The Asymmetric Effects of Government Debt on GDP Growth: Evidence from Somalia

Abstract

With the recent worldwide financial crisis, government debt has become a focal point of economic attention. This fundamental economic concept reflects the amount a nation owes in international loans. Rapid loan accumulation has brought Somalia's economy to the brink of a debt crisis, threatening the long-term economic stability of the region. This study examines the asymmetric relationship between government debt and GDP growth in Somalia from 1980 to 2020. It employs non-linear autoregressive distributed lag (NARDL) methods to investigate the asymmetric effects of government debt on GDP growth. The findings indicate a negative relationship between government debt and GDP growth; an increase in government debt significantly impairs GDP growth. The estimated long-run parameters for negative shocks to government debt are -0.711 and -2.88, respectively, suggesting that a decrease in government debt will lead to an increase in GDP growth. These results argue that for Somalia to stimulate GDP growth, it must maintain its obligations at a rational level and strive for fiscal sustainability. Policy implications include fiscal debt management, prioritizing public investments, and increasing revenue through tax reforms, anti-corruption measures, and promoting business initiatives to finance public investments and reduce debt.