Determinants of Trade Balance in Somalia: Regression Analysis using Time Series Data

Abstract

The study focuses on the Analysis of the Main determinants that have an impact on trade balance. Specifically this study focus on the main cause of Trade deficit in Somalia by analyzing the impact of Foreign Direct Investment (FDI), exchange rate and inflation rate; In this study The Ordinary Least Square method (OLS) under the E-View 7.1 software has been used for the econometric analysis with a sample period spanning from 1970-2010. This study adopted the two-country imperfect substitute model of Rose and Yellen which analyses the relationship of the real exchange rate and the trade balance.The regression result showed that there is only foreign direct investment variable impact on trade balance in Somalia. Foreign direct investment had negative impact on trade balance in Somalia. The other factors include exchange rate and inflation rate had no impact on trade balance in Somalia. According to the result, there are some recommendations to solve the trade deficits problem in Somalia. The government should keep the policies stable to attractive more investors and should have policies to support export such as investment incentive and taxes incentive.

Keywords: FDI, trade balance, Somalia, exchange rate