III Growth, Saving, and Investment
Author:
Mr. Eric Verreydt
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Mr. Michael T. Hadjimichael
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Mr. Thomas Rumbaugh
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Language:
English
Print Publication Date:
15 Sep 1992
Keywords:
OP; adjustment effort; re-export trade; public enterprise sector; enterprise; Gambian economy; private sector saving; investment balance; savings performance; investment project; government saving; Agricultural commodities; Agricultural sector; Private savings; Services sector; Public investment spending
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Abstract

The growth potential of the Gambian economy has improved markedly since 1985/86 with the removal of distortions in the structure of relative prices, the strengthening in economic incentives, including the introduction of a market-determined exchange rate, and the rehabilitation of economic infrastructure. These policies have encouraged a diversification of the production base primarily toward services (such as regional trade and tourism) and to a lesser extent manufacturing, while broadening at the same time the base of agricultural output. Notwithstanding the progress made in diversifying economic activity, the output base of the economy remains fragile; it continues to be sensitive to changes in the weather, as well as external and regional developments.

The growth potential of the Gambian economy has improved markedly since 1985/86 with the removal of distortions in the structure of relative prices, the strengthening in economic incentives, including the introduction of a market-determined exchange rate, and the rehabilitation of economic infrastructure. These policies have encouraged a diversification of the production base primarily toward services (such as regional trade and tourism) and to a lesser extent manufacturing, while broadening at the same time the base of agricultural output. Notwithstanding the progress made in diversifying economic activity, the output base of the economy remains fragile; it continues to be sensitive to changes in the weather, as well as external and regional developments.

The attainment of broad macroeconomic stability and the improved economic incentives have also contributed to a marked recovery in gross investment and domestically generated gross national savings from their low levels in 1985/86. The increase in gross investment was accompanied by an enhancement of its efficiency, particularly of government investment, thus supporting the strong expansion in output. The strengthening of the supply response of the economy facilitated the improvement in the savings performance, as well as in the external current account position, without undue restraint of domestic absorption. Notwithstanding the recovery in savings and investment in relation to GDP, savings and investment are still lower than their levels in the early 1980s and remain too modest to sustain a satisfactory expansion in economic growth and generate adequate employment opportunities for The Gambia’s rapidly growing labor force. In view of this, the policies currently in place are aimed at stimulating private sector savings and investment, while strengthening further government finances and maintaining macroeconomic stability.

Developments in Output

Real GDP leveled off during the second half of the 1970s, but rose markedly in the early 1980s, peaking in 1982/83, largely as a result of a steep expansion in groundnut production. Activity in agriculture fell sharply (26 percent) in the subsequent year, owing mainly to unfavorable weather, and recovered only modestly by 1985/86; this, together with a sluggish growth in industry and services, led to a similar trend in real GDP (Table 4). Following the introduction of the economic recovery program, real GDP grew steadily, at an annual average rate of 3.4 percent during the six-year period to 1991/92. During that time, real GDP growth was strongly influenced by the generally unfavorable weather and a marked decline in world groundnut prices, which led to a stagnation in agricultural output. The decline in real value added in agriculture was particularly strong in 1990/91, amounting to 14 percent, and despite an estimated increase of 5.4 percent in 1991/92, agricultural activity in that year was barely higher than in 1985/86. However, a marked expansion in real value added in the industrial and services sectors, averaging 4.5 percent and 4.1 percent a year, respectively, cushioned the adverse effects on total real GDP, thus facilitating a stabilization of real per capita income in the face of strong population growth. The Gambia’s growth performance since 1985/86 compares favorably with the average for all sub-Saharan African countries, where it amounted on average to only 2.1 percent a year, significantly below the estimated annual rate of population growth (3 percent).5

Table 4.

Gross Domestic Product by Kind of Economic Activity

article image
Sources: Data provided by the Gambian authorities; and IMF staff estimates.

Within the agricultural sector, a modest decline in real value added in crop production was offset by higher activity in the livestock, forestry, and fishery subsectors. Groundnut production fluctuated sharply from year to year, again owing largely to the vagaries of the weather and, in part, to a downward trend in real producer prices. In particular, after peaking at over 151,000 tons in 1982/83, groundnut production fell to 75,000 tons at the beginning of the adjustment efforts in 1985/86, before rising again to almost 130,000 tons in 1989/90. With a severe drought in 1990/91, groundnut production fell again to 74,000 tons and recovered only modestly to 84,000 tons in 1991/92. During the same period, groundnut oil prices in world markets displayed a pronounced year-on-year variability, falling overall from SDR 962 a ton in 1982/83 to SDR 565 a ton in 1991/92. As a consequence, the real producer price (purchase price since 1989/90) for groundnuts fluctuated as well, along a generally declining trend; by 1991/92, it was 27 percent lower than in 1982/83. The variability in groundnut production, together with changes in the producer price differential with a neighboring country,6 has affected the quantity of groundnuts processed domestically by the GPMB, and thus activity in the manufacturing and trading sectors.

The services sector has benefited most from the improved macroeconomic environment and strengthened economic incentives, including the gains in external competitiveness. Within the services sector, strong increases have been recorded since 1985/86 in activity in the trade (including reexports), tourism, transport and communications, and finance and insurance subsectors, amounting on an annual average basis to 4.9 percent, 5.5 percent, 11.5 percent, and 7.1 percent, respectively. The traditionally liberal trade regime maintained by The Gambia, combined with the lifting of exchange controls and the introduction of a market-determined exchange rate, boosted the expansion of reexports to the subregion. Regional political developments have, on balance, also enhanced the importance of The Gambia as an entry point for regional trade. A broad range of basic consumer goods (such as rice, green tea, sugar, tomato paste, tobacco, footwear, and textiles) are usually imported into The Gambia, where they are sold wholesale to visiting traders from several neighboring countries. While the development of the re-export sector has had limited employment and income linkages to the rest of the economy, with the exception perhaps of the transport and communications and in part the banking sectors, it has had a major impact on foreign exchange earnings.

The Gambia’s climate and sandy beaches offer an attractive and cheaper alternative to Mediterranean countries for many European tourists. As a result, the tourism sector has expanded markedly in recent years, aided in part by the fiscal incentives offered by the 1988 Development Act to domestic and foreign investors. The number of foreign-owned and -operated hotels has risen substantially, facilitating an increase in the number of tourists from 78,000 in 1985/86 to 109,000 in 1991/92, mainly under air charter tourist packages. While the import requirements of activity in the tourism sector remain fairly high, the strong expansion of the sector has boosted employment in the formal sector of the economy and activity in the construction sector, and has encouraged the development of related services, such as restaurants.

The industrial sector of The Gambia comprises mainly manufacturing and construction. Value added in the public utilities sector has traditionally been rather modest. Activity in the manufacturing sector has expanded on average by 3.5 percent a year since 1985/86, albeit from a low base. The development of the sector continues to be con-strained by the small size of the economy, the limited availability of domestic raw materials, the frequent disruptions in the supply of electricity, and the weak managerial and technical expertise available in the country. Activity in the construction sector, on the other hand, has benefited from the emphasis of the public investment program on economic infrastructure and the construction of new hotels and of private houses for rent (mainly to expatriates).

The share of the industrial sector in total real GDP rose marginally from 11 percent in 1985/86 to 12 percent by 1991/92, while that of the services sector expanded from 53 percent to 55 percent, respectively. With the stagnation of activity in the agricultural sector, its share declined markedly, from 25 percent in 1985/86 (28 percent in 1982/83) to only 20 percent by 1991/92 (Chart 4). Although data on employment and the labor force are not available, it is believed that at least 60 percent of the labor force has traditionally been employed in the agricultural sector. The deteriorating income prospects in the rural areas have encouraged a high rate of urban migration, estimated at 6 percent a year. Although data are not available, it is estimated that the pace of employment generation in the urban areas may not have kept up with the rapidly increasing labor supply, resulting in increasing urban underemployment and unemployment.

Chart 4.
Chart 4.

Sectoral Composition of Real GDP

(In percent of GDP)

Sources: Data provided by the Gambian authorities; and IMF staff estimates.

Developments in Saving and Investment

Tentative estimates of saving and investment balances indicate that both gross investment and the domestically generated gross national savings (i.e., excluding foreign grants) have recovered markedly from their low levels in 1985/86 (Table 5).7 In particular, after declining from 10 percent of GDP in 1982/83 to a negative level equivalent to 1 percent of GDP in 1985/86, domestically generated savings rose to 5 percent of GDP by 1991/92. Similarly, gross national savings fell in relation to GDP from 22 percent in 1982/83 to 15 percent in 1985/86, before recovering to 19 percent by 1991/92.8 Notwithstanding this recovery, both saving and investment in The Gambia are still too low to sustain a satisfactory growth in output, implying a continuing need to rely heavily on foreign savings (external current account deficit, excluding official transfers), as well as on foreign grants. While declining, the use of foreign savings by The Gambia and the value of foreign grants amounted each to the equivalent of 14 percent of GDP in 1991/92, a level not unduly high given The Gambia’s stage of economic development.9

Table 5.

National Income, Savings, and Investment

(In Percent of GDP)

article image
Sources: Data provided by the Gambian authorities; and IMF staff estimates.

Consists of both official and private tranifers.

Includes public enterprises.

Government current expenditure, less capital component of recurrent budget, plus current component of development budget.

Domestic revenue (excluding capital revenue), less government consumption.

Gross national savings, excluding official transfers.

Development expenditure (excluding rvec lending}, plus capital component of recurrent: budget, less current component of development budget.

Domestically generated financial balances.

The expansion in domestic savings reflected contributions from both the government and private sectors, but the recovery in gross investment emanated entirely from the private sector (including the public enterprise sector). The improvement in the Government’s savings performance, from 1 percent of GDP in 1985/86 to 3 percent in 1991/92, was associated with a decline in government investment as a ratio to GDP from 7 percent in 1985/86 (9 percent in 1982/83) to 5 percent in 1991/92. This resulted in a significant reduction in the Government’s net financial deficit and contributed importantly to the strengthening of The Gambia’s external current account position. It should be recognized, however, that while government investment declined relative to GDP, its efficiency has increased markedly through a more rigorous selection of investment projects and a greater emphasis on the rehabilitation of the basic economic infrastructure, thus supporting the recorded real GDP growth. The net financial deficit of the private sector, on the other hand, has been rather volatile. This reflected to a large extent the lumpiness of investment projects undertaken in the late 1980s in the tourism sector and the tendency of private savings to change from year to year so as to cushion private consumption levels from the fluctuations in private disposable income caused by the swings in agricultural output and the external terms of trade. The still modest level of private savings reflects largely the low levels of real per capita incomes, the impact of the traditional extended family system, and, in part, the weak development of the domestic financial system, notwithstanding the restoration of positive real interest rates.10 While data on the breakdown of private savings between personal and corporate savings are not available, it is believed that they comprise mainly profits by the business sector; part of these profits may have actually been placed abroad, given the absence of restrictions on capital movements and the foreign ownership of several enterprises in The Gambia, particularly in the tourism and trade sectors.

5

For a review of recent trends in developing countries, see International Monetary Fund (1992).

6

Groundnut producer prices in Senegal have tended to be less sensitive to changes in the world market price for groundnuts, resulting in a generally sizable positive differential vis-à-vis producer prices in The Gambia (amounting to about 50 percent in 1991/92), which has encouraged cross border sales of groundnuts.

7

The estimates of saving and investment balances are derived from partial indicators of sectoral expenditure patterns and thus, are unavoidably subject to a large margin for error.

8

The Gambia’s investment ratio compares favorably with that of other sub-Saharan African countries, which amounted to 17 percent of GDP in 1991, but is lower than the average for all developing countries (excluding Eastern Europe and the former U.S.S.R.), was estimated at 26 percent of GDP.

9

To a large extent, the high level of foreign grants relative to GDP reflected sizable technical assistance.

10

Although the empirical evidence suggests that interest rate policies have small effects on savings rates, maintenance of negative real interest rates for prolonged periods could lead to a flight out of financial savings. For a review of interest rate policies in developing countries, see International Monetary Fund (1983) and Aghevli and others 1990).

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Cover The Gambia
The Gambia
Economic Adjustment in a Small Open Economy
ISBN:
9781557752307
ISSN:
0251-6365
Publication Date:
15 Sep 1992
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781557752307.084
Pages:
48
Chart 4.

Sectoral Composition of Real GDP

(In percent of GDP)

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