The European Union on Thursday announced it will provide up to €43 million to help clear Somalia’s arrears to international financial institutions.
This means Somalia becomes eligible for forgiveness of most of its debt, measured at over US$5 billion, under the Heavily Indebted Poor Countries (HIPC) Initiative.
“We congratulate Somalia on reaching this historic milestone, and are proud to have continuously supported the country in this process. Somalia will now have access to significant new financial resources to address its development needs and help offer a brighter future to its youth. The European Union will continue to work closely with the Somali authorities and international partners to support Somalia on this path and in ensuring benefits for all Somalis”, Jutta Urpilainen, Commissioner for International Partnerships, stated on the occasion.
Somalia’s access to debt relief has been at the centre of the EU’s strategy in the country over the past three years. In October 2018, the EU and Somalia signed an agreement to provide €92 million to the Somali budget over two and a half years. This has been instrumental in helping Somalia build a track record of economic reforms and reach today’s milestone.
Up to €43 million of these funds will now be used to cover the funding gaps to clear arrears held by the International Monetary Fund (IMF) and the African Development Bank.
With the clearance of its arrears, Somalia officially reaches the HIPC ‘decision point’, the first of two milestones necessary for debt relief.
“On March 25, 2020, the IMF and World Bank approved Somalia’s eligibility for debt relief under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative. Debt relief will help Somalia make lasting change for its people by allowing its debt to be irrevocably reduced from US$5.2 billion at end-2018 to US$557 million in net present value terms (NPV) once it reaches the HIPC Completion Point in about three years’ time,” World Bank confirmed.
To get to this point, the country has also had to establish a track record of economic reforms and adopt a strategy for reducing poverty.
Somalia will now be able to access significant new resources, such as funding from the World Bank’s International Development Association.
The second milestone will be the ‘completion point’ when most of Somalia’s debt is effectively pardoned. To reach this target, the country will have to show good performance under its IMF programme and implement key reforms along with a Poverty Reduction Strategy for at least one year.
Somalia President Mohamed Farmajo said, “To all our partners, you may be sure that we are grateful for your faith and belief in the future of Somalia and for us, the fulfillment of that future for our people remains our motivation.”
EU Ambassador to Somalia Nicolas Berlanga said with the EU debt relief, the government of Somalia will have more resources for social services; banks and businesses will have easier access to credits and investments; IMF, WB or AfDB will provide financial and technical support.