1. My Gambian authorities appreciate the Fund Executive Board and Management for their continued engagement and support. They are grateful for the productive policy dialogue and counsel proffered by the Fund Mission during the Article IV consultation discussions. The authorities agree broadly with the staff report. Despite some misgivings, my authorities consent to the publication of all the related staff papers.
Recent economic developments
2. The Gambian economy has performed well in recent years. During 2007-2009, the economy grew on average by 6 percent per annum on account of sound macroeconomic policy implementation. Despite the adverse effects of the global financial crisis, real GDP growth remained fairly strong at 5.6 percent in 2009, led by the continued rebound in agriculture. Consumer price inflation declined to 2.8 percent in 2009, due largely to the tight monetary policy stance of the central bank and the relatively steady prices for food and fuel. Despite a slight acceleration in early 2010, inflation has remained low around 4 percent. The increase in government expenditure offset the relatively strong revenue performance in 2009, resulting in a moderate fiscal deficit and an increase in domestic borrowing requirement during the year. Consequently, in spite of a stronger-than-expected fiscal performance during the first three months of 2010, the target on the cumulative (12 month running) basic fiscal balance for end-March 2010 was exceeded by 0.3 percent of GDP.
3. The external current account deficit, excluding official transfers, narrowed in 2009 despite a marked decrease in tourism receipts and inward remittances. The improvement largely reflected the decline in global food and fuel prices and the recovery of re-export trade. Helped by the IMF SDR allocation and budget support from the World Bank and the African Development Bank, gross international reserve reached the equivalent of 6.4 months of import cover at the end of 2009.
4. All the performance criteria for end-2009 and end-March 2010 were met, with the exception (as indicated earlier) of the basic fiscal balance. Expenditure overruns were the main cause of the fiscal slippage in 2009. As explained during the sixth review, the fiscal slippage reflected the increase in capital expenditure as a result of my authorities buying back Gambia Telecommunication Company’s (GAMTEL) shares after a failed privatization and government purchasing a satellite link by the Gambia Radio and Television Services. These additional capital expenditures could not have been avoided, as The Gambia would have lost its broadcast assets due to an under-performing investor. Moreover, the expenditures were guided by legal obligations and not a reflection of deterioration in fiscal policy.
5. Underperformance of revenue was responsible for missing the target on the basic balance in 2010. This underperformance was mainly due to over optimistic revenue projections. The revenue from fuel taxes, the difference between the fixed retail price of petroleum products and the suppliers’ costs, decreased significantly in light of the unexpected increase in world oil prices during the first half of the year. Also, the impact of the reduction in the corporate tax rate (from 35 percent to 33 percent) to bring in more businesses under the tax net and spur economic activity was optimistic. Furthermore, the slower-than-expected recovery in Europe, which is a major trading partner as well as a major source of tourism to The Gambia, adversely impacted tourism and related activities. As a result, though expenditures were largely restrained, the target on the basic fiscal balance was missed. In light of these developments, my authorities are working closely with staff to prepare more realistic projections for the rest of 2010 and will be requesting the Executive Board to consider a modification of the fiscal target in due course.
6. The authorities have identified corrective actions for the fiscal slippages to help get the basic balance back on track as well as reduce the outstanding stock of domestic debt. As a result of these actions, new issuance of treasury bills will be less than maturing issues, which would substantially ease pressure on yields and ultimately lead to savings from lower interest expenses on domestic debt. As these savings are realized, resources would then be directed to other priority areas to accelerate growth and reduce poverty.
7. To achieve the basic balance target, my authorities have implemented new measures in June 2010 that will increase revenues from excise and fuel taxes. These include a reform of the mechanism for determining domestic fuel prices to allow for the full pass through of changes in world oil prices and exchange rate movements. On the expenditure front, the authorities have frozen non-priority hiring in the public sector, restricted travel of government officials and limited business class travel to only those at the ministerial level and above. Additionally, a special directive has been issued to all ministries, departments and budgetary agencies to curtail non-essential expenditures. In any event, if supplementary expenditures are necessary, equivalent revenue sources or savings from cutbacks in other expenditure areas will have to be identified. Even with these further constraints, my authorities will continue to allocate at least 20 percent of revenues to priority sectors for poverty reduction.
External debt management
8. The focus of my authorities’ external debt management strategy will now shift to securing the necessary funding for national development while maintaining medium- and long-term debt sustainability. To achieve these objectives, government will (i) secure debt relief committed under the HIPC initiative from non-Paris club creditors through an intensive campaign in cooperation with other former-HIPCs, major OECD governments and international organizations including OXFAM; (ii) continue to mobilize concessional financing for social and poverty reduction financed projects while accommodating less concessional loans for high-return capital intensive projects in sectors such as telecommunications, electricity, water and roads; (iii) link the medium term debt strategy with the overall national aid mobilization strategy through adherence to the Paris Declaration on aid quality and effectiveness; and (iv) reduce its aid dependence over the long term through reforms to increase domestic revenue effort and improve PFM and competitiveness. The development of the strategy would be supported by in-house capacity building to regularly analyze the cost-risk trade-offs and monitor implementation.
Monetary and financial sector policies
9. The current monetary framework has served the country well in achieving price and exchange rate stability. Given the recent increase in inflationary pressures, the Central Bank of The Gambia (CBG) will maintain the tightened monetary policy stance.
10. My authorities concur with staff that improving the predictability and transparency of liquidity management will enable commercial banks and other investors in government securities to plan and better manage their portfolios. To this end, as liquidity forecasting improves with the coordination of the interagency committee, the central bank will be able to announce regularly auction sizes one to two months in advance. By mid-2011, with the development of REPO instruments, the CBG would move to a fortnightly auction schedule. Such innovations would assist to increase competition in auctions and help lower interest rates.
11. To correct the government borrowing from the CBG over and above the statutory limit, the CBG and government have reconciled the government’s net position. Government’s net liability to the CBG was transformed to a 30-year Government Bond at an interest rate of 6 percent per annum. The principal repayments of this bond will be in two equal semi-annual payments each year during the life of the bond. This has resulted to the CBG compliance with the statutory requirement of lending to government not exceeding 10 percent of the previous year’s tax revenue. In addition, to help mitigate the impact of the temporary shortfall in the 2010 budget, as a result of delays in budget support, the CBG has provided a bridge financing loan to government. The terms of this facility include interest of 6.5 percent per annum and full repayment of the credit upon receipt of the initial disbursement of the budget support.
12. The banking sector is relatively sound and competition has been increasing. Generally, the banks are profitable and adequately capitalized. The risk-weighted capital adequacy ratio was 18.7 percent in March 2010, higher than the minimum requirement of 8.0 percent. All banks met the minimum capital requirement. Non-performing loans as a ratio of gross loans deteriorated from 12.0 percent in December 2009 to 16.9 percent in March 2010. However, all loans were adequately provisioned.
13. The CBG continues to place emphasis on the Prompt Corrective Action (PCA) framework with continuous assessment of banks in line with international best practices. This is geared towards promoting a safe and sound financial system by ensuring that corrective actions are taken in response to deteriorating performance of a bank. Additionally, a corporate governance framework has been introduced to better govern the operation of banks and improve the governance in the banking sector. Furthermore, significant progress has been registered in setting up of the necessary framework for the implementation of a risk-based supervisory approach to keep pace with the rapidly expanding banking industry. CBG also plans to introduce an electronic data reporting system to ease the reporting burden on banks and, at the same time, allow supervisors more time to conduct quality checks on the data.
Exchange rate policy
14. The central bank will continue to maintain the current floating exchange rate regime, which has served the country well, intervening in the market only to preserve orderly market conditions. While mostly abstaining from entering the market for foreign exchange, the CBG will, however, carry out a limited amount of foreign exchange sales for sterilization purposes to mop up liquidity generated by donor financed spending. The Gambia subscribes fully to Article VIII and currently has no restrictions on the import and exports of capital. Repatriation of capital by both residents and nonresidents can be made in any currency.
15. My Gambian authorities remain mindful of the importance of prudent fiscal and monetary policies to achieve and maintain macroeconomic stability. In this regard, they regret the recent fiscal slippages and have accordingly implemented appropriate revenue and expenditure measures that will help achieve modest fiscal surplus as the key to reduce the debt burden and related interest expenses. My authorities appreciate the continued support of Management and the Executive Board and development partners in realizing their development objectives.