Impact Of Exchange Rate On Debt In The Gambia: A Non-Linear Autoregressive Distributed Lag Model

This study investigates the relationship between exchange rate fluctuations and debt sustainability in The Gambia. Unstable currency rate remains a major problem to countries’ economy especially external debt which The Gambia is faced with. To achieve the objective of this study, we employed non-linear autoregressive distributed lag (NARDL) model to explore both short-term and long-term effect. Our study revealed that exchange rate volatility was found to significantly influence The Gambia’s external debt dynamics, particularly through the reduction of the Gambian Dalasi (GMD) against major currencies, which raises the cost of servicing foreign-denominated debt and strains fiscal resources. The study reveals that a 1% depreciation of GMD increases external debt by 6.6% in the short run, underlining the immediate impact of currency fluctuations on debt accumulation. This research highlights that exchange rate volatility can undermine investor confidence and escalate borrowing costs, and exacerbates debt challenges. In terms of policy recommendations, the study emphasizes the importance of robust debt sustainability analysis (DSA), effective currency management, and export-driven growth to mitigate the adverse effects of exchange rate fluctuations. The findings provide valuable insights for policymakers in The Gambia, suggesting strategies to improve fiscal resilience and manage exchange rate-induced economic risk.