External debt stock and economic growth in Somalia (1991-2016)

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Kampala International University, College of Economics and Management
The study aimed at investigating the relationship between the external debt stock and economic growth in Somalia (1991 to 2016). For the fact 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. This report was guided by two major specific objectives and they were; to find out the long run relationship between the external debt stock and economic growth in Somalia (1991-2016), to determine if there is a short run effect of external debt stock on economic growth in Somalia (1991-2016). The study was carried out using secondary data spanning from 1991 to 2016. Augmented Dickey- Fuller (ADF) and Phillip Perron (PP) tests were carried out on all variables in the study 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 1991-2016.An Error Correction Model (ECM) encompassing all the variables was developed to help assess how external debt stock affect economic growth in the short run, it showed that external debt stock negatively affects the 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 concessionality 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. Finally, in order to mitigate the crowding out effect of external debt, Somalia should strive to benefit from additional debt reduction schemes, and vigorous pursuit of an export expansion policy. This study contributes that complete avoidance of external debt as a means of financing budget deficits is not the case. As a matter of fact, given the low level of economic growth in Somalia caused by the low levels of income and the generally high incidence of poverty, the country has few prospects to source sufficient resources for development internally. This provides a sound argument for a conscious and carefully planned schedule of acquisition, deployment and retirement of foreign loans contracted for development projects.
A research thesis submitted to the College of Economics and Management Science in partial fulfilment of the requirements for the award of the Master of Arts in Economics of Kampala International University
Debt stock, Economic growth, Somalia