Could Dispute between Federal and Regional Leaders Derail Debt Relief?

President Hassan Sheikh Mohamud’s first four months at the helm of Somalia have been marred by conflicts on his own making. The latest conflict with regional states had been simmering for some time and erupted late last month.

A concerted message came on August 31 from regional state governments, particularly their finance ministries, stating that they would stop working with the federal finance ministry. News of the move was officially shared online by regional government ministries.

As with his bid for the presidency, Hassan Sheikh has sought support from his traditional foreign backers to prevent that outcome. His minister’s appearance with Kristina Svensson, World Bank Country Manager for Somalia, and Kate Foster, UK ambassador, on August 28 and 29 respectively, to rally support for the unilateral review of previous financial agreements prompted regional leaders to speak with one voice.

Last week, Federal Finance Minister Dr. Elmi Nur’s attempt to win over regional finance ministers was another fiasco because it’s not just finance in the disagreement. This led the president to convene a meeting of the National Consultative Council (NCC) which includes himself, his prime minister and regional leaders to find a way out of this dispute.

While each region has particular grievances ranging from the president’s alienation of the South West and Galmudug leaders for their support of the previous president, the personal feud between him and Said Deni to the controversial term extension of the Jubaland president, it was nonetheless the economy that triggered the current open conflict.

What is the crux of the financial dispute?

During the previous administration, Somalia embarked on a process of debt relief under the Heavily Indebted Poor Countries (HIPC) initiative launched by the IMF and the World Bank. In early 2020, Somalia reached the so-called “decision point”, which is an important step towards full debt relief. Somalia’s debt was later reduced to $3.7 billion from $5.2 billion.

The IMF promised Somalia $170 million in budget support and a first payment of $38 million was received at the beginning of 2020. The federal government at the time had negotiated with the regional governments on the management of this sum. According to the agreement, 40% of this amount would be distributed to the regions according to the specific needs of each region.

In July 2020, when the 10th Parliament overthrew the government led by Prime Minister Hassan Ali Khayre on July 2020 after an unexpected vote of confidence, the release of the remaining $132 million from the World Bank to Somalia was suspended.

While the suspension of the support has had a negative impact on the Somali economy, Villa Somalia resisted this undue pressure aimed at influencing internal politics. The government covered most of the loss with new IMF allocations intended for countries whose economies were struggling due to COVID-19.

Thanks to these funds and the financial discipline instituted by the Minister of Finance, Dr. Abdirahman Beyle, the government has been able to continue to function until today.

Somalia nevertheless would remain bound by the strict HIPC terms, including the guarantee of a “broad-based participatory process” in Somalia. In other words, failure to get an agreement with regional states would compromise the debt relief process.

New president, new policies, new political frictions

Following the election of Hassan Sheikh Mohamud on May 15, leaders of global financial institutions agreed, following discussion with the new president, to release the previously blocked $132 million to support the new administration in this period of transition.

The money has recently been transferred to the Central Bank of Somalia. Regional governments had been keeping tabs on financial activities in Mogadishu. They insisted that the federal government implement all preexisting financial agreements.

President Hassan Sheikh and his political team have another plan, however. They would give $2 million to each regional government and withhold the bulk of the money until they agreed to negotiate a new agreement involving non-financial political reforms.

Last month, all regions categorically rejected Hassan Sheikh’s new financial policy which disregards previously agreed terms and attempts to reach an agreement failed. Minister Nur told regional ministers that he could not decide on financial matters alone.

To make matters worse, some members of Hassan Sheikh’s entourage repeat that they will wage the same protracted and bitter war against the regional administrations as they waged against the Mohamed Abdullahi Farmajo’s administration. Therefore, they will not cede any money that could be used against them    or to resist the planned federal government reforms.

This intransigence, even hostility, of the Hassan Sheikh’s government towards all the regional administrations contrasts with the multilateralism of the previous government. President Farmajo and his team never escalated political disagreement with Puntland and Jubaland and used public money, especially monetary aid from international financial institutions received on behalf of Somalia, as political leverage.

What is the effect of this conflict on regional governments?

Experts, who closely follow recent Somali politics dynamics and the Somalia’s debt relief process, thus summarize the events that may result from the actions taken by regional leaders towards the economic process.

First, during Farmajo’s tenure, Somalia’s debt relief process reached its peak, as President Hassan Sheikh recently acknowledged. The current decision of the regional state government risks seriously harming this process. The message has already reached financial institutions, which pay particular attention to the discontent coming from regional governments, as they are in fact running most of the country.

Second, if the Federal Ministry of Finance does not return to the preexisting 40 percent agreement reached with the regional ministries, the whole process of debt relief will be jeopardized. It is a risk that President Hassan Sheikh’s team cannot afford. For this reason, according to experts in the field, any attempt by this team to reduce the previously negotiated share intended for the regions risks backfiring.

Third, if President Hassan Sheikh releases this money as demanded by regional governments, some of which are in his gun sight, there is a good chance that it will be used to organize a political defense that is difficult to defeat. This would be another political setback for the federal administration.

Fourth, global financial institutions are already concerned about the dispute over the allocation of the recently released fund. Experts believe they made no public announcement for two reasons. The federal finance minister has taken up his portfolio three weeks earlier and can still come up with a formula acceptable to the regions. They also want to spare a president they accused of corruption in his first term and give him a clean slate.

Finally, if under President Hassan Sheikh Mohamud’s previous mandate, the international financial community confidence was shaken by the abrupt resignation of Mrs. Yussur Abrar, then Governor of the Central Bank, now that he has returned to power, this hoarding of international funds under the guise of reforms, may be the beginning of yet another shocking development.

In conclusion

Due to its divisive and confrontational policies, President Mohamud managed to unite regional leaders against his administration. Now, regional leaders have a better awareness of their expectations of the controversial president and their strength within their unity. Their success now depends on how they manage this common front.

Hassan, on the other hand, will seek to divide them or resort to delaying maneuvers if the ongoing NCC meeting does not yield satisfactory result. His eagerness to strike a deal before his departure next week to the UN General Assembly Summit in New York, however, is his biggest weakness that most regional leaders would certainly use to their advantage.

In the absence of an all-out agreement, Hassan would do everything to extract an agreement on the form, even if it means bribing regional leaders to get it, and would postpone the contentious items. An agreement of this kind would be a Pyrrhic victory but enough for him to benefit from a certain image intended for the international community that he has control of the country.

Regardless of the outcome of these meetings, federal and regional leaders do not have much leeway and must work together to avoid undermining the debt relief process that was well under way. Farmajo’s government succeeded, with financial discipline, in bringing the country to the “decision point”. Mohamud’s government has inherited a marked path and must see the process through to the “completion point” in 2023.