Post-Debt Relief Reforms in Somalia: Monitoring IMF Debt Sustainability

Policy Briefs June 2025 009/2025 Post-Debt Relief Reforms in Somalia: Keeping an Eye on International Monetary Fund’s Debt Sustainability Analysis

June 2025 CBS Policy Briefs info@centralbank.gov.so www.centralbank.gov.so @CBSsomalia Central Bank of Somalia ©2025 In the case of quotation, please refer to this Publication as follow: - Central Bank of Somalia (CBS) Policy Briefs: June 2025 Mogadishu – Somalia To request a complimentary copy of this report, an electronic copy is available at www.centralbank.gov.so 55 Corso Somalia P. O. Box 11 Mogadishu, Somalia

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Post-Debt Relief Reforms in Somalia: Keeping an Eye on International Monetary Fund’s Debt Sustainability Analysis Policy Research & Analysis Division Research and Statistics Department Monetary, Financial, Regulatory Policy Group Central Bank of Somalia June 2025

Policy Brief, June 2025 2 Executive Summary Somalia achieved a major milestone on December 13, 2023, by attaining the completion point under heavily indebted poor countries initiative, drastically reducing its external debt from $5.3 billion (64% of GDP) in 2018 to $0.6 billion (under 6% of GDP) by end-2023. This marked a turning point in Somalia’s economic recovery, resulting from a decade-long effort of structural reforms, improved governance, and international cooperation particularly under the IMF-supported ECF. However, this debt relief is not an endpoint but a foundation for a new fiscal phase focused on maintaining debt sustainability while advancing inclusive and resilient development. In the post-HIPC era, the Somali government has implemented robust public financial management and revenue mobilization reforms. Despite these efforts, domestic revenues remain exceptionally low below 3% of GDP placing Somalia among the least fiscally mobilized economies in Africa. Recurrent expenditures, especially the public wage bill and security costs, exceed domestic revenue, and 65% of the government budget dependent on donor support. Under the New ECF Program (2023–2026), the IMF and the FGS reached a staff-level agreement on economic and financial reforms of three years (Dec 2023 to Dec 2026) in post￾HIPC policies. These include tax policy reform, payroll integration, debt policy regulation, PPP legislation, and strengthened central bank operations. Most of these benchmarks have been achieved or are in progress, indicating steady reform commitment. Debt sustainability analysis (DSA) indicates that Somalia’s debt levels are currently low and within all sustainability thresholds. External public debt is around 6.0% of GDP, with debt service obligations below IMF-set thresholds. However, Somalia remains categorized as a “moderate” debt distress risk due to vulnerability to external shocks and limited institutional capacity. Under adverse scenarios, such as reduced export earnings or donor support, debt service-to￾revenue ratios could breach sustainability thresholds. Somalia’s debt-carrying capacity remains low, with a Composite Indicator (CI) score of 1.58 classified as “weak” under the Low-Income Country – Debt Sustainability Framework “LIC-DSF” framework. This means Somalia must adopt a conservative borrowing strategy, focused on concessional financing and strict fiscal management, until significant progress is made in revenue generation and institutional strengthening. The paper identifies eight core challenges threatening post-HIPC fiscal sustainability: low revenue mobilization, high recurrent expenditure, excessive aid dependence, weak debt management institutions, underdeveloped natural resource governance, vulnerability to external shocks and climate disasters, and persistent political and security instability. These factors, if left unaddressed, could compromise Somalia’s hard-won debt relief gains. The paper outlines five strategic policy recommendations:

1. Advance Fiscal Sustainability: Somalia must urgently expand its tax base and control spending. Achieving the target of 4% revenue-to-GDP by 2027 is critical.
2. Reduce Aid Dependence: The FGS must prepare for declining grants by assuming donor-funded costs and building fiscal buffers.
3. Strengthen Debt Management: Institutionalize a medium-term debt strategy and limit non-concessional borrowing.
4. Govern Natural Resource Revenues Wisely: Finalize petroleum legal framework, establish a sovereign wealth fund, and prevent premature borrowing against unproven resource income.
5. Prioritize Climate Adaptation: Integrate climate risks into development planning and build national capacity to withstand natural disasters.

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1. Introduction On December 13, 2023, Somalia achieved a historic milestone by reaching the Completion Point under the Heavily Indebted Poor Countries (HIPC) Initiative. This accomplishment marks a significant turning point in Somalia’s economic journey, lowering its external public debt from US$5.3 billion (64 percent of GDP) in 2018 to just US$0.6 billion (less than 6 percent of GDP) by the end of 2023. This substantial progress not only indicates debt cancellation but also signifies a broader shift toward macroeconomic stability and structural reforms following decades of conflict, institutional collapse, and international isolation. The HIPC Completion Point was not an isolated policy achievement, but the result of a sustained, multi-year effort led by the Federal Government of Somalia (FGS), in collaboration with development partners. The process required implementing widespread reforms in public financial management, domestic revenue collection, governance, and the legal and regulatory framework for economic governance. Somalia’s successful track record under the IMF-supported Extended Credit Facility (ECF) between 2020 and 2023 was vital in reaching this milestone. Yet, debt relief is not an endpoint. Instead, it marks a transition to a new phase of economic policymaking, one centered around safeguarding debt sustainability while advancing inclusive growth. Somalia has now entered the post-HIPC era with a renewed focus on long-term fiscal discipline, domestic resource mobilization, and the institutional foundations needed to sustain access to concessional financing. The 2023–2026 ECF￾supporting reform program builds on this momentum, targeting improved resilience to shocks, inclusive development, and reduced reliance on external grants. Despite notable 1 SNBS, Somalia gross domestic product (GDP) 2024. https://nbs.gov.so/somalia-gross-domestic-product-gdp-2024/ gains, Somalia’s post-debt relief landscape remains fraught with challenges. Security risks, political uncertainty, and escalating climate shocks all significantly impact economic prospects. While real GDP growth is expected to rise to 4.1 percent in 20241 . This pace remains insufficient to significantly reduce poverty, which still affects over 54 percent of the population. The cornerstone of Somalia’s post-HIPC economic strategy is the pursuit of debt sustainability within a framework of concessional financing and prudent fiscal policy. The FGS has committed to maintaining a low risk of debt distress by avoiding non￾concessional borrowing and limiting fiscal deficits to manageable levels. At the same time, FGS is working to strengthen domestic revenue mobilization capacity through reforms such as the implementation of a new income tax law and customs modernization and to improve public financial management systems, including payroll integration and expenditure controls. This paper examines Somalia’s post-debt relief reforms through the lens of debt sustainability. It assesses how the government’s fiscal policy, financing choices, and institutional reforms are shaping the sustainability of its debt path in the medium and long term. Using official Ministry of Finance, IMF-WB DSAs, macroeconomic data, and policy documentation. The paper critically reviews the progress to date, recent reforms, and key issues, and discusses policy options to ensure that Somalia remains on a sustainable fiscal path while addressing pressing development needs. The paper is organized into six sections: (1) Introduction, (2) One Year After HIPC: Policy Reforms, (3) Debt Restructuring and Current Composition, (4) Debt Sustainability Analysis, (5) Key Notable Issues, and (6) Policy Recommendations. Post-Debt Relief Reforms in Somalia: Keeping an Eye on International Monetary Fund’s Debt Sustainability Analysis

Policy Brief, June 2025 4 2. One Year After HIPC: Policy Reforms In the post-HIPC era, the FGS implemented transformative reforms to strengthen financial governance and improve public financial management systems, including payroll integration and expenditure controls. As part of these efforts, the Ministry of Finance is driving domestic revenue mobilization reforms. Recently, the Government implemented the sales tax electronic system, which has significantly streamlined tax collection processes, improving efficiency and transparency in revenue generation. The ministry has introduced a set of tax policies and administrative reforms between 2023 and 2025, which included the Income Tax Law, the Turnover Tax regime, and the launch of a 5 percent electronic transaction tax in September 2024. Simultaneously, the rollout Invoice Tracking System aimed to improve tax compliance, audit capacity, and taxpayer registration. Over the last five years, cumulative domestic revenue has surpassed US$1.4 billion, consistently exceeding targets in the past three years. In 2024 alone, domestic revenue increased by 12 percent, reaching US$369 million in 2024. Domestic revenues covered compensation costs of employees for the third consecutive year, although they remain insufficient to cover the government’s recurrent expenditures. Somalia’s domestic revenue remains the lowest in Africa, particularly among East African economies, with a tax revenue-to-GDP ratio of less than 3 percent, contrasting sharply with Africa’s average of 15 percent (Volz et al., 2020). Moreover, external grants cover nearly 65 percent of total government revenue. Figure 1: FGS Domestic Revenues and Total Operational Costs, 2020–2024 Source: MoF, 2025 Figure 2:

5 Post-HIPC Priorities Somalia is now focused on: • Building fiscal resilience and expanding the tax base • Continuing reforms at the Central Bank • Aligning development with long-term strategies with the National Transformation Plan 2025–29 and other long-term strategies. Challenges Ahead • Foreign aid cuts in 2025 threaten growth momentum. • Somalia must double down on domestic revenue mobilization and private sector development to sustain progress. Figure 2: Comparison of Revenue to GDP (excluding grants) as % of GDP In East Africa Region (2024) Source: IMF Portal, 2025 © Microsoft, OpenStreetMap Powered by Bing 20.7 14.2 22.4 14.9 16.8 3.0 3.0 22.4 Series1 Post-Debt Relief Reforms in Somalia: Keeping an Eye on International Monetary Fund’s Debt Sustainability Analysis

Policy Brief, June 2025 6 Box 1: Natural Resource Revenue: Its Future Impact on Government Revenue Somalia’s oil and gas sector is nascent but holds significant promise. The country is believed to have sizable hydrocarbon prospects offshore and onshore (though there are no proven reserves yet). In a bid to attract investment, FGS has signed 16 production sharing agreements (PSAs) with international oil companies since 2022. Most of these were concluded in 2024, including several blocks awarded under a cooperation deal with Türkiye. As of 2024, no oil production has begun. These PSAs are for exploration, so there are no resource revenues flowing to the government yet. If and when commercial oil is discovered, the fiscal stakes will be enormous: even a moderate oilfield could yield hundreds of millions of dollars in annual government revenue, far exceeding with current US$370 million domestic revenue base. On other side, Somalia also has rich fisheries resources along its 3,300 km coastline the longest in Africa. Starting in 2018, the Ministry of Fisheries issued tuna fishing licenses to international fleets, and by 2024 these licenses had yielded a total of just over US$6 million in fees. On the revenue sharing mechanisms, the Baidoa Agreement (2018), enshrined in the Petroleum Act, outlines a derivation-based sharing model. For onshore oil, 50 percent of revenues go to the producing FMS and its district, 30 percent to the Federal Government, and the rest is divided among non-producing FMS. For offshore resources, the FGS receives a higher share (up to 55%)2 . While much depends on exploration outcomes, the fiscal upside of natural resources in Somalia is potentially very large. If oil production begins later this decade, government revenues from petroleum could quickly climb into the hundreds of millions of dollars per year – a several-fold increase over today’s domestic revenue. In a high-case scenario of a major oilfield, annual oil revenues might even approach or exceed $1 billion, fundamentally reshaping Somalia’s budget. For perspective, Somalia’s Medium-Term Revenue Roadmap (2024-2027) targets steady non￾resource revenue growth of about 0.3 percent of GDP per year any sizeable oil or gas income would be a windfall on top of these baseline gains3 . If used wisely, resource revenues could help Somalia cover its financing needs domestically and reduce reliance on foreign aid. The government’s goal of funding all core operating costs from domestic revenue by 2027 would become more attainable with natural resource income contributing. On front of the financial sector, CBS has introduced key legislation to align regulatory frameworks with international best practices, expand supervisory scope, and build a more resilient financial sector with robust risk management practices. Major initiatives include the enactment of the Takaful Act, the amendments to the Financial Institutions Law and the Revised Anti-money laundering and counter￾terrorist financing Act. As of December 2024, Somalia’s financial sector includes thirteen domestic commercial banks, one foreign bank branch, fifteen money transfer businesses, and five mobile money service providers. Additionally, the sector has 12 registered non-life insurance companies, 22 non￾deposit-taking microfinance institutions, and 6 money exchange bureaus4 . Somalia’s banking sector has undergone significant transformation, driven by efforts to modernize financial systems, enhance regulatory frameworks, and promote financial inclusion. 2 MoF, Somalia Financial Governance Report 2024. https://mof.gov.so/index.php/publications/somali-financial-governance-report 3 MoF, Somali Medium Term, Revenue Road Map 2024-27. https://mof.gov.so/publications/somali-medium-term-revenu-road￾map-2024-27 4 CBS, Quarterly Economic Review (2024Q4). https://centralbank.gov.so/wp-content/uploads/2025/06/Quarterly-Economic-Report_ Q4_2024.pdf

7 The sector continues to play a vital role in supporting economic growth, building trust in formal financial institutions, and expanding access to banking and non-banking services. Key collaborations between government agencies, financial institutions, and international partners have been instrumental in advancing reforms, improving governance, and integrating Somalia into the global financial system. The total assets of the banking sector have been increasing continuously, reflecting a significant rise in public trust in banks. The total assets of the banking sector in 2024 reached over US$2 billion5 . So far, CBS has completed institutionally all the critical actions/ benchmarks laid out by the currency reform roadmap. The Central Bank of Somalia adopted a currency board arrangement and intends to reintroduce the Somalia Shilling (SOS). 5 CBS, Quarterly Economic Review (2024Q4). https://centralbank.gov.so/wp-content/uploads/2025/06/Quarterly-Economic￾Report_Q4_2024.pdf The new SOS notes will provide an important liquidity function by facilitating payments for small value transactions and promoting financial inclusion for the most vulnerable and low-income people. To sustain these critical reforms for Somalia’s economic and social development, the IMF and the FGS reached a staff-level agreement on economic and financial reforms of three years (Dec 2023 to Dec 2026) in post-HIPC policies, providing about US$100 million under the Extended Credit Facility (ECF). The agreement aims to advance reforms that strengthen vital economic institutions and foster inclusive & sustainable growth, in line with Somalia’s national development plan and the government’s long-term vision, with below benchmarks. Figure 3: Financial Sector Landscape in Somalia Source: CBS, 2024 Figure 3: Source: Figure 4: Source: Figure 3: Source: Figure 4: Source: Post-Debt Relief Reforms in Somalia: Keeping an Eye on International Monetary Fund’s Debt Sustainability Analysis

Policy Brief, June 2025 8 Table 1. Structural Benchmarks Under the ECF, March 2024-November 2025 Benchmarks Target/ Proposed Data Sector/ FGS Agency Rational Status Publish a Tax Policy and Revenue Administration Roadmap approved by the Minister of Finance, in line with IMF staff recommendations. End-June 2024 MOF Support domestic revenue generation and revenue administration. Met Submit the Income Tax Bill to Parliament End-June 2024 MOF Support domestic revenue generation and revenue administration. Met, implemented with delay on July 9, 2024. Ensure full payroll integration of FGS employees in the SFMIS payroll module by reducing the ratio of non-payroll compensation of employee payments to total compensation of employees to less than 1 percent. End-June 2024 PFM / MOF NCSC MOLSA Strengthen payroll integrity, expenditure controls, and governance. Met (1) Issue a Prime Ministerial Decree that articulates the key parameters for debt policy and establishes the procedures to be followed for entering into new borrowing and issuing sovereign guarantees, in line with IMF staff recommendations; (2) amend the PFM regulations to include a clear definition of “other financial liabilities” that are considered guarantees as per Article 37 (6) of the PFM Act, in line with IMF staff recommendations. End-June 2024 MOF Define debt policy and strengthen debt management framework and capacity, in order to preserve fiscal sustainability. Met, implemented with delay on July 15, 2024. Submit the PPP Bill to Parliament with a framework that adequately manages fiscal risks and establishes a gateway process managed by the Ministry of Finance. End-June 2024 MOF Reduce fiscal risks and contingent liabilities/ Strengthen governance and reduce corruption risks. Met, implemented with delay on August 12, 2024. Develop an action plan to improve the quality of data submitted by commercial banks, in line with IMF recommendations, and communicate the action plan to commercial banks. End-July 2024 CBS Improve risk-based financial supervision. Met Develop a roadmap to implement the Pay and Grade policy, which would include as elements (i) a plan and timeline for the development of a strategy to align the salaries of temporary workers with the pay scale of permanent workers and (ii) a plan and timeline for conducting a costing exercise to understand the fiscal implications of the proposed shift of permanent and temporary workers to a new pay scale. End￾February 2025 PFM / MOF NCSC MOLSA Strengthen payroll integrity, expenditure controls, and governance. Ongoing (i) Publish the updated PFM regulations relating to digital signatures for the purchase order to payment process; and (ii) implement the digital signatures in the SFMIS. End-June 2025 PFM/MOF Strengthen expenditure controls and improve transparency and accountability. Ongoing Submit to Parliament amendments to the CBS Law, including to cover the currency board arrangement, in line with IMF recommendations. End￾December 2025 CBS Enhance central bank operations and independence under the currency board arrangement. Ongoing Source: IMF Country Report, December 2024

9 3. Debt Restructuring and Current Composition In the post-HIPC era, the FGS actively engaged with its creditors to restructure and settle outstanding debts as part of its broader economic recovery and fiscal sustainability efforts. As part of wider economic reform agenda, the Ministry of Finance undertook significant steps in 2024 to implement the debt relief terms outlined in the “Paris Club Agreed Minutes” signed on March 13, 2024, and the common reduction factor established in the Decision and Completion Point Document under the HIPC Initiative. One of the significant achievements during this period was the Ministry’s successful conclusion of debt cancellation agreements with nearly all Paris Club creditor countries. The only exception was Spain, with whom negotiations remained ongoing by the end of 2024. In parallel, the Ministry intensified its efforts to communicate with non-Paris Club and multilateral creditors to pursue comparable debt treatment, consistent with the Paris Club framework. These engagements reflected Somalia’s continued efforts to secure equitable and sustainable debt resolutions across all creditor groups. 6 MoF, Annual Debt Management Report of 2024. https://mof.gov.so/publications/debt-management-reports 7 MoF, Annual Debt Management Report of 2024. https://mof.gov.so/publications/debt-management-reports Key milestones achieved during high-level international forums. On June 25, 2024, the Ministry signed a US$36 million debt relief agreement with the OPEC Fund during the OPEC Fund Development Forum, supported by a bridge loan from the Kingdom of Saudi Arabia. Subsequently, on July 16, 2024, the Ministry finalized a separate agreement with the Islamic Development Bank, successfully resolving a US$28 million debt stock, further reinforcing Somalia’s progress in settling multilateral debt obligations. At the end of 2024, Somalia’s total external public debt stock stood at US$1.5 billion. Multilateral creditors accounted for the largest share, representing 45.5 percent of the total debt, or approximately US$685.10 million. Within this category, the largest creditors were the Arab Monetary Fund (AMF), the Arab Fund for Economic and Social Development (AFESD), and the International Monetary Fund (IMF). Non￾Paris Club creditors made up nearly 39 percent of the total debt portfolio. The principal lenders in this group included the Abu Dhabi Fund, the Government of Iraq, the Kuwait Fund for Arab Economic Development (KFAED), and the Saudi Fund for Development (SFD). In addition, Somalia retained a single commercial loan with a Serbian company, amounting to US$2.67 million6 . Table 2: Somalia Stock of debt at the end of 2024 in Millions of US Dollars Creditor Category / Creditor Name Face Value Interest Arrears Other Fee Arrears Total Stock GRAND TOTAL 749.55 654.08 111.72 1,515.35 Commercial 1.51 1.16 - 2.67 Government of Serbia 1.51 1.16 - 2.67 Multilateral 311.33 373.72 0.05 685.10 Arab Fund for Economic and Social Dev. 74.56 127.00 0.05 201.61 Arab Monetary Fund 58.20 246.72 - 304.92 Int. Fund for Agricultural Development 2.05 - - 2.05 International Monetary Fund 113.46 - - 113.46 Islamic Development Bank 26.67 - - 26.67 OPEC Fund for Int. Dev. 36.39 - - 36.39 Non-Paris Club 388.45 279.20 111.67 779.32 Abu Dhabi Fund for Development 94.22 172.48 0.02 266.72 Government of Algeria 0.90 0.66 - 1.56 Government of Bulgaria 5.53 5.96 - 11.49 Government of Iraq 31.22 69.70 111.65 212.57 Government of Libya 11.75 30.15 - 41.90 Government of Romania 123.70 - - 123.70 Saudi Fund for Development 118.86 - - 118.86 Paris Club 48.26 - - 48.26 Government of Russia 7.36 - - 7.36 Government of Spain 40.90 - - 40.90 Source: MoF, 20247 Post-Debt Relief Reforms in Somalia: Keeping an Eye on International Monetary Fund’s Debt Sustainability Analysis

Policy Brief, June 2025 10 4. Debt Sustainability Analysis Since achieving debt relief in 2023, Somalia’s public debt landscape has remained significantly streamlined. The government holds no guaranteed debt, and there are no identified liabilities from state-owned enterprises (SOEs), subnational governments, or public-private partnerships (PPPs). Furthermore, there is no domestic public debt issuance apart from legacy central government wage arrears. Somalia’s public debt burden has fallen dramatically following HIPC debt relief. The external public debt-to-GDP ratio declined from about 64 percent of GDP in 2018 to just 6.0 percent by the end of 20238 , reflecting the cancellation and restructuring of most legacy obligations. Total public debt (almost entirely 8 MoF, Annual Debt Management Report of 2024. https://mof.gov.so/publications/debt-management-reports 9 IMF & World Bank, Joint Debt Sustainability Analysis (2024). https://documents.worldbank.org/pt/publication/documents￾reports/documentdetail/099121924162519492/bosib168995492026196c31d3bba0e27f03 10 World Bank, Fiscal Vulnerabilities in Low-Income Countries: Evolution, Drivers, and Policies (2025) http://worldbank.org/en/ research/publication/fiscal-vulnerabilities external) stood at an estimated US$766.3 million (6.4% of GDP) at the end of 20249 . This is exceptionally low by international standards – for context, government debt in low-income countries averages around 72 percent of GDP as of 202310, giving Somalia a much-improved starting position. Subsector of the Public Sector Sub-Sectors Covered 1 Central Government X 2 State and Local Government 3 Other elements in the government 4 Guarantees (to other entities in the public and private sector) X 5 Central Bank (Borrowed on behalf of the government) X 6 Non-Guaranteed SOE debt X 1 The country’s Coverage of Public debt The central government, central bank, government-guaranteed debt, non￾guaranteed SOE debt Default Used for the analysis Reasons for deviations from the default setting 2 Other elements of general government were not captured in 1. 0 percent of GDP 0.0 3 SoE’s debt (Guaranteed and not guaranteed by the government in 1. 2 percent of GDP 0.0 No government guarantee or non￾guaranteed SOE debt in Somalia 4 PPP 35 percent of GDP 0.0 No PPPs exist in Somalia 5 Financial Markets (the default value of 5 percent of GDP is the minimum value) Total (in percent of GDP) 5 percent of GDP 5.0 Table 3: Somalia: Public Debt Coverage Sources: IMF, 2024

11 In the baseline scenario, Somalia’s PV of external debt-to-GDP is only around 4 percent, versus the 30% threshold for weak economies11. The present value of external debt￾to-exports is around 21-22 percent, extremely low relative to the 140 percent threshold. Debt service is also modest at present: external debt service in 2024 is about 0.9 percent of exports and 5.9 percent of government revenue, fall significantly by nearly half of the DSF limits (10% and 14% respectively)12 . Furthermore, the PV of total public debt-to￾GDP (including the domestic debt) is only 5 11 IMF & World Bank, Joint Debt Sustainability Analysis (2024). https://documents.worldbank.org/pt/publication/documents￾reports/documentdetail/099121924162519492/bosib168995492026196c31d3bba0e27f03 12 IMF & World Bank, Joint Debt Sustainability Analysis (2024). https://documents.worldbank.org/pt/publication/documents￾reports/documentdetail/099121924162519492/bosib168995492026196c31d3bba0e27f03 13 IMF & World Bank, Joint Debt Sustainability Analysis (2024). https://documents.worldbank.org/pt/publication/documents￾reports/documentdetail/099121924162519492/bosib168995492026196c31d3bba0e27f03 14 CBS, Somalia’s Post-HIPCS Priorities: Economic Prospects and Debt Sustainability. https://centralbank.gov.so/wp-content/ uploads/2024/09/CBS-Policy-Brief_June-2024_007.pdf percent, vs a 35 percent benchmark13. These figures illustrate that, following debt relief, Somalia’s debt burden indicators are well within sustainable ranges. In other words, Somalia currently has substantial borrowing space before approaching any DSF debt stock thresholds, a fortunate position that many post-HIPC countries did not maintain for long14 . Figure 4: Somalia’s External Debt-to-GDP Ratio, Before and after debt relief Source: MoF and IMF, 2024 Figure 3: Source: Figure 4: Source: Post-Debt Relief Reforms in Somalia: Keeping an Eye on International Monetary Fund’s Debt Sustainability Analysis

Policy Brief, June 2025 12 Table 4: Sensitivity of Debt Sustainability Indicators to Changes in GDP (Percentage of GDP, Unless Otherwise Indicated), Using GDP Figures in the Current LIC-DSA, 2023-2024 Sustainability Indicators 2023 2024 Total public debt-to-GDP ratio 6.4 6.4 PPG external debt-to-GDP ratio 6.4 5.9 PV of total public debt-to-GDP ratio 5.1 4.9 PV of PPG external debt-to-GDP ratio 4.4 4.3 PV of PPG external debt-to-exports ratio 22.5 21.0 PPG external debt service-to-exports ratio 0.7 0.9 Debt Indicator (Percent) DSF Threshold (Weak Capacity) 2024 (Baseline) PV of external public debt / GDP 30 4.3 (well below threshold) PV of external public debt / Exports 140 21.0 (well below threshold) External public debt Service / Exports 10 0.9 (below threshold) External public debt Service / Revenue 14 5.9 (below threshold in baseline) PV of total public debt / GDP (overall debt benchmark) 35 5.0 (well below benchmark) Source: IMF, 2024 In Somalia’s case, while all debt indicators stay comfortably below their thresholds in the baseline, the external debt service-to-revenue ratio would breach its 14 percent threshold under a severe shock scenario. Specifically, if the country were hit by adverse shocks (such as a sharp drop in exports and weaker growth), the standardized stress test, the annual debt service burden could temporarily rise above the indicative ceiling once initial grace periods on new loans end. This prospective threshold breach under stress is what drives the moderate risk rating (as opposed to a “low” risk rating which would require no breaches even under stress). At the same time, Somalia’s capacity to absorb severe shocks remains limited by its broader vulnerabilities. The country faces persistent risks from political and governance challenges, global commodity price swings, and climate-related disasters (e.g. droughts and floods), which can derail exports, growth, and revenues. Somalia also remains highly dependent on external grants financing to fund its budget. These factors mean that even with “space” under the debt indicators, a major shock or lapse in donor support could rapidly strain the fiscal position. The DSA emphasizes that Somalia’s apparent headroom should not lead to complacency, underscoring the importance of strengthening domestic revenue mobilization, building fiscal buffers, and enhancing debt management capacity to handle shocks. 4.1 Debt Sustainability Analysis Methodology This policy papers follows the World Bank￾IMF Low-Income Country Debt Sustainability Framework (LIC DSF). This framework assesses a country’s ability to meet its external debt obligations based on current economic indicators. It links debt thresholds to a country’s debt-carrying capacity, which is measured by a Composite Indicator (CI) derived from institutional quality and macroeconomic fundamentals. Each country’s CI score is used to classify it into one of three categories:

13 Table 5: CI score Classification CI Category Score Range Classification Weak CI ≤ 2.69 Low debt-carrying capacity Medium 2.69 < CI < 3.05 Moderate capacity Strong CI ≥ 3.05 High debt-carrying capacity Source: World Bank, 202515 Debt burden indicators are evaluated against external debt thresholds that vary by a country’s Composite Indicator (CI) classification, with key metrics including the Present Value (PV) of External Debt-to-GDP, PV of Debt-to-Exports, Debt Service-to-Exports, and Debt Service-to￾Revenue each serving as critical benchmarks for assessing debt sustainability under the World Bank-IMF framework. Table 6: Global Thresholds and Benchmarks PPG External Debt Debt Indicator Weak Capacity Medium Capacity Strong Capacity PV of External Debt-to-GDP (%) 30 40 55 PV of Debt-to-Exports (%) 140 180 240 Debt Service-to-Exports (%) 10 15 21 Debt Service-to-Revenue (%) 14 18 23 Source: World Bank, 202516 4.2 Debt-Carrying Capacity and Composite Indicator Somalia is currently classified as a “weak” capacity country under the LIC-DSF17, with a Composite Indicator (CI) score of 1.58 which is well below the 2.69 (Typically, a CI below around 2.69 corresponds to weak capacity)18. This rating reflects continued challenges, including low-income levels, limited fiscal and external buffers, and institutional fragility following prolonged conflict and state collapse. Although Somalia’s debt indicators remain comfortably within the thresholds for weak-capacity countries, the classification underscores its limited ability to manage higher debt burdens. Maintaining a conservative debt path is essential unless significant progress is made in macroeconomic performance and institutional capacity. 15 World Bank- Debt-Carrying Capacity, https://www.worldbank.org/content/dam/LIC%20DSF/Site%20File/station4. html#:~:text=WEAK 16 World Bank- Debt-Carrying Capacity, https://www.worldbank.org/content/dam/LIC%20DSF/Site%20File/station4. html#:~:text=WEAK 17 The Score based on factors like GDP growth, international reserves, remittances, and institutional quality (CPIA score). 18 World Bank- Debt-Carrying Capacity, https://www.worldbank.org/content/dam/LIC%20DSF/Site%20File/station4. html#:~:text=WEAK Post-Debt Relief Reforms in Somalia: Keeping an Eye on International Monetary Fund’s Debt Sustainability Analysis

Policy Brief, June 2025 14 5. Key Notable Issues Somalia is currently assessed to be at a moderate risk of debt distress, implying it has some room to borrow for development, yet remains vulnerable to shocks. Before accumulating new loans, Somalia must tackle a range of underlying issues to ensure that borrowing is sustainable and contributes to growth. In particular, three strategic priorities are crucial: scaling up domestic revenue, ensuring the state’s future affordability, and maximizing value for money in public spending. The following eight critical issues spanning economic, fiscal, governance, legal, and institutional domains – need to be addressed to strengthen Somalia’s fiscal resilience and mitigate risks prior to incurring new debt.

1. Low Domestic Revenue Mobilization: Somalia’s government revenues are extremely low by global standards, which undermines its ability to fund essential services and repay debt. After the state’s collapse in 1991, formal taxation virtually ceased, and domestic revenues hover around just 2.6 percent of GDP, among the lowest in Sub-Saharan Africa. Over 2012–2023 the FGS slowly rebuilt its 19 IMF Country Report, Somalia: Staff report for the sixth review under the Extended Credit Facility arrangement and request for a three-year arrangement under the Extended Credit Facility. https://www.imf.org/en/Publications/CR/Issues/2023/12/20/ Somalia-Staff-Report-for-the-Sixth-Review-Under-the-Extended-Credit-Facility-ECF-542834 20 MoF, Somalia Financial Governance Report 2024. https://mof.gov.so/index.php/publications/somali-financial-governance￾report revenue system, customs duties, a sales tax in Mogadishu, and some income and telecom taxes, but progress has been modest. Domestic revenues increased only by about 0.4 percent of GDP during the 2020–2023, far below initial targets19. A significant portion of Somalia’s economy operates informally or outside the tax system. As a result, Somalia relies heavily on donors for basic expenses.
2. High Recurrent Expenditure and Wage Bill Pressures: The “affordability of the state” is a major concern; FGS faces high recurrent expenditures (especially wages and security costs) that currently outstrip its revenues. Rebuilding Somalia’s civil service and security forces after decades of conflict has led to a rapidly rising wage bill. By 2024, security salaries alone accounted for 48 percent of the total government payroll, and overall security spending equated to about 64 percent of domestic revenues20. This leaves very little fiscal space for other services or development. In 2024, domestic revenues could cover the FGS employee compensation, However, the domestic receipts were insufficient to fully cover the government’s recurrent expenditure, which Table 7: Somalia: Composite indicate and Threshold Debt Carrying Capacity Weak Final Classification based on current vintage Classification based on the previous vintage Classification based on the two previous vintages Weak Weak 1.58 Weak 1.57 Weak 1.57 APPLICABLE External debt burden thresholds PV of debt in % of GDP 30 Exports 140 Debt Service in % of Exports 10 Revenue 14 APPLICABLE Total public debt benchmark PV of total public in percentage of GDP 35 Source: IMF, 2024

15 amounted to approximately US$876.7 million and forces the government to seek external financing to cover the resulting budget deficit. As Somalia assumes more responsibility for security (e.g. as AU peacekeepers draw down) and hires more teachers, health workers, etc., the pressure on the budget grows. Unchecked expansion of recurrent costs could force Somalia to borrow to pay salaries, a dangerous path that led to past arrears. 3. Dependence on External Aid and Grants: Somalia’s fiscal survival has long depended on aid from international partners. This aid dependency poses risks: donor grants can be unpredictable or may wane now that Somalia’s debt relief is achieved. In 2024, donors disbursed US$543 million to the FGS, including US$185 million in direct budget support that was essential for filling the government’s financing gap. Notably, over 80 percent of donor assistance remains off￾budget (channeled through UN agencies, NGOs, etc.), meaning the government cannot fully direct or predict these funds21. Post-HIPC, Somalia’s classification as moderate debt risk means multilateral aid is shifting from grants to loans. This transition could sharply increase Somalia’s debt if it continues relying on external financing for basic expenditures. A sudden reduction in grants (due to global priorities or Somalia’s governance concerns) would leave a financing gap that Somalia might fill by borrowing or by cutting essential services. 4. Limited Institutional Capacity for Debt Management and Framework: Until recently, Somalia had no experience managing external borrowing, having been cut off from new credit for 30 years and in default on old debts. Post-HIPC, a coherent debt management framework, is urgently needed to avoid repeating past mistakes. While the Ministry of Finance established a Debt Management Unit (DMU) in 2015, institutional capacity remains 21 MoF, Somalia Financial Governance Report 2024. https://mof.gov.so/index.php/publications/somali-financial-governance￾report 22 CBS, Quarterly Economic Review (2024Q4). https://centralbank.gov.so/wp-content/uploads/2025/06/Quarterly-Economic￾Report_Q4_2024.pdf constrained. Somalia lacks a comprehensive Medium-Term Debt Management Strategy (MTDS), and its legal framework for borrowing is incomplete. This raises the risk of ad-hoc borrowing or contracting loans on unfavorable terms. As Somalia gains access to new lenders and financial instruments, its debt management institutions risk being outpaced, potentially resulting in poor decision-making. 5. Petroleum Sector Governance and Revenue Management: Somalia’s offshore oil and gas potential has long been seen as a possible game-changer for the economy; petroleum revenues could eventually dwarf all other sources of fiscal revenue . However, this “resource hope” comes with high stakes and risks. The petroleum sector is still in its early stages – currently limited to exploration only- but the government has signed 16 PSAs with foreign companies as of 2024. Without robust governance, Somalia risks falling into the “resource curse,” where oil revenues fuel conflict and macroeconomic instability rather than fostering sustainable development. A particularly concerning scenario would involve premature borrowing against projected future revenue; if those revenues fail to materialize as expected – or delayed- Somalia could face sever fiscal imbalances and heightened debt vulnerabilities. 6. External Economic Shocks and Commodity Dependence: Somalia’s economy is highly exposed to external economic shocks, given its dependence on imported commodities and a narrow export base. Two prime examples are global food and fuel prices. Somalia imports the majority of its food (27% of total imports in 2024) 22 and virtually all of its petroleum fuels; thus, spikes in global prices (like those induced by the Conflict in Ukraine in 2022) directly translate into domestic inflation and strain on households. The government often has a limited ability to respond, and it can Post-Debt Relief Reforms in Somalia: Keeping an Eye on International Monetary Fund’s Debt Sustainability Analysis

Policy Brief, June 2025 16 barely afford subsidies. As a result, high prices simply cause economic pain and, occasionally, pressure for the government to reduce or forego import taxes to ease costs, which then impacts revenue. On the export side, Somalia primarily exports livestock and some crops. Any slowdown in global demand or trade, or bans (such as past livestock import bans by Gulf states due to disease concerns), can sharply reduce export earnings. Remittances, while relatively steady, could be affected by downturns in host countries’ economies or exchange rate shifts. In addition, Somalia is vulnerable to shifts in donor economies (as it shifts, e.g., USAID), if there is a global recession or new crises elsewhere, aid flows to Somalia could diminish. All these external factors are largely outside Somalia’s control, yet they can cause budget volatility or balance￾of-payments pressure. For instance, a surge in oil prices would increase costs for electricity (many businesses rely on diesel generators) and transport, slowing growth and potentially prompting higher security or salary costs (if cost of living rises), thus widening deficits. Without shock absorbers, Somalia could be forced to seek additional borrowing to cover import bills or emergency needs arising from such global shocks. 7. Climate Change and Natural Disaster Vulnerability: Somalia is extremely vulnerable to climate-related shocks – notably droughts and floods – which regularly derail economic activity and strain public finances. In the past decade, Somalia has suffered repeated droughts (including an unprecedented sequence of failed rainy seasons from 2020–2022) that caused crop failures, mass livestock deaths, and humanitarian crises23. These droughts cut GDP growth sharply (e.g. growth was only 2.7% in 2022 due in part to drought)24. They also force the government to redirect funds to emergency relief or rely on international aid, 23 CBS, Quarterly Economic Review (2022Q2). https://centralbank.gov.so/wp-content/uploads/2023/06/CBS-QER-2022Q2-. pdf 24 SNBS, Somalia gross domestic product (GDP) 2024. https://nbs.gov.so/somalia-gross-domestic-product-gdp-2024/. while reducing the tax base (as livestock and crop export revenue fall). Similarly, periodic floods (such as riverine flooding in southern Somalia) wipe out infrastructure and require spending. Climate change is expected to increase the frequency and severity of these events. Each shock adds to fiscal risk: for example, a drought can cause food insecurity, requiring emergency imports and humanitarian aid appeals, and if aid is insufficient, the government might need to borrow or shift budget resources. Without buffers, these shocks lead to crisis-driven spending spikes and revenue shortfalls. Furthermore, disaster responses often depend on external grants; if those ever lag, the pressure to take loans (even expensive ones) in a pinch could rise. Over time, the economic losses from climate shocks also keep Somalia’s GDP and revenues lower than they would otherwise be, meaning less capacity to carry debt. 8. Political Instability and Security Challenges: Somalia’s ongoing conflict and political instability undermine both economic performance and fiscal sustainability. Security consumes a significant share of resources, around 64 percent of domestic revenue is allocated to security-related spending, leaving limited fiscal space for development. Persistent insecurity disrupts economic activity, deters investment, and weakens revenue generation. Politically, Somalia’s federal system remains fragile. Tensions between the federal government and member states, coupled with an incomplete constitutional framework, create uncertainty. These political uncertainties can delay reforms, undermine fiscal planning, and risk suspension of external financing if successive governments do not uphold agreements. Without sustained peace and stable governance, Somalia’s economic recovery and debt sustainability remain at risk.

17 9. Maintaining Debt Sustainability and Prudent Borrowing Post-HIPC: Following its hard-won debt relief under the HIPC initiative, Somalia faces the critical challenge of safeguarding long-term debt sustainability and avoiding a relapse into debt distress. With debt now at a low level (around 6% of GDP)25 , there may be temptations or pressures to borrow for the many needs the country has. However, Somalia’s debt carrying capacity is still rated “weak” (1.58), meaning it can only handle limited debt safely26. The latest DSA projects Somalia’s risk of debt distress as moderate, and crucially, it shows that in stress scenarios (e.g., if growth falters or concessional financing declines) Somalia could breach debt service thresholds in the long term once grace periods on new loans expire27. In other words, the current low debt metrics mask future risks if borrowing is not carefully managed. Additionally, as noted, Somalia’s shift from grants to loans (especially from IDA) will gradually increase debt stock. The government has set a fiscal anchor of keeping deficits below 3.5 percent of GDP, primarily financed by highly concessional loans28. Sticking to this is vital. If Somalia were to accumulate debt too quickly, even if each loan is concessional, it could face a repayment hump in the 2030s or 2040s that its revenue base cannot support. The experience of other post-HIPC countries underscores the risk of debt re-accumulation due to non-concessional borrowing and weak fiscal consolidation. Somalia must embed debt discipline now to safeguard its hard-won gains and ensure fiscal sustainability. 25 IMF Country Report, Somalia: 2024 Article IV consultation and second review under the Extended Credit Facility. https:// www.imf.org/en/Publications/CR/Issues/2024/12/17/Somalia-2024-Article-IV-Consultation-and-Second-Review-Under-the￾Extended-Credit-Facility-559663 26 IMF Country Report, Somalia: 2024 Article IV consultation and second review under the Extended Credit Facility. https:// www.imf.org/en/Publications/CR/Issues/2024/12/17/Somalia-2024-Article-IV-Consultation-and-Second-Review-Under-the￾Extended-Credit-Facility-559663 27 IMF & World Bank, Joint Debt Sustainability Analysis (2024). https://documents.worldbank.org/pt/publication/documents￾reports/documentdetail/099121924162519492/bosib168995492026196c31d3bba0e27f03 28 IMF Country Report, Somalia: Staff report for the sixth review under the Extended Credit Facility arrangement and request for a three-year arrangement under the Extended Credit Facility. https://www.imf.org/en/Publications/CR/Issues/2023/12/20/ Somalia-Staff-Report-for-the-Sixth-Review-Under-the-Extended-Credit-Facility-ECF-542834 29 MoF, Somali Medium Term, Revenue Road Map 2024-27. https://mof.gov.so/publications/somali-medium-term-revenu-road￾map-2024-27 6. POLICY RECOMMENDATIONS Somalia’s post-debt relief fiscal landscape presents both opportunity and vulnerability: while the country’s debt burden has been significantly reduced, sustaining this trajectory requires disciplined governance, institutional resilience, and strategic borrowing. To avoid reaccumulating unsustainable debt, Somalia must prioritize domestic revenue mobilization, strengthen public financial management and debt oversight, and ensure that any new borrowing is transparent, concessional, and aligned with national development priorities. Sound fiscal federalism, institution building, and improved resilience to climate and economic shocks are essential pillars for preserving debt sustainability and securing inclusive, long-term growth. I. Advance Fiscal Sustainability (Revenue and Expenditure) A dual strategy of increasing domestic revenue and exercising strict expenditure control before taking on any new debt. On the revenue side, the government’s 2024 Medium-Term Revenue Roadmap aims to raise revenues to 4 percent of GDP by 202729 Improving revenue is perhaps the most critical step for Somalia’s debt sustainability. With revenues of 4 percent of GDP, even highly concessional loans can strain repayment capacity. In short, without stronger revenues, new borrowing would quickly become unsustainable for Somalia. At the same time, implement tight expenditure controls in operational costs through frugal budgeting and procurement savings. Reducing the mismatch between Post-Debt Relief Reforms in Somalia: Keeping an Eye on International Monetary Fund’s Debt Sustainability Analysis

Policy Brief, June 2025 18 revenues and expenses is vital for avoiding excessive borrowing. Currently, the gap between domestic revenue and operating expenses is about US$116 million (0.7% of GDP), which has been bridged by donor budget support. Together, more substantial revenue and spending discipline will reduce fiscal risks, support debt sustainability, and give Somalia the fiscal space to fund development without falling back into debt distress. II. Redirecting Aid Towards Productive Sectors and National Priorities in Somalia To enhance the long-term effectiveness and sustainability of aid, Somalia must transition from aid-driven development to investment in productive sectors aligned with national priorities. Aid should be redirected to critical areas such as agriculture, fisheries, energy, infrastructure, and small-scale manufacturing sectors with strong multiplier effects on employment, livelihoods, and domestic revenue generation. III. Strengthening Debt Management and Framework: The government should develop a comprehensive debt management strategy aligned with national economic goals to ensure debt sustainability. Commercial or non-concessional borrowing should be strictly limited; ideally, Somalia should avoid market-based borrowing until the economy grows stronger. Maintaining debt sustainability requires broader reforms in revenue mobilization and expenditure control. The government must be prepared to reject unfavorable loans, including supplier credits or politically motivated offers. For large investments, grants or public-private partnerships should be prioritized. A fiscal anchor keeping the deficit below 3.5 percent of GDP and ensuring at least half of financing is concessional should be codified in regulation or debt legislation and monitored through the budget process. A public debt strategy should guide borrowing, enhance transparency, and be shared with Parliament and development partners. IV. Strengthen Natural Resource Revenue Management and Governance Strengthening governance in the petroleum sector by finalizing and enforcing a complete legal and regulatory framework. This includes clear rules for PSAs, environmental safeguards, revenue sharing, and transparency. At the same time, develop a plan for managing future oil revenues. Establishing a sovereign wealth or stabilization fund can help smooth spending and avoid boom-bust cycles. A fair revenue-sharing formula with Federal Member States must be agreed upon before production begins to prevent future disputes. Effective governance will reduce the risk of reckless borrowing tied to overly optimistic resource projections. Avoiding the pre-spending of anticipated oil income through debt will help Somalia escape the mistakes of other resource-rich countries. V. Prioritize climate adaptation by strengthening coordination and institutional capacity. Somalia should place greater emphasis on medium- to long-term climate adaptation rather than mitigation by enhancing national coordination mechanisms, strengthening institutional capacity, and securing sustainable climate financing. Climate adaptation must be integrated into development planning at all levels. Empowering key institutions and mobilizing both domestic and international finance will boost Somalia’s resilience to climate shocks, reduce fiscal and economic vulnerabilities, and support sustainable development.

19 Reference Central Bank of Somalia [CBS]. (2022). Quarterly economic review (2022Q2). Mogadishu, Somalia. https://centralbank.gov.so/wp-content/uploads/2023/06/CBS-QER-2022Q2-.pdf Central Bank of Somalia [CBS]. (2023). Annual report 2022. Mogadishu, Somalia. https://centralbank. gov.so/wp-content/uploads/2024/02/Annual-Report-Year-2022.pdf Central Bank of Somalia [CBS]. (2024). Quarterly economic review (2024Q4). https://centralbank. gov.so/wp-content/uploads/2025/06/Quarterly-Economic-Report_Q4_2024.pdf Central Bank of Somalia [CBS]. (2024). Somalia’s post-HIPCS priorities: Economic prospects and debt sustainability. https://centralbank.gov.so/wp-content/uploads/2024/09/CBS-Policy-Brief_June￾2024_007.pdf International Monetary Fund [IMF]. (2023). Somalia: Staff report for the sixth review under the Extended Credit Facility arrangement and request for a three-year arrangement under the Extended Credit Facility. https://www.imf.org/en/Publications/CR/Issues/2023/12/20/Somalia-Staff-Report￾for-the-Sixth-Review-Under-the-Extended-Credit-Facility-ECF-542834 International Monetary Fund [IMF]. (2024). Somalia: 2024 Article IV consultation and second review under the Extended Credit Facility. https://www.imf.org/en/Publications/CR/Issues/2024/12/17/ Somalia-2024-Article-IV-Consultation-and-Second-Review-Under-the-Extended-Credit-Facility-559663 International Monetary Fund [IMF] & World Bank. (2024). Somalia: Joint Bank-Fund debt sustainability analysis. https://www.imf.org/en/Publications/CR/Issues/2024/12/17/Somalia-2024- Article-IV-Consultation-and-Second-Review-Under-the-Extended-Credit-Facility-559663 Mawejje, J. (2025). Fiscal vulnerabilities in low-income countries: Evolution, drivers, and policies. Washington, DC: World Bank. https://doi.org/10.1596/978-1-4648-1968-1 Ministry of Finance [MoF]. (2024). Somali medium-term revenue roadmap 2024–2027. https:// mof.gov.so/publications/somali-medium-term-revenu-road-map-2024-27 Ministry of Finance [MoF]. (2025). Annual debt management report of 2024. Mogadishu, Somalia. https://mof.gov.so/publications/fy2024-annaul-debt-management-report Ministry of Finance [MoF]. (2025). Somalia financial governance report 2024. https://mof.gov.so/ sites/default/files/Publications/Somalia%20Financial%20Governance%20Report%20%202024%20.pdf Somali National Bureau of Statistics. (2025). Somalia gross domestic product (GDP) 2024. https:// nbs.gov.so/somalia-gross-domestic-product-gdp-2024/ Volz, U., Akhtar, S., Gallagher, K. P., Griffith-Jones, S., Haas, J., & Kraemer, M. (2020). Debt Relief for a Green and Inclusive Recovery: A Proposal. Center for Sustainable Finance. https://drgr.org/ files/2021/01/DRGR-report.pdf Post-Debt Relief Reforms in Somalia: Keeping an Eye on International Monetary Fund’s Debt Sustainability Analysis

Policy Brief, June 2025 20 CENTRAL BANK OF SOMALIA info@centralbank.gov.so www.centralbank.gov.so @CBSsomalia Central Bank of Somalia