External Debt Stock and Economic Growth in Somalia (1990-2016)

Taofik Ibrahim and Abdisamad Farah

MPRA Paper from University Library of Munich, Germany

Abstract: Somalia has an estimated 5.5 billion dollars outstanding, due to many reasons, but the socio-economic indicators of the country show that it has contributed a little or almost nothing to the overall GDP, and continues to dwindle. Thus, this study investigates the relationship between the external debt stock and economic growth in Somalia (1990 to 2016) using the Error Correction Model (ECM). The Augmented Dickey-Fuller (ADF) and Kwiatkowski- Phillips-Schmidt- Shin (KPSS) unit root tests were carried out on all variables to ascertain their stationarity in which all of them were found to be stationary at first difference. Co-integration results of Trace and Maximum Eigen-value showed that there is a long run relationship between external debt stock and economic growth in Somalia for the period 1990-2016. The ECM result showed that external debt stock negatively affects economic growth. This implies that when external debt increases economic growth reduces. Thus, the study concluded that the problem of high external debt stock is associated with inadequate debt management; borrowing for social and political reasons; poor performance of export sector to increase foreign exchange earnings, and lack of transparent loan cycles to make projects compete for the scarce resources. Based on the above-mentioned results, the study recommends that the government should further promote the rational and proper utilization of resources while increasing the concessional ability of newly acquired debt inflows. To this end, measures should be taken to encourage non-borrowed funds, such as Foreign Direct Investment (FDI), portfolio investment and non-government guaranteed private debts.

Keywords: External Debt; Economic growth; Error Correction Model (ECM). (search for similar items in EconPapers)
JEL-codes: H63 (search for similar items in EconPapers)
Date: 2020-03-08, Revised 2020-03-08
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Published in Islamic University Multidisciplinary Journal (IUMJ) 1.7(2020): pp. 35-46

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