Analysis: Somalia’s debt relief milestone masks a risky push toward new borrowing

Somalia’s long campaign for debt relief culminated in December 2023, when the IMF and World Bank certified the country had reached the HIPC “Completion Point.” In March 2024, Paris Club creditors followed with sweeping cancellations, clearing much of the stock of legacy obligations. On paper, the breakthrough restores Somalia’s access to concessional finance and signals confidence in the government’s economic direction.

Yet the core domestic underpinnings that are supposed to safeguard a post-relief economy remain uneven and contested. Key federal laws are not uniformly accepted, the provisional constitution still leaves essential power- and revenue-sharing questions unsettled, and the political map remains fragmented. Against this backdrop, an accelerating drive to prove “creditworthiness” is already reshaping revenue policy—most visibly at Mogadishu port—with knock-on effects for businesses, banks and household prices. Without an agreed fiscal framework, new debt could do what old debt once did: magnify fragility.

What HIPC relief was meant to lock in

The HIPC framework was designed to wipe away unpayable, old debts while anchoring reforms that prevent a return to unsustainable borrowing. For Somalia, that intent translated into two pillars: credible rules and credible institutions.

• Rules: A shared legal basis for fiscal federalism under the provisional constitution; unified national tax policy and revenue administration; and debt management rules that impose transparency, limits and safeguards.
• Institutions: Budget discipline, independent oversight and anti-corruption controls; strengthened public financial management; and reforms that support private-sector growth.

Somalia’s political reality complicates both pillars. North Western State of Somalia remains outside the federal state-building process.Puntland Statehas rejected key federal finance bills over constitutional and process concerns, while Jubaland has also stepped back. Other federal member states say they were not meaningfully consulted on revenue and debt rules. The provisional constitution—meant to be the foundation of all federal legislation—still lacks a settled settlement on fiscal federalism, power sharing and resource sharing. That leaves federal laws vulnerable to challenge and uneven enforcement across the federation.

Why creditors cancel—and why Somalia qualifies

Creditors typically cancel debts for two broad reasons. The first is necessity: a country cannot service legacy debts and needs fiscal space to stabilize and rebuild. The second is strategic: clearing arrears opens the door to future lending and investment that creditors expect will yield returns.

Somalia’s modern economy—reconstituted after the 1990s state collapse—has been largely decoupled from the legacy debts amassed between the 1960s and 1980s. Debt servicing was effectively frozen; growth was driven by new private networks: telecoms, remittances, small trade and reconstructed infrastructure. That helps explain why many creditors view Somalia’s relief as an opportunity to finance a new cycle of development. But it also explains why the current scramble to take on new public debt is consequential in ways the old debt was not: it would bite directly into today’s functioning markets and budgets.

From relief to re-leverage

Under an IMF-supported program, Somalia is eligible for concessional loans—those with long maturities and low or no interest. On paper, this is prudent. In practice, two risks stand out. First, concessional envelopes are limited, and pressures to accept costlier loans may grow if grant financing proves insufficient. Second, even highly concessional loans can burden a shallow tax base if the projects they fund underperform or if revenues are raised in ways that depress economic activity.

The government’s revenue drive illustrates the trade-off. To demonstrate capacity to service debt and finance its budget, authorities have increased tariffs at Mogadishu port—Somalia’s busiest gateway and the one the federal government most directly controls. Comparable port systems in North Western State of Somalia and Puntland State remain outside federal tax harmonization, and Jubaland has stepped back from a unified tax framework. That concentrates the burden on Mogadishu-linked trade at a time when importers also face extortion from armed groups and informal road levies. Traders report rising landed costs, slower clearance and tighter margins that are rippling through prices.

Financial sector strain is emerging as well. Banks that extended credit to importers and small firms face repayment delays amid softer sales and higher costs. With collateral values falling—market participants describe a notable decline in Mogadishu land prices this year—some lenders have curtailed new lending. Business owners say peers are exploring relocation or diversification to regional hubs in Kenya, Zambia, the Democratic Republic of Congo and Rwanda. The economy still functions, but the direction of travel is worrying: higher input costs, more expensive credit, and eroding confidence.

The governance gap

The deeper problem is not tax rates alone; it is the absence of a shared fiscal and debt architecture. Without an agreed model of fiscal federalism, revenue measures devised in the center will be contested in the periphery; without a binding debt law, loan contracting can outpace safeguards. In that context, new borrowing risks three adverse dynamics:

• Economic drag: Higher taxes and fees to service debt filter swiftly into prices and wages, depressing demand in a low-income market and raising the odds of distress.
• Political friction: Perceptions that federal authorities are borrowing and spending without consensus can widen rifts with member states and stall constitutional completion.
• Integrity risks: Weak, fragmented oversight invites misuse of borrowed funds—saddling citizens with repayment obligations for projects that deliver too little.

Debt relief was supposed to help break this cycle by aligning financing with reforms. But if urgent revenue targets become the overriding priority, the sequencing flips: the state borrows first and fixes the basics later. That is the wrong order for a federation still building its foundations.

What to do next

Somalia’s leaders and partners can still convert the HIPC milestone into durable progress. That requires patience, transparency and a shared legal framework before significant new borrowing.

• Pause non-urgent borrowing: Limit new loans to life-safety, resilience and clearly bankable infrastructure with demonstrable economic returns and concessional terms. Defer discretionary borrowing until core governance preconditions are met.
• Finish the constitutional compact: Conclude binding agreements on fiscal federalism, power sharing, natural resource revenue sharing and justice administration. Translating these into consensus legislation will give revenue and debt policy legitimacy and predictability.
• Adopt a debt law with teeth: Establish a unified debt management framework covering central and member-state borrowing; require parliamentary approval, disclosure of all terms, and publication of a loan-by-loan registry and annual debt sustainability analyses.
• Protect the real economy: Revisit tariff hikes at Mogadishu port with an eye to competitiveness and affordability. Replace blunt levies with targeted compliance measures, digital customs, and risk management that broaden the base without crushing trade.
• Prefer grants where possible: Donors should extend budget and project support as grants rather than credits while Somalia finishes its fiscal institutions. When loans are used, tie disbursements to high-quality procurement, open contracting and independent audit.
• Safeguard the banking system: Monitor asset quality closely; allow prudent restructuring for viable borrowers; and avoid policy shocks that amplify credit risk. A credit crunch would turn a revenue problem into a wider recession.

A milestone, not a blank check

Somalia’s debt relief is real and hard-won. It should free fiscal space and attract long-horizon investment. But relief is a starting line, not a finish. Until there is a shared federal compact on money and power, large-scale public borrowing is more likely to test Somalia’s resilience than to strengthen it. The country has built back a functioning economy once already, from the ground up. Aligning new finance with rules, institutions and consensus is how it ensures this time the foundation holds.

By Ali Musa
Axadle Times international–Monitoring.