Somalia has turned a corner

Mahmoud Mohieldin
Tuesday 16 Jan 2024

Somalia owes its achievement to extensive reforms aimed at enhancing domestic revenue, strengthening public-finance management, addressing governance weaknesses, and bolstering the central bank’s institutional and regulatory capabilities, write Mahmoud Mohieldin and Abdulqafar Abdullahi

 

On December 13, 2023, Somalia reached the completion point of the Heavily Indebted Poor Countries Initiative (HIPC), becoming the 37th country to benefit from the program. With the goal of ensuring manageable debt burdens for poor countries, the HIPC, established by the International Monetary Fund and the World Bank, offers debt relief to countries that will use the saved funds for programs to benefit the poor and drive progress toward achieving the Sustainable Development Goals (SDGs).

Somalia has been in arrears to bilateral and multilateral creditors since the collapse of the Somali Democratic Republic in 1991. But following the HIPC completion point, its external debt has declined from $5.2 billion at the end of 2018 to less than $600 million. The journey to this milestone has been difficult, marked by severe and prolonged drought, the COVID-19 pandemic, chronically limited fiscal capacity, weak institutions, and other significant challenges.

Somalia owes its achievement to extensive reforms aimed at enhancing domestic revenue, strengthening public-finance management, addressing governance weaknesses, and bolstering the central bank’s institutional and regulatory capabilities. Since 2013, successive governments, supported by IMF and World Bank programs, as well as by the African Development Bank, the European Union, and many other development partners, not only took ownership of the process, but also mobilized the public and key leaders in its favor.

But Somalia still faces humanitarian challenges. The drought – which lasted from 2015 to 2023 – claimed many lives, devastated crop production and livestock, and exacerbated already severe food insecurity. In the past few months, heavy El Niño rains exacerbated already-dire conditions, causing widespread flooding in many parts of the country. According to a 2023 poverty report from the Somali National Bureau of Statistics, 54.4% of the population lives below the national poverty line ($2.06 per day).

 

Moreover, the current rate of economic growth is not adequate to reduce Somalia’s high poverty or create sufficient employment opportunities for young people. A 2022 government report indicates that at least 80% of children face multidimensional poverty (meaning they are deprived in at least two poverty dimensions). Despite considerable work toward some SDGs in recent years, Somalia’s first Voluntary National Review Report, in 2022, concluded that substantial financial and technical resources are needed to make meaningful progress by the SDGs’ 2030 deadline.

Still, our own impression is that Somalia’s enthusiastic young people (75% of the population is under 35 years old) have enormous potential to drive growth and development. Strategically located along critical maritime trade routes in the Gulf of Aden and the Indian Ocean, Somalia is blessed with a vibrant private sector and a thriving diaspora. With a coastline exceeding 2,000 miles – the second longest in Africa – it has abundant and diverse fish stocks, potential oil and gas reserves, vast arable land with two rivers, and a substantial livestock population.

Following its recent admission to the East African Community, Somalia also has an opportunity to deepen its economic integration in a region with more than 300 million people, potentially positioning itself as a regional trading hub. In the meantime, a newly approved IMF successor program will aim to assist the government in sustaining reform momentum, promoting inclusive growth, boosting domestic revenue, and strengthening public finances, among other objectives. If enacted in a timely fashion, these policies will also help build resilience against climate-related shocks. Given that Somalia has maintained a steadfast commitment to reforms despite its arduous recent past, there is good reason to expect its progress to continue.

Of course, recent political developments in the region raise concerns. Somalia has objected strongly to Ethiopia’s memorandum of understanding to lease a strip of coastal land from the breakaway region of Somaliland. It should go without saying that both peace within Somalia and good relations with its neighbors are prerequisites for achieving robust economic growth and advancing the SDG agenda. Given its strategic location, a united, prosperous, and peaceful Somalia is key to economic development across the Horn of Africa. As the African Union has stressed, mutual respect must prevail between Somalia and Ethiopia, or regional prosperity and stability will suffer.

Somalia’s completion of the HIPC indicates the country’s determination to realize its massive economic potential. But that will require enhanced security, comprehensive structural reforms, and substantial investment in both physical and social infrastructure to boost economic growth. With domestic revenue currently accounting for only 2.7% of GDP, adopting a prudent fiscal policy that can mobilize revenues and ensure debt sustainability will be essential.

The international community must continue supporting Somalia in its post-HIPC development. The country’s recent success is a testament to the power of multilateralism. There is much to be lost from complacency, and much to be gained from sustained international partnerships to support Somalia’s ambitious reforms.

Mahmoud Mohieldin, a former Egyptian minister of investment, is a UN Climate Change High-Level Champion, UN Special Envoy on Financing the 2030 Agenda for Sustainable Development. Abdulqafar Abdullahi is Adviser to the Executive Director at the International Monetary Fund.

Copyright: Project Syndicate, 2024.
 

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