This Selected Issues paper examines economic developments in The Gambia during 1994–98. Although real output growth slowed significantly in the early 1990s and turned negative in 1994/95, both 1997 and 1998 were characterized by an upswing in real economic activity. The 1994/95 output decline of 3.4 percent was primarily owing to a significant downturn in tourist activity. The recovery in the tourist sector and the more favorable weather conditions led to real GDP growth of 4.9 percent in 1997 and an estimated real growth rate of 4.7 percent in 1998.

Abstract

This Selected Issues paper examines economic developments in The Gambia during 1994–98. Although real output growth slowed significantly in the early 1990s and turned negative in 1994/95, both 1997 and 1998 were characterized by an upswing in real economic activity. The 1994/95 output decline of 3.4 percent was primarily owing to a significant downturn in tourist activity. The recovery in the tourist sector and the more favorable weather conditions led to real GDP growth of 4.9 percent in 1997 and an estimated real growth rate of 4.7 percent in 1998.

II. External Competitiveness8

A. Introduction and Summary

33. Beginning in 1985, The Gambia embarked on major structural adjustment and stabilization programs that were supported by the Fund and the World Bank. Considerable emphasis was given to trade reforms and exchange rate policies aimed at improving the long-run external competitiveness of the Gambian economy. Some of the key measures undertaken in these areas since the mid-1980s include the reduction of import duties, the abolition of export taxes, the granting of duty exemptions on inputs of export-oriented sectors, and a devaluation of the dalasi in 1986. Despite these measures, the performance of the export sector in terms of GDP experienced only a short-lived revival. The share of exports in GDP increased from 34 percent in 1986/87 to 45 percent in 1991/92 but weakened again markedly to 26¾ percent in 1997, raising concerns about the ability of the Gambian economy to compete in export markets. This chapter examines the external competitiveness of the Gambian economy relative to its major trading partners and neighbors over the period 1988-97.

34. The Gambia is a small, open economy, in which reexport trade accounts for about one-fourth of GDP, while total exports of groundnuts and other domestic products represent less than 5 percent of GDP. Both economic activity and exports are closely related to competitiveness issues. For example, the declining trend in overall exports since mid-1993 can be traced to a great extent to a series of adverse external shocks, such as the tightening of border controls by Senegal, the suspension of repurchases of CFA franc banknotes in August 1993, and the devaluation of the CFA franc in January 1994. Another aspect that needs to be emphasized in the case of The Gambia is the importance of tourism as a source of income and the need to keep the country competitive as a tourist destination.

35. This chapter looks into various indicators to assess developments in external competitiveness of The Gambia. Two considerations have guided the choice of indicators: (i) the relevance of the indicator to the special circumstances of the country; and (ii) the availability and quality of the data. In particular, not only trade-weighted indicators of external competitiveness but also tourism-weighted indicators are used. The chapter concludes that most of The Gambia’s external competitiveness indicators did not change substantially during the last decade, except during the period immediately before and after the CFA franc devaluation. However, its neighboring countries, in particular Senegal, gained in external competitiveness relative to The Gambia as a result of the CFA franc devaluation, thereby creating the need for the Gambian authorities to implement measures to improve efficiency in the export sector and to pursue a prudent wage policy.

36. The chapter is organized as follows. Section B summarizes the theoretical background for the measurement of external competitiveness, and highlights the advantages and shortcomings of the main competitiveness indicators available for The Gambia. Section C discusses the results of the application of these indicators to the Gambian data. Section D discusses the links between the movements in the competitiveness indicators and the equilibrium real exchange rate. Section E compares the competitiveness of The Gambia with that of its neighboring countries, using CPI-based real effective exchange rates. The last section presents the conclusions and policy implications.

B. Theoretical Background

37. When markets are frictionless, that is, there are no limitations to trade and complete arbitrage in the goods market, purchasing power parity (PPP) should hold and movements in relative prices should be offset by movements in the nominal exchange rate, at least in the longer run. Thus, the real exchange rate should be constant over time or return to a constant long-run equilibrium, once temporary shocks no longer have an impact on the economy. In practice, however, real exchange rates have been found to be very volatile, and deviations from PPP seem to peter out very slowly, a phenomenon that Rogoff (1996) calls the purchasing power parity puzzle. Even with increasing globalization of markets, there remain major obstacles toward achieving a frictionless functioning of international trade, such as transportation costs, trade barriers, and labor market inflexibilities.9

38. A variant of the PPP argument is the “law of one price”, which simply states that the domestic price of a particular good is equal to the foreign price of that good times the exchange rate between the home country and the foreign country, defined as the domestic currency price of the foreign currency. The reason why this law, again, does not always hold is market frictions and distortions in the exchange and trade regimes. Although non-labor inputs, which are highly tradable, might suggest a common price for a Big Mac in different countries, to use Rogoff’s (1996) example, the labor input and the pricing patterns (e.g., inclusion or exclusion of value added tax, property rents, profit margins, etc.) might differ substantially, and thus the law of one price might not hold.

39. Under the assumption that the PPP broadly holds, one can make judgements about changes in competitiveness by observing changes in the real exchange rate. However, if the PPP does not hold, these judgements become less straightforward and one should look at factors that might have affected the equilibrium real exchange rate—for example, changes in the terms of trade.

40. In principle, there are many ways to measure movements in the real exchange rate or, in case of a comparison between more than two countries, the real effective exchange rate (REER), to assess a country’s competitive edge in world markets. The main difference between these compilation methods is the way in which the nominal exchange rate is deflated: one could use either price-based deflators or cost-based deflators. The former group consists of the consumer price index (CPI), the producer price index (PPI), the GDP deflator, and export price deflators. With respect to the latter group, a possibility would be to use unit labor costs (labor costs per unit of output).

41. The following pros and cons of the various competitiveness indicators can be identified:

  • The REER index based on the CPI is most commonly used for developing countries as it is readily available. The downside of using the CPI as a deflator of nominal exchange rates is that the CPI includes indirect taxes and other distortions, as well as prices for imports and prices for services. In the case of The Gambia, however, the country’s openness is likely to attenuate this problem.

  • The REER index based on the GDP deflator does reflect the ratio of the relative prices of nontradable to tradable goods at home and abroad but is less frequently available and more imprecise.

  • The REER index based on the export price deflator is closely related to the competitiveness in export markets and is also not affected by different trends in productivity among tradables and nontradables. It does, however, come with a sampling bias as not all exportable goods are included, but only those that are priced sufficiently low to be exported.10

  • The REER index based on unit labor cost compares the profitability of non labor factors at home and abroad but tends to focus on manufacturing only. It uses average instead of marginal costs and thus does not completely reflect labor allocation incentives. A further problem is that factor prices for intermediate inputs in the production process may differ across countries, and capital intensities as well as labor productivity cycles, are unlikely to be the same in different countries11. Also, the data on unit labor costs are often not available or are of poor quality.

  • A measure for the real exchange rate is the ratio of prices in the nontradable goods sector to prices in the tradable goods sector, known as the internal real exchange rate. However, this measure does not take account of the differences in labor productivity growth across sectors.

C. Competitiveness Indicators for The Gambia

42. The measures that are used in this chapter are mainly based on the CPI, that is, the real exchange rate is obtained by deflating the monthly average nominal exchange rate with the CPI. The chapter also discusses REERs based on the GDP deflator, the import price deflator, and some measure of labor costs, though on an annual basis (1988-97) only. Finally, the chapter looks at the internal real exchange rate and discusses the links between these indicators and the equilibrium real exchange rate. Two different weighting schemes are used to calculate the real effective exchange rate: the trade-weighted and the tourism-weighted indices. The weights are calculated by taking account of each country’s share in total trade and total tourist arrivals. Countries are included only if both the relevant price index and the nominal exchange rate as a period average are available for the entire sample. Table 1 below summarizes the trade and tourism weights of The Gambia’s major partners.

Table 1.

The Gambia: Weights of Major Countries Entering in the Real Effecctive Exchange Rate by Trade and Tourist Volume

(in percent of total)

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Sources: IMF, International Financial Statistics and Direction of Trade Statistics; Central Statistics Department (CSD) of The Gambia; and staff calculations.

CPI-based indicators

43. The exchange rate of the dalasi vis-à-vis the U.S. dollar for the period January 1988 to March 1998 is shown in Figure 1. The Gambia utilizes a floating exchange rate system that is generally free of restrictions.12 While the dalasi depreciated against the U.S. dollar by 59 percent in nominal terms from January 1988 to August 1998, the real depreciation was only about 17 percent (Figure 1, top panel).

Figure 1.
Figure 1.

The Gambia: Real and Nominal Exchange Rates and Real Effective Exchange Rates Based on the CPI, January 1988-March 1998

Citation: IMF Staff Country Reports 1999, 071; 10.5089/9781451815399.002.A002

Sources: IMF, International Financial Statistics, Direction of Trade Statistics, and Information Notice System; CSD of The Gambia; and staff estimates.

44. The bottom panel of Figure 1 depicts The Gambia’s REER vis-à-vis all its trading partners for the period from January 1988 until March 1998, using the CPI and the trade and tourism weights explained above. For comparative purposes, the REER as compiled by the substantial real appreciation or depreciation over the entire sample. The trade-weighted index, IMF’s Information Notice System (INS) is also included.13 At first glance, the figure shows no for example, fluctuated between 94 and 112. However, all indicators until the end of 1991 show a trend depreciation, suggesting an improvement in The Gambia’s external competitiveness. The period from early 1992 until mid-1993 is characterized by a sharp appreciation of the three indicators considered, with a further peak of the trade-based index in January 1994. The remaining sample period shows again a trend depreciation, and thus a gain in the external competitiveness of The Gambia, with the exception of an appreciation from end-1996 to mid-1997.

45. The impact of the 1993-94 events can be seen clearly in all the indicators. The trade-weighted REER appreciated by 14 percent between November 1992 and June 1993, leading to a deterioration of The Gambia’s external competitiveness. It then depreciated by 11 percent until September 1993 before appreciating again between September 1993 and January 1994. The period from January 1994 to April 1996 is characterized by a trend depreciation of about 14 percent, resulting in an improvement of The Gambia’s external competitiveness. Beginning in April 1996, the REER appreciated again until August 1997, although at a slower pace (11 percent), followed by a depreciation to slightly above the April 1996 value. The tourism-weighted real effective exchange rate follows a similar but clearer pattern. The main differences are as follows. Between January 1990 and October 1992, the tourism-weighted index was well below the trade-weighted index. There are two plausible reasons for the sharp increase in this index until June 1993 and, thus, for the appreciation of the REER (25.6 percent in nine months) and the deterioration of The Gambia’s competitiveness. First, the ERM (European exchange rate mechanism) crises of 1992 and 1993 forced the U.K. pound sterling out of the European exchange rate system and the pound depreciated. With the United Kingdom as the main external competitiveness, as measured by the tourism-weighted index. The index increased by 31 percent between August 1992 and June 1993.

46. Secondly, the depreciation of the Spanish peseta during the ERM turmoil might have made travel to Spain and the Canary Islands more attractive to residents of those European countries that did not face a depreciating currency, such as the Netherlands, Germany, Belgium, and France. The remaining sample period is mainly characterized by a trend depreciation of the tourism-weighted REER index, which, in turn could be explained by the recovery of the pound sterling starting in early 1996. Finally, it is worth mentioning that the July 1994 military coup in The Gambia did substantial harm to the tourist business. The British and the Scandinavian governments issued travel advisories, resulting in a drop in the number of arrivals in the 1994-95 season; for example, tourist arrivals from the United Kingdom declined by almost two-thirds. Weights for the tourism index do not seem to have changed significantly as all nationalities traveling to The Gambia reduced their travel activities in broadly proportional fashion.

GDP-based and import price-based indicators

47. The annual trade- and tourism-weighted real effective exchange rates based on the GDP deflator are shown in the top panel of Figure 2. For an easier comparison, the monthly CPI-based REERs have been annualized and included in the same panel. The trade-weighted real effective exchange rate based on the GDP deflator appreciated in the first two years of the sample and subsequently stayed well below the CPI-based indices. The events of 1993-94 that show up in the CPI-based indices are almost invisible in the REER based on the GDP deflator. As the GDP deflator does incorporate the ratio of the relative prices of nontradable to tradable goods at home and abroad, it might well be that the CPI-based indicators sharply appreciated in 1992-93—and thus point to a loss in competitiveness—because the prices of goods and services contained in the CPI basket increased more than those in the GDP deflator. Like the trade-weighted indicators, the tourism-weighted real effective exchange rates based on the CPI and GDP deflators (Figure 2, top panel) show a depreciation of the REER between 1988 and 1991, a sharp appreciation between 1992 and 1993 and a depreciation after 1994. As in the monthly index of Figure 1 (bottom panel), the impact of the ERM crises is clearly visible.

Figure 2.
Figure 2.

The Gambia: Real Effective Exchange Rates Based on the GDP Deflator, the CPI and the Import Price Index, 1988-97

Citation: IMF Staff Country Reports 1999, 071; 10.5089/9781451815399.002.A002

Sources: IMF, International Financial Statistics, World Economic Outlook Database, and Direction of Trade Statistics; CSD of The Gambia; and staff estimates.

48. The trade-weighted REER calculated by using the import price index as a deflator (Figure 2, bottom panel) shows a different pattern, namely, an overall upward trend between 1988 and 1997, indicating a deterioration of the external competitiveness of The Gambia. The sharp increase from 1992 to 1993 strengthens the earlier argument that the rise in import prices was a major determinant of the sharp increase in the CPI during that period. The tourism-weighted REER that is deflated by the import price index follows a similar pattern to that of the annual GDP- and CPI-deflated indices. However, the appreciation of the tourism-weighted REER based on import prices was much stronger from 1992 to 1993 (a 28 percent increase) than that of the CPI-based indicator during that period (a 16 percent increase). Two external effects might have forced the import price-based index up: the ERM crises, as mentioned earlier, and the tighter boarder controls implemented by Senegal.

49. Given that The Gambia is a small open economy and thus a price taker in world markets, the export deflator might appear to be a less reliable indicator of The Gambia’s external competitiveness. However, in light of the discussion above—and as The Gambia’s main exports are reexports and many of the usual tourist amenities are imported—the import price-deflated REER and the export price-deflated REER could be presumed to move closely together. As this is indeed the case, no export price-deflated REER is shown in this chapter.

Labor cost-based indicators

50. Figure 3 shows the REER indices based on unit labor costs. Because of limitations in data availability and quality, only the major industrialized trading partners are included. While for these countries data on unit labor costs for the total economy are available, a measure of labor costs had to be constructed for The Gambia. Accordingly, wage developments in the public sector over the past decade were used as a proxy for labor costs. Given that public sector wages are indicative of private sector wage developments in The Gambia, this approximation seems reasonable. To account for changes in labor productivity, a proxy for productivity growth was constructed on the basis of population growth, labor force shares, and real GDP growth rates.14 Both the trade-weighted and the tourism-weighted REERs based on the above-described labor cost deflator indicate a sharp REER appreciation at the beginning of the sample period (15 percent for the trade-weighted and 14 percent for the tourism-weighted index). This is primarily due to a change in the pay scale of the public sector in 1989, resulting in a sharp overall wage increase. Furthermore, not only the dalasi but also all major trading partners’ currencies depreciated against the US dollar during that period. From 1989 to 1992, both indices indicate a continuous depreciation of the REER (of about 32 percent), suggesting an improvement in The Gambia’s external competitiveness. This depreciation can be explained by the similarity of labor cost developments across the partner countries and the movement of the trading partners’ currencies in the opposite direction to the dalasi’s. As was noted in the discussion on the CPI- and import price-based REERs, the ERM crises are more visible in the tourism-weighted index (bottom panel of Figure 3).

Figure 3.
Figure 3.

The Gambia: Real Effective Exchange Rates Based on Labor Costs, 1988-97

(Jan. 1990=100)

Citation: IMF Staff Country Reports 1999, 071; 10.5089/9781451815399.002.A002

Sources: IMF, International Financial Statistics, OECD, CSD of The Gambia; and staff estimates.

The internal real exchange rate

51. Another way of looking at a country’s competitiveness in international markets is to examine the so-called internal real exchange rate (RERN). As pointed out by Hernández-Catá and others (1998), the external real exchange rates might not be good indicators of competitiveness if the country is a small, open economy, because its prices of tradable goods are determined in world markets. Thus, domestic price changes might not fully reflect changes in production costs. One way out of this dilemma is to look at the internal real exchange rate, which is measured as the ratio of the domestic price of nontradable goods to the domestic price of tradable goods. This indicator therefore looks at the domestic allocation of resources between the tradable and nontradable sectors. If, for example, the price of nontradable goods increases, resources will be shifted to that sector, resulting in a deterioration of export and import competing sectors. To approximate the price of tradable goods, one could use either the import price index or the export price index. If a country’s exports are rather undiversified, the import price index is the more appropriate measure. As the domestic CPI is a weighted average of prices of tradable and nontradable goods, it is straightforward to calculate the internal real exchange rate:15

CPIPm=PmyPn1yPm=[PnPm]1y=(RERN)1yRERN=[CPIPm]11y,

where Pm is the import price index (measuring the price of tradables), Pn is the price of nontradables and y is the weight of tradable goods in the domestic CPI. The weighty has been determined by summing up the weights for tradables in The Gambia’s domestic CPI at 71.9 percent.16

52. The top panel of Figure 4 shows The Gambia’s RERN, where the price index of tradable goods is calculated using the import price index, the export price index, and the weighted average of these indices. A feature common to the previously analyzed indicators and the RERN indicators is the sharp increase in the indices between 1991 and 1994. The increase of all RERN measures in 1997 suggests that prices of nontradable goods increased more rapidly than the price of tradables. In fact, while the overall CPI of The Gambia increased by 2.8 percent, the import price index decreased by 3.2 percent and the export price index declined by 0.14 percent. The result of this exercise indicates that there is a trend appreciation of the real internal exchange rate over the past decade.

Figure 4.
Figure 4.

The Gambia: Real Internal Exchange Rate and Terms of Trade, 1988-1997

(Index, 1990=100)

Citation: IMF Staff Country Reports 1999, 071; 10.5089/9781451815399.002.A002

Sources: IMF, International Financial Statistics, Direction of Trade Statistics, CSD of The Gambia; and staff estimates.

D. Equilibrium Real Exchange Rates

53. As is well known, movements in real exchange rate indicators should always be analyzed with respect to the equilibrium real exchange rate. The reason is that a country does not necessarily lose in terms of external competitiveness in case of an appreciation of the real exchange rate if at the same time the equilibrium real exchange rate appreciates. Edwards (1994), for example, provides an estimation of the equilibrium real exchange rate for developing countries.17 The estimation of an Edwards-type model did not prove to be fruitful. Neither real growth nor an increase in domestic credit or the terms of trade were significant in explaining the equilibrium real exchange rate once the model was corrected for residual autocorrelation. Additional policy variables could not be included because of lack of data. Among policy-related factors, such as the supply of domestic credit or the size of the fiscal deficit, a fundamental determinant of the equilibrium real exchange rate is seen to be the terms of trade. A popular view is that an improvement in the terms of trade results in an equilibrium real appreciation.18 In fact, as seen in the bottom panel of Figure 4, the persistent increase over 1994-97 period in The Gambia’s terms of trade would suggest at least in part an equilibrium real appreciation. For the rest of the sample period, The Gambia’s terms of trade index remained fairly stable, fluctuating within a 5 percent range.

E. The Gambia’s External Competitiveness vis-à-vis its Neighbors

Exchange rate based comparison

54. The external competitiveness of The Gambia is also compared with that of some neighboring countries: Guinea, Guinea-Bissau, Mali, and Senegal. The REER index used for this comparison is taken from the IMF’s Information Notice System.19 It uses the major trading partners’ shares of trade as weights and the CPI as deflator. The analysis covers the period from January 1988 to March 1998. Figure 5 compares The Gambia’s external competitiveness with that of its neighboring countries.

Figure 5.
Figure 5.

The Gambia: Competitiveness Relative to Neighboring Countries, January 1988-March 1998

(Ratio of Gambian REER index to neigboring country’s index, 1990=100)

Citation: IMF Staff Country Reports 1999, 071; 10.5089/9781451815399.002.A002

Source: IMF, Information Notice System; and staff estimates.

55. Figure 5 shows The Gambia’s REER index as a ratio of its respective neighboring countries’ REER indices. Strikingly, until the devaluation of the CFA franc in January 1994, the ratios indicate that The Gambia did fairly well relative to its neighbors. However, once distortions in the CFA franc zone were removed with the devaluation, Senegal and Mali experienced large gains in their external competitiveness relative to The Gambia. Since Senegal is a major competitor with The Gambia, in particular with respect to tourism, this remains an important issue that has to be addressed.

Some general indicators

56. In a less technical way one could compare a country’s competitive position relative to other countries simply by looking at indicators such as energy prices, transportation costs, communication costs, port handling and the infrastructure in general. Whether a country can attract foreign investment depends, among other things, also on the cost of doing business and the bureaucracy which is involved in setting up new businesses. Table 2 below depicts some basic energy and communication prices in The Gambia, Côte d’Ivoire, Senegal and Mali.

Table 2.

The Gambia: Energy Prices Relative to Neighboring Countries

article image
Source: Data on Mali, Senegal and Côte d’Ivoire are based on a 1996 Chamber of Commerce of Senegal publication. Data on The Gambia for 1996 are provided by the CSD. National currencies (dalasis and CFA francs) have been converted into dollars at the average 1996 exchange rate. Data on phone prices in The Gambia were obtained from Gamtel and refer to 1999.

57. Table 2 shows that compared with neighboring countries, The Gambia has the highest energy prices in dollar terms. With tourism as a major source of income in the service sector, a price of about 26 cents per kilowatt hour for hotels adds substantially to the operating costs of the hotel business, given the high energy needs of hotels. Also straightforward are the implications of higher fuel prices. Most of The Gambia’s reexport trade goes by road. The natural thing for traders to do is thus to refuel outside The Gambia.20

F. Conclusions and Policy Implications

58. The Gambia’s external competitiveness has been assessed using monthly CPI-based real effective exchange rates, annual CPI-, GDP-, import price-, and labor cost-based real effective exchange rates, and the internal real exchange rate. The chapter constructed different weighting schemes, namely, on the basis of partner country’s shares in international trade and tourist arrivals in The Gambia. The following results emerged.

59. REER indices which have been calculated on the basis of the CPI do not show a clear trend but merely fluctuate, in particular during the ERM crises and during the mid-1993 and early 1994 events in the CFA franc zone. Because of the different weights attached to the different types of indices, the impact of these events differed for each set of variables. The same applies to the tourism-weighted and GDP deflated or import price deflated indices. The trade-weighted and GDP deflated index, on the other hand, show a declining trend, which would suggest an improvement in the external competitiveness of The Gambia. On the other hand, the indices that indicate a deterioration in the competitive position of The Gambia, thus, showing an upward trend, turned out to be the trade-weighted import price deflated index, the labor cost deflated indices (1992-94), and the real internal exchange rate indices.

60. Although the above mentioned indicators do not suggest a major deterioration of The Gambia’s external competitiveness, Senegal and Mali improved their external competitiveness relative to The Gambia significantly once pre-existing distortions were removed with the CFA franc devaluation in January 1994.

61. Given that an important trading partner—Senegal—has significantly improved its external competitiveness relative to The Gambia, the task for the Gambian economy now is to become more efficient and increase its attractiveness as a trading partner and a business address. The Gambia could attract business by improving services in the port area of Banjul and providing them more efficiently. Another important issue is the much-needed reduction of energy costs. Finally, with inflation at a very low level at 1.1 percent in 1998, increases in wages have to stay in line with productivity in order for The Gambia to regain some of the lost export competitiveness.

APPENDIX I: Labor Market Developments

This appendix discusses developments in the labor markets of The Gambia and its major trading partners, as well as the methodology used to construct the labor cost index for The Gambia. The annual wages in the public sector were used as an indicator for economy-wide wage developments, a proxy for labor cost. Labor force growth was approximated by population growth times the labor share in the total population. The proxy for productivity growth was then calculated as the difference between real GDP growth and labor force growth, ignoring the impact of changes in physical capital on productivity. On the basis of this proxy, the labor cost index was constructed. For an illustration, see Figure 6 below, which shows labor cost developments in the Gambia and its major industrial country trading partners. Table 3 gives an overview of some growth rates.

Table 3.

The Gambia: Real GDP, Labor Market Developments, Population and Inflation. 1988-97

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Figure 6.
Figure 6.

The Gambia: Labor Cost Developments Relative to Major Industrial Trading Partners, 1988-97

Citation: IMF Staff Country Reports 1999, 071; 10.5089/9781451815399.002.A002

Sources: OECD, CSD of The Gambia; and staff estimates.

References

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8

Prepared by Christian H. Beddies in collaboration with Matthew T. Jones.

12

See Chapter IV for details.

13

Note that the INS REER does not include all countries to determine the trade weights and does not use tourism data in the case of The Gambia. The total average trade volume (excluding reexports) is obtained by combining the series on average exports (of The Gambia to the rest of the world) over the past ten years with the series on average imports (by The Gambia from the rest of the world) over the past ten years.

14

See the Appendix for details.

16

The ratio of nontraded to traded goods could not be compiled directly, as detailed data on the composition of the domestic CPI are not available for the entire sample.

17

See Faruqee (1998) for an analysis of equilibrium real exchange rates in industrialized countries.

18

See Edwards (1994). From a theoretical viewpoint this result is ambiguous. The direction of the effect depends, among other things, on the elasticity of the demand for imports. In fact, the income effect of an improvement of the terms of trade, which increases aggregate demand and thus puts upward pressure on the price of nontradables has to dominate the substitution effect, which diverts resources and consumption out of the nontradable sector.

19

Again, all indices were rebased to January 1990.

20

During a recent visit to The Gambia, the mission was told that this happens with flights arriving in Banjul, going back via Dakar. Rather than refueling in Banjul, airlines seem to make use of the lower fuel prices in Senegal.

The Gambia: Selected Issues
Author: International Monetary Fund
  • View in gallery

    The Gambia: Real and Nominal Exchange Rates and Real Effective Exchange Rates Based on the CPI, January 1988-March 1998

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    The Gambia: Real Effective Exchange Rates Based on the GDP Deflator, the CPI and the Import Price Index, 1988-97

  • View in gallery

    The Gambia: Real Effective Exchange Rates Based on Labor Costs, 1988-97

    (Jan. 1990=100)

  • View in gallery

    The Gambia: Real Internal Exchange Rate and Terms of Trade, 1988-1997

    (Index, 1990=100)

  • View in gallery

    The Gambia: Competitiveness Relative to Neighboring Countries, January 1988-March 1998

    (Ratio of Gambian REER index to neigboring country’s index, 1990=100)

  • View in gallery

    The Gambia: Labor Cost Developments Relative to Major Industrial Trading Partners, 1988-97