The International Monetary Fund (IMF) and the World Bank’s International Development Association have determined that Somalia has taken the necessary steps to begin receiving debt relief under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. Somalia is the 37th country to reach this milestone, known as the HIPC Decision Point.
Debt relief will help Somalia make lasting change for its people by allowing its debt to be irrevocably reduced from US$5.2 billion at end-2018 to US$557 million in net present value terms (NPV) once it reaches the HIPC Completion Point in about three years’ time. As Somalia continues on its path towards stability and development after 30 years outside the international financial system, the immediate normalization of its relations with the international community will re-open access to critical additional financial resources to strengthen the economy, help improve social conditions, raise millions out of poverty, and generate sustainable employment for Somalis.
“We welcome Somalia’s efforts to restore stability, engage with creditors, and adopt a poverty reduction strategy,” said World Bank Group President David Malpass. “Resumption of regular financing to Somalia is an important landmark, and we look forward to further economic and social progress.”
“I would like to congratulate the Somali government and people for their intense efforts over the past years leading to this momentous event,” said Kristalina Georgieva, IMF Managing Director. “Successful reform efforts have laid the foundation for inclusive economic growth and for addressing the needs of the country’s most vulnerable people. Work must continue to sustain and expand the implementation of these reforms as Somalia starts a new chapter of its history. I am confident a more resilient and prosperous future lies ahead for the people of Somalia.”
“The Government and People of Somalia are very pleased by the IMF’s and World Bank Group’s decision which allows Somalia to fully re-engage with International Financial Institutions. This decision is an important milestone which presents ample opportunities for Somalia as it relentlessly pursues its ongoing reform processes as well as its recovery and development agenda,” said Hassan Ali Khayre, Prime Minister, Federal Government of Somalia. “The journey leading to this decision required hard work, dedication and partnership. The FGS expresses its appreciation to the IMF, World Bank Group and partners for their unwavering support and to the Somali people for their patience and resilience in this journey.”
Somalia has committed to maintaining macroeconomic stability; implementing a poverty reduction strategy; and putting in place a set of reforms focused on fiscal stability, improving governance and debt management, strengthening social conditions, and supporting inclusive growth in order to reach the HIPC Completion Point. The World Bank and IMF will continue working together to provide the technical assistance and policy guidance the authorities need to achieve these goals, including in the context of the new, three-year IMF financial arrangement.
In addition, the World Bank is considering a range of new IDA investments with a focus on immediate relief for communities impacted by flooding, the locust invasion as well as preparing for the fast-moving threat of COVID-19. The leadership of the World Bank Group and the International Monetary Fund expressed thanks to their member countries of all regions and income levels, in particular Italy, Norway, Qatar, and the United Kingdom, together with the EU, whose interventions catalyzed support and provided the necessary financial resources to help Somalia reach the Decision Point.
Details of the Debt Relief Operation
At the start of the HIPC process, Somalia’s public- and publicly-guaranteed external debt was estimated at US$5.2 billion in NPV terms. Application of traditional debt relief mechanisms reduces this debt to US$3.7 billion.
Additional debt relief under the enhanced HIPC Initiative is estimated at US$2.1 billion in NPV terms. Of this amount, US$843 and US$1,225 million is projected to be provided by official multilateral and bilateral creditors, respectively.
Paris Club creditors are expected to make a decision on debt relief by the end of March 2020. The largest Paris Club creditors are the United States, Russia, Italy, and France. The IMF Executive Board has approved interim debt relief on debt service falling due to the IMF in the period between the HIPC Decision and Completion Points. At the HIPC Completion Point, Somalia’s current debt due to the IMF will be paid with the proceeds of financial contributions that have been received from over 100 IMF members, including many low-income countries.
MDRI debt relief from IDA and the African Development Bank would cancel all remaining claims at the Completion Point.
Together, Somalia’s external debt burden is expected to fall from about US$5.2 billion (110.7 percent of GDP) in NPV terms as of end-2018 to US$557 million (9 percent of GDP) once the Completion Point is reached.
IMF and World Bank Arrears Clearance Operations
Arrears to IDA were cleared on March 5, 2020 through bridge financing provided by the government of Norway, reimbursed with the proceeds of a Development Policy Grant.
Arrears to the IMF were cleared on March 25 with the assistance of bridge financing from the government of Italy, which the authorities have reimbursed using the front-loaded access under the new IMF financial arrangement.
Arrears to the African Development Bank were cleared on March 5, 2020 through bridge financing provided by the government of the United Kingdom and a contribution from the EU. The bridge loan from the UK was reimbursed by the proceeds of a Policy Based Operation Grant.
The HIPC Initiative
In 1996, the World Bank and IMF launched the HIPC Initiative to create a framework in which all creditors, including multilateral creditors, can provide debt relief to the world’s poorest and most heavily indebted countries to ensure debt sustainability, and thereby reduce the constraints on economic growth and poverty reduction imposed by the unsustainable debt-service burdens in these countries. To date, 37 HIPC countries, including Somalia, have reached their decision points, of which 36 have reached the completion point.
Created in 2005, the aim of the Multilateral Debt Relief Initiative (MDRI) is to reduce further the debt of eligible low-income countries and provide additional resources to help them reach their development objectives. Under the MDRI, three multilateral institutions – the World Bank’s IDA, the IMF and the African Development Fund– provide 100 percent debt relief on eligible debts to qualifying countries, at the time they reach the HIPC Initiative Completion Point.
Kenya Receives $750 million Boost for COVID-19 Recovery Efforts
To reinforce Kenya’s resilient, inclusive and green economic recovery from the COVID-19 crisis, the World Bank approved $750 million in development policy financing to support policy reforms that will strengthen transparency and accountability in public procurement and promote efficient public investment spending.
This development policy operation supports measures to improve medium-term fiscal and debt sustainability through greater transparency and efficiency in government spending, building on ongoing World Bank support to enhance public finance management systems. The operation provides for the establishment of an electronic procurement platform for the public sector that seeks to make government purchases of goods and services transparent. This will help increase accountability in public spending and reduce opportunities for corruption. The support also strengthens public investment management by seeking cost-savings and applying rigorous selection and monitoring and evaluation criteria to all projects. Both measures are expected to yield fiscal savings of up to $2.6 billion.
“The operation prioritizes reforms in hard hit sectors, such as healthcare, education, and energy, which have been made urgent by the impacts of the COVID-19 crisis,” said Keith Hansen, World Bank Country Director for Kenya. “In recognition of the severity of the crisis and need for a comprehensive response, we are supporting the government’s post-COVID-19 Economic Recovery Strategy, which is designed to mitigate the adverse socioeconomic effects of the pandemic and accelerate economic recovery and attain higher and sustained economic growth.”
The policy operation also prioritizes energy sector reforms to improve electricity access and ensure that Kenyans benefit from least-cost, clean energy sources. Further, the new policy framework will help strengthen Kenya Power and Lighting Company’s (KPLC’s) finances with a new competitive pricing regime.
Kenyans will also benefit from better healthcare and disease prevention, especially for the poorest and most vulnerable households, through National Hospital Insurance Fund (NHIF) governance reforms and the establishment of the Kenya Center for Disease Control (KCDC) to strengthen disease prevention, detection, and response. Reforms will further seek to provide Kenyans with more equitable access to higher education, through a performance-based funding method to reduce the imbalances and inefficiencies created by the existing funding model for universities.
“Stabilizing the debt trajectory and reducing high debt costs is a top priority,” said Alex Sienaert, Senior Economist and Task Team Leader, World Bank Kenya. “This policy operation supports measures to reduce the budget deficit over time, such as by making public spending more efficient, whilst minimizing debt costs by helping to meet the government’s current financing requirements on concessional terms.”
DPOs are used by the World Bank to support a country’s policy and institutional reform agenda to help to accelerate inclusive growth and poverty reduction. The negative impacts of the COVID-19 crisis have made reforms that improve governance and service delivery, including those covered by this operation for Kenya, even more critical because they create better conditions for Kenya to inclusively and sustainably recover from it. Financing provided by the World Bank is offered on concessional terms, making it significantly lower than commercial loans. The total annual interest and service cost of the Kenya DPO is 3.1%.
* The World Bank’s International Development Association (IDA), established in 1960, helps the world’s poorest countries by providing grants and low to zero-interest loans for projects and programs that boost economic growth, reduce poverty, and improve poor people’s lives. IDA is one of the largest sources of assistance for the world’s 76 poorest countries, 39 of which are in Africa. Resources from IDA bring positive change to the 1.6 billion people who live in IDA countries. Since 1960, IDA has supported development work in 113 countries. Annual commitments have averaged about $21 billion over the last three years, with about 61 percent going to Africa.
World Bank Supports Croatia’s Firms Hit by COVID-19 Pandemic
Tamara Perko, President of the Management Board of the Croatian Bank for Reconstruction and Development (HBOR) and Elisabetta Capannelli, World Bank Country Manager for Croatia, signed a Loan Agreement for the HEAL Croatia Project (Helping Enterprises Access Liquidity) in the amount of EUR 200 million (US$242 million equivalent). The Croatian Deputy Prime Minister and Minister of Finance, Zdravko Marić also signed a Guarantee Agreement with the Bank for the Loan. The HEAL Croatia Project will provide liquidity and financial restructuring to firms that have been hit by the COVID-19 pandemic and by the two devastating earthquakes of 2020 and will support an inclusive and resilient recovery.
The COVID-19 crisis has caused a sharp decline in the economic activity of Croatian businesses and has had a profound effect on jobs and livelihoods. The pandemic disrupted firms’ production and reduced the demand for their goods and services, while the financial sector tightened lending to companies, due to rising credit risk. The crisis also exacerbated Croatia’s regional disparities and reduced credit access for young firms and for firms owned and managed by women.
To mitigate such negative effects, the HEAL Project will increase access to finance to firms focused on export, both small and medium enterprises (firms employing fewer than 250 people) and mid-caps firms (employing from 250 to 3000 people), as well as for firms from less developed regions of Croatia, and firms owned or managed by women. It will also increase access for young enterprises (operating less than five years). The Project will support HBOR’s continued development through improved business processes, strengthened sustainability and climate change resilience, and use of EU funds.
“The loan being signed today represents a continuation of the significant support provided by the World Bank to the Republic of Croatia since the beginning of the crisis in 2020, which is reflected in operations worth a total of EUR 760 million (including HEAL). With this project, we are contributing to the further recovery of Croatia’s private sector, following the existing measures of the Government of the Republic of Croatia adopted in the context of the COVID-19 pandemic, post-earthquake reconstruction and creating foundations for future sustainability and resilience,” said Zdravko Marić, Deputy Prime Minister and Minister of Finance of the Republic of Croatia.
“Terms and conditions granted by the World Bank will provide us an additional source of finance for granting further favorable loans to our entrepreneurs. We are pleased that the World Bank has recognized the significance of financing entrepreneur groups whose importance has also been recognized in HBOR’s five-year strategy. Exporters and entrepreneurs in underdeveloped areas are among them. In addition to granting favorable financing terms, the World Bank will support us in improving our Environmental and Social Management System. This will be important as HBOR’s activities in the coming period will be particularly committed to building more capacity for supporting sustainable projects and inclusive growth,” stated Tamara Perko, President of the Management Board of HBOR.
“We look forward to a smooth and quick implementation of the HEAL Croatia project which will help preserve jobs and support household livelihoods through direct support to approximately 150 firms employing around 25,000 people. The Project will contribute to a resilient, inclusive and sustainable recovery of Croatia, which has been hard hit by the global pandemic, the economic recession, and the devastating earthquakes of March and December 2020,” said Elisabetta Capannelli, the World Bank Country Manager for Croatia.
The HEAL Croatia project complements two other World Bank crisis operations approved last year, the Croatia Crisis Response and Recovery Program and Earthquake Recovery and Public Health Preparedness Project – worth together US$ 500 million, to help mitigate the effects of the economic shock, advance recovery, facilitate earthquake reconstruction and strengthen national systems for public health preparedness for pandemic outbreaks. The Justice for Business Project focused on improving the business regulatory procedures and justice service standards for businesses and citizens was also approved in March 2020, bringing the World Bank support to the country to EUR 760 million under the ongoing Country Partnership Framework.
The World Bank has been a partner to Croatia for over 27 years. During this period, the Bank has supported more than 50 projects, worth almost US$5 billion, produced numerous studies, and provided technical assistance to help strengthen institutions and support the design of policies and strategies. The Bank’s current program focuses on mitigating the economic and social impact of COVID-19, post-earthquake reconstruction, transport, justice, innovation, business environment, land administration, science and technology, and economic development of the Pannonian region.
New Financing to Help Indonesia Achieve a Deeper and More Resilient Financial Sector
The World Bank’s Board of Executive Directors today approved a loan of US$400 million to support reforms that will help the Government of Indonesia increase the depth, improve the efficiency, and strengthen the resilience of the financial sector.
The COVID-19 pandemic has caused recession in Indonesia, with potentially long-lasting financial, fiscal, and social implications. While the banking system is well-capitalized and profitability is high, the lack of depth in the Indonesian financial markets increases the country’s vulnerability to external shocks. The new financing is designed to help the country address financial sector vulnerabilities heightened by the pandemic. It does so through support to measures such as extending financial services to previously underserved groups, reducing the costs of such services for individuals and businesses alike, and strengthening the capacity of the financial sector to withstand financial and non-financial shocks.
“The COVID-19 outbreak has made structural reforms to address financial sector vulnerabilities urgent. The Government of Indonesia is committed to strengthening the financial sector given its critical role in sustaining Indonesia’s growth and in reducing poverty, especially during the COVID-19 recovery phase. “ said Minister of Finance of the Republic of Indonesia, Sri Mulyani Indrawati.
The new development policy loan will support Indonesia’s financial sector reforms through three key approaches. First, it aims to increase the depth of the financial sector by expanding the access to financial services – including by youth and women – broadening the range of financial products, and incentivizing long-term savings. These efforts would reduce Indonesia’s vulnerability to foreign portfolio outflows.
Second, it aims to improve the efficiency and lower the cost of the financial sector by strengthening the insolvency and creditor rights framework, protect consumers and personal data, and make payment systems more efficient and faster by utilizing digital technology. The latter will help large-scale social assistance payments to vulnerable people during the crisis.
Third, it aims to boost the capacity of the financial sector to withstand shocks by strengthening the resolution framework to avoid financial activities disruptions in the event of a bank failure, advancing the effectiveness of financial sector oversight and implementing sustainable finance practices.
“This financing complements the government’s efforts to cushion the financial sector and the overall economy from the impacts of the COVID-19 crisis. By making financial services more transparent, reliable and technology-oriented, savings can be channeled into the most productive investments in a less costly, faster and safer way, thus opening opportunities for people to invest in their future and to protect themselves from unexpected shocks,” said Satu Kahkonen, World Bank Country Director for Indonesia and Timor-Leste.
The World Bank’s support to financial sector reforms in Indonesia is an important component of the World Bank Group’s Country Partnership Framework for Indonesia, whose engagement area on strengthening economic resilience and competitiveness contains a specific objective focused on increasing the depth, improving the efficiency and strengthening the resilience of the financial sector. The new financing is also based on the World Bank Group’s GRID (green, resilient, inclusive development) principles.
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