Financial stabilization models in developing economies: An analysis of Somalia’s economic recovery and macroeconomic reform

Abstract

This paper examines the financial stabilization and macroeconomic reconstruction models applied in fragile and conflict-affected states (FCAS), using post-war Somalia as a primary case study. Following decades of institutional collapse, de facto dollarization, and an unregulated parallel financial ecosystem, Somalia achieved a historic milestone by reaching the IMF and World Bank Heavily Indebted Poor Countries (HIPC) Completion Point in late 2023. This milestone wiped out billions in external debt and unlocked a structured path toward economic formalization. This study analyzes the unconventional stabilization mechanisms that kept the Somali economy afloat during statelessness—specifically diaspora remittances and mobile money platforms—and contrasts them with the formal structural adjustments implemented under the National Transformation Plan (NTP). Using a qualitative and exploratory research design backed by secondary macroeconomic data from the Central Bank of Somalia (CBS), the World Bank, and the IMF, the paper evaluates the country's dual challenge: building a functioning fiscal federalist framework while managing a highly dollarized economy with zero traditional monetary transmission channels. The empirical findings indicate that while institutional reforms have substantially boosted domestic revenue mobilization and commercial banking oversight, long-term stabilization remains highly vulnerable to climate-driven supply shocks and structural credit shortages. The paper concludes with strategic policy models designed to transition Somalia from crisis-driven survival to self-sustaining economic growth.