The Dynamic Relationship Between Government Spending and Economic Growth: An Empirical Evidence from Somalia

Abstract

Government expenditure in Somalia's economy is influenced by income constraints, security concerns, insufficient institutional capacity, and resource limitations, necessitating efficient expenditure management techniques. Thus, this study investigates the relationship between public expenditure and economic growth in Somalia from 1989 to 2021 using a vector error correction (VECM) model. The analysis incorporates variables such as government spending, foreign direct investment (FDI), gross fixed capital formation (GFCF), and population growth to assess their influences on gross domestic product (GDP). The results revealed a significant negative association between GDP and public expenditure, suggesting that an increase in public spending is correlates with a lower in GDP. However, a positive correlation is observed between economic growth and government expenditure, implying that higher public spending can potentially stimulate economic growth in Somalia. The study also identifies a bidirectional causality between GDP and government spending, signifying that economic growth can influence government spending and vice versa. The results highlight the importance of careful planning and allocation of public expenditure to specific sectors to promote economic development, while avoiding adverse effects on the economy. The study provides valuable insights for policymakers in Somalia to make informed decisions regarding fiscal policy and economic growth with strategies. It recommends that allocating additional financial resources to sectors like agriculture, transportation, construction, communication, education, health, and other economic and social services can significantly contribute to economic development. However, it is important to consider that the study relies on available data, which may have limitations, and the chosen time frame may not capture recent developments or changes in economic conditions.