Effects of Foreign Debt and Foreign Aid on Economic Growth in Somalia

Abstract
This paper aims to assess the effects of foreign debt and foreign aid on economic growth in Somalia from 1970
to 2014. The ordinary least squares (OLS) method was used and basic model assumption tests were also
employed. We used the Augmented Dickey−Fuller (ADF) and Philip-Perron (PP) tests for the unit root and the
Johansen cointegration test to determine the long-run relationship between the variables. The results of the study
show that, in Somalia, foreign debt has an insignificant effect on economic growth, while the foreign aid has
positive significant effect on economic growth. The results also indicate that the cointegration method confirms
the incidence of long-run association among the variables. There is little research regarding the exact relationship
between increasing foreign debt and foreign aid on economic growth in Somalia. This study is also different
from previous studies as we used ADF and PP tests for the unit root and the Johansen cointegration test for the
long-run relationship between the variables. Additionally, the study used multivariate techniques. The paper
concludes that foreign aid is essential in economic growth and several policy implications are proposed.