1. Background

The Gambia is a small open economy with limited natural resources located on the west coast of Africa, extending inland for 320 kilometers along the banks of the River Gambia at widths varying from 24 to 28 kilometers. With a population of about 1.1 million, rising at a rate of 4.1 percent a year, The Gambia has a high population density, estimated at 250 inhabitants per square kilometer of agricultural land in 1993. The country’s comparatively undeveloped level of human capital is reflected in an adult illiteracy rate of 75 percent and a primary school enrolment rate of 59 percent (in 1992). A military Government came to power in July 1994, ending nearly three decades of multiparty democracy since independence in 1965.

During the first ten years of independence, The Gambia maintained broadly stable macroeconomic conditions with modest rates of economic growth. However, in the decade to 1985/86 the economic and financial performance deteriorated markedly. Agricultural output declined, and large expansions in government expenditure contributed to a widening of fiscal imbalances. This expansionary stance, and an increasingly overvalued currency, boosted the demand for imports, reduced exports earnings, and induced a growing external indebtedness and depletion of gross official reserves. While pressure was alleviated somewhat by large inflows of external assistance and some partial adjustment measures in the early 1980s, the external imbalances reached critical levels by the end of 1985/86. Gross official reserves fell to the equivalent of less than a week of imports, external public debt climbed to 113 percent of GDP, and external payments arrears reached SDR 88 million (about 150 percent of export earnings).

2. Adjustment policies and economic performance in 1985/86–1992/93

Faced with a rapidly deteriorating economic situation, the Gambian authorities began implementing a comprehensive adjustment program in 1985/86 to restore financial stability and lay the foundation for sustained economic growth based on a market-oriented strategy. The adjustment program aimed at: (a) reducing the involvement of the public sector in the economy; (b) restoring an appropriate structure of relative prices and strengthening economic incentives; (c) pursuing prudent macroeconomic policies; and (d) introducing complementary structural reforms, particularly in the public enterprise and financial sectors. ^1/

Owing to a sustained improvement in fiscal policy, the overall government budget deficit, excluding grants, was reduced from a peak of 17 percent of GDP in 1987/88 to 3 percent in 1992/93. The improvement in the fiscal position, together with net inflows of external assistance, enabled the Government to make sizable repayments to the banking system and was instrumental in bringing money supply growth under control, while allowing sufficient expansion in private sector credit. As a result, the average annual inflation rate was reduced from 46 percent in 1986/87 to 6 percent in 1992/93, and official external reserves recovered from near depletion to the equivalent of about five months of import cover. At the same time, the effectiveness of financial intermediation and monetary management improved, thanks to the lifting of controls on interest rates in 1985/86, the introduction of a treasury bill auction in 1986/87, and a shift to an indirect system of monetary control in 1990/91.

Stabilization policies were complemented by other structural reforms designed to enhance the efficiency of the economy and stimulate private sector activity. Public sector involvement was scaled back through the divestiture of more than half of the public enterprises. For those enterprises remaining in the government domain, new operational guidelines were created, including the introduction of performance contracts, aimed at improving their financial position. In the financial sector, reform efforts encompassed measures to strengthen bank supervision, the takeover by the Government of nonperforming bank loans, and the restructuring of a distressed government-owned commercial bank, which was eventually privatized in 1991/92.

A key aspect of The Gambia’s structural adjustment experience was the introduction of a liberal trading and exchange system. To eliminate the parallel market in foreign exchange, exchange restrictions on current and capital international transactions were lifted de facto early in the adjustment process and a flexible exchange rate regime based on an interbank market was introduced, replacing a system under which the Gambian dalasi was pegged to the pound sterling. External payments arrears were fully eliminated by 1990/91. Overall, the interbank foreign exchange market functioned well during the adjustment period, and expanded sufficiently to effectively absorb the parallel market, resulting in the virtual elimination of the spread between the rates in the two markets.

While the overall output response to structural adjustment was positive, it was still insufficient to achieve an increase in per capita income. Real GDP growth during 1985/86–1992/93 averaged 3.3 percent, significantly better than in many other sub-Saharan countries, but lower than The Gambia’s annual rate of population growth of 4.1 percent. The average growth rate reflected, to a significant extent, fluctuations in agricultural output owing to adverse weather conditions and erratic world prices for groundnuts—the principal cash crop (Chart 1). Other sectors of the economy remained hampered by the small size of the domestic market, inadequate infrastructure, the low level of human capital, and continuing inefficiencies in the management of public resources. The successful diversification of the economy through the growth of the re-export and tourism sectors was reflected in a reduction in the share of the agricultural sector in GDP from 25 percent in 1985/86 to 18 percent in 1992/93 and an increase in the share of the services sector (excluding public administration) from 40 percent to 46 percent (Chart 1).

THE GAMBIA DEVELOPMENTS IN OUTPUT AND PRICES 1984/85–1994/95

Citation: IMF Staff Country Reports 1995, 123; 10.5089/9781451815375.002.A001

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

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THE GAMBIA DEVELOPMENTS IN OUTPUT AND PRICES 1984/85–1994/95

Citation: IMF Staff Country Reports 1995, 123; 10.5089/9781451815375.002.A001

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

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THE GAMBIA DEVELOPMENTS IN OUTPUT AND PRICES 1984/85–1994/95

Citation: IMF Staff Country Reports 1995, 123; 10.5089/9781451815375.002.A001

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

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3. Initial challenge and shocks in 1993/94–1994/95

In view of the successful stabilization of the macroeconomic environment, albeit with a subdued response in output, the Gambian authorities recognized in 1993/94 the need to introduce a second round of structural reforms that aimed at strengthening the economy and further diversifying the economic base. The emerging development strategy was based on the objective of using donor aid to turn The Gambia into the “Gateway to West Africa” through the development of key services such as a freeport and bonding warehouse facilities and transforming Banjul into a hub for maritime traffic in the subregion.

Implementation of this strategy was frustrated by a number of critical developments that have occurred since mid-1993, and which have seriously eroded private sector confidence and affected economic growth prospects more generally. In August 1993, repurchases of the CFA franc were suspended and border controls tightened by Senegal, and subsequently in January 1994 the CFA franc was devalued as part of a broad adjustment program in the CFA franc zone countries. These developments significantly dampened the Gambian re-export trade, which declined in real terms by an estimated 24 percent in 1993/94 and 13 percent in 1994/95. The impact of these factors on economic activity was compounded by the July 1994 military coup, which triggered a cutoff of program aid by donors. The resulting political and economic uncertainties led in turn to the issuance of travel advisories by the British and Scandinavian governments and widespread disruption to the 1994/95 tourist season, when arrivals fell by nearly 60 percent.

As a result of these shocks, the economic and financial situation deteriorated significantly. Economic activity slowed down in 1993/94 and contracted by at least 4 percent in real terms in 1994/95. With the drop in re-export trade and the disruption of the tourist season, domestic government revenues declined by more than 4 percent of GDP during 1993/94–1994/95; foreign grants fell by an additional 2 percent of GDP, owing to the suspension of balance of payments assistance following the military coup. Since expenditure remained more or less constant as a percentage of GDP, severe fiscal imbalances emerged, and the overall budget deficit excluding grants rose to more than 6 percent of GDP, compared with 2 percent in 1992/93. Including grants, the deficit slipped to more than 4 percent of GDP in contrast to the surpluses recorded in previous years. This deficit was financed largely through a substantial increase in credit from the banking system, thus increasing pressure on prices. As a result, inflation accelerated from a year-on-year rate of minus 1 percent in June 1994 to 5 percent in June 1995 (Chart 1).

On the political front, during 1994/95 the military Government engaged in a consultative dialogue with representatives of professional and religious groups. On the basis of this dialogue, it was decided to shorten the transition period from four to two years, which means that elections and the return to constitutional rule are now scheduled to take place by July 1996.

1. Developments in output, savings, and investment

Real output growth in the Gambian economy slowed down in 1993/94 and turned negative in 1994/95, reflecting the cumulative impact of the exogenous shocks on economic activity. During 1993/94, the drop in re-export trade and related services was offset by good agricultural production and a very good tourist season; real GDP growth was 1.3 percent. The continued adverse external trade environment and the recession in tourism precipitated a substantial economic downturn in 1994/95; real GDP is estimated to have contracted by at least 4 percent (Table 1).

Owing to improved weather conditions, and aided by continued positive trends in fishing and livestock production, real value added in the agricultural sector increased on average by 6 percent during 1993/94–1994/95. In particular, groundnut production recovered from the historical low registered in 1992/93 following a substantial increase in real producer prices. Since the early 1980s, nonetheless, the share of agriculture in GDP has decreased by about 7 percent. Groundnut production, for example, despite the recovery to output levels of 80,000 tons, remained about 25 percent below the average crop levels recorded during the 1980s.

Re-export trade and tourism strongly influenced the performance of the Gambian services sector, although their high import content limited the contribution to employment and income levels in the Gambian economy. Because of the uneven performance of re-exports and tourism, real output in the services sector fell slightly in 1993/94 and by 5 percent in 1994/95. As a result, the share in GDP of the services sector (excluding public administration), after having steadily increased since 1985/86, dropped marginally to 44 percent in 1994/95. The Gambia’s small industrial sector contracted by 12 percent in 1994/95, owing to the impact of the adverse shocks on domestic economic activity.

The Gambian authorities do not compile national accounts by expenditure category, and staff estimates are derived using data from the external and fiscal accounts. These estimates indicate that domestically generated gross national savings and gross investment, which had been recovering from their low levels in mid-1980s, fell in 1993/94–1994/95, reflecting the economic difficulties. Domestically generated gross national savings are estimated to have declined to 3.2 percent of GDP from a peak of 6.3 percent in 1991/92, largely on account of the deterioration in the Government’s savings performance. A sharp reduction in investment by the private sector contributed to a fall in gross investment from 21 percent of GDP in 1992/93 to 16 percent in 1994/95 (Table 4, and Chart 1, panel d).

2. Developments in prices, employment, and wages

Price movements in The Gambia as measured by the consumer price index are strongly linked to developments in the re-export sector because those commodities—such as rice, sugar, and flour—that feature prominently in re-export trade also have a dominant weight in the domestic consumption basket. The disruption to the re-export trade, which initially took wholesalers by surprise, exerted continuous downward pressure on domestic prices during 1993/94, as the stocks of commodities originally imported for re-export were instead released into the domestic market. As a result, the inflation rate (on a year-on-year basis) fell from 11 percent in June 1993 to 5 percent in December 1993, and further to minus 1 percent in June 1994. Subsequently, however, the price trend reversed and inflation rose constantly from a low of minus 3 percent in August 1994 to 5 percent in June 1995, after traders adopted a more cautious import strategy and reduced their stocks of key food commodities (Table 9).

Employment data are incomplete in The Gambia. However, on the basis of information collected in a 1982/83 census and a 1992/93 household survey, employment on a sectoral basis mirrored changes in output during the ten-year period. ^1/ Although agriculture continued to provide for the bulk of employment, its share in total employment declined to 64 percent in 1992/93 compared with 77 percent in 1982/83. Conversely, the share of employment in the trading and other services sectors increased to 18 percent from 8 percent.

Detailed migration data in the 1992/93 household survey data corroborate the trend of labor movement away from agriculture. About one third of surveyed workers were considered migrants, largely to urban areas. As recent migrants reported higher earnings than comparable nonmigrant workers, these migratory movements reflected better financial opportunities in the urban services sector during the late 1980s, rather than poor living standards in rural areas. According to the survey, however, the vast majority of economically active persons remained in the informal sector. Only 10 percent of the economically active population was employed in the formal sector, where earnings averaged twice as high as in the informal sector. The formal private sector remained confined to the Greater Banjul area and, with an employment level of 10,000 in 1992/93, was roughly similar in size to the Gambian civil service.

Only indicative information can be used to assess the effects on employment of the shocks that have occurred since August 1993. According to a survey covering the majority of private sector companies in the Greater Banjul area, private formal employment was stable between December 1992 and December 1993, but it decreased by 26 percent during the subsequent 12-month period. Hardest hit were the tourism (minus 42 percent), construction (minus 40 percent), and trade (minus 20 percent) sectors. Employment in the core civil service increased by 2 percent between 1992/93 and 1994/95 (Table 12).

Wages for both the civil service and formal private sector employees increased in real terms during 1993/94–1994/95, as the unexpected trade shocks temporarily resulted in lower price levels than anticipated. Civil servants were granted on average a nominal wage Increase of 6 percent in 1993/94 and 7 percent in 1994/95, which in the event represented real increases of around 2 percent and 3 percent respectively. Monthly average nominal wages in the companies covered by the private sector survey were reported to have increased by 8 percent in nominal terms between December 1992 and December 1993, and by a further 18 percent during the subsequent 12-month period. This latter increase appears to imply, inter alia, that lower-paid workers were more affected than higher-income employees by retrenchments following the series of aggregate demand shocks.

1. Overview

Developments in the external sector since 1992/93 have largely reflected the impact of the various internal and external shocks faced by The Gambia starting in August 1993. Re-export trade, the largest foreign exchange earning sector, contracted by an estimated 37 percent in volume terms, which was due primarily to the reinforcement of border controls by Senegal, but also to some extent to the CFA devaluation and the increased economic and political uncertainty following the military coup. Tourism, the other key sector, was seriously affected by the travel advisories that were issued, and travel income dropped by nearly two-thirds in the 1994/95 season from its 1993/94 level.

These adverse developments were further compounded by a cutoff in program aid by donors in response to the coup, a slowdown in private foreign direct investment, and outflows of short-term capital. The cumulative effect of these developments was a marked deterioration in the country’s overall balance of payments, which moved into a deficit for the first time in nearly a decade. This deficit was financed by a rundown of gross official foreign exchange reserves, which declined by about SDR 11 million during 1993/94–1994/95. Despite the recent shocks, the nominal exchange rate of the dalasi vis-a-vis the U.S. dollar and the British pound remained fairly stable. In real effective terms, however, the dalasi underwent considerable appreciation in value, which implied a loss of international competitiveness. As at end-June 1995, The Gambia’s external debt burden, while rising relative to GDP, remained broadly manageable.

2. Developments in the re-export trade sector

Re-export and transit trading activities in The Gambia date as far back as the 1920s, when early petty traders began to take advantage of the favorable location of the port of Banjul to supply the region with essential imports, such as rice, flour, sugar, tea, spices, and simple consumer goods such as footwear and textiles. By the end of the Second World War, the main elements of the present system, which involve the supply of goods by large resident expatriate trading houses to wholesalers from neighboring countries, had been firmly established. The Gambia has traditionally had strong trading ties with Senegal, as well as with other neighboring countries, such as Guinea (Conakry), Guinea-Bissau, Mali, Mauritania, and Sierra Leone. Because of its geography, all goods transhipped through The Gambia, regardless of their final destination, must also pass through Senegal.

While re-exports from The Gambia to Senegal and other neighboring countries in the region are historically not a new phenomenon, the surge in re-exports and vigorous expansion of this sector in the 1980s and early 1990s was noteworthy. The sector became the largest foreign exchange earner of the economy. This rapid growth was mainly in response to the structural adjustment reforms undertaken during 1985/86–1991/92, as The Gambia became one of the first economies in the subregion to fully open up its external and internal markets. Specifically, structural adjustment measures, such as the introduction of a flexible exchange rate system in early 1986, the removal of trade and exchange restrictions, and major cuts in import tariffs, implied considerably lower costs when importing goods into the region via Banjul, as compared with other locations in the subregion. Moreover, actions undertaken by The Gambian authorities to improve the operations of the port of Banjul resulted in one of the fastest turnaround times for cargo ships in the region, implying a further lowering of transaction costs for imports through Banjul as the point of entry. Regional economic and political developments in the 1980s and early 1990s also contributed to the growth of re-exports from The Gambia. The emergence of serious economic and political dislocations elsewhere in the region, notably Liberia and Sierra Leone, effectively forced a number of regional traders to relocate their supply operations to The Gambia, which afforded a more stable political environment. In addition, the real appreciation of the CFA franc in the 1980s and early 1990s led to increased regional demand for imports into the CFA zone, including imports supplied through The Gambia.

Economic Importance of the Re-export Sector

^1/Net re-exports are defined as re-exports minus imports for re-export.

^2/For historical data prior to 1992/93, it is assumed to be 75 percent of total international trade taxes.

Economic Importance of the Re-export Sector

	1982/83	1985/86	1992/93	1994/95
	(In Percent)
Re-exports as a share of GDP	21	24	38	28
Net re-exports as a share of GDP 1/	9	10	15	11
Re-exports as a share of total exports	62	79	88	82
Re-exports as a share of total imports	59	63	64	62
Re-export revenue as a share of total government revenue 2/	52	52	49	38

^1/Net re-exports are defined as re-exports minus imports for re-export.

^2/For historical data prior to 1992/93, it is assumed to be 75 percent of total international trade taxes.

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Economic Importance of the Re-export Sector

	1982/83	1985/86	1992/93	1994/95
	(In Percent)
Re-exports as a share of GDP	21	24	38	28
Net re-exports as a share of GDP 1/	9	10	15	11
Re-exports as a share of total exports	62	79	88	82
Re-exports as a share of total imports	59	63	64	62
Re-export revenue as a share of total government revenue 2/	52	52	49	38

^1/Net re-exports are defined as re-exports minus imports for re-export.

^2/For historical data prior to 1992/93, it is assumed to be 75 percent of total international trade taxes.

The exact magnitude of the re-export trade is difficult to assess. Because of the small size of most transactions, and the difficulties in distinguishing local purchases from export sales, the bulk of the re-export trade remains officially unrecorded. The authorities have, for this reason, traditionally levied duties on all goods imported into The Gambia, irrespective of final destination. Estimates of re-export trade have generally relied on the analysis of household survey data and on direct interviews with importers conducted by the Central Bank of The Gambia, which have tried to gauge the plausible share of domestic consumption in total imports of key commodities and consumer goods; the remainder was assumed to be imports for re-export. Based on the results of a 1992/93 survey, the Central Bank estimated that 70 percent of rice imports (which account for some 20 percent of total imports), 85 percent of sugar imports (10 percent of total imports), and 22 percent of flour imports (5 percent of total imports) were re-exported. Of the nonessential items, which mostly comprise consumer goods (roughly one-third of total imports), 50 percent were estimated to have been re-exported.

After the period of strong expansion in the 1980s and early 1990s, the re-export sector experienced a dramatic downturn starting in August 1993, as a result of the various shocks that affected the Gambian economy. Data from the Gambia Port Authority, which provides detailed information on cargo throughout at the Port of Banjul by type of commodity, indicate that the total volume of imports declined by a cumulative 32 percent during 1993/94–1994/95. Imports of key re-export commodities dropped in volume terms during 1993/94–1994/95 by 23 percent for rice and by 34 percent for both sugar and flour. Nonessential commodities experienced a 32 percent drop in imports over the same period. Assuming that domestic consumption of essential goods was roughly constant, these cargo data would imply a real decline in commodity imports for re-exports in excess of 40 percent since 1992/93. For non-essential goods, the port data would indicate a less severe real decline in imports for re-exports, because domestic consumption contracted too with the downturn in economic activity.

It is not possible to quantify the magnitude of the effect of each of the different shocks individually. However, the impact of the suspension of repurchases of CFA franc bank notes outside the West African Monetary Union (WAMU) area appeared to be relatively short-lived because traders quickly shifted to other convertible currencies for transaction purposes. The intensification of border controls on transit trade by Senegal at the same time had a more deleterious effect on the re-export business. For traders from the subregion, the incentive to buy goods imported into Banjul and to transport them via land to neighboring countries was lessened as they faced the prospect of denial of transit. Attempts to adjust by establishing alternative transportation routes from Banjul via sea and air cargo proved expensive. Since 1993, the governments of Senegal and The Gambia have been trying unsuccessfully to reach understandings on the modalities for conducting transit traffic originating in The Gambia. ^1/

The devaluation of the CFA franc in January 1994 and the subsequent acceleration of reform efforts in neighboring CFA zone countries had an immediate income effect in the CFA zone, which contributed to a weakening of demand for all imports, including imports supplied through The Gambia. Moreover, the CFA franc devaluation, coupled with tariff reform in CFA zone countries, led to a significant loss of The Gambia’s comparative advantage as a supplier of low price imports into the region. Pre-devaluation retail price differentials for key re-export commodities—which were in favor of The Gambia by 33 percent for sugar, 11 percent for rice, and 10 percent for flour—narrowed or changed immediately after the devaluation to 5 percent, minus 10 percent, and minus 13 percent, respectively. The sharp real appreciation of dalasi vis-à-vis the CFA countries which occurred in January 1994 indicates a loss of competitiveness, although this has been partially reversed in subsequent months.

The cutoff of donor aid following the military coup, and the subsequent slowdown in domestic economic activity, undermined private sector confidence. More importantly, the political uncertainty led to a tightening of the foreign supplier credit lines for re-export trade that had been established over the years. As a result, the sector experienced an increase in operating costs, further eroding its competitiveness. At the same time, stepped-up reform efforts in regional non-CFA franc zone countries, such as Guinea, have raised the prospect of new potential competitors to Banjul as the port of entry into the subregion.

While the re-export trade remains a key economic sector for The Gambia, developments in the past three years have demonstrated the extreme vulnerability of this sector to regional, political, and economic developments and have underscored the need to further diversify the export base of the economy, by encouraging activities such as horticulture, fisheries, livestock, and light industry.

3. Tourism

Tourism is The Gambia’s second most important source of foreign exchange earnings. The structural adjustment reforms between 1985/86 and 1992/93 encouraged strong expansion in the sector, and foreign exchange receipts from tourism virtually doubled during this period (Chart 2, and Table 13). The 1993/94 season was exceptionally good, with the number of tourists (mostly from Britain, Germany, and Scandinavia) rising by 41 percent. Around one-third of the formal sector work force was employed in the tourism industry in 1992/93.

THE GAMBIA EXTERNAL SECTOR DEVELOPMENTS 1985/86–1994/95

Citation: IMF Staff Country Reports 1995, 123; 10.5089/9781451815375.002.A001

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

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THE GAMBIA EXTERNAL SECTOR DEVELOPMENTS 1985/86–1994/95

Citation: IMF Staff Country Reports 1995, 123; 10.5089/9781451815375.002.A001

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

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THE GAMBIA EXTERNAL SECTOR DEVELOPMENTS 1985/86–1994/95

Citation: IMF Staff Country Reports 1995, 123; 10.5089/9781451815375.002.A001

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

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The margin of competitiveness of the Gambian tourism business is very tight. Typically, air charter tour operators based in Europe arrange package tours for stays in the main hotels in The Gambia. The Central Bank estimates that local hotel accommodation accounts for only one-third of the retail price of such a package tour. Costs of air transportation, as well as operating costs and profit margins of the tour operators, reflect the remaining two-thirds of expenditure at the retail level. Moreover, the Gambian tourism sector has a very high import content. Hotels and restaurants import practically all food items and other amenities geared toward the tourists. In addition, hotels are heavy consumers of energy, which is estimated to account for up to 20 percent of local operating costs. To compete with other low-price destinations in this segment of the tourist-market (mainly in the Mediterranean and on the Canary Islands), The Gambia has depended largely on low wage costs and the possible economies of scale derived from large numbers of charter tourist arrivals.

As a result of the travel advisories that were issued, the number of tourists declined by 58 percent in the 1994/95 season, and travel income dropped by two-thirds. With the declining number of tourists, the operating margins of The Gambia’s hotels, and their ability to benefit from economies of scale, were reduced even further. At the same time, intensified adjustment efforts in neighboring countries and the depreciation of several European currencies, in particular the Spanish peseta, since 1993, have contributed to the narrowing of The Gambia’s competitive advantage. Although the outlook for tourism brightened a little following the lifting of travel advisories in March 1995, recent developments have shown a fundamental need to re-evaluate the prospects for tourism, so as to maximize the industry’s competitiveness and the domestic gains from tourism.

4. Developments in the balance of payments and external debt

Reforms undertaken during the structural adjustment period greatly improved the external position of The Gambia. The current account deficit, excluding official transfers, was reduced from a peak of 22 percent of GDP in 1986/87 to 16 percent in 1992/93. The deficit was generally covered by inflows of official transfers. Net inflows of concessional loans and increasing private foreign direct investment, mostly in the tourism sector, allowed for sizable balance of payments surpluses, which, along with exceptional financing from the Fund and debt rescheduling and debt relief, enabled a gradual repayment of all outstanding arrears and a strong buildup of gross official reserves. Reserves increased from just over SDR 1 million (less than a week of total imports) at end-June 1986 to SDR 75 million at end-June 1993 (equivalent to over 5 months of imports). With the repayment of external arrears, the stock of external public debt fell from SDR 221 million (113 percent of GDP) at end-June 1986 to SDR 213 million (83 percent of GDP) at end-June 1993. Correspondingly, debt service payments, inclusive of obligations to the Fund, declined as a ratio of current foreign exchange earnings from a peak of 104 percent in 1986/87 to 12 percent in 1992/93.

Despite the decline in re-exports and a worsening of the trade balance, the overall current account position improved in 1993/94 to 14 percent of GDP because of an exceptionally strong tourist season. In 1994/95, travel income plunged following the disruption to the tourist industry, but the impact on the current account deficit was more than offset by the slowdown in domestic economic activity, which significantly reduced import demand. Official transfers declined sharply in 1994/95, as donors withheld support in the aftermath of the coup. As a result, the current account deficit, including grants, widened to 5 percent of GDP from 3 percent the previous year. At the same time, The Gambia’s ability to finance the deficit diminished, in response to a cutoff in program loans, the slowdown in private foreign direct investment, and a sharp increase in short-term net capital outflows from The Gambia (the volume of project-related concessional loans remained broadly unchanged) (Chart 2).

As a result of these developments, the overall balance of payments deteriorated markedly, moving from a surplus of SDR 10 million in 1992/93 to a deficit of SDR 4 million in 1994/95 (Chart 2). This deficit was reflected in a sharp reversal of the strong buildup in gross official foreign exchange reserves that had been accomplished during the structural adjustment period. The decline in reserves was particularly acute in 1994/95, although relative to the reduced level of imports there was a slight increase.

The nominal stock of The Gambia’s external public debt was broadly unchanged at around 80–90 percent of GDP (Table 18). With the decline in re-exports and travel income, the ratio of external public debt to current foreign exchange earnings jumped from a relatively comfortable 142 percent at end-June 1993 to 212 percent by end-June 1995. Although The Gambia’s interest-to-export ratio remained relatively small (3–4 percent) in 1993/94–1994/95, reflecting the large concessional element in The Gambia’s debt, other indicators pointed to an increasing vulnerability in debt-servicing capacity. Because of the decline in current foreign exchange earnings, the debt service ratio jumped from 12 percent in 1992/93 to 18 percent in 1994/95. Moreover, the loss of official foreign exchange reduced interest earnings. ^1/

Despite the relative deterioration in The Gambia’s debt indicators, the overall composition of debt, as at end-June 1995, remained relatively satisfactory. Virtually all of the medium- and long-term debt was due to official creditors, of which multilateral sources accounted for 82 percent. Moreover, World Bank estimates (for end-December 1993) indicated that about 95 percent of the multilateral debt and about 85 percent of the debt contracted from bilateral sources was on concessional terms. The stock of short-term debt at end-June 1995 was negligible. Assuming the return to normal levels of program aid and foreign direct investment once the elections are completed, and a gradual recovery of tourism and re-exports, The Gambia’s debt indicators are expected to stabilize at comfortable levels in the medium term, following some further near-term deterioration. External debt is expected to peak at 96 percent of GDP in 1996/97, before declining to 75 percent by 1999/2000. Similarly, the debt service ratio is projected to remain in range of 15–17 percent through 1996/97, before declining to the manageable level of 12–13 percent by the end of the decade.

5. Exchange market developments

The Gambia has operated a liberal exchange system since 1986, when a floating exchange rate was introduced in the context of an interbank market. In January 1993, the authorities accepted the obligations of Article VIII, Sections 2, 3, and 4, of the Fund’s Articles of Agreement. There are no exchange controls or restrictions on current or capital transactions.

Despite the adverse shocks that have occurred since August 1993, the nominal exchange rate of the dalasi vis-à-vis the U.S. dollar and the British pound has remained fairly stable, although it depreciated significantly against the SDR (Chart 3). The real effective exchange rate (with weights adjusted for the officially unrecorded re-export trade), however, increased by around 5 percentage points between December 1993 and June 1995. Bilateral effective exchange rate movements indicate a significant loss of competitiveness with respect to CFA franc zone countries following the devaluation of the CFA franc in January 1994.

THE GAMBIA EXCHANGE RATE DEVELOPMENTS 1985/86–1994/95

Citation: IMF Staff Country Reports 1995, 123; 10.5089/9781451815375.002.A001

Sources: IMF, Information Notice System; data proviaed by the Gambian authorities; end staff estimates.1/ Trading partner country weights based on data provided by the Gambian authorities.

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THE GAMBIA EXCHANGE RATE DEVELOPMENTS 1985/86–1994/95

Citation: IMF Staff Country Reports 1995, 123; 10.5089/9781451815375.002.A001

Sources: IMF, Information Notice System; data proviaed by the Gambian authorities; end staff estimates.1/ Trading partner country weights based on data provided by the Gambian authorities.

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THE GAMBIA EXCHANGE RATE DEVELOPMENTS 1985/86–1994/95

Citation: IMF Staff Country Reports 1995, 123; 10.5089/9781451815375.002.A001

Sources: IMF, Information Notice System; data proviaed by the Gambian authorities; end staff estimates.1/ Trading partner country weights based on data provided by the Gambian authorities.

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The relative stability of the nominal dalasi/U.S. dollar exchange rate during 1993/94–1994/95 may be attributed to several factors. First, it reflects the authorities’ policy objective of stabilizing the exchange rate and their willingness to substantially run down gross official reserves. Second, the lack of pressure on the dalasi seems to have stemmed from the fact that the impact of the recent shocks was relatively limited on a net basis; the main economic activities that earn foreign exchange—re-export trade and tourism—are also relatively import-intensive. Third, specific institutional and structural characteristics have constrained the functioning of the interbank foreign exchange market. For prudential reasons, authorized dealers rarely trade among themselves, preferring instead to deal directly with the Central Bank or, occasionally, in the parallel market. In addition, the interbank market has been highly oligopolistic, with one authorized dealer accounting for more than 60 percent of foreign exchange transactions. Major market participants also appear to have had an interest in relative exchange rate stability, since they are fully or partially foreign-owned and have had, at times, considerable foreign exchange risk exposure. In the face of a potential scarcity of foreign exchange, banks have tended, in the short term, to avoid bidding up the exchange rate and preferred to re-evaluate the range of services offered to their clients, turning occasionally to informal queuing schemes that ration foreign exchange. The lack of substantial excess demand and the absence of foreign exchange restrictions is corroborated by relatively narrow and stable spreads between interbank and parallel market exchange rates (Table 20).

1. Overview of fiscal developments

The fiscal outcome for the last “pre-shock” year in 1992/93 was very favorable, culminating several years of successful adjustment. The overall deficit (excluding grants) declined to 2.2 percent of GDP, while the current balance recorded a surplus of 6 percent of GDP—twice that achieved in 1989/90 (Table 21). This outturn, however, represented a high point in fiscal performance. The series of external and internal shocks since August 1993 has resulted in a significant weakening of revenue performance and a rapid deterioration in the fiscal situation. The overall deficit (excluding grants) widened to 2.7 percent of GDP in 1993/94 and 6.3 percent in 1994/95 (Chart 4, panel a).

THE GAMBIA FISCAL DEVELOPMENTS 1989/90–1994/95

Citation: IMF Staff Country Reports 1995, 123; 10.5089/9781451815375.002.A001

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

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THE GAMBIA FISCAL DEVELOPMENTS 1989/90–1994/95

Citation: IMF Staff Country Reports 1995, 123; 10.5089/9781451815375.002.A001

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

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THE GAMBIA FISCAL DEVELOPMENTS 1989/90–1994/95

Citation: IMF Staff Country Reports 1995, 123; 10.5089/9781451815375.002.A001

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

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Between 1989/90 and 1992/93, the fiscal consolidation was bolstered by donor inflows of program grants, which allowed the overall government budget to record surpluses throughout the period, and enabled the Government to increase its deposits with the banking system. This fiscal stance provided room for adequate expansion of private sector credit and was generally conducive to economic growth. Program aid commitments started to decline in 1993/94, because The Gambia’s external position was perceived by the donor community as becoming increasingly more viable, exacerbating the vulnerability of The Gambia to exogenous shocks. The cutoff of program aid following the military coup contributed to a turnaround in domestic financing of the budget, from a position of net lending to the banking system equivalent to 5.8 percent of GDP in 1992/93 to net borrowing of 2.3 percent in 1994/95.

2. Revenue performance

The Gambia’s budget revenues reached 24 percent of GDP in 1992/93, reflecting the strength of collections from customs duties and a robust re-export trade. In the subsequent two years, however, revenue performance deteriorated sharply as a result of the shocks to the economy, and by 1994/95 total revenue had fallen to 20 percent of GDP. This decline in revenues was manifested in particular by a drop in taxes from international trade, which fell from 49 percent of total receipts in 1992/93 to 38 percent in 1994/95 (Table 22). ^1/

The Gambian authorities started taking measures in September 1993 to compensate for the loss of revenues expected from the disruption in re-export trade. Petroleum taxes were increased (from an average of about 90 percent to 117 percent of the value of oil imports) and exemptions on pre-mix and for designated petrol users eliminated. Efforts were intensified to improve tax administration in the Customs and Excise Department: customs records were computerized; clearance certificates were introduced to ensure better compliance; and staffing for the sales tax unit was increased to allow for more frequent audits. In the event, a good tourist season generated some increase in revenues from domestic sales taxes, and income tax collection improved, thanks to the cross-checking of tax clearance certificates, the registration of firms, the imposition of a 10 percent minimum tax on rental income, and the suspension of a number of exemptions that had been granted under the Development Act, As a result, the reduction of revenue in 1993/94 was contained at just over 1 percent of GDP.

The Government further developed its strategy of reducing reliance on taxes linked to the re-export trade in context of the 1994/95 budget. Measures were taken to eliminate the Development Act, including all related exemptions, and to strengthen the administration of domestic sales taxes. To improve the environment for the private sector without compromising Government revenue, income tax rates were lowered, but coverage of direct taxes was widened by introducing a system of tax identification numbers. In addition, exemptions from corporate income tax of the large parastatals were eliminated. In the event, practically all categories of revenue declined relative to GDP in 1994/95, reflecting the slowdown in economic activity, the disruption of tax administration, and the general dislocation in the civil service, following the coup. Domestic sales taxes registered a decline of about one third, largely stemming from lower tourist arrivals. ^1/ Overall petroleum consumption contracted sharply, so that revenues from this source fell by over 1 percent of GDP, despite the removal of exemptions from petroleum taxes. Furthermore, parastatal dividends were not paid as envisaged, owing to a lapse in public administration. The only improvement in revenue performance during 1994/95 came from income tax collections in response to intensified collection efforts facilitated by the new system of tax identification numbers.

3. Expenditure developments

With the strong improvement in revenue performance, current expenditures were allowed to increase to 17.7 percent of GDP in 1992/93 from 16.2 percent in 1991/92. The increase largely consisted of outlays on goods and services and transfers to nonprofit institutions in the health and education sectors, which rose from 7.6 percent of GDP to 8.8 percent (Tables 23 and 24). In response to the decline in revenues in 1993/94, the authorities implemented a series of expenditure control measures, which in aggregate resulted in a reduction in overall outlays of 0.7 percent of GDP. Current spending was contained at 18 percent of GDP. A system of monthly, rather than quarterly, expenditure allocations was adopted in order to strengthen expenditure monitoring and control. Spending cuts were made on outlays for goods and services, amounting to about 1 percent of GDP in 1993/94, which in effect reversed the increases made in the previous year. Capital expenditures fell by 1 percent of GDP, largely reflecting delays in foreign-funded project disbursements. These reductions were sufficient to offset the effects of an increase in the wage bill by 0.8 percent of GDP, which were due largely to an increase in public sector employment in the health and education sectors. These increases were motivated by the need to meet donor conditions for raising the share of health and education outlays in total government expenditure, but were hastily made in government employment, rather than in the service provision facilities of the two sectors. The implementation of a system of program budgeting to ensure better resource management in health and education was scheduled in 1994/95, but subsequently shelved with the interruption to flows of external assistance.

A tight rein was maintained in 1994/95 on budgetary allocations for current expenditures, which remained constant in nominal terms during the year. Outlays for procurement were frozen in nominal terms, despite an average inflation rate of 4 percent. Reductions in the core civil service, however, were offset by increases in employment in the uniformed services. Additional wage-related expenditures were incurred when civil servants were granted a one-month salary advance toward the end of the year, which was to be repaid only in 1995/96. As a result, the wage bill increased by 0.2 percent of GDP. This increase was offset by lower domestic interest payments, though, reflecting the net redemption of central bank bills by parastatals and other holders. Capital expenditures increased by 0.5 percent of GDP, largely on account of ongoing foreign-financed projects in the road construction, education, and health sectors. However, preliminary estimates indicate that there were unallocated expenditures equivalent to 0.7 percent of GDP, not accounted for in the fiscal reporting system and believed to relate to extrabudgetary accounts, which include on-lending to finance capital outlays of parastatals and revolving funds. Several key services, including health and education, were drawing down revolving funds, which had been funded by previously disbursed donor aid, to maintain basic services. These extrabudgetary expenditures offset whatever savings were made by the selective expenditure restraints on procurement, and overall expenditures therefore increased by 0.5 percent of GDP during 1994/95.

4. Performance of the parastatal sector

The Gambia made considerable progress in recent years in the area of public enterprise reform. The role of government has been significantly reduced through the divestiture of 22 public entities since 1985/86. Parastatals that remained in the public domain became subject to performance contracts overseen by the National Investment Board (NIB). As a result, budget support for the parastatal sector was reduced drastically, from about 10 percent of GDP in 1987/88 to under 1 percent of GDP by 1994/95. The most recent divestitures of enterprises included the Gambia Oilseeds Processing and Marketing Company (July 1993); the livestock marketing company (December 1993); and Gambia Airways (Spring 1994). ^1/ In addition, leasing arrangements for government assets were contracted during 1993/94 for a brick plant, a dockyard, a mechanical shop, and a hotel.

However, the privatization process increased pressures on the budget, as the cost of restructuring enterprises prior to privatization absorbed (in aggregate) more budgetary resources than the realized sale value. Moreover, the budgetary process became more complicated, because the NIB assumed significant quasi-fiscal responsibilities, including the dispensation of tax concessions and approval of capital budgets for the remaining public enterprises, thus making the financial relations between the budget and the parastatal sector less transparent and reducing the control of the Ministry of Finance.

In its supervisory role, the NIB emphasized compliance with the performance contracts, but the fiscal obligations of public enterprises—such as repayment of interest and principal, tax payments, and dividends to the budget—were allowed to slip. At the same time, considerable resources that were accruing to the Government were utilized outside the Government’s budget system when parastatals began to engage in significant spending on special projects, while the rest of the public sector—under the control of the government budget—continued to be squeezed because of fiscal restraints. As a result of these institutional weaknesses, a parallel budget system emerged during 1992/93–1993/94, thereby providing potential for the mismanagement of public resources. Certain entities found it easier to initiate projects through the large parastatals than to be subject to the scrutiny of the government budget process or the public investment program.

With a declining resource base, owing to the adverse impact of the series of exogenous shocks, the Government recognized that its financial relations with the parastatal sector needed to be overhauled. In particular, the government budget regularly made large foreign interest and amortization payments, mainly on loans contracted for public sector investment projects, which were subsequently on-lent to the key parastatals. These include the Gambia Telecommunications Company (GAMTEL; telephones), the Port Authority (GPA), the Gambia Utilities Corporation (GUC; electricity and water), the Public Transportation Corporation (GPTC), and the Civil Aviation Authority (GCAA; airport). Despite healthy profit and cash-flow positions, some of these parastatals became delinquent in their financial obligations on interest and principal repayments to the Government, and thus prevented the budget from recouping the foreign debt payments made on their behalf.

Financial Position of Selected Parastatals: Net Profit or Loss (-) ^1/

^1/Data for 1994/95 are not available.

^2/Later changed to the Utilities Holding Corporation (UHC).

Financial Position of Selected Parastatals: Net Profit or Loss (-) ^1/

	1991/92	1992/93	1993/94
	(In millions of dalasis)
GPA	35.8	30.6	32.7
GAMTEL	27.4	37.5	54.8
GUC 2/	…	-1.3	-15.6
Total dividends / turnover tax paid to the budget	2.6	2.0	4.0

^1/Data for 1994/95 are not available.

^2/Later changed to the Utilities Holding Corporation (UHC).

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Financial Position of Selected Parastatals: Net Profit or Loss (-) ^1/

	1991/92	1992/93	1993/94
	(In millions of dalasis)
GPA	35.8	30.6	32.7
GAMTEL	27.4	37.5	54.8
GUC 2/	…	-1.3	-15.6
Total dividends / turnover tax paid to the budget	2.6	2.0	4.0

^1/Data for 1994/95 are not available.

^2/Later changed to the Utilities Holding Corporation (UHC).

Both GPA and GAMTEL—with a turnover in 1993/94 of 2 percent of GDP and 5 percent of GDP, respectively—enjoyed tax concessions until 1993/94, and became subject to corporate income tax only in 1994/95. In view of the resources under the control of these wholly government-owned parastatals and its own weak revenue position, the Government announced in the 1994/95 budget a new dividend policy, aimed at raising dividend payments to the budget to 40 percent of profits. In the event, the NIB was dissolved under the new regime, and its functions were transferred to the Ministry of Finance. In this process, dividends were not collected by the government budget. Meanwhile, the two companies have again become prime targets for extrabudgetary or quasi-fiscal expenditures on behalf of the Government, which prevented them from fulfilling their financial obligations to the budget. The companies themselves started implementing extensive capital expansion budgets. GPA has embarked on investments in container storage facilities, a freight station, a jetty extension project, floating crafts, and a major port expansion project, while GAMTEL has begun investments in telephone line extensions to rural areas.

The Utility Holding Corporation (UHC) leased its operations and maintenance functions as of 1992/93 to Management Services Gambia Limited (MSG). The management company strengthened collections and contracted for major rehabilitation work on the electricity generating plants. Although electricity rates were among the highest in the region, the rehabilitation and management costs exceeded revenues, and the company continued to register losses in 1993/94. It was recognized that significantly more rehabilitation and investment in new generators was needed. However, these projects were initiated by UHC and MSG outside the public investment program of the Government and have recently involved significant borrowing contracted on nonconcessional terms. Legal disputes have prompted the Government to conduct a review in 1994/95 of MSG’s contract and the financing of the expansion in electricity generation. This review has not yet been completed.

The GCAA manages the airport, which was converted from a government department to a parastatal in 1991/92. It was given control of landing and departure fees to cover its operating costs. These fees proved far in excess of normal operating costs and were used for additional spending. At the same time, the GCAA did not make any debt or dividend payments to the budget. Consequently, in 1994/95, collection of departure fees was transferred to the customs administration, and these fees were included as a revenue item in the budget. The transportation company GPTC has made losses because of high operating costs and capital outlays for expansion of its bus fleet and ferries. It recently acquired five ferries financed by donor grants, and has sharply raised its fares to help reduce operating losses.

The Social Security and Housing Finance Corporation (SSHFC) is in charge of collecting social security contributions from employees and employers and runs pension and provident funds as its primary function. It also operates a Housing Finance Fund for investment in real estate. The latest published accounts of SSHFC for end-1992/93 showed considerable assets equivalent to over 7 percent of GDP, of which 80 percent were invested in treasury bills. ^1/ Although the SSHFC is an independent entity, the Government during 1994/95 requested the corporation to pledge a part of its treasury bill holdings as collateral for a commercial bank loan taken by another parastatal to finance rice imports. This was in turn guaranteed by the Government, with the budget bearing any residual liability. As the parastatal involved had no prior experience in the marketing of rice, which has been primarily the domain of the private sector, this transaction represented a new trend of government intervention in the trading sector.

With the liquidation of the NIB, the Ministry of Finance is currently in charge of parastatal financial management, contracts, debts, and performance monitoring, to ensure transparency and commercial integrity of the operations of parastatals. The Government has made it a high priority to require parastatals to pay in full their debt obligations, taxes, and dividends to the government budget, but staffing in the ministry is inadequate to appropriately cover these responsibilities, and political intervention in the management of the parastatals has remained problematic. In view of the tight fiscal resources, the weakness in parastatal management has become one of the most pressing public sector problems facing The Gambia.

1. Monetary policy during structural adjustment

Monetary policy during the structural adjustment period until 1992/93 aimed at reducing inflation, stabilizing the exchange rate, and replenishing the country’s foreign exchange reserves from an initially low level. The growth of broad money during this period largely mirrored the improvement in the net foreign asset position of the banking system, while the net domestic assets of the banking system declined by an annual average of 11.5 percent of beginning period M2. This reduction was achieved through large net repayments by the Government to the banking system, which allowed adequate expansion of credit to the private sector within the context of a restrictive overall monetary stance (Chart 5).

THE GAMBIA MONETARY DEVELOPMENTS 1985/86–1994/95

Citation: IMF Staff Country Reports 1995, 123; 10.5089/9781451815375.002.A001

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

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THE GAMBIA MONETARY DEVELOPMENTS 1985/86–1994/95

Citation: IMF Staff Country Reports 1995, 123; 10.5089/9781451815375.002.A001

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

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THE GAMBIA MONETARY DEVELOPMENTS 1985/86–1994/95

Citation: IMF Staff Country Reports 1995, 123; 10.5089/9781451815375.002.A001

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

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Controls on bank deposit and lending rates were lifted early in the adjustment period and a biweekly tender for treasury bills was introduced in 1986/87, with a view to enhancing the role of market forces In the determination of domestic interest rates. Credit ceilings and quantitative controls on credit expansion by individual banks were replaced in 1990/91 by a system of indirect control of monetary aggregates. Since then, the Central Bank has exercised control over credit and monetary developments through limits on its net domestic assets and the conduct of open market operations to tighten domestic liquidity conditions, in conjunction with a flexible exchange rate regime.

2. Monetary developments in 1993/94–1994/95

Monetary policy during 1993/94–1994/95 was intended to help contain the adverse effects of the series of shocks that started in August 1993 by maintaining a tight monetary stance. In the event, broad money growth for the 12-month period ended June 1994 slowed down to 3 percent, reflecting a slower accumulation of net foreign assets, while the Government continued to make sizable net repayments to the banking sector. However, broad money growth subsequently accelerated, reaching 7 percent for the 12-month period ended June 1995, largely in response to bank financing of the growing budget deficit (Table 25). At the same time, the task of effecting monetary restraint was assisted by the loss of foreign reserves.

Both deposit growth and private sector credit demand slowed down significantly with the depressed level of economic activity during 1993/94–1994/95 (Table 27). Lending and deposit rates remained virtually flat, in the ranges of 20–25 percent and 9–14 percent, respectively, during the two-year period (Table 29), even though the treasury bill rate, which anchors the interest rate structure, eased by 2 percentage points to 15.5 percent in December 1993. As a result, real interest rates remained highly positive but fluctuated significantly, reflecting movements in the inflation rate (Chart 5). During this period the average spread between lending and deposit rates was relatively high, at around 12 percent. This reflected the oligopolistic nature of the financial sector (see below), relatively large transaction costs (the payments system outside of the Greater Banjul area is still underdeveloped), and high recovery costs.

3. Structural features and reforms in the financial sector

The enactment of new Central Bank and Financial Institutions Acts in November 1992 involved considerable reform of the financial sector. In particular, the Central Bank Act enhanced the ability of the monetary authorities to formulate and implement monetary policy by, inter alia, facilitating the issuance of central bank bills as instruments of open market operations. The Financial Institutions Act was designed to strengthen the role of the Central Bank in the supervision and prudential regulation of financial institutions through a variety of measures, including stiffer penalties for noncompliance with reserve requirements, the imposition of higher minimum capital requirements and equity ratios, and the specification of modern accounting standards and expansion of the scope for audits.

Despite these reforms, financial markets in The Gambia have remained thin, reflecting the small size, the modest degree of diversification, and the relatively early stage of development of the economy. The money market has continued to be dominated by one large bank; two of the three smaller commercial banks started their operations only in the early 1990s. The interbank market has remained largely dormant, except for a few ad hoc transactions, which were necessitated mainly by the CBG’s rules and regulations. Banks have preferred to use the central bank refinance facility to obtain liquidity, despite a penalty of 3 percent over the treasury bill rate, rather than dealing with each other, so as to avoid revealing their financial position and to preserve control over their market shares. Although participation of the nonbank public in treasury bill auctions has increased, total investment has remained small and bills have typically been held to maturity.

Competition in the money market has remained very limited. Most activities in the short-term market have centered on trade, primarily import and re-exports, where the number of participants is relatively small. As a result, banks have usually been on the same side of the market and subject to the same seasonal, cyclical, or external factors, which has further reduced the scope for interbank transactions.

The liberal stance of The Gambia’s banking legislation has helped ease barriers to entry for potential competitors in commercial banking. The oligopolistic nature of the Gambian banking system seems to have been more the result of the limited size of financial markets and the lack of economies of scale available. In 1993/94, the monetary authorities therefore identified measures to intensify competition, including: (a) the use of the rediscount rate as a signaling device in situations where the CBG felt a need for the market interest rate to move in a certain direction; (b) the licensing of nonbank primary security dealers; and (c) the examination and periodic publication of the various commissions levied by commercial banks in addition to interest charges. At the same time, the Central Bank also planned to remove reserve requirements on interbank deposits and change the mandatory observation period for reserve and liquidity requirements from the current daily to a biweekly averaging basis; the objective was to encourage the commercial banks to improve their liquidity management and promote the use of the interbank market. However, In view of the low level of private sector confidence in 1994/95, the Central Bank has decided to postpone these actions for the time being.