Reforms and relief:
How Somalia turned a page amid a global debt crisis
Across the world, business owners face many daily challenges, from inflation to limited access to finance to supply-chain disruptions. In countries affected by fragility, conflict, or entrenched poverty, though, these routine obstacles take on another hue.
As Hersio Abdulle Siad, a Somali mother of 14, grew her business from a street stall to a distributor of fruits and vegetables, she had to overcome not only considerable economic woes, but the impact of floods, droughts, pests, and a decades-long civil war.
Yet, recent developments in her country give Siad reason for hope.
With support from the international community, Somalia has successfully implemented wide-ranging reforms aimed at rebuilding its economy and state institutions, despite a challenging domestic and external environment. The country, for long marred in conflict and debt, also managed to clear its arrears to international financial institutions.
These achievements paved the way for Somalia to conclude the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative in December 2023. As a result, the country received $4.5 billion in debt relief by the World Bank's International Development Association (IDA), the International Monetary Fund (IMF), the African Development Fund, other multilateral creditors as well as by bilateral and commercial creditors, mostly members of the Paris Club. This achievement reduced Somalia’s external debt from 64% of GDP in 2018 to less than 6% of GDP by the end of 2023, allowing the country to reenter the global financial system following two decades of isolation.
“Somalia can be a fertile country,” said an optimistic Siad. “We’re looking forward to investors coming, especially to the farming sector, so we can produce more and sell more, in the country and abroad.”
In addition to attracting more private investment, the country expects to normalize relations with former creditors and broaden its sources of development finance as investor confidence rises. Part of the expectation was met in March 2024, when Somalia secured the cancelation of nearly all the debt it owed to member counties of the Paris Club. Somalia’s recent admission into the East African Community could also open new markets.
A way out of distress
Somalia’s positive story of overcoming debt distress is unfortunately one of very few in recent years.
About 60% of the world’s poorest countries are currently at high risk of or already in debt distress—with a public debt averaging about 70% of their GDP, an increase of more than 60% from a decade ago.
The precarious position forces these countries to channel more of their budgets to service debt than to meet critical needs including health and education, which would benefit their most vulnerable citizens.
Somalia was in that situation, with interest and charges mounting on its debt, when the country joined HIPC, an initiative launched in 1996 by the IMF and the World Bank to provide relief to countries burdened by unsustainable debt.
To participate in the program, countries needed to meet certain criteria—such as being eligible to borrow from IDA, the World Bank’s fund for the poorest nations. They also had to commit to policy changes supported by the IMF and the World Bank and demonstrate their implementation.
More than 30 countries have benefited from HIPC since its inception, with Somalia being one of the last ones remaining in the program.
Crucial international support
Somalia’s debt relief quest was not a simple process—and it took nearly a decade to be completed. Reforms undertaken by the government as part of the debt relief agreement prioritized rebuilding state institutions, including improving public finances, addressing institutional weaknesses, and enhancing public trust in government. They also aimed at building a competitive private sector and supported areas such as digital identification, federal-state cooperation on health and education, and statistical capacity.
With more than two-thirds of the Somali population living on less than $2.15 a day, the country launched, for example, a strategy to reduce poverty that led to the implementation of Baxnaano, the country’s first national safety-net program. Launched in 2019 with support from the World Bank, the program has since reached over 3.7 million people, mostly women and children, through nutrition-linked cash transfers and emergency cash to support early recovery from shocks. The program, implemented in partnership with the United Nations, is expected to reach more than 4.17 million people by December 2025—nearly one-fourth of the country’s population.
Herculean efforts by Somalia were strongly supported by the international community. One crucial step in this regard was the clearance of arrears to IDA, the world’s largest source of development finance for poor countries. The achievement, part of a comprehensive plan for arrears clearance that included the IMF and the African Development Bank, allowed IDA to reengage with the country in 2020. Since then, IDA’s portfolio in Somalia has grown to $2.3 billion between grants and technical support.
About 20% of the financing that IDA provides worldwide is in the form of grants, with the rest in low-interest credits that can be repaid over a long period of time. These low-cost funding enables countries to avoid costly financing and reduce fiscal burdens. IDA also helps governments facing high debt and fiscal imbalances to manage risk while entrenching sustainable, transparent borrowing practices.
IDA Grant Allocation Traffic Light: Guiding Sustainable Debt Management
IDA Grant Allocation Traffic Light: Guiding Sustainable Debt Management
IDA work in Somalia is now being complemented and amplified by a new Country Partnership Framework, a joint five-year strategy between the World Bank and the federal government. The framework, announced in February 2024, builds stability so the country can provide basic services to its population, foster private sector-led growth, and enable Somalia to emerge from fragility and conflict.
What’s next
Somalia’s recent achievements send a clear signal to the world: the country turned an important page in history—yet big challenges remain ahead. Especially in fragile environments, development is not linear and can easily slide back if momentum is lost. State and institutional building needs to continue—and so does international support.
“We are out of failure… and working very hard to get out of fragility,” said Somalia’s Deputy Prime Minister Salah Jama recently, at the World Bank’s Fragility Forum.
“It is a story of hope and positive development but it’s not a finished story. It needs partnerships to continue and reach the ultimate point.”
The World Bank—including IDA—continues to provide well-coordinated international effort to support Somalia, allowing access to increased IDA offerings to deepen state and institution-building, and to support relief and resilient recovery from crises.
For Siad, the business owner in Mogadishu, opportunities are now more clearly visible. Expanding her company, Somfresh, further is part of her plans, but they’re not limited to that. She dreams of providing microfinance to Somali women with business aspirations like herself—and hopes that more economic stability and access to finance could create conditions for that to happen.
“I’d like women to feel safe and come forward with their business plans. And then I would like to be able to invest in their ideas,” says Siad.
Hersio Abdulle Siad
Hersio Abdulle Siad
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Photos taken by Dookh Press. All rights reserved to The World Bank.