Evaluating the impact of trade openness on inflation in Somalia: insight from fragile states

Abstract Somalia, classified as a fragile state because of prolonged political instability, conflict, and governance challenges, provides an important setting for examining the relationship between trade openness and inflation. This study investigates this relationship using annual time-series data from 1989 to 2023 and an autoregressive distributed lag (ARDL) model. The findings indicate the existence of a long-run cointegrating relationship. In the long run, trade openness, the exchange rate, money supply, GDP, and foreign direct investment (FDI) have positive and statistically significant coefficients. In the short run, trade openness and money supply have statistically significant negative coefficients, whereas GDP and FDI are not statistically significant at the 5% level. Exchange-rate depreciation has a positive short-run coefficient, but the effect is statistically insignificant; therefore, it should not be interpreted as a significant short-run driver of inflation. The negative and statistically significant error-correction coefficient indicates a relatively rapid adjustment toward long-run equilibrium. Overall, the findings suggest that trade openness may intensify imported inflation in an economy characterized by limited domestic production, exchange-rate vulnerability, and institutional constraints. Policy should therefore prioritize exchange-rate stability, productive diversification, efficient trade logistics, and stronger monetary and statistical institutions rather than broad import restrictions.