Public debt in The Gambia has soared over the last decade, reversing gains achieved through the Heavily Indebted Poor Countries (HIPC) Initiative in 2007, raising concerns about its impact on the economy. After halving to 38% of GDP following the HIPC initiative in 2007, total public debt has soared over the last decade to reach 84% of GDP in 2022. Thanks to domestic revenue mobilization, public debt has begun to decline, while remaining high at 71.2% of GDP in 2024 (Figure 1). External debt continues to dominate, accounting for an average of 64.5% of the total public.
Figure 1. Public debt has soared over the past decade, wiping out the gains made from the HIPC initiative in 2007.
Source: World Development Indicators.
The rise in public debt stems from low domestic savings, low tax revenues, weak State-Owned Enterprises (SOEs)’ performance, high external deficits, low inflows of external private capital, and the growing impact of climate-related events. With limited savings, investment funding has largely relied on debt over the years. Lower tax revenue, combined with increased and rigid expenditures, led to large fiscal deficits and worsened public debt. Due to a narrow export basket, the trade merchandise deficit increasingly widened, financed largely through external borrowing. Additionally, external private capital inflows have been insufficient to bridge the domestic savings gap. Foreign direct investment inflows have been limited. Despite high remittance inflows, their contribution to savings and investment remains limited as they are mainly used for consumption. Climate shocks compound these challenges by eroding government revenue and increasing fiscal pressures.
While moderate levels of public debt support long-term economic growth, excessive debt have an adverse impact on The Gambia’s economic performance. Reasonable levels of public debt (moving from 0 indebtedness to point A) exert a positive effect on growth by financing productive investment, increasing aggregate demand and employment. As debt ratios increase beyond point A, additional debt slows growth down even though the overall debt level continues to make a positive contribution to growth. Beyond a certain threshold (point B), the negative effects of high debt levels, such as increased interest payments and reduced private investment and consumption, begin to outweigh the benefits: the country becomes worse off than in the case of no indebtedness (Figure 2). The optimal debt-to-GDP ratio threshold is calculated at 51.9% of GDP, well below the actual ratio at 71.2% in 2024, which harms economic growth. Public debt affects The Gambia’s economy through adverse effects on public and private investment, interest rates, and private sector credit.
The expiration of external debt service deferral is projected to lower economic growth. With resumption in external debt service payments, debt service payments are projected to rise to 29% of the 2025 budget, further constraining development financing. By draining resources and increasing the demand for foreign exchange, this may reduce economic growth by 1.3 ppts between 2025 and 2028.
Figure 2. While moderate levels of public debt support long-term economic growth, excessive debt have an adverse impact on The Gambia’s economic performance.
1. Strengthening domestic revenue mobilization by (i) reducing tax incentives and exemptions and (ii) continuing to strengthen tax administration.
2. Improving public spending efficiency by (i) rationalizing public spending; (ii) streamlining subsidies; and (iii) reducing budget allocations to SOEs.
3. Ensuring a robust competition policy framework to enhance productivity and expand the revenue base by (i) developing antitrust laws; and (ii) setting up independent and well-functioning enforcement bodies.
4. Improving the institutional environment for debt transparency by (i) expanding debt information such as data on the composition of the debt stock; and (ii) expanding the debt instruments and sectoral coverage.
5. Developing climate finance and resilient debt instruments by (i) initiating a climate finance strategy; and (ii) exploring innovative debt instruments like climate swaps.
6. Exploring debt-for-development swaps by conducting a comprehensive assessment of their appropriateness, including their impact on debt sustainability and financial gains.
7. Tapping into the regional market to boost exports and reduce external imbalances by (i) improving firms’ access to finance; (ii) enhancing human and physical capital to support industrial development; (iii) developing a favorable environment for SMEs; and (iv) investing in regional industrial value chains.
8. Attracting more FDI and remittances for investment by (i) enhancing competition, (ii) deepening financial markets, (iii) improving the business climate; (iv) promoting diaspora investment; and (v) establishing partnerships with financial institutions to reduce remittance transfer costs.
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