Exchange Reform and Exchange Rate Policy

As indicated in Section II, the peg of the dalasi to the pound sterling was replaced in January 1986 with a flexible exchange rate system in the context of an interbank market. At the same time, the implementation of the Exchange Control Act was suspended, resulting essentially in the lifting of all the restrictions on current, as well as capital, inter-national transactions. The liberalization of the exchange system was completed in July 1990, with the elimination by then of all the outstanding external payments arrears.¹¹

Under the flexible exchange rate system, the exchange rate of the dalasi is determined freely by the supply and demand for foreign exchange between the authorized foreign exchange dealers and their customers, and among the dealers them-selves (interbank market). Dealers are required to observe limits on their net holdings of foreign exchange, and amounts in excess of these limits have to be offered to the interbank market or sold to the Central Bank. The Central Bank holds a weekly fixing session with the participation of all foreign exchange dealers; the rate determined at this session is used mainly for statistical valuation purposes and applies only to transactions taking place at that time among the participants.¹² The fixing sessions have also provided a forum for the dealers to exchange views on, and share assessments of, developments in the foreign exchange market. The number of authorized dealers was initially limited to the three commercial banks, but it has since been significantly increased, following the establishment of foreign exchange bureaus in April 1990. With the strong expansion of the re-export trade, the foreign exchange market has been deepened further, as a sizable volume of trade transactions in The Gambia is conducted in CFA francs.

The foreign exchange market has functioned fairly smoothly, resulting in the effective absorption of the parallel exchange market and a virtual elimination of the differential between the rates prevailing in the two markets; the spread has actually narrowed to less than 2 percent. Foreign exchange transactions between banks have tended to be modest, while transactions between authorized dealers and their customers have expanded substantially. Despite the lifting of controls on capital movements, the foreign exchange market in The Gambia has remained essentially a flow market, in the sense that supply and demand is linked more to current transactions rather than changes in the desired outstanding stocks of foreign exchange and dalasis (asset market). Nonetheless, it is estimated that the restoration of positive real interest rates on dalasi-denominated assets has encouraged currency substitution away from foreign exchange into domestic currency.

Exchange rate policy has focused on establishing and maintaining an appropriate market-determined exchange rate, so as to reverse the sizable overvaluation of the dalasi that had taken place prior to 1986 and thus stimulate the production and export of tradable goods. This has resulted in a major initial depreciation of the dalasi in real effective terms. The real effective exchange rate has since then been maintained broadly stable through appropriately restrictive fiscal and monetary policies, aimed at lowering inflation to a low level, comparable to the average for the main trading partner countries. Over the past couple of years, this emphasis of policies has facilitated a broadly stable nominal effective exchange rate of the dalasi as well In this context, to support the exchange irate policy and help minimize the incentives for private capital outflows, interest rates in The Gambia have been maintained, through open market operations, at positive levels in real terms and with appropriate margins above interest rates abroad. These differentials have tended to be sizable, exceeding at times the inflation differentials and the ex post depreciation of the dalasi against the currencies of major industrial countries.¹³ In May 1992, the treasury bill rate in The Gambia amounted to 18.5 percent, some 14.5, 8.0, and 8.5 percentage points higher than comparable instruments denominated in U.S. dollars, pounds sterling, and French francs, respectively.

The Central Bank does not intervene in the interbank market with a view to influence the movements in the exchange rate. However, it has tended to be a net purchaser of foreign exchange from the market so as to achieve quarterly quantitative targets for the level of gross official reserves, specified under the Government’s adjustment program. For the most part, these purchases by the Central Bank have not had an undue impact on the prevailing exchange rate in the interbank market. On one occasion (in late 1990), however, when an unexpected decline in tourist arrivals and a disruption in the re-export trade affected adversely the supply of foreign exchange, the Central Bank’s efforts to meet its gross reserve targets led to a marked depreciation of the dalasi.

Until mid-1990, the pace of accumulation of gross reserves by the Central Bank had been rather modest, given the need to gradually eliminate the outstanding external payments arrears. In particular, gross official reserves rose from the equivalent of less than a week of total imports in June 1986 to 2.1 months in June 1990, but have since then risen to an estimated 4.9 months of imports by June 1992, or 7.9 months of domestic imports. Such a level of reserve coverage is considered by the Government as necessary to facilitate the maintenance of a liberal exchange system, while providing a cushion against adverse exogenous shocks, given the country’s vulnerability to changes in the weather, declines in the terms of trade, shortfalls in external assistance, and regional developments.

External Trade and Tariff Reform

The Gambia has traditionally maintained a liberal trade system, free of import quotas and other trade restrictions in the importation or exportation of any good other than groundnuts. The monopoly of the GPMB in the exportation of groundnuts was eliminated in January 1990. Since then, private traders have been allowed to use the processing facilities of the GPMB for the decortication of domestically purchased groundnuts for export. The Gambia’s import tariff structure has tended to be lower than in neighboring countries, contributing to the development of the re-export trade. As part of the adjustment efforts since 1985/86, the tariff structure has been rationalized, with a view to achieving over time a low and uniform level of protection.

Soon after the introduction of a flexible exchange rate system in 1986, all specific import duties were converted into ad valorem equivalents. Moreover, the overall structure of customs duties has since been modified to avoid the excessive taxation of intermediate inputs and other anomalies, while average duty rates have been lowered. The general duty rate of 6 percent applied to all imports was eliminated following the introduction of a national sales tax in 1988, and the level of specific duties was reduced from an average of about 36’ percent (excluding petroleum) in 1985/86 to about 20 percent by 1990/91. Most imports are now taxed at rates below 24 percent, with the major exceptions being petroleum products, motor vehicles, beer and alcohol, and soap. Beer and soap manufacturing are the only industries in The Gambia that are protected by relatively high import duties. Petroleum products are subject to a 10 percent sales tax, and a variable duty that is deter-mined by the difference between the administered pump price, specific allowances to distributors, and the import costs. Currently, import duties on petroleum products range from about 170 percent to 2.50 percent. The 10 percent duty on- exports of groundnut products was eliminated in 1989, thus reducing the vulnerability of the fiscal position to fluctuations in groundnut production, as well as improving production incentives to farmers. Tariff policy in The Gambia has also sought to encourage domestic trading activity by maintaining relatively low tariffs on commodities that are typically re-exported. In addition to the 10 percent sales tax, tariffs on these commodities generally range from zero to 10 percent.

Diversification of Exports

As highlighted in Sections II and III, strengthened economic incentives, particularly the establishment of a market-determined exchange rate and the associated gains in external competitiveness, together with the maintenance of a liberal trade regime and regional developments, have given rise to a notable diversification of the production and export bases of the Gambian economy.

The strong expansion of the tourism sector has resulted in a doubling, between 1985/86 and 1991/92, of travel receipts, which have replaced groundnut exports as the most important source of foreign exchange earnings. At the same time, reexports have become the second largest source of foreign exchange earnings. Other domestic exports (i.e., fish, cotton, and horticultural products) have also expanded markedly, albeit from a very low base. Consequently, the share of groundnuts in total foreign exchange earnings from domestic exports, net reexports, and travel income declined from a peak of 45 percent in the early 1980s to an estimated 12 percent in 1991/92, while the shares of travel income and net reexports rose from 24 percent and 26 percent to 49 percent and 31 percent, respectively (Chart 5 and Table 6).

Composition of Foreign Exchange Earnings, 1982/83-1991/92

(In percent of net exports plus travel income)

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

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Composition of Foreign Exchange Earnings, 1982/83-1991/92

(In percent of net exports plus travel income)

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

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Composition of Foreign Exchange Earnings, 1982/83-1991/92

(In percent of net exports plus travel income)

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

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Table 6.

Foreign Exchange Earnings

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

Table 6.

Foreign Exchange Earnings

										1991/92
	1982/83	1983/84	1984/85	1985/86	1986/87	1987/88	1988/89	1989/90	1990/91	Est.
					(In millions of SDRs)
Groundnuts	22.8	31.7	15.9	8.5	9.8	13.5	13.2	12.9	11.1	10.2
Other domestic exports	3.6	3.6	3.6	4.2	2.3	3.6	4.7	5.9	5.9	7.0
Net reexports	17.1	17.0	14.2	15.5	14.6	14.1	18.4	21.1	24.4	25.8
Travel income	14.2	18.4	18.5	20.6	27.5	28.0	31.4	30.4	39.7	41.1
Total	57.7	70.7	52.2	48.8	54.3	59.2	67.7	70.4	81.1	84.1
					(Shares in the total; in percent)
Groundnuts	39.5	44.9	30.4	17.4	18.1	22.8	19.5	18.4	13.7	12.1
Other domestic exports	6.2	5.1	6.9	8.6	4.3	6.1	7.0	8.4	7.3	8.3
Net reexports	29.6	24.0	27.2	31.8	26.9	23.8	27.2	30.0	30.1	30.7
Travel income	24.6	26.0	35.4	42.2	50.7	47.3	46.4	43.2	48.9	48.8
Total	100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0

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

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Table 6.

Foreign Exchange Earnings

										1991/92
	1982/83	1983/84	1984/85	1985/86	1986/87	1987/88	1988/89	1989/90	1990/91	Est.
					(In millions of SDRs)
Groundnuts	22.8	31.7	15.9	8.5	9.8	13.5	13.2	12.9	11.1	10.2
Other domestic exports	3.6	3.6	3.6	4.2	2.3	3.6	4.7	5.9	5.9	7.0
Net reexports	17.1	17.0	14.2	15.5	14.6	14.1	18.4	21.1	24.4	25.8
Travel income	14.2	18.4	18.5	20.6	27.5	28.0	31.4	30.4	39.7	41.1
Total	57.7	70.7	52.2	48.8	54.3	59.2	67.7	70.4	81.1	84.1
					(Shares in the total; in percent)
Groundnuts	39.5	44.9	30.4	17.4	18.1	22.8	19.5	18.4	13.7	12.1
Other domestic exports	6.2	5.1	6.9	8.6	4.3	6.1	7.0	8.4	7.3	8.3
Net reexports	29.6	24.0	27.2	31.8	26.9	23.8	27.2	30.0	30.1	30.7
Travel income	24.6	26.0	35.4	42.2	50.7	47.3	46.4	43.2	48.9	48.8
Total	100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0

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