Economy In Shackle: The Damaging Effects Of Gambia’s Unproductive Indebtedness
Almost every year, huge chunks of the loans taken by the government of The Gambia are said to be spent on infrastructures – which barely plough back for repayments. The productive sector and social services certainly bear most of the consequences caused by the Gambia’s rising indebtedness.
Meanwhile, the government’s continues to essentially rely on tax revenue to repay such unproductive loans that heavily slice the annual budget, leading to under budgeting for key sectors like health and agriculture.
This year, the government spent 40 percent of tax revenue on debt interest. Its economic policies centred on indiscriminately grabbing every available loan, both domestically and overseas, is now subject to sharp criticism by citizens.
“I am not an economist but I am worried by the debt level of this country. It’s really growing and I think it’s scary and threatening to our national sovereignty. What I cannot understand is that, all these loans that are coming, our university is lacking basic needs like desks, equipment, almost no drugs at the hospital and poverty are increasing. We have a terrible electricity supply [system] in this country. Where are these monies going?”, Fanta Dahaba, a student told The Chronicle.
The outstanding domestic debt stock of the Gambia has increased to D34.8 billion (35.3 percent of the GDP) as at the end of November 2020. At the end of December 2019, the debt stock was D33.1 billion (36.9 percent of the GDP), according to the Central Bank of The Gambia in its latest Monetary Policy report published on December 3, 2020,.
Meanwhile, the country’s external debt constitutes D35.5 billion (37 percent of GDP) in 2020, the Minister of Finance and Economic Affairs, Mambury Njie, says in his 2021 Budget speech.
The most recent loans taken by the government arrived in multi-million-dollar packages, meant to address the broken economy ruined by COVID-19 pandemic.
“Support from the IMF under the Rapid Credit Facility to the tune of US$21.3 million was received for the financing of Government’s COVID-19 expenditure,” according to the Minister.
Additionally, the Catastrophe Containment and Relief Trust (CCRT) provided US$4.4 million in debt relief, with the Debt Service Suspension Initiative (DSSI) amounting to US$4 million from ECOWAS Bank for International Development, People’s Republic of China, Kuwait Fund for Arab Economic Development, and the Saudi Fund for Development. However, this only helps in strengthening Gambia’s debt sustainability outlook and creating fiscal space and not a debt cancellation.
Minister Njie admitted that debt management is crucial given the unsustainable trajectory of the public debt, adding that the government has engaged most of its external creditors to secure a debt restructuring programme.
“The recently published Medium-Term Debt Strategy would ensure a cost-effective public debt level with a prudent degree of risk as well as promote the development of our domestic debt market,” he says.
The 2020 Gambia Debt Sustainability Analysis (DSA) published by the Finance Ministry indicated that the country remains in debt distress as its debt is unsustainable.
The government has been criticised and accused of sacrificing the country’s sovereignty with its continued borrowing from external sources.
“As long as we talk about the importance of certain sectors without addressing them, we will keep on begging and taking loans and will keep on sacrificing the sovereignty of this country,” veteran politician Sidia Jatta says.
The lawmaker says it’s not a strategic planning and budgeting for every D100 to be spent in the country when D41 or D42 will go into debt servicing.
“If you add what goes into debt servicing and serious commitment, you are only left with 10% of the country’s budget. Where do you go with 10% of the budget?”
The Gambia’s public debt profile improved a couple of years ago when the debt to GDP formula underwent a debasement, reducing the debt to GDP ratio from 117% to 80% and improving the country’s capacity to borrow from traditional and non-traditional creditors.
A burden on other priorities
Economist Nyang Njie says debt servicing is basically a burden and an opportunity cost to taxes collected.
“Once that is paid, what is left is what we use to spend. Let’s say today The Gambia happens to have a debt to GDP ratio of 27 percent, it means that for every one dalasi we collect, 27 bututs will go towards debt, then the rest will be used towards having a budget and spending it on other things. So, basically, a higher debt service takes away key priority areas like education, health and agriculture.”
The current government’s projects that are being funded by domestic debts include the Banjul project, Nuimi Hakalang road project etc. The government will rely on tax revenue to pay such debts. But according to Nyang, if tax revenues are not enough, the government uses debt servicing to pay for it. “It means the roads we are building is at the expense of the monies to be spent on our schools, agricultural sector and many other areas.”
“We need to prioritize as a nation. But the priority is primarily making the politicians look good; that is in the area of road construction and others, and not building schools, hospitals etc. As a country, we need to take a critical look and invest heavily on human development such as the welfare of Gambian people.”
The need for a debt legislation ceiling
While the external creditors like IMF, World Bank, ADB, Kuwaiti Fund etc. can adopt debt restructuring plans whenever Gambia defaults, domestic debt has to be paid.
“The problem is our domestic debt which is basically a treasury bill. When the government takes the money from the general public, we don’t restructure debt for them. They have to pay because they are not NGOs. So, when these debts are due, the government has to pay, it’s an obligation.”
In a situation where the government cannot pay, it will contract more debts to pay the domestic debts yet owe other people and it becomes a vicious cycle.
To avoid the festering debt challenges, Njie believes that the government needs to enact a debt legislation ceiling which will put a cap to limit the borrowing in every budget cycle.
“The appetite of the politicians will be capped by the law and that’s the way we will get out. When you look at what the president of this country is doing, he’s making himself look good in terms of embarking on infrastructural projects that this country cannot afford and Gambia cannot continue to do that.
“We need a law to protect us from politicians who are very selfish and narrow-minded in trying to look at their personal gains against the interest of the economy and future generation of Gambians,” he says.
Njie also suggested creating a law that will prevent the use of loans on expenditures like travels, per diems, rent because there are no returns on investments.
Figures could balloon as election nears
Based on the Finance Ministry’s figures, the domestic debt component in 2020, stood at D32.1 billion or 34% of GDP and the external component stood at D35.5 billion or 37% of GDP. Gambian economist and former Executive director of the Africa Development Bank Sidi Sanneh, now based in the United States, says the figures are expected to balloon in the run-up to presidential elections.
“In The Gambia, they are [election is] scheduled for 2021 which will inevitably give rise to expenditure overruns. Weak management of state-owned-enterprises (SEOs) also are highly susceptible to corruption and political capture of the public investment program. Expect the domestic component of the public debt to increase discernibly in 2021 due to the presidential elections.”
He says the increasing use of the Ex-Im Bank facilities of the governments of India and Turkey will further exacerbate the debt crisis because the cost of borrowing from these state-owned export-promotion agencies are far more expensive than from Gambia’s traditional development partners, such as the World Bank, African Development Bank, Islamic Development Bank and similar agencies.
“Whereas these development banks lend to The Gambia at concessionary rates of 0.5 -0.75% service charge, Ex-Im Bank loans command anywhere from 10-15% rate, depending on the type of project and lending terms. As the government increasingly depends on Ex-Im Banks, the public debt will continue to balloon, exponentially unless the government is selective in the types of projects financed using Ex-Im Bank facilities.”
The National Assembly Building was financed by the Ex-Im Bank of India at the cost of US$27M at or near commercial interest rate. The edifice is not generating any income to help service the loan; therefore, the entire loan will be financed from revenues collected by GRA.
The tractors under Jammeh were financed by Ex-Im Bank of India which was to have been sold by private companies. Instead, the sale was done by Jammeh. Even if Jammeh did not lodge the proceeds of the sale in the public treasury, Gambians as taxpayers, will be saddled with the bill.
The need for fiscal discipline
“The way forward is really very simple: Gambia, like other countries that have managed to bring their public debt under control, must bring fiscal discipline to bare on our public finances. Prudent fiscal measures must be strictly applied across the public service, evenly and without exception,” Sanneh says.
“Domestic borrowing must also be brought under control. Revenue collection must improve significantly. My personal view is, as part of improving the government’s revenue collection, the government must dis-aggregate the GRA back to its component parts i.e., Customs and Income Tax. When a monopoly is too big, you break it up to inject competition.”
The World Bank and the IMF have advised the government to pursue a strict fiscal consolidation programme to ensure that debt is brought to sustainable levels by improving revenue collection and managing expenditure.
A joint 2020 Debt Sustainability Analysis by the two lending institutions highlighted the need for the government of the Gambia to gradually reduce the usage of expensive debt facilities, as this is a major drag on the external debt service burden.