The Gambian authorities extend their appreciation to staff for the constructive policy dialogue with the country and for the candor in identifying the policy challenges and presenting options for restoring fiscal prudency and maintaining macroeconomic stability while promoting broad-based inclusive growth. They are especially thankful to the Executive Board and Fund Management for their continued support and policy guidance against the backdrop of a challenging global economic environment. My authorities have embarked on improving macroeconomic management through increased fiscal consolidation and public inancial management reforms. Accordingly, measures to enhance domestic revenue mobilization have been introduced while prudent expenditure management is pursued under a cash budget system. Implementation of The Gambia’s development agenda is, however, severely challenged by inadequate external financing, which remains crucial in creating the required fiscal space. Since the discussion of the last staff report on The Gambia’s 7th review of the ECF arrangement, the country has held a very successful presidential election, thereby consolidating the country’s democratic process. My authorities share the thrust of the staff report as it provides a candid assessment of recent economic developments.
Recent economic developments
The Gambian economy has performed well in recent years. During 2008 to 2010, the economy grew on average by 6.5 percent per annum on account of the robust growth in agriculture and the services sector. In spite of the adverse effects of the difficult global economic environment and poor weather conditions, real GDP growth remained fairly strong at 5.5 percent in 2011 led by a rebound in tourism. Consumer price inflation declined to 4.3 percent in November 2011 from 6.1 percent and 5.8 percent in September and December 2010 respectively. The deceleration in headline inflation was due largely to the tight monetary policy stance of the central bank and the fall in domestic food prices.
Fiscal performance improved in 2011, reflecting the strict implementation of a cash budget system which limits spending to available resources. This helped to contain government’s net domestic borrowing, cleared its overdraft with the central bank and marked an end to the central bank financing of the deficit. Moreover, the improvement in public finances strengthened the independence of the central bank and enabled the monetary authorities to focus on their key mandate of price and exchange rate stability.
The balance of payments is projected to record a surplus in 2011, in contrast to a deficit in 2010 on account of the expected increase in private capital and official transfers. Similarly, the current account deficit, before official transfers narrowed, reflecting improvement in the goods and services account. Due largely to central bank purchases of foreign exchange, gross international reserves reached the equivalent of 5.0 months of import cover at end-2011. In the year to end-September 2011, the dalasi depreciated against the major trading currencies in the domestic foreign exchange market owing to increased demand for foreign currency in the face of rising international commodity prices.
Outlook and policies
My authorities’ principal policy objective over the near and medium term is to maintain a stable macroeconomic environment to support robust and sustainable inclusive growth. It is expected that such growth would result in job creation, poverty reduction and the achievement of the Millennium Development Goals (MDGs). GDP growth is expected to return to trend in the medium term as government pursues prudent fiscal and monetary policies, increase investment in infrastructure and agriculture. The external current account deficit is expected to narrow in the medium term, on account of the expected recovery of exports and increase in services. Gross international reserves are projected to fall to around 4 months of imports of goods and services by the end of 2016. The exchange rate is expected to maintain its relative stability over the medium term, while inflation is targeted at 5 percent.
On the fiscal front, my authorities will strengthen efforts to enhance public financial management to reduce new borrowing to ease pressure on interest rates. The fiscal outlook for 2012 marks the commencement of the Program for Accelerated Growth and Employment (PAGE) implementation, the successor program to the PRSP II. PAGE is the government’s development strategy and investment program for 2012 to 2015. The PAGE is based on Vision 2020 and various sector strategies, and is the execution template for the government’s long-term vision. PAGE is fully aligned with the MDGs and its main objective is to accelerate growth and job creation in order to consolidate and sustain recent economic achievements and reinforce gains in welfare over the past years.
My Gambian authorities remain committed to pursuing prudent fiscal management with a view to maintaining medium-to long-term fiscal sustainability. This was demonstrated by the strong expenditure restraint exercised by government to strengthen fiscal consolidation despite 2011 being an election year. Mindful of the challenges in scaling-up resources to effectively implement PAGE, my authorities are determined to institute far-reaching policy measures to ensure mobilization of substantial domestic resources to complement external donor financing of government programs and projects. To this end, the authorities will pursue tax policy and revenue administration reforms to increase revenue and make the tax system simpler and more efficient. The foundation of these reforms will be the continuous implementation of the fuel pricing formula and launch of a Value Added Tax (VAT) system in 2013. Further reforms in the area of tax policy and revenue administration include the implementation of a quota system on duty exemptions on fuel for diplomatic missions, expansion of tax coverage through the collection of taxes on domestically produced goods, bringing into the tax net holders of expired special investment certificates and removal of the fuel concession to the Gambia Ports Authority. Additionally, in a bid to facilitate both tax compliance and ease payments, the Gambia Revenue Authority (GRA) in 2011 launched an initiative where commercial banks will accept payments from tax payers on behalf of government. Besides the mandate given to GRA to collect motor vehicle taxes and fees, GRA will be responsible from January 2012 for issuing the licenses and road tax discs to vehicle owners. Moreover, the authorities plan to simplify small business taxation and eliminate the existing alternative turnover-base method of determining minimum income and capital gains tax. The envisaged upgrading of the ASYCUDA will also greatly improve tax assessments and boost revenue collection. Finally, the authorities have adjusted fuel prices four times in 2011, with the most recent one in December 2011.
On the expenditure front, my authorities will seek to switch expenditures towards their strategic priorities of increasing investments in infrastructure and other key sectors such as education, health and agriculture, consistent with the goals of the PAGE. Accordingly, nonstatutory expenditures will be appropriately contained to create the needed fiscal space. Also, the monthly cash budgeting framework will be refined further to ensure that borrowing is contained within projected targets in order to avoid unnecessary buildup in domestic debt. Unanticipated expenditures will be accommodated through the contingency reserves in the budget. If necessary, the annual budget will be adjusted through a supplementary bill, while maintaining the target for net domestic borrowing.
Monetary and exchange rate policies
My authorities’ monetary policy in 2011 focused on sustaining the disinflationary process, maintaining exchange rate stability, and a viable external position. The policy was conducted in a highly challenging global environment including larger-than-expected rise in commodity prices in the first half of the year. Nevertheless, the monetary authorities were able to maintain a subdued inflationary environment as well as a stable exchange rate with a comfortable level of international reserves. This created room for the Monetary Policy Committee (MPC) to relax monetary policy to permit a further reduction in interest rates in the later part of the year. Accordingly, the central bank policy rate, the rediscount rate, was reduced by 1 percentage point to 14 percent.
Going forward, the monetary authorities will continue to use a monetary targeting framework to pursue their price stability objective. In this regard, the central bank will remain vigilant and will stand ready to raise the policy interest rate if necessary. Furthermore, to improve monetary management, the authorities will, in the coming week, start making public announcements of the size of treasury bill auctions one month in advance of the auction dates. The horizon of these announcements will be gradually extended to correspond with the 4 quarterly meetings of the MPC. Moreover, the fiscal authorities will collaborate with the central bank to strengthen liquidity forecasting both by participating in the regular meetings of the inter-agency committee and by improving its weekly forecast of the public sector borrowing requirements.
The monetary authorities will continue to maintain a floating exchange rate policy, intervening only to maintain orderly market conditions. Whenever required, the central bank may purchase foreign exchange from the domestic interbank market to meet its target for international reserves (around 5 months of import of goods and services).
Financial sector policy
My authorities raised the minimum capital requirement of banks in December 2010 to meet the challenges of the growing number of banks and to ensure solvency in the banking industry. Consequently, the banking sector remains sound and adequately capitalized to absorb shocks, with a risk-weighted capital adequacy ratio of 27.1 percent, significantly higher than the minimum requirement of 10 percent. The banking sector is characterized by increased competition and expansion in the form of branches and agencies across the country. This has increased access to banking services and products nationwide. Accordingly, in response to the need for a well functioning financial system, installation of a new payment system infrastructure is complete. The Real Time Settlement System (RTGS) and the Automated Cheque Processing and Clearing Systems were launched on December 5 and December 16, 2011 respectively, while the Security Settlement System is targeted to go live during the first quarter of 2012. Additionally, the central bank has initiated an electronic reporting system for commercial banks for the timely reporting of data as well as facilitation of onsite and offsite supervision. This system will become operational by June 2012. The central bank also plans a gradual migration from a hybrid (compliance and risk-based) to a fully risk-based supervisory framework. To keep pace with the fast growing banking system, the central bank will continue to strengthen capacity at its Financial Supervision Department both through maintaining adequate staffing levels and training.
Debt Management Policy
My authorities are concerned that the recent debt sustainability analysis conducted by the Fund and World Bank indicates that the country remains at a high risk of debt distress, in spite of the substantial debt relief granted under the HIPC and MDRI initiatives. To mitigate these risks, my authorities have developed a medium term debt management strategy. In addition, my authorities intend to rely more on grants and concessional external loans with minimum grant element of 35 percent to finance the PAGE. Furthermore, the authorities will explore productive opportunities for public-private partnerships. Moreover, as market conditions allow, my authorities will endeavor to extend the maturity of domestic public debt by introducing longer-term instruments such as bonds aimed at reducing rollover risks. Finally, to strengthen debt management and monitoring, the authorities will continue to conduct annual debt sustainability analysis in consultation with the Fund and World Bank to ensure that all debt indicators fall and remain below their corresponding thresholds.
My authorities consider the implementation of appropriate structural reforms as critical to achieving the medium-term objective of high and sustainable inclusive growth. To this end, the authorities have embarked on major reforms in public financial management aimed at supporting its goal of reducing poverty through the attainment of a stable macroeconomic environment and good governance. Accordingly, Integrated Financial Management Information System (IFMIS), which was originally piloted to 6 sites, is now fully rolled out to all Ministries, effective January 2011. In addition, the authorities interfaced the IFMIS with the national payment system at the central bank. Also, to enhance accountability, the Internal Audit of the Ministry of Finance has been revitalized with a view to providing an independent and objective evaluation of government’s financial position.
Furthermore, the authorities have embarked on budgetary reforms aimed at introducing a medium-term horizon in planning and budgeting system. The Medium Term Expenditure Framework (MTEF) will constitute a budget planning framework that provides incentives for policy makers and budget planners to formulate medium-term budget plans by linking planning and policy formulation with budget allocation, aligning the annual budget decision with the medium term macro-fiscal strategy, restricting expenditures within realistic resource envelope, and improving monitoring and tracking of budget performance. Finally, the authorities are committed to strengthening the Public Utility Regulatory Agency (PURA) and to improving the financial health of the National Water and Electricity Company (NAWEC), in line with the recommendations of the World Bank.
I would like to reiterate my authorities’ commitment to sound macroeconomic management and growth promotion underpinned by prudent public finance management. This is an important step towards job creation and poverty reduction. In this regard, my authorities intend to direct policy efforts towards narrowing the budget deficit as the key to reducing the debt burden and related interest payments. They appreciate the support from the IMF and the international community and count on the continuation of such support to realize their development goals.