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.
1. Introduction
On behalf of our Gambian authorities, we would like to thank staff for the productive discussions during the last consultations and negotiations on the new PRGF arrangement with the Fund. We also thank the Executive Board and Management for their continued support. The authorities value the advice proffered by the Fund and are in general agreement with the thrust of the staff report. The Gambia has made significant progress towards macroeconomic stability in recent years, driven by the strengthened macroeconomic management. However, the economy continues to be vulnerable to external shocks; public debt remains high; and unsustainable and poverty is widespread. In this regard, the authorities are requesting a new PRGF arrangement with the Fund. The new PRGF supported program will form the basis of the Gambia’s relationship with the Fund for the next three years and will be instrumental in anchoring the reform program and obtaining debt relief under the enhanced HIPC and MDRI. This relief will create fiscal space which will facilitate allocation of resources to development and poverty reducing activities.
2. Recent economic developments
Macroeconomic performance continued to be solid during the past year, with robust and generally broad based growth. The main contributors to growth were the construction, telecommunications, agriculture, and services sectors. Inflation remained in the low single-digits, reflecting the prudent monetary policy stance adopted by the authorities. The dalasi remained stable, supported by the strong economic fundamentals and robust foreign exchange inflows.
Fiscal performance is estimated to have improved in 2006 despite the increased fiscal pressures posed by the Gambia’s hosting of the African Union (AU) summit and the presidential elections. Revenue performance was broadly in line with the budget while spending was higher than budgeted as a result of the one-off expenditures on the AU summit. Domestic interest payments fell from 47 percent of current spending in 2005 to about 35 percent at the end of 2006, as a result of lower interest rates.
The external current account deficit (including official transfers) narrowed significantly in 2006, owing to the strong growth in tourism earnings, and the rebound of groundnut exports following their collapse in 2005 on account of a failure in marketing arrangements. The current account deficit continued to be financed by foreign direct investment and official concessional loans. The overall external position remained comfortable, with gross international reserves equivalent to about four months of imports.
3. Macroeconomic policies
The new PRGF supported program is aimed at consolidating macroeconomic stability and fostering conditions conducive to high and sustainable growth as well as poverty reduction. In the medium term (2007-09), the program envisages real GDP growth of 6–7 percent, annual inflation in the range of 2–3 percent and improvement in the fiscal basic balance to a surplus of about 2.7 percent of GDP. The improvement in the fiscal basic balance will be supported by lower interest payments, associated with reduced domestic borrowing by the government. The external current account deficit (including official transfers) is expected to fall from 14 percent of GDP in 2006 to 11 percent of GDP in 2009, supported by strong growth in tourism earnings. International reserves will be maintained at the equivalent of about four months of imports.
Fiscal policy
Fiscal policy will continue to be the main instrument for consolidating macroeconomic stability. In this vein, the authorities are committed to redouble their efforts to sustain the significant progress achieved in improving fiscal performance in recent years. They will maintain fiscal discipline in order to contain domestic borrowing and reduce the domestic public debt to sustainable levels.
The reduction in domestic debt will ease budgetary pressure imposed by the currently high interest payments, which have tended to crowd out poverty reducing and growth promoting expenditures. The authorities therefore, plan to contain domestic borrowing and to finance the future budget shortfalls through concessional borrowing and grants. On the revenue side, government is implementing measures to boost revenues through efficiency gains from improved tax administration. To this end, the Gambia Revenue Authority has been established and a number of measures are being implemented to broaden the tax base and increase tax compliance.
The authorities are continuously making efforts to improve the budget formulation processes and stem the problem of arrears that arise mainly as a result of inadequate budgetary provisions for counterpart funding of donor funded projects. They have continued to implement measures to strengthen expenditure management, including the launching of the Integrated Financial Management Information System (IFMIS) in January 2007. The IFMIS is expected to enhance all the accounting aspects of the budget process, including commitment control and generation of reports for budget monitoring.
The authorities are also taking steps to improve transparency, comprehensiveness and timeliness of reporting on fiscal operations. In this regard, they are establishing a central project management and aid coordination directorate unit whose responsibilities will include compiling comprehensive information on aid flows into the country and the uses to which the resources are put. A reporting framework for collection of data from public enterprises has also been formulated in order to facilitate monitoring of their fiscal risk and improve fiscal transparency. Significant progress has been made to improve accountability in the use of public resources by clearing the backlog of unaudited government accounts. To date, accounts for fiscal years up to 2004 have been submitted to the Auditor General and it is expected that by the end of 2007, the submission of annual accounts will have been brought up to date.
To improve the effectiveness and efficiency of the civil service, the authorities have initiated work on a comprehensive civil service reform program. In this regard they have requested the assistance of 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 The Gambia’s capacity to implement the PRSP.
Monetary policy and financial sector
Monetary policy continues to focus on the pursuit of price stability. The monetary targeting framework will continue to be used to achieve this objective, building on the recent success in bringing inflation down to low single digits. In order to further enhance the CBG’s capacity in execution of monetary policy, the government will continue to strengthen the operational independence of the central bank in line with the provisions of the CBG Act (2005). To this end, the government will recapitalize the CBG to the tune of D100 million over a period of five years, covering 2006–2010. The authorities also plan to bring government borrowing from the central bank in line with the 10 percent of the previous year’s tax revenue limit stipulated by the CBG Act (2005) by the end of 2007. A plan on how this will be executed has been jointly developed by the CBG and the government.
The financial sector in The Gambia is sound with banks well capitalized, profitable and having relatively low levels of non performing loans. However, credit extension to the private sector remains low as the banks continue to be risk averse. In an effort to facilitate bank lending, the CBG is establishing a credit bureau which will provide reference on credit worthiness of potential borrowers seeking credit from the financial sector. Enhanced competition in the banking sector as a result of the operations of the newly licensed banks is also expected to facilitate some improvement in financial intermediation as well as the reduction in the currently wide spread between lending and deposit rates. The CBG has also reduced the required reserve ratio for banks thus increasing their scope for lending.
4. Promotion of private sector-led growth
The authorities remain committed to the implementation of policy measures that facilitate the attainment of high, sustainable and broad based growth necessary to reduce poverty and meet the country’s development goals. In this regard they place great importance to the role of competitiveness and the investment climate in promoting private sector led growth. Regional cooperation and global economic integration are also high on the authorities’ development agenda. In this vein the Gambia implemented the ECOWAS Common external tariff (CET) at the beginning of 2006 and increased sales tax in line with regional taxes. While this is likely to have a negative effect on the competitiveness of The Gambia’s re-export trade with neighboring countries, 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 market will surpass the costs.
As part of the strategy to improve The Gambia’s external competitiveness and the investment climate, the authorities have, with the support of the World Bank, implemented the “Gateway” project which aims to make The Gambia a globally competitive export and processing centre through the expansion of private investment in export oriented production and employment. Progress made under the project 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.
The authorities are also reviewing the investment legislation and incentives regime in order to further improve the investment climate. The World Bank is currently assisting with a number of studies that will provide input into the formulation of the country’s action plan.
5. HIPC completion point
The Gambia had reached HIPC decision point in December 2000 but the authorities were not able to implement a program that could have helped them build the necessary track record for advancing towards HIPC completion point. However, the satisfactory performance for at least six months under the new PRGF supported program will, together with the fulfillment of other HIPC completion point triggers, facilitate reaching completion point and make the country eligible for debt relief under both HIPC and MDRI. This is very important for The Gambia as the level of public debt is very high and unsustainable and without full delivery of this debt relief, The Gambia is deemed to be under debt distress. The authorities are fully committed to the successful implementation of the program. Significant progress towards meeting completion point triggers has also been made and it is hoped that the completion point will be reached by mid 2007. The fiscal space provided by the debt relief will be used to increase pro-poor spending.
6. Prior actions to the program
The authorities and staff had agreed on a set of three prior actions to be implemented before the Board consideration of their PRGF request. We wish to inform the board that these have been successfully implemented. The National Assembly has approved the 2007 Budget which aims at a basic fiscal balance that is in line with the program; the 2003 government accounts have been submitted to the Auditor General for audit; and the action plan for aligning government borrowing with the CBG Act (2005) by the end of 2007 has been formulated.
7. Conclusion
In conclusion, we wish to reaffirm the authorities’ commitment to the successful implementation of the program, which underpins consolidating progress made towards macroeconomic stability, promotion of growth, and implementation of a structural reform agenda. They are confident that, with the continued support of the Fund and the international community, they will deliver on the program and propel The Gambia into a higher and more sustainable growth path.