This paper focuses the effect of foreign Debt to Somali Economic Growth taken 48 years time series data.

1. ‫بسم‬
‫الرحمن‬ ‫هللا‬
‫الرحيم‬
SOMALI NATIONAL UNIVERSITY
FACULT OF ECONOMIC AND MANAGEMENT SCIENCE
THESIS PRESENTAION
Supervisor: Mohammed Abdullah Khalif
Title: The effect of external debt on Somali economic growth
Candidate:
Mohammad Hussein Dable
ID NO:B2eco116
13TH June 2020

2. Outline of the study
Introduction and background of the study
Research problem (problem statement )
Objectives of the study and research questions
Methodology
 findings
Recommendation

3. Introduction
External Debt: According to the World Bank definition: - external debt is a debt owed to non-
residents Repayable in foreign currency, goods or services”. External borrowing for productive
investment creates macroeconomic stability (Burnside, 2000),
Economy Growth can be defined as the rise in the value of goods and services in the market
adjusted for inflation over time by the economy. Usually it is the increase in percentage in real
gross domestic product, as measured in per capita terms. The growth in the economy lead to
innovation of technology and positive foreign forces (IMF 2012)

4. Historical background:
In 1945-47 when the second world war has come at end, many European countries have
been devastated by that war and their economy was on ruin, but USA marshal plane has
helped them, to rebuild their economy within 10 years throughout debt finance which
it was estimated around 12 billions of dollars(world bank 1954.)).
From 1950s and 1960s have been referred to as “golden years” for developing countries,
when the least developed countries (LDCs) increased their investment with less dependence
on external resources. However, in the 1970s, these countries began to rely more heavily on
external investment, which also led them to be more indebted and fall into the debt crises ((
Boboye, 2012)

5. CONTINUE:-
During the 1970-1980 Eras, many developing countries have got an expanded access to private financial and
other trade credits and spent more on public expenditure. Beside this many of these countries were not in a
good position to survive the second oil shock which happened in the late 1970’s. During the early 1980’s (1980
- 1983) the overall world recession occurred following the oil shock have led the lender countries to respond
(high interest rate, a decline in official lending and a delayed adjustment program of IFM) that even makes the
situation very difficult for many developing countries’ economics.
SOMALI HISTORICAL EXTERNAL DEBT
After the 1977 war with Ethiopia (77-war) the country run into the economic turmoil, due to the higher budget
deficit, and central government has shifted from soviet model to western system, to get loans from world fund
agencies such as IMF, World Bank, or other western creditors.
During the 1980s, When Somalia faced difficulties servicing debt, resulting in the government concluding two
rescheduling agreements with the Paris Club, an informal group of creditor governments of wealthy
industrialized countries who stands to negotiate with countries facing external debt problems.
But in 27 years later Somalia’s external debt is estimated to be US$ 4.6 billion (as of the end the 2017). And
5.2 billion in 2018(Ifm,report,2018).

6. Research Problems
Somali is one of the indebted countries that its external debt was estimated around
107% of Its GDP in 2019.many of developing and developed world economist have
different prospective towards on external debt effect on developing countries’
economics. Some economist believe that these loans have made the economics in third
world more stagnant ,increase of poverty and even forces some countries to fall on
‘’debt of hanging’’, ,while others opposed that arguments and insist it will have positive
effect if there were managed well and invest in productive sectors in economics. The
main challenges that Somali economy is facing currently is lack of investment, from
higher external debt and political instability that hampered to get FDI to its economy
mainly on agricultural dominant.
Therefore In here i will investigate the real effect of these loans on Somali economic
growth using time series data collected from accurate sources of Somali debt reports.

7. General Objectives of the study
General objective of the study
The main purpose of this study is to examine the effect of external debt on Somali Economy.
Specific objectives:
The specific objectives are:
1-To investigate the effect of external debt on economic growth of Somalia
2- To examine the effect of foreign Aid on Somalia economic growth.
3- To find out the Overall effect of external debt and Foreign Aid on Somalia Economic Growth.

8. Research Questions
This study will have the following research questions:
1-What is the relationship between External debt and economic growth of
Somalia.?
2-What is the effect of Foreign Aid on economic growth of Somalia?
3- What is the Overall effect of external debt and Foreign Aid on Somali Economic
Growth?

9. Research Methodology
Methodology is a set of rules or system to overcome the research problem. In order to achieve the
objectives, the researcher needs to choose from the various procedures, models and method of
research methodology. Therefore, the researcher used secondary Research from 1970 to 2016. Data
sources was from IMF and World Bank reports. The study has employed both descriptive and
econometric Tools.
RESEARCH DESIGN: Quantitative & Qualitative research
Study population
The study population of this study is the whole Economic Growth and External debt of Somalia
Sample size
The sample size of this study is time series analysis extending over the period of 1970 to 2016 with 48 years with 3
variables. The data were sourced from the publications of World Bank and Ifm data bases.

10. Data Variables and its
sources
NO Variables Time Period Type of Data Sources of data
I. 1 External Debt(EXD) 1970-2016 Time series World Bank and IFM
2 Foreign Aid(FA) 1970-2016 Time series IFM,Sesric.Org and Mundi
3 Economic Growth 1970-2016 Time series IFM&World bank Groups

11. The Model
EG=F(EXDE,FA,U)
lny=lnexd+lnfa+µ(logarithm form)
lnY =lnβ0+ β1lnx1+ β2lnx2+µ
It may be noted that sometimes logarithmic transformation is used to reduce
heteroscedasticity as well as skewness.(Gujarat 2009,p 166.)
Where lny stand s logarithm of Economic Growth, β0 is Intercept which means if we hold other
independent variables zero The Economic Growth will remain β0
while All β1, and B2 are the slopes and µ is Error term, other factors that are outside of the
models.

12. Tests of research model
• 4.2 Regression Results
• 4.4 Test for unit root test Augmented Dickey Fuller (ADF) Test results at
first difference
• 4.5.1multicollinearity
• 4.5.2 hetroscedasticity
• 4.5.3 Serial Autocorrelation
• 4.5.4 Model Specification Test
• 4.5.5 Normality Test
• 4.5.6 Co-integration test for Relationship
• 4.5.7 Error Correction Model

13. 4.2 Regression Results
Dependent Variable: LGDP
Method: Least Squares
Date: 12/16/19 Time: 17:41
Sample: 1970 2016
Included observations: 47
Variable Coefficient Std. Error t-Statistic Prob.
C -4.447377 1.923993 -2.311535 0.0255
LEXDE 0.386460 0.119738 3.227540 0.0024
LFA 0.182337 0.128490 1.419082 0.1629
R-squared 0.462914 Mean dependent var 7.247670
Adjusted R-squared 0.438501 S.D. dependent var 0.847330
S.E. of regression 0.634932 Akaike info criterion 1.991103
Sum squared resid 17.73808 Schwarz criterion 2.109197
Log likelihood -43.79092 Hannan-Quinn criter. 2.035543
F-statistic 18.96177 Durbin-Watson stat 0.601758
Prob(F-statistic) 0.000001

14. Table 4.4 Test for unit root test Augmented Dickey Fuller (ADF) Test results at level and first
difference.
Variablessee ADF AT LEVEL 5% REMARK VARAIBLES ADF AT 1st
difference 5%
REMARK
GDP P-VALUE 0.0002 STATIONARY GDP 0.0002 STATIONARY
EXTERNAL DEBT 0.0000 STAIONARY EXTERNAL DEBT 0.0032 STATIONARY
FOREIGN AID 0.35 NON STAIONARY FOREIGN AID 0.000 STATIONARY
(see in appendix E)
Hypothesis:
H0: variable has unit root problem
H1: Variables are stationary
Rule of Decisions
Reject Ho if p-value is less then critical value otherwise do not.
Conclusion:
We can reject Ho since p-value of 0.0000 is less than 5% significant level.
As above table 4.4 showed our variables are stationary at level GDP and EXDE, except FA, which become
stationary at First differenced with intercept. Our model is Cleary free from any unit root problems All variables
of GDP.EXDE, And FA were stationary t at first differenced

15. Table4.5.1multicollinearity
Variance Inflation Factors(VIF) ANALYSIS VIF=1/(1-R2)
Date: 12/07/19 Time: 12:05
Sample: 1970 2016
Included observations: 47
Coefficient Uncentered Centered
Variable Variance VIF VIF
C 3.701748 431.5695 NA
LEXDE 0.014337 742.7209 2.004846
LFA 0.016510 735.6027 2.004846
As we can see above table of 4.5.1 we cannot reject H0.
Conclusion:
Since the VIF for each independent variable is not greater than 5 as a thumb of rule, there is
adequate evidence to indicate that no serious multicollinearity suspected among independent
variables at the significance level of 0.05.

16. Table 4.5.2Serial Auto-correlation
Breusch-Godfrey Serial Correlation LM Test:
F-statistic 7.832466 Prob. F(2,40) 0.087
Obs*R-squared 12.94508 Prob. Chi-Square(2) 0.067
Hypothesis:
H0: There is no autocorrelation problem.
H1: There is an autocorrelation problem.
Conclusion:
Since the value of probability for Chi-square (0.067) shown in the table 4.6.3. is greater than 0.05,
we cannot reject H0. Thus, we do have sufficient evidence to conclude that there is no
autocorrelation problem in the model at the significance level of 0.05

17. Table 4.5.3 Heterisedascity test
Heteroscedasticity Test: Breusch-Pagan-Godfrey
F-statistic 0.500079 Prob. F(3,41) 0.6843
Obs*R-squared 1.588478 Prob. Chi-Square(3) 0.6620
Scaled explained SS 5.895735 Prob. Chi-Square(3) 0.1168
Hypothesis:
H1: Heteroscedasticity problem does not exist.
H0: Heteroscedasticity problem exists.
Conclusion:
We cannot reject H0 since P-value of Obs*R-squared is 0.66220, which is more
than 0.05, Hence, there is sufficient evidence to conclude that there is no
heteroscedasticity problem at the significance level of 0.05

18. Table 4.5.4 Normality Testing
0
2
4
6
8
10
-1.0 -0.5 0.0 0.5 1.0
Series: Residuals
Sample 1970 2016
Observations 47
Mean -7.46e-16
Median -0.112714
Maximum 1.195824
Minimum -1.184227
Std. Dev. 0.620975
Skewness 0.359779
Kurtosis 2.228025
Jarque-Bera 2.181013
Probability 0.336046
Conclusion:
As value of probability for JB states is 0.336046 which is more than 0.05, So we cannot reject H0. Therefore, there is
sufficient evidence to conclude that the error term is normally distributed at the significance level of 0.05.
Hypothesis:
H0: Error term is normally distributed.
H1: Error term is not normally distributed.

19. Table 4.5.5 MODEL SPECIFICATION
Value Df Probability
t-statistic 0.462973 41 0.6458
F-statistic 0.214344 (1, 41) 0.6458
Likelihood ratio 0.239857 1 0.6243
Sources: Secondary Data
Ramsey RESET Test
Hypothesis:
H0: The model is correctly specified.
H1: The model is not correctly specified
We cannot reject H0 since the probability value of F-statistic is (0.6458) which is more than 0.05. so,
we have enough evidence to conclude that the model is correctly specified at the significance level of
0.05.

20. Table 4.5.6 Co integration Test
Unrestricted Cointegration Rank Test (Trace)
Hypothesized Trace 0.05
No. of CE(s) Eigenvalue Statistic Critical Value Prob.**
None * 0.483411 37.70458 29.79707 0.0050
At most 1 0.153303 8.642276 15.49471 0.3995
At most 2 0.029558 1.320154 3.841466 0.2506
Trace test indicates 1 cointegrating eqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
Unrestricted Cointegration Rank Test (Maximum Eigenvalue)
Hypothesized Max-Eigen 0.05
No. of CE(s) Eigenvalue Statistic Critical Value Prob.**
None * 0.483411 29.06230 21.13162 0.0031
At most 1 0.153303 7.322122 14.26460 0.4518
At most 2 0.029558 1.320154 3.841466 0.2506
Max-eigenvalue test indicates 1 cointegrating eqn(s) at the 0.05 level
Hypothesis:
H0: There is no co integration equation.
Ha: There is at list one co integration equation
Conclusion:
We can reject H0 since the level of significance t-statistics,0.0050,0.0031, of Trace and Max-eigenvalue tests are less than critical value, so, we can
conclude there are at least one Coe integration between GDP, EXDE, and FA variables. that means, they are moving to gather

21. Table 4.5.7 Error Correction Model Long run Causality
ERROR CORRECTION MODEL
Estimation Method: Least Squares
Date: 12/21/19 Time: 08:45
Sample: 1973 2016
Included observations: 44
Total system (balanced) observations 132
Coefficient Std. Error t-Statistic Prob.
C(1) -0.013021 0.021597 -0.602914 0.5478
C(2) -0.103856 0.132709 -0.782582 0.4356
C(3) -0.571032 0.132238 -4.318203 0.0000
The coefficients of the error-correction terms of external debt and Foreign aid variables carrying the correct signs and it is statistically
insignificant According to its p-value (0.5478 and 0.4356 in the table>0.05 in hypothesis ) which means we cannot reject our null of
No long association, so the explanatory variables of external debt and Foreign do not have long run causality on GDP, which means in
short they will move together .but in long run, they will be disequilibrium according to probability value.

22. Conclusion:
Findings
Recommendations

23. Findings
The research study attempted to Further explore the impact of explanatory variables of external debt and foreign aid toward on the
Somali GDP. This study consists of 48 years of Time series data which is from years 1970-2016 and it obtained on annual basis.
The findings showed that both explanatory variables have an impact to influence on Somali economic growth. In the result of
OLS model, each explanatory variable, such external debt and Foreign Aid, Only External Debt was significant and positive to
determine Economic Growth of Somalia. As has shown above table4.2, the coefficient of determination R-squared R2 is 0.4626%.
This result implies that on the average about 46.3% the variations of economic growth in Somalia under this period was explained
by changes in these predictor variables. Thus, about 54% variations in economic growth in Somalia remain unexplained by these
explanatory variables. The unexplained variables are other external factors not included in the model, and the reason is common in
many econometric time series analysis, the researcher also investigated the long run Cointegration using Cointegration test and
Vector error correction model (VECM) among explanatory variables and dependent variable, and result found out that there was
short-run relationships running from EXDE and FA to GDP,that means in longer they will disequilibrium according to result of
table of 4.5.7 . Fortunately there was autocorrelation in OLS model, but had solved and other diagnostic problem of multi-
collinearity , Heterosadecasity ,Normality test, and model specifications were solved as well..

24. Recommendations
In here the study made the following recommendations
Our findings showed that external Debt is significant to influence our Economic Growth/GDP, meanwhile
foreign aid is not significant to effect on Economic Growth of Somalia but, it must be noted, however, that
the institutions in Somalia that responsible for receiving and distributing that Loans should restraint it on
primary purpose of developing the country’s GDP, and to protect from misallocation, corruptions or using
as political instability.
-Somali Government should increase its Debt Relief/Cancellation Campaign, to attract for FDI, that could
create New jobs for our unemployment generations.
The Government should reduce its Recurrent Expenditures which is around 50% of its total budget
Expenditures and supports to rise the fund of Capital Expenditures which will be more productive and
brings great jobs for unemployment-populations.

25. There are great sources of income that Muslims have specifically; that is ‘’Zakat Revenue’’, so in here we
encouraging our Government should take into account that great income we have Neglected. Around 5
billion of dollar we can collected that zakat only in southern of Somalia, from Three types of Animals,
business, crop products, and any Halaal earnings, to be self-sufficient state. I am sure if we take this policy
of zakat and allocate only 25-30% of That income to put back these sectors we will free from foreign
donors and their Interventions, politically, economically, militarily and socially.
Somali political stakeholders should focus on the development in Agricultural sectors that is basic
livelihood as well as Small Industrial development, by offering taxes advantage to Somali and non-Somali
investors.