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

Author

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  • Ibrahim, Taofik
  • Farah, Abdisamad

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.

Suggested Citation

  • Ibrahim, Taofik & Farah, Abdisamad, 2020. "External Debt Stock and Economic Growth in Somalia (1990-2016)," MPRA Paper 100334, University Library of Munich, Germany, revised 08 Mar 2020.
    • Handle: RePEc:pra:mprapa:100334
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    References listed on IDEAS

    as
    1. Toan Quoc Nguyen & Mr. Benedict J. Clements & Ms. Rina Bhattacharya, 2003. "External Debt, Public Investment, and Growth in Low-Income Countries," IMF Working Papers 2003/249, International Monetary Fund.
    2. International Monetary Fund, 1990. "Debt Overhang, Debt Reduction and Investment: The Case of the Philippines," IMF Working Papers 1990/077, International Monetary Fund.
    3. Cohen, Daniel, 1993. "Growth and External Debt," CEPR Discussion Papers 778, C.E.P.R. Discussion Papers.
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    Keywords

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    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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