International trade and economic growth in Somalia: An empirical analysis using time series data, VECM and ARIMA models

Abstract

This study investigates the impact of international trade on economic growth in Somalia, focused specifically on the roles of exports, imports, and inflation. Despite the growing importance of trade in the global economy, limited research has addressed its relationship with economic growth in the Somali context. The study employed a Vector Error Correction Model (VECM) using annual time series data from 1989 to 2022 obtained from the World Bank. This advanced econometric approach captures both short-run dynamics and long-run relationships among the selected macroeconomic variables. The findings reveal that exports have a significant and positive long-run impact on GDP, while imports also contribute positively but with less magnitude. Inflation, on the other hand, exhibits a negative influence on economic growth, suggesting macroeconomic instability undermined trade gains. The forecast indicates potential, but, underlines that without structural reforms in the trade sector, economic gains may remain limited. The results highlight the importance of promoting export diversification, improving trade infrastructure, and ensuring macroeconomic stability to sustain economic development. By incorporating inflation into the model, a variable often omitted in previous Somali studies and applying a robust methodology, this research provides fresh insights and practical policy guidance for fostering inclusive and resilient economic growth in Somalia.