V Fiscal Adjustment
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; development expenditure; Development expenditure; expenditure category; expenditure Policy; unallocated expenditure; Civil service; Total expenditures; West Africa
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Abstract

In the decade to 1985/86, following the launching of The Gambia’s first five-year development plan in 1975, public sector involvement in the economy increased substantially through the creation of public enterprises, the liberal provision of government-guaranteed loans at subsidized interest rates, and a large expansion in the size of the Central Government. Although a substantial in-crease in revenue mobilization occurred in this period, it was outpaced by a steep rise in expenditure, particularly with respect to the wage bill and public investment. The large increases in the wage bill reflected a doubling in the size of the civil service. In 1975, there were 4,000 civil servants and 2,000 nonpermanent staff. By 1985 these numbers had risen to 10,700 civil servants and 5,000 nonpermanent staff.

In the decade to 1985/86, following the launching of The Gambia’s first five-year development plan in 1975, public sector involvement in the economy increased substantially through the creation of public enterprises, the liberal provision of government-guaranteed loans at subsidized interest rates, and a large expansion in the size of the Central Government. Although a substantial in-crease in revenue mobilization occurred in this period, it was outpaced by a steep rise in expenditure, particularly with respect to the wage bill and public investment. The large increases in the wage bill reflected a doubling in the size of the civil service. In 1975, there were 4,000 civil servants and 2,000 nonpermanent staff. By 1985 these numbers had risen to 10,700 civil servants and 5,000 nonpermanent staff.

The large expansion in the size of the civil service, and the overly ambitious public investment program, contributed to a substantial deterioration in the fiscal position, which together with the exogenous shocks that hit The Gambian economy in the early 1980s, gave rise to mounting fiscal imbalances. The prolonged Sahelian drought of 1980-81 drastically affected government revenue, and the impact of the 1979 oil price hike and the rising inflation and interest rates in industrial countries further aggravated the domestic economic situation. In response, some cuts in current expenditure were effected, but the relatively high levels of public investment were maintained. This expenditure was increasingly financed by foreign borrowing, including substantial use of short-term loans. The overall fiscal deficit widened to the equivalent of 12 percent of GDP in 1982/83. As a result, the Government’s inability to service its external debt obligations gave rise to a significant buildup of external payments arrears. Despite some improvement in revenue mobilization during the three-year period to 1985/86, the overall budget deficit was only contained by a sharp reduction in expenditure on operations and maintenance, which led to a deterioration in the physical infrastructure. By 1985/86, the fiscal deficit still exceeded 10 percent of GDP (Chart 6 and Table 7).

Chart 6.
Chart 6.

Fiscal Developments, 1982/83-1991/92

(In percent of GDP)

Sources: Data provided by the Gambian authorities; and IMF staff estimates.
Table 7.

Central Government Operations

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

Foreign grants correspond to official unrequited transfers in the balance of payments less technical assistance grants.

Special provisions consist of D 72.6 million for the creation of the Managed Fund and D 83.0 million in budgetary support for the GPMB in 1986/87, D 130.7 budgetary support for the GPMB in 1987/88, D 111.0 million for the liquidation of public enterprise debt in 1989/90, D 43.4 million for the covering of the Central Bank’s losses in the 1990/91, and an estimated D 51.0 million for the replacement of the net nonperforming assets of the The Gambia Commercial and Development Bank in 1991/92.

Based on the revised GDP data.

The ambitious public investment program, with the exception of investment in the tourism sector, reflected poor evaluation and selection of investment projects and contributed only marginally to raising the growth prospects of the economy. In addition, the creation of an inefficient public enterprise sector, together with prices administered at subsidized levels, led to the accumulation of large public enterprise debts to the domestic banking system, which will place a substantial burden on the fiscal position in subsequent years. For example, the external debt of several public enterprises has invariably been serviced by the Government.

These problems have been directly addressed in the context of the adjustment efforts pursued since 1985/86. An integral objective of these efforts has been a scaling back of the role of the public sector in the economy with a view to creating a favorable climate for private investment. To this end, fiscal policy has been aimed at lowering the budget deficit, raising government savings, and encouraging economic activity through tax reforms and more efficient public investment that has focused on developing the basic economic and social infrastructure. Fiscal policy has also played a role in alleviating the social impact of adjustment and of poverty in general.

Tax Policy

Tax policies during the period since 1985/86 have been directed at broadening the tax base, strengthening tax administration, and rationalizing the structure of taxation, so as to improve economic incentives and enhance the efficiency and equity of the tax system. These efforts have been aided by the positive impact on the tax base of the depreciation of the dalasi, the increasing volume of imports, and the rising level of economic activity. The key tax reforms implemented included a restructuring of customs duties, the repeal of export taxes, the introduction of a national sales tax, reductions in marginal tax rates on personal income, and increases in specific excise duties and charges.

In the first two years of the adjustment efforts, domestic revenue benefited from the marked broadening of the tax bases, with tax reforms limited to a restructuring of import tariffs; as indicated in Section IV, all specific duties were converted into ad valorem rates, while the structure of customs duties was rationalized and the average duty rates lowered. Until 1987/88, the bulk of domestic revenue (over 70 percent) emanated from taxes on international trade (Table 8).

Table 8.

Structure of Government Revenue

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

To reduce the reliance on this source of tax receipts, a national sales tax of 10 percent was introduced in 1988, applying to all goods produced or imported into The Gambia. Exemptions to the sales tax include goods for educational and religious purposes; foodstuffs other than wine, alcohol, and candies; production equipment; medical supplies; butane gas and gas cookers (for environmental reasons); packaging of goods for export; and air freight on exported Gambian produce. Since The Gambia has little domestic production of manufactured goods, the coverage of the sales tax has gradually been extended to cover most services, including the tourism industry. As a result, revenue from taxes on goods and services rose sharply, from 1 percent of GDP in 1987/88 to 6 percent of GDP in 1988/89 and to 8 percent of GDP in 1991/92; its share in total domestic revenue increased from 7 percent in 1987/88 to 40 percent in 1990/91, before easing to 36 percent in 1991/92, accompanied by a reduction in the share of taxes on international trade to 44 percent by 1991/92 (Chart 7). However, a substantial portion of domestic indirect tax receipts is still derived from international trade, as approximately 80 percent of taxes on goods and services is generated from the sales tax on imports.

Chart 7.
Chart 7.

Structure of Revenue and Expenditure, 1982/83–1991/92

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

Another key tax reform was a rationalization and restructuring of the personal income tax system with a view to improving private sector incentives. With effect from January 1, 1988, a standard deduction of D 5,000 has been introduced; marginal income tax rates have been lowered to a range of 10-35 percent (previously rates ranged from 2 percent to 75 percent), and the number of brackets has been reduced from 12 to 5; all income in kind has been made taxable; and stiffer provisions for enforcement have been established. The reforms of the income tax system have generally been revenue neutral, as taxes on income and property have remained at about 2.5-3.0 percent of GDP. Nontax revenue has also remained broadly constant in relation to GDP, while capital revenue has increased slightly, reflecting revenue generated from the divestiture of public enterprises.

Overall, the implementation of these tax reforms contributed to an increase in domestic revenue in relation to GDP from 20 percent in 1985/86 to a peak of 23 percent in 1988/89. Since then, however, domestic revenue declined steadily in relation to GDP, falling to 20 percent by 1991/92, largely as a result of the slowdown in the growth of economic activity, the impact of the reductions in customs duty rates on key commodities that feature prominently in the re-export trade (duty rates were reduced to zero for some commodities), and a widespread granting of discretionary customs duty waivers by the Government. In response to these developments, as well as to an overrun in current government expenditure in 1991/92, far-reaching reforms of customs duties and direct taxation began to be implemented in March 1992. The reforms were designed to strengthen tax administration, broaden the tax base, and further improve economic incentives. In particular, these reforms involved (1) the discontinuation of all discretionary and temporary customs duty waivers not

explicitly provided for under the 1988 Development Act or by international agreements (e.g., for diplomats and project-related imports financed by donors); (2) a stricter monitoring of the concessions granted under the Development Act; (3) a tightening of the arrangements for “direct delivery” of imported goods, under which the payment of customs duties can be deferred for specified periods; (4) a rationalization of the customs clearing procedures, including computerization, so as to eliminate anomalies and the potential for abuse; and (5) the preparation by the Commissioner of Income Tax of more rigorous assessments of the turnover and tax liability of individual corporations. While the full effects of these measures would be felt over time, some improvement in tax collections has already been evidenced in the last quarter of 1991/92.

Expenditure Policy

Within the context of a strategy designed to reduce the overall fiscal deficit, expenditure policies since 1985/86 have been aimed at lowering total expenditure and net lending in relation to GDP, as well as at changing the composition of total government spending in favor of outlays on the priority areas. In this regard, the primary focus of the adjustment efforts has been to reduce the relative size of the civil service wage bill, eliminate the substantial implicit and explicit transfers to public enterprises, and improve the efficiency of public investment, in order to increase budgetary provisions for operations and maintenance, the social sectors, and investment on the rehabilitation and development of the basic economic and social infrastructure.

These policies have succeeded in reducing total expenditure and net lending as a proportion of GDP from 27 percent in 1985/86 to an estimated 25 percent by 1991/92 (Table 9). During some of the intervening years, however, expenditure rose sharply. In 1986/87 and 1987/88, it reached a peak of 37 percent of GDP, when the Government took over nonperforming bank loans and made provisions for the liquidation of public enterprise debt. The composition of expenditure also changed in this period: personal emoluments, transfers to parastatals, and development expenditure and net lending all declined as a proportion of GDP. In particular, the locally financed component of development expenditure was reduced from 4 percent of GDP in 1985/86 to 1 percent of GDP in the subsequent years. On the other hand, expenditure on “other charges” rose from 6 percent of GDP in 1985/86 to 8 percent in 1991/92, reflecting, in part, increased provisions for operations and maintenance and the social sectors.

Table 9.

Structure of Government Expenditure

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

The principal reform initiated at the outset of the adjustment efforts was a restructuring of the civil service pay and employment structure, with World Bank support. The first stage took place in early 1986 and involved the removal of 2,600 temporary workers (out of a total of 5,000), a reduction in the budgetary provision for vacant posts to token amounts, and the elimination of the practice of transferring funds from other expenditure categories to wages and salaries.14 The second stage, instituted in August 1986, involved the retrenchment of 900 civil servants (about 9 percent of the total), the addition of 300 temporary staff, and the elimination of 800 vacancies from the roster of established posts. Since the completion of the retrenchment exercise, the Government has attempted to keep the overall size of the civil service broadly constant; however, control of civil service employment has not always been adequate, and staffing levels have increased in certain years. At the end of December 1991, the number of established posts in the civil service stood at about 9,500, or some 11 percent lower than in 1985. Within a declining total,- the number of teachers was raised markedly, so as to prevent increases- in, if not lower, the already high pupil-to-teacher ratio in the face of rising school enrollments.

During the implementation of the retrenchment program, and while a pay and grading exercise was being carried out, civil service salaries were frozen. The change to a new grade structure, which reduced the number of grades-from 19 to 12, took place in October T988, and a general pay increase of 67 percent was awarded in January 1989—the first pay increase in the civil service since July 1985. Following this discrete adjustment, there were no further increases in civil service salaries until July 1991, when a 6 percent increase was awarded. As a consequence, the growth in average wage earnings has not kept up with the increase in consumer prices, undermining efforts to attract and retain skilled civil servants. Current government pay policy calls for annual increases in civil service wages based on the targeted average rate of Inflation, the need to attract and retain qualified personnel, overall productivity gains In the economy, and the avail-ability of domestic budgetary resources.

The civil service reform program in The Gambia was implemented relatively quickly and efficiently In comparison with the experience of some other West African countries.15 But a bigger challenge has been to follow through on the short-term gains by developing a small, productive, and highly motivated civil service. This objective remains elusive, and the Government continues to have problems recruiting and retaining qualified personnel

While adequate control on total government expenditure has broadly been established since 1985/86, difficulties in controlling certain expenditure items that are centrally administered (other than the wage bill, such as external travel) continued for some time, necessitating expenditure cuts in other areas of current spending.16 This has meant that the Ministries of Health and Education, among others, have been held for some years below their budgetary allocations. These problems have been addressed during the last three years and the situation has improved considerably. Given the importance attached by the Government to developing human capital, and notwithstanding the pursuit of continued fiscal adjustment, the budgetary allocations for improvements in the quality of social services have been significantly increased; in particular, the combined share of recurrent outlays on education and health in total current spending (excluding interest payments), after having declined from 27 percent in 1985/86 to 13 percent in 1987/88, was raised steadily to 32 percent by 1991/92 (Table 10).

Table 10.

Functional Classification of Current Expenditure by Key Ministries

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

Government current expenditure excluding interest.

Government transfers to public enterprises and net lending have been strongly influenced by the Government’s groundnut pricing policy and the reform efforts in the public enterprise and financial sectors. As indicated in Section II, producer prices for groundnuts were deliberately set high in the early stages of adjustment, so as to encourage a reversal of cross-border sales of groundnuts, thus necessitating sizable budgetary subsidies to the GPMB to cover its operating costs during 1986/87 and 1987/88. Similarly, as part of the efforts to restructure certain key public enterprises and improve their financial performance, the financial liabilities of these enterprises to the state-owned commercial bank (the GCDB) were repaid by the Government in 1989/90, thus boosting the budgetary provisions for net lending in that year. In addition, in the context of the efforts to restructure the GCDB and prepare it for privatization, the Government took over in 1986/87 the GCDB’s nonperforming loans to other public enterprises that had been guaranteed by the Government, as well as the remaining nonperforming loans (net of GCDB’s liquid assets) in late 1991/92. Finally, the budget for 1990/91 provided for special transfers to the Central Bank to cover its operating losses sustained in earlier years; thereafter, the Central Bank’s net profit position was explicitly incorporated in the budget as part of nontax receipts. As a result of these special provisions, the outlays on government subsidies to public enterprises and net lending fluctuated markedly from year to year. In particular, subsidies to public enterprises rose from 1.5 percent of GDP in 1985/86 to a peak of 10 percent in 1987/88 but were brought down to zero by 1990/91.

Further improvements in the budgetary procedures are expected in the period ahead as a result of the ongoing work to develop public expenditure programs in key ministries. In this context, public expenditure programs were completed in 1991/92 for the priority sectors of education, health, agri-culture, and public works and communication. It is envisaged that the public expenditure programs would be updated and rolled forward on an annual basis; their coverage would be broadened to cover all expenditure categories, thus facilitating greater consistency between the public investment program and the outlays for operations and maintenance provided for in the recurrent budget.

During the adjustment period, the Government has made use of a three-year rolling public investment program, which has emphasized the need to provide adequate infrastructure and support services for the development of the private sector and the promotion of human resource development. Public investment thus has focused on infrastructure (transport, communications, and public utilities), agriculture and natural resources, health, and education. The public investment program for each year is established taking into account resource availability, debt-servicing capacity, and the overall stance of fiscal policy. In collaboration with the World Bank, selection criteria for investment projects have been developed with a view to increasing the efficiency of public investment. These criteria entail (1) the completion of an adequate feasibility study; (2) the prospect of attaining an economic rate of return (where calculable) of at least 15 percent (projects in the social sectors, where an economic rate of return cannot be determined, are selected on the basis of least cost alternatives); (3) compatibility of the recurrent cost implications with future recurrent budgets; and (4) compatibility with medium-term balance of payments objectives. The increased rigor in project selection has also helped to mobilize external financial sup-port for public investment; the share of the development budget financed by local resources has fallen significantly since 1985/86.

Developments in the Budget Balance

Overall, the budget deficit (excluding foreign grants) widened initially from 10 percent of GDP in 1985/86 to a peak of 17 percent in 1987/88, but has since declined to an estimated 4 percent of GDP by 1991/92. The evolution of the budget deficit has been strongly influenced by the impact of the special provisions indicated above, which have masked the extent of the underlying improvement in the fiscal position achieved through the expenditure and tax policies pursued since 1985/86. Excluding these special provisions, as well as foreign grants, the budget deficit declined fairly steadily from 10 percent of GDP in 1985/86 to an estimated 2.2 percent by 1991/92. The budget for 1992/93 provides for a further reduction in the deficit to 2 percent of GDP.

The substantial strengthening in the fiscal position since 1985/86 is also illustrated by the evolution of other measures of the budget deficit. In particular, the current budget surplus, excluding grants, increased from 2.3 percent of GDP in 1985/86 to 4.7 percent by 1991/92 (Table 11), consistent with an increase in government savings (on a national accounts basis) from 1.3 percent of GDP to 2.9 percent, respectively (Table 5). More important, the primary budget surplus, excluding foreign grants and the externally financed portion of development expenditure, rose from 2.3 percent of GDP to 7.5 percent. Overall, despite the severity of the fiscal imbalances at the onset of the adjustment efforts, the relatively quick introduction of several key adjustment measures paved the way for the restoration of a fiscal position consistent with a stable overall macroeconomic framework.

Table 11.

Alternative Measures of the Budget Balance

(In percent of GDP)

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

Represents the repayment of government external payments arrears.

For a breakdown of special provisions see Table 7, footnote 2.

Total revenue, minus capital revenue, less current expenditure.

Total revenue, minus total expenditure and net lending (excluding interest).

Total revenue, minus current expenditure (excluding interest), net lending, and the locally financed portion of development expenditure.

14

Budgetary provisions are based on established posts and therefore include provisions for vacant posts. The process of transferring funds from other expenditure categories to wages and salaries was eliminated in order to prevent expenditure savings from elsewhere in the budget being used to hire additional temporary workers.

15

For a comparison of the experience with civil service reform of The Gambia, Ghana, and Guinea, see de Merode (1991). For a comprehensive review of Ghana’s adjustment efforts, see Kapur and others (1991).

16

Similarly, during the early 1980s, the pressures of the deteriorating economic and financial environment led to reductions in expenditure in areas where effective political interest groups could not be formed to protect their budgetary allocations. As a result, expenditure reductions tended to affect outlays on operations and maintenance and to some extent recurrent spending on health and education.

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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 6.

Fiscal Developments, 1982/83-1991/92

(In percent of GDP)
Chart 7.

Structure of Revenue and Expenditure, 1982/83–1991/92

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