The effect of inflation on economic growth in somalia using ARDL model

Abstract This study examines the effect of inflation on economic growth in Somalia using annual time-series data spanning 1990–2023. Given Somalia’s prolonged institutional fragility and limited monetary policy capacity, understanding the inflation–growth relationship is particularly important for macroeconomic stabilization. The analysis employs the Autoregressive Distributed Lag (ARDL) bounds testing approach to estimate both short-run and long-run dynamics, with government expenditure, foreign direct investment, gross capital formation, and external debt included as control variables. Unit root tests confirm mixed orders of integration, justifying the use of the ARDL framework. To ensure robustness, the long-run results are validated using Dynamic Ordinary Least Squares (DOLS) and Canonical Cointegrating Regression (CCR) estimators. The findings indicate a stable long-run cointegrating relationship among the variables. Inflation exerts a negative and statistically significant effect on economic growth in both the short and long run. Specifically, a 1 percent increase in inflation reduces GDP per capita growth by approximately 0.22 percent in the long run. Government expenditure positively contributes to growth, while foreign direct investment exhibits a negative effect, reflecting structural and institutional constraints. Gross capital formation is statistically insignificant, suggesting inefficiencies in investment utilization, while the effect of external debt varies depending on its allocation. Overall, the results underscore the importance of price stability, efficient public spending, and improved investment governance for sustaining long-term economic growth in Somalia.