The governments of the United Kingdom and the European Union have paid Somalia’s arrears on loans it owed to the African Development Bank (AfDB)—an amount of US$122.55 million—in full. As a result, the bank will lift its sanctions on Somalia, which opens up new finance opportunities to support ongoing and new reforms. President Mohamed Abdullahi Farmajo and Prime Minister Hassan Ali Khayre have consistently engaged with the bank over years to resolve this debt, and have implemented key reforms to bring the country closer to debt relief. The AfDB intends to institute new programs to boost economic growth and development in Somalia, building atop an existing portfolio in the country totaling US$135 million.
Why It Matters
The burden of foreign debt is a major obstacle to continued capital acquisition and economic growth in developing nations. A large debt ratio makes it almost impossible for the government to fund necessary improvements like road infrastructure, construct new factories, or offer microloans to entrepreneurs to start up businesses. Adjustment programs to alleviate this debt usually target public aid programs such as welfare and pensions, which in turn causes immense frustration among the populace that can significantly weaken if not destabilize an already fragile government.
For Somalia, the clearing of this debt will allow more funds to come in from the AfDB, which has given tens of millions elsewhere on the continent for large projects designed to increase energy independence, improve access to clean water, and transform extractive resource industries into proper manufacturing hubs. Such development is critical for the Somalian government as it seeks to rebuild the country while also fighting an ongoing insurgency from al-Shabab, which thrives on economic and political instability.