The effect of government expenditure on unemployment in Somalia using ARDL model

Somalia faces significant challenges in maintaining low unemployment and achieving sustainable economic growth, especially due to traditional development bottlenecks such as political instability, inadequate infrastructure and excessive reliance on foreign aid. Realizing the need for inclusiveness of growth, this study empirically investigates the relationship between unemployment and the selected macroeconomic variables, namely, government expenditure, gross domestic product (GDP), agricultural value added and official development assistance (ODA), using annual data from 1990 to 2023. The study employs the Autoregressive Distributed Lag to estimate both the long run as well as short-run dynamics, while the Augmented Dickey-Fuller test is employed to ascertain stationarity of the variables, and Granger causality tests help us in determining causal direction among variables. The long-term findings reveal that increased government expenditure, GDP growth and agricultural output play a significant part in reducing unemployment, while ODA exerts a minimal influence on raising unemployment with implications of possible inefficiencies or aid dependency. Short-term unemployment dynamics are influenced by both GDP and agriculture. While GDP consistently reduces unemployment across lags, agriculture has mixed effects that suggest short-term frictions or transition issues. Causality analysis shows that there is a two-way causal relationship between GDP, government spending and ODA and a unidirectional relationship between unemployment and government spending. These findings require concentrated fiscal policy, efficient public spending, incremental agricultural modernization and better-linked foreign assistance focused on employment creation steps vital to the reduction of unemployment and the support of inclusive, sustainable growth in Somalia’s unsettled economic environment.