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Somalia and the Enhanced HIPC Initiative: Summary

Core Content

The document outlines the preliminary assessment of Somalia's eligibility for assistance under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI). It highlights the progress made by Somalia in economic and institutional reforms and the potential benefits of debt relief under these initiatives.

Key Information

• Debt Status: Somalia's public and publicly guaranteed external debt was estimated at US$5.3 billion at the end of 2018, with US$5.0 billion in arrears. In net present value (NPV) terms, the debt stood at US$5.2 billion.
• Debt Relief Eligibility: After applying traditional debt relief mechanisms, Somalia's debt-to-exports ratio was 328.9%, well above the HIPC threshold of 150%. A preliminary Debt Relief Analysis (DRA) shows that Somalia qualifies for HIPC debt relief of US$1.9 billion in NPV terms, with a common reduction factor (CRF) of 54.4%.
• Debt Relief Impact: With HIPC, MDRI, and beyond-HIPC assistance, Somalia's debt-to-exports ratio is projected to decline from 491.7% in 2018 to 57.0% in 2027 and 41.5% in 2038.
• Debt Service-to-Exports Ratio: This ratio is expected to initially increase after the HIPC Completion Point due to resumption of regular payments and arrears rescheduling, but will gradually decrease to 1.9% in 2038.
• HIPC Decision Point: Somalia is expected to reach the Decision Point by the end of March 2020, contingent on:
  • Continued satisfactory performance under the IMF Staff-Monitored Program (SMP).
  • Clearance of arrears to multilateral creditors.
  • Agreement on Completion Point triggers.
• MDRI Debt Relief: Upon reaching the Completion Point, Somalia would qualify for MDRI debt relief from the World Bank's IDA and African Development Fund (AfDF), which could amount to US$116.6 million in NPV terms (2022).
• IMF Assistance: The IMF would provide beyond-HIPC assistance, including the cancellation of pre-Decision Point financing not already covered by interim relief. This includes the first disbursement under the ECF and EFF-supported arrangement.
• Paris Club: Paris Club creditors are expected to provide further beyond-HIPC assistance at the Completion Point.

Main Views

• Eligibility: Somalia has been found eligible for assistance under the Enhanced HIPC Initiative due to its sustained commitment to economic and institutional reforms.
• Reforms and Progress: Somalia has made significant progress in:
  • Macroeconomic reforms, including improved budgeting, public financial management (PFM), and the establishment of the Somalia Financial Management Information System (SFMIS).
  • Structural reforms, such as the development of fiscal federalism through the Intergovernmental Fiscal Forum (IGFF).
  • Financial sector reforms, including the strengthening of financial regulation and supervision, and the introduction of AML/CFT measures.
• Poverty and Social Indicators: Poverty remains widespread, with 69% of Somalis living below the poverty line (US$1.90 per day). Non-monetary deprivations are also significant, with almost 90% of households affected in at least one dimension of poverty.
• Vulnerability: Somalia is highly vulnerable to climate shocks and security deterioration, which exacerbate poverty and economic instability.
• International Support: The IMF and World Bank have been key partners in Somalia's reform journey, with the World Bank Group's Country Partnership Framework (CPF) focusing on institutional strengthening and economic resilience.
• Future Steps: The IMF and World Bank expect to finalize the Decision Point and Completion Point triggers by the end of 2020, with the goal of achieving debt relief and fiscal normalization.

Key Points for Consideration

• Arrears Clearance: The IDA arrears clearance set-aside will be used to finance reengagement grants and budget support. The estimated arrears to be cleared by end-February 2020 are US$357 million.
• IMF Financing: The IMF is mobilizing financing resources to help clear Somalia's arrears and finance its HIPC and beyond-HIPC debt relief, which are estimated at SDR 131.1 million (US$182.3 million) and SDR 109.9 million (US$153 million) in end-2018 NPV terms.
• Public Spending Monitoring: The IMF and World Bank will monitor public spending following the provision of HIPC assistance to ensure it aligns with poverty reduction goals.
• Completion Point Triggers: A social registry is proposed as a key trigger for the floating Completion Point, which will help improve post-disaster assistance delivery.
• Continued Reforms: Sustained political, economic, and institutional reforms are essential to ensure long-term debt sustainability and poverty reduction.

Conclusion

The document outlines the eligibility and potential benefits of the HIPC Initiative for Somalia. It emphasizes the importance of continued reform efforts, arrears clearance, and international cooperation in achieving debt relief and economic recovery. With the support of the IMF and World Bank, Somalia is on track to reach the Decision Point by the end of March 2020, and the Completion Point in the near future, which would unlock significant debt relief and development assistance.