Debt relief or Smoke Screen?

Debt relief or Smoke Screen?

Somalia faces unprecedented challenges that threaten its existence. For example: The Federal Government of Somalia does not control much of the country. Al-Shabaab pitilessly targets civilians at will. Peace remains elusive in many parts of the country.  The country’s health system is not prepared to confront any outbreak including the deadly Covid-19. There is no agreed electoral model as 2021 presidential election deadline approaches. These are serious issues that can derail any progress made thus far. Instead of tackling them Villa made the “debt relief” a top priority.  In just last week alone, the Prime Minister, Mr. Ali Kheyre and Minister of Finance hold three separate celebratory press conferences on what they termed “Dayn Cafis”. One might ask why the debt relieve is top priority when the Federal Somali Government cannot provide reliably the basic security needed for any economic growth?  Is Villa Somalia genuinely concern about the poor economic conditions of the country or is this part of 2021 election campaign

This essay seeks to answer the following: Was Somali’s debt erased as the Finance Minister claimed?  Did Somalia take more new loans in the process of “Dayn cafis” to pay off its existing debt? Will the “debt relief” have any significance on Somalia economy?

Is Somalia debt erased?

The simple answer is no. To understand the whole “debt relief” milieu one must scrutinize the semantics. The World Bank and International Monetary Fund (IMF) chose to use different language than the one employed by the Prime Minister Ali Kheyre – “Dayn Cafis”. No Somali loan was forgiven.  According to IMF website, Somalia become eligible for debt relief “under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative”. This is not a new thing- 37 other poor countries are participating the HIPC program, and research shows that not much has change the economics of those countries.  In addition, IMF says, “The decision point means that Somalia’s debt will be reduced from US$ 5.2 billion at end-2018 to US$3.7 billion in net present value (NPV)terms”. This is on the condition of increasing the revenue collection, and with the current political circumstance, the goal is not achievable.

Did Somalia take more new loans in the process of “Dayn cafis”

Yes. In a statement World Bank said, “The payment of these arrears was made possible through a $365.9 million bridge loan from the Norwegian government”. The interest of the new loan was not revealed yet. This is another fact left out in the celebratory press conferences organized by Villa Somalia. Due to the lack of transparency no one knows how much more separate bridge loans that the Somali government requested from its counterparts. This is dangerous and can have dire consequences for future Somali generations.

Will the “debt relief” have any significance on Somalia economy?

Debt relief does not equate economic growth, as Villa Somalia would like us to believe. In fact, a research paper titled “Debt Relief: What Do the Markets Think?” published by National Bureau of Economic Research (NBER) found that IMF and World Bank debt relief programs do not work for small counties, which do not have infrastructure.  The research paper argued, “Debt relief is unlikely to promote investment, reform or growth in the Heavily Indebted Poor Countries (HIPC) Initiative”. The paper justifies why debt relieve does not work for poor countries like Somalia  for two reason: “ Theory suggests that in order for a country to be a legitimate candidate for debt relief, it must satisfy two necessary (but not sufficient) conditions. First, the collective action problem must stand in the way of net capital inflows to that country. Second, the country must have a social infrastructure that is sufficiently well developed to ensure that net capital inflows will be channeled into growth-generating investment”.

 Evidence shows that debt relief is not catalyst for economic growth nor does it provide mechanisms to reduce the rampant unemployment which Somalia suffers. One might then ask why Somalia government is obsessed with debt relief when it does not reliably provide basic security needed for any economic growth?  There are two conclusion one might arrive  

1. The “debt relief” narrative is smoke screen to conceal the growing doubt over the government’s inability to find a lasting solution to Somalia ‘s tenacious problems.
2. The “debt relief” puts Villa Somalia in a position (if it fully materialized) to seek more bridge loans from individual countries. This is reckless strategy which imposes a great burden on the future generations to come and puts the country in far worse place than before.

Conclusion

Research shows that debt relief programs of the World Bank and IMF does not work for small countries. The lack of political stability and poor security makes the Somali case even more difficulty. There are real problems of which the country faces; chief among them is the rampant insecurity. Somali people will evaluate Villa Somalia not how much bridge loans it has taken, but rather what it has done about the insecurity. It is now time to question the “debt relief” narrative.  

References:

Key Questions on Somalia. (n.d.). Retrieved from https://www.imf.org/en/Countries/SOM/key-questions-on-somalia.

Somalia Clears Arrears to World Bank Group. (n.d.). Retrieved from https://www.worldbank.org/en/news/press-release/2020/03/05/somalia-clears-arrears-to-world-bank-group

Arslanalp, S., & Henry, P. B. (2002). Debt Relief: What Do the Markets Think? (No. w9369). National Bureau of Economic Research.

By: Bader Cabdullahi Sanayre