The US suspends Somalia’s $1.1 billion national debt after Mogadishu’s latest victory

Richard H. Riley, the U.S. ambassador to Somalia, said the debt relief was worth $1.14 billion and was a strong sign of U.S. commitment to Somalia’s future.

“This debt cancellation is a testament to our continued commitment to supporting the Somali people on their journey to a better future,” Riley said after signing the agreement for his country on Tuesday. Finance Minister Bihi Iman Egeh signed the agreement for the Federal Government of Somalia.

“This agreement will transform Somalia’s future, allowing our government to allocate resources to essential public services,” said Mr Egeh, who hailed the debt relief as a solution that could enable the government to boost allocations for healthcare, education and infrastructure development to increase.

Somalia achieved its first major economic milestone by receiving $4.5 billion in debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative, as announced by the International Monetary Fund (IMF) and the International Development Association (IDA) of the World Bank in December 2023.

“After the HIPC Completion Point, Somalia’s external debt fell from 64 percent of GDP in 2018 to less than 6 percent of GDP at the end of 2023,” the Bretton Woods institutions said.

“This debt relief will facilitate access to crucial additional financial resources that will help Somalia strengthen its economy, reduce poverty and promote job creation.”

The debt relief came after years of negotiations with the IMF on behalf of creditors through several rounds of employee-controlled programs (SPMs) until they reached a completion point, paving the way for significant debt cancellation.

In July 2023, Somali officials said Russia had provided debt relief for more than $684 million owed by the Horn of Africa nation in a deal finalized on the sidelines of a Russia-Africa summit in the city of St. Petersburg.

In March 2024, the Paris Club, a coalition of creditor countries, announced the cancellation of about $2 billion in debt, which followed the IMF and World Bank’s announcement of debt relief for 99 percent of Somalia’s debt.

On Tuesday, Mr. Riley said: “The $1.1 billion is in addition to the $1.2 billion in development, economic, security and humanitarian assistance provided by the United States to Somalia during the current fiscal year.”

“The United States remains a steadfast partner in support of the people of Somalia,” he said separately.

Somalia has faced many challenges in rebuilding its institutions and was once saddled with a massive $5 billion debt, part of which was borrowed in the final years of the Siad Barre regime in the late 1980s.

But the country has also suffered from the negative consequences of climate change, insecurity, high poverty and unstable governance. Debt relief initially depended on improvements in state institutions and data collection to adequately measure the health of the economy and reduce waste.

Dr. Mohamud Mohamed Uluso, a former presidential candidate in 2017, suggested that debt cancellation is beneficial if managed properly.

“Debt relief promotes sound macroeconomic management, adherence to free market principles and the recognition of the private sector as the engine of economic development, the establishment of efficient public administration, prudent domestic and foreign borrowing, and above all, respect for the rule of law. ” said Dr. Uluso in an analysis.

“Mobilizing domestic revenues to support self-sufficiency, provision of public services and social stability provides additional benefits.”

Debt cancellation is generally seen as an incentive for investment, especially in productive sectors such as livestock, agriculture and fishing.

International financial institutions, especially the IMF, have upgraded the growth forecast for Somalia’s gross domestic product, forecasting growth of four percent for 2024 and 2025, supported by the revival of traditional productive sectors and remittances.

According to recent World Bank reports, more than two-thirds of Somalia’s population lives on less than $2.15 a day, underscoring the critical need for comprehensive economic reforms and substantial financial support to tackle widespread poverty.

However, this week aid agencies warned that Somalia could face serious food shortages after prolonged dry spells.

Dr. Hussein Ali Ahmed, a Mogadishu-based economist, said The East African: “To counter all these socio-economic ills, debt relief must be complemented by strong national reforms.”

Dr. Ahmed, a fisheries sector consultant, added: “Somalia’s recent accession to the East African Community is expected to pave the way for new markets and opportunities for economic expansion, especially the country’s potential blue economy.”