Determinants of External Debt: The Case of Somalia

Abstract

Most emerging countries owe substantial external debt and depend on foreign aid to achieve sustainable economic development. However, this paper's key purpose is to examine the determinants of Somalia's external debt. To achieve this, the study used the autoregressive distributed lag (ARDL) model and cointegration test to establish the short-and long-run relationships during the period from 1980 to 2018. The results show that exchange rate and domestic investment have a significant and positive effect on external debt in the long run, while GDP per capita and government expenditure have a significant negative relationship with external debt; the result in the short run is consistent with the long-run result. The study recommends that the government of Somalia should also concentrate on the profitable sectors (e.g., livestock, fisheries and agriculture) with a view to improving the production and revenue base in order to minimize external debt, government expenditure and imports. Similarly, the expansion of a simpler tax base system and the removal of spending dependence on fiscal stability would boost fiscal balance. Many governments have disguised borrowing by those fiscal measures, which have expanded debt stocks. Foreign debt and aid dependence are not the best ways to ensure a healthy economy, so the Somali governments should start rethinking the allocation of foreign debt and policymakers could promote a strategy and policy to reduce high dependence on debt that has worked in the past. Contribution/Originality: This study contributes to the existing literature by investigating the determinants of external debt in Somalia.

Seçilmiş Değişkenlerin Dış Borç Stoku Üzerine Etkisi: Türkiye Örneği

“…Furthermore, a 1% increase in the trade openness ratio is accompanied by an average 0.24% increase in the external debt stock. These findings are consistent with the findings in (Mahdavi, 2004;Kızılgöl and Evren, 2014;Saheed, Sani and Idakwoji, 2015;Ogunbiyi and Okunlola, 2015;Bölükbaş, 2016;Chaudhry, Iffat and Farooq, 2017;Kocha, Iwedi and Sarakiri, 2021;Omar and Ibrahim, 2021;Çolak and Özkaya, 2021) reporting the positive effects of trade openness, fixed capital formation and general government final consumption expenditures on external debt stock. The FMOLS and CCR coefficients show that the external debt stock falls by an average of -1.17% for every 1% growth in GDP per capita.…”

“…They examined the effects of net domestic savings, gross fiscal deficit, exchange rate, net domestic capital formation, imports, exports, terms of trade, foreign exchange reserves, debt service payments, consumer price index, interest rates, and GDP on external debt. The findings revealed that all of the variables considered in the study had a substantial impact on external debt Omar and Ibrahim (2021). investigated the factors influencing Somalia's external debt.…”

Determining the Relationship Between Exchange Rate and Gross Debt Loan in South Africa

“…The results of the study by Omar and Ibrahim [11], using the Auto Regressive Distributed Lag (ARDL) model and cointegration test, established that the exchange rate has a significant and positive effect on external debt in the long-run. One study investigating whether the exchange rate determine foreign debt in Indonesia using the ARDL approach found that, in the long-run, the foreign exchange reserves have no significant effect on foreign debt, while the exchange rate has a positive significant effect on foreign debt [10].…”

Macroeconomic determinants of Jordan’s external debt in the period 1980–2022 using ARDL

“…Specifically, their findings indicated that heavily indebted economies are limited in their ability to reap growth benefits from FDI, as they prioritize reducing their debt levels beyond a certain threshold. Omar and Ibrahim (2021) studied the determinants of external debt in Somalia from 1980 to 2018 using joint integration to establish short and long-term relationships and using Distributed Autoregressive Model (ARDL). They showed that the exchange rate and domestic investment had a significant and positive impact on external debt in the long run, while per capita GDP and government spending had significant and negative effects on external debt.…”