Assessing the impact of domestic and external debt on the Gambia’s economic growth : an ardl analysis

Abstract

This study investigates the short- and long-run effects of domestic and external public debt on economic growth in The Gambia, a low-income economy characterized by persistent fiscal constraints and external vulnerabilities. Using annual data from 1976 to 2023, the analysis employs the Autoregressive Distributed Lag (ARDL) bounds testing approach to examine the dynamic relationship between public debt components and GDP growth, while incorporating key macroeconomic variables such as inflation, interest rates, and foreign direct investment (FDI). The results indicate that both domestic and external debt negatively impact economic growth in the short run, with external debt exerting a stronger adverse effect (–0.54%) compared to domestic debt (–0.30%), largely due to the crowding-out of private investment. In the long run, a stable relationship exists, yet external debt continues to suppress growth, driven by exchange rate volatility and substantial debt servicing obligations that consume over 40% of government revenue. The findings challenge classical economic assumptions such as Ricardian Equivalence, revealing that fiscal deficits may stimulate short-term demand in contexts marked by low household savings and weak financial systems. In response, the study proposes a tailored Debt Sustainability Framework (DSF) for The Gambia that emphasizes strengthened domestic revenue mobilization, enhanced public financial management, the promotion of FDI, and a strategic shift toward concessional borrowing. By offering empirical insights and policy-oriented solutions, this research adds value to the limited literature on debt-growth dynamics in aid-dependent economies and provides actionable strategies for achieving sustainable economic development.