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Hassan Sheikh gets his debt deal

Somalia hopes a long-awaited $4.5bn debt write-off will unlock financing for the country and restore investor confidence

Somalia has secured a US$4.5 billion debt write-off from global lenders, marking the culmination of a decade-long process of negotiations and a major political coup for President Hassan Sheikh Mohamud.

Securing the debt deal, which makes Somalia the 37th recipient of the enhanced Heavily Indebted Poor Countries (HIPC) Initiative, has been Hassan Sheikh's main priority since returning to the presidency last year (AC Vol 63 No 11, Kenya and US welcome Hassan Sheikh's presidential comeback).

The move by multilateral and bilateral lenders, including the World Bank and International Monetary Fund (IMF), significantly reduces the country's debt to $600 million from a high of $5.2bn, according to the World Bank. Somalia's external debt now drops below 6% of GDP, from 64% in 2018.

This has been a painstaking process during which the new government has been praised by the IMF for implementing laws to tackle illicit financial flows, tax transparency and increase revenue collection.

In March, the IMF completed discussions with the Somali authorities in Nairobi and reached a staff-level agreement on the fifth review under the existing Extended Credit Facility (ECF) arrangement (Dispatches, 1/6/23, Hassan Sheikh moves closer to winning debt relief).

Somali authorities also reached debt relief agreements with most Paris Club members and the Kuwait Fund for Arab Economic Development.

In total, commercial creditors will account for $3bn of the write-off, while the World Bank's International Development Association and the IMF will write-down $448.5m and $343.2m respectively, and the African Development Fund $131m.

The debt write-down and new legal framework should, Hassan Sheikh hopes, help unlock concessional and climate financing for the nation, revive investor confidence in the economy and restore some level of integration into the international financial system.

Fears about money laundering and terrorism financing saw Somalian institutions lose the ability to make international transactions in 2014, but in March the central bank began enforcing the use of international bank account numbers (IBAN).

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