Somalia’s economy has faced persistent instability due to shocks from COVID-19,
climate-related disasters, and conflict, resulting in stagnant GDP growth (averaging
2% from 2019 to 2023) and declining real GDP per capita (−0.8% annually). Despite
government expenditure rising to 9% of GDP in 2021, its efficiency in driving growth
remains uncertain, raising critical questions about fiscal policy effectiveness in fragile
states. We aim to investigate the relationship between government expenditure
and GDP growth in Somalia from 1991 to 2021 using the ARDL estimation
technique. The results show that, in the long run, both gross fixed capital formation
and foreign direct investment (FDI) positively impact long-term GDP growth.
However, government expenditure negatively affects GDP growth. In the short
run, government expenditures positively impact GDP growth, while gross capital
formation negatively influences GDP growth. The study proposes policy reforms
where the Somali government should implement strategic expenditure reduction
by gradually decreasing overall spending levels while reallocating resources toward
high-productivity sectors. To maximize economic returns, the government should
shift spending toward sectors that enhance productivity and long-term growth, such
as Infrastructure, Agriculture & Livestock, Education and Private Sector Development.
This study’s originality lies in its focus on Somalia’s distinctive economic landscape,
a region that has yet to receive much attention in the previous literature. The
study suggests policy reforms that encourage the Somali government to prioritize
attracting foreign investments and strengthening capital formation as critical drivers
of economic growth