Macroeconomic Determinants of Economic Growth in Somalia

Abstract

In the last forty years, Somalia has seen immense unrest and civil conflict, that has had a negative influence on the country’s people and economy. Despite being one of the world’s poorest and most corrupt countries, Somalia has seen modest improvement in the past few years. The goal of this study is to look into the macroeconomic factors and to examine that influence or determine Somalia’s economic development. The research used secondary data from 1991-2017 to run interpolation steps on the connections among Gross Domestic Product, exchange rate, inflation rate, and foreign direct investment by using STATA and R-Studio statistical software to determine whether the data was stationary or not and to analyze the data. Descriptive statistics were calculated in the form of graphs and tables copied from R Stu- dio or Stata platforms to search for the factors determining economic growth in Somalia. The inferential statistics were evaluated using time series data methodological approaches including the Autoregressive Distributed Lag Model (ARDL), unit roots for testing station- arity, Multiple Cointegrating Relationships to determine if two variables or more were cointegrated, Bound Test to examine the maximum lag for each variable, and Long-run and short-run coefficients to evaluate whether the ARDL model was used for the long-run or short-run coefficients using the bound test. All the variables from the data were found to be strong predictors of economic growth in Somalia since they were all statistically significant in the study. The economic growth in Somalia will increase for each unit of the dollar increase in the exchange rate and the inflation rate, and it will decrease for every additional unit of foreign direct investment. According to this study, the rate of inflation, the rate of exchange, and foreign direct investments are all important determinants of economic growth in Somalia. The study recommends that to improve the contribution of the exchange rate and foreign direct investment, raising for the exchange rate, and decreasing foreign direct investment. Somalia’s government has set aside sufficient funds to assist stabilize or regulate inflation. Keywords: GDP in Somalia, the Autoregressive Distributed Lag Model (ARDL), Bound Test, and short-run test