Financial regulation remittances and economic growth in fragile economy evidence from Somalia

Abstract

This study examines how remittance inflows and financial regulation influence economic growth in Somalia using annual time-series data from 1991 to 2020. The study applies the Autoregressive Distributed Lag (ARDL) bounds testing approach to analyse the short-run and long-run relationships among GDP per capita, remittances, trade openness, population growth, official development assistance, inflation, and a remittance regulation reform proxy. The ARDL bounds test confirms a long-run equilibrium relationship among the variables. The findings show that remittance inflows have a negative and statistically significant effect on economic growth, suggesting that remittances in Somalia are largely used for household consumption and imports rather than productive investment. Trade openness positively contributes to growth, while population growth negatively affects GDP per capita. More importantly, the regulation dummy and its interaction with remittances are positive and statistically significant, indicating that stronger financial regulation enhances the growth-related role of remittance inflows. Robustness checks using Fully Modified Ordinary Least Squares (FMOLS) and Canonical Cointegrating Regression (CCR) confirm the consistency of the ARDL results. The Granger causality results further show that trade openness and population growth predict economic growth, while no direct predictive causality is found between remittances and GDP per capita. The study contributes to the literature by showing that remittances do not automatically promote growth in fragile economies; their developmental impact depends on the quality of financial governance, formal remittance channels, and regulatory oversight. Policy efforts should therefore strengthen money transfer business supervision, AML/CFT compliance, financial inclusion, and mechanisms that encourage the productive use of remittances in Somalia.