Abstract

The Gambia has made considerable progress since the mid-1980s in laying the foundation for a sustainable expansion of output through the successful implementation of a wide range of financial and structural reforms, supported by successive arrangements from the Fund and structural adjustment credits from the World Bank. As a result, by the end of the three-year ESAF arrangement, The Gambia’s internal and external imbalances had been reduced and a comfortable external position had been attained, consistent with no need for exceptional balance of payments financing, mainly as a result of the significant progress made in diversifying the production and export bases.

The Gambia has made considerable progress since the mid-1980s in laying the foundation for a sustainable expansion of output through the successful implementation of a wide range of financial and structural reforms, supported by successive arrangements from the Fund and structural adjustment credits from the World Bank. As a result, by the end of the three-year ESAF arrangement, The Gambia’s internal and external imbalances had been reduced and a comfortable external position had been attained, consistent with no need for exceptional balance of payments financing, mainly as a result of the significant progress made in diversifying the production and export bases.

This impressive performance can be attributed to four main factors: first, the strong commitment by the Gambian authorities to the adjustment process, as evidenced by their willingness to take prompt and appropriate corrective measures in the face of changing external circumstances and domestic policy slippages; second, the reliance on a market-oriented approach, entailing the early restoration of an appropriate structure of relative prices and the strengthening of economic incentives, notably through the shift to a market-determined exchange rate, the liberalization of the exchange and trade system, the lifting of all price controls, and the restoration of positive real interest rates; third, the pursuit of restrictive fiscal and monetary policies and the implementation of a broad range of structural reforms, including the scaling down of the size of the public sector through a far-reaching privatization program; and finally, the provision of substantial technical and concessional financial assistance from the international donor community.

The sequencing of the policy reforms has been appropriate and critical for the positive results that have been achieved. The removal of the distortions in the relative price and overall incentive structure, and most notably the establishment of a market-determined exchange rate, at the outset of the adjustment efforts has fostered the diversification of the economy. It has also allowed The Gambia not only to cushion the adverse effects of sharp declines in both the volume and price of its principal export commodity, groundnuts, but also to improve markedly its external position and normalize relations with its foreign creditors. In addition, the implementation of a broad range of adjustment measures in virtually all policy areas has sustained a sizable inflow of external financial assistance—notwithstanding the delays experienced in implementing some structural reforms—as well as improved The Gambia’s macroeconomic situation and maintained real per capita incomes against formidable odds and despite the stagnation of agricultural output.

The Gambian economy, nonetheless, remains vulnerable to adverse external developments and changes in the weather, while it continues to be heavily dependent on external assistance. As the experience in recent years has demonstrated, the macroeconomic situation remains fragile, sensitive to regional developments, which have a pronounced effect on the re-export trade, and to delays or shortfalls in annual aid disbursements, which tend to exacerbate the effects of any financial policy slippages. The reforms already implemented and those under preparation appear also to have strained the public sector’s management and implementation capacity, particularly at the sectoral level where significant delays or slippages from the envisaged policy path have been recorded. This experience clearly underscores the importance for the Gambian authorities of strengthening budgetary discipline and policy implementation, as well as of enhancing the monitoring of economic developments.

In addition, it is recognized that the base of output growth remains somewhat fragile, despite the commendable progress already made in diversifying production and exports. As the experience during the past few years has demonstrated, the attainment of a satisfactory growth in real per capita income depends critically on the existence of favorable weather, while the re-export trade, which provides a large share of tax receipts and accounts for an increasing share of output, is strongly influenced by regional political developments and changes in the tariff structures of neighboring countries.

It is clear that much remains to be done to consolidate the gains already made and address more forcefully the deep-rooted developmental constraints that confront the Gambian economy. The high rate of population growth, an underdeveloped human capital base, the paucity of natural resources, and the degradation of the environment continue to impede additional gains in real per capita income. While the development process will unavoidably be a protracted one, an important head start to this end has already been made.

Economic Adjustment in a Small Open Economy
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