On behalf of the Gambian authorities we thank staff for the candid and constructive dialogue during the Article IV consultations and the review of the country’s performance under the SMP. We also thank the Executive Board and Management for their continued support. The authorities appreciate the advice extended by the Fund and are in general agreement with the thrust of the staff report. As a result of the strengthened macroeconomic management, The Gambia has made significant progress towards macroeconomic stability in recent years. However, the economy continues to be vulnerable to external shocks including drought and higher oil prices. Public debt also continues to be high and unsustainable. The authorities look forward to negotiating a new PRGF arrangement with the Fund, which will be critical in anchoring their reform program, unlocking donor support, obtaining debt relief under enhanced HIPC and MDRI and realizing some fiscal space which will allow allocation of resources to development and poverty reducing activities.

Macroeconomic performance in 2005 was broadly favorable with growth in real GDP being supported by agriculture, construction and services sectors. The level of inflation remained in the low single-digits for over a year as a result of the tight monetary policy regime adopted by the authorities. The dalasi also continued to be stable, supported by the strong economic fundamentals and robust foreign exchange inflows.

Fiscal performance weakened somewhat in 2005 as a result of slightly lower revenues, a marked decline in grants and increased expenditures. Lower international trade tax revenue—attributable in part to a two-month closure of the border with Senegal—was largely responsible for the lower revenue performance. On the expenditure side, higher domestic interest payments were the main factors behind the increase. The size of domestic interest payments, at 47 percent of current spending in 2005, was a reflection of the high interest rates and domestic debt in 2004 which was issued to finance the much needed poverty reducing expenditure in the absence of adequate donor support as well as for monetary policy operations.

The external current account deficit (including official transfers) widened markedly in 2005, largely as a result of increased imports, in particular, the higher oil import bill. In spite of a marked increase in production in the 2004/05 crop season, the export of groundnuts and their products almost collapsed in 2005 on account of a failure in marketing arrangements. The current account deficit was financed by increased private capital inflows and some official concessional loans. The overall external position remained comfortable, with the level of gross international reserves of about four months of imports.

The Gambia’s good performance under the SMP is an indicator of the authorities’ commitment to improve macroeconomic management and establish a track record of sound policy implementation. All the quantitative targets and structural benchmarks were met, albeit a few with a slight delay. Internal controls at the CBG were strengthened by putting in place guidelines and procedures for improving accounting practices and controls in reserves management. The authorities have also begun improving public financial management and accountability by reducing the backlog of unaudited government accounts.

Significant progress has been made in improving fiscal performance over the past year and the authorities are committed to stepping up their efforts to sustain this performance. They have reassured that the slippage in budget implementation as a result of higher than budgeted expenditure on the AU summit was a once off occurrence that would not be repeated again. This was mainly a result of the significant shortfall in external assistance that the country expected for financing the summit. To mitigate against the impact created by hosting the summit, the authorities plan to sell some of the assets acquired for the summit. The basic fiscal balance is still expected to generate a surplus, thus indicating improved fiscal effort relative to last year.

High interest payments continue to exert tremendous strain on the budget and divert resources away from poverty reducing and growth promoting expenditures. This is evident in the fact that PRSP related spending fell short of the budget estimates in 2005. The high interest payments reflect the high level of domestic debt for financing the deficit and the tight monetary policy. The authorities therefore plan to contain domestic borrowing and to finance future budget shortfalls through concessional borrowing and grants. This is expected to alleviate the problem of high interest payments through reductions in the stock of domestic debt and interest rates. The authorities also plan to pay off half of their CBG long term loan.

The authorities are committed to improving budget formulation processes and stem the problem of arrears arising from inadequate budgetary provision for counterpart funding of donor funded projects. They are currently in the process of implementing the Integrated Financial Management Information System (IFMS), with the assistance of the World Bank, to improve public financial management. To facilitate performance in the interim, they plan to extend the commitment control system that was introduced on a pilot basis in 2005 to cover all budget units. Technical assistance from the Fund’s regional advisor has been requested to build capacity in this regard. On the revenue side the authorities are taking measures to improve tax administration and promote tax compliance.

The authorities are also taking steps to improve transparency and timeliness of reporting on fiscal operations. They are currently in the process of clearing the backlog of unaudited government accounts and their submission to the Auditor General is expected to be brought up to date by the end of 2007.

The primary objective of monetary policy will continue to be the pursuit of price stability, through monetary targeting. The tight monetary policy stance adopted by the authorities has succeeded in bringing inflation to low single digits. Implementation of the new central Bank legislation which provides for enhanced central bank independence is also expected to further the CBG’s capacity in execution of monetary policy.

The financial sector remains sound with banks well capitalized and profitable. However, credit extension to the private sector is low. To address this, the CBG in collaboration with representatives of the Banking Association, is undertaking a review of the legal system with a view to identifying and addressing impediments to lending. They also plan to establish a credit bureau which will provide reference on credit worthiness of individuals and private entities seeking credit from the financial sector. The authorities agree with staff that there may be room for increased competition in the banking sector. In view of this they hope that the two new banks that the CBG has licensed to begin business by the end of 2006 would enhance competition. The spread between commercial bank deposit and lending rates in the Gambia continues to be wide indicating that the bank costs may be high. Staff has identified the payoff to shareholders, overhead costs and the implicit cost of reserves as the main factors behind high bank costs. The reduction in the current high levels of government domestic borrowing, due to a return to fiscal stability, is expected to facilitate a reduction in risk premia and the decline in the implicit rate on government securities. This is expected to reduce bank holdings of treasury bills, and increase the supply of loanable funds thereby improving financial intermediation. The CBG will also consider staff’s recommendation to help reduce bank costs by lowering the levels of statutory reserves.

As indicated by the joint Fund-Bank debt sustainability analysis, the level of public debt is high and unsustainable and without full delivery of debt relief The Gambia is deemed to be under debt distress. It is therefore very important for the country to enter into a PRGF arrangement which will facilitate reaching the HIPC completion point and further debt relief under the MDRI. The Gambia has made significant progress towards meeting completion point triggers and it is expected that the completion point will be reached by mid 2007 and the fiscal space provided by the debt relief will be used to increase pro-poor spending.

Achievement of high, sustainable and broad based growth is necessary for The Gambia to reduce poverty and meet the MDGs. Significant progress has been made in the promotion of the tourism sector which has attracted a lot of investment and has been growing at an annual average growth rate of 10 percent since 2002. The authorities are cognizant of the important role of competitiveness and the investment climate in promoting private sector led growth. The recent implementation of the ECOWAS common external tariff and the increase of sales tax to be in line with regional taxes is likely to have a negative effect on the competitiveness of the Gambia’s re-export trade to neighboring countries. However, the authorities believe that, given the small size of the economy, the potential benefits of regional integration and duty free access to the whole ECOWAS region will outweigh the costs.

The authorities agree with staff that fast tracking structural reforms aimed at improving Gambia’s external competitiveness and the investment climate is imperative. In this regard they have, with the support of the World Bank, implemented the “Gateway” project which aims to make Gambia a globally competitive export and processing centre through the expansion of private investment in export oriented production and employment. Significant progress under the project has been made. This includes the establishment of the Gambia Investment Promotion and Free Zone Agency (GIPFZA), implementation of several road projects to improve transportation infrastructure, development of physical infrastructure for the free zone and opening up of the energy and telecommunications sectors to private participation.

Action has also been taken to strengthen the country’s legal framework and align the business regulatory framework with the rest of the world. To this end, a commercial court was established in 2005 with the goal of speeding up dispute resolution and the authorities have requested the Commonwealth Secretariat to assist with judges to clear the backlog of cases before the commercial court. An Alternative Dispute Resolution Act has also been passed to alleviate the pressure on the commercial court and work is underway to make it functional. In addition, the authorities are also undertaking a review of the Companies Act to enhance its comprehensiveness and strengthen its financial reporting provisions. The authorities acknowledge that more still needs to be done to improve the business climate and they are committed to taking additional measures to make the country a more attractive investment location.

The authorities acknowledge that the significant deficiencies in statistics complicate macroeconomic analysis and policy formulation. They are therefore taking appropriate action to alleviate this problem. In light of the capacity constraints being experienced in dealing with this issue the authorities request continued technical assistance from the Fund in order to enhance progress in this area.

In conclusion, we would like to reiterate the authorities’ commitment to consolidating progress made towards macroeconomic stability, promotion of growth and implementation of their reform agenda. They hope they can continue to count on the continued support of the Fund and the international community in general in mitigating the enormous capacity and financial constraints that they face in their pursuit of these objectives. This is particularly important for the country to reduce poverty and make progress towards achieving the MDGs. The authorities look forward to the negotiation of the new PRGF program later this month and to its successful implementation which will pave the way for debt relief and creation of fiscal space to tackle poverty reduction.