Asymmetric modeling of the fiscal policy–economic growth nexus in Somalia

Abstract

Somalia has faced a prolonged challenge of high dollarization, which has limited the effectiveness of conventional monetary policy tools. In response, fiscal policy has taken center stage as the primary means of economic management by the government. This study aims to investigate the asymmetric impact of fiscal policy on Somalia’s economic growth, utilizing annual time series data spanning from 1970 to 2019 and employing the Nonlinear Autoregressive Distributed Lag (NARDL) model. The results indicated the existence of cointegration among the variables. In the long run, both increases and decreases in government expenditure exhibited a significant positive effect on economic growth, with a more pronounced impact observed for decreases in public expenditure compared to increases in government spending. Furthermore, in the short run, both increases and decreases in government expenditure had a significant positive effect on economic growth, although an increase in government spending showed a stronger impact on economic growth compared to a decrease in government expenditure. Notably, the study surpassed various diagnostic tests, ensuring the robustness of the findings. Based on these results, we recommend that policymakers prioritize fiscal policy, particularly public spending, as a crucial channel for fostering economic growth. Additionally, directing public spending towards productive sectors of the economy and promoting fiscal transparency are suggested as means to achieve fiscal policy objectives effectively.