Debt Cancellation for Somalia

The Road to Peace, Poverty Alleviation and Development

7 February 2019 by Somalia NGO consortium

You will find below a report on Somalia’s sovereign debt which was issued by a consortium of NGOs. While some of their recommendations and their approach to possible solutions to the debt crisis are not completely in agreement with the CADTM’s positions, we found their analysis useful to understand the current crisis in Somalia.

As a result of protracted conflict and devastating recurring droughts, Somalia is one of Sub-Saharan Africa’s most troubled and underdeveloped countries. Following the collapse of the central government in 1991, the country has been plagued with violent conflict and insurgency, extreme and widespread poverty, acute food shortages, weak governance and political instability, economic underdevelopment, human rights abuses and recurring natural disasters such as droughts and floods. Somalis to date lack essential security services, healthcare, education, clean and safe drinking water and have very limited employment opportunities. The Federal Government of Somalia (FGS) has meagre resources to meet the country’s pressing needs.

The parliamentary and presidential elections in 2012 led to renewed international recognition of the FGS and its constructive re-engagement with the international community. This, however, led to the inheritance of external debts accumulated by Somalia’s former governments, leaving the country with the status of being a heavily indebted poor country that has sizeable arrears to bilateral and multilateral creditors and an external debt of US$ 4.6 billion (as of end 2017). Consequently, the country’s external debt overhang and a large stock of arrears restricts it from accessing critically needed financial resources from the international community, which are essential for reconstruction and development of Somalia.

Expedited, Full Debt Cancellation

To address Somalia’s external debt overhang and provide the country with access to concessional resources, the country will need to:
• Clear arrears owed to the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
, World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

and African Development Bank;
• Complete the processes of the Heavily Indebted Poor Country (HIPC Heavily Indebted Poor Countries
In 1996 the IMF and the World Bank launched an initiative aimed at reducing the debt burden for some 41 heavily indebted poor countries (HIPC), whose total debts amount to about 10% of the Third World Debt. The list includes 33 countries in Sub-Saharan Africa.

The idea at the back of the initiative is as follows: a country on the HIPC list can start an SAP programme of twice three years. At the end of the first stage (first three years) IMF experts assess the ’sustainability’ of the country’s debt (from medium term projections of the country’s balance of payments and of the net present value (NPV) of debt to exports ratio.
If the country’s debt is considered “unsustainable”, it is eligible for a second stage of reforms at the end of which its debt is made ’sustainable’ (that it it is given the financial means necessary to pay back the amounts due). Three years after the beginning of the initiative, only four countries had been deemed eligible for a very slight debt relief (Uganda, Bolivia, Burkina Faso, and Mozambique). Confronted with such poor results and with the Jubilee 2000 campaign (which brought in a petition with over 17 million signatures to the G7 meeting in Cologne in June 1999), the G7 (group of 7 most industrialised countries) and international financial institutions launched an enhanced initiative: “sustainability” criteria have been revised (for instance the value of the debt must only amount to 150% of export revenues instead of 200-250% as was the case before), the second stage in the reforms is not fixed any more: an assiduous pupil can anticipate and be granted debt relief earlier, and thirdly some interim relief can be granted after the first three years of reform.

Simultaneously the IMF and the World Bank change their vocabulary : their loans, which so far had been called, “enhanced structural adjustment facilities” (ESAF), are now called “Growth and Poverty Reduction Facilities” (GPRF) while “Structural Adjustment Policies” are now called “Poverty Reduction Strategy Paper”. This paper is drafted by the country requesting assistance with the help of the IMF and the World Bank and the participation of representatives from the civil society.
This enhanced initiative has been largely publicised: the international media announced a 90%, even a 100% cancellation after the Euro-African summit in Cairo (April 2000). Yet on closer examination the HIPC initiative turns out to be yet another delusive manoeuvre which suggests but in no way implements a cancellation of the debt.

List of the 42 Heavily Indebted Poor Countries: Angola, Benin, Bolivia, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad, Comoro Islands, Congo, Ivory Coast, Democratic Republic of Congo, Ethiopia, Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Kenya, Laos, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Myanmar, Nicaragua, Niger, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, Somalia, Sudan, Tanzania, Togo, Uganda, Vietnam, Zambia.
) Initiative and Multilateral Debt Relief Initiative (MDRI); and
• Obtain full debt cancellation from all of its external creditors.

For For Somalia, it is vital that the debt relief process is accelerated to unlock new financial resources to be channelled for reconstruction and development and to encourage greater investments in the country. It is also crucial that Somalia receives full debt cancellation from its external creditors to avoid servicing external debts after obtaining debt relief through the HIPC Initiative, as servicing of debts will divert scarce resources away from development. This will require Somalia’s external creditors to accelerate the debt relief process and grant the country full debt cancellation. Overall, an accelerated debt relief process and full debt cancellation will consolidate the restoration of peace and political stability and spur development, thereby reducing the risk of the country reverting back into conflict.

A diverse group of national and international civil society actors under the umbrella of the Somalian NGO Consortium are offering their support to advocate and campaign for speedy and full debt cancellation. This group commissioned an advocacy and policy brief entitled Debt Cancellation for Somalia: The Road to Peace, Poverty Alleviation and Development. The policy brief contains:
• An outline of the technical processes for arrears clearance, HIPC, MDRI, and beyond-HIPC debt relief, including the progress made thus far by the Federal Government of Somalia;
• Logical and moral arguments for expedited debt cancellation; and • Pragmatic recommendations for the Government, international financial institutions and bilateral creditor countries.

Contact: info at somalianngoconsortium.or




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