The Gambia
2006 Article IV Consultation and Assessment of Performance Under the Staff-Monitored Program-Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for The Gambia
Author: International Monetary Fund
Publication Date:
19 Dec 2006
eISBN:
9781451815542
Language:
English
Keywords:
ISCR; CR; lending; deficit; treasury bill; yield; consumer price index; debt relief; base year; GDP deflator; regulatory agency
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The authorities’ response to policy recommendations in the 2005 Article IV Consultation has been generally positive, and authorities successfully completed an SMP. The appreciation reflects the tightening of monetary policy and increased inflows of remittances, transfers, and FDI. The Gambian economy has stayed relatively competitive. The principal purpose of the SMP was to help the authorities reestablish a policy track record. In particular, over commitments, expenditure overruns, and extrabudgetary expenditures risk further accumulation of domestic arrears and/or increased domestic borrowing.

Abstract

The authorities’ response to policy recommendations in the 2005 Article IV Consultation has been generally positive, and authorities successfully completed an SMP. The appreciation reflects the tightening of monetary policy and increased inflows of remittances, transfers, and FDI. The Gambian economy has stayed relatively competitive. The principal purpose of the SMP was to help the authorities reestablish a policy track record. In particular, over commitments, expenditure overruns, and extrabudgetary expenditures risk further accumulation of domestic arrears and/or increased domestic borrowing.

I. Introduction

1. The Gambia is at a crossroad in its economic development. Though over the past two and a half years the authorities have succeeded in achieving macroeconomic stability, the economy remains highly vulnerable to exogenous and policy-induced shocks. In recent years, shocks have included drought, a sharp depreciation of the exchange rate, disruptions to groundnut marketing arrangements, and closure of the borders with Senegal. To build on the recent stabilization, the authorities need to make a decisive long-term commitment to a reform agenda that will promote growth and reduce poverty. Such an agenda should include strengthening governance and accountability in public finances and at the central bank, a deepening of the financial system, and improving the investment climate to foster private sector development.

2. A combination of exogenous shocks, fiscal slippages, and accommodating monetary policy derailed The Gambia’s last PRGF-supported program soon after it was approved in 2002. In 2003, staff discovered that data had been misreported to the Fund under the 1998–2001 Enhanced Structural Adjustment Facility (ESAF)/PRGF arrangement, and a Safeguards Assessment undertaken by the Fund revealed questionable audit practices and a breakdown in internal controls at the Central Bank of The Gambia (CBG). Following delays in implementing measures specified by Fund staff to address the weaknesses revealed by the Safeguards Assessment, the PRGF arrangement expired in July 2005 without a single review being completed.1

3. The authorities’ response to policy recommendations in the 2005 Article IV consultation has been generally positive (Box 1 ), and they successfully completed an SMP spanning October 2005–March 2006. 2 They are eager for a new PRGF arrangement so that they can make progress toward the completion point under the Heavily Indebted Poor Countries (HIPC) initiative and benefit from debt relief under both the Enhanced HIPC initiative and the Multilateral Debt Relief Initiative (MDRI). The results of a debt sustainability analysis undertaken as part of the Article IV consultation indicate that the country is currently debt distressed—with all the key debt and debt service indicators well above indicative thresholds—and stress tests suggest that it will remain at modest risk of debt distress even after MDRI relief.

4. Given recent political events and forthcoming elections, staff pointed out the potential adverse effects of political developments on the country’s economic prospects. In particular, donors are concerned about political governance issues. In June 2006, the Millennium Challenge Corporation (MCC) of the United States suspended The Gambia’s eligibility for assistance, citing among other factors, human rights abuses and increased restrictions on political parties and press freedom.

The Authorities’ Response to the 2005 Article IV Consultation Recommendations

  • The authorities curtailed discretionary expenditures in the second half of 2005, but were unable to offset completely the impact of extrabudgetary expenditures early in the year.

  • The retail prices of petroleum products were raised in July 2005 and again in January 2006 to curtail subsidies and shore up government revenues. The authorities review prices every month and adjust them when warranted to avoid budget subsidies for these products in the aggregate. The price of kerosene is cross-subsidized by premium petrol and diesel prices.

  • The authorities have made good progress in implementing an Action Plan to strengthen internal controls at the CBG. The plan approved by the CBG Board in July 2005 reflected recommendations of new external auditors and of the Fund’s Safeguards Assessment.

  • A new Act aimed at strengthening the operational independence of the CBG was passed by the national assembly in December 2005; the president gave his assent in January 2006.

  • The government took some steps to strengthen public financial management and to enhance transparency and accountability in the budget process. Regulations to operationalize the Government Budget Management and Accountability Act (2004) are being implemented. A commitment control system has been introduced on a pilot basis with Fund technical assistance.

  • The monopoly of the Gambian Agricultural Marketing Corporation (GAMCO) in purchasing groundnuts was broken, but other reforms in the groundnut sector have stalled. A government decision to increase substantially the financial requirement for licensing groundnut buyers/operators led to the then-new GAMCO monopolizing crop purchases and processing in the 2004/05 season. For the 2005/06 season, five operators were licensed, including the Gambia Groundnut Corporation (GGC) which previously had been limited to providing storage and transportation services. The authorities have fallen behind in their schedule to privatize GGC (a HIPC completion point trigger).

II. Recent Economic Developments and Performance Under the SMP

A. Recent Economic Developments

5. The macroeconomic environment has improved significantly over the last few years and was again favorable in the first half of 2006 (Figure 1, Table 1).

The Gambia: Selected Economic and Financial Indicators, 2002–05

article image
Sources: Gambian authorities; IMF staff estimates and projections.

Defined as domestic revenue minus expenditure and net lending, excluding externally financed capital expenditure.

Including official transfers.

Figure 1.
Figure 1.

The Gambia: Selected Economic and Financial Indicators, 2001–June 2006

Citation: IMF Staff Country Reports 2006, 444; 10.5089/9781451815542.002.A001

Sources: Gambian authorities; IMF staff estimates.
Table 1.

The Gambia: Selected Economic and Financial Indicators, 2002–11

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Sources: Gambian authorities; IMF staff estimates and projections.

Computed based on values in U.S. dollars.

Excluding reexports and imports for reexport.

Including advances to the government in foreign currencies.

Data presented in 2006 represent the yield as of June 27, 2006.

Defined as domestic revenue minus expenditure and net lending, excluding externally financed capital expenditure.

Defined as domestic revenue minus expenditure and net lending, excluding interest payments and externally financed capital expenditure.

  • In spite of large adverse terms of trade movements, real GDP growth rebounded from a drought-induced decline in 2002 to an annual average of 5.7 percent per year for 2003-05 (Table 1.), outpacing average annual population growth (estimated at 2.8 percent). Growth was broad-based, led by agriculture, construction, hotels and restaurants, and communications (Table 2).

  • Inflation fell to low single-digit levels, underpinned by a tightened monetary policy stance. Year-on-year inflation as measured by the consumer price index fell from a peak of 21 percent in August 2003 to 8 percent in December 2004 and 1.8 percent in December 2005, and stayed below 2 percent in the first six months of 2006. The annual rate of growth in broad money fell from 43 percent at end-2003 to around 13 percent at end-June 2006.

  • Though treasury bill yields and banks’ lending rates have fallen, they are still very high in real terms, reflecting high levels of government domestic borrowing in the past, and more recently the CBG’s cautious approach to lowering its rediscount rate. The CBG reduced the rediscount rate gradually from 33 percent at the end of 2004 to 15 percent in May 2006. In the government securities market, the average yield on treasury bills fell from 30 percent at the end of December 2004 to 16 percent at the end of December 2005 and to 14.5 percent at the end of June 2006. The lending rates of commercial banks have declined more slowly; prime rates were reported to be around 19 percent in June 2006.

Table 2.

The Gambia: Selected National Accounts Indicators, 2002–11

(Annual percentage changes in constant prices)

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Sources: Gambian authorities; IMF staff estimates and projections.

6. The fiscal adjustment effort slackened in 2005 compared to 2004 (Figure 2, Table 3). After registering a surplus of 2.4 percent of GDP in 2004, the basic balance—a proxy for the domestic fiscal effort—was near balance in 2005, reflecting lower customs revenues and higher domestic interest payments. 3 A two-month closure of the border with Senegal pushed customs revenues down, and high domestic debt at the end of 2004 resulted in a substantial increase in domestic interest payments.

Figure 2.
Figure 2.

The Gambia: Fiscal Developments, 2001–06

(As a Percentage of GDP)

Citation: IMF Staff Country Reports 2006, 444; 10.5089/9781451815542.002.A001

Source: Gambian authorities; IMF staff estimates and projections.
Table 3.

The Gambia: Central Government Operations

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Sources: Gambian authorities; IMF staff estimates and projections.

Domestic revenue - expenditure and net lending, excluding capital spending financed by external loans

Domestic revenue -expenditure and net lending, excluding interest payments and externally financed capital spending [It includes HIPC-funded expenditures on capital.]

Table 4.

The Gambia: Monetary Survey, 2002-11

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Sources: Gambian authorities; IMF staff estimates and projections.

Excluding advances to the government in foreign currencies.

These advances reflect previously unrecorded public spending and borrowing in 2001, financed by the Central Bank of The Gambia (CBG), and the previously unrecorded depletion of foreign exchange reserves in 2001-03 as reported by the authorities on October 28, 2003.

In March 2003, the government instructed the CBG to lend the equivalent of D137 million in U.S. dollars to a newly created public enterprise for a seismic survey of offshore oil deposits.

Claims on foreign exchange bureaus reflect the delayed delivery of foreign currency purchased on a spot basis.