The Nexus between Exchange Rates and Energy Consumption in Somalia

Abstract

This study investigates the nexus between exchange rates and energy consumption in Somalia, a country characterized by its heavy reliance on imported energy and significant economic challenges. Employing time-series data from 1990 to 2021, this research examines how fluctuations in exchange rates influence energy consumption patterns through direct and indirect mechanisms. Variables such as energy consumption per capita, employment in agriculture, land under cereal production, domestic investment, and rainfall are analyzed using an ARDL approach to explore both short- and long- term relationships. The findings highlight that exchange rate depreciation increases the cost of energy imports, thereby reducing affordability and consumption. Additionally, exchange rate volatility indirectly affects energy use by influencing agricultural productivity, investment levels, and rural incomes. While domestic investment and employment in agriculture positively contribute to economic growth and energy demand, the underdevelopment of energy infrastructure and reliance on biomass limit Somalia’s capacity to meet rising energy needs. The study emphasizes the need for exchange rate stabilization policies and increased investment in renewable energy to ensure energy security and support sustainable development. These insights provide a foundation for policymakers to mitigate the adverse effects of exchange rate volatility and enhance energy efficiency in Somalia.