World Bank and IMF, put your money where your mouth is on Somalia

It is fair to say that Somalia was not top of the agenda at this year’s annual meetings of the International Monetary Fund and World Bank. Finance ministers and central bank governors were too busy chewing the fat over the state of the global economy and the threat posed by cybercrime to pay much attention to a poor country with a population of 14 million people in the Horn of Africa. Or, indeed, pay it any attention at all.
Yet the decisions the IMF and World Bank make – or don’t make – about Somalia matter. They obviously matter to the 400,000 Somali children with acute malnutrition and 3 million people living in crisis or emergency food security conditions. They also matter in a wider sense, because both institutions are keen to demonstrate that they are now truly progressive and dedicated to the elimination of poverty and tackling inequality. Somalia is a good test of whether the grand plans and the lofty rhetoric actually amount to anything, because this is a country that needs help – and it needs it now.
Here’s the position. Somalia narrowly averted a famine earlier this year thanks to an impressive humanitarian effort. The World Bank was part of the effort, because it managed to persuade its board to provide $50m (£37m) from the crisis response window of the International Development Association (IDA), the part of the bank that provides grants and soft loans to the world’s poorest countries.

But the drought and near-famine have left Somalia’s already weak economy in a parlous state. Farmers’ goat herds have been wiped out, hunger is widespread and children are not going to school. The humanitarian effort has created the rudimentary infrastructure for a health system, but this will collapse unless the country is provided with some long-term, reliable funding.
The World Bank has pledged to make a priority of helping fragile and conflict states, of which Somalia – the country where the battle between US forces and local militia spawned the film Black Hawk Down – is a classic example. When the bank was rattling the tin for a big increase in donor funding for the IDA, one reason it said it needed $75bn to spend over three years was so it could help countries like Somalia.
There is, however, a problem. Somalia is not eligible for IDA funds because it owes the bank and the IMF just over $300m – part of a $5bn debt mountain owed to multilateral and bilateral creditors. These debts were incurred in the 1980s when most of Somalia’s current population – 70% of which is under 30 – was not even born. Creditors long ago realised they would never get their money back and 90% of the debt has been written off.
So the obvious way forward would be for Somalia to get debt relief under the heavily indebted poor country initiative (HIPC) established by the IMF and World Bank in 1996. HIPC was designed to free poor countries from unpayable debts, but there were a few countries in which conflict, civil war or ungovernability meant they never qualified. Somalia was one of them. At an international conference hosted by Theresa May earlier this year, Somalia’s president, Mohamed Abdullahi Mohamed, made a point of saying that debt relief and normal relations with the bank and the fund were a priority for his government.
The two Washington-based multilateral organisations like Mohamed. They think he is changing Somalia for the better, implementing the right sort of reforms. In its latest health check, the IMF praised the “significant progress made in rebuilding the economy and restoring key economic and financial institutions in a difficult political and security environment”.
Somalia is in the second year of an IMF programme, but as things stand it will have to wait for another two years before it reaches decision point – the moment under HIPC when its debt arrears will be cleared. The fund wants Somalia to establish a longer track record of reform before it gives the green light to debt relief.

This is the safety first approach, the old way of doing things, the path guaranteed not to cause any problems for the World Bank president, Jim Yong Kim, and the IMF’s managing director, Christine Lagarde, with their executive boards.

It is also a fundamentally daft approach. By fast-tracking Somalia through the debt relief process, the two institutions would provide the country’s government with extra resources that would help it improve the resilience of the economy and so make it more likely that the reform process will continue.

There are officials in Washington, at the World Bank at least, who understand this. Somalia is on the radar of the bank’s chief executive, Kristalina Georgieva, who wants to step up support for fragile states.
In Somalia’s case that could be done in one of two ways. The World Bank and the IMF could bring forward Somalia’s decision point and write off its arrears, providing access to multi-year funding under the IDA. Alternatively, the bank could decide that Somalia is moving toward the point at which it will qualify for debt relief and so allocate a pre-arrears clearance grant.

Kevin Watkins, the chief executive of Save the Children, said: “Somalia desperately needs predictable multi-year finance to underpin the investments in health, nutrition, education and livelihoods needed to escape the cycles of drought and hunger that blight so many lives.
“It is frankly indefensible for creditors to obstruct that finance because of arrears on debts created 40 years ago through irresponsible borrowing and reckless lending. Why should Somalia’s children be denied a future because of debts they played no part in creating?”

There is a precedent for the World Bank and the IMF getting a move on, because Liberia – which had arrears as deep as Somalia’s – was fast-tracked in 2004. That, though, was with the support of the US treasury, which is not minded to be as generous to Somalia. In part, that’s because the US is Somalia’s biggest creditor and has not written off all of the debt. The biggest chunk of it is owed to the Pentagon, which demonstrates what the loans were for in the 1980s.

So speeding up help for Somalia will only happen if Kim and Lagarde are prepared to have a fight with the US, something they are reluctant to do at a time when Donald Trump has the world’s multilateral organisations in his sights. They would prefer to avoid a confrontation with the White House.

Kim and Lagarde have made a big song and dance about how committed they are to tackling inequality. A test of that commitment is whether they are prepared to defend the weak against the strong. It means showing leadership by standing up for what is right. Talk, by contrast, is cheap.