Empirical Analysis of the Determinants of Trade Balance in Somalia

Abstract

This paper utilizes the autoregressive distributed lag (ARDL) model, which gained popularity through the work of Pesaran and Shin (1999), to examine the determinants of trade balance in Somalia between 1970 and 2022. The main results indicate that the exchange rate, foreign direct investment, and inflation rate do not have a long-run cointegration relationship with trade balances. Still, in the short run, foreign direct investment (FDI) contributes positively to the trade balance, and an increase in the exchange rate typically results in a short-term decline in the trade balance. In the short run, inflation shows no evident correlation with trade balances. The bound test result of the computed F-statistic is less than the upper critical value at 5% of the significance level, indicating the variables don’t have a long-run relationship. This study employed the Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests to ascertain the variables' stationary nature. The result shows the variables' mixed stationarities and the second-order difference; all variables are stationary.