THE EXCHANGE RATE AND ECONOMIC GROWTH: AN EMPIRICAL ASSESSMENT OF SOMALIA

The purpose of this research investigation is to determine the effect of the exchange rate with control variables including inflation, capital, and labor, on economic growth by using data spanning from 1989 to 2018 in Somalia. ARDL bounds testing approach was employed to model the long-run and short-run cointegrations and the causality directions respectively of the scrutinized variables. The empirical results of the study found a long and a short cointegration between the variables. It revealed that exchange rate, inflation, and capital improves the economic growth of Somalia in the long-run and short-run both, whereas labor harms economic growth both in the long and short runs. Capital is seen to contribute to long term gross domestic product (GDP). Long-term economic growth of 1.079 percent is induced by a 1% increase in capital, suggesting that capital growth is more responsive to economic growth than other variables. Therefore, policymakers should establish a strategy to expand the economy by promoting the economy's most important drivers, such as exchange rates, capital, and inflation, and address drivers that impede the country's economic growth, such as the labor force.