II Overview of Recent Economic Performance
Author: Mr. Eric Verreydt, Mr. Michael T. Hadjimichael, and Mr. Thomas Rumbaugh
Language:
English
Keywords:
OP; adjustment effort; re-export trade; public enterprise sector; enterprise; Gambian economy; export basis; flexible exchange rate system; balance of payments; price distortion; net export; International reserves; Imports
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Abstract

The economic strategy since 1985/86 has been aimed primarily at substantially reducing the involvement of the public sector in the economy, encouraging the development of the private sector, lowering domestic and external imbalances, and fostering economic growth. Accordingly, the strategy has entailed mainly (1) the early restoration of an appropriate structure of relative prices and a strengthening of economic incentives in the context of a market-oriented approach; (2) the implementation of restrictive fiscal and monetary policies; and (3) the introduction of complementary structural reforms, particularly in the public enterprise and financial sectors.

The economic strategy since 1985/86 has been aimed primarily at substantially reducing the involvement of the public sector in the economy, encouraging the development of the private sector, lowering domestic and external imbalances, and fostering economic growth. Accordingly, the strategy has entailed mainly (1) the early restoration of an appropriate structure of relative prices and a strengthening of economic incentives in the context of a market-oriented approach; (2) the implementation of restrictive fiscal and monetary policies; and (3) the introduction of complementary structural reforms, particularly in the public enterprise and financial sectors.

Adjustment Policies

A notable feature of the adjustment efforts has been the emphasis on strengthening the supply response of the economy and enhancing the efficiency of resource allocation by removing price distortions and government controls, introducing a market-determined exchange rate, and liberalizing the marketing arrangements for groundnuts.

To encourage a return of the foreign exchange proceeds to the official banking system, as well as to stimulate the production of exportables, a flexible exchange rate system was introduced in January 1986 in the context of an interbank market, replacing the peg of the dalasi (the national currency) to the pound sterling. To deepen the foreign exchange market, the enforcement of the Exchange Control Act was suspended at the same time, resulting in a de facto lifting of the exchange restrictions on current and capital international transactions, and licensed foreign exchange bureaus were established in April 1990. The only remaining exchange restriction related to the existence of external payments arrears, which were gradually eliminated in the period to July 1990. Overall, the interbank foreign exchange market has functioned smoothly, resulting in an effective absorption of the parallel foreign exchange market and the virtual elimination of the spread between the exchange rates prevailing in the two markets. Under the new exchange rate regime, the dalasi depreciated by 57 percent in nominal effective terms during 1986, but appreciated gradually by some 18 percent by early 1990 (Chart 1); since then, it has remained broadly stable, fluctuating within a narrow range. The nominal exchange rate adjustments, combined with tight financial policies and progress in lowering inflation has improved The Gambia’s external competitiveness markedly. In real effective terms, the dalasi depreciated by 44 percent during 1986, and even though it appreciated somewhat in the period to mid-1989, it has since gradually fallen back to its level at the end of 1986.2

Chart 1.
Chart 1.

Exchange Rate Developments

(Indices, 1980= 100)

Sources: International Monetary Fund, Information Notice System (INS); International Financial Statistics (IFS).1 Weights are based on Direction of Trade Statistics (DOTS) for 1988–90, and a reduced subset of trading partners (excluding Brazil and Argentina, in particular, compared with the INS index).

The depreciation of the dalasi facilitated marked increases in real producer prices for groundnuts and other cash crops in 1985/86. In fact, to induce a reversal of cross-border sales of groundnuts to a neighboring country, where producer prices have been kept high through government subsidies, producer prices in The Gambia were initially set higher than export prices, necessitating sizable budgetary support to the Gambia Produce Marketing Board (GPMB) to cover operating costs. Groundnut producer prices were lowered in subsequent years to eliminate the need for government subsidies, as well as to reflect the weakening in world groundnut oil prices. In order to liberalize the marketing arrangements for groundnuts, the system of guaranteed producer prices for groundnuts was abolished with effect from the 1989/90 crop year and replaced with new arrangements under which the GPMB announces a groundnut purchase price at the beginning of the crop year, based on commercial criteria and without any government involvement. In addition, the export monopoly of the GPMB was lifted in October 1990. The subsidies on fertilizers and other agricultural inputs were also eliminated, and the marketing of these inputs liberalized in the early stages of the reform efforts. In addition, all other price controls were lifted, while public utility tariffs and retail prices for petroleum products have been adjusted frequently to reflect changes in the underlying cost structures.

An integral part of the adjustment efforts since 1985/86 has been the pursuit of a restrictive fiscal policy, aimed at lowering the budget deficit (excluding grants) and raising government savings, as well as fostering economic activity. On the revenue side, policies have focused on broadening the tax base, strengthening tax administration, and rationalizing the structure of taxation. Tax reforms have been directed at improving economic incentives and enhancing efficiency and equity in the economy. The reforms included the introduction of a sales tax, reductions in the marginal rates of personal income taxation, abolition of the taxes on exports, and reductions in import tariffs so as to move toward a low and uniform rate of protection, while preserving the tariff incentives for the re-export trade. On the expenditure side, policies have sought to increase the efficiency of public investment by focusing on the rehabilitation of the basic economic and social infrastructure, while also reorienting current expenditure to facilitate higher provisions for operations and maintenance and social services. In the latter regard, special emphasis has been placed on raising the share in total current spending of outlays on education and health, given the importance attached under the program to improving the country’s human capital and paving the way for long-term growth. To facilitate such a restructuring of government spending, the growth of the civil service wage bill has been kept modest.

Overall, the budget deficit (excluding grants) was reduced from a peak of 17 percent of GDP in 1987/88 to an estimated 4 percent in 1991/92. This was achieved despite a boost in government expenditure caused by special budgetary provisions for the repayment of public enterprise debts to the domestic banking system and the takeover by the Government of nonperforming bank loans. The improvement in the fiscal position, together with the available net inflows of external assistance, has allowed the Government to make sizable net repayments to the banking system, thereby accommodating the legitimate financing needs of the private sector and supporting the anti-inflationary stance of monetary policy. The latter has been primarily directed at lowering inflation to a low level comparable to that of trading partner countries, while also achieving the targeted improvement in the overall balance of payments position and the associated buildup of gross official reserves, in a framework consistent with the targeted expansion in output. To this end, a broadly restrictive monetary and credit policy has been pursued. At the same time, the effectiveness of financial intermediation was enhanced through the lifting of interest rate controls in September 1985, the introduction of an auction system for issuing treasury bills in July 1986, and, more important, a shift to an indirect system of monetary control in September 1990. Since 1986/87, interest rates have been maintained through open market operations at positive levels in real terms (measured in relation to inflation during the previous 12 months) and with appropriate differentials vis-à-vis interest rates abroad, thereby encouraging financial savings and supporting the exchange rate policy.

External policies, for their part, have been aimed at broadening the export base and at containing the debt-service burden by maintaining a liberal exchange and trade system, preserving external competitiveness, and pursuing a prudent external debt-management policy. As indicated above, with the emphasis of financial policies on bringing inflation under control, me nominal effective exchange rate has been kept reasonably stable, after an initial marked decline, in the context of a flexible exchange rate regime, despite occasional fluctuations. This flexibility has cushioned the impact on the economy of the deterioration in The Gambia’s external terms of trade (excluding reexports) and has helped preserve the gains in competitiveness. In its foreign borrowing policy, the Government has relied exclusively on official grants and concessional long-term loans, avoiding any recourse to, or guaranteeing of, external loans on commercial terms; short-term foreign borrowing has also been limited to normal import-financing purposes.

These policies have been complemented by a broad range of structural reforms designed to enhance the efficiency of the economy and stimulate private sector activity. Under the public enterprise reform program, public sector activities that could be more efficiently carried out by the private sector have been scaled back markedly, through the divestiture of some 20 enterprises (almost 60 percent of the total number of public enterprises). In addition, several measures have been taken to improve the financial position of the enterprises remaining in the Government’s portfolio, including the signing of performance agreements. In the financial sector, the reform efforts have focused on improving the efficiency of the intermediation process and encompassed the take-over by the Government of nonperforming bank loans, measures to strengthen bank supervision, and the restructuring of the largest commercial bank (The Gambia Commercial and Development Bank (GCDB)), which was owned by the Government, culminating in its privatization in June 1992. Furthermore, a tourism development area has been designated and a new Investment Code was enacted in 1988, providing a range of fiscal incentives to private investment in export-oriented and import-substituting activities.

Sectoral strategies have been aimed at stimulating the supply response of the economy and exploiting the development potential that exists in the agricultural sector, small-scale manufacturing, fisheries, tourism, entrepét trade, and other services, supported by the World Bank and other bilateral and multilateral donors. Given the importance of agriculture for the well-being of most of the population, special emphasis has been placed on developing this sector. In particular, policies have been directed at enhancing efficiency in groundnut production, processing, and marketing, as well as diversifying into other cash crops and horticulture, and continued expansion of food crops; these objectives were to be attained through improved applied research and extension services, and an expanded role of the private sector in output marketing and input supply. Sectoral policies have also focused on improving basic health and education services, reducing the high rate of population growth, and protecting the environment.

The Gambia’s economic strategy has been supported by considerable technical and financial assistance from the international donor community. The provision of such assistance, particularly of concessional long-term project and program loans, has responded quickly to the introduction of comprehensive adjustment measures by the Gambian authorities. Total aid disbursements rose from SDR 38 million (19 percent of GDP) in 1985/86 to an annual average of SDR 52 million (25 percent of GDP) in the subsequent five years (Table 1).

Table 1.

External Assistance1

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

Including commodity aid and technical assistance.

Policy Implementation

Policy implementation has been guided by a set of quarterly financial benchmarks and performance criteria, relating to the net domestic assets of the banking system (the Central Bank since September 1990), net credit to the Government by the banking system, gross credit to the GPMB, gross official reserves, the contracting or guaranteeing of new foreign loans by the Government, and the out-standing stock of external payments arrears; quantitative benchmarks on current government expenditure (excluding debt-service payments and contributions to the development fund) have also been set for the last four fiscal years. In addition, several structural benchmarks and structural performance criteria have been set, relating mainly to the divestiture of public enterprises. Overall, policy implementation has been broadly satisfactory. Occasional financial slippages and delays in the implementation of certain structural reforms have caused the nonobservance of a few quantitative and structural benchmarks, but the nonobservance of these benchmarks has resulted mainly from exogenous factors, shortfalls or delays in external assistance, and slippages in the implementation of fiscal and monetary policies induced by special factors or, in a couple of cases, pressures on government expenditure. On some occasions, there have been delays in sterilizing the impact on money supply of higher-than-expected inflows of foreign exchange earnings from tourism and reexports. In all cases of deviations from the programmed path, the authorities have been quick to adopt corrective measures to help bring the program back on track, usually after consultations with the Fund.

The program for 1986/87-1988/89, supported by two annual arrangements under the SAF and the first annual arrangement under the ESAF, were implemented broadly on schedule. Economic performance weakened somewhat during the first half of 1989/90, the program for which was supported by the second annual ESAF arrangement. A disruption of the re-export trade, due to regional political disturbances, a decline in tourist arrivals, and a shortfall in nonproject grant receipts, curtailed the supply of foreign exchange to the interbank foreign exchange market and exerted downward pressure on the exchange rate of the dalasi. As a result, the quantitative targets for gross official reserves were not observed and the monetary program was shifted off track. With a tightening of fiscal policy during the second half of 1989/90, together with a depreciation of the dalasi earlier in the fiscal year, and a recovery in tourist arrivals and reexports, the momentum of adjustment was regained.

The program for 1990/91, supported by the third annual ESAF arrangement, was on track for most of the fiscal year. The quantitative benchmarks and performance criteria for the first three quarters were met. However, delays in implementing some envisaged structural reforms caused a postponement of the disbursement of the second tranche of SAC II from the World Bank, including the associated cofinancing. Among the delayed reforms were the strengthening of the management of the GPMB and of customs administration and the completion of public expenditure plans for the priority sectors of the economy. The resulting major shortfall in external assistance, combined with an overrun in government current spending, led to the nonobservance of several of the quantitative benchmarks for the end of June 1991.

The impact of these developments on economic performance was aggravated during the first half of 1991/92: additional shortfalls in external assistance, unrelated to policy implementation, and sizable overruns in government expenditure induced a worrisome acceleration in monetary expansion. As a consequence, several of the indicative quantitative benchmarks for the period were not met. In response, the authorities introduced a package of corrective measures in March 1992, with special emphasis on tax reforms and other measures to strengthen the fiscal stance, designed to bring the program back on track.

Developments Since 1985/86

The implementation of the authorities’ economic strategy has resulted in an impressive improvement in The Gambia’s economic and financial performance, thus laying the foundation for a sustainable expansion in output. During the six-year period to 1991/92, a steady growth in real GDP was recorded, inflation declined, and the overall balance of payments balance switched from deficits to sizable surpluses, facilitating the gradual elimination of all outstanding external payments arrears and the buildup of a comfortable level of gross official reserves. The external objectives and, to a lesser extent, the inflation targets of the programs supported by the SAF/ESAF arrangements were met, but actual real GDP growth fell somewhat short of the program targets, particularly during the last two fiscal years, owing largely to exogenous factors.

In particular, despite unfavorable weather, which led to a stagnation of agricultural output, real GDP grew on average by 3.4 percent a year, in line with the rapid growth of the population (Chart 2 and Table 2).3 The vagaries of the weather, together with the downward trend in world groundnut prices, led to sharp fluctuations from year to year in groundnut production. Excluding agriculture, real GDP grew on average by 4.4 percent a year, as activity in the industrial and services sectors expanded strongly, particularly in the dynamic tourism and trade sectors, including the re-export trade. End-of-period inflation, as measured by changes in the consumer price index, declined from 70 percent in 1985/86 to 5 percent in 1990/91, before rising again to 12 percent in 1991/92; in annual average terms, the inflation rate has been more stable, falling from a peak of 46 percent in 1986/87, reflecting largely the impact effect of the exchange rate adjustment, to a range of 9-11 percent in the subsequent five years.

Chart 2.
Chart 2.

Developments in Output and Prices

(Annual percentage changes)

Sources: Data provided by the Gambian authorities; and IMF staff estimates.
Table 2.

Table Selected Economic and Financial Indicators

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

Based on the revised national accounts statistics, which involve a significant upward adjustment in nominal GDP since 1981/82.

Including re-export trade.

Annual average data. For 1991/92 the data relate to the first eight months of the fiscal year.

ln percent of broad money at the beginning of the period.

Data for 1991/92 relate to the rate prevailing as of April 1992.

Gross national savings minus official transfers. including special provisions.

Including special provisions.

Net exports defined as total exports minus imports used for reexports.

Debt service paid, including cash payments for arrears reduction after 1985/86, and after debt relief.

The Gambia’s external position has improved substantially since 1985/86. The gains in competitiveness and the enhanced price incentives have encouraged a diversification of the production and export bases, which has more than offset the adverse impact on total foreign exchange proceeds of the virtual stagnation in groundnut export receipts. The increased availability of foreign exchange has facilitated a strong expansion in domestic imports, reflecting to a large extent the increasing project-related imports financed by donors under the public investment program. Overall, the external current account deficit, excluding official transfers, has been contained at about SDR 30-35 million throughout the period since 1985/86, implying a reduction in relation to GDP from a peak of 22 percent in 1986/87 to an estimated 14 percent in 1991/92 (Chart 3 and Table 3). This deficit has, on average, been covered fully by the inflows of official transfers, while the net disbursements of concessional official loans and the increasing inflows of private investment—reflecting in large part direct investment in the tourism and horticultural sectors—have allowed sizable overall balance of payments surpluses to be recorded in every fiscal year since 1985/86. These surpluses, together with the exceptional financing available from the Fund, as well as debt reschedulings and debt relief,4 have facilitated a gradual repayment of all outstanding external payments arrears and a strong buildup of gross official reserves. The latter rose from a mere SDR 1.4 million (less than a week of total imports) at the end of June 1986 to an estimated SDR 68 million at the end of June 1992, or the equivalent of 4.9 months of total imports.

Chart 3.
Chart 3.

External Developments

Sources: Data provided by the Gambian authorities; and IMF staff estimates.1Inflows of official transfers and long-term concessional loans.
Table 3.

Balance of Payments

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

Structural adjustment credits; including cofinancing.

Including private suppliers’ credits and errors and omissions.

Cash payments in connection with the Paris Club and London Club reschedulings.

In respect of Paris Club rescheduling.

Based on the revised GDP data.

End of period.

In percent of exports and travel income less imports used for re-exports.

Including cash payments for arrears reduction, and after debt relief.

The Gambia’s external debt and debt-service position has also improved appreciably in recent years. As the arrears were being repaid, the external public debt declined from SDR 221 million (113 percent of GDP) at the end of June 1986 to SDR 196 million (88 percent of GDP) by the end of June 1990, before rising to an estimated SDR 211 million (86 percent of GDP) by the end of June 1992. Debt-service payments, on the other hand, inclusive of obligations to the Fund and of cash payments for arrears reduction and after debt relief, fell as a ratio of current foreign exchange earnings (i.e., domestic exports plus travel income and net re-exports) from a peak of 104 percent in 1986/87 to 22 percent by 1991/92. The external cur-rent account deficit in relation to GDP and the debt-service ratio are expected to continue to decline over the medium term, while gross official reserves are projected to rise further to more than five months of total imports. With the normalization of its relations with external creditors and the improvement in its external accounts achieved so far, The Gambia has reached a position where it no longer needs exceptional balance of payments financing, but continues to require sizable, though declining, inflows of foreign assistance in relation to GDP.

Notwithstanding the improvement in its economic and financial performance, The Gambia continues to be confronted with major structural, institutional, and financial constraints, as it remains highly vulnerable to adverse external developments and heavily dependent on foreign financial assistance. In addition, the country continues to face a number of deep-rooted developmental constraints, such as high population growth, under-developed human capital, paucity of natural resources, and degradation of the environment. These constraints are being addressed in the con-text of the country’s ongoing reform efforts.

2

Based on the IMF’s Information Notice System, under which the effective exchange rate index is calculated as the ratio of the dalasi to a trade-weighted basket of the currencies of 20 indus-trial and developing trading partner countries, expressed in a common currency. An alternative effective exchange rate index, calculated with updated weights based on trade statistics for 1988-90, covering a subset of trading partners (excluding, notably, Brazil and Argentina), suggests a slightly more depreciating trend for the dalasi since 1989 (see Chart 1).

3

Based on revised GDP data. In December 1991, revised national accounts statistics were released by the Central Statistics Department, indicating changes in the composition and the level of real GDP, as well as a significant upward adjustment in the GDP deflator; thus, by 1990/91 nominal GDP was 34 percent higher than previously estimated.

4

Outstanding arrears and debt-service obligations amounting to SDR 17.0 million were rescheduled by Paris Club creditors in September 1986, while arrears and debt of SDR 14.3 million were rescheduled by London Club creditors in January 1988. Debt relief of about SDR 21.9 million, in the form of cancellation of debt-service payments on bilateral loans falling due during 1989-98, was also granted by France in 1989.

Within Same Series

Other IMF Content

Other Publishers Content

Cover The Gambia
The Gambia
Economic Adjustment in a Small Open Economy
Author: Mr. Eric Verreydt, Mr. Michael T. Hadjimichael, and Mr. Thomas Rumbaugh
ISBN:
9781557752307
ISSN:
0251-6365
Publication Date:
15 Sep 1992
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781557752307.084
Pages:
48

Exchange Rate Developments

(Indices, 1980= 100)

Developments in Output and Prices

(Annual percentage changes)

External Developments

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