Center in Washington, D.C. commented that “Several initiatives currently being considered by Congress would have the effect of reducing the role of the IMF in Africa, while others would continue and even increase its role”.

The survey was conducted at the time, as there were as there is still today, criticisms that the two multilateral institutions abuse many African countries. The fact was that the economies of many African countries then collapsed, and the multilateral institutions had to come up with ways to lessen the debt burdens on these countries. Many commercial banks shy away from lending to poor countries because of the perceived risks, making the multilateral institutions one of the few options for poor countries to have access to foreign financing. 

The programs of the IMF included the Enhanced Structural Adjustment Facility (ESAF), which is a concessional lending facility for the least developed countries. Perhaps, that is the financing envisaged for Somalia, but it is known that those countries who have used the ESAF program have only increased their debt burdens and hence “experienced lower economic growth”, according to Robert Naiman and Neil Watkins in their aforesaid survey.

Basically, Somalia should not rush to borrowing and increasing its debts again, at least for the time being. People have learned how to live with difficulties and without additional borrowings of the government, and it is not necessary for Somalia to burden itself with US$ 2.1 billion as envisaged and was mentioned by President HSM in a Baidoa meeting with Federal Member States of Somalia about a year ago.

The Federal Government of Somalia should know that it would be the weaker party in a debt relationship with the IMF or the World Bank or for that matter any other party and hence, it should rely on its resources which are many, should it be paying attention, and the first step is to deploy competent people and not the unqualified relatives and clansmen and clanswomen, if the nation has to be rebuilt again.