Government spending and economic growth dynamics in Somalia: time series evidence from ARDL bounds testing

Abstract

Somalia’s economy has faced persistent instability due to shocks from COVID-19, climate-related disasters, and conflict, resulting in stagnant GDP growth (averaging 2% from 2019 to 2023) and declining real GDP per capita (− 0.8% annually). Despite government expenditure rising to 9% of GDP in 2021, its efficiency in driving growth remains uncertain, raising critical questions about fiscal policy effectiveness in fragile states. We aim to investigate the relationship between government expenditure and GDP growth in Somalia from 1991 to 2021 using the ARDL estimation technique. The results show that, in the long run, both gross fixed capital formation and foreign direct investment (FDI) positively impact long-term GDP growth. However, government expenditure negatively affects GDP growth. In the short run, government expenditures positively impact GDP growth, while gross capital formation negatively influences GDP growth. The study proposes policy reforms where the Somali government should implement strategic expenditure reduction by gradually decreasing overall spending levels while reallocating resources toward high-productivity sectors. To maximize economic returns, the government should shift spending toward sectors that enhance productivity and long-term growth, such as Infrastructure, Agriculture & Livestock, Education and Private Sector Development. This study’s originality lies in its focus on Somalia’s distinctive economic landscape, a region that has yet to receive much attention in the previous literature. The study suggests policy reforms that encourage the Somali government to prioritize attracting foreign investments and strengthening capital formation as critical drivers of economic growth.