THE GAMBIA | ECONOMIC UPDATE - SPRING 2025 The Gambia Public Debt: An Achilles Heel? © 2025 International Bank for Reconstruction and Development/The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbankgroup.org Some rights reserved. This work is a product of the staff of The World Bank Group with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the World Bank Group, its Board of Executive Directors, or the governments they represent. The World Bank Group does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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Table of Contents Abbreviations and Acronyms iv Acknowledgements v Executive Summary vi Chapter 1: State of the Economy 1 1.1.  Recent economic developments 2 Global growth has stabilized while Sub-Saharan Africa’s economy has expanded, supported by easing inflation and monetary easing 2 Economic activity has increased in The Gambia supported by aggregate demand and a slowdown in inflation 2 External sector vulnerabilities persisted and the current account deficit worsened 5 The CBG’s monetary policy stance remained tight to address persistent inflationary pressures. 7 The fiscal deficit has narrowed despite persistent fiscal vulnerabilities and high public debt 11 Extreme poverty declined in 2024, but major obstacles to rapid poverty reduction remain 12 1.2.  Outlook, risks and challenges 14 The outlook is broadly positive with robust growth underpinned by a rebound across all sectors 14 Rising global and domestic risks cloud to the outlook 18 Chapter 2: The Gambia’s Public Debt: An Achilles Heel? 21 2.1. Public debt has soared over the last decade, reversing the gains achieved through the HIPC initiative in 2007, with most current debt linked to foreign borrowing 22 2.2.  Reasons for financing The Gambia’s economy through debt 25 2.3.  Impact of public debt on economic growth in The Gambia 33 2.3.1.  Literature review: Public debt has both positive and negative effects on growth 33 2.3.2.  Public debt has a non-linear impact on economic growth in The Gambia, with debt ratios exceeding optimal thresholds 34 2.4.  Channels through which public debt impacts the Gambian economy 40 2.4.1.  Public debt impacts economic growth through various transmission channels 40 2.4.2.  Public and private investment as well as interest rates are the primary transmission channels through which public debt affects economic growth in The Gambia 41 2.4.3.  ARDL model 43 2.5.  Analyzing the impact of the expiration of external debt service deferral 47 2.5.1.  Model specification 47 2.5.2.  Accuracy of prediction, forecast assumptions, and forecasts 49 2.6.  Options for curbing the growth of public debt and reducing debt-related risks 52 References 57 Appendix 71 TABLE OF CONTENTS i GAMBIA | ECONOMIC UPDATE - 2025 List of Figures Figure 1. Private consumption and gross fixed capital investment were the main growth drivers on the demand side in 2024 3 Figure 2. Services continued to be the main growth driver on the supply side in 2024 3 Figure 3. The Gambia’s growth has outperformed that of the SSA and ECOWAS since 2017, reversing historical low performance 3 Figure 4. The number of tourist arrivals has continued to increase, nearly reaching pre-pandemic levels 5 Figure 5. The depreciation of the dalasi against the US dollar that began in 2022 continued in 2024 6 Figure 6. The trade deficit narrowed but remained high in 2024 6 Figure 7. Inflation is on a downward trend, driven by moderating food prices . . .  8 Figure 8. . . . and continued tight monetary policy 8 Figure 9. Net domestic assets contracted further in 2024 9 Figure 10. The money supply fell further in 2024 9 Figure 11. Bank assets are still dominated by government debt 10 Figure 12. The cost of government domestic borrowing was lower in 2024 10 Figure 13. The financial sector remains sound 10 Figure 14. The fiscal deficit narrowed in 2024 12 Figure 15. While public debt is on a downward trend, it remains high 12 Figure 16. Share of extreme poor 13 Figure 17. Number of extreme poor 13 Figure 18. Public debt has soared over the past decade, wiping out the gains made from the HIPC initiative in 2007 23 Figure 19. External debt represents the bulk of public debt 23 Figure 20. External public debt is mainly owed to multilateral creditors . . .  24 Figure 21. . . . mainly such as the IsDB, IMF, IDA, and BADEA 24 Figure 22. External bilateral public debt is mainly owed to three creditors: Saudi Arabia, Kuwait, and India 24 Figure 23. Domestic public debt is mainly owed to commercial banks 24 Figure 24. Most domestic debt is focused on long-term maturities 25 Figure 25. High debt servicing costs constrain The Gambia’s public spending 26 Figure 26. Domestic debt service accounts for the largest share of the government’s domestically financed budget 26 Figure 27. Selected public debt indicators under baseline and alternative scenarios, 2024–2034 27 Figure 28. Domestic savings have historically been too low to cover investment needs 29 Figure 29. Domestic revenues are low, and fiscal outcomes are increasingly dependent on grants 30 Figure 30. Capital investment is mostly financed through external resources 30 Figure 31. Declining export prices . . .  31 Figure 32. . . . and anarchic fluctuations in import prices . . .  31 Figure 33. . . . have led to deteriorating terms of trade . . .  32 Figure 34. . . . and a widening trade deficit on merchandise 32 Figure 35. FDI inflows increased dramatically in 2020 32 Figure 36. Remittances have risen sharply over the past five years 32 Figure 37. In The Gambia, most remittances are used for consumption 33 Figure 38. Real GDP and Real GDP Forecast Series, 1994–2022 50 Figure 39. RGDPF forecast series, 1994–2022 51 ii TABLE OF CONTENTS THE GAMBIA PUBLIC DEBT: AN ACHILLES HEEL? List of Tables Table 1. Policy options for curbing the growth of public debt and reducing debt-related risks ix Table 2. Medium-term outlook 16 Table 3. Forecast assumptions for the impact of debt deferral on economic growth 51 Table 4. GDP forecasts with and without external debt service payment resumption 52 Table 5. Potential gains from domestic revenue mobilization reforms 54 TABLE OF CONTENTS iii GAMBIA | ECONOMIC UPDATE - 2025 Abbreviations and Acronyms Acronyms Definition AfCFTA African Continental Free Trade Area AfDF African Development Fund ARDL Autoregressive Delayed Lag BADEA Arab Bank for Economic Development in Africa CAD Current account deficit CBG Central Bank of The Gambia CPI Consumer price index ECM Error correction model ECOWAS Economic Community of West African States ECT Error correction term EIB European Investment Bank EMDEs Emerging markets and developing economies FDI Foreign direct investment GBoS Gambia Bureau of Statistics HIPC Heavily Indebted Poor Countries IDA International Development Association IFAD International Fund for Agricultural Development IMF International Monetary Fund IsDB Islamic Development Bank MCC Millennium Challenge Corporation MTO Money transfer agency NDA Net domestic asset OIC Organization of Islamic Cooperation Ppt Percentage point PV Present value SME Small and medium enterprise SOE State-owned enterprise SSA Sub-Saharan Africa TFP Total factor productivity WDI World Development Indicators iv ABBREVIATIONS AND ACRONYMS THE GAMBIA PUBLIC DEBT: AN ACHILLES HEEL? Acknowledgements The Gambia Development Update monitors recent reviewers Alief Aulia Rezza (Senior Economist, EMNMT) significant economic developments in the country, and Tano Michel Aka (Consultant, EAWM1) for their highlighting key structural challenges to achieving comments and suggestions. Sincere appreciation goes to inclusive and sustained economic growth, and analyzes Oscar Parlback (Consultant) for editing the report. Theresa relevant policy options. This report is prepared by the Adobea Bampoe (Senior Program Assistant, EAWM1) and World Bank’s Economic Policy (EP) Global Department Awa Njie (Administrative Assistant, AWMGM) provided team led by Ephrem Niyongabo (Economist, EAWM1) outstanding administrative support. and  comprised of Moritz Meyer (Senior Economist, EAWPV) and Honore Ahishakiye (Consultant). The The findings, interpretations, and conclusions expressed team benefited from the guidance of Keiko Miwa in this report do not necessarily represent the views of the (Country Director, AWCF1), Hans Anand Beck (Practice World Bank and are entirely those of the authors. Manager, EAWM1), Daniela Marotta (Lead Economist, EAWM1,  AFCE1), Franklin Mutahakana (Resident Comments and questions on the content of this report Representative, ACWF1), and Edouard Al-Dahdah (Lead are welcome. To do so, please contact Ephrem Niyongabo Country Economist, EAWDR). We also thank the peer (eniyongabo@worldbank.org). ACKNOWLEDGEMENTS v GAMBIA | ECONOMIC UPDATE - 2025 Executive Summary Recent economic developments 22.2 percent and 10.9 percent, respectively, in 2023. To curb inflation, the Central Bank of The Gambia (CBG) The Gambia’s economy continued its recovery in maintained its policy rate at 17  percent in November  2024, 2024, driven by agriculture and services on the supply unchanged since August 2023, following a cumulative side and by public and private consumption and 700 basis points increase since March 2022. investment spending on the demand side. Economic growth accelerated from 4.8  percent in 2023 to an The fiscal deficit narrowed in 2024, supported by estimated 5.7 percent in 2024, while per capita growth stronger tax revenue mobilization, which helped rose from 2.4 to 3.4 percent over the same period. reduce public debt, although it remains elevated with a On the supply side, growth was mainly supported by high risk of distress. Total revenue rose from 20.7 percent agriculture and services, which benefited from fertilizer of GDP in 2023 to 21.1 percent in 2024, supported by support, high-yield seeds, and increased tourism. Industrial revenue-boosting measures. Domestic revenue increased growth decelerated following the completion of major considerably from 12.5  percent of GDP in 2023 to infrastructure projects related to the Organization of 14.0 percent in 2024, driven by higher tax revenue. Islamic Cooperation (OIC) summit. On the demand Non-tax revenue remained stable at 2.8 percent of GDP side, growth was boosted by robust private investment in 2024. Meanwhile, grants decreased by 1.3 percentage and consumption, supported by remittances, and public points (ppts) to 7.1 percent of GDP in 2024. Total consumption related to hosting the summit. expenditure increased moderately from 24.5 percent of GDP in 2023 to 24.6 percent in 2024, due to a substantial Despite increased service exports and robust 1.6 ppts of GDP increase in current expenditure, which remittances, the external accounts worsened in 2024 offset a nearly proportional fall in capital expenditure. As and foreign exchange reserves in months of imports a result, the fiscal deficit narrowed from 3.8 percent of declined. The current account deficit (CAD) is estimated GDP in 2023 to 3.5 percent in 2024. Due to lower net to have widened from 5.4 percent of GDP in 2023 to domestic borrowing, public debt declined for the second 5.7 percent in 2024, reflecting higher imports linked to consecutive year, from 75.6 percent of GDP in 2023 the OIC summit. The CAD was financed by foreign direct to 71.2 percent in 2024. Still, The Gambia remains at investment (FDI), donor support, external government elevated risk of debt distress. borrowing, and international reserves. Reserves remained at comfortable levels but declined from 4.9 months of While extreme poverty declined in 2024, supported by imports in 2023 to an estimated 4.7 months in 2024. rising labor incomes and lower inflation, significant Over the same period, the currency depreciated by disparities and inequalities persist. The extreme 7.2 percent in nominal terms. poverty rate—measured using the international poverty line of $2.15 in 2017 PPPs—fell from 17.3 percent in In 2024, monetary policy remained tight to combat 2023 to 16.7 percent in 2024, driven by rising labor rising inflation. Headline inflation averaged 11.7 percent incomes, higher international remittances, and reduced in 2024, down from 16.9 percent in 2023, as energy and inflationary pressure. However, spatial disparities remain food prices moderated, while remaining far above the entrenched, with monetary poverty closely linked to poor Central Bank of The Gambia’s (CBG) medium-term human development outcomes and limited access to basic target of 5 percent. Food and nonfood inflation averaged infrastructure, which have a disproportionate impact on 15.5 percent and 7.0 percent, respectively, down from the poorest households. vi EXECUTIVE SUMMARY THE GAMBIA PUBLIC DEBT: AN ACHILLES HEEL? Outlook, risks and challenges to the issue of a country’s ability to repay debt, issues under intense debate concern the benefits and costs of The medium-term macroeconomic outlook suggests debt accumulation, the productive use of debt and the a continued recovery. Real GDP growth is projected to optimal level of indebtedness. For The Gambia, the expiry average 5.6 percent (3.4 percent per capita) in 2025–2027, of external debt service deferrals at the end of 2024 could driven by increased activity across all sectors. A continued increase pressures on the macroeconomic framework. The growth momentum is expected in agriculture and services second chapter of this Economic Update has analyzed assuming favorable rainfall and increased use of high-yield how public debt affects the country’s macroeconomic seeds, and continued recovery of tourism, respectively. performance through economic growth and other Private consumption and investment, supported by stable potential channels, including public investment, private remittances, and resilient public consumption and investment investment, interest rates and private sector credit. It has are expected to support growth in the industry sector. answered the questions of what factors have driven the increase in public debt, whether there is an optimal public Despite the positive outlook, significant downside debt threshold, and what impact the expiry of deferred risks persist. Risks include escalating regional conflicts, external debt servicing will have on economic growth. debt vulnerabilities, balance-of-payment pressures, extreme weather events, fiscal slippage, rising domestic debt service High public debt poses a threat to the country’s long- costs, and political uncertainty. A slowdown in European term sustainability and development financing, as growth could dampen the tourism recovery and reduce debt servicing absorbs a significant portion of the capital and remittance inflows. Domestic and external fiscal budget, and the country is exposed to a high risk of risks include pressures to clear state-owned enterprises’ external and overall debt distress. Total public debt (SOEs) contingent liabilities; a continued rise in the has increased over the last decade, reaching 83.2 percent cost of credit to the government due to a high monetary of GDP in 2022, due to structural factors such as low policy rate; weaker-than-expected grants; higher interest domestic savings, low tax revenue, a large external rates relative to previous external borrowing options; deficit, low inflows of external private capital, and liquidity pressures emanating from the resumption of climate events. Thanks to progress in domestic revenue bilateral external debt service repayments beginning mobilization, public debt has begun to decline, falling to in 2025; and other external price shocks. The Gambia 71.2 percent of GDP in 2024. External debt continues remains highly vulnerable to climate shocks, which can to dominate, accounting for an average of 64.5 percent undermine agricultural output, household income, and of total public debt, with multilateral debt constituting fiscal stability. Any political uncertainty related to the 68  percent of external debt as of September  2024. upcoming presidential election could negatively affect Domestic debt is mainly owed to commercial banks, macroeconomic stability. In addition, uncertainty over US averaging 42  percent of domestic public debt as of September 2024. High debt servicing costs—averaging foreign aid could affect social and infrastructure programs 6.5 percent of GDP in 2024, equivalent to over one- in The Gambia. Lastly, disruptions to global trade— third of public spending (23.1 percent of GDP annually whether from trade tensions or other external shocks— between 2021 and 2024)—limit the government’s could adversely affect the country’s economy, given its heavy ability to finance development programs. Domestic debt reliance on remittances, tourism, and basic goods imports. servicing consumed 23 percent of domestically financed budgets in 2020–2024, nearly matching the combined The Gambia public debt: An Achilles heel? allocations for health and education. External debt service to revenue (percent) reached 31.9 percent in 2023 while Public debt remains high in The Gambia, although the acceptable threshold is 18  percent. Despite recent it has been falling over the past two years, raising progress, The Gambia remains at high risk of external and concerns about its impact on the economy. In addition overall debt distress. EXECUTIVE SUMMARY vii GAMBIA | ECONOMIC UPDATE - 2025 The rise in public debt is due to insufficient resources for total public debt in The Gambia is close to 52 percent to meet development needs. This in turn is the result of GDP, while the actual debt-to-GDP ratio was around of low domestic savings, low tax revenues, weak SOEs 71 percent in 2024. Similarly, external and domestic debt performance, a large external deficit, insufficient external thresholds are close to 35 percent and 16 percent of GDP, private capital inflows, and climatic shocks. Between respectively, while actual levels were close to 44 percent 1966 and 2023, domestic savings averaged a low and 27 percent, respectively, in 2024. Exceeding these 4 percent of GDP each year, far below the average of optimal thresholds harms economic growth, primarily SSA at 17.4 percent, low-income countries (LICs) at through high debt servicing, which negatively impacts 13.1 percent and Economic Community of West African economic growth in the long run. Debt service ratios are States (ECOWAS) at 11 percent. Over the same period, currently above the thresholds for a sustainable trajectory1. investment averaged 15  percent of GDP, well below Public debt affects The Gambia’s economy through SSA (22.4 percent), LICs (23.2 percent) and ECOWAS public and private investment, interest rates, and access (19.7  percent). With limited savings, investment to private sector credit. Studies have identified several funding has largely relied on debt. Tax revenue averaged channels through which debt can impact economic only 10.2 percent of GDP from 2017 to 2023, which, growth, including capital accumulation, private saving, combined with increased and rigid expenditures, led to interest rates, total factor productivity (TFP) growth, bank large fiscal deficits, averaging 4.7 percent of GDP over the credit to the private sector, and financial deepening. same period, close to the ECOWAS average (4.7 percent) Public debt negatively affects private investment, and and well above the SSA average (3.6  percent), and thus economic growth due to, inter alia, investment worsened public debt. Due to a narrow export basket and risk perception—anticipated and actual uncertainty and heavy dependence on imports of essential goods, the trade instability—and limited public spending in business- merchandise deficit widened from 14.9 percent of GDP environment-enhancing areas. Research suggests that in 2002 to 39.6 percent in 2022, financed largely through total public debt above 71.4 percent and 70.3 percent of external borrowing. Additionally, external private capital GDP negatively impacts private and public investment, inflows have been insufficient to bridge the domestic respectively. Interest rates are also a long-term channel savings gap. FDI inflows have been limited, hovering through which public debt impacts economic growth, around 5 percent of GDP per year since 1970, due to with an optimal threshold of 48.4 percent of GDP. While an unconducive business climate, poor infrastructure, private sector credit is not a long-term transmission and institutional and governance challenges. Despite channel, it is negatively affected by public debt in the high remittance inflows, exceeding 20 percent of GDP short term. Similar effects are observed when examining over the last five years, their contribution to savings the transmission channels between external public debt and and investment remains limited. About 80 percent of economic growth. remittances are used for daily consumption, with only a small fraction allocated to savings and investment. The expiration of external debt service deferral is expected Climate shocks compound these challenges by disrupting to lower economic growth. External debt servicing can livelihoods, eroding government revenue, and increasing have a direct impact on economic growth through several fiscal pressures. channels. First, by draining public resources that could be allocated to public investment and social services. Second, While moderate levels of public debt support long-term debt servicing may require higher taxation, siphoning off economic growth, excessive debt have an adverse impact on The Gambia’s economic performance. Moderate debt 1 External debt service to export ratio is above the threshold supports growth in The Gambia, while excessive debt (15 percent) since 2020. External debt service to tax revenue (percent) undermines growth by crowding out private investment and reached 31.96 percent in 2023 while the acceptable threshold for a consumption. Research indicates that the optimal threshold country at high risk of indebtedness is 23 percent. viii EXECUTIVE SUMMARY THE GAMBIA PUBLIC DEBT: AN ACHILLES HEEL? private savings that could support private investment. are projected to increase from US$54.8 million in 2024 Third, since the repayment is made in foreign currency, (2.0 percent of GDP) to an average of US$90.6 million it takes up part of foreign exchange reserves and increases (2.7 percent of GDP) annually in 2025–2028. This increase exposure to external shocks and macroeconomic crises. With in debt servicing is expected to reduce economic growth by debt servicing resuming, external debt service payments approximately 1.2 ppts over 2025–2028. Table 1. Policy options for curbing the growth of public debt and reducing debt-related risks Objectives Policy options Timeframe Responsibility Strengthen fiscal 1) Strengthen domestic revenue mobilization by: ST MOFEA, GRA policy, governance, (i) reducing tax incentives and exemptions; and institutions (ii) digitalizing domestic tax collection; and (iii) addressing tax base erosion due to inadequate international transfer pricing. ST MOFEA 2) Improve spending efficiency by : (i) implementing planned reforms to rationalize public spending (implementing program-based budgeting; consolidating public agencies and strengthening the management of investment projects); (ii) streamlining subsidies; and (iii) reducing budget allocations to SOEs. ST MOTIE 3) Ensure a robust competition policy framework by developing antitrust laws and setting up independent and well-functioning enforcement agencies. Improve debt 4) Improve the institutional environment for debt ST MOFEA, CBG transparency transparency and enhance debt reporting by improving: (i) debt composition, (ii) debt instrument coverage, and (iii) debt sectoral coverage Develop innovative debt 5) Explore options to develop climate-resilient debt MT MOFEA instruments instruments. 6) Explore the use of debt-for-development swaps. MT MOFEA Reduce extenal deficits 7) Tapping into the regional market to boost exports and MT MOTIE and increase external reduce external imbalances. private capital inflows 8) Pursue reforms to attract more FDI and remittances MT MOFEA, for investment. MOTIE, CBG Note: ST: Short term (within a year); MT: medium term (2–3 years). EXECUTIVE SUMMARY ix Chapter  1: State of the Economy GAMBIA | ECONOMIC UPDATE - 2025 1.1. Recent economic developments paused their tightening cycle. A few, however, have raised rates due to a recent flare up in inflation. The median fiscal Global growth has stabilized while Sub-Saharan deficit in the region declined from 3.9 percent of GDP in Africa’s economy has expanded, supported by 2023 to 3.3 percent in 2024, despite high government easing inflation and monetary easing financing needs and mounting debt service payments. The region continued to face challenges from rising insecurity Global economic growth in 2024 stabilized at the same and climate change—exacerbated by food insecurity, level as in 2023, supported by lower inflation and conflict, and reduced emergency aid. Despite heightened monetary easing in advanced and emerging economies. insecurity and climate shocks, economic activity in the Global headline inflation continued to gradually ease in region edged up from 2.4 percent in 2023 to 3.2 percent 2024, reflecting falling commodity prices and the lagged in 2024, driven by increased private consumption and effects of monetary tightening. Global financial conditions investment. Falling inflation raised the purchasing power have eased slightly, owing mainly to the onset of monetary of households, while monetary policy rate cuts boosted easing in the United States. The global economic context business sentiment, fostering investment (World Bank has become modestly more favorable, following several 2025b). These favorable regional economic developments years characterized by overlapping negative shocks. There have had a positive impact on The Gambia, given the has been a post-pandemic global economic expansion, growing importance of intra-African tourism and the with accelerating global trade growth. Improved investor country’s increasing reliance on imports from the region.2 sentiment spurred capital inflows and enhanced financial conditions in emerging markets and developing economies (EMDEs). Against this backdrop, global growth fell from Economic activity has increased in The Gambia 6 percent in 2021 to 3 percent in 2022, before stabilizing supported by aggregate demand and a at an estimated 2.7 percent in 2024–similar to the level slowdown in inflation recorded in 2023. Growth in advanced economies fell from The Gambia’s economic recovery continued in 2024. 5.5 percent in 2021 to 2.8 percent in 2022, before settling Economic growth accelerated to an estimated 5.7 percent at 1.7 percent in 2024. By contrast, growth in EMDEs (3.4 percent in per capita terms) in 2024, up from has remained robust, increasing from 3.7 percent in 2022 4.8 percent (2.4 percent in per capita terms) in 2023 to 4.2 percent in 2023 and 4.1 percent in 2024, driven by (Figure 1). On the supply side, growth was mainly supported growth in China, India, Indonesia, and Bangladesh (World by agriculture and services, which benefited from fertilizer Bank 2025a). These favorable global economic developments support, high-yield seeds, and increased tourism.3 However, benefit The Gambia, a small open economy that depends industry growth decelerated following the completion of on remittances from its large diaspora, tourist arrivals from major infrastructure projects related to the Organization of developed countries, and imports of essential goods such as Islamic Cooperation (OIC) summit. On the demand side, fuel, food, and medicines. However, any escalation in global trade tensions poses risks to The Gambia’s economy through 2 ECOWAS accounted for 39.6 percent of The Gambia’s total imports disruptions in trade, tourism, and remittance inflows. in 2022 (GBoS 2023). According to data from The Gambia Tourism Board, Africa’s share of tourist arrivals in The Gambia increased from Sub-Saharan Africa’s (SSA) economic growth improved 8 percent in 2018 to 12 percent in 2024. in 2024, driven by private consumption, investment, 3 The tourism sector remains a key driver of growth in The Gambia. and a slowdown in inflation from monetary policy Estimates from the World Tourism and Travel Council suggest adjustments. Median inflation in SSA fell from 7.1  percent that tourism directly contributed about 8.5 percent to GDP and 6.5 percent to employment in 2019. When indirect impacts are in 2023 to 4.5 percent in 2024, with 70 percent of factored in, its contribution increases to 15.5 percent of GDP and countries seeing inflation decline. The monetary policy 17.1 percent of employment (121,000 people employed). Tourism is stance remains differentiated across SSA, although most also a major source of foreign direct investment, having attracted over central banks have either started to cut interest rates or US$45 million between 2017 and 2022 (World Bank 2022). 2 Chapter 1: State of the Economy THE GAMBIA PUBLIC DEBT: AN ACHILLES HEEL? Figure 1. Private consumption and gross fixed Figure 2. Services continued to be the capital investment were the main growth drivers main growth driver on the supply side on the demand side in 2024 in 2024 Demand side contribution to real GDP growth, percent Supply side contribution to real GDP growth, percent 25 8 Percent, percentage points 20 15 Percent, percentage points 10 6 5 0 –5 4 –10 –15 –20 2 2018 2019 2020 2021 2022 2023 2024e 2025f 2026f 2027f Imports 0 Exports 2018 2019 2020 2021 2022 2023 2024e 2025f 2026f 2027f Statistical discrepancy Gross fixed capital investment Government consumption Agriculture Industry Private consumption Services Net taxes Real GDP growth Real GDP growth Source: World Bank staff estimates based on data from Gambia Bureau of Statistics (GBoS) and International Monetary Fund (IMF). robust private investment and consumption—supported Figure 3. The Gambia’s growth has by remittance inflows4—and increased public consumption outperformed that of the SSA and ECOWAS associated with hosting the OIC summit boosted overall since 2017, reversing historical low performance growth (Figure 2). While The Gambia’s growth performance GDP growth in The Gambia, SSA and ECOWAS has historically been below the average of SSA and the Economic Community of West African States (ECOWAS), 8.0 the country has outperformed its regional peers since 2017, 6.0 with the exception of 2021–22 (Figure 3). 4.0 2.0 4 Remittances have been relatively high, averaging more than 20 percent of GDP per year over the last five years. A study on the impact of 0.0 remittances on economic growth in The Gambia found a statistically significant positive impact from remittances, mainly through –2.0 consumption by satisfying households’ daily needs related to food, water, –4.0 electricity, education, entertainment, and religious festivals (Ceesay et al. Average 1992–2016 2017 2018 2019 2020 2021 2022 2023 2024e 2019). Furthermore, a recent study on the Impact of remittances on the exchange rate in The Gambia found that remittance inflows have a positive significant effect on the real effective exchange rate in the long run, highlighting the extent to which remittances affect not only the Gambia (The) ECOWAS SSA country’s macroeconomic stability but also its external competitiveness (Ceesay and Limbe 2024). Source: World Bank Staff using data from WDI data and IMF data. Chapter 1: State of the Economy 3 GAMBIA | ECONOMIC UPDATE - 2025 On the supply side, the agriculture sector grew by an in 2024.6 The 225 kV transmission line, part of the estimated 4.0 percent in 2024, up from 2.4 percent Gambia River Regional Cooperation in initiative,7 is fully in 2022, supported by continued fertilizer subsidies deployed and operational, with its inauguration having and high-yield seeds. While a rapid assessment of the occurred in February 2025. Despite these developments, 2024/2025 cropping season shows a decline in rice the industry sector remains the smallest contributor to and groundnut production due to unfavorable weather GDP, recording only a moderate increase from 9.8 percent conditions (MOA 2025), overall agricultural production in 2010 to 14.7 percent in 2024. While the sector has increased in 2024, driven mainly by the livestock subsector demonstrated the highest long-term productivity growth and a recovery in fisheries and aquaculture, owing to a in the Gambian economy, its low employment growth has renewed focus on aquacultural development—including limited its overall contribution to economic growth (World perch farming and other crops. Sustained improvements Bank 2024). Investment in the sector remains constrained, in agricultural practices (e.g., use of fertilizer subsidies with nearly two-thirds directed toward construction. and high-yield seeds5) contributed to the sector’s Broader industrial Investment is hindered by supply-side improved performance. However, the agriculture sector constraints, including limited access to finance, skills continues to face severe structural constraints that hamper mismatches, and infrastructure deficiencies. productivity, including limited access to equipment, finance, input markets, extension services, and storage, Growth in services is estimated to have accelerated as well as challenges related to climate change, land from 4.0 percent in 2023 to 7.7 percent in 2024, due degradation, and lack of scale (AfDB 2017). These to the continued recovery in tourism. Tourism-related constraints have contributed to the sector’s declining subsectors such as wholesale and retail trade, transport share of GDP, from 35.2 percent in 2010 to an estimated and storage, and accommodation and food services were 24.1 percent in 2024. key contributors to this growth. Growth was also recorded in other service subsectors such as information and Growth in the industry sector decelerated sharply from communication, healthcare, financial intermediation, 10.1 percent in 2023 to an estimated 2.5 percent in real estate activities, education, and human health and 2024, following the completion of major infrastructure social work activities. International tourist arrivals reached projects related to the OIC summit. Despite robust private infrastructure investment and increased electricity generation, industry growth slowed. The mining subsector 6 The Gambia Electricity Restoration and Modernization Project is stabilized, while manufacturing growth contracted due supported by the World Bank, European Union, and the European Investment Bank to improve the power generation and transmission to competitiveness challenges. The electricity subsector capacity in the country. The project has three components: (1) on-grid improved. In 2023, The Gambia completed its first solar PV with storage, including the development of a 20MW solar solar park under the Gambia Electricity Restoration and PV Plant in Jambur village in the Greater Banjul Area, with battery Modernization Project, and it finalized the country’s first backup to minimize grid absorption concerns; (2) restoration and high-voltage energy infrastructure under the same project modernization of transmission and distribution (T&D)—including upgrades of the transmission and distribution 225 kV line to: (i) absorb the additional generation capacity; (ii) prepare for future capacity expansion, including Gambia River Regional Cooperation, other pipeline projects, and 30kV MV backbone lines; (iii) reduce T&D losses; and (iv) enable future grid extensions—and (3) urgent institutional support 5 For the 2024/25 season, the government provided fertilizer to improve the sector, including institutional strengthening, capacity support amounting to 35,000 tons, including 1,000 tons building, and project implementation support related to improving of organic fertilizer for vegetable growers and 5,513 bags the operational performance of NAWEC. (50kg) of chemical fertilizer. High-yield seeds amounting 7 Organisation pour la Mise en Valeur du Fleuve Gambie (OMVG) is to 677.4 tons were also distributed (https://foroyaa.net/ a sub-regional organization for cooperation and integration between finance-minister-says-govt-provided-35000-tons-of-fertilizer/). The Gambia, Guinea Bissau, Guinea Conakry, and Senegal. 4 Chapter 1: State of the Economy THE GAMBIA PUBLIC DEBT: AN ACHILLES HEEL? 227,472 persons in 2024, marking a 10 percent increase of GDP) in 2023. Investment has nearly tripled since the from 2023 and approaching pre-COVID-19 pandemic democratic transition, rising from 12.3 percent of GDP in levels (Figure 4). Despite being the principal sector of 2010 to an estimated 35.1 percent in 2024. This growth the economy, services continue to face weak productivity has been fueled by strong development partner support growth, declining from 60 percent of GDP in the early and increased investor confidence. However, The Gambia 2000s to an estimated 53.9 percent in 2024. Structural must sustain current levels of investment over several constraints such as inadequate infrastructure, a shortage decades to accelerate economic growth—a prospect of skilled labor, high dependence on seasonal workers, that raises financing concerns given The Gambia’s weak and low value-added tourism continue to limit the sector’s domestic savings and high public debt levels (discussed in growth potential. Chapter 2). On the demand side, economic activity in 2024 was The contribution of net exports to growth remained supported by robust consumption and investment negative in 2024, reflecting The Gambia’s chronic from both private and public sectors, amid slowing import dependence and narrow export basket. Goods inflation and the hosting of the OIC summit. Public exports continue to be dominated by a limited number of consumption increased due to expenditures associated products, including groundnuts, vegetable fats, oil seeds, with hosting the OIC summit, which took place in Banjul oleaginous fruits, fish, and crustaceans. Goods exports in May 2024, as well as continued, though slower, public amounted to 4.8 percent of GDP in 2024, slightly below infrastructure investment. Private consumption recovered, the 5 percent average recorded between 2017 and 2023. bolstered by easing inflation and robust remittance Nonetheless, total exports expanded in 2024, largely due inflows, which reached US$776 million (30.9 percent of to higher services exports, driven by a continued recovery GDP) in 2024, up from US$747 million (32.1 percent in tourism inflows. Although exports are estimated to have grown faster than imports, the contribution of net exports to economic growth remained negative due to the large Figure 4. The number of tourist arrivals has continued to increase, nearly reaching trade deficit, which narrowed slightly from 32.2 percent pre-pandemic levels of GDP in 2023 to an estimated 28.6 percent in 2024. This structural trade imbalance is a key driver of The Tourist arrivals Gambia’s high public debt levels. 300,000 235,789 External sector vulnerabilities persisted 250,000 227,472 and the current account deficit worsened 209,135 206,936 200,000 182,795 The current account deficit (CAD) widened slightly from 5.4 percent of GDP in 2023 to 5.7 percent in 150,000 2024 due to large imports related to the OIC summit. 102,460 Goods imports increased in 2024, driven in part by goods 100,000 89,232 required for hosting the OIC summit, such as cars to transport attending delegations. Tourist arrivals increased 50,000 by 10 percent in 2024, nearly approaching pre-pandemic levels. Although higher imports contributed to a wider 0 CAD, this was partially offset by growth in services 2018 2019 2020 2021 2022 2023 2024 exports and remittance inflows. The Gambia remains Source: The Gambia Tourism Board. among the group of ECOWAS countries with a CAD Chapter 1: State of the Economy 5 GAMBIA | ECONOMIC UPDATE - 2025 Figure 5. The depreciation of the dalasi against the US dollar that began in 2022 continued Figure 6. The trade deficit narrowed but remained in 2024 high in 2024 GMD per USD Trade balance (US$ million) 71 1,400 0 69 –100 1,200 67 –200 65 1,000 63 –300 800 61 –400 59 600 –500 57 400 55 –600 53 200 –700 51 0 –800 49 2019 2020 2021 2022 2023 2024e 47 Exports of goods and services Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 Feb-21 Apr-21 Jun-21 Aug-21 Oct-21 Dec-21 Feb-22 Apr-22 Jun-22 Aug-22 Oct-22 Dec-22 Feb-23 Apr-23 Jun-23 Aug-23 Oct-23 Dec-23 Feb-24 Apr-24 Jun-24 Aug-24 Oct-24 Dec-24 Imports of goods and services Trade balance (rhs) Source: CBG. Source: CBG; IMF; World Bank staff. exceeding 5 percent of GDP, although it remained in US$95.6 million (4.1 percent of GDP) in 2023, with single digits in 2024.8 edible fruits, fish, cashews, and groundnuts as the main exports. However, the increase in goods exports continues In 2024, the trade deficit narrowed compared to the to be constrained by a narrow export base. A limited previous year despite an increased import bill, largely export basket, combined with high import dependence due to a rise in service exports. Merchandise imports and continued currency depreciation (Figure  5), has rose from US$919 million in 2023 to US$985 million contributed to a persistently high trade deficit (Figure 6). in 2024 (Appendix 1), remaining stable at approximately The recovery in tourism supported an increase in 39.3 percent of GDP in 2024—similar to 39.5 percent services exports, with the services trade balance posting recorded in 2023. The rise in imports was driven by a surplus of US$147.7 million (5.9 percent of GDP) in goods needed during the OIC summit. The Gambia’s 2024, up from US$74.7 million (3.2 percent of GDP) main merchandise imports include electricity, vegetables, in 2023. As a result, the overall trade deficit decreased rice and cereals, fuel, and oil. Goods exports reached from US$749 million (32.2 percent of GDP) in 2023 to US$121 million (4.8 percent of GDP) in 2024, up from US$716 million (28.6 percent of GDP) in 2024. 8 The CAD in ECOWAS averaged 3.9 percent of GDP in 2024, Higher current transfers in 2024 helped contain up from 2.7 percent in 2023. In terms of CAD, ECOWAS can be the CAD, despite a decline in financial inflows. The grouped into three types of countries: (i) countries with CAD below secondary income account (current transfers) increased 5 percent of GDP (Burkina Faso, Ghana, Niger, Nigeria, and Togo); from US$545.6 million (23.5 percent of GDP) in 2023 (ii) countries with a CAD between 5 and 10 percent of GDP (Benin, Cabo Verde, Cote d’Ivoire, The Gambia, Guinea Bissau, Guinea, Mali, to US$550.7 million (22.0 percent of GDP) in 2024. and Sierra Leone); and (iii) countries with a CAD in the double digits Budget support, or official transfers, declined from (Liberia and Senegal) (IMF 2024). US$70.7  million (3.0  percent of GDP) to US$48.2  million 6 Chapter 1: State of the Economy THE GAMBIA PUBLIC DEBT: AN ACHILLES HEEL? (1.9 percent of GDP) in the same period. Net official transfer agencies to comply with its reference exchange remittances recorded by the Central Bank of The Gambia rate in their transactions10 in April  2023 to address (CBG) increased from US$ 482.6 million(20.8 percent foreign exchange shortages. The steady rise in remittance of GDP) in 2023 to US$507.8 million (20.3 percent of inflows recorded over the past five years may reflect GDP) in 2024. Despite robust development assistance the re-routing of remittances through formal channels. and foreign direct investment (FDI), financial inflows This improvement is partly due to the narrowing wedge declined sharply. Net inflows in the capital account reached between official and parallel exchange rates. US$139.3 (5.6 percent of GDP) in 2024, compared to US$159.9 million (6.9 percent of GDP) in 2023, while net inflows in the financial account entered negative territory The CBG’s monetary policy stance remained over the same period—US$−45.7 million (−1.8 percent tight to address persistent inflationary of GDP) in 2024, compared to US$0.2 million (0 percent of pressures. GDP) in 2023—due to high outflows of other investments, which offset FDI inflows. Inflation has decelerated but remains in double digits due to monetary tightening and declining global The foreign exchange market has been functioning commodity prices. Inflation averaged 11.7  percent smoothly following the introduction of a new foreign in 2024, down from 16.9 percent in 2023 and above exchange policy in December 2023. The CAD has been the CBG’s target of 5 percent. Both food and nonfood financed through a combination of FDI, donor support, inflation decelerated from an average of 22.2 percent external government borrowing, and, to some extent, and 10.9 percent, respectively, in 2023 to 15.5 percent international reserves. International reserves remained and 7.0 percent, respectively, in 2024 (Figure 7). Inflation stable at US$476.6 million in 2024, slightly up from remained on a downtrend at the beginning of 2025, US$474.3 million in 2023, although the import cover reaching 10.2 percent year-on-year, in January 2025, down declined from 4.9 to 4.7 months in the same period. In from 16.0 percent, year-on-year, in January 2024. External 2024, The CBG’s reference exchange rate depreciated by factors play a key role in shaping inflation in The Gambia. 7.2 percent, year-on-year (Figure 5), while the wedge with Over the long term, inflation dynamics are influenced by the parallel exchange rate narrowed to around 2 percent, global prices of key commodities—such as food, oil, and compared to a pick-up of 10 percent in mid-2022. The fertilizer—as well as the exchange rate and the domestic smooth functioning of the foreign exchange market output gap. In the short term, global food prices and reflects the positive outcomes of the December 2023 policy second-round effects from changes in food prices and the shift, reaffirming the CBG’s commitment to a market- output gap also impact on inflation trends (Nachega et al. determined exchange rate. Previously, the CBG has faced 2023). As a net importer of essential foods and energy, criticism for attempting to control the exchange rate by, The Gambia is sensitive to changes in global prices, with for example, imposing restrictions on the withdrawal of food and energy accounting for 50 percent and 6 percent, foreign currency deposits in May 20229 and requiring respectively, of the consumer price index (CPI). Hence, commercial banks, foreign exchange bureaus, and money 10 In April 2023, the CBG introduced a requirement to commercial 9 The CBG adopted in May 2022 a directive requiring holders of banks, foreign exchange bureaus, and money transfer agencies to foreign currency deposits to make withdrawals in local currency and comply with its reference exchange rate in their transactions, which a requirement for money transfer agencies to send their proceeds to was perceived as an attempt to control the parallel exchange rate. As a banks and control shipments. These measures were, however, lifted result, the Association of Licensed Forex Bureaus (ALFOB), which has later in August 2022, and the CBG took steps in early October 2022 to at least 119 foreign exchange bureaus approved by the CBG, threatened address the wedge between its published exchange rate and the parallel in early May 2023 to close all bureaus, before finally reaching an market rate, clarifying to banks and foreign exchange bureaus that they agreement with the CBG. ALFOB argued that they cannot sustain can officially transact at a market-based exchange rate to dissipate any the losses on their operations due to the implementation of the CBG potential concerns about CBG policies. reference rate. Chapter 1: State of the Economy 7 GAMBIA | ECONOMIC UPDATE - 2025 Figure 7. Inflation is on a downward trend, Figure 8. . . . and continued tight monetary driven by moderating food prices . . . policy Inflation and components (yoy, 12 months Monetary policy rate average percentage change) 19 40 20 35 17 30 25 15 20 10 13 15 10 11 5 9 0 0 Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Apr-23 Jul-23 Oct-23 Jan-24 Apr-24 Jul-24 Oct-24 Jan-25 7 Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Apr-23 Jul-23 Oct-23 Jan-24 Apr-24 Jul-24 Oct-24 Jan-25 Energy inflation Food inflation Headline inflation (rhs) Source: World Bank Staff using data from GBoS. Source: World Bank Staff using data from CBG. the slowdown in inflation is primarily attributed to the has been maintained at 18 percent since August 2023 decline in global commodity prices. The co-movement (monetary policy rate plus 1 percentage point). Inflation between currency depreciation and domestic inflation has is negatively and significantly correlated with the policy also strengthened, reflecting the country’s high import rate and its square, suggesting that monetary policy has the dependence. The correlation between headline inflation potential to tame inflation in the short run—provided that and the domestic output gap captures the influence of rate adjustments are timely and bold (Nachega et al. 2023). fiscal and monetary policies as well as remittances—key drivers of private consumption and investment. Growth in monetary aggregates has continued to decelerate, reflecting a moderation in net domestic The CBG has maintained a tight monetary policy assets (NDAs) in the banking system. Annual growth stance to address ongoing inflationary pressures. The in broad money moderated to 7.9 percent, year-on-year, monetary policy rate was held at 17 percent during the at the end of December 2024, down from 8.8 percent monetary policy committee meetings in November 2024 in the same period in 2023 (Figure 10). This reflects and February 2025. This followed a cumulative increase a moderation in NDAs of depository corporations, of 700 basis points in March 2022 and August 2023, despite an increase in net foreign assets of both the CBG after which the policy rate was held steady (Figure 8). The and commercial banks (Figure 9). Growth in NDAs reserve requirements for commercial banks remained at decelerated from 7.2 percent in 2023 to 0 0.7 percent in 13 percent, unchanged since their reduction by 2 ppts 2024, primarily due to a decline in credit growth to public in May 2020. The standing deposit facility interest rate enterprises, which contracted by 21 percent in 2024 after increased to 4 percent in November 2024 after remaining growing by 40.3 percent in 2023. By contrast, credit to at 3 percent since May 2020. The standing lending facility government grew by 33.0 percent in 2024, up from a 8 Chapter 1: State of the Economy THE GAMBIA PUBLIC DEBT: AN ACHILLES HEEL? Figure 9. Net domestic assets contracted further Figure 10. The money supply fell further in 2024 in 2024 NFA and NDA, percentage change M2 & Reserve money 70.0 40.0 60.0 35.0 50.0 30.0 40.0 25.0 20.0 30.0 15.0 20.0 10.0 10.0 5.0 0.0 0.0 –10.0 –5.0 –20.0 –10.0 2018 2019 2020 2021 2022 2023 2024 2018 2019 2020 2021 2022 2023 2024 NFA NDA M2 Reserve money Source: World Bank Staff using data from CBG. contraction of 2.2 percent in 2023. Similarly, credit to the well above the regulatory requirement of 10 percent. The private sector accelerated from 12.0 percent in 2023 to liquidity ratio stood at 78.5 percent, above the prudential 24.3 percent in 2024.11 On the liability side of the CBG’s requirement of 30 percent. Non-performing loans remained balance sheet, slower money supply growth reflected a high at 14.6 percent (Figure 13), largely due to concentration contraction in reserve money, which fell by 5.6 percent risks in the loan portfolios of some banks. The level in 2024, following a 14.1 percent expansion in 2023. of NPLs largely exceeded the worldwide standard of After rising sharply in 2023 due to monetary tightening, 5 percent considered to be the prudential threshold for interest rates on government securities began to decline, portfolio quality (EBA, 2018). However, the portfolios with the weighted average yield averaging 6.4 percent are adequately provisioned, and the Central Bank’s stress in June 2024, down from 12.2 percent in June 2023 testing results reported in February 2025 suggest that the (Figure 12). banking sector remains resilient to potential capital and liquidity shocks. Nevertheless, the situation calls for close Despite elevated levels of non-performing loans (NPLs), monitoring since loan arrears indicate a deterioration in the banking system remains stable and financially credit risk and an increase in the probability of default, sound, though it is highly exposed to government with probable systemic effects on the financial banking borrowing. The industry aggregated risk-weighted capital sector. Still, the banking sector’s significant exposure to adequacy ratio reached 28.5 percent in December 2024, government debt remains a concern. As in previous years, commercial banks have increasingly allocated assets to 11 The increase in private sector credit despite continued monetary government securities, with claims on the government tightening was due to credit sectoral distribution. Consumer credit reaching 63.8 percent of banks’ domestic assets as of is not affected by monetary tightening, unlike other sectors such as December 2024, higher than 31.3 percent for claims on agriculture, construction, distributive trade, and tourism, for which the private sector (Figure 11). Although private sector credit drops significantly after tightening (Momodou 2021). The Gambia’s banks focus on financing consumer goods and tend not to credit increased in 2024, it continues to be crowded engage in investment financing (Bukhari 2005), which could explain out by elevated government borrowing. Banks’ credit the rise in private borrowing despite monetary tightening. is skewed toward the public sector, representing almost Chapter 1: State of the Economy 9 GAMBIA | ECONOMIC UPDATE - 2025 Figure 11. Bank assets are still dominated by Figure 12. The cost of government domestic government debt borrowing was lower in 2024 Claims on government and the private sector Financial soundness indicators, percentage as share of banks’ domestic asset 20 100 90 15 80 70 60 10 50 40 5 30 20 0 10 Jun-22 Aug-22 Oct-22 Dec-22 Feb-23 Apr-23 Jun-23 Aug-23 Oct-23 Dec-23 Feb-24 Apr-24 Jun-24 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 3 months treasury bills rate, monthly average Claims on the private sector 6 months treasury bills rate, monthly average Claims on government, net 12 months treasury bills rate, monthly average Source: World Bank Staff using data from CBG. twice the share of banks’ credit to the public sector in Sub- Figure 13. The financial sector remains sound Saharan Africa12. The concentration of banks’ assets in Financial soundness indicators, percentage government debt is partly due to an unfavorable business environment that increased banks’ risk aversion. 100 16 14 The large exposure of banks to the government and 80 12 the heavy dependence of their income on government 60 10 securities could have an impact on the stability of 8 the banking system. As highlighted in The Gambia 40 6 Financial Sector Assessment Program of June 2022, Bank 4 profitability could decline in case of a rapid fall in rates on 20 government securities, as they did in 2020 when negative 2 0 0 2019 2020 2021 2022 2023 2024 12 Total domestic credit to the private sector in The Gambia reached 8.07 percent of GDP in 2020, the fifth lowest in a sample of 35 SSA Risk weighed capital adequation ratio (CAR) (lhs) countries (where the average was 26.82 percent of GDP). Out of total Liquidity ratio (lhs) Non performaning loans (NPLs) (rhs) domestic credit, bank credit to the private sector reached 7.58 percent of GDP in 2020, the fourth lowest in a sample of 38 SSA countries Source: World Bank Staff using data from CBG. (where the average was 23.45 percent of GDP). By contrast, The Gambia’s bank credit to the government was the fifth highest (21.81 percent of GDP in 2020) in a sample of 34 SSA countries (where the average was 12.59 percent of GDP) (https://www.theglobaleconomy. com/rankings/bankcredit_to_government/Sub-Sahara-Africa/ (consulted on April 10, 2025). 10 Chapter 1: State of the Economy THE GAMBIA PUBLIC DEBT: AN ACHILLES HEEL? real interest rates on government securities reduced both improved economic activity and revenue-boosting earnings from the bulk of banks’ assets. This adds to measures pursued over the last three years. These measures other vulnerabilities in the banking sector such as: (i) the included a series of customs reforms to improve the tax systemic risk posed by the high concentration of deposits administration and processes such as rolling out Asycuda in funding portfolios; (ii) liquidity risks, as government World and approving a duty waiver policy in 2024, which securities are not particularly liquid due to the lack of a introduced structured rules for administering, monitoring, secondary market; and (iii) longstanding structural issues and reporting duty exemptions.14 The policy contributed that hinder bank financial intermediation, including to an increase in GDP of 0.6 ppts, bringing the corporate information asymmetries, weak contract enforcement, income tax to 2.3 percent of GDP in 2024. As a result, and foreclosure issues (World Bank, 2023a). duty exemptions declined to 2.4 percent of GDP, down from 3 percent in 2023. Tax revenue collection exceeded budget forecasts by around 1 ppt of GDP. The fiscal deficit has narrowed despite persistent fiscal vulnerabilities and high public debt Non-tax revenue remained stable in 2024, buoyed by administrative fees, but fell short of budget targets. It The fiscal deficit narrowed from 3.8 percent of GDP in stood at 2.8 percent of GDP in 2024, the same level as 2023 to an estimated 3.5 percent in 2024, supported by in 2022 and 2023, primarily supported by administrative increased domestic revenue mobilization. Total revenue fees. However, revenue underperformed by 0.5 ppts of increased to 21.1 percent of GDP in 2024, up from GDP due to low compliance and enforcement. 20.7 percent in 2023, buoyed by expanded economic activity and revenue-boosting measures. Domestic revenue Current spending has increased significantly, while increased considerably, reaching 14.0 percent of GDP in externally financed capital spending has decreased 2024, up from 12.5 percent of GDP in 2023, driven by following the completion of OIC-related infrastructure higher tax revenue that more than offset a proportional projects. Current spending rose from 13.0 percent of GDP decline in grants while non-tax revenues remained in 2023 to 14.6 percent in 2024, driven by higher spending stable (Appendix 2). Grants decreased by 1.1 ppts to on goods and services (related to the OIC summit), interest 7.2 percent of GDP in 2024, driven by both budget and payments (due to high Treasury bill issuance and debt project support. Total expenditure increased moderately rollovers), and current transfers (including unbudgeted from 24.5 percent of GDP in 2023 to 24.6 percent in payments to settle arrears owed by the national electricity 2024, due to a substantial 1.6 ppts of GDP increase in and water company, NAWEC). Capital expenditure current expenditure, which offset a nearly proportional decreased as share of GDP from 11.5 percent in 2023 to fall in capital expenditure. Despite the increase in total spending, the faster growth in revenue helped reduce the fiscal deficit, which declined from 3.8 percent of GDP 14 Other reforms include the rollout of Asycuda World; the in 2023 to 3.5 percent in 2024—below the ECOWAS implementation of the Single Window platform (to allow traders to average of 4.5 percent of GDP13 (Figure 14). submit documents and data requirements through a single entry point just once), e-tracking, and the digital weighbridge; the completion The upward trend in tax collection was sustained of the taxpayer update for larger taxpayers to improve tax assessment by continued implementation of revenue-boosting and compliance; the deployment of a customs and inland border measures. Tax revenue increased from 9.8 percent of control policy in all border stations to standardize border clearance procedure; the implementation of electronic excise stamp for key GDP in 2023 to 11.2 percent in 2024, driven by higher manufacturing businesses and importers; the implementation of the corporate income taxes and customs revenue, reflecting fuel marking process; the setting up of a telecom measurement system; and the approval in 2024 of a Duty Waiver Policy, which established 13 The fiscal deficit in most ECOWAS countries remained below 5 structured rules for the administration, monitoring, and reporting of percent of GDP, except for Senegal (IMF 2024). duty exemptions. Chapter 1: State of the Economy 11 GAMBIA | ECONOMIC UPDATE - 2025 Figure 15. While public debt is on a downward Figure 14. The fiscal deficit narrowed in 2024 trend, it remains high Fiscal stance (percent of GDP) Public debt (percent of GDP) 30 15 100 90 25 80 20 10 70 15 60 50 10 5 40 5 30 20 0 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024e 10 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Total revenue and grants Total expenditures Fiscal deficit, incl. grants (rhs) Domestic debt External debt Fiscal deficit, excl. grants (rhs) Total debt Source: MOFEA; IMF; World Bank staff. 10 percent in 2024. External resources financed 84 percent 2023, reaching an estimated 70.7 percent in 2024, of capital spending in both years. down from 84 percent in 2022 and 75.6 percent in 2023 (Figure 15). The Gambia remains at a high risk The fiscal deficit was mainly financed through external of both external and overall debt distress, as the debt level borrowing, with net external borrowing making up remains well above the 40 percent of GDP prudential 60 percent of total deficit financing and 2.7 percent limit for developing countries and the 2024 ECOWAS of GDP. External financing included one concessional average of 59 percent of GDP.15 loan contracted from the Islamic Development Bank (IsDB) and resources under the International Monetary Extreme poverty declined in 2024, but major Fund’s (IMF) ongoing External Credit Facility 2024–2026 obstacles to rapid poverty reduction remain arrangement. The share of net domestic financing increased from 14 percent in 2023 to 40 percent in 2024, mainly The incidence of extreme poverty declined in 2024. through the issuance of short-term securities. Increased Rising labor incomes, increased international remittances, borrowing for the fiscal deficit continues to crowd out private sector credit, as a large portion of bank credit is 15 ECOWAS countries can be divided up into: (i) countries with directed toward claims on the government. public debt below 50 percent of GDP (Guinea and Sierra Leone); (ii) countries with public debt around 50–60 percent (Benin, Burkina The public debt stock has declined but remains high, Faso, Cote d’Ivoire, Liberia, Mali, Niger, Nigeria); and (iii) countries keeping The Gambia at a high risk of debt distress. with high public debt above 60 percent of GDP (Cabo Verde, Gambia, The public debt-to-GDP ratio began to decline in Ghana, Guinea Bissau, Senegal, and Togo) (IMF 2024). 12 Chapter 1: State of the Economy THE GAMBIA PUBLIC DEBT: AN ACHILLES HEEL? Figure 16. Share of extreme poor Figure 17. Number of extreme poor 35 500,000 450,000 30 400,000 Share of the extreme poor 25 350,000 Numberof poor 300,000 20 250,000 15 200,000 10 150,000 100,000 5 50,000 0 0 2019 2020 2021 2022 2023 2024 2025 2026 2027 2019 2020 2021 2022 2023 2024 2025 2026 2027 National Rural Urban Rural Urban Source: Calculations based on 2020-IHS. Note: Poverty rates are measures using the international poverty line of US$2.15 in 2017 PPs. Actual data: 2020. Nowcast: 2021–2024. Forecasts are from 2025 to 2027. Projections are made using a microsimulation tool. and easing inflationary pressure contributed to improved meaning that 56.4 percent of WAP are outside the labor household living standards and a reduction in the extreme market. There are also many underemployed workers with poverty rate to 16.7 percent (measured using the international the labor underutilization rate16 reaching 41.5 percent poverty line of US$2.15 in 2017 PPPs) (Figure 16). (50.5 percent among women and 31.8 percent among While this represents nearly 430,000 individuals living men) in the same period. In addition, employment is in extreme poverty, around 18,000 people escaped mainly informal and unwaged, with 79.4 percent of all extreme poverty between 2023 (when 17.3 percent of workers being engaged in informal employment (ranging the population lived in poverty) and 2024 (Figure 17). from 74.7 percent of male workers to 84.7 percent These trends reflect a gradual decline in poverty since of female workers ), and only 30.8 percent of workers 2020, when the rate stood at 17.2 percent, but significant having waged jobs (ranging from 17.3 percent of female challenges to inclusive growth remain. workers to 43.5 percent of male workers ) in 2023 (World Development indicators). Furthermore, a large The labor market remains the main source of proportion of working-age youth (aged 15–24) is left household income but suffers from entrenched issues behind by the labor market, with only 30.9 percent such as low labor force participation, significant labor of people in this age group being actively engaged in underutilization, high employment informality and the labor market by working in 2023, far lower than large gender disparities. According to The Gambia Labor Force Survey (GLFS) 2022–2023, the labor market 16 Labor underutilization combines unemployment (which was faces a low labor force participation rate at 43.6 percent estimated at 7 percent in the GLFS 2022–2023), time-related of working age population (WAP), divided between underemployment, and persons who are outside the labor force but 47.9 percent for men and only 39.6 percent for women, are considered as potential labor force. Chapter 1: State of the Economy 13 GAMBIA | ECONOMIC UPDATE - 2025 66.3 percent in early 1983, which reflects declining higher than 7.7 percent in urban areas. Nevertheless, employment opportunities over the years (World Bank, the largest number of poor individuals reside in regions 2024). All these issues constrict income growth17. with relatively lower poverty rates, particularly in densely populated urban settlements in the Brikama region near Inflation continues to pose a challenge, especially the capital. rising food prices. The headline CPI slowed from 16.9  percent, year-on-year, in 2023 to 11.7  percent The Gini index was estimated at 38.7 in 2024, in 2024, driven by higher energy and food prices and highlighting disparities in access to services and currency depreciation. Food inflation slowed, although it opportunities despite minimal household monetary remained elevated at 15.5 percent in 2024 (compared to inequality. High poverty levels correlate with deficits 22.2 percent in 2023) and continues to erode households’ in human capital and limited access to essential real purchasing power. Inflation disproportionately infrastructure. While living standards have improved in affects poor households, which allocate around half of recent years, disparities remain. From 2023 to 2019, access their budgets to food, resulting in significant inequality to water, sanitation, and electricity improved for all but in inflation impacts. the poorest quintile. For example, access to protected water rose from about 15 to 30 percent for the second Spatial disparities persist, with monetary poverty quintile, and electricity access rose from 20 to 80 percent overlapping with human development challenges. for the middle quintile. However, households in the Poverty rates are higher in rural areas dominated poorest wealth quintile saw no improvements in access to by agricultural employment, while the urban poor largely basic services, and access to electricity and water remained work in the informal service sector. In 2024, the poverty under 20 percent. rate was an estimated 27.8 percent in rural areas, much 17 Contribution of the labor force participation rate in per capita 1.2. Outlook, risks and challenges value-added growth is marginal due to low labor force participation The outlook is broadly positive with robust rate. Underemployment translates into low productivity and low wages. Wide gender gaps in labor market outcomes are notably growth underpinned by a rebound across all attributed to wide gaps in educational attainment. Among adults sectors aged 15–64 in 2018, 46 percent of women did not complete elementary school, higher than 36 percent of men. Together with The medium-term macroeconomic outlook points to traditional gender norms, this contributes to significant gender gaps a continued recovery. Growth is projected to average in labor market outcomes, including among the self-employed. 5.5 percent (3.3 percent per capita) in 2025–2027, driven Three out of four women of working age have no access to their by increased activity across all sectors, despite a deceleration own earnings, as opposed to nearly half of men. Men are 2.3 times in services as tourism is expected to slow down due to more likely to be wage-employed and 42 percent more likely to run their own businesses than women. By contrast, women are 3.7 times global economic uncertainty, , alongside capital spending- more likely to be unpaid family workers and 26 percent more likely based fiscal consolidation in 2026. to be engaged in subsistence agriculture. Moreover, self-employed women suffer worse labor market outcomes and are much less likely Agriculture is expected to grow steadily, contingent to obtain financial assistance from friends and family than their male on favorable rainfall, ongoing fertilizer subsidies, counterparts. On average, female-run business profits are 60 percent and increased investments in high-yield seeds. Value of those of male-run businesses. While female businesses represent addition will be driven by government plans to increase 44 percent of all businesses in The Gambia, they account for only land preparation, maintain fertilizer support, promote 8 percent of businesses with paid employees. Compared to men, women also have less access to financial services. Only 15 percent of high-yield seed varieties, and expand small and medium women have an account at a formal bank, which is half the rate of enterprise (SME) matching grants and other incentives men (World Bank 2022c). to engage the private sector and attract youth and women 14 Chapter 1: State of the Economy THE GAMBIA PUBLIC DEBT: AN ACHILLES HEEL? into agriculture and improve market access. The consumption and investment. The sector will benefit upcoming Gambia Incentive-Based Risk Sharing System from ongoing large infrastructure projects (e.g., urban for Agricultural Lending project, backed by the African and rural road construction, port expansion, and energy Development Bank, aims to enhance lending from projects); sustained public and private construction; financial institutions for activities related to agricultural improvements in the business environment (bolstered value chains, boosting agricultural production. In by a vast judicial reform agenda, updated regulations to particular, The Gambia’s five-year Livestock Master improve access to finance, upcoming digitalization of the Plan and Livestock Sector Strategy, updated veterinary business registration process, etc.; creation of a special legislation, and the Animal Health Act of 2023 are economic zone; and a continuation of public policies expected to boost the livestock subsector. The gradual following the democratic transition to improve areas implementation of new regulations to reduce aflatoxin such as state-owned enterprises (SOEs) and governance. exposure in key value chains will also enhance compliance New regulations are expected to encourage private sector with safety standards and boost agricultural production participation in energy generation and increase the share of renewable energy. Growth in industry will be driven Services are expected to continue to grow, assuming primarily by: (i) construction, (ii) mining and quarrying, a sustained recovery in tourism. Trends in the tourism and (ii) electricity, gas, steam, and air conditioning. sector over the past three years suggest that tourism However, while private consumption is set to remain arrivals will reach—or even exceed—pre-pandemic high, deceleration is expected as remittances are likely levels, driven by the accelerated implementation of to decline following a slow pace of growth in advanced a World Bank-supported investment project (World economies, given the challenges posed by the current Bank 2022) and the implementation of the government’s global trade environment. tourism policy action plan (UNCTAD 2022), which outlines six strategic objectives: (i) promoting The Inflation is projected to return to single digits by 2025 Gambia as a “must experience” and “revisit destination;” and converge with the CBG’s target in the medium term. (ii) increasing activities at tourism centers; (iii) promoting Headline inflation fell from 16.7 percent, year-on-year, in community-based tourism; (iv) positioning The Gambia February 2024 to a 34-month low of 9.4 percent, year- as a welcoming, safe, clean, hygienic, and accessible on-year, in February 2025, driven mainly by declining destination; (v) expanding the number of five-star hotels; food prices. Over the same period, food inflation fell from and (vi) facilitating the availability of skilled workers 22.2 percent to 11.0 percent, year-on-year, while non- in the tourism sector (UNCTAD 2022). Growth is food inflation fell from 10.2 percent to 7.2 percent, year- expected across various services subsectors, including on-year. Inflation is projected to remain in single digits accommodation and food service activities; financial and through 2025 and reach the CBG’s 5 percent target in insurance activities; wholesale and retail trade; real estate 2027, reflecting domestic monetary tightening and easing activities; information and communication; transport global commodity prices (Table 2). and storage; and wholesale and retail trade. However, while the service sector is projected to continue growing, The fiscal deficit is expected to narrow further, aided a deceleration is expected as tourism is set to slow down by fiscal consolidation. The fiscal deficit is projected to following decreased demand from advanced economies average 1.0 percent of GDP in 2025–2027, supported given the challenges of the current global trade context. by stronger domestic revenue mobilization and spending measures. Revenue measures will stem from the Domestic Private consumption and investment are expected Revenue Mobilization Strategy and The Gambia Revenue to boost growth in the industry sector, supported Authority’s Corporate Strategic Plan for 2025–2029. by stable remittance inflows and resilient public These include reforms to the investment code to streamline Chapter 1: State of the Economy 15 GAMBIA | ECONOMIC UPDATE - 2025 Table  2. Medium-term outlook 2022 2023 2024e 2025p 2026p 2027p Output and prices (Annual percentage change, unless otherwise indicated) Real GDP 5.5 4.8 5.7 5.6 5.3 5.5 Private consumption 2.6 –4.7 4.4 4.8 4.2 4.1 Government consumption –2.6 5.8 7.1 6.8 4.0 4.5 Investment 3.6 7.6 7.1 8.0 4.1 4.2 Exports of goods and services 8.8 28.0 18.4 34.0 18.0 17.6 Imports of goods and services –1.8 4.8 7.2 3.0 6.3 6.2 Sectoral contributions to growth Agriculture (ppts) 1.7 0.5 0.9 0.9 1.2 1.1 Industry (ppts) 0.7 1.8 0.5 1.1 0.9 1.3 Services (ppts) 2.7 2.1 4.0 3.2 2.8 2.7 Consumer prices (Annual average) 11.5 16.9 11.7 9.0 6.5 5.0 GDP deflator 8.1 13.6 11.7 9.1 6.3 4.0 Monetary sector (Annual percentage change) Broad money (M2) 7.1 8.8 7.9 7.9 5.9 5.5 Claims on the private sector 25.0 12.0 24.0 –9.5 10.9 –0.5 Claims on the government (net) 18.0 2.1 7.0 5.5 5.6 5.1 Net foreign assets –9.7 11.4 18.7 6.8 5.7 2.9 Central government finance (In percent of GDP) Total revenue and grants 19.6 20.7 21.1 23.0 22.9 22.8 Total expenditure 25.0 24.5 24.6 24.5 24.3 23.6 Overall balance (incl grants, comm. basis) –5.3 –3.8 –3.5 –1.4 –1.4 –0.8 Overall balance (excl grants, comm. basis) –12.4 –12.2 –10.6 –9.5 –9.0 –7.8 Grants 7.0 8.4 7.1 8.1 7.6 7.0 Balance of payments (In percent of GDP) Balance of goods and services –26.0 –32.2 –28.6 –26.4 –25.4 –24.1 Exports fob 12.4 14.3 17.4 17.4 18.0 18.8 Imports fob 38.3 46.5 46.0 43.9 43.4 42.9 (continues) 16 Chapter 1: State of the Economy THE GAMBIA PUBLIC DEBT: AN ACHILLES HEEL? Table 2. Medium-term outlook (Continued) 2022 2023 2024e 2025p 2026p 2027p Current transfers (net) 23.3 23.5 21.7 20.2 19.9 19.2 Current account balance (incl official transfers) –4.3 –5.5 –5.7 –5.9 –3.6 –2.1 Overall balance of payment –5.0 –2.5 –3.7 –3.1 –3.4 –1.6 Foreign Direct Investment 4.7 4.1 3.8 3.6 3.4 3.3 Debt (In percent of GDP) Public debt (external and domestic) 84.0 76.9 71.2 65.3 60.3 56.7 External debt 52.1 47.9 43.9 38.0 32.9 28.9 Interest payments to revenue (%) 17.4 17.2 21.4 20.3 17.7 13.9 Poverty Percentage International poverty rate ($2.15 in 2017 PPP) 16.5 17.3 16.7 15.9 152 14.4 Lower middle-income poverty rate ($3.65 46.4 47.6 46.5 45.3 44.1 42.9 in 2017 PPP) Upper middle-income poverty rate ($6.85 82.2 83.3 82.2 81.0 80.0 79.2 in 2017 PPP) Memorandum items Nominal GDP (LCU Billions) 119.5 142.3 168.1 193.6 216.6 237.5 Nominal GDP (US$ Millions) 2,156.6 2,324.8 2,507.5 2,755.8 3,008.4 3,234.0 Real GDP per capita (annual % change) 3.0 2.4 3.4 3.3 3.0 3.3 Source: MOFEA, IMF and World Bank estimates as of May 2025. tax exemptions; digitalize tax administration and customs, anticipate extra revenue from Africa 50’s Asset Recycling including electronic VAT invoicing; broaden the tax base; Program. Spending measures include enforcing cash-based improve compliance; and increase certain administrative budget execution to align spending with available resources; fees. Additionally, there are plans to adjust domestic fuel strengthening public financial management to strengthen prices to mitigate revenue losses. The authorities plan to budget processes and accountability, enhance the efficiency introduce a 5 percent social security contribution, a sugar of public spending, and reduce arrears and governance and levy, and a new duty on scrap-metal exports. Efforts are corruption vulnerabilities; extending project investment also underway to collect additional revenue, including prioritization and selection tools by the Gambia Strategic through privatization and the sale of stolen assets under Review Board to domestically financed and PPP projects, the Janneh Commission.18 Moreover, the government with the aim to enhance efficiency and contain spending; overhauling the SOE sector to reduce their dependence on 18 The Janneh Commission was initiated by President Adama Barrow public resources; and consolidating redundant agencies. in July 2017 to investigate the financial and other related activities of certain public bodies, enterprises, and offices as regards their dealings Public debt is decreasing and remains sustainable, with former President Yahya Jammeh. although it faces high risks of external and overall Chapter 1: State of the Economy 17 GAMBIA | ECONOMIC UPDATE - 2025 debt distress. Public debt is expected to average Rising global and domestic risks cloud 60 percent of GDP between 2025 and 2027, supported to the outlook by economic growth and fiscal consolidation. However, The Gambia is expected to remain at high risk of Significant downside risks cloud the economic outlook. While the baseline projects a continued economic recovery, debt distress, although debt is deemed sustainable, as the outlook is threatened by persistent external shocks highlighted in the joint IMF/World Bank DSA. Breaches related to an escalation or spread of global and regional of indicative thresholds highlight limited space for conflicts, debt vulnerabilities, persistent balance of payment additional borrowing and underscore the importance of pressures, climate-related events, fiscal slippage, the impact building fiscal buffers to manage increased debt-service of monetary tightening on the cost of domestic debt service, costs. Debt servicing remains a major driver of public political uncertainty, and uncertainty about US foreign aid spending. Following the end of the external debt service and global trade environment. deferral, debt service allocations (for both domestic and external debt) are projected to reach 29 percent Persistent regional and global geopolitical tensions of 2025 budget (GMD 11 billion)—rising from an obscure medium-term growth prospects. The Gambia estimate of 6.2 percent of GDP in 2024 to 6.5 percent depends heavily on imports of essential goods such as food in 2025. This is well above the combined budget of five (with over 50 percent of the food supply being imported), ministries, including education, health, and agriculture. oil, fertilizer, and medicines. An escalation or spread of The expiration of debt-service deferrals will potentially conflict in the Middle East and Near East, with the ensuing lead to higher debt-service payments due in those years impact on global commodity prices, tourist arrivals, and and tighter liquidity, posing a fiscal risk in short to remittance inflows, would worsen the country’s growth medium term. and fiscal and external balances. The Gambia’s persistent high import bill fuels inflation, compounding the adverse The CAD is expected to deteriorate in 2025 and effects of Russia’s invasion of Ukraine.19 Furthermore, The improve in the medium term due to improved trade Gambia depends on remittances and tourist arrivals from and fiscal conditions. It is expected to increase at advanced economies, especially Europe. Weaker-than- 5.9  percent of GDP in 2025, due to lower services expected growth in Europe could undermine the recovery exports and remittances as a result of the challenges posed in tourism and reduce capital and remittances inflows. by the current global trade environment, before falling In the short to medium term, fiscal risks may weaken to 2.4 percent in 2026–27 assuming an improved global fiscal management and macroeconomic stability. These trade environment, the resolution of cross-border export risks stem from internal and external factors, exacerbating disruptions, increased groundnut exports, and enhanced the fiscal deficit and public debt. Internal fiscal risks include fiscal balances in line with the authorities’ consolidation weaker-than-expected growth; contingent liabilities from efforts. Remittance inflows are expected to remain robust, SOEs; and rising costs of credit due to high monetary policy albeit slowing due to the impact of the current global trade rates. External fiscal risks include weaker-than-expected environment on economic growth in advanced economies grants; higher interest rates relative to past concessional in the near term, which is likely to affect migrants’ terms, which would increase external debt servicing costs; revenues. The CAD will be financed through capital the resumption of external debt service payments starting transfers (e.g., development aid), foreign investment, and in 2025; and other external price shocks. The resumption public-sector debt financing. While foreign exchange of external debt servicing obligations will likely absorb reserves are projected to decline in the medium term, resources from critical social and infrastructure investments, partly due to the expiration of debt service deferrals, negatively impacting economic growth. Resource scarcity they are expected to remain at an adequate level (around 4 months of imports), supported by disbursements from 19 Wheat imports from Ukraine represented 84 percent of The Gambia’s development partners. total wheat imports between 2018 and 2020 (FAO). 18 Chapter 1: State of the Economy THE GAMBIA PUBLIC DEBT: AN ACHILLES HEEL? may induce liquidity pressure and new financing needs, Extreme weather events pose a significant threat to growth particularly given The Gambia’s limited borrowing and long-term poverty reduction. The Gambia is highly capacity in the near term. Increased domestic government vulnerable to climate shocks. Reports of natural disasters borrowing raises banks’ exposure to debt and risks public increased from 6.3 percent in 2015 to 11.8 percent in insolvency, crowds out private sector credit, and jeopardizes 2020. Climate-related disasters have consistently subdued macroeconomic stability. Furthermore, fiscal slippage tied economic growth, pushed vulnerable households into to the 2026 presential election or unexpected natural poverty, and worsened fiscal and debt outcomes. Poor disasters could undermine fiscal consolidation efforts. households, women, and female-headed households are disproportionately affected by climatic shocks, as they are Monetary tightening has raised the cost of servicing overrepresented in agriculture and livestock activities and domestic debt and could continue to weigh on public have limited or no access to protection mechanisms. finances. Following monetary policy tightening, The Gambia’s Treasury bill yields have increased sharply, Political uncertainty surrounding the upcoming following a long period of low interest rates. Although presidential election could undermine macroeconomic interest rates on government securities were trending lower stability. Following the 2016 presidential election that led in 2024 than in 2023, they remain above their 2022 levels. to regime change, The Gambia held a second successful Yields on the country’s 3-month Treasury bill rose from presidential election in 2021 and peaceful legislative and 1.4 percent in June 2022 to 9.1 percent in June 2023, local elections in 2022 and 2023, respectively. The next before settling at 6.3 percent in June 2024. Yields for its presidential election is scheduled for December 2026. 6-month T-Bills increased from 4.3 percent in June 2022 However, the National Assembly has not concluded its to 11.8 percent in May 2023, before falling to 4.5 percent review of the proposed Constitution bill, raising questions in June 2024. Finally, yields for 12-month T-Bills increased about the bill’s prospects and future constitutional from 4.3 percent in June 2022 to 16.2 percent in June 2023, reforms, including the retroactivity of the two-term limit before setting at 8.5 percent in June 2024. As a result, interest on presidential mandates. Uncertainty tied to the 2026 payments increased from GMD 2.6 billion (2.2 percent of presidential election could slow democratic consolidation GDP) in 2022 to GMD 3.0 billion (2.1 percent of GDP) in and delay critical economic reforms. 2023 and GMD 5.0 billion (3.0 percent of GDP) in 2024, of which 81 percent were dedicated to domestic interest Shifts in US foreign aid policy and global trade dynamics payments. Continued issuance and rollover of short- could also affect The Gambia’s outlook. In 2024, term debt could sustain high domestic interest payments the United States, through its Millennium Challenge and further strain public finances, especially alongside the Corporation (MCC), disbursed US$2.4 million to resumption of external debt service payments. support governance, health, and population initiatives in The Gambia. The country benefits from MCC’s Global and regional conflicts may exert persistent US$25 million Threshold Program focused on improving pressure on the country’s balance of payments, widening the government’s capacity to deliver reliable electricity to the external deficit. A sharp rise in international commodity Gambian homes and businesses. The US administration’s prices due to global and regional geopolitical tensions or final decision on foreign aid will therefore have an impact a decline in tourist arrivals due to these tensions would on social and infrastructure programs.20 In addition, amplify the external deficit. While foreign exchange disruptions to global trade—including trade tariffs—pose reserves are already projected to decline due to the risks to The Gambia’s economy due to its heavy reliance expiration of debt servicing deferrals, further reductions on remittances, tourism, and imports of basic goods. could impair the country’s capacity to service external debt and result in shortages of essential imports. This would likely increase pressure on the domestic currency and inflation, significantly worsening household welfare. 20 https://foreignassistance.gov/cd/gambia/2024/obligations/1. Chapter 1: State of the Economy 19 Chapter  2: The Gambia’s Public Debt: An Achilles Heel? GAMBIA | ECONOMIC UPDATE - 2025 This chapter analyzes The Gambia’s debt trajectory, triggers (IDA and IMF 2008).21 However, starting in the its impact on the macroeconomy, and what the early 2010s, public debt began to rise again, reaching country can do to finance public expenditure needs 83.2 percent of GDP in 2022. Owing to progress in while avoiding the risks posed by excessive debt domestic revenue mobilization and efforts to limit accumulation. The six sections in this chapter respectively external borrowing to concessional loans, public debt provides an analysis of (i) The Gambia’s debt trend has since started to decline—although it remained and composition, (ii) main reasons for financing the high at 76.9 percent of GDP in 2023 and an estimated Gambia’s economy through debt, (iii) debt’s impact on 70.6 percent of GDP in 2024 (Figure 18). The factors economic growth, (iv) key macroeconomic channels behind the rise in debt are discussed in the next section. through which debt influences growth in the case of Public debt is dominated by external debt, which averages The Gambia, (v) impact of the expiry of the external two-thirds of total public debt. In September 2024, total debt service deferrals on economic growth, and (vi) a public debt reached US$1,804.2 million, representing menu of policy options that can help The Gambia strike 73.4ercent of GDP. At the same time, public external debt a prudent balance between the level of public debt to was US$1,163.2 million, representing 64.5 percent of finance public expenditure needs, while sustaining total outstanding public debt, and public domestic debt economic growth, and avoiding the risks posed by was US$641.0 million, representing 35.5 percent of total excessive debt accumulation. outstanding public debt (Figure 19). External public debt is dominated by multilateral debt, 2.1. Public debt has soared over which represents about two-thirds of total external debt. the last decade, reversing the As of September 2024, multilateral creditors accounted gains achieved through the HIPC initiative in 2007, with most current debt linked to foreign 21 Fully implemented triggers related to: (A) poverty reduction: borrowing (i) preparation of a full Poverty Reduction Strategy Paper through a participatory process and satisfactorily implemented for one year, and Public debt in The Gambia declined significantly (ii) improvement of the poverty database and monitoring capacity; following the Heavily Indebted Poor Countries (B) macroeconomic stability: (iii) satisfactory implementation of the Poverty Reduction and Growth Facility (PRGF)-supported (HIPC) initiative in 2007, but it nearly doubled program; (C) governance: (iv) strengthening of public expenditure to 76.9 percent of GDP by 2023. After reaching management, including the issuance of annual public reports on 75.2 percent of GDP in 2000, government gross debt budget execution and semiannual reports on the use of interim declined to 38 percent in 2007 upon completing the HIPC Initiative debt relief ); (D) social sector reforms: (v) use of HIPC Initiative. This achievement required meeting budgetary savings from HIPC interim debt service in accordance with six key conditions: (i)  preparation and satisfactory approved annual budgets to implement education and health reform programs, including (vi) increasing the number of teachers for lower implementation of a full Poverty Reduction Strategic basic education graduating from The Gambia College, (vii) ensuring Paper for at least one year and improvements in poverty appropriate funding of a trust fund for girls’ scholarships in the poorest monitoring; (ii) maintenance of macroeconomic regions, (viii) increasing the share of primary and secondary healthcare stability; (iii) strengthening of public expenditure within the recurrent health budget; and (E) structural reforms to management; (iv) proper use of interim HIPC debt promote private sector development: (ix) establishment of a functional multisector regulatory agency. Partially implemented triggers include relief; (v) education and health sector reforms; and (D) social sector reforms: (x) increasing the number of births attended (vi) structural reforms. Overall, The Gambia had fully by a person trained in antenatal care; and (E) structural reforms: implemented nine out of eleven completion point (xi) bringing The Gambia’s two major public groundnut processing triggers and partially implemented the other two plants to the point of sale. 22 Chapter 2: The Gambia’s Public Debt: An Achilles Heel? THE GAMBIA PUBLIC DEBT: AN ACHILLES HEEL? Figure 18. Public debt has soared over the past decade, wiping out the gains made from the Figure 19. External debt represents the bulk HIPC initiative in 2007 of public debt General government gross debt, 2000–2023 External debt and domestic debt, percent of GDP 120.0 90 80 100.0 70 80.0 60 50 60.0 40 40.0 30 20 20.0 10 0.0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 GMD billions Percent of GDP External debt Domestic debt Source: WDI. for 68 percent of outstanding external public debt respectively. The remaining debt was distributed between (Figure 20). Key creditors include the IsDB, International China, United Arab Emirates, Venezuela, Libya, and Monetary Fund (IMF), International Development Taiwan (Figure 22). Association (IDA), and Arab Bank for Economic Development in Africa (BADEA), which together Domestic debt is primarily owed to commercial banks represent 74 percent of multilateral debt. The remaining and consists of mainly long-term government securities. debt was shared more or less equally between the OPEC As of March 2024, 42 percent of domestic public debt Fund, International Fund for Agricultural Development, was owed to commercial banks, while 29 percent was European Investment Bank (EIB), African Development owed to commercial banks and non-banking financial Fund (AfDF), and ECOWAS Development Bank, with institutions, 20 percent to the CBG, and 9 percent to other creditors, such as African Development Bank/ non-banking financial institutions (Figure  23). Debt Nigeria Trust Fund and Islamic Solidarity Fund for comprises T-bonds (51 percent), T-bills (45.9 percent), Development, representing a marginal share (Figure 21). and SAS bills or Islamic bills (2.9 percent). Focusing on The average interest rate on The Gambia’s external debt longer term maturities is part of the government’s effort to is 1.2 percent, with an average maturity of 9.3 years, with reduce debt-related roll-over risk. T-bonds include 3-year multilateral debt having a longer average maturity of T-bonds, representing 44 percent of the total T-Bonds 24 years and a 3-year grace period. portfolio at an average interest rate of 14.30 percent, followed by 30-year T-bonds at 38 percent (with an External bilateral debt is mainly owed to Saudi Arabia, average rate of 7 percent), 5-year T-bonds at 13 percent Kuwait, and India, which account for 81 percent of (with average rate of 8.7 percent), 2-year T-bonds at external bilateral debt. As of end of September 2024, 3.5 percent (with an average rate of 18.36 percent), and Saudi Arabia, Kuwait, and India accounted for 34 percent, 7-year T-bonds at 1 percent (with an average rate of 27 percent, and 20 percent of external bilateral debt, 12 percent) (Figure 24). Chapter 2: The Gambia’s Public Debt: An Achilles Heel? 23 GAMBIA | ECONOMIC UPDATE - 2025 Figure 20. External public debt is mainly owed Figure 21. . . . mainly such as the IsDB, IMF, IDA, to multilateral creditors . . . and BADEA External debt by creditor, USD million and Multilateral debt by creditor, percentage, September 2024 percentage, September 2024 ECOWAS: 21 (2%) 4% IDA: BADEA: 16% 11% AfDF: 6% 357 (31%) EIB: 7% IMF: 19% 785 (67%) IFAD: 4% IsDB: OPEC Fund: 28% 5% Bilateral Multilateral Private creditor IDA IMF IFAD OPEC fund IsDB EIB AfDF BADEA ECOWAS Source: MOFEA. Figure 22. External bilateral public debt is mainly owed to three creditors: Saudi Arabia, Figure 23. Domestic public debt is mainly owed Kuwait, and India to commercial banks External bilateral debt, percentage Domestic debt by creditor, GMD billion and percentage, September 2024 Taiwan: 1% China: 7% India: 20% Saudi Arabia: 34% 8 (20%) 11 (29%) Venezuela: 5% 4 (9%) Kuwait: 27% 21 (42%) Libya: 1% United Arab Emirates: 5% China India Kuwait United Arab Emirates Libya Venezuela Saudi Arabia Taiwan Central bank Commercial banks Other non banks Banks & non-banks Source: MOFEA. 24 Chapter 2: The Gambia’s Public Debt: An Achilles Heel? THE GAMBIA PUBLIC DEBT: AN ACHILLES HEEL? Figure 24. Most domestic debt is focused on this ratio is often used as a prudential limit for developed long-term maturities and emerging countries, it varies depending on countries’ level of development, growth and revenue potential, and Domestic debt by instrument, GMD billion and percentage, September 2024 institutional governance (UN 2023). For developing economies, the United Nations (UN 2023) recommends a long-term debt-to-GDP ratio not exceeding 40 percent. The Gambia’s public debt stock ratio surpasses the United Nations’s representative prudential limit of 40 percent debt-to-GDP ratio, placing the country at high risk of 19 (42%) debt distress due to breaches in revenue and export-related 23 (52%) indicators (Figure 27). According to the December 2024 joint IMF-WB DSA, the external debt service-to-revenue ratio breaches its threshold (the benchmark is 18 percent), reflecting increased debt service commitments in the 2 (5%) medium term.22 Heightened domestic debt vulnerabilities also contribute to the breach of the present value (PV) T-Bills SAS T-Bonds of the overall debt-to-GDP ratio (the benchmark is 55 percent), although it falls within the benchmark level Source: MOFEA. by 2026 and continues to decline thereafter,23 suggesting that overall debt remains sustainable. Debt servicing significantly limits the government’s ability to finance social and infrastructure development. 2.2. Reasons for financing The Gambia’s Between 2021 and 2024, total public spending averaged economy through debt 23.1 percent of GDP, with just one-third allocated to debt serving costs (representing 6.5 percent of GDP). Countries borrow primarily because they lack sufficient Of this, about 3.0 percent of GDP was dedicated to financial resources to meet their development needs. domestic debt servicing, while 3.5  percent of GDP The rise in public debt to finance development needs went to external debt (Figure 25). Domestic servicing often stems from low domestic savings, low tax revenues, costs averaged 23 percent of the domestically financed weak SOEs’ performance, high external deficits, low government budgets from 2020 to 2024, nearly matching inflows of external private capital, and the growing impact the combined budget for health and education, which of climate-related events (Zouirchi et al. 2023): averaged 24.7 percent (Figure 26). With the expiration of the Debt Servicing Suspension Initiative in 2024, debt • Low domestic savings: Developing countries face service payments are projected to rise to 29 percent of substantial investment gaps due to lagging development the 2025 budget—exceeding combined expenditures on and insufficient domestic savings (Alzghoul et al. 2023). education, health, and agriculture, further constraining This leads to low domestic investment and impedes development financing. External debt service to revenue economic growth. Limited capital accumulation is a (percent) reached 31.9  percent in 2023 while the acceptable threshold is 18 percent. 22 Unlike the December 2023 DSA where the present value (PV) of external debt-to-GDP, the PV of external debt-to-exports, and the Despite a downtrend in public debt since 2023, The debt-service-to-exports ratio breached their respective thresholds, they Gambia remains at high risk of external and overall remained below the threshold levels in the November 2024 DSA. debt distress. The IMF considers a debt-to-GDP ratio 23 The PV of debt-to-revenue and debt service-to-revenue trend of 60 percent a high-risk threshold (IMF 2011). While downward over the forecast horizon in the baseline scenario. Chapter 2: The Gambia’s Public Debt: An Achilles Heel? 25 GAMBIA | ECONOMIC UPDATE - 2025 Figure 26. Domestic debt service accounts Figure 25. High debt servicing costs constrain for the largest share of the government’s The Gambia’s public spending domestically financed budget Public debt service and total public spending, Main items on government domestically funded percent of GDP budget, percentage 8 25 100 7 7 7 24 90 6 24 80 6 24 6 70 23 5 4 23 60 4 4 50 4 3 3 3 40 3 22 2 2 22 30 2 20 21 10 1 0 0 20 2020 2021 2022 2023 2024 2021 2022 2023 2024 Defence Home administration Total public debt service Freign affairs Economic affairs External public debt service Centralized services Infrastructure Domestic public debt service Education Health Total public spending (rhs) National debt service Source: MOFEA. key contributor to low productivity and slow economic is especially highlighted for low-income countries growth in developing economies (Bosworth and (Gupta et al. 2004), where Choudhary et al. (2024) Collins 1999). Factors such as low per capita revenue found that there is a tax threshold around 15 percent growth, poor financial development, and high political of GDP where future inclusive growth significantly instability contribute to low savings. This is highlighted improves due to increased productive spending, more in several empirical studies examining the relationship progressive taxes, and lower output volatility. between financial intermediation and economic • Weak performance of State-Owned Enterprises development, including Cihák et  al. (2012) who (SOEs): SOEs play an important role in many covered 205 economies, Honohan and Beck (2007) economies, and operate across a range of sectors, who covered Africa, Levine (2005) who reviewed several including infrastructure, natural resources, energy, cross-national studies, Beck et al. (2000) who covered logistics, transportation, financial services and 63 countries, and Edwards (1996) who analyzed the manufacturing (OECD, 2024). In SSA, SOEs play determinants of savings in a panel of 36 countries. an important role in providing basic services such as • Insufficient tax revenue: Inadequate tax collection electricity, water, telecommunications, and other public hampers economic growth by limiting infrastructure utilities. The SOEs sector has systemic implications for investment, underfunding public services, increasing the public finances and the economy more broadly, income inequality, and forcing governments to rely more they account for a significant share of public sector heavily on aid and debt to cover public expenditures balance sheets, with liabilities worth an average of (Choudhary et  al. 2024; Gupta et  al. 2004). This 20 percent of GDP, and assets of about 32 percent of 26 Chapter 2: The Gambia’s Public Debt: An Achilles Heel? THE GAMBIA PUBLIC DEBT: AN ACHILLES HEEL? Figure 27. Selected public debt indicators under baseline and alternative scenarios, 2024–2034 PV of debt-to GDP ratio PV of debt-to-exports ratio 80 1400 70 1200 60 1000 50 800 40 600 30 20 400 Most extreme shock is Exports 10 Most extreme shock is Exports 200 0 0 2024 2026 2028 2030 2032 2034 2024 2026 2028 2030 2032 2034 Debt service-to-exports ratio Debt service-to-revenue ratio 120 45 40 100 35 80 30 25 60 20 40 15 Most extreme shock is Exports 10 20 5 Most extreme shock is Exports 0 0 2024 2026 2028 2030 2032 2034 2024 2026 2028 2030 2032 2034 Baseline Historical scenario Most extreme shock 1/ Threshold Source: Joint World Bank-IMF Post-mission DSA December 2024. M2 Reserve Money GDP across a set of SSA countries (Harris Private et al. 2020). Consumption to-EBITDA ratio (DTE) either greater than 5 (40 cases) Government Consumption While they also contribute significantly to government Gross Fixed Investment or smaller Statistical than zero because of negative EBITDA Discrepancy Chg in Inventories revenue in some countries, many of them face difficult Net Exports (24 cases). As a result, SOEs have become an important Real GDP Growth financial conditions, including the lack of profitability source of fiscal risks and their underperformance and liquidity constraints, giving rise to a need for burdens on the government fiscal accounts and debt. sustained and significant bailouts. In a study on the This burden includes significant support to SOEs (e.g., SOEs’ debt sustainability and profitability, Wezel and recapitalizations, recurring subsidies, and assumption Carvalho (2022) assessed SOEs’ liabilities in light of of SOE debt), a high public sector debt stock curtailing their earnings, more precisely, earnings before interest, fiscal space in case of adverse shocks (e.g., fall in taxes, depreciation and amortization (EBITDA). commodity prices for commodity exporters), SOE’s A threshold of debt not exceeding five times EBITDA obligations to private parties through joint ventures or is used as reference since higher ratios would reflect less public-private partnerships that the sovereign may have ability to handle the debt burden or assume additional to honor in case of SOE payment default (IMF, 2020). debt. The authors found that more than two-thirds • Deteriorating terms of trade and large external of the surveyed large SOEs in SSA (64 of 89 firms, or imbalances: Many developing countries primarily 72 percent) display unsustainable debt, i.e., a debt- export low value-added raw materials and import high Chapter 2: The Gambia’s Public Debt: An Achilles Heel? 27 GAMBIA | ECONOMIC UPDATE - 2025 value-added manufactured goods from industrial public debt can rise by 6 percent of GDP within three countries. This structural imbalance makes them years (IMF 2019).24 In addition, rising climate risks vulnerable to commodity price volatility, which are putting upward pressure on the cost of market negatively affects their trade balances. To import financing, with climate risk premiums estimated industrial goods, these countries must export a between 65 and 120 basis points for the most vulnerable relatively larger quantity of raw goods, leading to countries (Bolton et al. 2022). persistent trade deficits and growing dependence on • Domestic savings in The Gambia have historically external and domestic debt (Zouirchi et al. 2023). been too low to cover investment needs. Between • Weak external private capital inflows, including 1966 and 2023, domestic savings averaged a mere FDI and remittances: FDI can provide much-needed 4  percent of GDP, far below the average of SSA capital for poor countries to acquire physical capital at 17.4  percent, low-income countries (LICs) at and improve workforce skills through technology 13.1 percent and Economic Community of West transfer (Hossain 2008), but it often remains limited African States (ECOWAS) at 11 percent25. Over in many developing countries due to weak business the same period, investment averaged 15 percent of environments and minimal technology spillovers to local GDP (Figure 28), well below SSA (22.4 percent of firms. While remittances contribute to the household GDP), LICs (23.2 percent of GDP) and ECOWAS welfare of receiving households, not all countries attract (19.7  percent of GDP)26. In recent years, gross sufficient remittances. Additionally, most remittances capital formation has increased considerably, from are spent on basic consumption rather than investment 25.5 percent of GDP in 2016 to 34.7 percent in 2023. as observed in Philippines (OECD 2005). Additionally, With limited domestic savings and insufficient external unfavorable macroeconomic policies, such as significant aid, the country is obliged to rely on debt to finance divergence between the official and parallel exchange its investment needs (DeLisle et al. 2016). According rates, can divert remittances to unofficial channels. For to the Mo Ibrahim Foundation (2024), recent example, Nigeria attracted more than US$20 billion in development experience suggests that economic take- remittances in 2023, surpassing the country’s foreign off requires countries to reach and sustain an investment direct and portfolio investments of US$2.9 billion rate of at least 30 percent of GDP for two decades or in 2022. However, the country has been known for more. The Gambia has only recently approached this its inability to maintain such important remittances threshold, with investment rates around 30 percent within official channels, with an estimated 50 percent of remittances channeled through informal networks, 24 International Monetary Fund (2019). “Building Resilience in mainly due to exchange rate disparities (Cooper and Developing Countries Vulnerable to Large Natural Disasters”, Esser, 2020). IMF Policy Paper. IMF, Washington DC. • Climate-related events: Climate change poses both 25 Domestic savings as share of GDP over 1966–2023 averaged immediate and long-term risks to the debt trajectories 7.6 percent for Benin, 8.2 percent for Burkina Faso, 14.0 percent for Cabo Verde, 21.4 percent for Cote d’Ivoire, 8.5 percent for Ghana, of developing countries. High vulnerability to climate 25.3 percent for Guinea, 0.3 percent for Guinea Bissau, 4.8 percent shocks, coupled with an increase in natural disasters and for Mali, 9 percent for Niger, 10.0 percent for Senegal, 15.8 percent low socioeconomic resilience, strains public finances for Sierra Leone and 14.5 percent for Togo (no data for Liberia and in developing countries (Cabrillac et al. 2023). Climate- Nigeria) (WDI). induced economic losses constrain developing countries’ 26 Gross capital formation as share of GDP averaged 17.3 percent for fiscal revenue and often require them to borrow Benin, 18.6 percent for Burkina Faso, 33.0 percent for Cabo Verde, 18.5 percent for Cote d’Ivoire, 17.3 percent for Ghana, 12.3 percent externally, especially during emergencies (De Bandt for Guinea, 24.6 percent for Guinea Bissau, 18.9 percent for Mali, et alii 2022). Cross-country evidence suggests that 18.1 percent for Niger, 19.1 percent for Senegal, 19.7 percent for GDP per capita can decline by 2 to 5 percent in the Sierra Leone and 24.2 percent for Togo (no data for Liberia and four years following major natural disasters, while Nigeria) (WDI). 28 Chapter 2: The Gambia’s Public Debt: An Achilles Heel? THE GAMBIA PUBLIC DEBT: AN ACHILLES HEEL? Figure 28. Domestic savings have historically been too low to cover investment needs Domestic savings and investment in The Gambia, 1966–2023, percent of GDP 45 40 35 30 25 20 15 10 5 0 –5 –10 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Gross capital formation Gross domestic savings Source: World development indicators. of GDP over the last four years. This progress raises tax reforms in 2021;27 and (iv) implementing revenue important questions about the appropriate mechanism measures in the 2023 budget.28 While several reforms to finance and sustain this rate of investment, given were undertaken to improve the tax administration, tax concerns about debt sustainability. With per capita revenue averaged only 10.2 percent of GDP from 2017 to income at US$861 in 2023, which is lower than the 2023, significantly below the SSA average of 18.9 percent average for low-income countries US$ 901 and US$ and the 15 percent ‘tipping point’ for critical investments 1623 for SSA (WDI), basic consumption needs absorb (Vitor et al. 2016). Low tax revenue, combined with most household resources, making it difficult to save. rising and rigid expenditures, has resulted in large fiscal In addition, weak financial development constrains domestic savings, as The Gambia’s financial sector 27 Effective January 1, 2021, The Gambia introduced various tax is small and undiversified. As of December 2021, reforms, including increasing the capital gains tax threshold; reducing the fringe benefits tax rate; repealing the environmental tax payable commercial banks held 86.2 percent of total financial by employees and the air transport levy; increasing the threshold assets and 32.1 percent of GDP, indicating low levels for voluntary value-added tax registration; and introducing the of financial intermediation (World Bank 2023a). requirement for large taxpayers to submit audited financial statements with their annual tax returns. Tax revenue collection in The Gambia is inadequate 28 Revenue measures introduced in the 2023 budget included: to cover investment needs. Recently, The Gambian increasing the excise tax on tobacco; revising the immigration fees authorities implemented tax policy and administration of non-Gambians in line with regional benchmarks; introducing an reforms to enhance tax collection. These reforms included: ad-valorem tax on used tires; revising duty waiver application fees; introducing an environmental tax on second-hand goods that do not (i) introducing the value-added tax in 2013; (ii) instituting currently attract an environmental tax and security levy on all insurance reporting obligations in 2019 to enhance the transparency premiums; allowing for deduction of rental income tax at source for all and administrability of the small taxpayer regime as well commercial rental properties; and increasing the Expatriate Quota tax the informal sector tax regime; (iii) adopting a series of for non-ECOWAS residents. Chapter 2: The Gambia’s Public Debt: An Achilles Heel? 29 GAMBIA | ECONOMIC UPDATE - 2025 Figure 29. Domestic revenues are low, and fiscal Figure 30. Capital investment is mostly financed outcomes are increasingly dependent on grants through external resources Revenue, spending and fiscal balance, percent of GDP Share of domestic and external investment financing, percent 30 14 100 25 12 90 10 80 20 8 70 15 60 6 10 50 4 5 40 2 30 0 0 20 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 10 0 Total revenue 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Total expenditure Fiscal deficit including grants Fiscal deficit excluding grants Externally financed investment GLF investment Source: World Economic Outlook, WDI. Source: MOFEA. deficits, averaging 4.7 percent of GDP from 2017 to 2023 The low performance of SOEs weighs on debt and fiscal (Figure 29), close to the ECOWAS average (4.7 percent) sustainability in The Gambia. In 2020, government and above the SSA average (3.6 percent)29. Revenue and budgetary support to SOEs was estimated at 5 percent of fiscal outturns are increasingly dependent on external GDP (MOFEA 2021), while net arrears to the government grants, which accounted for 34 percent of total revenue amounted to 3.6 percent of GDP (World Bank 2022). over 2017–2023. Capital spending is highly dependent Additionally, the government intervenes to service SOEs on external grants, with grants funding 80 percent of debt when they fail to meet financial obligations. At the capital expenditure between 2017 and 2023, compared end of 2020, outstanding external loans contracted by with just 20 percent for the government’s locally funded the government on behalf of SOEs amounted to GMD (GLF) investments (Figure 30). Given these constraints 14.6 billion (US$284 million), equivalent 15.5 percent to finance public spending, the government has resorted of GDP—60 percent of which were in the energy sector. to borrowing to bridge the investment-savings gap. The ability of SOEs to meet debt service payments places External borrowing can bridge fiscal gaps and finance a burden on the public budget. In 2019, the government infrastructure, but high debt may ultimately hamper transferred more than GMD 2.5 billion (US$49.7 million economic growth (Kolawole 2023). or 2.8  percent of GDP) of the National Water and Electricity Company (NAWEC)’s debt to third parties and converted around GMD 5.1 billion (US$101.4 million 29 The deficit as share of GDP averaged 4.0 percent for Benin, or 5.6 percent of GDP) of debt owed to the government 6.4 percent for Burkina Faso, 4.0 percent for Cabo Verde, 4.4 percent (mainly on-lent external loans) into capital. In 2020, the for Cote d’Ivoire, 9.0 percent for Ghana, 1.6 percent for Guinea, government made US$17 million (GMD 885 million) 5.7 percent for Guinea Bissau, 5.0 percent for Liberia, 4.1 percent for Mali, 4.8 percent for Niger, 5.0 percent for Nigeria, 5.0 percent in payments to the Islamic Trade Finance Corporation on Senegal, 4.37 percent for Sierra Leone and 3.7 percent for Togo (World behalf of NAWEC and Gambia Groundnut Corporation. Economic Outlook). It also assumed liability for NAWEC’s domestic currency 30 Chapter 2: The Gambia’s Public Debt: An Achilles Heel? THE GAMBIA PUBLIC DEBT: AN ACHILLES HEEL? bonds, with an outstanding balance of GMD 1.2 billion Private external capital has been insufficient to bridge (US$23.3 million or 1.3 percent of GDP) at end-2020, The Gambia’s domestic savings gap, despite increasing as well as for GMD 800 million (US$15.6 million or remittance inflows. FDI remained limited for decades, 0.9 percent of GDP) of NAWEC’s debt to the social security averaging around 5 percent of GDP per year since 1970. fund. In 2024, the government provided unbudgeted Only since 2020 has FDI reached an annual average of emergency support amounting US$20 million to settle 10 percent of GDP (Figure 35). The low level of FDI is due NAWEC’s arrears with its suppliers, which increased the to an unconducive business climate, poor infrastructure, fiscal deficit by 0.3 ppts of GDP. and institutional and governance challenges, as highlighted in the recent enterprise survey for The Gambia (World Bank Adverse external conditions have widened the country’s 2023b). By contrast, remittances have been relatively high, external deficit, increasing its reliance on external debt approaching 10 percent of GDP since the second half of the to finance the gap. International price fluctuations, coupled 2000s and have, over the past five years, exceeded 20 percent with a narrow export basket—dominated by vegetable fats, of GDP (Figure 36). However, their contribution to savings oil seeds, oleaginous fruits, fish and crustaceans—have and investment remains limited. In a study on the impact resulted in a continuous decline in The Gambia’s export of personal remittances on economic growth in The prices since early 1980s. Although export prices have risen Gambia, Ceesay et al. (2019) found that while remittances over the last decade, they remain below levels recorded positively impact economic growth, most are used for four decades ago (Figure 31). Meanwhile, import price consumption rather than productive investment. Nearly fluctuations for essential goods like oil (Figure 32) have 80 percent of remittances are spent on food, education, led to a deterioration in the country’s terms of trade water and electricity, entertainment, and religious festivals; (Figure 33). This widened the merchandise trade deficit 10 percent are used for buying properties and constructing from 14.9 percent of GDP in 2002 to 18.4 percent in houses; 7 percent for savings; and 4 percent for investing 2012 and 39.6 percent in 2022 (Figure 34), increasing in businesses. The proportion directed toward savings and the need to resort to external borrowing to cover the investment is significantly smaller than that allocated to financing gap. food and education (Figure 37). Figure 32. . . . and anarchic fluctuations in Figure 31. Declining export prices . . . import prices . . . Commodity export price index, 2012 = 100 Crude oil, average ($/bbl) 140 120.0 130 100.0 120 80.0 110 60.0 100 40.0 90 20.0 80 0.0 70 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 60 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Crude oil, average ($/bbl) Source: https://data.imf.org/myprofile?tb=Downloads. Source: WDI. Chapter 2: The Gambia’s Public Debt: An Achilles Heel? 31 GAMBIA | ECONOMIC UPDATE - 2025 Figure 33. . . . have led to deteriorating terms Figure 34. . . . and a widening trade deficit of trade . . . on merchandise Net barter terms of trade index (2015 = 100) External trade deficit on merchandises, percent of GDP 190 45.0 40.0 170 35.0 150 30.0 25.0 130 20.0 110 15.0 10.0 90 5.0 70 0.0 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 2022 50 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 External trade deficit on merchandises Source: WDI. Source: UNCTAD. Climate shocks negatively impact The Gambia’s real (Han and Karabaeva 2024). While direct assessments of GDP growth, fiscal stability, and debt sustainability. disaster-related economic damages in The Gambia are Cheng and Han (2022) estimate that economic losses limited, Koks et al. (2019) identify the country among the from flood-related infrastructure in Philippines damage top twenty globally in terms of the multi-hazard Expected can reach 3.8 percent of GDP when the probability of Annual Damages relative to GDP. This vulnerability is flooding is one-third annually (i.e., occurs once every largely due to the exposure (adverse effect of climate- three years). In The Gambia, the probability of flooding related events) of transport infrastructure, with estimated has exceeded this threshold over the past three decades, losses exceeding 0.2  percent of GDP annually. The suggesting that actual economic losses may be even greater widely used EM-DAT database, which provides economic Figure 35. FDI inflows increased dramatically Figure 36. Remittances have risen sharply over in 2020 the past five years Foreign direct investment, net inflows (% of GDP) Personal remittances, received (% of GDP) 14 30.0 12 25.0 10 8 20.0 6 15.0 4 10.0 2 0 5.0 –2 0.0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Source: WDI. 32 Chapter 2: The Gambia’s Public Debt: An Achilles Heel? THE GAMBIA PUBLIC DEBT: AN ACHILLES HEEL? Figure 37. In The Gambia, most remittances are used for consumption Distribution of remittances received between different uses 40 35 30 25 20 15 10 5 0 Household Education Extra/ Buying properties Savings Investment expense entertainment and construction in a business of houses Source: Ceesay et al. (2019). damage estimates for countries, does not provide data for the: (i) conventional analysis hypothesis (Elmendorf and The Gambia. Using a local projection regression to assess Mankiw 1999), (ii) debt overhang theory (Myers 1977), the economic losses as a share of GDP, Han and Karabaeva (iii) Ricardian equivalence hypothesis (Barro, 1974), and (2024) found that The Gambia’s real GDP growth (iv) nonlinear effects theory (Reinhart and Rogoff 2010). remains 2.0–3.1 percent below pre-disaster levels for up to five years following a natural disaster. The country’s • The conventional analysis hypothesis aligns with the coastal zone, consisting of 80 km of open ocean coastline Keynesian view that, in the short run, debt-financed and 200 km of sheltered coastline, is prone to flooding deficits can stimulate aggregate demand (Phelps and erosion. In 2022, severe flooding affected over 2022). The conventional view emphasizes aggregate 50,000 people—about 2 percent of the population— demand in the short run and crowding out in the long resulting in an estimated US$80 million in damage run (Elmendorf and Mankiw, 1999). While supporting (GoG 2022). The rising frequency and severity of natural the Keynesian view, Modigliani (1961) notes that in the long run, the economy adheres to the classical disasters weighs on public finances by increasing the costs view that higher debt can reduce the capital stock and of emergency response and infrastructure rehabilitation, productivity, ultimately lowering output. Public debt thereby increasing fiscal risks (MOFEA 2023). can also crowd out private investment by reducing available credit or increasing long-term interest rates. Moreover, external debt can harm economic growth 2.3. Impact of public debt on economic if it is used for consumption rather than investment growth in The Gambia (Chaudhry et al. 2009). 2.3.1. Literature review: Public debt has both • The debt overhand theory emphasizes the negative positive and negative effects on growth effects of public debt on economic growth (Myers 1977). It argues that high public debt negatively affects Four main theoretical frameworks describe the economic growth by reducing private sector investment relationship between public debt and economic growth, and acting as a tax on future output (Reinhart et al. 2012; illustrating both positive and negative effects. These are Krugman 1988). Chapter 2: The Gambia’s Public Debt: An Achilles Heel? 33 GAMBIA | ECONOMIC UPDATE - 2025 • The Ricardian equivalence hypothesis proposes that considered sustainable for countries with institutional debt- and tax-financed government spending has quality and policies—set at 40  percent of GDP for equivalent effects on the economy (Ricardo 1817). developing countries. This reinforces the importance of The theory that there is equivalence between public debt determining whether an optimal debt threshold exists and taxes was developed Robert J. Barro (1974) in an for The Gambia, beyond which public debt may begin article entitled “Are government bonds net wealth?”. It to hinder growth. As Patillo et al. (2011) point out, suggests that government spending financed by current the relationship between debt and economic growth or future taxes (and current deficits) will not stimulate may be better represented by a non-linear than a linear the economy, as consumers and investors anticipate relationship in a context of relatively high indebtedness. future tax increases and adjust their consumption and Reasonable levels of current debt inflows are expected to investment accordingly (Sambou 2023; Mosikari and have a positive effect on growth by increasing aggregate Eita 2017). demand and financing productive investment. Beyond a • The nonlinear effects theory suggests that excessive certain threshold, the negative effects of high debt levels, public debt beyond an optimal threshold harms such as increased interest payments and reduced private economic growth. This theory, developed by debt investment, begin to outweigh the benefits. overhang theorists and based on the Laffer curve theory adapted to public debt, has been supported by authors 2.3.2. Public debt has a non-linear impact on like Krugman (1988), Sachs (1988), and Cohen (1997). economic growth in The Gambia, with debt It posits that beyond a certain threshold, public debt ratios exceeding optimal thresholds harms economic growth by discouraging investment and consumption. Studies on the nonlinear relationship 2.3.2.1. Model between public debt and economic growth often draw on the work of Reinhart and Rogoff (2010). Their This study investigated the optimal thresholds of public results revealed that the relationship between public debt and its components in The Gambia. It referenced debt and real GDP growth was weak for debt-to-GDP studies such as Pattillo et al. (2002), Fofana N’Zué (2018), ratios below a threshold of 90 percent of GDP. Above Diallo and Fofana N’Zue (2021a), Diallo and Fofana 90 percent, median growth rates fall by 1 percent, and N’Zué (2021b), and Prasai (2024). The study analyzed the average growth falls considerably more. When external relationship between debt and growth using a multivariate debt reaches 60 percent of GDP, annual growth falls regression model, particularly the augmented production by about 2 percent. For higher levels of external debt, function: growth rates are roughly halved. PERCAPt = f _ DEBT, DEBT 2, LABOR, INV, Most studies indicate that public debt negatively or DEBTSERV i  (1) non-linearly impacts economic growth when exceeding an optimal threshold. Appendix 3 summarizes studies where PERCAP is the GDP per capita in local currency at on the relationship between public debt and economic constant prices; DEBT is the debt-to-GDP ratio; DEBT2 growth carried out over the last twenty-five years, compiled is the square of the debt-to-GDP ratio; INV is the gross by Yamin et al. (2023), Penzin and Akanegbu (2024), and fixed capital formation in billions of constant 2017 Tarawalie and Mbayoh (2024), among others. Of the international dollars; LABOR is the active population 72 studies compiled, 22 found a negative relationship and (aged 15–64); and DEBTSERV is debt service on 37 found a non-linear relationship, while only 13 found external debt—public and publicly guaranteed—to a positive relationship (Table A1). The Gambia falls into GDP. Including debt service along with debt in the model the non-linear effects model. The country’s current public makes it possible to approximate the crowding-out effect debt level exceeds the prudential threshold typically as opposed to the over-indebtedness effect (Jalles 2011). 34 Chapter 2: The Gambia’s Public Debt: An Achilles Heel? THE GAMBIA PUBLIC DEBT: AN ACHILLES HEEL? • Most empirical studies strongly support the debt 2.3.2.2. Data overhang hypothesis, which claims that debt repayments lead to fiscal uncertainty, liquidity This study empirically tests the threshold effects of constraints, and increased issuance of government public debt on economic growth in The Gambia. securities (Pattillo et al. 2011; Clements et al. 2003; Studies indicate that debt thresholds vary between Sachs 1988; Krugman 1988). The coefficient of the countries depending on their characteristics30 (Prasai public debt ratio (total debt and external or domestic 2024; Tarawalie and Mbayoh 2024; Tarawalie and Jalloh debt) is expected to be positive, while the coefficient of 2021; Ndoricimpa 2020). Given the limited availability the square of its ratio is expected to be negative. These of country-specific evidence,31 a threshold analysis was signs signify a non-linear concave relationship between conducted to determine optimal debt thresholds in The public debt and economic growth, with moderate debt Gambia. levels promoting growth and higher levels negatively The analysis used annual time series data to evaluate impacting growth. the relationship between debt and economic growth. • Investment positively impacts economic growth by Annual data for GDP per capita, external debt service, increasing employment, stimulating domestic demand, and labor were sourced from the World Development strengthening infrastructure, and fostering innovation Indicators (WDI) database. Data for investment, total (Ben Yedder et al. 2023). debt, and external and domestic debt were obtained from • There are three perspectives on the impact of IMF reports and the IMF international financial statistics demographic change on economic growth. Pessimists database. see a negative effect; optimists argue for technological advancements and positive growth, while those with a more neutral perspective find no significant effect (Prskawetz and Lindh 2007). • Public debt service is generally expected to have a 30 If debt thresholds exist, they might vary by country income depending negative impact on economic growth, with only a on the level of economic development, level of development of domestic few studies finding no connection (Saungweme and financial markets, the degree of openness, growth and revenue potential, Odhiambo 2018). Higher debt servicing can crowd out and institutional considerations (Caner et al., 2010). private investment, increase government interest bills, 31 It appears that only the study by Penzin and Akanegbu (2024) on the impact of total debt on economic growth in The Gambia was and reduce public savings and the availability of credit. carried out as part of an analysis of ECOWAS countries. A country- It can also negatively affect government spending on specific level analysis could better capture the country’s debt thresholds infrastructure and human capital, further hindering by integrating relevant control variables such as gross fixed capital growth (Clements et al. 2003). formation and labor. 2.3.2.3. Autoregressive delayed lags (ARDL) model Methodological note This study used econometric models to determine optimal debt thresholds, transmission channels of debt’s impact on economic growth and the impact of external debt service expiry on economic growth. Given that data are time series, the stationarity of all the variables used was analysed before estimating the models. The stationarity tests revealed that the variables used in the different models across this study are integrated in mixed orders, that is, stationary in level (I(0)) and in first difference (I(1)), suggesting the ARDL model as the most appropriate approach for the study of long-run and short-run regressions. (continues) Chapter 2: The Gambia’s Public Debt: An Achilles Heel? 35 GAMBIA | ECONOMIC UPDATE - 2025 Stationarity tests The stability of time series’ statistical properties is a critical assumption for many forecasting models that rely on predictable and consistent patterns in the data. A stationary time series has statistical properties—such as its mean, variance, and autocorrelation—that remain consistent over time. It is important to test stationarity in time series data before attempting to build an empirical model since regression with non-stationary variables may produce spurious results with unreliable t- stat and R-squared if variables are cointegrated. Referring to (Acaravci, 2010), this study examined the univariate properties of the time series using two types of unit root tests. The first group of tests, known as Ng-Perron unit root tests (Ng-Perron, 2001), does not allow for structural breaks. The Ng-Perron test is suitable for small samples (Alimi, 2014). The standard stationarity tests may lead to give false results if structural breaks in series are present. The second group of tests, allowing structural breaks, is the Zivot and Andrews (1992) test, which use three models to test a unit root: (1) model A, which allows a one-time change in the level of the series; (2) model B, which allows a one-time change in the slope of the trend function, and (3) model C, which combines a one-time changes in the level and the slope of the trend function of the series. Studies generally use the A or C model (Muhammad et al., 2006). Sen (2003) showed that if we use the model A while in fact the rupture occurs according to the C model, there will be a loss of substantial power. However, if the rupture is characterized according to model A, but that the model C is used, the loss of power is minor, which suggests that the model C is superior to model A. Based on these observations, we chose the Model C for our analysis of unit roots. ARDL Model Cointegration among variables was evaluated using bound test for long run relationships, and error correction model for short run dynamics. The cointegration test was conducted, comparing the F-statistic with critical limits from Narayan (2005)32, which are more suitable for small sample observations. If the calculated statistic F is greater than the higher critical bound at the 5 percent significance level, the null hypothesis of no cointegration is rejected, indicating that there is a cointegration relationship between variables. If a cointegration relationship is present, both long- and short-run models are valid, and ARDL is the most appropriate approach for studying both long- and short-run regressions simultaneously. As noted by Bouattour et al. (2024), there are several reasons for choosing the ARDL technique over other cointegration methods. First, this method allows different orders of integration to be considered. Second, unlike other cointegration methods, the ARDL approach is suitable for small sample sizes. Third, the ARDL method has the advantage of allowing the appropriate selection of lags, which helps to improve the quality of the estimates obtained. Fourth, the ARDL approach also incorporates an analysis of the dynamic error correction model (ECM). In addition to stationary and cointegration tests, we conducted residual diagnostics using LM serial correlation test and heteroskedasticity test, as well as Normality test. The stability diagnostic test with recursive cusum squares residuals was used and plotted on a chart. Optimal debt thresholds After estimating the long-term debt equation, the threshold for the public debt-to-GDP ratio is obtained by taking the first derivative of the dependent variable (DepVar) with respect to the debt variable and setting it to zero (equation A below, where β2 is the coefficient of the debt variable). 32 Narayan adapted the model of Pesaran et al. (2001) which, in turn, modified or replicated existing cointegration tests including Johansen’s. Narayan generated the critical values for a small sample. (continues) 36 Chapter 2: The Gambia’s Public Debt: An Achilles Heel? THE GAMBIA PUBLIC DEBT: AN ACHILLES HEEL? d ln DepVart = a + b1 + 2 b2 ln DEBTt = 0 d ln DEBTt  (A) - b1 ln DEBTt = with (b2 ' 0 2 b2  (B) DEBTt* = exp f p - b1 2 b2  (C) The coefficient for public debt ratio (total, external and domestic) is expected to be positive, while the coefficient for its square should be negative. These signs signify a concave non-linear relationship between public debt and economic growth. This would mean that moderate levels of debt promote growth, while higher levels of debt have an adverse impact on growth. The results of the Bounds tests indicate a cointegration External debt service and high total public debt have a relationship between the variables, suggesting they negative significant impact on economic growth in the move together in the long run. Unit roots tests using the long run. The ARDL model is used to analyze the -run Ng-Perron (2001) and Zivot and Andrews (1992) tests show relationships (estimation of Equation A3 in Appendix 5), that variables are integrated in a mixed order, 0 and order 1, and an ECM is used to analyze short-run relationships i.e. a mix of variables stationary in level and in first difference. (estimation of Equation A4 in Appendix 5). In the long The Zivot and Andrews test identified 2007 as a structural run, all variables significantly affect long-term economic break for total debt and its square as well as external debt growth (GDP per capita) (Equation 2, corresponding to and its square. The results reveal that The Gambia’s debt model A3 in appendix 5). The total debt-to-GDP ratio relief under the HIPC initiative in 2007 had an immediate has a positive and significant coefficient at the 5 percent effect on total and external debt (Table A4 in Appendix 4.1 level, suggesting that total debt does not hinder economic and Table A5 in Appendix 4.2). Equation A1 in appendix 5 growth. The quadratic composition of this variable has shows the generalized ARDL model, while equation A2 in a negative and statistically significant coefficient in the appendix 5 shows the form of the ARDL model combining long term, indicating the non-linearity of the debt- the corresponding long-term multipliers and the coefficients growth relationship and the existence of a threshold of the short-term dynamics of the underlying ARDL level of indebtedness. The coefficient of the investment model. Equations A3 and A4 in the same appendix show, variable is positive and significant, with a 1  percent respectively, the long-term and short-term equations to be increase in investment increasing GDP per capita by estimated. A cointegration test was conducted, comparing 0.16  percent. This positive relationship is consistent the F-statistic with critical limits from Narayan (2005). The with Keynesian economics, which suggests that higher values of the calculated Fisher statistic when the ARDL investment supports economic growth by stimulating model include the total debt, external debt and domestic domestic demand. The labor force variable (lnLABOR) debt ratios respectively as explanatory variables in the model has a negative coefficient, indicating that a 1 percent respectively, all exceed the critical limits at the 5 percent increase in the labor force decreases economic growth by significance level, leading to the rejection of the  null 0.33 percent. Similar findings are reported by Muryani hypothesis of no cointegration (table A6 in appendix 6). (2018) as well as Adofu and Okwanya (2018), and this Therefore, there is a cointegration relationship between the negative relationship may be due to a number of factors variables. Consistent with the literature, the ARDL model that hinder effective participation in the labor market, such is appropriate for estimating both long-run and short-run as low female labor force participation, the preponderance relationships. of informal employment, the high underemployment, Chapter 2: The Gambia’s Public Debt: An Achilles Heel? 37 GAMBIA | ECONOMIC UPDATE - 2025 and limited share of skilled workers, which inhibit the T ln percapt = 0.10 T ln Invt - 0.08 T ln Invt -1 productive reallocation of labor from low- to high-skilled sectors (Eludire 2023; Topel 1999). The coefficient (0.00)))) (0.01))) of external debt service is negative and statistically - 0.02 T ln Debtservt - 1.21 ECTt -1 significant, aligning with neoclassical and debt overhang theories, supported by the findings of other studies such (0.10)) (3) (0.00)))) as Akanbi et al. (2022), Getinet and Ersumo (2020), and Ezema et al. (2018). In the short run, investment The optimal threshold for total public debt is calculated maintains a positive and statistically significant coefficient, at 51.9 of GDP, well below the actual public debt ratio while external debt servicing maintains a negative but estimated at 70.6 percent in 2024. To determine the level statistically insignificant coefficient at the 5 percent level of debt at which the marginal impact of debt on growth (Equation 3, corresponding to model A4 in appendix 5). becomes negative, we used a specification combining total debt as a percentage of GDP and its square. The quadratic The error correction term (ECT) is statistically significant specification supports a Laffer curve relationship between at the 1 percent level, with a negative coefficient.33 The debt and growth if the coefficient of debt is positive diagnostic analysis confirms the model’s suitability (the and that of its square is negative. As described in the decisions are based on a P-value greater than 5 percent, methodological note, the total indebtedness threshold is indicating no autocorrelation or heteroskedasticity, and calculated as follows: a normal distribution of residuals)34 as well as its stability (Appendix 7). TTDEBTt = exp a - 0.893126 ` 2 ) _ - 0.113070 i j k ln percapt = 0.89 ln Ttdebtt - 0.11 ln Ttdebtsqt = 51.906208 (4) (0.02))) (0.02))) Below this threshold, total public debt has a positive effect on The Gambia’s economic growth, while beyond this + 0.17 ln Invt - 0.33 ln Labort threshold, any marginal debt increase will have a negative effect on growth. (0.00)))) (0.00)))) External debt service and high external public debt - 0.12 ln Debtservt + 10.86 negatively impact economic growth. The optimal (0.00)))) (0.00))))  (2) threshold for external public debt is calculated at 34.7 percent of GDP, below the actual ratio of 43.6 percent in 2024. With external debt as the main explanatory variable, all variables have a significant impact on economic growth (GDP per capita) in the long run (Equation 5). In the long run, the external debt-to-GDP ratio has a positive and significant coefficient at the 5 percent level, 33 Narayan and Smyth (2006) state that if the lagged error correction indicating that external debt does not have an adverse term (ECTt−1) coefficient is between −1 and −2, the lagged ECT leads impact on economic growth. The quadratic term of this to dampened fluctuations in economic growth around the equilibrium variable is negative and statistically significant in the long path. In their study, the coefficient of the lagged ECT in the short-run term, indicating the non-linearity of the debt-growth model is −1.2, meaning that instead of monotonically converging to relationship and the existence of a threshold level of the equilibrium path directly, the error correction process fluctuates around the long-run value in a dampening manner. However, once this external indebtedness. In the short term (Equation 6), the process is complete, there is rapid convergence to the equilibrium path. coefficient for the ‘investment’ variable remains positive 34 Adj-R2 = 0.71; LM (1) = 0.40 (0.53); LM (2) = 0.82 (0.67); and is significant at the 1 percent threshold. The external BPG = 13.91 (0.18); J − B = 0.01 (0.995); ESET (1) = 0.38 (0.55). debt service keeps the negative sign, but it is not significant. 38 Chapter 2: The Gambia’s Public Debt: An Achilles Heel? THE GAMBIA PUBLIC DEBT: AN ACHILLES HEEL? The coefficient of the Lagged Error Correction Term This validates a non-linear relationship between external (ECTt−1) is between −1 and −2. The diagnostic analysis debt and economic growth in The Gambia. External confirms the model’s suitability (no autocorrelation or debt below this threshold improves economic growth. heteroskedasticity, and a normal distribution of residuals)35 Accumulating external debt above 34.66 percent harms and stability (Appendix 8). growth. ln percapt = 0.64 ln Exdebtt - 0.09 ln Exdebtsqt High domestic public debt has a negative and significant impact on economic growth, with the optimal threshold (0.03))) (0.02))) calculated at 15.5 of GDP, well below the actual + 0.19 ln Invt - 0.41 ln Labort domestic debt ratio of 26.9 percent in 2024. Unlike the two previous scenarios, with domestic public debt as main (0.00)))) (0.00)))) explanatory variable, the active population (ln LABOR) and external debt service (ln EDEBTSERV) are not - 0.14 ln Debtservt + 12.3 significant in the long term (Equation 8). Although the active population shows a positive impact, it is not (0.00)))) (0.00))))  (5) statistically significant. The domestic debt-to-GDP T ln percapt = 0.09 T ln Invt - 0.08 T ln Invt -1 ratio has a positive and significant coefficient at the 1 percent level, indicating that it does not adversely (0.01)))) (0.01)))) impact economic growth. The quadratic term is negative and statistically significant, revealing a non-linear debt- - 0.02 T ln Edebtservt growth relationship and a threshold level of indebtedness. (0.22) In the short term (Equation 9), domestic debt positively influences economic growth, while external debt service + 0.07 T ln Edebtservt -1 - 1.07 ECTt - 1 has a negative effect on growth. The coefficient of the lagged ECT (ECTt−1) is negative and significant. (0.00)))) (0.00)))) (6) The diagnostic analysis confirms the model’s suitability (no autocorrelation or heteroskedasticity, and a normal The analysis indicates that the country’s optimal threshold distribution of residuals)36 and stability (Appendix 9). for external debt is 34.66 percent of GDP, well below the actual external debt ratio of 43.9 percent in 2024. To ln percapt = 0.68 ln Domdebtt - 0.13 ln Domdebtsqt determine the level of external debt at which the marginal impact of external debt on growth becomes negative, we (0.00))) (0.00)))) used a specification combining external debt as a percentage + 0.05 ln Invt + 0.04 ln Labort of GDP and its square. The quadratic specification above supports a relationship between debt and growth by a (0.00)))) (0.07)) Laffer curve relationship if the coefficient of external debt is positive and that of its square is negative. The external debt - 0.001 ln Debtservt + 8.01 threshold is calculated for The Gambia as follows: (0.00)))) (0.95))))  (8) EXDEBTt = exp a - 0.642458 ` 2 ) _ - 0.090600 i j k = 34.659573 (7)  35 Adj-R2 = 0.71; LM (1) = 1.64 (0.20); LM (2) = 3.16 (0.21); 36 Adj-R2 = 0.83, LM(1) = 0.01 (0.91); LM(2) = 1.48 (0.48); BPG = 12.25 (0.27); J − B = 0.76 (0.68); RESET (1) = 0.38 (0.55). BPG = 13.36 (0.59); J − B = 0.14 (0.93); RESET(1) = 1.33 (0.27). Chapter 2: The Gambia’s Public Debt: An Achilles Heel? 39 GAMBIA | ECONOMIC UPDATE - 2025 T ln percapt = 1.41 T ln Percapt -1 “uncertainty” (Moss and Hanley, 2003).37 In addition to the impact on economic growth and debt repayment capacity, (0.00)))) the channels through which debt influences economic performance also raise concerns (Ebi and Imoke 2017). + 0.87 T ln Percapt - 2 - 0.37 T ln Percapt - 3 (0.00)))) (0.01)))) 2.4.1. Public debt impacts economic growth + 1.77 T ln Domdebtt -1 + 0.03 T ln Invt through various transmission channels (0.00)))) (0.17) The literature shows several channels through which the accumulation of public debt can hinder economic - 0.03 T ln Debtservt - 2.47 ECTt -1 growth, including: (0.04))) (0.00)))) (9) • Long-term interest rates: Rising government borrowing can raise sovereign debt yields, leading to a higher net The domestic debt threshold is calculated as follows: flow of funds from the private to the public sector, increase in private interest rates, and lower private DOMDEBTt = exp b - 0.684363 ` 2 ) _ - 0.124948 i j k spending by households and firms. This shift in capital allocation slowed potential output growth (Elmendorf (10) = 15.465183 and Mankiw 1999). • Reduced public and private investment and capital The results suggest that The Gambia’s threshold for accumulation. High public debt can reduce public domestic debt is 15.5 percent of GDP. Domestic debt investment due to budgetary constraints. Under fiscal below this threshold boosts economic growth, while debt pressure, governments typically cut capital expenditures exceeding this threshold harms economic growth. This before pensions and salaries (Alesina and Perotti 1997), threshold is very low compared to that of external debt. One and higher taxation to service debt can discourage explanation could be that internal debt generates a higher private investment (Iyoha 1999; Rosem 1992). interest burden than external debt. While external debt • Low TFP growth: Elevated debt levels can hinder accounts for almost two-thirds of total public debt, interest growth by heightening uncertainty and instability that payments on domestic debt account for around 80 percent limit incentives for technological improvement and of total interest payments, even before the suspension of efficient resource use, all of which reduce TFP. This external debt servicing payments. The domestic debt often discourages long-term investments, slowing threshold value is comparable to the 13.6 percent threshold productivity growth (Pattillo et al. 2004). calculated for Nigeria by Eboreime and Sunday (2017), as well as the 17.31 percent threshold calculated for Kenya by Obiero and Topuz (2023). 37 According to the debt overhang theory, if a country’s future debt is likely to exceed its ability to repay it, the anticipated costs of 2.4. Channels through which public debt servicing the debt may depress investment. Similarly, if a larger share impacts the Gambian economy of foreign capital is used to service foreign debt, few resources will remain to finance investment and growth, which is known as the Policymakers need to understand the channels through crowding-out effect. The uncertainty created by debt in the form of default possibilities, rescheduling, etc., would make future flows and which debt impacts the economy. Concerns about debt’s additional lending unstable and create a situation in which the wait- adverse impact on economic growth are often framed and-see option would be used by foreign as well as domestic investors. through concepts such as “debt overhang” (Krugman, This would lead to a reduction in capital productivity, slowing 1988), “crowding-out effect” (Diaz-Alejandro, 1981), and economic growth. 40 Chapter 2: The Gambia’s Public Debt: An Achilles Heel? THE GAMBIA PUBLIC DEBT: AN ACHILLES HEEL? • Reduced bank credit to the private sector and 32 Asian developing economies. These studies show that decreased financial deepening: Public debt can higher debt burdens reduce household savings through crowd out private credit, as banks prefer lending to higher taxes needed to finance interest payments. In the government or SOEs (De Bonis and Stacchin addition, the tax burden and uncertainties caused 2010). This shift reduces available credit to the private by high indebtedness can push private companies sector (Cottarelli et al. 2009) and weakens financial to transfer capital abroad, as they may anticipate intermediation, resulting in “lazy banking” by reducing inflationary pressures and/or perceive increased risk in banks’ effectiveness as a primary source of credit, which financial markets. in turn will reduce financial deepening over time • Interest rates: Ebi and Imoke (2017) found insights (Hauner 2009). into the relationship between interest rates, debt, and growth by studying Nigeria, while Hassan and Most empirical studies find that investment (capital Meyer (2021) did it by researching 30 SSA countries. accumulation) and TFP are the primary channels They concluded that public debt exerts a direct effect through which public debt negatively impacts on interest rates, which in turn negatively impacts economic growth. Other channels include interest rates, economic growth. savings, private credit, and human capital development. • Human capital development: Beyene and Kotosz (2022) looked at the link between debt and human • Capital accumulation and TFP have been validated capital development for HIPC countries. They found in several studies as the main ways public debt affects a negative association between debt and human capital growth. These studies have covered both advanced development, reflecting the negative impact of high debt economies (Checherita-Westphal and Rother 2012; on the ability to finance essential public services, which Kumar and Woo 2010; and Silva 2000) and developing in turn has a negative impact on economic growth. economies (Turan and Iyidogan 2023; Shabbir 2013; • Private sector credit: Evidence for the link between Schclarek 2005; Pattillo et al. 2004). In emerging private credit, public debt, and growth was found by economies (Clements et al. 2003), Sub-Saharan Africa Hauner (2009) by studying 73 middle income countries, (SSA) (Hassan and Meyer 2021), Asian developing Turan and Iyidogan (2023) by studying 53 developing economies (Dawood et al. 2024), low-income countries economies, Benayed and Gabsi (2020) by studying (Benayed and Gabsi, 2020), and low-middle-income a panel of 20 LICs in SSA, and Emran and Farazi countries (Haque et  al. 2023), high public debt has been (2009) by researching 60 developing economies. Their shown to reduce both public and private investment findings revealed that an increased share of the bank (and therefore the capital stock) due to budgetary credit absorbed by the public sector to finance large constraints and the increased tax burden linked to fiscal deficits crowds out private sector credit and debt servicing (Table  A7 in Appendix 10). These negatively impacts financial development. developments negatively impact on labor and capital productivity due to increased economic uncertainties. 2.4.2. Public and private investment as well Pattillo et al. (2004) found that two-thirds of the debt- as interest rates are the primary transmission induced growth slowdown in developing economies channels through which public debt affects results from reduced TFP, while one-third comes from economic growth in The Gambia diminished capital accumulation. • Savings: Evidence for the role of savings in the 2.4.2.1. Data relationship between debt and growth was found by Qureshi and Liaqat (2020) by studying 123 countries, This study analyzes the transmission channels through Checherita-Westphal and Rother (2012) by studying which public debt affects economic growth in The 12  Euro zone countries, Bal and Rath (2018) by Gambia using time series data. It utilizes annual studying India, and Dawood et al. (2024) by studying secondary data, including private investment (percent Chapter 2: The Gambia’s Public Debt: An Achilles Heel? 41 GAMBIA | ECONOMIC UPDATE - 2025 of GDP), public investment (percent of GDP), real debt variable and set to equal zero, as described previously interest rates (RINT), and domestic credit to the private in the methodological note. sector (percent of GDP) as channels of debt transmission between 1993 and 2023. Control variables include total public debt as a ratio of GDP (TTDEBT), its square 2.4.2.2.1. Private investment channel (TTDEBT2), per capita GDP (PERCAP) as a proxy Private investment is a potential mechanism through for economic growth, gross domestic savings (GDS) which debt may hinder economic growth once it reaches as percentage of GDP, trade (imports and exports as a a certain threshold. The debt overhang hypothesis percentage of GDP), and broad money (M2) to GDP as indicates that high debt creates expectations of increased a measure of financial deepening38. taxation, which discourages investment and reduces future returns. This reluctance to invest by both domestic 2.4.2.2. Model specifications and foreign investors slows capital stock formation and economic growth (Pattillo et  al. 2004). Building on Different equations have been specified to determine Equation 11, this study uses the econometric model of public debt transmission channels. Similar to other private investment, which includes trade openness and country-specific studies, such as Ebi and Imoke (2017) credit to the private sector as part of its control variables for Nigeria and Akram (2017) for Sri Lanka, this study (Equation 12).39 Trade openness is meant to promote private uses the following model to analyze each transmission investment, as the trade sector is more capital intensive than channel: the non-trade sector (Baldwin and Seghezza 1996). Zt = b0 + bt ln TTDEBT t + bt 7 ln TTDEBT A 2 2.4.2.2.2. Public investment channel + bit Xit + ft (11) Public investment is also a potential mechanism through Where Z, the dependent variable, is the transmission which debt can slow economic growth after reaching channel, and TTDEBT and TTDEBT2 are total public a certain threshold. Public debt makes it possible for debt as a share of GDP and its squared term, respectively. government to invest in areas that are critical for the The square term of total public debt variable is included economy whereby tax revenue is not enough to finance such in the model to determine whether the channel transmits projects. However, beyond a certain threshold, the impact of a non-linear effect on economic growth. X contains debt on public investment can become negative. This can control variables such as per capita GDP (PERCAP), gross be explained by the fact that, in their consolidation efforts, domestic savings (GDS) as a percentage of GDP, trade governments may tend to cut expenditure allocated for (imports and exports as a percentage of GDP), domestic public investment, including maintenance of public credit to private sector (DCP) as a percentage of GDP, infrastructure. Such a negative association was found by and broad money (M2) to GDP. After the estimation of Chalk and Tanzi (2004) and Checherita and Rother the long-run equation (Equation 11), the threshold of (2012) for the European Union, and Ncanywa and public debt-to-GDP ratio is obtained by taking the first Masoga (2018) for South Africa. Such a negative derivative of the dependent variable with respect to the association will lead to an inverse relationship in the 38 The data are mainly extracted from IMF international financial statistics database and World Bank world development indicators, and 39 ln PRIGDPt = β0 + β1 ln TTDEBTt + β2 [ln TTDEBTt]2 annual reports from the central bank of The Gambia. + β3 ln TRADEt + β4DCPt + εt (12) 42 Chapter 2: The Gambia’s Public Debt: An Achilles Heel? THE GAMBIA PUBLIC DEBT: AN ACHILLES HEEL? public debt economic growth nexus. For this study, the A dichotomous variable has been inserted to account for public investment equation (Equation 13)40 includes the an outlier observed in 2004, which was due to the rise in real interest rate, which serves as an opportunity cost inflation measured by the annual growth rate of the GDP variable influencing investment decisions and the overall implicit deflator, estimated at 94.2 in 2004 (WDI). cost of investment projects. Higher interest rates increase the cost of debt servicing (Collins and Wanjau 2011). The equation also incorporates trade openness, as more open 2.4.2.2.4. Private sector credit channel economies compete for FDI—often by increasing public High public debt can lead banks to hold more government investment in infrastructure, which is typically financed securities, reducing credit available to the private sector and managed by governments (Tilahun 2021). (Funyina 2020). Equation 5 includes money supply and real GDP per capita as part of control variables.42 Money 2.4.2.2.3. Real interest rate channel supply is an alternative indicator of monetary conditions, and credit to the private sector is expected to increase as Long-term interest rates can negatively impact economic conditions improve (Imran and Nishat 2013). An increase growth in the context of rising public debt. As public in real GDP raises income for the manufacturing sector financing needs increase, sovereign debt yields rise, and the general population, increasing domestic deposits triggering a net reallocation of funds from the private and bank liquidity, which in turn allows for more lending to the public sector. This leads to higher private interest for investment. There is an expected positive correlation rates and reduces spending by households and firms between GDP (or GDP per capita) and credit to the (Kumar and Woo, 2010; Elmendorf and Mankiw, private sector. 1999). The real interest equation (Equation 14)41 incudes money supply and gross domestic savings as part of the control variables. Money supply is a proxy of financial 2.4.3. ARDL model deepening, which is commonly identified as driver of economic growth (McKinnon and Shaw, 1973). The The variables of this study are integrated in a mixed Fisher equation suggests a positive correlation between order (i.e. order 0 and order 1), justifying the use of money supply and interest rates, while the liquidity view the ARDL model. The results of the stationarity tests posits that higher nominal interest rates decrease money are presented in Tables A8 and A9 in Appendix 13.1 demand, as higher nominal interest rates represent the and Appendix 13.2). The results indicate that structural opportunity cost of holding cash. Therefore, a reduced breaks for total debt and its square occurred in 2007, money supply results in higher interest rates to balance coinciding with debt cancellation under the HIPC the money market (Monnet and Weber 2001). Real initiative. The cointegration test confirms the existence interest rates are influenced by the desired level of savings of a cointegration relationship between the variables and the expected level of investment, with the rise in real (Appendix 14). Equation A5 in Appendix 15 shows rates being the result of a decline in desired savings and the ARDL model that combines the corresponding an increase in expected investment (Jenkinson 1996). long-term multipliers and the coefficients of short-term dynamics. 40 ln PBIGDPt = C0 + C1 ln TTDEBTt + C2 [ln TTDEBTt]2 + C3 ln TRADEt + β4 RINTt + υt (13) 41 ln RINTt = d0 + d1 ln TTDEBTt + d2 [ln TTDEBTt]2 42 ln DCPt = f 0 + f 1 ln TTDEBTt + f 2 [ln TTDEBTt]2 + d3 ln M2t + d4GDSt + DUM2004 + μt (14) + f 3 ln M2t + f 4 ln PRIGDPt + f 5 ln PERCAPt + μt (15) Chapter 2: The Gambia’s Public Debt: An Achilles Heel? 43 GAMBIA | ECONOMIC UPDATE - 2025 High total public debt has a negative and significant ln PRIGDPt = 31.04 ln TTDEBT t impact on private investment in the long run. In the _ 0.00 i))) long run, all variables significantly affect the private investment-to-GDP ratio (Equation 16). The total debt- - 3.64 ln TTDEBTSQ t + 2.97 ln TRADEt to-GDP ratio has a positive and significant coefficient _ 0.00 i))) _ 0.04 i)) at the 1 percent level, indicating that total debt by itself does not have an adverse impact on private investment. + 0.25 DCPt - 76.66 The quadratic term of this variable is negative and _ 0.01 i) _ 0.00 i))) (16) statistically significant in the long term at the 1 percent level, indicating the non-linearity of the debt-private D ln Prigdpt = - 0.44 D ln Prigdpt - 1 investment relationship and the existence of a threshold level of indebtedness. The sign of the domestic credit _ 0.00 i))) coefficient is positive and significant at 1 percent. An - 3.95 D ln Ttdebtt - 1 + 0.49 D ln Ttdebsqt increase in domestic credit to the private sector of 1 percent leads to a 0.25 percent increase in private investment, as _ 0.05 i) _ 0.05 i)) long-term credit is oriented toward investment needs. - 0.05 D ln Ttdebtsq t - 1 - 0.32 D ln Trade These findings align with studies by Mohan (2008) and Mose (2017), who found a positive correlation between _ 0.01 i))) _ 0.14 i credit expansion and private investment. Likewise, trade - 0.10 D DCPt - 0.29 ECT t - 1 openness has a positive and significant effect on private investment, as a 1 percent increase in trade openness _ 0.01 i))) _ 0.01 i))) (17) leads to a 2.97 percent increase in private investment. In the short term, the debt-investment relationship takes a The optimal threshold for total public debt-private U-shaped form (Equation 17), rather than the inverted investment relationship is 71.4 percent of GDP. This U curve. This suggests that due to insufficient domestic indicates that public debt begins to have a negative savings, public debt may crowd out private investment impact on private investment beyond this threshold. in the short term. Notably, domestic credit to the As total debt rises, investors anticipate increased taxes, private sector discourages investment, as its coefficient is adding to the uncertainty about the economy generated negative and statistically significant at the 1 percent level. by the accumulation of public debt, which could This reflects the focus of Gambian banks on financing reduce investors’ expectations about the return on their consumer goods instead of investment (Bukkari 2005). An investment. This finding of non-linearity between increase in short-term private credit translates into more public debt and private investment aligns with studies resources directed toward consumption needs, reducing by Benayed et al. (2015), Riffat and Munir (2015), Silva (2020), and Dawood et al. (2024). the resources available for private sector investment. The lagged ECT coefficient is negative and significant at the High levels of total public debt have a negative and 1 percent level. Disequilibrium correction is slow at about statistically significant impact on public investment 29 percent (29 percent of disequilibrium is correct in a year). in the long run, with the optimal threshold at The diagnostic analysis confirms the model’s suitability 70.3 percent of GDP. In the long term, total public (no autocorrelation or heteroskedasticity, and a normal debt has a positive and significant impact on public distribution of residuals)43 and stability (Appendix 16). investment, while its quadratic term has a negative and significant coefficient (Equation 18). The turning point of total public debt is estimated at 70.28 percent of GDP. 43 Adj-R2 = 0.95; LM (1) = 0.05 (0.82); LM(2) = 0.70 (0.71); Large debt accumulation increases the debt burden, BPG = 13.39 (0.27); J − B = 0.32 (0.85); RESET(1) = 3.92 (0.07). reducing capital expenditure in the government’s fiscal 44 Chapter 2: The Gambia’s Public Debt: An Achilles Heel? THE GAMBIA PUBLIC DEBT: AN ACHILLES HEEL? consolidation efforts. These findings are consistent with High total public leads to higher long-term real interest prior research, including studies by Checherita-Westphal rates. In the long run (Equation 20), total debt is positive, and Rother (2012), Hassan and Meyer (2021), Dawood albeit insignificant, at the 5 percent level. Its square et al. (2024), Qureshi and Liaqat (2020), Riffat and Munir is negative and significant at the 5 percent level. The (2015), and Silva (2020). With a negative and statistically results show a non-linear, inverted U-shaped relationship significant coefficient in the long run, a 1 percent increase between total debt and the real interest rate. The total in the real interest rate reduces public investment by debt threshold is computed at 48.35 percent of GDP. 0.09 percent. This indicates that financing costs influence The inverse-U relationship emerges because when public public investment decisions. Economic openness has debt starts to rise, real interest rates increase due to risk a significant negative impact on public investment. premiums. However, beyond a critical threshold, excessive While economic openness typically implies greater indebtedness negatively affects economic growth and infrastructure needs—suggesting a positive relationship increases financial instability, forcing interventionist (Tilahun, 2021)—this is not the case for The Gambia, policies that will lower real interest rates. These findings as the country has not complemented its increasing are consistent with studies by Ebi and Imoke (2017) as trade openness with corresponding investments in well as Hassan and Meyer (2021), who also identified the infrastructure. In the short run (Equation 19 B), the interest rate as a key transmission channel linking public real interest rate remains negative and is significant at debt and economic growth. The coefficient of money 1 percent. The coefficient of the lagged error correction supply is negative and significant at the 1 percent level, term (ECTt−1) in absolute value is between 0 and −1. The with a 1 percent increase in the money supply decreasing diagnostic analysis confirms the model’s suitability44 and the real interest rate by about 10.72 percent, aligning stability over time (Appendix 17). with theoretical expectations. Money supply is assumed ln PBIGDPt = 21.96 ln TTDEBT t to be exogenously determined by the monetary authority. As the money supply increases, interest rates decrease (Ebi _ 0.00 i))) and Imoke 2017). The dummy variable has a negative - 2.58 ln TTDEBTSQ t - 2.51 ln TRADE t sign that falls within the normal range, as inflation is supposed to erode the real interest rate. In the short run _ 0.00 i))) _ 0.00 i))) (Equation 21), the coefficient of money supply is positive - 0.09 RINT t - 32.96 and significant at the 1 percent level. The diagnostic analysis confirms the model’s suitability45 and stability _ 0.00 i))) _ 0.00 i))) (18) (Appendix 18). D ln Pbigdpt = - 0.64 D ln Pbigdpt - 0.28 D ln Ttdebtt RINT t = 78.51 ln TTDEBTt - 10.12 ln TTDEBTSQt _ 0.00 i))) _ 0.87 i _ 0.06 i) _ 0.04 i)) + 0.09 D ln Ttdebtsqt + 0.04 D ln Ttdebtsqt - 1 - 10.72 ln M2t + 0.44 GDSt _ 0.62 i _ 0.05 i)) _ 0.00 i))) _ 0.06 i) - 0.03 D RINT t - 0.49 ECT t - 1 - 55.04 DUM2004 - 95.6 _ 0.00 i))) (19) _ 0.00 i))) _ 0.00 i))) (20) _ 0.25 i 44 Adj-R2 = 0.93; LM(1) = 0.65 (0.42); LM(2) = 1.81 (0.40); 45 Adj-R2 = 0.95; LM(1) = 0.79 (0.38); LM(2) = 0.83 (0.66); BPG = 5.85 (0.83); J − B = 0.23 (0.89); RESET(1) = 0.05 (0.83). BPG = 10.45 (0.40); J − B = 0.44 (0.80); RESET(1) = 2.41 (0.14) Chapter 2: The Gambia’s Public Debt: An Achilles Heel? 45 GAMBIA | ECONOMIC UPDATE - 2025 D RINT t = 24.07 D ln M2t + 17.87 D ln M2 t - 1 (2022). The negative relationship may be explained by the limited repayment capacity of households _ 0.00 i))) _ 0.00 i)) and businesses and by credit rationing. According to + 0.05 D GDSt - 0.47 D GDSt - 1 - 1.19 ECT t - 1 Hoffman (2004), economic activity influences credit through both supply and demand channels. Demand _ 0.67 i _ 0.00 i))) _ 0.00 i))) (21) for credit is shaped by economic conditions that drive consumption and investment, while the supply of Private sector credit is negatively and significantly credit is shaped by cash flows and income levels, which affected by public debt in the short term, although it determine the repayment capacity of companies and does not appear to be a transmission channel in the households. When repayment capacity is low, financial long term. institutions may become reluctant to extend credit. Therefore, the state of economic activity can determine • Public debt may not influence interest rates in the the credit supply. The negative sign may also reflect the presence of government intervention, but it is likely low reimbursement capacity and reluctance of banks to affect credit to the private sector. While public debt to provide credit due to low household income. GDP affects private sector financing through the lending per capita exerts a positive effect on private sector rate, the equilibrium interest rate tends to be relatively credit, supporting the view that credit growth to the unresponsive to market perceptions in financially private sector is often an outcome of economic growth repressed economies. In such contexts, public debt (Islam 2022). may have a significant effect on private credit but • In the short term, total public debt has a negative not on the interest rate if the government intervenes and statistically significant effect on private sector in the banking sector (e.g., through administrative credit (Equation 23). Its square, on the other hand, controls on interest rates, direct involvement in credit is positive and statistically significant, indicating a allocation, or control over financial institutions) U-shaped relationship between public debt and private (Reinhart et al. 2011; Anyanwu et al. 2017). High credit. The negative and significant coefficient of public levels of government borrowing may deter banks from debt suggests a crowding out effect on private sector lending to riskier sectors, such as private businesses credit. The coefficient of the lagged error correction (Msafir et al. 2022). term (ECTt−1) is negative and significant. The diagnostic • In the long run, public debt and its squared term analysis confirms the model’s suitability46 and stability have opposite signs, but neither is statistically (Appendix 19). significant (Equation 22). Domestic credit to the private sector does therefore not appear to be a channel ln DCPt = -1.7 ln Ttdebtt + 0.2 ln Ttdebtsqt _ 0.37 i through which total public debt affects long-term _ 0.43 i economic growth in The Gambia. The money supply, however, has a positive and statistically significant + 0.9 ln LM2t - 0.5 ln PRIGDPt _ 0.00 i))) _ 0.00 i))) coefficient, suggesting that expansionary monetary policy supports the growth of bank lending to the private sector. This finding is consistent with studies + 1.4 ln Percapt - 10.1 such as Guo and Stepanyan (2011), Imran and _ 0.06 i) _ 0.28 i (22) Nishat (2013), and Islam (2022). Conversely, private investment appears to constrain domestic credit to the private sector in The Gambia, which is inconsistent 46 Adj-R2 = 0.92; LM(1) = 1.49 (0.22); LM(2) = 2.67 (0.26); with expectations and other studies such as Islam BPG = 12.31 (0.42); J − B = 0.12 (0.94); RESET(1) = 0.24 (0.63). 46 Chapter 2: The Gambia’s Public Debt: An Achilles Heel? THE GAMBIA PUBLIC DEBT: AN ACHILLES HEEL? D ln DCPt = - 4.13 D ln Ttdebtt 0.12 D ln Ttdebtt - 1 risk premiums. However, once debt exceeds the critical threshold, excessive debt negatively affects economic _ 0.00 i))) _ 0.04 i)) growth and heightens financial instability, prompting + 0.48 D ln Ttdebtsqt - 0.20 D ln Prigdpt interventionist policies that ultimately reduce real interest rates. Private sector credit is negatively affected in the _ 0.00 i))) _ 0.00 i))) short term by external public debt, although it does not + 0.20 D ln Percapt - 0.81 D ln Percapt - 1 appear to serve as a long-term transmission channel for the impact of external public debt on economic growth _ 055 i _ 0.04 i)) (Equation A10 and Equation A11 in Appendix 23). - 0.72 ECT t - 1 _ 0.00 i))) (23) 2.5. Analyzing the impact of the expiration of external debt service deferral The results for external public debt are consistent with those for total public debt and confirm that private External debt servicing has a direct impact on economic public investment as well as real interest rates are growth. It exerts a resource-draining effect that can slow long-run transmission channels through which public economic growth and contribute to over-indebtedness debt affects economic growth. External public debt (Abuzaid 2011). In addition, external debt servicing has a non-linear effect on private investment in the increases the demand for often scarce foreign exchange, long-run under an inverted-U curve, with a statistically introducing an exchange rate risk (Abbas and Christensen positive and significant coefficient of external debt and 2010) and reducing resources that could have been used for a statistically negative and significant coefficient of its social services (El Aboudi and Khanchaoui 2021). If debt quadratic term at 1 percent significance level, and an is contracted at a floating rate, this exposes the country optimal threshold of 50.4 percent of GDP (Equation A7 to changes in global interest rates, which may lead to an in Appendix 20). This supports the assumption that an increase in the cost of debt servicing (Elhendawy 2022; increase in The Gambia’s external debt stock (beyond IMF 2017). Debt servicing is crucial to debt sustainability, the threshold) would result in existing and potential as repaying current debt determines the ability to borrow investors anticipating higher and new taxes to service in the future (Lwanga and Mawejje 2014; Karaijiene the debt, reducing expectations of return on investment 2015). In the context of highly indebted countries, debt and discouraging private investment. Likewise, external servicing can drain public revenues to such an extent that public debt has a non-linear effect on public investment economic growth remains low, even in the presence of (Equation A8 in Appendix 21) and real interest rates structural reforms (AKos and Istvàn 2019). Moreover, (Equation A9 in Appendix 22) in the long run under external debt servicing can increase a country’s vulnerability an inverted-U curve, with a statistically positive and to external shocks and macroeconomic crises (Anderu et al. significant coefficient of external debt and a statistically 2019; Bekun and Alola 2016; Dey and Tarequ 2020). negative and significant coefficient of its quadratic term Given the potential consequences, it is essential to assess the at 1 percent significance level, and optimal thresholds impact of the expiration of external debt service deferrals in of 51.0  percent of GDP and 33.6  percent of GDP, The Gambia beginning in late 2024. respectively. Continued accumulation of external debt increases the debt burden, reducing long-term investment 2.5.1. Model specification spending due to the government’s fiscal consolidation efforts. The results suggest that initially, rising public The study applied the ARDL technique to analyze the debt leads to higher real interest rates due to increased relationship between external debt service and real Chapter 2: The Gambia’s Public Debt: An Achilles Heel? 47 GAMBIA | ECONOMIC UPDATE - 2025 GDP, with the goal of predicting the impact of expiring economic views. The Keynesians perspective holds external debt service deferral on economic growth. The that government spending can simulate economic model is based on Akanbi et al. (2022) and Salisu et al. expansion by increasing household purchasing power, (2024) and is described as follows : thereby boosting aggregate demand and output through expenditure multipliers (Romer 1996). By contrast, RGDP = f _ EXDEBT, DEBTSERV, INV, GOV, the classical school argues that public consumption expenditure is inefficient due to the crowding out effect RINT, IMPOR i (24) or Ricardian equivalence. The crowding out effects Where real GDP (RGDP) is a function of external debt occurs when increased government spending reduces stock as a percentage of GDP (EXDEBT), external debt private sector activity by raising interest rates, as the service as a percentage of GDP (DEBTSERV), real government’s need to finance the fiscal deficit through investment as a percentage of GDP (INV), imports of borrowing pressures the credit market, increasing interest goods and services as a percentage of GDP (IMPOR), rates (Barro 1974). Under Ricardian equivalence, government consumption expenditure as a percentage government expenditure has a neutral impact on the of GDP (GOV), and real interest rates (RINT). Annual private sector. An increase in current government data cover 1993–2023 and were sourced from the expenditure can be viewed by the private sector as World Development Indicators (WDI) database, except an increase in future taxes, prompting households investment, which came from the IMF national economic and firms to reduce consumption and investment in accounts database. This has been transformed into a anticipation of future tax burdens (Bernheim 1989). stochastic form to be estimated as follows: • Interest rates have a mixed impact on output (Drobyshevsky et al. 2017). Within the framework of ln RGDPt = b0 + b1 ln EXDEBT t + b2 ln DEBTSERV t the theory of irreversible investment, Arrow (1968) and Bertola and Caballero (1994) argue that rising interest + b3 ln INV t + b4 GOV t + b5 RINT t rates have a negative effect on output by increasing (25) the cost of borrowing while encouraging immediate + b6 ln IMPOR t + nt investment as firms seek to avoid future financing Where β0 is a constant, β1, . . . , β6 are coefficients of costs. Wickens (2008) outlined the mechanisms the independent variables, and μ is the error term. As through which these two opposing effects influence the variables EXDEBT, DEBTSERV, and INV were output in open economies. An increase in interest introduced in the first section, this section will show the rates leads to local currency appreciation, which in impact of imports, government expenditure, and real turn increases the volumes of imports of intermediate interest rates on economic growth. goods and capital equipment—thereby supporting output. However, currency appreciation can also • Imports can positively influence economic growth reduce the competitiveness of domestically produced by supporting the development of industrial sectors, goods, worsening net exports and output especially through importation of technological goods and machinery, which enhance productivity (Lee 1995). The variables of this study are integrated in a mixed Imports of medical products also extend life expectancy order (i.e. order 0 and order 1), justifying the use of and improve workforce health (Uddin and Khanam the ARDL model. The results of the stationarity tests are 2017). However, imports can negatively affect growth presented in Tables A11 and A12 in Appendix 26.1 and by widening external imbalances and increasing Appendix 26.2). Equation A12 in Appendix 24 represents vulnerability to external shocks (Esfahani 1991). the ARDL model combining the corresponding long- • Public consumption expenditure affects economic term multipliers and the coefficients of the short-term growth differently under the Keynesian and classical dynamics. 48 Chapter 2: The Gambia’s Public Debt: An Achilles Heel? THE GAMBIA PUBLIC DEBT: AN ACHILLES HEEL? External debt has a negative but statistically external deficits and increased vulnerability to external insignificant impact on real GDP. The analysis reveals shocks due to high levels of imports. a negative and insignificant influence of external debt on real GDP (Equation 26). This finding does not contradict Real interest rates have a positive but insignificant the results presented in Section 2, where external debt was effect on GDP. This result is consistent with the findings shown to positively influence economic growth up to a Njie and Badjie (2021) for The Gambia. Higher real rates threshold of 34.7 percent. Over the period 1993–2023, of return lead to higher levels of savings, which in turn there were six years in which external debt did not reach spur economic growth. this threshold. This result supports the assertion by Investment has a positive and significant effect on GDP. Pattillo et al. (2011)47 that the relationship between debt A 1 percent increase in investment increases real GDP and economic growth can be better represented by a non- by 0.5 percent. This positive relationship is consistent linear relationship. with expectations, suggesting that higher investment External debt service has an insignificant negative supports economic growth by stimulating domestic effect on real GDP. This partly supports Saungweme and demand. Imports are negatively correlated with real GDP, Odhiambo’s (2019) argument that debt relief initiatives although the relationship is statistically insignificant. The may implicitly reduce debt servicing costs, as well as diagnostic analysis confirms the model’s suitability48 and Clements et al.’s (2003) argument that debt service may stability (Appendix 28). be insignificant in the growth equation because its effect ln Rgdpt = - 0.24 ln Exdebtt - 0.16 ln Debtservt materializes instead through its impact on investment. Akanbi et al. (2022) interpret this negative coefficient _ 0.12 i _ 0.45 i of external debt service as a manifestation of a resource + 0.52 ln Invt - 0.09 ln Import - 0.61 ln Govt depletion effect. _ 0.00 i))) _ 0.79 i _ 0.07 i) Government consumption expenditure and imports + 0.01 RINT t + 3.16 have a negative but insignificant effect on growth. A 1 percent increase in consumption expenditure reduces _ 0.34 i _ 0.14 i (26) real GDP by 0.61 percent. This result supports the policy strategy advocated by the Bretton Woods institutions D ln Rgdpt = 0.01 D ln Invt - 0.02 D ln Govt that recommends a reduction in recurrent expenditure in _ 0.79 i _ 0.77 i developing countries to stimulate growth by transferring funds to infrastructure development (Mitchell 2005). An + 0.0004 D RINT t - 0.18 ECT t - 1 increase in government consumption expenditure usually _ 0.38 i _ 0.00 i))) (27) comes at the expense of capital expenditure or private sector investment. The negative correlation between imports and real GDP aligns with studies by Tahir 2.5.2. Accuracy of prediction, forecast et al. (2015) and Esfahani (1991), reflecting heightened assumptions, and forecasts The accuracy of prediction indicates that the real GDP forecasts are of good quality. Actual GDP 47 Since the objective of this section is to focus on external debt servicing values and simulated GDP series (GDPF) align closely, in relation with certain forecasts, the linear form was adopted, as the original study by Pattillo et al. (2011) also used both linear and non- linear specification. The non-linear specification has already been used 48 Adj-R2 = 0.98; LM(1) = 1.63 (0.20); LM(2) = 3.63 (0.16); in previous sections. BPG = 12.99 (0.22); J − B = 1.79 (0.41); RESET(1) = 0.02 (0.89) Chapter 2: The Gambia’s Public Debt: An Achilles Heel? 49 GAMBIA | ECONOMIC UPDATE - 2025 underscoring the reliability of the forecasts (Figure 38 Figure 38. Real GDP and Real GDP Forecast and Figure 39).49 Series, 1994–2022 This study provided a forecast of real GDP and 2,000 projected its growth rate between 2025 and 2028. 1,800 This forecast required providing future values of the explanatory variables, which in turn necessitated 1,600 assumptions about those variables. For external debt and external debt service, the study relied on projections 1,400 from the IMF (2024), which indicate that external debt service payments will rise significantly following 1,200 the expiration of the debt service deferrals as the end of 2024.50 As a percentage of GDP, external debt is 1,000 projected to rise from 2.0 percent in 2024 to 2.5 percent 800 in 2025, 2.7 percent in 2026 and 2027, and 3.0 percent in 2028, averaging 2.7 percent per year in 2025–2028. 600 To build a reference scenario without a resumption of 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22 debt service payments, the study assumed debt service levels RGDP RGDPF equivalent to the average observed over a 15-year period from 2009 to 2023. The projected annual increases in Source: Author’s calculation using Eviews 10. debt service as a share of GDP are 0.5 percent in 49 The historical simulations do not deviate drastically from the 2025, 0.2 percent in 2026 and 2027, and 0.3 percent observed values. The data presented alongside the RGDPF graph in 2028. For the other explanatory variables included (Figure 39) allow a statistical evaluation of the predictive quality of the in the model, the study assumed they would continue model. This study utilized two statistics independent of the dependent to follow the average rate of change observed over the variable’s measurement scale: mean Absolute Percentage Error and Theil period 1993–2023 (Table 3). Inequality Coefficient. The Theil Inequality Coefficient ranges from 0 to 1, with a value close to zero indicating a good fit. In this study, the two statistics have values of 2.89 and 0.01 respectively—both under 5 Resuming bilateral external debt servicing may percent—indicating strong predictive performance of the model. This reduce economic growth by 1.3 ppts between 2025 is also confirmed by the decomposition of the Mean Squared Error and 2028. Given past investment levels, GDP growth, into three types of proportions: bias proportion, which indicates how which remained strong at an estimated 7.09 percent in much the mean of the forecasts deviates from the mean of the current 2024, is projected to drop to 3 percent by 2028 if current values of the series, variance proportion, which indicates how much the economic trends persist. External debt servicing places a variation of the forecast values deviates from that of the current values, and covariance proportion, which measures non-systematic forecast significant burden on The Gambia’s revenue, resulting errors. For a reliable forecast, the first two proportions should yield in lower real GDP compared to a scenario without debt low values. In this case, the bias proportion and variance proportion payments. This outcome is largely explained by the are 0.005 and 0.001, respectively. All four statistics confirm that the debt transmission channels, particularly investment, model’s predictive performance is very strong. which plays a critical role in driving economic growth. 50 External debt service payments are set to increase from Increased debt servicing may also constrain essential US$54.8 million in 2024 to US$76.0 million in 2025, before reaching US$87.9 million in 2026, US$91.9 million in 2027, and US$16.5 imports, negatively impacting economic growth. The million in 2028, averaging US$90.6 million annually between 2025 adverse effects tend to diminish over time, especially as and 2028. the pace of economic growth slows. 50 Chapter 2: The Gambia’s Public Debt: An Achilles Heel? THE GAMBIA PUBLIC DEBT: AN ACHILLES HEEL? Figure 39. RGDPF forecast series, 1994–2022 2,400 Forecast: RGDPF Actual: RGDP 2,000 Forecast sample: 1993 2023 Adjusted sample: 1994 2023 Included observations: 30 1,600 Root Mean Squared Error 32.42207 Mean Absolute Error 26.65402 Mean Abs. Percent Error 2.286386 1,200 Theil Inequality Coefficient 0.012622 Bias Proportion 0.004587 800 Variance Proportion 0.000962 Covariance Proportion 0.994451 Theil U2 Coefficient 0.597542 400 Symmetric MAPE 2.286103 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22 RGDPF ±2 S.E. Source: Author’s calculation using Eviews 10. Table 3. Forecast assumptions for the impact of debt deferral on economic growth External debt service/GDP Real investment Public final Real Import/GDP External debt Without With (7,94 percent consumption/GDP interest rate (29,19 percent (PPG)/GDP payment payment growth) (21,73 decline) (20,196 percent) growth) 2024 40.0 2.4 2.40 2102.7 7.25 3.58 29.8 2025 37.8 2.52 2.92 2232.5 7.12 2.88 27.1 2026 35.9 2.74 3.15 2338.5 6.99 2.32 24.6 2027 33.9 2.71 3.11 2437.2 6.88 1.86 22.3 2028 32.0 2.96 3.36 2516.0 6.76 1.50 20.3 Source: Author’s calculation using Eviews 10. Chapter 2: The Gambia’s Public Debt: An Achilles Heel? 51 GAMBIA | ECONOMIC UPDATE - 2025 Table 4. GDP forecasts with and without external debt service payment resumption Without payment With deferred debt payments RGDP_SIM RGDP growth RGDP_SIM2 RGDP growth Gap in RGDP growth 2023 1963.60 1963.60 2024 2078.29 5.84 2078.29 5.84 0 2025 2200.74 5.89 2191.37 5.44 −0.45 2026 2328.77 5.82 2311.53 5.48 −0.33 2027 2470.82 6.10 2446.05 5.82 −0.28 2028 2620.05 6.04 2589.00 5.84 −0.20 Source: Author’s calculation using Eviews 10. 2.6. Options for curbing the growth terms that not only align with debt sustainability but also of public debt and reducing yield long-term growth dividends for the economy. debt-related risks A set of policy options can help balance the use of Public debt remains high and negatively affects the public debt for financing public expenditure needs and economy through several transmission channels. These sustaining economic growth while avoiding excessive include low domestic savings, weak tax revenues, large debt risks. These include: (i) strengthen domestic revenue external deficits, the fiscal burden of SOEs, limited mobilization; (ii) improving public spending efficiency; external private capital investment, and macro-fiscal (iii) ensuring a robust competition policy framework by vulnerabilities from climate shocks. Total, external, and developing antitrust laws and setting up independent and domestic public debt exceeds optimal levels, negatively well-functioning enforcement agencies; (iv) improving impacting economic growth. The key long-run transmission the institutional environment for debt transparency; channels are public and private investment as well as (v)  developing climate finance and resilient debt interest rates. instruments; and (vi) exploring debt-for-development swaps, (vii) tapping into the regional market to boost The findings of this study underscore the critical exports and reduce external imbalances; (viii) attracting importance of maintaining optimal levels of public more FDI and remittances for investment. debt and managing it efficiently to avert adverse effects on economic growth. With both external and • Strengthening domestic revenue mobilization. Efforts domestic debt exceeding optimal thresholds, public include: (i) reducing tax incentives and exemptions; debt is crowding out public and private investment and (ii) continuing to strengthen tax administration; and credit to the private sector, potentially creating instability (iii) expanding the tax base. Recent revenue-boosting in the macroeconomic system if debt levels were to rise measures, along with the Cabinet’s September 2024 further. This situation could further jeopardize economic adoption of the revised Duty Waiver Policy, will require growth. To mitigate such risks, the government is called effective implementation. The authorities will also upon to enhance debt management and strengthen fiscal need to accelerate the Cabinet’s adoption of the revised consolidation efforts to avoid debt repayments leading Gambia Investment and Export Promotion Agency Act to excessive budget overruns or the need for new debt to rationalize tax incentives. In addition, the Domestic financing. Public borrowing should be conducted on Revenue Mobilization Strategy outlines further 52 Chapter 2: The Gambia’s Public Debt: An Achilles Heel? THE GAMBIA PUBLIC DEBT: AN ACHILLES HEEL? measures, although an implementation roadmap is still • Ensure a robust competition policy framework by needed. Certain reforms present low-hanging fruits, developing antitrust laws and setting up independent such as digitizing the Integrated Tax Administration and well-functioning enforcement agencies. System (ITAS) and pursuing transformative initiatives Improving the business environment is essential to like expanding electronic tax registration, filing, enhance productivity and expand the revenue base. and payments. The Gambia also faces tax base risks The Gambia faces challenges in advancing policy and from abusive transfer pricing and treaty shopping, institutional reforms, as reflected in its low score on underscoring the need to build capacity in the tax the Country Policy and Institutional Assessment, administration to protect domestic revenue. particularly in macroeconomic policy and public sector • Enhancing the efficiency of public spending: Planned governance. The authorities need to urgently focus on reforms aim to rationalize public spending and include developing a comprehensive national strategy for good approving a roadmap for implementing program-based governance, addressing governance and corruption budgeting, preparing a study on rationalizing and vulnerabilities, and implementing a solid competition consolidating public agencies, and strengthening the policy framework. This would require the development management of investment projects (e.g., by expanding of antitrust laws, an independent and well-functioning the use of IFMIS to all new donor and government-funded enforcement agency, independent regulatory bodies, projects and expanding the investment prioritization and and judicial support (Cherif et al.2020). Institutional selection tool by the Gambia Strategic Review Board to reforms will need to be complemented by pursuing domestically financed and public-private partnerships). investments in infrastructure to accelerate capital Commitment to these reforms is crucial for fiscal and accumulation and productivity and improve domestic debt sustainability. Complementary reforms are also and international connectivity. needed, including: (i) targeting subsidies to the most • Improving the institutional environment to increase vulnerable; (ii)  reducing SOE budget allocations; debt transparency. Fostering debt transparency and and (iii) improving efficiency in expenditure. For better debt management can mitigate some of the costs example, electricity subsidies—representing 3.2 percent associated with debt accumulation and reduce political- of total spending or 0.8  percent of GDP—mostly economy pressures to increase borrowing (Kose et al. benefit affluent households due to their better access 2020). The Gambian authorities have made important to electricity, higher level of ownership of electrical progress in implementing debt management reforms appliances, and higher consumption of electricity. and increasing transparency, particularly in output The top 20 percent of households in terms of deciles reporting, institutional framework for reporting, legal of per capita disposable income capture 53.4 percent requirements for reporting, and debt records, although of all electricity subsidies, while the bottom 40 percent there are several areas in need of improvement51. receive only 11.2 percent. This indicates inequity and suggests the need for alternative policy instruments, 51 Several reforms have been undertaken since the last 4 years including such as transfers to vulnerable households and ending the publication of a Medium-Term Debt Strategy consistent with the generalized electricity subsidies. Government fiscal Medium-term Fiscal Framework; publication of quarterly reports on injections into SOEs, estimated at 5 percent of GDP external debt commitments, agreements and disbursements for 2019 (MOFEA 2021), present further opportunities for on its website; publication of an annual borrowing plan (systematically budgetary savings. In addition, The Gambia 2020 Public published since 2021); approval of the framework for the management Expenditure Review (PER) highlighted large spending of government loan guarantees; publication of the annual public debt bulletin, including government guarantees extended to all SOEs; inefficiencies in health, education, and security—among publication of a report on outstanding arrears between Government the sectors that account for the largest share of public and SOEs and among SOEs; elaboration of a regulatory instrument spending—that if addressed could generate fiscal savings adopting a credit risk assessment score card for the provision of public of about 4.9 percent of GDP (World Bank 2020). guarantees and on lending to SOEs. Chapter 2: The Gambia’s Public Debt: An Achilles Heel? 53 GAMBIA | ECONOMIC UPDATE - 2025 Table 5. Potential gains from domestic revenue mobilization reforms Revenue gains Policy measure (percent of GDP) Source Reduce tax incentives, 4–6 • A study by Oxford Economics Africa in 2022 on The Gambia’s exemptions, and duty tax expenditure found that the country had foregone potential waivers revenue in tax relief averaging 4.95 percent of GDP over 2028–2020 (6.96 percent in 2018, 3.98 percent in 2019, and 3.93 percent in 2020) through tax incentives for investment in priority sectors and aid-funded projects (Oxford Economics 2022). • The Gambia PER 2020 found that tax revenues are about 4–6 percent lower than the country’s potential due to generous tax incentives, multiple tax rates, difficulties in taxing government institutions, and the prevalence of zero-rated goods (World Bank 2020). • The Gambia Domestic Revenue Mobilization strategy estimates tax revenue losses due to tax exemptions at 4.2 percent of GDP (MOFEA, 2024). Introduce electronic tax 1.6 The introduction of e-filing and e-payment would help streamline registration (electronic the tax process, increase the share of on-time payments, reduce filing and electronic tax compliance costs, and increase tax revenue. Raising the payments) adoption of e-filing by 50 percent of total tax filing in low-income countries could boost tax revenues by 1.6 percent of GDP (Manabu and Andualem 2023). In Burkina Faso, the adoption of tax e-filling and e-payment in 2020 helped increased the number of taxpaying firms and individuals recorded in the government’s taxpayer database by 76 percent over 5 years, from 95,515 in 2017 to 168,623 in July 2023 (World Bank 2023c). In The Gambia, while the Integrated Tax Administration System is being prepared, the revenue administration has not yet enabled electronic filling for any of its core taxes or taxpayer segments. Improve expenditure 4.9 The Gambia PER 2020 found that tackling spending efficiency in efficiency education, health, and security—among the sectors that account for the largest share of public spending—could potentially generate 4.9 percent of GDP in fiscal savings (World Bank 2020). Reduce budget allocations 5–6 Government transfers to SOEs, which are unbudgeted, are to SOEs estimated at 5–6 percent of GDP (World Bank 2021). Current debt reports are up-to-date and adequate, non-guaranteed SOEs or other government-related but there are gaps, including missing information entities. The World Bank’s Transparency Heatmap such as data on the composition of the debt stock indicates areas for improvement, such expanding the (e.g., fixed vs. floating rates) and details on on-lending coverage of debt instruments (including historical to SOEs. While the 2014 PFM Act provides a sound guarantees and current on-lent credit by beneficiaries legal framework, enforcement should be strengthened and creditors) and debt sectoral coverage (including by, for example, requiring debt reporting from non-guaranteed debt from SOEs and subnational 54 Chapter 2: The Gambia’s Public Debt: An Achilles Heel? THE GAMBIA PUBLIC DEBT: AN ACHILLES HEEL? government debt under the non-financial public sector sustainable debt outlook, it could be a strong candidate (World Bank 2023d). for this instrument. Debt-for-development swaps can • Developing climate finance and climate-resilient help smooth debt amortization profiles, support sound debt instruments. Climate finance includes funding liability management (e.g., reduced debt stocks and, from public, private, and alternative sources at local, possibly, lower liquidity pressures), while supporting national, regional, and international levels. It aims high-impact development projects and potentially to support actions that contribute to climate change improving the balance of payments and fund high- mitigation and adaptation. There are several climate impact local development projects (replacing debt finance options, featuring diverse instruments such service in foreign currency with expenditures with as disaster risk management tools (e.g., contingency high local content). However, implementing such funds, traditional insurance policies, insurance-linked instruments requires a comprehensive assessment to securities like catastrophe bonds, and disaster risk ensure their appropriateness, including their impact facilities), thematic bonds (e.g., green bonds), debt on debt sustainability, potential financial gains, debt for climate swaps, and carbon pricing initiatives. management capacity, and transparency. Despite these Not all options are suitable for every country, as their challenges, these instruments hold significant potential effectiveness depends on a country’s specific context— benefits for The Gambia. including its policy and governance environment, • Taping into the regional market to boost exports and macro-financial conditions, financial market reduce external imbalances. Exports are dominated by development, and access to concessional funds. The edible fruits and nuts, fish and crustaceans, and oil seeds Gambian authorities should initiate a climate finance and oleaginous fruits, representing 55 percent of total strategy as part of their climate-resilience efforts, and exports in the third quarter of 2024. The Gambia’s top they should explore innovative debt instruments like export destinations are China and India, accounting debt for nature and climate swaps that align with the for more than 60 percent of its exports. The country’s local context. These climate-resilient instruments can imports are dominated by mineral fuels, representing help mitigate the financial impact of climate shocks more than 40 percent of total imports. Food imports without imposing a significant fiscal burden. are also part of the top imports, accounting for • Exploring debt-for-development swaps: Debt swaps 20 percent of total imports in the third quarter of 2024 are agreements between a government and one or (GBOS 2024) and representing more than 50 percent more of its creditors to restructure existing sovereign of food consumption. The intra-regional market debt into new liabilities that include a commitment represents 39.6 percent of total imports, but only to fund specific development goals (WB and IMF 11 percent of exports went to ECOWAS in 2022. The 2024).52 These goals may include nature conservation, Gambia needs to increase its exports to the regional climate action, improving education or nutrition, market, which could be done by capitalizing on trade or support for refugees. The spending commitment opportunities provided by ECOWAS and the African is often associated with the country’s decision to Continental Free Trade Area (AfCFTA). The country pursue an important development policy. Given that adopted the five-tiered ECOWAS Common External The Gambia is at high risk of debt distress with a Tariff in January 2017, became the 14th West African country to have signed the region-to-region Economic Partnership Agreement with the European Union in 52 The country’s commitment to allocate payments toward the swap’s August 2018, and became the 22nd nation to ratify development objective (e.g., a marine conservation fund) constitutes the African Continental Free Trade Area (AfCFTA) a liability that reduces future cash flows available for other purposes. Although this obligation is not classified as public debt and thus in April 2019. The national AfCFTA implementation excluded from debt statistics, it functions similarly by constraining strategy, validated in March 2024, identifies high-value fiscal space. products with high export potential to increase exports Chapter 2: The Gambia’s Public Debt: An Achilles Heel? 55 GAMBIA | ECONOMIC UPDATE - 2025 to various African markets and improve participation Tackling the financing and institutional challenges and in regional value chains. The Gambia must strengthen commitment to reforms are essential to implementing its internal productive capacity to leverage regional the proposed policy reforms. The implementation market opportunities. It can do this by: (i) increasing of the reforms requires sustained efforts to tackle major FDI inflows to acquire technologies; (ii) strengthening obstacles in terms of financing, institutional capacity research and development to learn and assimilate and engagement of key stakeholders. The magnitude of imported technologies; (iii) improving firms’ access financing constraints is illustrated by financing requirements to finance; (iv) reform education to increase human of the National Development plan 2023–2027 estimated at capital development and ultimately support industrial US$3.5 billion. Only $0.7 billion of funding was available development; (v) developing a favorable environment in December 2023, implying a financing gap of 80 percent for SMEs promotion; and (vi) investing in regional of the estimated cost, which could affect its implementation industrial value chains. if the Government does not mobilize more fiscal resources. • Increasing the attractiveness and efficiency of To address the funding requirements, the government is external capital flows (FDI and remittances). exploring a three-pronged strategy : domestic resource Despite having an open investment regime and mobilization, innovative financing, and concessionary modern business regulations, supply-side constraints, financing. Implementing the proposed policy options vulnerability to external shocks, and persistent will thus need to be part of ongoing resource mobilization bottlenecks impede private sector development and efforts, with the view to strengthening the link between FDI inflows (UNCTAD 2017). Supply-side constraints policies with the Medium-Term Expenditure Framework include an infrastructure gap, weak development (MTEF) and annual budgets to ensure that development of human capital, weak competition, limited size priorities are appropriately financed. Implementing and weak diversification of the domestic economy, reforms also poses a challenge in terms of institutional and limited involvement of the domestic financial framework and public administration capacity for sector in investment financing. Although FDI coordination and monitoring. A reform monitoring positively correlates with economic growth in The committee has recently been set up at the Ministry of Gambia (Gaye and Njie, 2023), FDI inflows remain Finance and Economic Affairs. The authorities will need low. To attract more FDI, the country should pursue a to ensure that this committee functions effectively, with series of policy reforms to improve its macroeconomic adequate resources and back up at a high level of State and institutional framework, including enhancing apparatus. Limited administrative capacity has been competition (notably by reforming SOEs), deepening identified as hampering the delivery of timely and quality financial markets, enhancing regional integration to public services. The authorities will need to pursue efforts overcome the obstacles posed by the small size of the in strengthening the capacity of public administration national market, improving the quality of physical and in terms of processes and human resource qualifications. human capital, and improving the business climate to The implementation of the suggested policy options will better exploit sectors with high growth potential to also require strong political commitment to reforms. This diversify the economy. 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