Exchange Rates and Somalia's Trade Balance: What a 2025 ARDL Study Reveals

A digest of Nur & Sheikh Ali (2025), Edelweiss Applied Science and Technology

Somalia imports far more than it exports, and its currency has had an unusual history: the Somali shilling kept circulating after the central government collapsed in 1991, while the US dollar became the main medium of exchange. How exchange-rate movements feed into trade performance in such a setting is poorly documented. This 2025 study, by economists at the Central Bank of Somalia and SIMAD University, uses annual data from 1990 to 2021 to estimate how the real effective exchange rate, GDP, consumer prices and foreign direct investment relate to Somalia's trade balance in the short and long run. Its tables tell a more cautious story than its abstract, which makes it a useful case for anyone reading macroeconomic evidence from fragile economies.

The study covers 1990–2021, giving 32 annual observations. The ARDL bounds test (F = 16.02) indicates a long-run relationship, yet none of the 4 long-run effects is significant at 5%. The speed of adjustment is −0.652 per year.

Article at a Glance

The article is "Exchange rate dynamics and trade balance in Somalia: An ARDL approach," by Abdulkadir Mohamed Nur (Central Bank of Somalia) and Ali Yassin Sheikh Ali (SIMAD University). It was published in Edelweiss Applied Science and Technology, Vol. 9, No. 4, pp. 186–198 (Learning Gate; open access, CC BY), in 2025 (received 27 January; accepted 25 March; published 3 April). Its research area is international and monetary economics, and its study context is Somalia, using annual national data for 1990–2021. The method is quantitative time series: ADF and PP unit-root tests, Johansen cointegration, and ARDL bounds testing with an error-correction model. The DOI is https://doi.org/10.55214/25768484.v9i4.5954.

The Research Problem

International evidence on exchange rates and trade balances is mixed: studies the authors review find depreciation helping trade in some countries (Brazil, Slovakia), hurting it in others (Nigeria, Tunisia), and no link in still others (Vietnam, Albania).

Earlier Somali research focused on the shilling's volatility and the absence of monetary regulation. To the authors' knowledge, no study had directly estimated how the exchange rate affects Somalia's trade balance — a gap that matters as the country rebuilds its central bank and trade policy.

Research Objective

The study aims to estimate the short- and long-run effects of the exchange rate on Somalia's trade balance, alongside other macroeconomic drivers, to inform trade policy. No formal research questions are listed; the authors set out expected signs for each driver. The real effective exchange rate (REER) and consumer price index (CPI) are expected to worsen the balance, while GDP and foreign direct investment (FDI) are expected to improve it.

How the Study Was Conducted

A single-country time-series design with 32 annual observations (1990–2021) from the World Bank, IMF, SESRIC and the Central Bank of Somalia. The trade balance is measured as the ratio of imports to exports, so a rise means the balance is worsening and a fall means it is improving. All variables are in logarithms, and the analysis was run in Stata 17.

The analysis followed six steps. In step 01, Unit roots, ADF and Phillips–Perron tests showed that TB, FDI, GDP and REER are I(1), while CPI is I(2). In step 02, Lag length, FPE, AIC, HQIC and SBIC all selected four lags. In step 03, the Johansen test, trace and maximum-eigenvalue tests pointed to one cointegrating relationship. In step 04, the bounds test, ARDL F = 16.02, above the 5% upper bound (3.49), indicated a long-run relationship. In step 05, Estimation, ARDL long-run coefficients and a short-run error-correction model were fitted. In step 06, Diagnostics, serial-correlation, heteroskedasticity and Ramsey RESET tests were run.

Key Findings

The table reports long-run and short-run coefficients with p-values in parentheses, as reported in Table 8 of the article. The interpretation of each is Skilful's reading, based on the paper's own definition of the trade balance as imports ÷ exports. The exchange rate (REER) has a long-run coefficient of 0.349 (p = 0.421) and a short-run coefficient of 0.438 (p = 0.118), so it is not significant in either horizon. FDI has −0.022 (p = 0.278) in the long run and 0.030 (p = 0.022) in the short run; in the short run the import ratio rises, so the balance worsens. GDP has 0.292 (p = 0.502) in the long run and 0.540 (p = 0.060) in the short run; the short-run effect is weak (10% level), and the balance worsens. CPI has −0.348 (p = 0.305) in the long run and −0.575 (p = 0.048) in the short run; in the short run the import ratio falls, so the balance improves. The error-correction term is −0.652 (p = 0.001), meaning about 65% of any gap is closed each year.

1. No statistically significant long-run drivers. Although the bounds test indicates a long-run relationship, none of the four long-run coefficients is significant. The authors themselves note that other, unmeasured factors are likely to shape Somalia's trade balance over time.

2. The exchange rate shows no significant effect. The REER coefficient is positive but insignificant in both the long run (p = 0.421) and the short run (p = 0.118), so the data do not show exchange-rate movements driving the trade balance.

3. Short-run links for FDI, prices and output. Rising FDI is associated with a higher import-to-export ratio (p = 0.022), which the authors read as a worsening balance. CPI has a negative coefficient (p = 0.048); the authors interpret it as inflation hurting trade, although under the paper's definition a negative sign implies a lower import ratio. GDP's positive link is significant only at 10%.

4. Deviations are corrected quickly. The error-correction term (−0.652) implies roughly 65% of any departure from equilibrium is closed within a year.

Reading note: The abstract reports positive long-run effects of GDP and the exchange rate and negative long-run effects of inflation and FDI, and the discussion describes a negative exchange-rate relationship and FDI improving the balance. Table 8 shows no significant long-run coefficients, a positive exchange-rate sign, and FDI linked to a worsening balance. Readers should rely on Table 8.

What the Study Contributes

The contribution is primarily empirical: a country-level estimate of exchange-rate and trade-balance links for Somalia over three decades, drawing on Central Bank of Somalia data alongside international sources. It proposes no new theory or method. The authors recommend economic diversification, stronger export competitiveness, price stability, an investment climate that attracts FDI, and infrastructure and institutional development.

Important Limitations

Identified by the authors: The paper does not include a dedicated limitations section; its own results note that unmeasured factors likely drive the long-run trade balance.

Skilful cautions arising from the study design: The serial-correlation test rejects no autocorrelation (p = 0.03 and 0.0005); the paper reads this as model significance, but it weakens the standard errors. CPI is I(2), which the ARDL bounds test does not accommodate. In addition, 32 observations with four lags leaves few degrees of freedom. The REER series averages about 16,000, a scale more typical of a nominal shilling rate than an index. Finally, data for 1990s Somalia were collected without a functioning state and may be less reliable.

Why This Research Matters

As the Central Bank of Somalia works to rebuild monetary policy and currency management, evidence on how exchange rates affect trade is directly relevant to policymakers, development partners and trade analysts. The study is also an accessible, open-access example of ARDL applied to a fragile, highly dollarised economy.

Skilful Research Insight

Editorial commentary — not a finding of the study. Three lessons stand out. First, when a dependent variable is a ratio such as imports ÷ exports, every sign must be translated before it is interpreted; writing the translation next to each coefficient prevents contradictions. Second, a null result is a finding: in a dollarised economy, the shilling's exchange rate may simply matter less for trade than it would elsewhere, a hypothesis worth testing directly. Third, future work could apply corrections for serial correlation, test asymmetric effects of depreciation and appreciation, and use quarterly or product-level trade data to increase sample size and precision.

Read the Original Research

The original article is "Exchange rate dynamics and trade balance in Somalia: An ARDL approach," published in Edelweiss Applied Science and Technology, 9(4), 186–198 (2025), by Abdulkadir Mohamed Nur and Ali Yassin Sheikh Ali. Its DOI is https://doi.org/10.55214/25768484.v9i4.5954, and the publisher/journal page is Learning Gate, learning-gate.com (full text) (open access, CC BY). Skilful summarises; all findings belong to the original authors.

SEO Information

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