Somalia should reject IMF & World Bank Debt Relief

17 February 2020 by David Calleb Otieno

Last week, the World Bank and the International Monetary Fund (IMF) announced that the two institutions were moving closer to offering Somalia a debt relief of USD 5.3 billion translating to about KES530 billion under the Enhanced Heavily Indebted Poor Countries (HIPC) initiative which is an IMF strategy of advancing its Structural Adjustment Programs (SAPs).

While on the face value, the Somalia Debt Relief appear to be good, behind the scene, the 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.

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.
offer is a poisoned chalice that will lead the East African country into more colonisation using debts. The debt relief initiative started at the 1988 Toronto G7 summit where it was agreed that 33 percent of non Overseas Development Aid (ODA ODA
Official Development Assistance
Official Development Assistance is the name given to loans granted in financially favourable conditions by the public bodies of the industrialized countries. A loan has only to be agreed at a lower rate of interest than going market rates (a concessionary loan) to be considered as aid, even if it is then repaid to the last cent by the borrowing country. Tied bilateral loans (which oblige the borrowing country to buy products or services from the lending country) and debt cancellation are also counted as part of ODA. Apart from food aid, there are three main ways of using these funds: rural development, infrastructures and non-project aid (financing budget deficits or the balance of payments). The latter increases continually. This aid is made “conditional” upon reduction of the public deficit, privatization, environmental “good behaviour”, care of the very poor, democratization, etc. These conditions are laid down by the main governments of the North, the World Bank and the IMF. The aid goes through three channels: multilateral aid, bilateral aid and the NGOs.
) would be cancelled for poor countries. The rate has since been revised upwards. This initiative came with strict conditions that were restrictive hence it did not solve the debt problem. Faced by pressure from anti-debt activists, the global moneylenders in 1996, came up with another debt relief initiative; the 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.
that was enhanced in 1999. Of significance was the involvement of the World Bank and IMF who in 1986 had resisted debt relief claiming that their statutes forbade them from offering debt relief. Why is there a change of position by IMF and World Bank?

The IMF and the World Bank were presenting a facade of magnanimity when they changed their position on debt relief but the real issue that drove them to adopting debt relief was the mortal fear that the debt could cause the entire global financial system to collapse. HIPC initiative is therefore not a tool to relieve the debt burden of the poor countries like Somalia but a strategy to make the external debt of those countries sustainable by slightly reducing the debts owed by the poor countries to put an end to late payment, defaulting and or application for debt restructuring by countries that are unable to repay their debts.

To benefit from the HIPC initiative, a country must first sign an agreement with IMF to pursue an economic policy approved by Washington popularly known as the Poverty Reduction Strategy Paper Poverty Reduction Strategy Paper
Set up by the World Bank and the IMF in 1999, the PRSP was officially designed to fight poverty. In fact, it turns out to be an even more virulent version of the structural adjustment policies in disguise, to try and win the approval and legitimation of the social participants.
(PRSP) over a period of three years. This means that Somalia will effectively loose its sovereignty to the IMF and World Bank as it will lead to privatisation of the Somalia resources and parastatals, plunder of Somalia natural resources under the guise of ensuring that Somalia can generate enough resources to repay any future debts.

Somalia should reject the HIPC initiative and instead repudiate all her debts and focus on investing their resources to public service delivery. Somalia has all reasons to reject debt repayment if past HIPC initiative performance are anything to go by. The IMF and the World Bank are not concerned by the disastrous effects the SAPs on Somalia citizens.

While the original objective of the HIPC initiative was to guarantee fundamental human rights, eradicate poverty and enable citizens of countries concerned their sovereignty over their affairs, the reality on the ground given the experiences of countries that have joined the HIPC initiative is different since the initiatives real purpose is to enable the poor countries repay their debts regularly and to the maximum of their financial capacity. It is therefore a cancellation of debts that a country cannot repay to a level that the poor countries like Somalia cannot suspend repayment. It is about making the debts sustainable to ensure that the creditors are sure of receiving repayments without the risk of sudden stoppage of debt repayment.

The HIPC initiative is therefore not in the interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. of Somalia citizens but in the interest of creditors since the SAPs that accompany the HIPC initiative will drastically reduce Somalia government’s social expenditure, devalue the Somalia currency, increase the interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
in Somalia, development of export oriented raw material economy, complete opening up of Somalia market by elimination of custom barriers, liberalisation of Somalia economy by abolition of all capital movement control and exchange control, a tax regime in Somalia that aggravates inequalities, massive privatisation of public resources and retreat of Somalia state from competitive sectors of production. This is against the HIPC initiative own goal of guaranteeing fundamental human rights, eradicating poverty and enabling the Somalia citizens to have sovereignty authority over their affairs.

The Kenyan Peasants League and the Kenyan Social Movements for Abolition of Illegitimate Debts is calling on Somalia government to reject the HIPC initiative and is also calling on Somalia citizens to rise up and force their government to reject the initiative.

David Calleb Otieno

KPL International Coordinator and Convener, Kenyan Social Movements for Abolition of Illegitimate Debts

Other articles in English by David Calleb Otieno (7)



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