The Gambia
Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility and for Additional Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries: Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for The Gambia
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International Monetary Fund
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Publication Date:
22 Mar 2007
eISBN:
9781451967135
Language:
English
Keywords:
ISCR; CR; government; priority government expenditure; SDR; Gambia; debt service; exchange rate; balance of payments; base year; excess reserves; Monetary base
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This paper discusses the Request from Gambia for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF) and for Additional Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries (HIPC). The Gambian authorities are requesting a three-year PRGF arrangement to support their economic reform program and to help them make progress toward the HIPC completion point. The program aims to consolidate recently achieved macroeconomic stabilization while addressing the formidable challenges faced by the country, including debt distress, vulnerability to exogenous shocks, and widespread poverty.

Abstract

This paper discusses the Request from Gambia for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF) and for Additional Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries (HIPC). The Gambian authorities are requesting a three-year PRGF arrangement to support their economic reform program and to help them make progress toward the HIPC completion point. The program aims to consolidate recently achieved macroeconomic stabilization while addressing the formidable challenges faced by the country, including debt distress, vulnerability to exogenous shocks, and widespread poverty.

I. Introduction

1. The Gambian authorities are requesting a new three-year arrangement under the PRGF to support their economic reform program and to help them make progress toward completion point under the HIPC initiative. The authorities have been successful in stabilizing the economy over the last three years—inflation is down to low single-digit levels, the exchange rate has been relatively stable, and international reserves have been rebuilt to comfortable levels. Nevertheless, the country continues to face formidable economic challenges; it is debt-distressed, the economy remains vulnerable to exogenous shocks, and over 60 percent of the population lives below the poverty line.

2. The primary objectives of the program are to consolidate recent macroeconomic achievements and promote sustained high growth and poverty reduction. The program draws on the authorities’ recently completed second Poverty Reduction Strategy Paper (PRSP II) which integrates the Millennium Development Goals (MDGs) into its objectives. PRSP II is to be implemented during 2007–11. Policies to promote growth include increased public investment in infrastructure and human capital, and measures to improve the investment climate. Poverty reducing measures include steps to ensure that budget execution is better aligned to PRSP II priorities than was the case with the first PRSP.1

3. Program design is also informed by the findings of the ex post assessment (EPA) of Fund-supported programs in The Gambia undertaken by Fund staff in 2005.2 The EPA concluded that programs had failed to achieve many of their objectives because of insufficient commitment to key reforms on the part of the authorities (reflecting a lack of ownership), as well as flaws in program design (e.g., over-optimistic revenue projections and inadequate attention to capacity constraints).

4. Conditions are propitious for implementing far-reaching economic reforms. The beginning of a new five-year term for President Jammeh, the unveiling of an MDG-based PRSP II, and indications of increased project aid from development partners, provide an opportunity for the country to make a decisive break from past stop-go policies, remove structural impediments to private investment, and improve public financial management and accountability.

II. Recent Economic Developments

5. Real GDP growth recovered from a drought-induced decline in 2002 to average about 6 percent annually during 2003–06, outpacing estimated 2.8 percent annual population growth. The fastest growing sectors were hotels and restaurants (reflecting increased tourist arrivals), construction, and telecommunications. Services—mainly tourism-related activities, and transport and communications—dominate the economy, contributing over 60 percent of GDP.

6. A marked slowdown in broad money growth helped lower year-on-year consumer inflation from a peak of 21 percent in August 2003 to less than 3 percent since June 2005. As the macroeconomic environment improved, the CBG eased its monetary policy stance by gradually lowering the rediscount rate from 34 percent in September 2004 to 14 percent in October 2006. It also reduced the required reserve ratio on commercial banks’ deposit liabilities from 18 percent to 16 percent in October 2006.

uA01fig01

The Gambia: Growth in Real GDP, 2002–06

(Percent)

Citation: IMF Staff Country Reports 2007, 116; 10.5089/9781451967135.002.A001

Sources: Gambian authorities; IMF staff estimates and projections.
uA01fig02

The Gambia: Growth in Consumer Price Index, Reserve Money, and Broad Money, January 2001-October 2006

(Twelve-month changes; in percent)

Citation: IMF Staff Country Reports 2007, 116; 10.5089/9781451967135.002.A001

Sources: Gambian authorities.
uA01fig03

The Gambia: Fiscal Developments, 2003–06

(Percent of GDP)

Citation: IMF Staff Country Reports 2007, 116; 10.5089/9781451967135.002.A001

Sources: Gambian authorities; IMF staff estimates and projections.

7. After a strong adjustment effort in 2004, the fiscal basic balance deteriorated in 2005, reflecting the impact of extrabudgetary spending, lower customs revenues, and higher domestic interest payments.3Preliminary indications suggest that fiscal performance improved in 2006, though not as much as envisaged in the budget. Revenues were broadly in line with budget projections, while expenditures exceeded budgeted levels mainly on account of overruns associated with hosting the African Union (AU) summit. Interest payments—80 percent of which are on domestic debt—fell as envisaged to 6.6 percent of GDP, but remained some 35 percent of current expenditures. The larger-than-expected deficit was financed by increased domestic borrowing and additional capital revenue. The stock of outstanding domestic public debt is estimated at 32 percent of GDP at end-2006. In addition, domestic payments arrears accumulated over several years are estimated at 3 percent of GDP.

8. Nominal interest rates have fallen, but real rates remain very high. Notably, reductions in lending rates have lagged behind other key rates, reflecting a high-risk lending environment and insufficient competition among banks.

uA01fig04

The Gambia: Selected Nominal Interest Rates, 2001Q1–2006Q3

(Percent per year) 1/

Citation: IMF Staff Country Reports 2007, 116; 10.5089/9781451967135.002.A001

Sources: Gambian authorities; and IMF staff estimates.1/ Lending rate refers to the mid-point of rates reported by the commercial banks for loans to the redistribuitive trade sector.
uA01fig05

The Gambia: Selected Real Interest Rates, 2001Q1–2006Q3

(Percent per year) 1/

Citation: IMF Staff Country Reports 2007, 116; 10.5089/9781451967135.002.A001

Sources: Gambian authorities; and IMF staff estimates.1/ Lending rate refers to the mid-point of rates reported by the commercial banks for loans to the redistribuitive trade sector.
uA01fig06

The Gambia: Commercial Bank Claims on Private Sector and Public Enterprises, 2002Q1–2006Q3

Citation: IMF Staff Country Reports 2007, 116; 10.5089/9781451967135.002.A001

Source: Gambian authorities.

9. Credit to the private sector and public enterprises has rebounded strongly after contracting in 2004. Falling yields have reduced the attractiveness of treasury bills to banks relative to lending. Outstanding claims increased by 30 percent in the twelve months ending in September 2006, with loans to the agriculture, construction, and tourism sectors registering the fastest growth rates.

10. After widening substantially in 2005, the external current account deficit (including official transfers) narrowed significantly in 2006 (Table 1). However, at 14 percent of GDP, the current account deficit remains large. Highlights of external sector performance in 2006 included strong growth in tourism earnings and a recovery in groundnut exports from a near collapse in 2005. Foreign direct investment (FDI) and official concessional loans have been the main sources of financing for the current account deficit. The level of gross international reserves remains comfortable, at slightly more than four months of imports.

Table 1.

The Gambia: Selected Economic and Financial Indicators, 2004–11

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

Computed based on values in U.S. dollars.

Excluding reexports and imports for reexport.

Data for 2006 represent as of October 2006.

Including advances to the government in foreign currencies.

Weighted average for all maturities based on weekly auction data. Data shown for 2006 are for November.

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.

Exports of goods and nonfactor services (not including re-exports).

Figure 3.
Figure 3.

Effective Exchange Rates, January 2001–September 2006

(Index, 2000 = 100)

Citation: IMF Staff Country Reports 2007, 116; 10.5089/9781451967135.002.A001

Source: IMF, Information Notice System (INS).

11. The dalasi has appreciated slightly in nominal and real effective terms over the last two years, after massive depreciations during 2002–03. The recent appreciation reflects increased inflows of remittances, transfers, and FDI. The economy remains relatively competitive, as demonstrated by robust growth in tourism receipts (the main source of foreign exchange earnings).

12. The Gambia has a de facto managed floating exchange rate system. The CBG’s intervention in the foreign exchange market in the last two years has been largely limited to purchases to augment its international reserves.

uA01fig07

The Gambia: Sales of Foreign Exchange, January 2001- September 2006

(Millions of U.S. Dollars)

Citation: IMF Staff Country Reports 2007, 116; 10.5089/9781451967135.002.A001

Source: Gambian authorities.
uA01fig08

The Gambia: Purchase of Foreign Exchange, January 2001- September 2006

(Millions of U.S. Dollars)

Citation: IMF Staff Country Reports 2007, 116; 10.5089/9781451967135.002.A001

Source: Gambian authorities.

III. Macroeconomic Framework and Policies

13. The most pressing macroeconomic challenge facing the authorities is how to rebalance the policy mix in order to lower real interest rates, stimulate private investment, and create fiscal space for growth-promoting and poverty-reducing government expenditures. Fiscal adjustment is central to the program, designed to support a reduction in domestic interest rates. Increased external aid will help avoid undue fiscal contraction and boost growth. Structural reforms under the program include: measures to enhance CBG internal controls and operational independence to sustain macroeconomic stability; a strengthening of public financial management to ensure that aid and domestic resources are used effectively in line with national priorities; and creation of a credit reference bureau to deepen financial intermediation.

A. Consolidating Macroeconomic Stability

14. Key assumptions and objectives underlying the program’s medium-term macroeconomic framework for 2007–09 are (Tables 1-5):4

Table 2.

The Gambia: Central Government Operations, 2004–09

(Millions of dalasis, unless otherwise indicated)

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

After MDRI debt relief from 2007 onward.

The difference between financing and the overall balance of revenue and expenditure.

Domestic revenue - expenditure and net lending, excluding externally financed capital spending.

Domestic revenue - expenditure and net lending, excluding interest payments and externally financed capital spending

Including non-interest-bearing notes held by the CBG, net of balances in the sterilization account (which holds the proceeds from treasury bill sales), and net of balances held in the MDRI account.

Table 2.

The Gambia: Central Government Operations, 2004–09 (continued)

(Percent of GDP)

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

After MDRI debt relief from 2007 onward.

The difference between financing and the overall balance of revenue and expenditure.

Domestic revenue - expenditure and net lending, excluding externally financed capital spending.

Domestic revenue - expenditure and net lending, excluding interest payments and externally financed capital spending

Including non-interest-bearing notes held by the CBG, net of balances in the sterilization account (which holds the proceeds from treasury bill sales), and net of balances held in the MDRI account.

Table 3.

The Gambia: Monetary Survey, 2004–09

(Millions of dalasis, unless otherwise indicated)

article image
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 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.

Table 4.

The Gambia: Analytical Account of the Central Bank of The Gambia (CBG), 2004–09

(Millions of dalasis, unless otherwise indicated; end of period)

article image
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 CBG, and previously unrecorded depletion of foreign exchange reserves in 2001–03 as reported by the authorities on October 28, 2003.

Advances to commercial banks and commercial banks’ holdings of central bank bills.

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

Table 5.

The Gambia: Balance of Payments, 2004–11

(Millions of U.S. dollars, unless otherwise indicated)

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

Reflects the impact of MDRI stock relief from IDA and AfDF from 2007.

Includes arrears and debt relief. From 2007, includes debt relief from Paris Club; interim relief from multilaterals is treated as grants.

  • Real GDP average annual growth of 6.3 percent.

  • Annual inflation in the range of 2–4 percent.

  • The fiscal basic balance achieves an average annual surplus of 2.7 percent of GDP to bring down domestic public debt to a sustainable path, and to clear domestic payments arrears.

  • The external current account deficit (including official transfers) narrows steadily from 14 percent of GDP in 2006 to 11 percent in 2009, reflecting strong growth in tourism earnings and a slowdown in import growth as the level of FDI and official loans taper off.

  • International reserves are maintained around the equivalent of 4–5 months of import cover.

Structure of Real GDP and Sources of Growth, 2001–091

(Percent)

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

Based on real GDP at factor cost.

15. The services and industry sectors are expected to lead growth. Growth rates were revised, compared to those presented in the 2006 Article IV staff report, based on revised official national accounts estimates for 2004–06 and indications of sustained high levels of externally financed investments in the country. FDI in infrastructure related to tourism services has begun to pay off as tourist arrivals have risen sharply. The industry sector (especially construction) is projected to sustain the robust average annual growth rate (7 percent) of the last six years. Agriculture is projected to grow at 1 percent higher than the average over the last six years, but significantly less than the average for the last three years. Some FDI has gone into non-traditional agriculture and should boost growth in the sector.

16. Proposed policies and external debt relief are expected to help the country achieve debt sustainability. The stock of domestic public debt falls from 32 percent of GDP in 2006 to 23 percent in 2009. HIPC and MDRI debt relief help lower the net present value of external debt-to-GDP ratio from 41 percent in 2006 to 27 percent in 2009, falling below the indicative sustainability threshold for The Gambia (30 percent). A recent debt sustainability analysis (DSA) undertaken by staffs of the Fund and the World Bank concluded that The Gambia would remain at a moderate risk of falling back into debt distress even after receiving debt relief under the HIPC and MDRI initiatives.5 It stressed the importance of relying more on nondebt creating flows (grants and FDI) rather than loans for The Gambia’s public debt sustainability. The program builds in a shift in external financing from loans to grants (paragraph 18), and new external borrowing will be contracted on concessional terms only.

Fiscal policy

17. Fiscal adjustment is premised on sustaining revenues at about 21 percent of GDP, falling domestic interest payments, and nonrecurrence of exceptional expenditures such as those related to the AU summit and presidential elections. The fiscal effort is slightly higher in 2007 than in subsequent years to allow for a large repayment of arrears that year. Maintaining fiscal discipline is critical for containing the government’s domestic borrowing requirement and putting downward pressure on interest rates to reduce the heavy burden of domestic debt service on the budget. The projected decline in domestic interest payments assumes a steady fall in the average real yield on treasury bills from about 13 percent in 2006 to 8 percent in 2009. At end-2006, the average treasury bill yield across maturities had already fallen to about 10 percent in real terms.

The Gambia: Summary of Central Government Operations, 2003–09

(Percent of GDP)

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

Domestic revenue minus expenditure and net lending, excluding externally financed capital expenditures.

18. The program projects a significant increase in net external financing in US dollar terms, allowing for increased growth-promoting and poverty-reducing government expenditures. Project-related grants increase significantly in 2007 and then taper off. This reflects donor commitments to finance new projects, including a large European Union-sponsored roads project, and commitments by the World Bank and the African Development Bank to shift the composition of their assistance from loans to grants. Staff projections of external financing represent about 60 percent of donor commitments, and are about half of the authorities’ estimated requirement to fully implement PRSP II. The authorities are planning a donors conference in March/April 2007 where additional pledges will be sought.

The Gambia: Net Official External Financing, 2003–091

(Millions of U.S. dollars, unless otherwise indicated)

article image
Source: IMF staff estimates.

Excluding technical assistance.

Monetary policy

19. To meet the program’s inflation targets, broad money is targeted to expand at slightly above the growth rate of nominal GDP. Falling real interest rates and strong capital and grants inflows should boost real money demand. Commercial bank lending rates are projected to fall, following recent monetary easing and greater competition in the banking system from the arrival of two new entrants in 2006. The authorities need to monitor closely the capacity of the economy to absorb the expected increase in external resource inflows. Foreign-financed investment is likely to exert pressure on prices of scarce goods and services, such as skilled labor, while items such as food may not be significantly affected. The CBG considers it prudent to pause to assess the effects of the recent easing, before signaling any further change in policy.

B. Strengthening Public Financial Management and Accountability

20. The authorities are committed to improving all aspects of the budget process (MEFP, paragraphs 18 and 19). Weaknesses in budget formulation combined with poor budget execution have in the past led to overspending and large domestic payments arrears. The launching of the World Bank supported Integrated Financial Management Information System (IFMIS) in January 2007, should improve budget management considerably, including more effective commitment control to avoid the incurrence of new arrears.

21. To enhance accountability in the use of public resources, the government intends to clear the backlog of unaudited government accounts in 2007 and improve the transparency and comprehensiveness of the accounts (MEFP, paragraphs 22 and 23). Accounts for 2000–03 have been submitted to the Auditor-General, and the government has undertaken to submit those for 2004–06 before the end of 2007. The government will set up a central project management and aid coordination directorate at the Department of State for Finance and Economic Affairs (DoSFEA) which will compile information on aid inflows and the uses to which they are put. The government will also collect quarterly financial information on key public enterprises to maintain a record of possible quasi-fiscal activities and help monitor potential risks to the budget.

22. The authorities are taking steps to enhance revenue administration and collection (MEFP, paragraph 17). The 2007 budget provides resources for the Gambia Revenue Authority to recruit additional staff in critical areas and to upgrade equipment and software. The forthcoming issuance of taxpayer identification numbers should also help to improve tax collection.

C. Strengthening Central Bank of The Gambia Internal Controls and Operational Independence

23. The CBG is addressing vulnerabilities identified by a 2004 Safeguards Assessment, but is yet to make key control mechanisms fully effective. Notable progress has been made in strengthening accounting controls. However, vulnerabilities remain in controls over international reserves and procedures for extending credit to the government. The program contains measures to address the remaining vulnerabilities, based on the recent update Safeguards Assessment. Priority measures include semi-annual audits of monetary program data, the implementation of segregation of duties in the reserves management function, and a phased implementation of international accounting standards.

24. To strengthen the CBG’s operational independence, the government has undertaken to recapitalize the C (MEFP, paragraph 26). A return to profitability in 2006 after many years of making losses should also strengthen the CBG (MEFP, paragraph 25). The authorities will ensure that by the end of 2007, government borrowing from the CBG is brought within the limit stipulated in the law (MEFP, paragraph 27).

D. Promoting Growth and Poverty Reduction

Promoting growth

25. Tourism and trade are expected to remain important sources of growth. Tourism has been growing at an annual average rate of 10 percent since 2002, and should remain strong in light of recent and expected large investments. The impact on trade of a tariff increase in January 2006 as part of the implementation of the ECOWAS common external tariff needs further analysis.6 The authorities acknowledged that the tariff increase may adversely affect the re-export trade. However, they believe that the long-term benefits of duty-free access to the whole ECOWAS region would outweigh the costs.7

26. Weak transportation and energy infrastructure, the high cost of doing business, and a small domestic market remain serious impediments to growth. The authorities need to improve the investment climate, particularly in the legal and infrastructure areas. The Gambia was featured for the first time in the World Bank’s “doing business” rankings in 2006. It performed well in relation to other sub-Saharan African countries (14th out of 45 countries ranked) but did poorly globally, ranking 113th out of 175 countries. Areas of greatest weakness were taxation of companies, protecting investors, and access to credit. The World Bank is assisting with several studies to guide improvements in the investment climate and to promote the expansion and diversification of exports (MEFP, paragraph 32).

27. The CBG plans to establish a Credit Reference Bureau to help deepen financial intermediation. The financial sector in The Gambia is relatively sound, with high profitability and liquidity ratios and a relatively low share of nonperforming loans in total outstanding loans (Table 6). However, loan-to-deposit ratios are low and spreads in commercial interest rates are very wide, reflecting a low level of competition in the banking system, and a high-risk environment (partly due to weaknesses in the legal system).

Table 6.

The Gambia: Financial Soundness Indicators for the Banking Sector, 2000–September 2006

(Percent at end-of-period, unless otherwise indicated)

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Sources: Gambian authorities; IMF staff estimates.

Net income before extraordinary items and taxes divided by the average value of total assets (average of current and preceding end-year values).

Net income before extraordinary items and taxes divided by the average value of total capital and reserves (average of current and preceding end-year values).

Based on mid-rate for the range of lending rates.

Based on excess reserves for the end of the last week of each month as provided by the banks, and broad money as of month’s end.

Poverty reduction

28. Agriculture, which accounts for about one-quarter of GDP, is the principal source of livelihood for the vast majority of the population. Groundnuts cultivation remains the mainstay of the agricultural sector (about one-third of value-added), although its share has been declining. Disruptions in groundnut marketing over the last few seasons adversely affected the income of farmers. Plans to privatize the Gambia Groundnut Corporation have stalled, and the World Bank is helping the authorities explore options for moving forward while safeguarding the welfare of farmers (MEFP, paragraph 33).

29. The authorities have undertaken to ensure that PRSP-related expenditures are well protected in budget execution. A distinction is made in the budget between PRSP-related spending and discretionary spending at a departmental line-item level. Spending units have been instructed to ensure that allocations intended for poverty-reduction purposes are not diverted to other ends. The 2007 budget allocates over 40 percent of domestically-generated funds to poverty reduction (defined to include rehabilitation of key trunk roads).

E. Toward HIPC Completion Point

30. The HIPC completion point triggers are grouped under five headings (Table 7). They appear to have been met in two areas—poverty reduction and social sector reforms. In the area of macroeconomic stability, the conditions are expected to be met by end-July 2007. Work to fulfill the conditions in the remaining two areas—governance and structural reforms—is in progress, and the authorities expect to satisfy all the conditions around mid-2007.

Table 7.

The Gambia: HIPC Initiative Completion Point Triggers

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F. Other Issues

31. Data weaknesses and low implementation capacity have hampered economic management in The Gambia. The authorities are receiving technical assistance from the World Bank and the Fund to improve the quality and timeliness of statistics on consumer prices, national accounts and balance of payments (MEFP, paragraph 35). The Fund has also been providing technical assistance in the areas of monetary statistics, monetary operations, banking supervision and public financial management.

32. The authorities are initiating work on a comprehensive civil service reform program. They have requested the World Bank to undertake a study that would guide the formulation and implementation of a plan to establish a more efficient and better remunerated civil service. The African Development Bank is also considering a project targeted at improving the capacity to implement the PRSP.

IV. Access Level and Financing Assurances

33. The proposed access level is SDR 14 million (45 percent of quota) over three years (Table 8). This is in line with the norm for a fourth PRGF arrangement.8 The program projects small balance of payments surpluses over the medium-term, but experience suggests that adverse shocks can alter the outlook substantially. The recent DSA showed that the external outlook is highly sensitive to assumptions about export growth and non-debt creating inflows.

Table 8.

The Gambia: Proposed Schedule of Disbursements

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The Gambia’s quota is SDR 31.10 million.

34. The authorities are also requesting additional interim assistance under the enhanced HIPC Initiative in the amount of SDR 0.36 million in 2007. The Fund committed SDR 1.8 million in HIPC assistance at the decision point, of which SDR 80,000 was disbursed in interim assistance, before The Gambia’s last PRGF-supported program went off-track.

35. The first year of the program (2007) is fully financed based on commitments from donors and expected debt relief from multilateral and bilateral creditors. It is assumed that most of the debt relief will come in the second half of 2007 after the country reaches HIPC completion point. The Fund has received financing assurances from the Paris Club.9 The bulk of The Gambia’s external debt is owed to multilateral creditors, with the World Bank, African Development Bank and the Fund accounting for about 70 percent of total outstanding external debt at end-2005.

The Gambia: Nominal External Debt Outstanding, End-20051

(Millions of U.S. dollars, unless otherwise indicated)

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Source: Gambian authorities; IMF staff estimates.

Data are not reconciled with creditor statements.

V. Prior Actions, Program Monitoring, and Capacity to Repay the Fund

36. The authorities undertook to implement the following actions prior to IMF Executive Board consideration of their request for the new PRGF arrangement: (i) approval of a budget for 2007 by the National Assembly that is in line with the program with respect to the size of the fiscal basic balance; (ii) submission of government accounts for 2003 to the Auditor-General; and (iii) formulation of an action plan to bring government borrowing from the CBG in line with the limit under the CBG Act (2005) by end-2007.

37. Performance under the program will be monitored through: (i) a set of quantitative performance criteria and indicative targets (MEFP Table 1); (ii) a set of structural performance criteria and benchmarks (MEFP Table 2); and (iii) semi-annual program reviews. The quantitative targets for end-March 2007 and end-September 2007 are performance criteria; those for end-June 2007 and end-December 2007 are indicative targets. Definitions of all targeted variables and reporting requirements are contained in the Technical Memorandum of Understanding attached to the authorities letter of intent.

38. The Gambia has a good record of meeting its debt service obligations to the Fund, and is expected to continue in that vein. The debt service associated with the new disbursements from the Fund is relatively small over the medium-term; about 0.5 percent of total external debt service and 0.1 percent of exports (Table 9).

Table 9.

The Gambia: Indicators of Capacity to Repay the Fund, 2006–111

(Millions of dalasis, unless otherwise indicated)

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

Includes the prospective disbursement under the PRGF of SDR 14 millions (45 percent of quota); data for 2007 exclude MDRI stock relief. Data beyond 2007 include MDRI relief.

Exports of goods and nonfactor services (not including reexports).

VI. Risks to the Program

39. Persistently high real interest rates, shortfalls in donor support, and exogenous shocks pose the main risks to program objectives. Real interest rates are unlikely to continue falling if fiscal discipline breaks down, resulting in more domestic borrowing than programmed. Given The Gambia’s past record of stop-go policies, maintaining fiscal discipline will require commitment to achieving the program’s objectives by the highest political authorities. President Jammeh assured the mission of his government’s commitment to the program. In the event interest payments remain high in spite of the authorities’ best efforts, the program’s fiscal objectives will be safeguarded by new measures to boost revenues or cut non-PRSP related expenditures.

40. A substantial shortfall in donor support would jeopardize attainment of the authorities’ growth and poverty-reduction objectives, but is unlikely to affect the program’s fiscal targets in the short-term. The program assumes that external assistance is provided predominantly in the form of project aid; hence expenditures are predicated on the availability of the associated external financing. Donor engagement will depend to some extent on the authorities’ sustained commitment to economic reforms. In the past, some donors have also withheld support because of concerns about political freedoms and governance issues.

41. shocks that would be most damaging to program objectives are those that adversely impact tourism and trade—e.g., political instability or border closures. Adverse weather conditions would also lower growth and the welfare of farmers, but would not be as damaging to achieving short-term program targets. Responses to adverse shocks will be discussed in the context of program reviews.

VII. Staff Appraisal

42. Macroeconomic performance has improved significantly over the last few years. The authorities implemented strong financial policies to stabilize the economy following serious policy slippages in the early 2000s. They deserve credit for achieving low inflation, stabilizing the exchange rate, and rebuilding international reserves.

43. The program is aligned with the objectives set out in the new PRSP. The staff welcomes steps to integrate the PRSP into the budget process, and to safeguard poverty-reducing expenditure.

44. The program’s policies are appropriately designed to bring down the public debt to a sustainable level and consolidate macroeconomic stability. A reduction of domestic debt is essential to bring down interest rates and ease the debt-service burden. The program also rightly makes allowance for a speedy repayment of accumulated domestic arrears. Staff welcomes the measures taken to improve revenue collection and administration.

45. After much delay, the authorities are moving aggressively with plans to improve public financial management. The launching of IFMIS in January should facilitate the establishment of a comprehensive commitment control system by mid-2007, and enhance transparency and accountability in public financial management.

46. Monetary policy is appropriately prudent at this stage. The policy stance will be re-assessed as part of the first program review, against the backdrop of fiscal developments and the evolution of interest rates.

47. The CBG has made progress toward strengthening internal controls, however vulnerabilities remain in key safeguards areas. The program includes conditionality on priority actions based on the update Safeguards Assessment. Staff encourages the CBG to implement the recommendations of the update Safeguards Assessment.

48. Financial intermediation needs deepening. The licensing of two new banks and the plan to establish a credit bureau should help, but legal reforms are needed to remove disincentives to lending.

49. Staff recommends approval of the authorities’ request for a new three-year arrangement under the PRGF and for interim relief under the HIPC initiative.

APPENDIX I

Banjul, The Gambia

February 7, 2007

Mr. Rodrigo de Rato

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Mr. de Rato:

1. The macroeconomic environment in The Gambia has improved significantly over the last three years as a result of policies implemented by the government and the Central Bank of The Gambia (CBG) to reverse earlier policy lapses. Inflation has returned to low single-digit levels, the exchange rate of the dalasi has stabilized, and international reserves have been rebuilt to a comfortable level. Nevertheless, the country still faces many development challenges. A majority of the population lives below the poverty line, and the narrow production base of the economy makes it vulnerable to exogenous shocks such as drought. Furthermore, a heavy debt service burden has limited the government’s scope for undertaking growth-promoting and poverty-reducing expenditures.

2. We seek the assistance of the International Monetary Fund to help us address the economic development challenges we face. In this regard, the government of The Gambia has prepared a medium-term economic and financial program to build on the recent achievement of macroeconomic stability by undertaking reforms aimed at promoting sustained growth and poverty reduction. The program draws on the government’s recently completed second Poverty Reduction Strategy Paper (PRSP II).

3. As you know, The Gambia reached the decision point under the Heavily Indebted Poor Countries (HIPC) Initiative in December 2000, but has not yet been able to advance to the completion point, partly because the country’s last IMF-supported program—under a Poverty Reduction and Growth Facility (PRGF) arrangement—went off-track soon after it was approved in 2002. Following the successful implementation of a staff monitored program (SMP) that spanned October 2005-March 2006, the government of The Gambia hereby requests a three-year arrangement under the Poverty Reduction and Growth Facility in an amount equivalent to SDR 14 million (45 percent of quota), to be disbursed in seven equal installments of SDR 2 million each. The first disbursement would occur upon Executive Board approval of this arrangement, and subsequent disbursements would be linked to six program reviews that are scheduled to be conducted at six-monthly intervals beginning in July 2007. In addition, we request the resumption of interim relief under the enhanced HIPC Initiative in the amount of SDR 0.36 million (20 percent of the total HIPC commitment) to help us cover part of the principal repayments to the IMF falling due during 2007.

4. The Memorandum of Economic and Financial Policies (MEFP) attached to this letter (Attachment I) describes the economic and financial policies as well as structural measures that the government intends to implement to meet the objectives of the program. Table 1 in the MEFP contains quantitative financial performance criteria and indicative targets, while Table 2 contains structural performance criteria and benchmarks, to be used to monitor the program. To further assist the IMF monitor the program, the government and the CBG undertake to provide in a timely manner the information specified in the Technical Memorandum of Understanding (TMU) attached to this letter (Attachment II).

5. The government believes that the policies and measures set forth in the MEFP are adequate to achieve the objectives of the program. However, it is prepared to take any further measures that may become appropriate for this purpose. During the implementation of the program, the government will consult with the Managing Director on the adoption of any measures that may be appropriate, on its own initiative, or whenever the Managing Director requests such a consultation.

6. We wish to assure you that the government of The Gambia is determined to fully implement the PRGF-supported program. In particular, we will take all necessary measures to ensure that the first program review is completed by end-July 2007. That review will be based on the quantitative performance criteria at end-March 2007 and structural performance criteria through end-June 2007. We expect that by end-July 2007, the government would also have implemented all the measures required for The Gambia to reach completion point under the HIPC Initiative.

7. The government intends to make the contents of this letter and those of the attached MEFP and TMU available to the public, and so authorizes the IMF to arrange for these documents to be posted on the IMF website following Executive Board approval of The Gambia’s request for the new PRGF arrangement.

Sincerely yours,

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Attachments: Memorandum of Economic and Financial Policies Technical Memorandum of Understanding

ATTACHMENT I THE GAMBIA Memorandum of Economic and Financial Policies

I. Introduction and Background

1. This memorandum outlines the government of The Gambia’s economic and financial program under a three-year Poverty Reduction and Growth Facility (PRGF) arrangement with the International Monetary Fund (IMF). Following the successful implementation of a Staff Monitored Program (SMP) over the period October 2005-March 2006, the new program aims at consolidating macroeconomic stability and fostering the conditions for sustaining high growth and reducing poverty.

2. The focus of the SMP was on strengthening internal controls at the Central Bank of The Gambia (CBG) to underpin its operational independence, and enhancing public financial management and accountability. All the structural benchmarks under the SMP were implemented, albeit a few with a delay. In particular, the CBG instituted guidelines and procedures to strengthen accounting practices, and the government made progress toward clearing the backlog of unaudited accounts by submitting the 2000 and 2001 accounts to the Auditor-General.10 Performance against the quantitative targets was mixed in relation to the December 2005 targets but improved in the second half of the program and all the targets were met on a cumulative basis at the end of March 2006.

3. The Gambia reached the decision point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative in December 2000. Reaching the completion point will make The Gambia eligible for debt relief under the Multilateral Debt Relief Initiative (MDRI). The conditions for reaching the completion point include satisfactory performance under the PRGF-supported program for at least six months and the implementation of the other completion point triggers established at the decision point.

II. Strategy for Poverty Alleviation

4. The Gambia’s first Poverty Reduction Strategy Paper (PRSP) which spanned 2002–05 was prepared through a broad-based participatory process. Reviews contained in two annual progress reports (APRs) prepared by the government indicated that implementation of the PRSP was hampered by capacity constraints, limited donor support, and inadequate prioritization by the government. The APRs noted some progress in increasing access to basic social services, but not much progress in the government’s divestiture and decentralization programs. The APRs also highlighted a need to increase budgetary resources dedicated to PRSP-priority expenditures.

5. A new PRSP (PRSP II) which integrates the achievement of the Millennium Development Goals (MDGs) into its objectives has been completed after an extensive consultative process. The strategy for growth and poverty reduction is built on the following five pillars: (i) improving the policy environment; (ii) enhancing the capacity and output of the productive sectors—agriculture, fisheries, industry, trade, and tourism; (iii) improving the delivery of basic social services; (iv) building the capacity of local communities and civil society organizations; and (v) mainstreaming issues related to gender, youth, population, HIV/AIDS, nutrition and the environment into the development process.

6. PRSP II emphasizes prudent fiscal and monetary policies to achieve macroeconomic stability. Objectives of fiscal policy include: improving revenue collection by strengthening institutional capacity, making the budget process more transparent and reflective of government priorities, and reducing the domestic debt burden by maintaining a primary surplus and containing the government’s borrowing requirement. The principal objective set for monetary policy is the maintenance of low inflation. The CBG is also charged with promoting a sound and flexible financial system.

III. Recent Economic Developments

7. The macroeconomic environment has improved significantly over the last few years. Real GDP growth rebounded from a drought-induced decline in 2002 to an annual average of about 6 percent a year during 2003–06, outpacing average annual population growth (estimated at 2.8 percent). From a peak of 21 percent in August 2003, year-on-year consumer inflation fell to 1.8 percent in December 2005, and stayed below 2 percent through November 2006. Key interest rates have fallen, but remain very high in real terms. The CBG lowered its rediscount rate gradually from 31 percent at the end of 2004 to 15 percent in May 2006 and to 14 in October 2006. The CBG also lowered the statutory reserve requirement in October 2006—from 18 percent to 16 percent. The dalasi has remained relatively stable in nominal and real effective rate terms after marked depreciations during 2001–03.

8. Fiscal performance deteriorated in 2005 after a strong adjustment in 2004. The basic balance fell from a surplus of 2.4 percent of GDP in 2004 to near balance in 2005, reflecting extrabudgetary spending, lower customs revenues, and higher domestic interest payments. 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. A larger fiscal deficit and a relatively tight monetary stance increased domestic debt from 33 percent of GDP at the end of 2004 to 36 percent of GDP at the end of 2005. Preliminary indicators of fiscal performance in 2006 show an improvement over 2005, but not by as much as envisaged in the budget mainly due to higher-than-budgeted expenditures on the hosting of the African Union summit in July 2006.

9. High interest payments have crowded out priority PRSP-related expenditures. In 2005 and 2006, interest payments are estimated to have accounted for 47 percent and 35 percent of total current expenditure, respectively. PRSP-related spending fell short of budget estimates in both 2005 and 2006.

10. In spite of strong growth in tourism earnings, the external current account deficit (including official transfers) widened significantly from about 13 percent of GDP in 2004 to 20 percent of GDP in 2005 before falling to14 percent of GDP in 2006. The current account deficits were financed mainly by inflows of foreign direct investment (FDI) and official concessional loans. The ratio of nominal external debt to GDP fell from 145 percent at the end of 2004 to 136 percent at the end of 2005.

IV. Program Objectives and Policies

A. Medium-Term Objectives and Macroeconomic Framework

11. The key assumptions and objectives underlying the program’s medium-term macroeconomic framework are:

  • Annual real GDP growth of 6–7 percent.

  • Annual inflation in the range of 2–4 percent.

  • The fiscal basic balance improves from a surplus of less than 2 percent of GDP in 2006 to an annual average of about 3 percent of GDP during 2007–09.

  • The ratio of domestic public debt to GDP is projected to fall from 32 percent at the end of 2006 to about 23 percent in 2009.

  • The external current account deficit (including official transfers) is reduced from about 14 percent of GDP in 2006 to 9 percent of GDP in 2009.

  • International reserves will be maintained at the equivalent of about four months of imports.

12. The growth rates assumed under the program are higher than the 4.5 percent average annual growth rate assumed in PRSP II. The rates for the program are based on substantial upward revisions of recent growth performance and growth prospects undertaken after completion of PRSP II.

13. The projected improvement in the fiscal basic balance reflects lower interest payments, associated with lower domestic borrowing by the government.

14. The projected reduction in the external current account deficit reflects increased official transfers and lower trade deficits. Part of the increase in official transfers is associated with a switch in the composition of official external financing for projects from loans to grants by the World Bank and the African Development Bank. In addition, it is assumed that there will be a modest increase in external financing in support of PRSP II. A donor conference has been scheduled for March 2007 to solicit additional external assistance for the implementation of PRSP II. Lower trade deficits mainly reflect a recovery in groundnut exports from near collapse in 2005.

15. Monetary policy will target an expansion in broad money slightly above the growth rate of nominal GDP over the medium term. Low inflation is expected to boost the demand for money and steady fiscal consolidation should allow real interest rates to fall, stimulating credit to the private sector.

B. Policies for 2007 Fiscal policy and related structural reforms

16. Fiscal policy will be the principal instrument for consolidating macroeconomic stability. The government is committed to maintaining fiscal discipline in order to contain domestic borrowing and so put downward pressure on interest rates and reduce the domestic public debt to sustainable levels.

17. The government is implementing measures to improve tax administration and thereby boost revenues through efficiency gains. The establishment of the Gambia Revenue Authority (GRA) which merged the previous Central Revenue and Customs and Excise departments under one management structure was designed to achieve synergies in the government’s revenue collection efforts. Measures aimed at broadening the tax base include the introduction of taxpayer identification numbers, enhanced taxpayer education efforts, and increased staffing, training and equipment to strengthen the valuation and audit functions.

18. Weaknesses in budget formulation—for example, inadequate provision in the budget for the government’s contribution to projects financed by international development banks and donors and for the payment of utility bills—have in the past led to large domestic payments arrears. Extrabudgetary expenditures have also crowded out budgeted expenditures and complicated budget execution. The government is taking steps to avoid overcommitments and the resort to extrabudgetary expenditures except in the circumstance and under the conditions stipulated in the Government Budget Management and Accountability Act (2004).

19. The launching of the Integrated Financial Management Information System (IFMIS) in January 2007 will go a long way to improve all aspects of the budget process (formulation, execution, monitoring, and reporting). In particular, commitment control will be strengthened by ensuring that funds are available before local purchase orders or other commitments are entered into. In the event IFMIS is delayed, the government will strengthen the monitoring of compliance with the manual commitment control system.

20. The government is committed to increasing poverty-reducing expenditures in line with PRSP II objectives and targets. In order to monitor the extent to which this objective is being achieved, the Department of State for Finance and Economic Affairs (DoSFEA) will continue producing a monthly report on PRSP-related expenditures out of the Gambia Local Fund, by functional and economic classifications. In due course, as IFMIS becomes established, the reporting will be extended to cover all expenditures (i.e., including those that are externally financed).

21. In order to improve the transparency and comprehensiveness of government accounts, the government is setting up a central project management and aid coordination directorate at DoSFEA with responsibilities that will include compiling comprehensive information on aid flows into the country and the uses to which the resources are put.

22. The government intends to enhance accountability in the use of public resources by clearing the backlog of unaudited government accounts and publishing more information on the budget and its execution. Accounts for 2004 are scheduled to be submitted to the Auditor General by February 2007, and those for 2005 and 2006 will follow before the end of the year. The National Audit Office will be adequately equipped to conduct the audits and submit reports on them to the national assembly as soon as possible after they receive the accounts. With respect to publications, DoSFEA has established a website (www.dosfea.gm) where budget related information and reports will be posted.

23. In order to improve fiscal transparency and to track fiscal risks, the government will establish a reporting framework to collect quarterly financial information on selected public enterprises (see sample format in Annex I). Initially, the following public enterprises will be covered: Social Security and Housing Finance Corporation, Gambia Port Authority, and Gambia Telecommunications Cellular Company (GAMCEL). In due course, information will also be collected on the Gambia Telecommunications Company (GAMTEL) and the National Water and Electricity Company (NAWEC). This reporting framework will help to (i) maintain a transparent record of possible quasi-fiscal activities of key public enterprises, and (ii) improve the capacity of the government to monitor the financial position of parastatals and introduce, if necessary, corrective measures to improve their efficiency and reduce the risk to the budget.

Monetary policy, CBG governance, and related structural reforms

24. The CBG will continue to use a money targeting framework to pursue its price stability objective. It will also use its rediscount rate to signal changes in policy stance. In setting the rediscount rate, the CBG’s Monetary Policy Committee will pay due regard to the evolution of the market determined treasury bill rates. In order to improve the efficiency of the treasury bill market, the CBG upgraded its electronic book-entry system in September 2005, and in April 2006 introduced a primary dealership system and shortened the settlement period from five days to one day after the auction date.

25. The CBG has been in a weak financial position for several years, a situation that may constrain its operational independence. It expects to turn a profit in 2006. However, since 2001, it has incurred operational losses ranging from about 2 percent of GDP in 2003 to 0.2 percent in 2005. These losses reflect a combination of factors including the following: (i) a rundown of international reserves associated with a special loan to the government during 2001–02 at low interest and with a long grace period; (ii) acquisition of other significant non-interest bearing assets (e.g., overdrafts on the governments Treasury Main Account); (iii) sharp increases in foreign currency denominated costs during the period of marked depreciation of the dalasi (2001–03); (iv) large administrative costs; and (v) provisions for various credit losses, some of which reflect loans extended to private enterprises.

26. In order to strengthen the CBG’s operational independence, the government and the CBG have undertaken to ensure compliance with two key provisions of the CBG Act (2005) related to CBG capital and limits on lending to the government. The government will recapitalize the CBG to the tune of D100 million (the amount stipulated in the CBG Act) over a five year period beginning in 2006. The government has already paid the 2006 contribution of D20 million and has appropriated another D20 million in the 2007 budget.

27. The 2005 CBG Act stipulates that the CBG’s lending to the government should not exceed 10 percent of government tax revenues in the previous year. The CBG’s claims on the government have exceeded this limit throughout 2006. Since June 2006, the government has acted to reduce substantially the level of its outstanding borrowing from the CBG. The government and the CBG have undertaken to bring government borrowing from the CBG in line with the statutory limit by the end of 2007. An action plan indicating how this will be achieved has been provided to IMF staff. The action plan will include a clarification of items covered by the quantitative limit and will also establish a mechanism for ensuring that duration limits on CBG advances to government stipulated in the law are respected.

28. The CBG will continue implementing the Action Plan aimed at strengthening internal controls that was approved by the CBG Board in 2005. In particular, it will make operational the segregation of duties in foreign reserves management as stipulated in the CBG’s Policy Guidelines on Segregation of Duties of Foreign Exchange Market Operations.

29. The CBG intends to adopt International Financial Reporting Standards (IFRS) as its accounting framework. As first steps in that direction, it will commission a gap analysis and formulate an Action Plan to convert to IFRS over three years commencing with a gap analysis for the 2006 financial statements. The CBG is also undertaking reforms aimed at strengthening monetary operations and banking supervision. It will also continue work on its research agenda aimed at enhancing the effectiveness of monetary policy.

Financial intermediation

30. The banking system in The Gambia is relatively sound, but financial intermediation remains low. Profitability and liquidity ratios are high, and the proportion of loans that are nonperforming is relatively small at 13 percent in September 2006. However, the loan-to-deposit ratio is very low (40–45 percent) suggesting scope for increased lending activities. In order to facilitate the lending process, the CBG has decided to establish a credit reference bureau. Commercial banks are supportive of the plan and are willing to share the cost of implementing it.

External policies and reforms to enhance external competitiveness

31. The government is in the process of establishing a business park under the World Bank supported Gateway Project. The project is designed to promote private investment in export-oriented production and employment. The Gambia Investment Promotion and Free Zones Agency (GIPFZA) which was set up under the Gateway Project is fully operational and is actively involved in investment promotion and facilitation. The government is in the process of reviewing the investment act and associated incentive regime.

32. The World Bank is also helping the government with several studies that should provide material for formulating an action plan to improve the investment climate in The Gambia. The studies include an Investment Climate Assessment and a Diagnostic Trade Integration Study (DTIS). The DTIS is the first stage of The Gambia’s participation in the Integrated Framework for Trade-Related Technical Assistance which is designed to help the country integrate more effectively into the regional and global economy through trade. The DTIS draft report which is due in February 2007 will identify key constraints to the expansion and diversification of exports. The final report will contain an Action Plan that will include policy reforms to be undertaken by government and investment projects to be funded by donors.

other structural reforms

33. The government has agreed to the privatization of public industrial assets in the groundnut sector, in line with commitments entered into with its bilateral and multilateral donor partners. However, the problems that have beset marketing operations in the sector during recent crop seasons and which have resulted in poor quality exports have undermined confidence in the viability of the sector by local banks and international buyers. A recent World Bank mission that examined the sector concluded that it was still capable of contributing significantly to poverty reduction if the privatization process is professionally implemented in phases. In particular, the mission cautioned that it was necessary to regain the confidence of potential strategic partners before embarking on a full privatization in order to avoid pitfalls experienced with similar ventures in the sub-region. The government is seeking assistance from the EU to commission a study that will map out a privatization strategy for the sector.

34. In view of the importance of capacity constraints in the implementation of government programs, the government is seeking assistance from the World Bank to undertake a comprehensive civil service reform.

Statistics

35. The quality and timeliness of economic statistics need improvement. Weaknesses in a broad range of economic statistics are hampering the analyses of economic developments in the country. The National Assembly passed a new statistics act in December 2005 that formed the basis for transforming the Central Statistics Department (CSD) into an autonomous Gambia Bureau of Statistics (GBS). The GBS is receiving assistance from the World Bank to use the results of the household budget survey conducted in 2003 to improve the quality of the consumer price index and national accounts statistics. In the area of balance of payments statistics, the CBG has begun to prepare estimates according to the fifth edition of the Balance of Payments Manual.

V. Prior Actions and Program Monitoring

36. The following actions have been implemented prior to IMF Executive Board consideration of The Gambia’s request for a new PRGF arrangement: (i) approval of a budget for 2007 by the National Assembly that is in line with understandings reached between representatives of the government and IMF staff on the size of the fiscal basic balance; (ii) submission of government accounts for 2003 to the Auditor-General; and (iii) formulation of an action plan to bring government borrowing from the CBG in line with the limit under the CBG Act (2005) by the end of 2007.

37. Performance under the program will be monitored through a set of quantitative financial targets (Table 1), a set of structural performance criteria and benchmarks (Table 2), and program reviews. The quantitative financial targets for end-March 2007 and end-September 2007 are performance criteria, and those for June 2007, and December 2007 are indicative targets. The first and second program reviews are scheduled to be completed by end-July 2007 and end-January 2008, respectively. Definitions of all targeted variables and reporting requirements are contained in the attached Technical Memorandum of Understanding.

Table 1.

The Gambia: Quantitative Targets and Projections, End-December 2005–End-December 2007

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Source: IMF staff estimates.

MDRI debt relief is assumed to take place in the fourth quarter of 2007.

March 2007 and September 2007 are performance criteria; June 2007 and December 2007 are indicative targets.

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

To be applied on a continuous basis.

External debt contracted or guaranteed other than that with a grant element equivalent to 35 percent or more, calculated using a discount rate based on the Organization for Economic Corporation and Development (OECD) commercial interest reference rates (CIRRs). Excludes borrowing from the IMF.

Excluding normal import-related credits.

Table 2.

The Gambia: Structural Conditionality for December 2006–December 20071

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PA, PC, and B denote prior action, performance criterion, and benchmark, respectively.

ATTACHMENT II THE GAMBIA Technical Memorandum of Understanding

(December 2006–December 2007)

I. Introduction

1. This memorandum sets out the understandings between the Gambian authorities and staff of the International Monetary Fund (IMF) regarding the definitions of quantitative performance criteria, indicative targets, structural performance criteria, and structural benchmarks that will be used in monitoring the Poverty Reduction and Growth Facility (PRGF)-supported program covering the period of 2007–09. It also sets out the related reporting requirements.

II. Quantitative Performance Criteria

A. Net Domestic Assets of the Central Bank

2. Definition. The net domestic assets of the CBG are defined as the difference between reserve money and the net foreign assets of the CBG. Reserve money is defined as the sum of currency issued by the CBG (i.e., currency in circulation) and the deposits of commercial banks at the CBG. Net foreign assets are defined as foreign assets minus foreign liabilities. Foreign assets and foreign liabilities are defined as claims on nonresidents and liabilities to nonresidents, respectively.

3. For program monitoring purposes, in the calculation of the net domestic assets of the CBG, foreign assets and liabilities will be converted first into U.S. dollars at the prevailing cross-rates and then converted into dalasi using the D/USD program exchange rate. The end-of quarter dalasi/U.S. dollar program exchange rates are as follows: 28.10 (December 2006); 28.17 (March 2007); 28.23 (June 2007); 28.30 (September 2007); and 28.36 (December 2007). These are accounting exchange rates only, and should not be construed as projections.

4. Supporting material. Net domestic assets of the central bank will be transmitted as part of the balance sheet of the CBG on a monthly basis within four weeks of the end of each month.

B. Basic Balance of the Central Government

5. Definition. The basic balance of the central government is defined as revenue (tax and nontax) minus total expenditure and net lending, excluding externally financed capital expenditure. Central government excludes local and regional governments and public enterprises.

6. supporting material. Reporting on the basic balance will form part of the consolidated budget report described in paragraph 26 below.

C. External Payments Arrears of the Central Government

7. Definition. External payments arrears are defined as the stock of external arrears on loans contracted or guaranteed by the central government, except on debts subject to rescheduling or a stock of debt operation. They occur when undisputed interest and amortization payments on the above-referenced loans are not made within the terms of the debt contract or in conformity with the terms for interim relief provided under the enhanced HIPC Initiative. This performance criterion will be assessed on a continuous basis.

8. Supporting material. An accounting of nonreschedulable external arrears (if any) by creditor countries, with detailed explanations, will be transmitted on a monthly basis within four weeks of the end of each month. This accounting would include, separately, arrears owed by the central government and other public sector entities to Paris Club and non-Paris-Club creditors.

D. Net Usable International Reserves of the Central Bank of The Gambia

9. Definition. Net usable international reserves (NIR) of the CBG are defined as the difference between usable reserve assets and reserve liabilities. Usable reserve assets are readily available claims on nonresidents denominated in foreign convertible currencies. They include the CBG holdings of SDRs, foreign currency cash, foreign currency securities, deposits abroad, and the country’s reserve position at the IMF. Excluded are any assets that are pledged, collateralized, or otherwise encumbered, claims on residents, claims in foreign exchange arising from derivatives in foreign currencies vis-à-vis domestic currency (such as futures, forwards, swaps, and options), precious metals, assets in nonconvertible currencies, and illiquid assets (including capital shares in international organizations). Reserve liabilities are all foreign exchange liabilities to residents and nonresidents, including commitments to sell foreign exchange arising from derivatives (such as futures, forwards, swaps, and options), and all credit outstanding from the IMF.

10. supporting material. End-month data on net usable international reserves of the CBG will be transmitted within seven days of the end of each month.

E. New Nonconcessional Debt Contracted or Guaranteed by the Central Government with Original Maturity of More Than one Year

11. Definition. This target refers to new nonconcessional external debt with original maturity of more than one year contracted or guaranteed by the central government. It applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt, adopted by the Executive Board of the IMF on August 24, 2000 (Decision No. 12274–00/85), but also to commitments contracted or guaranteed for which value has not been received. Excluded from this target are loans or purchases from the IMF and debts with a grant element of at least 35 percent.11

12. supporting material. A comprehensive record, including a loan-by-loan accounting of all new concessional and nonconcessional debt contracted or guaranteed by the central government with detailed explanations, will be transmitted on a quarterly basis within four weeks of the end of each quarter. Nonconcessional external debt over one year includes financial leases and other instruments giving rise to external liabilities, contingent or otherwise, on nonconcessional terms.

F. Outstanding Stock of External Public Debt with Original Maturity of One Year or Less

13. Definition. This target refers to the stock of outstanding external public sector debt with original maturity of one year or less, owed or guaranteed by the central government. 12Public sector consists of the central and regional governments and other public agencies, including the CBG. Excluded from this target are normal import-related credits.

14. Supporting material. A comprehensive record of all external debt with original maturity of less than one year owed or contracted by the public sector, with detailed explanations, will be transmitted on a quarterly basis within four weeks of the end of each quarter.

III. Quantitative Indicative Targets

A. Domestic Budgetary Arrears

15. Definition. Domestic budgetary arrears are defined as the sum of all bills that have been received by a central government spending unit or line ministry under the recurrent expenditure budget (including rents and utilities) or the development expenditure budget, and for which payment has not been made within 30 days. Arrears can be cleared in cash or through debt swaps.

16. supporting material. A comprehensive record of all domestic budgetary arrears, with detailed explanations, will be transmitted on a quarterly basis within four weeks of the end of each quarter.

IV. Structural Performance Criteria and Benchmarks

A. Make the Central Project Management and Aid Coordination Directorate Operational

17. Definition. The directorate is deemed operational when it is fully staffed and it begins establishing a database on external aid received by all departments of government.

18. supporting material. A comprehensive record of external aid received by all departments of government, by donor and project, will be transmitted on a quarterly basis within four weeks of the end of each quarter.

B. Commitment Control System

19. Definition. The target on establishing a comprehensive system will be deemed to be met if IFMIS becomes operational and is used to track expenditure commitments made by all government departments and agencies covered by the central government budget. In the event IFMIS is delayed, the target will be deemed to be met if the manual commitment control system introduced on a pilot basis in 2006 is extended to all government departments and agencies covered by the central government budget.

20. Supporting material. A monthly budgetary execution report with detailed information on expenditure appropriations, commitments, payment orders, and actual payments by broad category of spending will be transmitted within four weeks of the end of each month. The coverage of the monthly budget execution report will include all government departments and agencies covered by the central government budget.

C. Segregation of Duties in the Management of International Reserves

21. Definition. This target refers to the item in the CBG’s “Policy Guidelines on Segregation of Duties of Foreign Exchange Market Operations” which prescribes that front and back office responsibilities will be assigned to the Foreign and the Finance Departments, respectively, and which envisages the establishment of a middle office.

22. Supporting material. The CBG’s Internal Audit Department will issue a report on compliance with the Guidelines.

D. Special Audit Reports on Monetary Program Data

23. The special audits will be conducted on the basis of the draft terms of reference dated December 19, 2006, agreed between CBG and IMF staffs.

V. Other Data Requirements and Reporting Standards

24. In addition to providing the data needed to monitor program implementation in relation to the program’s performance criteria, indicative targets, and benchmarks, as set out above, the authorities will transmit the following data within the time frame specified below:

A. Prices

25. The monthly disaggregated consumer price index will be transmitted within four weeks of the end of each month.

B. Government Accounts Data

26. The following monthly reports will be transmitted to the IMF within two weeks of the end of the month: (i) revenue flash report; and (ii) expenditure flash report.

27. A monthly consolidated central government budget report (i.e., the analytical table) on budget execution during the month and cumulatively from the beginning of the year, will be transmitted to the IMF within four weeks of the end of the month. The report will comprise: (i) revenue data by major item, including tax (direct tax, taxes on domestic goods and services, and taxes on international trade) and nontax; (ii) external grants by type (e.g., project, program); (iii) details of recurrent expenditure (including data on wages and salaries, interest payments, and other charges); (iv) details of capital expenditure and net lending (including data on externally financed capital expenditure, expenditures from the Gambia Local Fund, and net lending); (v) the overall balance and the basic balance (defined in paragraph 5); (vi) details of budget financing (including net domestic borrowing and its gross components, external grants, net external borrowing and its gross components, utilization of privatization proceeds, and arrears).

28. Net domestic borrowing by the central government over a given period is defined as the change in the net domestic debt at the end of the period minus the net domestic debt at the beginning of the period. The central government’s net domestic debt is defined as: claims on the central government by the banking system minus deposits of the central government with the banking system plus claims by the nonbanking sector, including public enterprises. Central government excludes local and regional governments and public enterprises. The banking system comprises the Central Bank of The Gambia (CBG) and commercial banks.

C. Poverty Reducing Expenditure

29. A monthly report on poverty-reducing expenditures, by functional and economic classifications, will be transmitted within four weeks of the end of each month. Poverty reducing expenditures comprise line items in the budget that have been specifically tagged as PRSP-related. For 2007, they include expenditure on the construction of trunk roads.

D. Financial Information on Selected Public Enterprises

30. Quarterly financial data in the format of Annex I will be transmitted to the IMF within four weeks of the end of the quarter.

E. Monetary Sector Data

31. The balance sheets of the CBG, prepared on the bases of current and program exchange rates, will be transmitted on a monthly basis to the IMF within four weeks of the end of each month. The balance sheet should explicitly identify all claims on government. In addition, balances in the treasury main, sterilization, and other deposit accounts should also be presented. The consolidated balance sheet of the commercial banks and a monetary survey (i.e., consolidation of the accounts of the CBG and the commercial banks) will be transmitted within six weeks of the end of each month.

F. Treasury Bills and CBG Bills

32. Weekly data on the issuance and outstanding stocks of treasury bills and CBG bills, and on the yields (interest rates) of the various instruments will be transmitted on a monthly basis within seven days of the end of the month. The weekly Liquidity Management Reports (LMRs) will be transmitted on a weekly basis within seven days of the end of the week. Data on treasury bills outstanding (including information on the distribution by bank and nonbank holders) will be transmitted on a monthly basis within six weeks of the end of each month. The monthly LMR, reflecting the data as of the last working day of the month, will be transmitted within seven days after the end of each month.

G. External Sector Data

33. The following standards will be adhered to in reporting data on exchange rates: (i) the interbank market exchange rates, defined as the simple average of the weekly weighted average buying and selling rates, will be transmitted on a weekly basis within five business days of the end of the week; and (ii) the CBG’s published monthly average and end-month exchange rates, including those for all currencies in which foreign assets and liabilities are denominated, will be transmitted within two weeks of the end of the month.

34. The CBG will compile balance of payments statistics on a quarterly basis beginning from the first quarter of 2007. The balance of payments data will be transmitted to the IMF with a one quarter lag.

Annex I Quarterly Reporting System for Public Enterprises

Name of the Enterprise: ______________________________

Supervisory Authority: _______________________________

Regulatory Authority (if any): _______________________

Law Establishing the Company: ________________________

Government Shares (percent of total capital): __________________________

Date of Last Audited Accounts: ___________________________

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1

Implementation of the first PRSP which covered the period 2002–05 was uneven (MEFP, paragraph 4).

2

IMF Country Report No. 06/11 (January 2006).

3

The basic balance is defined as revenues (excluding grants) minus total expenditure and net lending, excluding externally financed capital spending.

4

The growth and inflation assumptions in this framework differ from those in PRSP II. They reflect discussions during the mission which took place after PRSP II had been completed. PRSP II assumes annual growth rates of 4.5 percent (much lower than recent average growth) and inflation of 5 percent.

5

See Appendix I of IMF Country Report No. 06/444 (December 2006).

6

The tariff rate on consumer goods, which form the bulk of reexports was increased from 18 percent to 20 percent. The sales tax on non-oil imports was also increased from 10 percent to 15 percent to align it with the domestic sales tax.

7

Goods with a minimum of 35 percent value-added in the home country can be exported duty-free within ECOWAS.

8

The Gambia’s three previous ESAF/PRGF arrangements were approved in 1988, 1998, and 2002.

9

The Paris Club agreed a debt treatment on Cologne terms with The Gambia in January 2003. Implementation of that agreement was suspended following the expiration of the country’s last PRGF arrangement. A new agreement is expected to be signed after approval of the new PRGF arrangement.

10

The government subsequently submitted the 2002 and 2003 accounts to the Auditor-General in October 2006 and December 2006, respectively.

11

A loan is concessional if its grant element is at least 35 percent, calculated on the basis of the commercial interest reference rates (CIRR) and following the methodology set out in staff paper on Limits on External Debt or Borrowing in Fund Arrangements–Proposed Change in Implementation of the Revised Guidelines approved by the IMF Executive Board on April 15, 1996.

12

The term “debt” has the meaning set forth in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt, adopted by the Executive Board of the IMF on August 24, 2000 (Decision No. 12274–00/85).

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Cover IMF Staff Country Reports
The Gambia: Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility and for Additional Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries: Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for The Gambia
Author:
International Monetary Fund
Volume/Issue:
Volume 2007: Issue 116
Publisher:
International Monetary Fund
ISBN:
9781451967135
ISSN:
1934-7685
Pages:
75
DOI:
https://doi.org/10.5089/9781451967135.002
  • View in gallery

    The Gambia: Growth in Real GDP, 2002–06

    (Percent)

  • View in gallery

    The Gambia: Growth in Consumer Price Index, Reserve Money, and Broad Money, January 2001-October 2006

    (Twelve-month changes; in percent)

  • View in gallery

    The Gambia: Fiscal Developments, 2003–06

    (Percent of GDP)

  • View in gallery

    The Gambia: Selected Nominal Interest Rates, 2001Q1–2006Q3

    (Percent per year) 1/

  • View in gallery

    The Gambia: Selected Real Interest Rates, 2001Q1–2006Q3

    (Percent per year) 1/

  • View in gallery

    The Gambia: Commercial Bank Claims on Private Sector and Public Enterprises, 2002Q1–2006Q3

  • Figure 3.
    View in gallery
    Figure 3.

    Effective Exchange Rates, January 2001–September 2006

    (Index, 2000 = 100)

  • View in gallery

    The Gambia: Sales of Foreign Exchange, January 2001- September 2006

    (Millions of U.S. Dollars)

  • View in gallery

    The Gambia: Purchase of Foreign Exchange, January 2001- September 2006

    (Millions of U.S. Dollars)

The Gambia: Growth in Real GDP, 2002–06

(Percent)

The Gambia: Growth in Consumer Price Index, Reserve Money, and Broad Money, January 2001-October 2006

(Twelve-month changes; in percent)

The Gambia: Fiscal Developments, 2003–06

(Percent of GDP)

The Gambia: Selected Nominal Interest Rates, 2001Q1–2006Q3

(Percent per year) 1/

The Gambia: Selected Real Interest Rates, 2001Q1–2006Q3

(Percent per year) 1/

The Gambia: Commercial Bank Claims on Private Sector and Public Enterprises, 2002Q1–2006Q3
Figure 3.

Effective Exchange Rates, January 2001–September 2006

(Index, 2000 = 100)

The Gambia: Sales of Foreign Exchange, January 2001- September 2006

(Millions of U.S. Dollars)

The Gambia: Purchase of Foreign Exchange, January 2001- September 2006

(Millions of U.S. Dollars)