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Effects of external financing and public expenditure on economic growth in Somalia

Year: 2026

Type: article

Abstract: This study examines the effects of external financing and public expenditure on economic growth in Somalia using annual time-series data covering the period 1989–2023. Specifically, the study investigates the long-run and short-run impacts of public expenditure, external debt, foreign direct investment (FDI), and trade openness on Somalia’s economic growth. The analysis employs the Autoregressive Distributed Lag (ARDL) bounds testing approach due to the mixed order of integration among variables, confirmed through Augmented Dickey–Fuller (ADF), Phillips–Perron (PP), and Zivot Andrews structural break tests. The empirical findings reveal the existence of a stable long-run cointegration relationship among the variables. In the long run, public expenditure and trade openness exert positive and statistically significant effects on economic growth, whereas external debt negatively affects growth, supporting the debt overhang hypothesis. Foreign direct investment shows a positive but statistically insignificant effect. In the short run, public expenditure and external debt positively influence growth, while trade openness and FDI demonstrate negative but insignificant effects. The error correction term is negative and significant, confirming a strong adjustment toward the long-run equilibrium. Robustness checks using Dynamic Ordinary Least Squares (DOLS) further validate the consistency of the long-run estimates. The study concludes that productive public expenditure and greater trade integration are essential drivers of sustainable economic growth in Somalia, while excessive dependence on external debt may undermine long-term economic performance. The findings provide important policy implications for fiscal management, debt sustainability, trade policy, and investment promotion in fragile and post-conflict economies such as Somalia.

Source: Discover Sustainability

DOI: 10.1007/s43621-026-04242-1

Authors: Mahad Abdiwali Mohamed, Ahmed Nur Dirie, Abdiaziz Bashir Mohamud

Institution: Hormuud University

Language: English

Topic: Fiscal Policy and Economic Growth

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: gold

Estimated APC paid: $1,390