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Somalia Receives Debt Relief Without Common Macroeconomic Governance
By Dr. Mohamud M Uluso 
Tuesday November 21, 2023

The Somali Government received the good news of achieving the Heavily Indebted Poor Countries (HIPC) Completion Point (CP) before the deadline of December 31, 2023, which is a historical milestone for important reasons. First, the HIPC-CP determines the eligibility for full and irrevocable cancellation of about 90% of the $5.6 billion of Somalia’s external debt, committed at the decision point (DP). Second, it confirms the commitment of Somalia to repay the remaining debt, estimated to be about 10% of the total debt, amounting $557 million, and any future debt. Technically, this implies that Somalia’s debt burden is reduced to a sustainable level in relation to its gross domestic product (GDP) and export earnings (EE), although reality casts doubt.

Third, it commits the federal government to increase substantially the financial resources allocated to social sectors to implement the Poverty Reduction Strategy (PRS). The increase comes from the forgiven debt, a hypothetical revenue convertible into domestic expenditure. Fourth, it requires the continuation of the track record of good macroeconomic performance under IMF and WB supported programs.

In other words, the debt relief promotes sound macroeconomic management, adherence to the free market principles, recognition of private sector as the engine of economic development, establishment of efficient public administration, prudent domestic and external borrowings, and above all the respect for the rule of law. However, the case of Somalia is unique in the sense that it’s politically and administratively fragmented without common macroeconomic governance, which limits the ability of the federal government to perform macroeconomic functions for Somalia’s socio-economic development and stability.

Somalia receives debt relief on good will, because according to World Bank Country Policy and Institutional Assessment (CPIA), Peace Fund Fragile States Index (FSI), Ibrahim Index of African good governance (IIAG), Transparency International Corruption Perception (CPI), and UN Human Development Index (HDI), it fails on all indicators. On the scale of 1 to 6, the overall 2023 CPIA score of Somalia is 2.1. The sub-score for public sector management and Institutions is 1.9, which indicates bad governance defined as systemic corruption, arbitrary policy making, lack of transparency and accountability, and political marginalization.

In addition, the seven-year discussions between the Somali government and the IMF staff missions on debt relief have taken place in Nairobi, Kenya or in Addis Ababa, Ethiopia for insecurity in Somalia. Unfortunately, that kind of high-risk assessment didn’t motivate the Somali leaders to repudiate the characteristics of leadership failure that has derailed Somalia’s peace and state building, despite considerable international support.

President Hassan’s campaign to defeat Al Shabab militarily is one of the six pillars of a strategy designed to restore the Somali State. The second and third pillars are the systematic completion of the constitution and the enactment of democratic electoral system which lays the basis for the legitimacy of the political power. The fourth and fifth pillars are credible security and judicial system and an efficient public administration. The sixth pillar is good macroeconomic management to fight poverty, unemployment, inflation and corruption.

IMF has announced preliminary approval of new Extended Credit Facility (ECF) of $100 million to strengthen the priorities pursued under the three-year Extended Credit Facility (ECF) of $243.20 million and Extended Fund Facility (EFF) of $52.30 million Somalia received in March 2020 for HIPC-CP.  The loans under the ECF are zero interest and payable on final maturity date of 10 years while the EFF loans are concessional with interest rate of 1.05% plus surcharge and fees and payable in 12 installments upon maturity date of 5 to 10 years.

Few questions came to mind to highlight the ultimate goals of the debt relief process. The first question is, do Somalis appreciate the critical importance of having common macroeconomic governance? Second question is, do Somalis recognize the leadership role of the federal government on macroeconomic management? Third question is, does the Federal Government factor in the debt -servicing of the remaining debt of $557 million plus any additional debt under current economic condition? Fourth question is, did the federal and state Institutions gain the necessary capacity for pursuing sound macroeconomic management and good governance? Fifth question is, do the Somali leaders take into account the correlation between the growth of private entrepreneurship and direct foreign investment, and the supremacy of the rule of law and credible judicial system?

One of the reasons behind those questions is the impression that Somali leaders ignore the common-sense governance practices and behaviors recommended in the IMF, WB, and UN documents. For example, one of those documents, issued in October 2015 by the WB under the title “Somalia Economic Update-Transition Amid Risks – with Special Focus on Inter-Governmental Fiscal Relations,” argued the following:

The de facto intergovernmental fiscal arrangements that are emerging, as interim state administrations are formed, will affect what is politically possible to negotiate as part of the constitution-making process. In particular, state administrations are occupying most available tax bases, limiting the scope for the federal government to play its proper role in redistribution. …… Inequitable distribution of resources was a fundamental cause of conflict in Somalia.……. Somalia’s new fiscal arrangements should be designed to (a) work as coherent system, preserving a strong common economic space across the country; and (b) provide scope to address inequities across regions…. If states without access to strong revenue bases are supported through transfers, they will be less likely to look for economically harmful ways to raise revenue.”

Today, Somalia faces the intractable problem of negotiating genuinely fiscal federalism to perfect the federal system. Views circulating within various constituencies foil the establishment of coherent system of governance, including common macroeconomic governance. Despite institutional and legal gaps, the following national priorities pursued during the past seven years will be pursued in the next three years:

1.   Mobilization of domestic revenues to support self-sufficiency, provision of public services, and social stability.

2.    Development of national, digital identification (ID) for critical objectives.

3.    Strengthening of public financial management and debt management.

4.    Continued deepening of the Central Bank Capacity in terms of supervisory on financial institutions, and the analytical and operational capacity to manage liquidity and foreign exchange operations for the reintroduction of Somali Shilling. Somalia is de facto dollarized economy.

5.    Strengthening the capacity of the Financial Reporting Center (FRC) to enforce compliance with the AML/CFT laws and regulations.

6.    Continued deepening of the efforts to improve the private businesses environment for competitiveness, economic growth and development.

7.    Enhancing the production and dissemination of reliable macro-economic statistics for effective policy formulation, evaluation, forecasting, transparency, and accountability.

8.    Strengthening the fiscal budget preparation and execution, enhancing parliamentary oversight functions, and the quality of the general government fiscal reporting.

9.    Deepening of the inter-governmental fiscal relations and consolidated reporting of FGS and FMS fiscal operations in line with IMF GFSM2014 Standards.

10. Implementation of national anti-corruption strategy.

The IMF, the WB, the AfDB, and the UN Security Council have consistently highlighted the risks stemming from bad governance, the defilement of the federal constitution and federal system, and the sham elections. Many failures and crisis were temporarily mitigated by the interventions of the international community. Therefore, Somalia faces the serious choice between going back to clan fiefdoms or moving forward and expediting constitution-based peace and state building as substantiation of the national reconciliation and honor of the sovereignty, territorial integrity, political independence and unity of Somalia, recognized and respected by the international community. 

Dr. Mohamud M Uluso
[email protected]



 





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