Journal Issue
Share
Article

The Gambia

Author(s):
International Monetary Fund
Published Date:
January 2012
Share
  • ShareShare
Show Summary Details

BACKGROUND: ACHIEVING ROBUST GROWTH IN A DIFFICULT GLOBAL ENVIRONMENT

1. The Gambian economy achieved robust growth with low-to-moderate inflation in recent years, despite the global economic crisis (Figure 1). Real GDP growth averaged around 6½ percent a year during 2008–10, driven mainly by agriculture. Tourism and remittances, however, were hit hard by the global crisis. Meanwhile, inflation ranged between 2½ and 7 percent (year-on-year), as the Central Bank of The Gambia (CBG) generally maintained a restrained monetary stance. At times, this required extensive mopping up of liquidity generated by central bank financing of fiscal deficits.

Figure 1.Strong Performance Despite the Global Crisis

Source: The Gambian authorities and Fund staff estimates and projections.

2. The government’s fiscal deficit widened substantially during this period, resulting in a sharp increase in domestic debt (Figure 2). The deterioration of the fiscal balance was caused by a steady decline in government revenues and episodes of large spending overruns. After peaking at nearly 17½ percent of GDP in 2007, revenues fell to just under 15 percent of GDP in 2010, as collections from all major taxes were eroded away. At the same time, expenditures (excluding donor financed projects) rose from about 14½ percent of GDP to 18 percent of GDP. Extra-budgetary expenditures, including realized contingent liabilities, were major factors behind the surge in government spending, particularly in 2009 and 2010. The ensuing large fiscal deficits, were mostly financed with domestic borrowing.1

Figure 2.Unsustainable Fiscal Policy

Source: The Gambian authorities and Fund staff estimates and projections.

3. Despite having received extensive debt relief, The Gambia continued to face a heavy debt burden, especially because of rising domestic debt. As of end-2010, domestic debt had risen to almost 30 percent of GDP. Correspondingly, interest on domestic debt has consumed an increasing share of government revenues (18 percent of government revenues in 2011). Moreover, most domestic debt consists of short-term Treasury bills, which poses substantial rollover risks. Despite a large reduction in its external debt under the Highly Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI) in December 2007, external debt indicators suggest that The Gambia is still at high risk of debt distress.2

4. The banking sector expanded at a rapid pace in recent years. Between 2007 and 2010, the number of banks doubled (to 14),3 helping to fuel a deepening of financial intermediation. During this period, credit to the private sector and public enterprises relative to GDP grew by about 4½ percentage points, to nearly 17½ percent of GDP.

The new banks are mostly foreign-owned, which generated substantial foreign direct investment, including from the increase in the minimum capital requirement effective at the capacity, while intense competition among a high number of banks in a relatively small market contributed to increased risks to the banking system.

5. Progress on reducing poverty has been mixed. Various social indicators have shown strong improvement (Table 9), notably in education (primary school enrolment and completion and youth literacy rates) and health (immunization and child and maternal mortality rates), but a large share of the population still lives in poverty (58 percent in 2008). 4 The government’s recent initiative to provide greater support to agriculture is expected to have contributed to some progress in reducing the incidence of poverty, by boosting incomes for the rural poor. In addition, the authorities are finalizing a new poverty reduction strategy, the Programme for Accelerated Growth and Employment (PAGE), which places further emphasis on agriculture, as well as investment in infrastructure.

Table 1.The Gambia: Selected Economic Indicators
2010201120122013201420152016
Act.Proj.Proj.Proj.Proj.Proj.Proj.
National account and prices(Percent change; unless otherwise indicated)
Nominal GDP (millions of dalasi)26,81129,67332,81036,28640,12244,37249,076
Nominal GDP10.610.710.610.610.610.610.6
GDP at constant prices6.35.55.55.55.55.55.5
GDP per capita (US$)560566567573589606625
GDP deflator4.04.94.84.84.84.84.8
Consumer prices (average)5.05.45.05.05.05.05.0
Consumer prices (end of period)5.85.05.05.05.05.05.0
External sector
Exports, f.o.b.3.612.65.35.96.06.77.4
Of which: domestic exports25.534.3−0.16.86.06.810.3
Imports, f.o.b.5.34.37.14.27.17.57.2
Terms of trade (deterioration −)−0.2−0.71.21.02.02.02.0
NEER change (depreciation −)1−1.6−4.3
REER (depreciation -)10.3−4.0
Money and credit(Percent change; in beginning-of-year broad money)
Broad money13.713.313.213.213.313.413.5
Net foreign assets1.32.43.91.02.33.13.2
Net domestic assets, of which:12.310.99.312.211.010.210.3
Credit to the government (net)16.47.44.32.31.00.80.9
Credit to the private sector (net)4.74.39.39.19.28.48.3
Other items (net)−9.6−1.8−6.5−1.1−1.1−1.0−0.9
Velocity (level)2.02.01.91.91.81.81.7
Average treasury bill rate (in percent)211.39.3
Central government budget(In percent of GDP; unless otherwise indicated)
Domestic revenues14.814.014.314.815.415.415.4
Grants4.04.53.33.53.53.63.5
Total expenditure and net lending24.822.120.520.820.920.920.9
Overall balance−5.6−3.6−3.0−2.4−2.0−1.9−2.0
Basic balance−3.3−1.5−0.4−0.30.20.1−0.1
Net foreign financing1.40.91.31.41.51.41.5
Net domestic financing4.22.71.61.00.50.50.5
Public debt69.268.467.564.962.159.457.0
Domestic public debt329.329.228.026.424.322.520.9
External public debt39.939.239.538.537.836.936.1
External public debt (millions of US$)377.1386.0399.8415.2432.6450.6470.9
External sector
Current account balance
Excluding budget support−16.8−14.4−15.3−14.7−14.5−14.1−13.4
Including budget support−16.8−14.4−15.3−14.2−14.0−13.7−12.9
Current account balance(Millions of U.S. dollars; unless other wise indicated)
Excluding budget support−162.9−146.3−160.3−161.5−169.4−175.8−177.7
Including budget support−162.9−146.3−160.3−156.0−163.6−169.6−171.2
Overall balance of payments−25.77.6−2.8−1.75.711.011.8
Gross official reserves163.3174.7171.6168.3170.7176.6184.2
in months of imports of goods and services4.85.04.64.34.14.03.9
Use of Fund resources(Millions of SDRs)
Disbursements2.02.30.00.00.00.00.0
Repayments0.00.0−0.2−1.0−2.1−3.8−4.0
Sources: Gambian authorities and Fund staff estimates and projections.

Percentage change between December of the previous year and December of the current year (September for 2011).

Average for the month of December (October for 2011).

Defined as gross domestic interest bearing debt.

Sources: Gambian authorities and Fund staff estimates and projections.

Percentage change between December of the previous year and December of the current year (September for 2011).

Average for the month of December (October for 2011).

Defined as gross domestic interest bearing debt.

Table 2.The Gambia: Statement of Central Government Operations(In millions of local currency)
2010201120122013201420152016
Act.Proj.Proj.Proj.Proj.Proj.Proj.
Revenue5,0265,4965,7726,6687,6048,4249,276
Taxes3,5283,6544,1424,7495,4586,0366,676
Taxes on income, profits, and capital gains1,1091,1311,2301,4281,6581,8342,028
Domestic taxes on goods and services1,5001,6291,7982,0872,4362,6942,980
Taxes on internatioal trade and transactions8678491,0571,1691,2921,4291,581
Other taxes53455864717887
Grants1,0651,3341,0781,2871,4221,5871,714
Budget support000181200220241
Project grants11,0651,3341,0781,1061,2221,3671,472
Other revenues433508552632725801886
Expenditures6,4666,5716,7417,5368,4059,29110,273
Expenses24,0594,6024,5224,9955,3455,6266,027
Compensation of employees1,5161,6651,7691,9562,1632,3922,645
Use of goods and services1,2161,3421,2011,2611,3241,3901,460
Interest7669339611,1571,1651,1591,202
External137168151264285309334
Domestic629765810893880850869
Subsidies561662592622693685720
Net acquisition of nonfinancial assets2,4071,9692,2192,5413,0603,6654,247
Acquisitions of nonfinancial assets2,4071,9692,2192,5413,0603,6654,247
Foreign financed21,8081,7141,8792,0502,2862,4922,651
Gambia local fund5992553404927751,1731,596
Gross Operating Balance9678931,2501,6732,2602,7993,249
Net lending (+)/borrowing (−)−1,440−1,075−969−868−801−866−997
Net acquisition of financial assets3175000000
Net incurrence of liabilities1,5101,076972869799865997
Domestic, of which:1,123815541363201222245
Loans1,220815591363201222245
Net borrowing1,220815591363201222245
Bank41,424986644389188183226
Nonbank−204−171−53−26133919
Foreign387261431506599643752
Loans387261431506599643752
Borrowing7426278349441,0631,1241,179
Amortization−355−366−403−438−465−482−426
Statistical discrepancy5−105021−2−20
Memorandum items:
Basic balance6−873−695−168−1066338−60
Basic primary balance7−1072387931,0511,2281,1971,142
Domestic public debt87,8478,6629,2039,5669,7669,98810,233
Sources: Gambian authorities and Fund staff estimates and projections.

Projection for 2011 includes grants under the World Bank’s West Africa Regional Communications Integration Project (WARCIP).

Beginning in 2011, includes spending on wages and other charges financed by project grants and external borrowing. Prior to that, project grants and external borrowing were assumed to finance capital expenditure only.

Figure for 2010 consists of domestic loans only, and reflects onlending to GAMTEL financed by WARCIP.

In 2010, includes bridge loan from CBG for part of the shortfall in disbursements of budget support.

The difference between financing and the overall balance of revenue and expenditures.

Overall balance, excluding statistical discrepancy, less expenditures financed by project grants and external borrowing.

Basic balance, excluding interest payments.

Defined as gross domestic interest bearing debt.

Sources: Gambian authorities and Fund staff estimates and projections.

Projection for 2011 includes grants under the World Bank’s West Africa Regional Communications Integration Project (WARCIP).

Beginning in 2011, includes spending on wages and other charges financed by project grants and external borrowing. Prior to that, project grants and external borrowing were assumed to finance capital expenditure only.

Figure for 2010 consists of domestic loans only, and reflects onlending to GAMTEL financed by WARCIP.

In 2010, includes bridge loan from CBG for part of the shortfall in disbursements of budget support.

The difference between financing and the overall balance of revenue and expenditures.

Overall balance, excluding statistical discrepancy, less expenditures financed by project grants and external borrowing.

Basic balance, excluding interest payments.

Defined as gross domestic interest bearing debt.

Table 3.The Gambia: Statement of Central Government Operations(In percent of GDP)
2010201120122013201420152016
Act.Proj.Proj.Proj.Proj.Proj.Proj.
Revenue18.718.517.618.419.019.018.9
Taxes13.212.312.613.113.613.613.6
Taxes on income, profits, and capital gains4.13.83.73.94.14.14.1
Domestic taxes on goods and services5.65.55.55.86.16.16.1
Taxes on internatioal trade and transactions3.22.93.23.23.23.23.2
Other taxes0.20.20.20.20.20.20.2
Grants4.04.53.33.53.53.63.5
Budget support0.00.00.00.50.50.50.5
Project grants14.04.53.33.03.03.13.0
Other revenues1.61.71.71.71.81.81.8
Expenditures24.122.120.520.820.920.920.9
Expenses215.115.513.813.813.312.712.3
Compensation of employees5.75.65.45.45.45.45.4
Use of goods and services4.54.53.73.53.33.13.0
Interest2.93.12.93.22.92.62.5
External0.50.60.50.70.70.70.7
Domestic2.32.62.52.52.21.91.8
Subsidies2.12.21.81.71.71.51.5
Net acquisition of nonfinancial assets9.06.66.87.07.68.38.7
Acquisitions of nonfinancial assets9.06.66.87.07.68.38.7
Foreign financed26.75.85.75.65.75.65.4
Gambia local fund2.20.91.01.41.92.63.3
Gross Operating Balance3.63.03.84.65.66.36.6
Net lending (+)/borrowing (−)−5.4−3.6−3.0−2.4−2.0−2.0−2.0
Net acquisition of financial assets30.70.00.00.00.00.00.0
Net incurrence of liabilities5.63.63.02.42.01.92.0
Domestic, of which:4.22.71.61.00.50.50.5
Loans4.62.71.81.00.50.50.5
Net borrowing4.62.71.81.00.50.50.5
Bank45.33.32.01.10.50.40.5
Nonbank−0.8−0.6−0.2−0.10.00.10.0
Foreign1.40.91.31.41.51.41.5
Loans1.40.91.31.41.51.41.5
Borrowing2.82.12.52.62.62.52.4
Amortization−1.3−1.2−1.2−1.2−1.2−1.1−0.9
Statistical discrepancy5−0.40.00.00.00.00.00.0
Memorandum items:
Basic balance6−3.3−2.3−0.5−0.30.20.1−0.1
Basic primary balance7−0.40.82.42.93.12.72.3
Domestic public debt829.329.228.026.424.322.520.9
Sources: Gambian authorities and Fund staff estimates and projections.

Projection for 2011 includes grants under the World Bank’s West Africa Regional Communications Integration Project (WARCIP).

Beginning in 2011, includes spending on wages and other charges financed by project grants and external borrowing. Prior to that, project grants and external borrowing were assumed to finance capital expenditure only.

Figure for 2010 consists of domestic loans only, and reflects onlending to GAMTEL financed by WARCIP.

In 2010, includes bridge loan from CBG for part of the shortfall in disbursements of budget support.

The difference between financing and the overall balance of revenue and expenditures.

Overall balance, excluding statistical discrepancy, less expenditures financed by project grants and external borrowing.

Basic balance, excluding interest payments.

Defined as gross domestic interest bearing debt.

Sources: Gambian authorities and Fund staff estimates and projections.

Projection for 2011 includes grants under the World Bank’s West Africa Regional Communications Integration Project (WARCIP).

Beginning in 2011, includes spending on wages and other charges financed by project grants and external borrowing. Prior to that, project grants and external borrowing were assumed to finance capital expenditure only.

Figure for 2010 consists of domestic loans only, and reflects onlending to GAMTEL financed by WARCIP.

In 2010, includes bridge loan from CBG for part of the shortfall in disbursements of budget support.

The difference between financing and the overall balance of revenue and expenditures.

Overall balance, excluding statistical discrepancy, less expenditures financed by project grants and external borrowing.

Basic balance, excluding interest payments.

Defined as gross domestic interest bearing debt.

Table 4.The Gambia: Monetary Accounts1(In millions of local currency; unless otherwise indicated)
2010201120122013201420152016
Act.Proj.Proj.Proj.Proj.Proj.Proj.
I. Monetary Survey
Net foreign assets3,8084,1334,7164,8875,3256,0106,799
in millions of U.S. dollars134137146145152165181
Net domestic assets9,48510,92912,32814,41416,54018,77921,325
Domestic credit10,07311,75914,13316,40918,74321,19923,976
Claims on central government (net)4,9535,9406,5836,9727,1607,3437,569
Claims on other financial corporations10111111111111
Claims on other public sector28709921,3201,6502,0292,4752,970
Claims on private sector4,2404,8176,2197,7769,54311,37013,426
Other items (net)3−589−830−1,805−1,995−2,202−2,420−2,651
Broad money13,29215,06217,04419,30121,86524,78928,124
Currency outside banks2,0652,2642,4862,7172,9713,2523,562
Deposits, of which:11,22812,79814,55816,58418,89421,53724,562
Time and savings deposits7,2708,4669,72711,08012,62414,39016,411
II. Central Bank Survey
Net foreign assets2,4522,7472,8692,9343,2593,8254,490
Foreign assets4,6375,2665,5555,6695,9826,4256,935
Foreign liabilities, of which:−2,185−2,518−2,686−2,735−2,723−2,599−2,445
SDR allocations−1,301−1,355−1,400−1,449−1,496−1,542−1,570
Net domestic assets1,0529251,2191,6081,7911,7961,774
Domestic credit5813268231,3281,6301,7571,871
Claims on central government (net)5252727691,2741,5761,7031,816
Claims on other financial corporations10111111111111
Claims on private sector46444444444444
Claims on public enterprises0000000
Other items (net)347159939628016138−96
Reserve money3,5033,6724,0874,5415,0505,6216,264
Currency outside banks2,0652,2642,4862,7172,9713,2523,562
Commercial bank deposits1,4391,4081,6011,8242,0782,3692,702
Sources: Gambian authorities and Fund staff estimates and projections.

End of period.

Includes public enterprises and the local government.

Including valuation.

Sources: Gambian authorities and Fund staff estimates and projections.

End of period.

Includes public enterprises and the local government.

Including valuation.

Table 5.The Gambia: Monetary Accounts1
2010201120122013201420152016
Act.Proj.Proj.Proj.Proj.Proj.Proj.
I. Monetary Survey
(Percent change; in beginning of period broad money)
Broad money13.713.313.213.213.313.413.5
Net foreign assets1.32.43.91.02.33.13.2
Net domestic assets12.310.99.312.211.010.210.3
II. Central Bank Survey
(Percent change; in beginning of period monetary base)
Reserve money10.54.811.311.111.211.311.4
Net foreign assets−16.78.43.31.67.211.211.8
Net domestic assets27.2−3.68.09.54.00.1−0.4
Memorandum Items:
Growth of credit to the private sector14.813.629.125.022.719.118.1
Growth of currency in circulation3.09.79.89.39.49.49.5
Growth of demand deposits10.19.511.513.913.914.014.0
Growth of time and savings deposits19.316.414.913.913.914.014.0
Net usable international reserves (in millions of U.S. dollars)126.5131.8129.3127.8133.6145.9159.9
Money velocity2.021.971.931.881.841.791.75
Money multiplier3.794.104.174.254.334.414.49
Daily reserve money23,782
Growth rate of daily reserve money17.0
Broad money (percent of GDP)49.650.851.953.254.555.957.3
Credit to the private sector (percent of GDP)15.816.219.021.423.825.627.4
Central bank financing of central government (in millions of local currency)413−253497505302127113
Commercial bank financing of central government (in millions of local currency)9611240147−116−11456113
Sources: Gambian authorities and Fund staff estimates and projections.

End of period.

Average for the month of December.

Sources: Gambian authorities and Fund staff estimates and projections.

End of period.

Average for the month of December.

Table 6.The Gambia: Balance of Payments(In millions of U.S. dollars; unless otherwise indicated)
2010201120122013201420152016
ActProj.Proj.Proj.Proj.Proj.Proj.
1. Current account
A. Goods and services-177.9-164.7-181.3-184.9-196.1-208.5-215.4
Trade balance−215.0−215.9−233.3−241.3−259.8−280.4−300.5
Exports, f.o.b.98.2110.6116.4123.3130.7139.5149.8
Of which: domestic goods113.618.318.319.520.722.124.4
Imports, f.o.b−313.1−326.5−349.7−364.6−390.5−419.9−450.3
Of which: oil−40.8−54.9−56.3−59.2−61.3−64.1−67.0
Services (net)37.051.152.056.463.771.985.1
Of which: travel income70.977.281.488.898.3109.0121.1
B. Income (net)-40.0-39.6-39.7-40.6-40.8-38.9-39.7
Income credits22.626.429.531.933.338.140.2
Income debits−62.6−66.0−69.2−72.5−74.1−77.0−79.8
C. Current transfers55.057.960.769.473.377.883.9
Official transfers0.00.00.05.55.86.16.5
Remittances45.247.950.453.456.660.566.0
Other transfers9.810.110.310.610.911.111.4
Current account (excl. budget support)-162.9-146.3-160.3-161.5-169.4-175.8-177.7
Current account (incl. budget support)-162.9-146.3-160.3-156.0-163.6-169.6-171.2
2. Capital and financial account
A. Capital account238.545.634.533.535.638.339.8
B. Financial account98.7108.4123.0120.9133.8142.3143.2
Foreign direct investment85.662.676.266.869.773.176.8
Portfolio investment−1.5−1.1−1.1−0.2−0.30.61.5
Other investment14.646.947.854.364.468.665.0
Of which: Official other investment (net)10.88.913.815.317.418.020.3
Loans23.621.426.728.630.931.531.8
SDR Allocations0.00.00.00.00.00.00.0
Amortization−12.8−12.5−12.9−13.3−13.5−13.5−11.5
Capital and financial account137.2153.9157.5154.3169.3180.6183.0
Errors and omissions0.00.00.00.00.00.00.0
Overall balance-25.77.6-2.8-1.75.711.011.8
Financing
Net international reserves (increase −)25.7−7.62.81.7−5.7−11.0−11.8
Change in gross international reserves22.6−11.33.13.3−2.4−6.0−7.5
Use of IMF resources (net)3.13.7−0.3−1.6−3.3−6.0−6.3
Disbursements3.13.70.00.00.00.00.0
Repayments0.00.0−0.3−1.6−3.3−6.0−6.3
Memorandum items:
Exports of goods and services228.8251.8265.1282.6303.1326.9354.0
Imports of goods and services−406.8−416.5−446.4−467.4−499.2−535.4−569.4
Gross International Reserves
US$ millions163.3174.7171.6168.3170.7176.6184.2
Months of imports of goods and services4.85.04.64.34.14.03.9
Sources: Gambian authorities and Fund staff estimates and projections.

Domestic goods consist of (in decreasing order of importance): groundnuts, fruits and vegetables, zircon, fish, and cotton.

Projection for 2011 includes grants under the World Bank’s West Africa Regional Communications Integration Project (WARCIP).

Sources: Gambian authorities and Fund staff estimates and projections.

Domestic goods consist of (in decreasing order of importance): groundnuts, fruits and vegetables, zircon, fish, and cotton.

Projection for 2011 includes grants under the World Bank’s West Africa Regional Communications Integration Project (WARCIP).

Table 7.The Gambia: Balance of Payments(In percent of GDP)
2010201120122013201420152016
Act.Proj.Proj.Proj.Proj.Proj.Proj.
1. Current account
A. Goods and services-18.4-16.2-17.3-16.8-16.8-16.8-16.2
Trade balance-22.2-21.3-22.2-22.0-22.3-22.6-22.7
Exports, f.o.b.10.110.911.111.211.211.211.3
Of which: domestic goods11.41.81.71.81.81.81.8
Imports, f.o.b−32.3−32.2−33.3−33.2−33.5−33.8−34.0
Of which: oil−4.2−5.4−5.4−5.4−5.3−5.2−5.1
Services (net)3.85.05.05.15.55.86.4
Of which: travel7.37.67.88.18.48.89.1
B. Income (net)-4.1-3.9-3.8-3.7-3.5-3.1-3.0
Income credits2.32.62.82.92.83.13.0
Income debits−6.5−6.5−6.6−6.6−6.3−6.2−6.0
C. Current transfers5.75.75.86.36.36.36.3
Official transfers0.00.00.00.50.50.50.5
Remittances4.74.74.84.94.94.95.0
Other transfers1.01.01.01.00.90.90.9
Current account (excl. budget support)-16.8-14.4-15.3-14.7-14.5-14.1-13.4
Current account (incl. budget support)-16.8-14.4-15.3-14.2-14.0-13.7-12.9
2. Capital and financial account
A. Capital account24.04.53.33.03.03.13.0
B. Financial account10.210.711.711.011.511.510.8
Foreign direct investment8.86.27.36.16.05.95.8
Portfolio investment−0.2−0.1−0.10.00.00.00.1
Other investment1.54.64.64.95.55.54.9
Of which: Official other investment (net)1.10.91.31.41.51.41.5
Loans2.42.12.52.62.62.52.4
SDR Allocations0.00.00.00.00.00.00.0
Amortization−1.3−1.2−1.2−1.2−1.2−1.1−0.9
Capital and financial account14.215.215.014.114.514.513.8
Errors and omissions0.00.00.00.00.00.00.0
Overall balance-2.70.7-0.3-0.20.50.90.9
Sources: Gambian authorities and Fund staff estimates and projections.

Domestic goods consist of (in decreasing order of importance): groundnuts, fruits and vegetables, zircon, fish, and cotton.

Projection for 2011 includes grants under the World Bank’s West Africa Regional Communications Integration Project (WARCIP).

Sources: Gambian authorities and Fund staff estimates and projections.

Domestic goods consist of (in decreasing order of importance): groundnuts, fruits and vegetables, zircon, fish, and cotton.

Projection for 2011 includes grants under the World Bank’s West Africa Regional Communications Integration Project (WARCIP).

Table 8.The Gambia: Financial Soundness Indicators(In percent, unless otherwise indicated)
20072008200920102011
(June)
Capital Adequacy
Regulatory capital to risk-weighted assets22.519.618.824.524.8
Tier-1 capital to risk-weighted assets120.021.019.027.025.6
Asset quality
Nonperforming loans to total gross loans10.413.712.314.512.7
Nonperforming loans net of provisions to capital2.85.84.37.56.4
Earnings and profitability
Return on assets (average)4.50.1−1.60.41.2
Return on equity (average)36.40.8−24.91.85.8
Net Interest income to gross income34.735.337.041.337.4
Operating expenses to gross income47.065.862.058.257.8
Liquidity
Liquid assets to total assets45.043.635.747.938.6
Liquid assets to short-term liabilities74.970.962.168.459.4
Exposure to FX risk:
Net open FX position to capital36.919.16.4−0.4−2.9
Sources: Gambian authorities, and Fund staff estimates.

Tier-1 capital is larger than regulatory capital due to the supervisory deduction from premises revaluation.

Sources: Gambian authorities, and Fund staff estimates.

Tier-1 capital is larger than regulatory capital due to the supervisory deduction from premises revaluation.

Table 9.The Gambia: Progress toward the Millennium Development Goals, 1990-20091
19901995200020052009
Goal 1: Eradicate extreme poverty and hunger
Employment to population ratio, 15+, total (%)7373737373
Employment to population ratio, ages 15-24, total (%)5959595858
GDP per person employed (constant 1990 PPP $)..........
Income share held by lowest 20%....45..
Malnutrition prevalence, weight for age (% of children under 5)..231516..
Poverty gap at $1.25 a day (PPP) (%)....3512..
Poverty headcount ratio at $1.25 a day (PPP) (% of population)....6734..
Vulnerable employment, total (% of total employment)..........
Goal 2: Achieve universal primary education
Literacy rate, youth female (% of females ages 15-24)....41..60
Literacy rate, youth male (% of males ages 15-24)....64..71
Persistence to last grade of primary, total (% of cohort)....736261
Primary completion rate, total (% of relevant age group)4645746978
Total enrollment, primary (% net)5164737176
Goal 3: Promote gender equality and empower women
Proportion of seats held by women in national parliaments (%)8..2139
Ratio of female to male primary enrollment (%)637487102104
Ratio of female to male secondary enrollment (%)4755....96
Ratio of female to male tertiary enrollment (%)..552923..
Share of women employed in the nonagricultural sector (% of total nonagricultural employment)20.9........
Goal 4: Reduce child mortality
Immunization, measles (% of children ages 12-23 months)8691928196
Mortality rate, infant (per 1,000 live births)7872666158
Mortality rate, under-5 (per 1,000)165145128112101
Goal 5: Improve maternal health
Adolescent fertility rate (births per 1,000 women ages 15-19)..1311148773
Births attended by skilled health staff (% of total)44..5557..
Contraceptive prevalence (% of women ages 15-49)12..10....
Maternal mortality ratio (modeled estimate, per 100,000 live births)750690560460400
Pregnant women receiving prenatal care (%)....9198..
Unmet need for contraception (% of married women ages 15-49)..........
Goal 6: Combat HIV/AIDS, malaria, and other diseases
Children with fever receiving antimalarial drugs (% of children under age 5 with fever)....5563..
Condom use, population ages 15-24, female (% of females ages 15-24)..........
Condom use, population ages 15-24, male (% of males ages 15-24)..........
Incidence of tuberculosis (per 100,000 people)185204225248269
Prevalence of HIV, female (% ages 15-24)........2.4
Prevalence of HIV, male (% ages 15-24)........0.9
Prevalence of HIV, total (% of population ages 15-49)0.10.20.51.12.0
Tuberculosis case detection rate (%, all forms)..46555447
Goal 7: Ensure environmental sustainability
CO2 emissions (kg per PPP $ of GDP)00000
CO2 emissions (metric tons per capita)00000
Forest area (% of land area)44.2..46.147.148.0
Improved sanitation facilities (% of population with access)..60636567
Improved water source (% of population with access)7479848992
Marine protected areas (% of territorial waters)00000
Net ODA received per capita (current US$)10140384076
Goal 8: Develop a global partnership for development
Debt service (PPG and IMF only, % of exports, excluding workers’ remittances)211511189
Internet users (per 100 people)0.00.00.93.97.7
Mobile cellular subscriptions (per 100 people)0001685
Telephone lines (per 100 people)12333
Fertility rate, total (births per woman)66655
Other
GNI per capita, Atlas method (current US$)300340330270440
GNI, Atlas method (current US$) (billions)0.30.40.40.40.7
Gross capital formation (% of GDP)22.320.217.426.825.9
Life expectancy at birth, total (years)5354555758
Literacy rate, adult total (% of people ages 15 and above)....37..46
Population, total (billions)0.00.00.00.00.0
Trade (% of GDP)131.5122.0104.8102.980.6
Source: World Development Indicators.

Figures in italics refer to periods other than those specified.

Source: World Development Indicators.

Figures in italics refer to periods other than those specified.

6. The Gambia has received relatively modest support from development partners (Figure 3). Although a pickup is expected in 2011, donor grants averaged only about 2½ percent of GDP a year during 2007-10. Some potential donors have expressed concern over human rights and freedom of the press. Most recently, President Jammeh was re-elected by a wide margin to a fourth 5-year term. Parliamentary elections are scheduled for March 31, 2012.

Figure 3.The Gambia: Cross Country Comparison

Sources: IMF country desk data.

7. Progress on implementation of recommendations from the 2010 Article IV consultation has been mixed (Box 1).

Box 1.Implementing Recommendations from the 2010 Article IV Consultation

Implementation of the 2010 Article IV recommendations for fiscal consolidation, tax and public financial management (PFM) reforms was mixed. The authorities introduced a fuel pricing formula that would preserve excise taxes, but implementation has been irregular. Large extra-budgetary spending during the final quarter of 2010 resulted in a higher-than-targeted deficit. In 2011, however, fiscal discipline has improved. Good progress was achieved toward the introduction of the VAT, notably the VAT policy paper has been endorsed by cabinet. However, measures to improve tax compliance have not yet been effective. Also, most “nuisance” taxes have not been eliminated, contrary to staff’s recommendations. On PFM reforms, good progress has been achieved to strengthen the system for monitoring and reporting on budget execution. Also, in an initial step to improve transparency in the budget process, a budget policy paper was prepared for 2012.

Progress was also mixed in implementing recommendations on monetary policy and the financial sector. Until recently, the liquidity forecasting committee met only sporadically, which handicapped liquidity management and the ability of the CBG to project and pre-announce upcoming offerings in T-bill auctions. The reconciliation of government accounts at the CBG and the first stage of the planned increase in the minimum capital requirement for commercial banks were completed as scheduled. Additional staff were hired to beef up the CBG’s supervisory capacity, albeit not as many as recommended. Development of short-term monetary instruments is behind schedule.

In line with staff’s advice, the authorities plan to seek funding alternatives for the PAGE that would safeguard debt sustainability. These include concessional borrowing and private sector participation in infrastructure investment. The authorities are already employing the latter option in the telecom sector with help from the World Bank.

ECONOMIC DEVELOPMENTS IN 2011: MAINTAINING GROWTH, WHILE RESTORING FISCAL DISCIPLINE

8. The Gambian economy has continued to perform well in 2011, but vulnerabilities persist. In particular, poor weather conditions have weakened the expected expansion in agriculture. Still, real GDP is expected to grow by about 5½ percent—only a slight slowdown from the previous year’s performance—partly due to early indications of an upturn in tourism. Year-on-year inflation dipped to about 4 percent in recent months and is expected to end the year slightly below 5 percent.

9. The Gambian authorities have made significant progress restoring fiscal discipline in 2011. By employing a strict cash budgeting approach to limit spending to available resources,5 government’s net domestic borrowing (NDB) is on track to meet the authorities’ target of just over 2½ percent of GDP in 2011. Moreover, the government cleared its overdraft balance with the CBG and has refrained from new central bank financing of the deficit. This progress toward eliminating fiscal dominance and strengthening the independence of the CBG has allowed monetary policy to focus on achieving its principal objective of maintaining low inflation. In addition, the improved fiscal discipline has contributed to a drop in T-bill yields in recent months.

T-bill yields

Source: IMF country desk data.

10. However, the authorities have yet to stop the steady erosion of government revenues (relative to GDP). Government revenues are expected to fall by another full percentage point of GDP in 2011. Lost revenues from fuel taxes, mainly because of only partial implementation of the new fuel pricing formula, accounted for much (about three-fourths) of the revenue shortfall. By allowing greater pass-through of international fuel prices to the administered domestic retail prices, the formula would have maintained fuel excise taxes and eliminated unbudgeted subsidies. Poor tax compliance and falling duties on non-fuel imports also contributed to the poor revenue effort.

ECONOMIC OUTLOOK: POSITIVE, BUT WITH RISKS

11. Prospects for the Gambian economy over the near and medium term are good. Under the baseline scenario (not reflecting the PAGE), real GDP is projected to continue to grow at a robust pace (5½ percent a year), led by healthy growth in agriculture, a gradual, but sustained recovery in tourism and construction, and returns to large ongoing investment in telecommunications. This outlook is predicated on a gradual fiscal adjustment that would reduce NDB to ½ percent of GDP a year in 2014 and beyond, as proposed by the Gambian authorities. 6 The fiscal adjustment would help ensure the CBG’s independence to focus on maintaining annual inflation around its objective of 5 percent, while also easing pressure on interest rates and avoiding crowding out of the private sector. The external current account deficit is expected to narrow to about 13 percent of GDP by 2016, financed primarily by foreign direct investment (FDI), project grants, and concessional loans. However, the coverage of gross international reserves is projected to slip to around 4 months of imports by end-2016.

12. This scenario is subject to some risks. First and foremost, fiscal shocks—such as unanticipated revenue shortfalls and higher-than-budgeted spending—could threaten macroeconomic stability. These shocks could quickly lead to more domestic borrowing and higher interest costs, especially given the high roll-over requirements of outstanding debt. Large fiscal deficits could also lead to a return to fiscal dominance or crowding out effects although risks of crowding out over the near term are diminished by large capital injections in the banking system arising from the ongoing process to increase the minimum capital requirement. Contingent liabilities in particular are a leading potential source of spending overruns. The Gambian economy is also vulnerable to terms of trade and weather-related shocks.

13. A weaker global economy poses a near-term risk to growth, particularly for the tourism sector, but this risk would likely be mitigated by lower international prices for fuels and other imported commodities. As has been the case in recent years, policies that focus on expanding agriculture, would also help to cushion the impact on the Gambian economy, especially for the rural poor. Regarding the fiscal effects of a global economic slowdown, the envisaged contribution by a gradual recovery in the tourism sector to the rebuilding of tax revenues would likely be delayed. At the same time, lower fuel prices would facilitate the full restoration of fuel excise taxes, which is also an important source of government revenues.

POLICY DISCUSSIONS: SUSTAINING ROBUST GROWTH AND ACCELERATING POVERTY REDUCTION

14. Discussions focused primarily on two key challenges: (i) fiscal adjustment to reduce the burden and risks of domestic debt; and (ii) financing options for the PAGE. Discussions also covered the following surveillance issues, which addressed other potential risks to macroeconomic stability:

  • Monetary policy and operations;

  • Financial sector stability and supervision;

  • An assessment of the exchange rate and exchange rate policy;

  • International competitiveness;

  • Debt sustainability; and

  • The quality of economic statistics.

15. Although there were some differences, the authorities and staff broadly agreed on the policy framework going forward. In particular, noting the high cost and roll-over risks of domestic debt, it was agreed that curbing government’s domestic borrowing should be the anchor for macroeconomic policies over the medium term.

A. Fiscal Adjustment: Near-Term Discipline and Medium-Term Reforms

16. The authorities aim to reduce reliance on net domestic borrowing with a strong initial step in 2012, followed by a further gradual decline in subsequent years. The 2012 budget targets a reduction in NDB by about 1 percentage point of GDP in 2012, followed by further reductions to about ½ percent of GDP a year in 2014 and beyond. Although the gradual adjustment may not ease pressure on T-bill yields as quickly as the sharper adjustment that was envisaged under the recently expired Fund-supported program, it would allow the authorities to minimize potential negative effects on growth from large sudden cuts in government spending. The fiscal adjustment can be viewed as a two-stage process: first, exercising discipline to achieve near-term targets for NDB; and second, a broader medium-term reform agenda encompassing tax policy, revenue administration, and public financial management (PFM).

Near-Term Fiscal Discipline

Staff’s Advice

17. To reap the benefits of a gradual fiscal adjustment—notably an easing of pressure on inflation and T-bill yields—as early as possible, it is necessary to build credibility in the authorities’ commitment to the adjustment path. Thus, it is critical that the near-term targets for NDB are met. For 2011, the authorities had set a ceiling for NDB (GMD 815 million or just over 2½ percent of GDP) that would stabilize the stock of domestic debt at just over 29 percent of GDP. For 2012, staff recommended a reduction in NDB by about one percentage point of GDP, which would initiate a downward trend in the stock of domestic debt relative to GDP.

18. Staff urged the authorities to achieve the targets for NDB by continuing to implement a strict cash budgeting approach. In recent years, spending pressures during the final months of the year undermined the successful execution of the budget. Spending on contingent liabilities and extra-budgetary items—such as bills and debt service owed by the National Water and Electricity Company (NAWEC), investments by the Gambia Radio and Television Service (GRTS) and the state-owned telephone company (GAMTEL), and claims associated with the failed privatization of the state-owned cell phone company (GAMCEL)—were leading sources of expenditure overruns. To meet the NDB target in 2011, it is important to resist such pressures, which typically crop up at the end of the year. State-owned companies and agencies must strive to balance their own accounts, as was planned in the budget. The lack of donor assistance to cover election expenses, however, poses an additional strain on budget execution. But even this must be managed if the NDB target is to be met.

19. On the revenue side, staff recommended near-term measures to reverse the drop in revenues that occurred in 2011, including an immediate adjustment in fuel prices, so that the full value of the excise taxes could be collected. While this adjustment would provide a modest, but much needed revenue boost at the end of 2011, adhering to the fuel price formula going forward would have a strong impact and could recoup much of the 1 percent of GDP of revenues that were lost in 2011. Staff recommended additional measures for the 2012 budget to lift projected tax revenues to 13.2 percent of GDP—the same as was collected in 2010—including extending the coverage of the general sales tax to electricity.

Authorities’ Views

20. The authorities have made a concerted effort to achieve their NDB target for 2011. The lack of donor support for elections added to the fiscal challenge, but they were prepared to reallocate resources as needed. Similarly, possible claims of contingent liabilities and extra-budgetary spending late in the year were expected to be contained. Although spending on many budgeted items has been trimmed, the authorities reiterated that they were striving to meet key targets for poverty reducing expenditures, such as the 20 percent share of total current expenditures going toward basic and primary education.

21. For 2012, the authorities proposed an NDB target of 1.8 percent of GDP—a reduction of almost one percentage point of GDP. The authorities proposed increases for a collection of miscellaneous taxes and fees that would add up to about ½ percentage point of GDP of additional revenues in 2012. However, they were not inclined to take stronger tax measures, mainly citing political considerations during an election year. Though prepared to improve the implementation of the fuel price formula, they stopped short of committing to an automatic application, particularly if it implied large increases in retail prices. Similarly, they were not prepared to extend the sales tax to electricity tariffs, arguing that this would negatively affect businesses and the poor.

22. To improve tax compliance, the government is setting up a Commission of Inquiry on Tax Evasion. At the same time, the Gambia Revenue Authority (GRA) is stepping up implementation of administrative measures in line with recommendations by Fund technical assistance. Measures taken to increase compliance among large taxpayers appeared to have helped to significantly increase income tax filings. However, revenue collections have not gone up. The GRA cited a lack of trained auditors as a primary reason for the weak revenue effects. The authorities anticipated that the new Commission of Inquiry will raise awareness about compliance and help boost revenues.

B. Medium-Term Fiscal Adjustment to Support Long-Term Growth

Staff’s Advice

23. Staff advocated a slightly larger fiscal adjustment, whereby NDB would be reduced to near zero in 2014 and beyond, compared with the authorities’ goal of ½ percent of GDP a year. Although the differences in the two paths are minor in terms of reducing interest costs and ensuring debt sustainability, staff noted that the zero NDB target could give a clearer signal that the focus of the adjustment is on debt reduction (relative to GDP). In either case, however, credibility of the adjustment is key to generating the fiscal savings from lower interest rates. Staff urged the authorities to rigorously implement the budget and consistently meet NDB targets year after year. The medium-term fiscal adjustment also provides an opportunity to step up reforms of tax policy, revenue administration, and public financial management that would enhance the effectiveness of government and The Gambia’s international competitiveness.

24. Staff advocated a comprehensive tax reform to help rebuild government revenues, while boosting the efficiency of the tax system (Box 2 and Appendix 1). Building upon the planned introduction of a VAT in January 2013, staff recommended flat rate personal and company income taxes with minimal exemptions and deductions. The proposed reform emphasizes simplicity, broad coverage, and low tax rates. Similar reforms have succeeded to increase tax buoyancy and compliance and to enhance competitiveness in a number of countries, including in Africa. Staff envisages that sequencing of the reform would start with planned improvements in revenue administration and regular implementation of a fuel pricing formula that would help preserve excise taxes. In line with past advice, staff also recommended the elimination of “nuisance” taxes—low yielding taxes that do not warrant the resources absorbed by administration and compliance—in the run-up to introduction of the VAT. To allow the authorities’ efforts to focus on the introduction of the VAT as scheduled, staff recommended that the reform of income taxes should come after the VAT, say in 2014. This would allow further study and debate on the parameters and objectives of the tax to ensure a smooth transition.

25. Staff engaged both high-level government officials, as well as representatives of the business community in the discussions on tax reform. While there was a strong interest in the reforms, it would be challenging to extend both VAT and income taxes to some sensitive sectors such as electricity and trade in basic foodstuffs. As a next step, staff recommended an assessment of tax expenditures in the country.

Box 2.Comprehensive Tax Reform in The Gambia

The Gambian authorities are facing significant challenges in the areas of revenue policy and administration. Tax revenues relative to GDP have lagged behind regional averages and have declined in recent years. This cannot be explained entirely by cyclical factors and the changing structure of the economy, notably the strong expansion in agriculture, which is largely outside the tax net. Rising tax expenditures and widespread tax evasion have eroded the tax base. Tax rates are high and the system is widely perceived as unfair. There is widespread rent-seeking, as Gambian entrepreneurs expend scarce time, energy, and talent on obtaining tax preferences. Moreover, compliance procedures are cumbersome for both the GRA and the private sector. Indeed, results from the 2012 World Bank Doing Business report suggest that difficulties with the tax system have weakened The Gambia’s international competitiveness (Appendix 2).

These challenges could be addressed by further tax reforms aimed at broadening the tax base, eliminating “nuisance” taxes, and simplifying direct taxes, including by lowering both the number and levels of tax rates. If implemented well, such a reform would complement and reinforce the ongoing push to improve revenue administration and compliance. Simpler and lower taxes are easier to enforce and to comply with. Simpler and lower direct taxes would encourage the acceptance of the VAT.

There has been widespread experience with similar tax reforms around the world, including throughout Eastern and Central Europe. Evidence indicates (see Appendix 1) that such reform packages can enhance revenue. These reforms also tend to make tax systems more equitable, especially if the preexisting system was applied unevenly.

A significant broadening of the tax base ought to be part and parcel of the reform. A first step would be for the authorities to complete a comprehensive survey and estimates of tax expenditures. Annual assessment of tax expenditures would help highlight the costs of various tax incentives and therefore make it more difficult to justify special tax privileges.

26. Staff urged the authorities to make further progress with the ongoing introduction of the VAT. The policy paper for the VAT has been endorsed by cabinet, 7 but a number of legislative and administrative steps need to be taken before it can be successfully implemented. Widespread taxpayer education is also necessary.

27. Strengthening revenue administration is essential for a successful tax reform. The mission urged the Gambia Revenue Authority (GRA) to make rapid progress on its reform agenda, particularly for the Large Taxpayer Unit, which has received extensive support from Fund technical assistance. Simplicity aspects of the proposed tax reform, together with lower tax rates should facilitate revenue administration.

28. Given the resource constraints under current policies, expenditures would need to be restrained over the medium term, growing roughly in line with GDP. Within this envelope, the government intends to increase the share of total spending directed toward agriculture. At the same time, spending is expected to shift from current to capital expenditures. Fiscal savings on interest payments and a modest reduction in subsidies, would allow a commensurate increase in physical investment, such as irrigation projects. The wage bill is projected to remain steady relative to GDP. If additional resources are generated through greater revenue mobilization or increased donor support, staff envisages that these could be directed toward PAGE priorities.

29. Further progress on PFM reforms is essential for getting greater value-for-money on government expenditures. Key areas of PFM reform include (i) strengthening the budget process, expenditure framework (MTEF) and program-notably preparation of a budget policy paper and a phased-in approach to a medium-term based budgeting; and (ii) enhancing internal and external audit functions. With support from the World Bank, the integrated financial management information system (IFMIS) has been rolled out to all government offices and the interface with the CBG has been established. The IFMIS is expected to significantly improve monitoring and reporting of government expenditures. The recent submission of the audited government accounts for 2007—the first year to use inputs from IFMIS—to the National Assembly was an important step forward for transparency and governance and should pave the way for accelerated preparation and submission of audited accounts for subsequent years.

Authorities’ Views

30. The authorities welcomed proposals to modernize the tax system. They renewed their commitment to introduce the VAT and promised to step up preparations. In particular, they will immediately prepare a VAT bill (with Fund technical assistance) and expedite its submission to the National Assembly. Nevertheless, taking note of delays in the preparations for the VAT thus far, the authorities cautioned that the introduction of the VAT could be delayed by a year to January 2014. On revenue administration, the authorities considered the planned Committee of Enquiry on Tax Evasion as a key element of their strategy to boost tax compliance. To better assess the appropriateness and feasibility of a comprehensive tax reform, the authorities expressed that further study is needed, including an assessment of tax expenditures under the current system. They were particularly cautious that a major reform might overwhelm administrative capacity and jeopardize revenue collections.

C. Monetary Policy and Financial Sector Stability

31. Price stability remains the focus of monetary policy, with the CBG typically aiming to keep inflation close to 5 percent (y-o-y). To control inflation pressures, the CBG targets broad money, mainly by observing (end period) quarterly targets for reserve money. For 2012, the CBG has targeted reserve and broad money growth rates of 11.3 percent and 13.2 percent, respectively, which would allow ample growth of credit to the private sector. The CBG’s discount rate serves as a policy rate to signal the monetary policy stance, but interest rates so far have weak transmission power. In light of the recent dip in inflation, the authorities lowered the discount rate by one percentage point, to 14 percent, at the October meeting of the Monetary Policy Committee.

Staff’s Advice

32. Staff emphasized that the progress in recent months toward eliminating fiscal dominance and strengthening the independence of the CBG provides an opportunity to improve the conduct of monetary policy. Instead of reacting to mop up unanticipated liquidity injections by central bank financed government spending, the CBG is now better placed to implement a more consistent monetary policy with more predictable use of policy instruments, notably sales of T-bills. Staff recommends that the CBG, in coordination with the Ministry of Finance and Economic Affairs (MoFEA), continue to improve its projections of T-bill auctions for the month ahead, with a view toward publicly announcing details of planned offerings in early 2012. This would likely enhance competition in the T-bill auction, which could help to lower yields, while also enabling banks to better plan their investment portfolio decisions.

33. Staff encouraged the CBG to build its capacity to target average reserve money (on a monthly basis), which has a far more stable relationship with broader money aggregates than end-period reserve money. The challenge will be to manage liquidity on a daily basis in a manner consistent with longer-range targets for average reserve money, while maintaining sufficient flexibility to ensure orderly behavior in the interbank money market. This would require development of daily liquidity management tools (such as repos and reverse repos), as well as further study of liquidity demand and supply patterns for forecasting purposes. Further study is also needed to determine an effective policy interest rate. The current policy rate—the rediscount rate—tends to be punitive and has little direct influence on market interest rates.

34. CBG should continue to strengthen financial stability. Banks are generally well capitalized and liquid,8 although system-wide averages can mask potential problems in individual banks. With 13 banks competing for a small customer base, competition is fierce resulting in narrow profit margins. Moreover, the Social Security and Housing Finance Corporation (SSHFC) continues to be the major depositor in the banking system and uses its dominant position to drive up interest rates on deposits. Fund technical assistance is helping the CBG expand its toolkit for banking supervision with stress-testing capability. Staff encouraged the CBG to conduct more frequent on- and off-site supervision based on financial indicators for Prompt Corrective Action (PCA). Also, given its role as a source of funding to the banking system, the SSHFC should be monitored more closely (Box 3 and Appendix 4).

35. Staff urged the CBG to ensure that the credit reference bureau fully serves its function as a reliable and timely source of credit information. High quality information would allow creditors to better guard against exposure to nonperforming loans. It would also allow borrowers with a good credit rating to obtain loans at lower interest rates. This would help address the high cost of financing, which is a major concern for businesses.

Box 3.The Gambia: Financial Sector Assessment*

The Gambian banking system underwent significant changes in recent years. From 2005 to 2010, the number of banks increased from 5 to 14 (one dropped out in early 2011), credit to GDP expanded from 10 percent of GDP in 2005 to 17.4 percent of GDP in 2010, and credit growth averaged 23 percent a year over the same period.

The Gambian banking system is well capitalized and liquid. The average risk adjusted capital ratio was 25.6 percent as of June 2011. However, across the 13 banks the capital adequacy ratio (CAR) ranges from 16.9 to 155.6 percent.** The ratio of liquid assets to short-term liabilities is 60 percent, with a large share of short-term government paper and a few large depositors.

Asset quality has deteriorated over the years, but provisioning has not kept up. Nonperforming loans (NPLs) have increased from 5 percent of total loans and advances in 2005 to 14.5 percent at end 2010. However, recently NPL fell by 2 percentage points as of June 2011. Full provisioning (100 percent) is required only for loans that are past due for more than 360 days and restructured loans attract only a 5 percent provision.

Profitability weakened, turning negative in 2009, but began to recover in 2010. From 2007 to 2009, return on assets (ROA) and return on equity (ROE) dropped from 4.5 percent to -1.6 percent and from 36.4 percent to -24.9 percent, respectively. Both rations turned around from 2010, reaching 1.2 and 5.8 respectively by June 2011, owing to banks efforts to improve their portfolios.

Stress testing suggests that the banking system can withstand large shocks. Stress testing conducted in March 2011 revealed that credit risk is the most important source of risk to the banking system. Banks can withstand severe liquidity shocks arising from deposit withdrawals. The exchange rate and interest rate risks are negligible.

The supervisory framework is robust, but can be further strengthened. It is based on the monitoring of Prompt Corrective Action (PCA) indicators that are collected quarterly. As the largest depositor in the banking system, the SSHFC’s investment decisions have effects on monetary policy through interest rates and on the banking system and therefore should be monitored closely.

* This assessment is based on a diagnostic of the banking system and stress testing exercises performed by Fund technical assistance. The Fund is also providing training to build the CBG’s own capacity for stress testing.** The particularly high (risk-weighted) CAR reflects a high share of investment in government T-bills.

Authorities’ Views

36. The monetary authorities reiterated that their main objective is price stability. They agreed with the recommended steps and noted that further technical assistance may be needed to implement them. They are also keen to announce T-bill offerings in advance, but noted that better information sharing with MoFEA is necessary.

37. The authorities concurred with staff’s analysis and recommendations on financial sector stability. However, they officials from banks’ headquarters abroad and preparing a full report, was only feasible on an annual basis.

D. Exchange Rate Policy

38. Results from staff’s assessment suggest that the exchange rate is broadly aligned with economic fundamentals; albeit with results pointing to a small overvaluation (of 6½-10 percent) (Appendix 3). Indeed, in 2011 the Gambian dalasi has depreciated modestly, partly reflecting the greater exchange rate flexibility in the current year, compared with 2010, when there was a brief period of interventions by the CBG.

Staff’s Advice

39. The mission encouraged the authorities to continue to follow a highly flexible exchange rate policy, using foreign exchange market interventions only to maintain orderly market conditions. In addition, it may be necessary for the CBG to purchase foreign exchange to meet its target for international reserves of about five months of import cover. Given the U.S. dollar’s recent appreciation against the euro, exchange rate flexibility would help preserve The Gambia’s competitiveness in the region and as a tourist destination for Europeans. The staff noted that historical data suggest that there were periods where the authorities appeared to have employed a soft peg to the U.S. dollar.

Authorities’ Views

40. The authorities concurred with staff on the need to maintain a flexible exchange rate. They vigorously denied any pegging to the U.S. dollar, pointing to the recent depreciation of the dalasi as proof. They explained that the interventions in 2010 addressed an acute demand for the U.S. dollar by importers.

E. Poverty Reduction and Other Structural Reforms

41. The PAGE seeks to reduce poverty by boosting economic growth and employment with a stepping up of investment in infrastructure and government support for agriculture, education, and health; but financing the PAGE is a big challenge. The focus on agriculture is expected to enhance the inclusiveness of growth over the near and medium term, while education and infrastructure investment—particularly in telecommunications and electricity—would help to diversify the economy down the road. The DSA indicates that if concessional terms are observed (minimum grant element of 35 percent), there is scope for up to US$30 million a year of additional borrowing over the next five years, while still maintaining debt sustainability.

Staff’s Advice

42. Staff encouraged the authorities to build support for the PAGE among donors, but cautioned against overly optimistic projections for the resource envelope. Staff cautioned against greater recourse to domestic borrowing and noted that, by adhering to the fiscal adjustment, eventually fiscal savings (of approximately ½ percent of GDP a year by 2014) would be available for PAGE priorities from the reduced interest costs on domestic debt.

43. Private sector participation in infrastructure investment could make a valuable contribution to PAGE objectives, but to ensure that such participation is productive, it is critical that an effective institutional framework and strong regulatory agencies are in place beforehand. In particular, staff observed that NAWEC’s poor financial condition is a deterrent to private sector investment in the electricity sector, as pointed out by World Bank staff in a recent diagnostic analysis of the sector. Staff encouraged that some initial steps be taken to help improve NAWEC’s financial position, including an automatic cost-of-fuel adjustment in electricity tariffs, as well as steps to strengthen the regulatory agency (PURA). Staff further advised the authorities to work on medium-term structural reforms needed to establish NAWEC’s financial viability. Exploring alternatives to the near-monopoly structure of fuel importation might also help to reduce energy costs. In addition, staff noted the dynamic private sector led growth in the telecom sector, where competition is fierce and technological change rapid, and urged the authorities to move forward with plans for a fully transparent privatization of GAMCEL. Such structural reforms would also help eliminate major sources of contingent liabilities that have impaired government finances in recent years.

Authorities’ Views

44. The authorities were keen to engage development partners to help finance the PAGE, but understood the need to be realistic about the resource envelope. They intend to organize a donor conference to support the PAGE in the coming months, after which a realistic action plan could be budgeted for. They agreed with staff’s views on boosting private sector participation, much of which is already referenced to in the PAGE. However, in the electricity sector, both NAWEC and PURA officials emphasized that government approval of a national energy strategy/policy is needed.9

F. Debt Sustainability

45. Although a DSA conducted jointly with World Bank staff suggests that The Gambia’s public debt is on a sustainable path, the debt situation remains a concern. Based on external debt indicators, The Gambia continues to be at high risk of debt distress. And, as discussed above, domestic debt is costly and poses substantial rollover risks.

Staff’s Advice

46. While the DSA suggests that there is some scope for additional external borrowing, staff recommended that loans be restricted to concessional terms with a minimum grant element of at least 35 percent. The staff urged the authorities to articulate a medium-term debt strategy consistent with gradually reducing NDB. Now that T-bill yields have begun to fall, the authorities could once again test the market for longer-term bonds (beginning with 2- or 3-year bonds) in an effort to begin to lengthen the maturity structure and reduce rollover risks. As NDB declines, it is likely that interest rates would continue to fall, which would allow for larger offerings of longer-term instruments. (see DSA report).

Authorities’ Views

47. The authorities concurred with staff on the debt sustainability analysis. Their debt management strategy will be fully consistent with the need to strengthen debt sustainability. They intend to issue government securities with maturities of 2-3 years, initially in modest amounts to test the market.

G. Other Surveillance Items

Data Quality

48. Quality of economic and financial data is generally sufficient for effective surveillance, but there is much room for further improvement. For the national accounts, next steps include developing quarterly GDP statistics and GDP statistics by expenditure category. The updating of the CPI statistics based on the 2010 household survey would be welcome, together with a review of appropriate weights. BOP statistics and the compiling and monitoring of project grants need to be improved. The authorities would continue to welcome Fund technical assistance in these areas.

Outreach

49. Staff met with a broad cross-section of Gambian society to discuss surveillance issues and the role of the Fund in The Gambia. Meetings were held with members of the National Assembly, opposition party leaders, representatives of the business community, labor union officials, NGOs, university students, and the donor community. A public presentation and discussion of the proposed tax reform was well received.

STAFF APPRAISAL

50. The Gambian economy has performed well in recent years, despite a difficult global environment. Real GDP growth has been robust and inflation has generally been low. Moreover, the authorities’ efforts to support agriculture appear to have made growth more inclusive. To shed better light on the impact on the poor, staff encourages the authorities to complete the 2010 household survey soon. The outlook for the Gambian economy is positive, although there are a number of risks. In particular, the high cost and rollover risks of domestic debt could threaten macroeconomic stability.

51. Staff welcomes the authorities’ 2012 budget, which aims at taking a strong initial step toward reducing domestic borrowing. To fully realize the benefits of lower government borrowing and a sustained decline in the interest burden, it will be critical that the authorities consistently meet the targeted reduction in government borrowing, which will build credibility in their efforts to gradually bring net domestic borrowing down further to ½ percent of GDP by 2014 and, if possible, to near zero. To achieve this, rebuilding revenues will be essential, especially in light of growing spending needs associated with the authorities’ new poverty reduction strategy, the Programme for Accelerated Growth and Employment (PAGE). In particular, staff encourages the authorities to take strong and immediate actions to reverse the worrisome erosion of tax revenues since 2007, including a further decline in the tax-to-GDP ratio of around 1 percent of GDP in 2011. Staff urges the authorities to immediately adjust fuel prices and reinstate regular adjustments in line with a fuel pricing formula that would allow greater pass-through of changes in world prices and help preserve revenues from fuel taxes.

52. Staff encourages the authorities to build upon the ongoing efforts to introduce a VAT by January 2013 and pursue a comprehensive tax reform. A reform that emphasizes simplicity, broad coverage, and low tax rates could bolster revenues and add buoyancy to the tax system, while also improving the business environment and enhancing international competitiveness. Despite recent delays in the steps needed to implement the VAT, staff urges the authorities to strive toward meeting the January 2013 target date. In addition, staff recommends that the VAT bill extend coverage of the tax to the electricity sector.

53. Improving tax compliance is necessary not only to boost revenues in the near-term, but also to provide a foundation for introducing the VAT and other tax reforms. The authorities’ decision to establish a commission of inquiry on tax evasion could raise awareness among the public and hopefully lead to a buy-in on compliance enhancing measures. At the same time, the Gambia Revenue Authority urgently needs to strengthen the large taxpayers unit, particularly its auditing capabilities.

54. Government’s expenditure restraint in 2011 has been a welcomed improvement from the spending overruns in recent years. Already, there has been some pay off, as T-bill yields are coming down. However, staff encourages the authorities to step up the pace of public financial management reforms, particularly on budget procedures, execution, and monitoring to ensure value-for-money from government spending. In the mean time, and especially during the run-up to parliamentarian elections, staff encourages the authorities to stay the course by maintaining strict cash budgeting.

55. With fiscal dominance abating, the Central Bank of The Gambia (CBG) has an opportunity to better focus monetary policy on its primary goal of maintaining low inflation. The CBG should endeavor to develop a near-term liquidity management strategy and tools that would assist it in achieving this objective.

56. The Gambia has appropriately maintained a floating exchange rate regime. An assessment by staff suggests that the exchange rate is broadly in line with fundamentals, although there may have been a small overvaluation. Instances of heavy interventions around mid-2010 have not been repeated in 2011 as the dalasi depreciated modestly in real effective terms. Going forward interventions should be limited to safeguarding orderly market conditions and to meeting the CBG’s international reserves target.

57. The banking system is well capitalized and liquid, but supervision must remain vigilant to address possible weaknesses in individual banks. The CBG has a well-articulated banking supervision framework which, nevertheless, could be further improved. The financial indicators for prompt corrective action are extremely useful supervisory tools that provide detailed information on the health of the banking system and should be monitored frequently. Staff welcomes the authorities’ intention to strengthen the supervisory apparatus through the introduction of risk-based supervision and stress-testing. Staff urges the authorities to ensure that the Credit Reference Bureau maintains a high-quality and up-to-date database, not only to help banks contain nonperforming loans, but also to enable borrowers with good credit ratings to access financing at lower interest rates. Given its prominent role, it will be important to monitor the impact of the Social Security and Housing Finance Corporation’s investment policy and portfolio structure on the financial sector.

58. A well-specified debt management strategy is needed to ensure debt sustainability. Key elements of such a strategy include limiting external financing to concessional terms, while gradually reducing net domestic borrowing to lower interest costs. As yields drop, longer-term government securities could be issued to reduce rollover risks.

59. Financing the PAGE will be a major challenge. Although there is some scope for additional external borrowing on concessional terms, which would be consistent with debt sustainability, the authorities would need to seek private sector participation for some major infrastructure investments. For this participation to be productive, an effective institutional framework and strong regulatory agencies must be in place beforehand. In particular, to address energy needs, staff encourages the authorities to formulate a strategy that ensures a financially viable electric utility company under such a regulatory framework.

60. Staff recommends that the next Article IV consultation for The Gambia take place on the standard 12-month cycle.

Appendix 1. Comprehensive Tax Reform in The Gambia1

The Gambian authorities are facing significant challenges in the areas of revenue policy and administration. Tax revenues relative to GDP have lagged behind regional averages and have declined in recent years (see Figures 1 and 2). Compliance is poor. Cumbersome procedures are straining the GRA and providing a disincentive to private sector employment and investment. The current system invites rent-seeking, as Gambian entrepreneurs expend scarce time, energy, and talent on obtaining tax preferences. The current system is widely perceived as unfair, due to tax evasion as well as tax preferences for some and high rates for everybody else. The country ranks 178 out of 183 countries in the world for ease of paying taxes in the 2012 World Bank Doing Business report (last among ECOWAS countries and third from the bottom in AFR). Part of these problems is due to weak institutional capacity.

Figure 1:Tax Revenue In 2010 For 15 ECOWAS Countries

(% of GDP)

Sources: WEO and IMF country desk data.

Figure 2:Change In Tax Revenue Over 2009-10 For 15 ECOWAS Countries

(% of GDP)

Sources: WEO and IMF country desk data.

Another part is due to a complex tax system which has created a vicious circle, with a multiplicity of taxes (some with relatively high rates) “chasing” a shrinking tax base.

These challenges could be addressed by further tax reforms aimed at broadening the tax base, eliminating “nuisance” taxes, and simplifying direct taxes, including by lowering both the number and levels of tax rates. If implemented well, such a reform would re-energize employment, investment, and growth by improving economic incentives and reducing the financial and administrative burden on the private sector. The reform would speed up progress toward meeting the Millennium Development Goals (MDGs) and the objectives of the Programme for Accelerated Growth and Employment (PAGE), the country’s new poverty reduction strategy. Second, a major tax reform would complement and reinforce the ongoing push to improve revenue administration and compliance. Simpler and lower taxes are easier to enforce and comply with. Third, such reforms could boost tax revenues by accelerating growth, by improving compliance, and by re-focusing the revenue side of the budget on its core mission: raising revenue. Table 1 presents some cross-country evidence which indicates that similar reform packages can enhance revenue. Out of 18 countries listed in that table, nine experienced an increase in revenues from personal and corporate income tax (PIT and CIT), 11 countries collected more revenues from indirect taxes (VAT and excise tax), and in 12 countries the sum total of revenues from PIT, CIT, and indirect taxes went up. Fourth, the proposed reform would make The Gambia’s system more equitable. Broadening the tax base would promote both horizontal and vertical equity. Raising the personal exemption for PIT and improving compliance would enhance vertical equity, especially if these are combined with subjecting electricity consumption to sales tax (and later the VAT) and with raising more revenue from excise taxes on fuel. Fifth, simpler and lower direct taxes would encourage the acceptance of the VAT. Table 1 suggests that similar reform packages around the world are associated with higher revenues from indirect taxes.

Table 1:Tax Revenues In 18 Countries In The Year Before And After The Introduction Of A Flat Personal Income Tax(% of GDP)
PITCITDomestic indirect taxesSum
Countryyear beforeyear afteryear beforeyear afteryear beforeyear afteryear beforeyear after
Albania (2008)1.52.22.41.913.514.217.418.3
Belarus (2009)4.24.310.69.011.811.426.624.7
Bosnia and Herzegovina (2009)0.20.90.60.917.317.018.218.8
Bulgaria (2008)3.02.83.03.216.516.622.522.6
Czech Republic (2008)4.33.75.04.211.211.020.518.9
Estonia (1994)8.58.14.53.310.813.123.824.5
Georgia (2005)2.72.51.61.87.711.012.015.3
Kazakhstan (2007)1.61.710.711.59.59.321.822.5
Latvia (1997)5.45.62.02.412.612.520.020.5
Lithuania (1994)5.05.45.32.56.216.3116.514.2
Macedonia (2007)2.72.61.51.78.819.6113.013.9
Mauritius (2007)21.21.42.33.09.710.513.214.8
Mongolia (2007)2.11.66.04.86.515.8114.612.2
Montenegro (2007)24.34.60.62.012.7114.3117.620.9
Romania (2005)2.92.43.02.79.910.915.816.0
Russia (2001)2.42.95.55.79.611.317.519.9
Slovakia (2004)3.22.12.72.411.311.717.216.2
Ukraine (2004)5.13.85.04.79.39.119.417.6
Unweighted average3.43.34.03.810.811.418.218.4
Sources: Keen, Kim, and Varsano (2006), GFS, WEO, and IMF country desk data.

VAT only.

In both Mauritius and Montenegro the reforms were enacted in mid-2007, so 2006 is the “year before” and 2008 is the “year after.”

Sources: Keen, Kim, and Varsano (2006), GFS, WEO, and IMF country desk data.

VAT only.

In both Mauritius and Montenegro the reforms were enacted in mid-2007, so 2006 is the “year before” and 2008 is the “year after.”

Mauritius is a recent example of an AFR country which implemented a major tax reform, several aspects of which are worth emulating. There are significant differences between the two countries: for example, Mauritius is a middle-income country and also an off-shore financial center. However, there are certain similarities as well: both countries are small, highly dependent on tourism, and with newly established revenue authorities. Furthermore, the Mauritius reform was implemented in the context of a major fiscal adjustment. In mid-2007, Mauritius replaced the four rates in its personal income tax (ranging from 10 to 30 percent) with a single rate of 15 percent, combined with a significantly higher personal exemption, which removed a large fraction of small taxpayers from the tax net. At the same time, Mauritius also simplified its corporate income tax, which now features a single 15 percent rate. The VAT rate is also 15 percent. Furthermore, the reform broadened the tax base significantly, including by consolidating various reliefs, allowances, deductions, and exemptions. As a result, tax expenditures are estimated to have fallen from 3 percent of GDP to 1.5 percent. The country ranks 11 out of 183 countries in the world for ease of paying taxes in the 2012 World Bank Doing Business report (which makes Mauritius the highest-ranked AFR country).

While correlation is not causation, the evidence presented in Table 2 is suggestive: revenues from PIT, CIT, VAT as well as overall tax revenues were significantly higher in 2008–2010 than during 2004–2006. Of course, an identical tax reform package might yield different results in different countries: it all depends on the structure of the economy, on institutional capacities and constraints, and on the behavioral response to tax reform.

Table 2:Tax Revenues In Mauritius% of GDP, 2004-2010)
AverageAverage
20042005200620072008200920102004-062008-10
Tax revenue17.217.917.317.618.219.118.417.518.6
PIT1.31.41.21.21.41.51.51.31.5
CIT1.62.12.32.43.03.72.82.03.2
Domestic indirect taxes8.68.89.710.710.510.610.99.010.7
Source: IMF country desk data.
Source: IMF country desk data.

A significant broadening of the tax base ought to be part and parcel of the reform package. A first step would be for the authorities to complete a comprehensive survey and estimates of tax expenditures. Annual assessment of tax expenditures would help highlight the costs of various tax incentives and therefore make it more difficult to justify special tax privileges. Several opportunities to broaden the tax base are easy to spot. Various waivers of excise tax, sales tax, and import duty could be eliminated. Electricity consumption could become subject to sales tax (and eventually to VAT). The fuel pricing formula could be implemented regularly in order to ensure stable and positive revenues from excise taxes on fuel. The Fringe Benefit Tax rate could be re-aligned with the reformed personal income tax rate and applied consistently to all allowances. Various tax preferences extended through The Gambia Investment and Export Promotion Act 2010 (GIEPA) and its predecessors could be allowed to expire without renewal and the authorities could abstain from extending new ones.

An ambitious tax reform must be preceded by significant improvements in revenue administration and compliance. The authorities should follow through with their compliance improvement strategy. It should be a public priority and involve a lot of political support, including at the highest levels of government.

The timing and pace of tax reform will be driven by institutional capacity constraints, among other factors. Similar reform packages have been successfully implemented in many countries around the world (see Table 1). Some have opted for a piecemeal approach, while a big-bang strategy has worked very well for others (including Mauritius). If the Gambian authorities select the big-bang approach, a natural launching date for the reforms would be January 2013, concurrently with the VAT launch. A downside here would be the strain this would add to the country’s institutional capacity. If the authorities choose a more gradual reform path, the reforms could be staggered over a period and come on the heels of improvements in compliance, revenue administration, and revenue collections.

Appendix 2: Competitiveness of The Gambia1

According to survey-based indicators, The Gambia ranks poorly in the entire sample of countries, albeit somewhat better than in most other countries in the region. The 2011 World Bank’s Doing Business Survey ranks The Gambia 146th globally and 5th among ECOWAS countries in terms of overall ease of doing business, and 3rd in cross-border trading and enforcing contracts. The Gambia also has relatively high overall ranking in the 2011 Global Competitiveness Index (99th) compared to its neighbors, largely owing to its relatively good infrastructure, flexible labor market and well educated workforce.

Lack of progress in addressing key institutional bottlenecks could begin to undermine The Gambia’s relative competitiveness in the region. The cumulative change in Doing Business score from 2006 to 2011 indicates that The Gambia has lagged behind most of its ECOWAS peers in improving its overall business environment, underperformed only by Cape Verde and Guinea. In order to stay competitive, The Gambia needs to augment its effort to address its key institutional bottlenecks, including ensuring better investor protection and removing impediments for paying taxes. For example, moderate improvements in paying taxes can potentially yield a significant gain in The Gambia’s overall competitiveness. Simulation result shows that by reducing the time to prepare and pay taxes, as well as lowering total tax rate measured as percentage of profit, to ECOWAS averages, The Gambia’s global ranking improves from 146 to 134 and to 3rd among ECOWAS countries.

2011 Doing Business Survey: Global (ECOWAS) Rankings
Ease of Doing BusinessStarting a BusinessProtecting InvestorsPaying TaxesTrading Across BordersEnforcing Contracts
Ghana67 (1)99 (3)44 (2)78 (1)89 (4)45 (2)
Cape Verde132 (2)120 (9)132 (4)100 (3)55 (1)38 (1)
Nigeria137 (3)110 (5)59 (3)134 (5)146 (11)97 (4)
Sierra Leone143 (4)61 (1)28 (1)159 (10)136 (10)144 (11)
Gambia, The146 (5)115 (6)173 (14)176 (15)87 (3)67 (3)
Burkina Faso151 (6)119 (8)147 (6)148 (7)175 (15)108 (5)
Senegal152 (7)101 (4)167 (13)170 (13)67 (2)148 (12)
Mali153 (8)117 (7)147 (6)159 (10)154 (12)133 (8)
Liberia155 (9)64 (2)147 (6)84 (2)116 (6)166 (14)
Togo160 (10)169 (12)147 (6)157 (9)93 (5)151 (13)
Côte d’Ivoire169 (11)172 (13)154 (10)153 (8)160 (13)126 (6)
Benin170 (12)157 (10)154 (10)167 (12)127 (8)177 (15)
Niger173 (13)159 (11)154 (10)144 (6)174 (14)138 (9)
Guinea-Bissau176 (14)183 (15)132 (4)133 (4)117 (7)139 (10)
Guinea179 (15)181 (14)173 (14)173 (14)129 (9)130 (7)
Source: World Bank Doing Business Survey 2011
Source: World Bank Doing Business Survey 2011
Paying Taxes
Ease of

Doing

Business

Rank
RankPayments

(number

per year)
Time

(hours per

year)
Profit tax

(%)
Labor tax

and

contributions

(%)
Other

taxes (%)
Total tax

rate (%

profit)
Ghana6778332241814133
Cape Verde132100431861819137
Nigeria137134359382210132
Sierra Leone14315929357011224236
Gambia, the146176503764113238292
Burkina Faso151148462701623645
Senegal152170596661524746
Mali153159592701333752
Liberia1558432158053844
Togo160157532709281451
Côte d’Ivoire169153642709201644
Benin1701675527015272466
Niger173144412702020747
Guinea-Bissau176133462081525646
Guinea1791735641619251155
ECOWAS average1404734113202659
Source: World Bank Doing Business Survey 2011
Source: World Bank Doing Business Survey 2011
Appendix 3. Is the Dalasi Aligned with the Economy’s Fundamentals?1

A number of complementary approaches were adopted to assess whether The Gambia’s exchange rate is aligned with fundamentals. These alternative approaches, proposed by the IMF’s Consultative Group on Exchange Rate Issues (CGER), include the macroeconomic balance approach, the external sustainability approach, and the equilibrium real exchange rate approach. The purchasing power parity approach was also included in the assessment. These alternative approaches produce somewhat different results.

The macroeconomic balance approach suggests that the dalasi may be overvalued by 17 percent. The country’s underlying current account deficit is 12 percent of GDP. The underlying fundamental driving this result is the large fiscal deficits in recent years. Temporary factors, such as government-financed external payments for a large telecommunications project, also played a role. With an estimated current account norm of about 2 percent, roughly in line with estimates in past assessments, a depreciation of 17 percent would be needed to restore sustainability.

The external sustainability approach indicates an overvaluation of 8½ percent. With an underlying current account balance of 12¼ percent, the Gambia’s long-run net foreign assets (NFA) would be unsustainable at about -138 percent of GDP. In order to bring the NFA to a sustainable level of -70 percent of GDP, the exchange rate would require a depreciation of 8½ percent with a corresponding current account deficit of 6½ percent of GDP.

Results from the equilibrium real exchange rate approach suggest an overvaluation of between 3 and 6 percent. Given The Gambia’s unique status as a very small and very open West African country with a flexible exchange rate, staff adopted a single-country approach. Staff further adopted a vector error correction model (VECM) to estimate the real effective exchange rate (REER) because of the presence of a cointegrating relationship between the REER and its fundamentals. Given the relatively small sample size (1980–2010) and the presence of a unit root, staff also used Ordinary Least Squares (OLS) with one lag. While the VECM estimates indicate that the exchange rate may be overvalued by 6 percent, the OLS estimates suggest a slightly smaller overvaluation of about 3 percent. In both cases, the terms of trade, the nominal exchange rate, and government consumption are the most significant explanatory variables.

The Gambia: Results from Exchange Rate Assessments
MethodologyValuation (in percent):
Over (+) or Under (−)
Macroeconomic Balance (MB)17.0
External Sustainability8.5
Equilibrium RER (average)4.5
Average (incl. MB approach)10.0
Average (excl. MB approach)6.5
Source: IMF staff estimates.
Source: IMF staff estimates.

The purchasing power parity approach suggests that the dalasi may be overvalued by 3 percent. Staff used the sample mean of the logarithm of the REER as an estimate of its long-run equilibrium value. The degree of percentage difference between the most recent observed value and the estimated long-run equilibrium.

Overall, staff analysis suggests that the exchange rate was broadly aligned with fundamentals, although it may have been slightly overvalued. The average of the three CGER-based approaches suggests an overvaluation of 10.0 percent. Excluding the macroeconomic balance approach—which appears to be an outlier, partly driven by data weaknesses—the estimated overvaluation would be 6.5 percent. Note that the purchasing power parity approach indicates a much smaller overvaluation of around 3 percent. As in most low-income countries, one should be mindful of data shortcomings and methodological uncertainties in interpreting these results.

Appendix 4. Financial Sector Surveillance1

I. STRUCTURE OF THE BANKING SYSTEM AND HISTORICAL BACKGROUND

The Gambia’s financial system is dominated by banks and has undergone big changes over the last decade. The number of banks increased from 4 in 2001 to 14 in 2009, with several Nigerian banks entering the market during 2007–2009 (one voluntarily wound down in 2011). All but the largest bank have majority foreign ownership. Based on their total assets, Gambian banks can be classified into three peer groups: (i) three large banks, which represent around 57 percent of total assets and loans at end-2010, (ii) three median banks that account for around one fourth of total assets and loans, and (iii) seven small banks that account for 20 percent of assets and 23 percent of loans to the industry.

Total assets grew rapidly, reaching 54 percent of GDP at end 2010. Loans to the private sector represent only a little more than 25 percent of assets, while government securities represent 29 percent of assets. Credit to the private sector increased from 10 percent of GDP in 2005 to 17.4 percent of GDP in 2010 and credit growth averaged 23 percent a year over the same period. Total bank deposits more than doubled during 2005-2010 to D11.2 billion. Around 98 percent of deposits are from local depositors and the largest depositor in the banking system is a state-owned institution.

II. BANKING SYSTEM STRENGTHS AND VULNERABILITIES

A. System Condition

The banking system is well capitalized; however the aggregate number masks a wide dispersion across banks. With a CAR of 25.6 percent, the banking sector remains well above the minimum requirement, which was raised from 8 percent to 10 percent, as of May 2011. In response to the deteriorating environment, the CBG raised the minimum capital requirement from D 60 million to D 150 million with effect from end-2010, and to D 200 million with effect from end-2012. All 13 banks complied with the new requirements as of December 2010. While the new banks tend to be highly capitalized, some of the oldest and largest banks have significantly lower CARs.

Gambia: Financial Soundness Indicators(Banking Industry)
20072008200920102011
June
(in percent, otherwise indicated)
Capital Adequacy:
Regulatory capital to risk-weighted assets22.519.618.824.524.8
Tier-1 capital to risk-weighted assets 1/20.021.019.027.025.6
Asset quality:
Nonperforming loans to total gross loans10.413.712.314.512.7
Nonperforming loans net of provisions to capital2.85.84.37.56.4
Earnings and profitability:
Return on assets (average)4.50.1−1.60.41.2
Return on equity (average)36.40.8−24.91.85.8
Net Interest income to gross income34.735.337.041.337.4
Operating expenses to gross income47.065.862.058.257.8
Liquidity:
Liquid assets to total assets45.043.635.747.938.6
Liquid assets to short-term liabilities74.970.962.168.459.4
Exposure to FX risk:
Net open FX position to capital36.919.16.4−0.4−2.9
Sources: Gambian authorities, and Fund staff estimates.
Sources: Gambian authorities, and Fund staff estimates.

Banks have ample liquidity; however, concentration of the largest deposits deserves vigilance. Almost one third of banks’ assets are invested in government securities and 17.6 percent of total assets are in the form of highly liquid instruments: cash balances at the CBG and with commercial banks. The short-term liquidity ratio remains well above the common international level of 30 percent. Although liquidity buffers remain high, banks are vulnerable to funding liquidity shocks from large depositors, pointing to a heavy reliance on wholesale funding.

Although the loan portfolio of the banking sector is small (29.8 percent of assets), its concentration potentially poses major risks to the banking system. The top four borrowers account for 33 percent of the loan portfolio, based on June 2011 data. Moreover, in one of the banks, the largest loan to one borrower exceeds the maximum limit of 25 percent relative to the bank’s capital, although a government guarantee is provided. The largest borrowers are concentrated in electricity, fuel, agriculture, and the telecommunications sectors.

The loan portfolio quality has deteriorated over time. Against the backdrop of the rapid credit expansion and weakening of lending standards, banks experienced a rapid deterioration of their credit portfolio quality. NPLs increased from 5 percent of total loans and advances in 2005 to 14.5 percent at end 2010. Further losses may have been incurred but have not as yet been accounted for, due to a substantial lag between credit events and loan loss accounting.

Provisioning requirements remain low. At present, the regulatory prescribed loan loss provisioning system in The Gambia is based on days past due. For all loans up to 90 days past due, only a 1 percent provisioning is required. Full provisioning (100 percent) is required only for loans that are past due for more than 360 days. Further, the current loan classification rule allows banks to restructure loans and charge only a 5 percent provision. Although, following recommendations of the July 2010 Article IV mission, NPLs now include restructured loans, provisioning requirements remain unchanged, and the loan classification scheme does not include a watch or special-mention category that typically captures loans that are delinquent up to 90 days. These rules will result in banks’ losses being understated and capital overstated.

Profitability has eroded and is likely to erode further. ROA and ROE dropped from 2007 with the recent multiple entries of new banks, as margins shrunk. Overhead and staffing costs increased as a result of competition. The power of wholesale depositors to negotiate higher deposit interest rates contributed to eroding profits. And recently T-bills yields have dropped and are likely to continue to slide, if the government continues its fiscal adjustment efforts. If provisioning requirements were to be tightened, with 30-90 days past due attracting 5% provisioning, it would lead to a further drop in profitability.

Although government T-bills are typically held to maturity, market and related government credit risk are high due to the substantial concentration of banks’ assets. Holdings of government bills vary from bank to bank and ranges from almost 50 percent to 5 percent of total assets (from 564 percent to 1 percent of capital). This makes the banking system poorly diversified against sovereign risk: were the government to default or restructure its debt, some banks would be hard hit. Other market risks, such as related to trading book or holdings of other securities, are negligible.

Direct exposure to interest and exchange rate risks remain limited. Banks tend to match the re-pricing terms of their assets and liabilities. The average maturity of loans in the banking system is short (around 1 year), and only very rarely exceeds five years. The majority of term deposits are for three months. Although loans are short-term, it is a common practice among banks to adjust lending rates when official interest rates change. The ability to maintain a positive interest rate margin between government t-bills and deposit interest rates is a substantial source of income for banks, especially for those banks that have a very small loan portfolio relative to their total assets. A further decline in interest rates on government t-bills and an increase in deposit interest rates might push some banks to leave the market. Dollarization is limited as foreign exchange (FX) loans and deposits constitute a relatively small (about 5 percent) share of assets and liabilities, respectively. Banks’ net open position is small at around 0.3 percent of capital.

The entry of the new banks reduced systemic, “too-big-to-fail” related risks, but new potential risks have emerged. The share of the largest player in the market shrank from 52 to 19 percent. Although this has decreased problems related to potential costs from a failure of a credit institution, the high number of small, not very well diversified banks has created new challenges. First, small banks do not have sophisticated risk management systems in place and consequently tend to have weaker lending standards. Second, the increased number of banks ratcheted up supervisors’ work load. Third, the high share of foreign ownership exposes the Gambian banking system to potential cross-border contagion effects. Against this background there is anecdotal evidence that recently banks’ lending standards have become more stringent—for example, the maximum Loan-to-Value (LTV) for new loans decreased from 100 percent to 75 percent. Also, to date, banks’ dependency on foreign capital inflows has remained low. Gambian authorities are a party to Memoranda of Understanding (MOUs) on cross-border cooperation in the area of supervision of banking groups, with relevant authorities of neighbor countries. Several supervisory colleges were also established.

B. Stress Testing2

Stress testing results based on June 2011 data reveal that credit risk is the major source of risk to the banking system. To assess the current vulnerabilities of the banking system, the effect of a multiple factor shock scenario on credit risk was evaluated. The shock assumes a decline in Gambian exports (groundnut and cotton), as well as lower receipts from the tourism sector. A decline in export revenues might be brought about by a number of factors, such as a drought and/or a fall in groundnut and cotton prices or, alternatively, an increase in energy prices. A combination of all these factors would result in a higher current account deficit (CAD), lower government revenues, and lower GDP growth. A technical assumption was made that the government neither would be able to cover the budget deficit with additional borrowings from international institutions nor inflate its debt. Moreover, the currency is assumed to depreciate by 40 percent. Demand for imports would decrease, whilst agriculture, construction, and the trade sector would suffer losses. NPLs and, subsequently, provisions would increase. Credit growth would slow down to half of its long term (2001–10) annual average growth rate. Additional assumptions were made regarding banks’ income, and the capital position was adjusted for under-provisioning.3

The results from the multi-factor scenario revealed that by the second quarter of 2012, two banks out of 13 will not meet the minimum CAR (Table 3). Overall banking sector’s CAR will decrease to 20.1 percent by 5.5 percent. One large bank and one medium size bank will need recapitalization in Q2:2012, however the cost for recapitalization will be relatively small, approximately 0.45 percent of GDP.

A credit risk stress-test’s results indicate that once banks fully provision their NPLs, two banks would need recapitalization, though the amounts involved would be negligible. The scenario assumes that a shock to credit risk leads to a gradual increase in provisioning levels for the current NPLs, to 100 percent eventually—in other words, due to the weak loan classification system and low provisioning requirements, ultimately all NPLs will become losses.

Another credit risk stress-test’s results indicate that once NPLs increase by 80 percent from their current level (largest observed historical shock in 2001–10 period), and thereupon are 100 percent provisioned, two banks (one large and one medium) would be in need of a modest amount of capital. The post-shock CAR is 21.4 percent for all banks, 13.9 percent for large banks, 13.0 percent for medium banks, and 50 percent for small banks—hence, the shock impact was not significant.

Credit risk stress-test results show that the high concentration of large exposures poses the most significant risk to the banking sector. The test results show that if all three largest borrowers default simultaneously, the CAR of six banks will fall below minimum CAR, indicating two large banks will become insolvent with negative CAR. A small number of large companies with well-connected business in the agriculture, domestic trade, and import, energy, and telecom industries dominate the borrower’s market. The combined total of the largest three exposures of each bank in the banking system would add up, on average, to 42 percent of total industry loans. Should some of these loans default simultaneously from a shock or sharp drop in commodity prices or an increase of energy prices, the impact on the sector could be substantial.

Shock related to the restructuring of government debt4reveals that, with a 5 percent haircut, all the banks will meet the minimum CAR, higher haircut will lead to a substantial deterioration of their capital positions. In the extreme case of a 50 percent of haircut, four banks will be technically insolvent, having negative CAR.

Overall, credit risk stress tests broadly confirmed the concerns raised in 2010 Article IV report and by the TA mission on diagnostic assessment of the banking system in 2011. Meanwhile, the results highlighted several characteristics: 1) provisioning could be a more important indicator than NPL ratios of credit risk.

The Gambia: Summary Results of the Stress Tests(Based on data as of June 2011)
Undercapitalized Banks

(CAR<10%)
Recapitalization Need (In millions of Dalasi)Recapitalization Needs (% of GDP)Min CARMax CAR
Aggregate

CAR
Change

in CAR
Number 1/% of total

bank

assets
A. Single Factor Shocks
Pre-shock Baseline (13 banks)25.613.1155.6
Credit Risk
80% Increase of NPLs21.4−2.62(Bank2,5)281090.46.0155.0
3 Largest exposures default8.7−17.06(Bank 1,2,3,4,5,6)796192.2−7.5109.2
Under-provisioning22.9−3.72(Bank2,5)28610.27.3151.8
Exchange Rate Risk
Depreciation of dalasi by 40%25.3−0.312.9156.4
Appreciation of dalasi by 40%25.90.313.4154.8
Interest Rate Risk
Increase in interest rate by 500 bps25.2−0.414.8115.0
Government debt restructuring−1.4−27.04(Banks: 1,2,3,6)6515855.6−35.789.0
B. Multi-Factor Scenario
Shock in export revenue:
2012 Q220.1−5.52(Bank2,5)281280.452.9142.3
Sources: Central Bank of The Gambia and staff estimates.
Sources: Central Bank of The Gambia and staff estimates.

Especially during a period of credit expansion, the NPL ratio could be shielded by the increase in the credit base; 2) a high concentration of exposures is an important source of credit risk; 3) Concerns with a number of large banks suggest that the supervision of systemically important banks needs to remain intense and focused.

Stress tests indicate that the direct impact from exchange rate risk is negligible, due to the small size of banks’ net open positions. While the long foreign exchange position of most banks shields them from the direct impact of the Gambian dalasi depreciation, it exposes them to the risk of an appreciation of the exchange rate. The stress test on exchange rate risk was conducted to evaluate the direct impact on the banking system. A 40 percent depreciation of the Gambian dalasi would reduce the average CAR by 0.3 percent. Medium size banks are more exposed to foreign exchange depreciation risks, and the CAR would decline by 1 percentage points—given their high capital buffers, their CAR will remain well above the regulatory CAR minimum level.

The effects of a change in interest rates on the value of bank portfolios were simulated. The interest rate risk was evaluated using the newly collected June 2011 data on the term structure of banks’ assets and liabilities, as well as on weighted average interest rates on loans and deposits. As the cumulative maturity mismatch is relatively small, the impact of an increase in interest rates on portfolio valuation was not significant; 500 basis point increases in interest rate will lower the CAR to 25.3 percent and lower the average profitability of the banks (return on assets) by 0.1 percent. However, it is difficult to gauge which rates would ultimately have the greatest impact on bank balance sheets as the monetary policy transmission mechanism appear to be weak.

Liquidity risk stress test results show that the banking system is highly liquid and could withstand severe shocks arising from deposit withdrawals. However, its shock absorption capacity is highly dependent on the market liquidity of government securities and on the behavior of wholesale depositors. The stress testing on liquidity risk assessed whether the banking sector could meet a sudden need for a large amount of cash due to a loss of public confidence in the banking sector that generates a bank run. In particular, given the high concentration of depositors, the test shows for each bank how many days it would withstand liquidity drain before having to resort to accessing liquidity from outside sources. The available liquid assets mainly consist of cash, balances from other banks and government securities, while deposits account for the bulk of liquid liabilities (75 percent on average). The stress tests on liquidity risk indicate that all banks are capable of withstanding a sizable liquidity shock (a 15 percent withdrawal per day of demand and savings deposits; and a 9 percent withdrawal per day of time deposits) for two days without recourse to LOLR (CBG). On the third and fourth day of a similar deposit run, two medium size banks would become illiquid.

Liquidity risk stress testing results typically assume a sufficiently liquid market for government securities. In the case of a systemic event, only the CBG would be in a position to provide the necessary liquidity to the market.

The Gambia: Results of the Liquidity Stress Tests(Based on data as of June 2011)
All BanksLarge BanksMedium BanksSmall Banks
Pre-shock Liquidity Ratio 1/71.277.847.872.3
Min31.259.431.272.8
Max189.5103.585.0189.5
Shock: Run on Banks, fire sale of assets
Illiquid banks
After day 10000
After day 20000
After day 32020
After day 42020
After day 52020
Sources: Central Bank of The Gambia and staff estimates.

Liquid ratio is defined as the ratio of liquid assets to liquid liabilities. Liquid assets include cash, due from other banks and government bills.

Sources: Central Bank of The Gambia and staff estimates.

Liquid ratio is defined as the ratio of liquid assets to liquid liabilities. Liquid assets include cash, due from other banks and government bills.

Because of a large slippage on the fiscal performance criterion for end-December 2010, the recent arrangement under the Extended Credit Facility expired (on March 31, 2011) without completion of the final review.

See the debt sustainability analysis prepared jointly by World Bank and IMF staffs, as specified in this bundle.

One bank closed early in 2011.

Results from the 2010 household survey are expected to be available soon. As a sign of progress, in the areas of education and health, The Gambia scores “green lights” in all 5 indicators for “Investing in People” monitored by the Millennium Challenge Corporation (update forthcoming).

The authorities have tried to maintain spending on poverty reducing priorities, especially those that are a precondition for donor grants.

Projected government revenues in the macroeconomic framework include effects of measures proposed by the authorities for 2012. They do not include an adjustment in fuel prices to fully restore excise taxes, as proposed by Fund staff.

The VAT Policy Paper identifies a uniform tax rate of 15 percent and an appropriately high threshold (GMD 1 million). Electricity is exempted.

The minimum capital requirement will increase by GMD 50 million, (to GMD 200 million) on December 31, 2012. This will likely increase capital adequacy and liquidity even further in early 2013.

The authorities intend to seek guidance on an energy strategy/policy from World Bank staff.

The author of this note is Slavi Slavov.

Prepared by Minsuk Kim (SPR)

The author of this note is Tamsir Cham.

The appendix was prepared by Kay Chung (MCM) and Philippe Egoumé (AFR).

’Data deficiencies hamper the analysis of risks in the financial sector and data quality and timeliness should be improved. Based on February 2011 mission’s recommendations, the authorities are making a concerted effort to improve the data reporting system.

It was assumed that all NPLs require to be 100 percent provisioned, in line with international practice and the mission’s recommendations. Consequently, the initial capital base and risk weighted assets (RWAs) were adjusted accordingly.

This single factor test did not take into account second-round effects on credit risk, interest rate, and exchange rate movements.

Other Resources Citing This Publication