The Gambia
Selected Issues and Statistical Appendix

This Selected Issues paper assesses The Gambia’s external competitiveness by reviewing developments in several indicators, ranging from exchange rate-based indices to survey-based assessments of the investment climate. The paper reviews the evolution of several multilateral and bilateral real exchange rate indices for The Gambia, and summarizes the results of a regression analysis that tests for misalignment of the exchange rate. The paper also evaluates the degree of autonomy extended to the Central Bank of The Gambia (CBG) under the provisions of the new Central Bank of The Gambia Act, 2005.

Abstract

This Selected Issues paper assesses The Gambia’s external competitiveness by reviewing developments in several indicators, ranging from exchange rate-based indices to survey-based assessments of the investment climate. The paper reviews the evolution of several multilateral and bilateral real exchange rate indices for The Gambia, and summarizes the results of a regression analysis that tests for misalignment of the exchange rate. The paper also evaluates the degree of autonomy extended to the Central Bank of The Gambia (CBG) under the provisions of the new Central Bank of The Gambia Act, 2005.

I.External Competitiveness Issues in The Gambia1

A. Introduction

1. A substantial widening of the external current account deficit during 2003–05, partially linked to declines in export earnings (in 2003 and 2005), has raised concerns about the sustainability of The Gambia’s external position and possible erosion in the country’s external competitiveness.Furthermore, the authorities’ emphasis on regional integration as an important plank in their growth strategy has brought to the fore, the country’s external competitiveness in relation to other countries in West Africa. In this regard, implementation of the common external tariff (CET) of the Economic Community of West African States (ECOWAS)—which entailed increases in Gambian tariffs in January 2006—is likely to adversely affect the profitability of the country’s vibrant re–export trade. This chapter assesses The Gambia’s external competitiveness by reviewing developments in several indicators, ranging from exchange–rate based indices to survey–based assessments of the investment climate.

2. The average level of the external current account deficit rose from less than 4 percent of GDP during 1999–2003 to about 13 percent during 2004–05, reflecting mainly increased imports(Table 1).2Tourism (“travel income” inTable 1) is the leading foreign exchange earner, followed by re–export trade and then exports of domestically produced goods. The main commodity export—groundnuts—is the principal crop in the agriculture sector. A drought–induced output decline in the 2002–03 season led to a decline in groundnut exports in 2003. By contrast, a collapse in groundnut exports in 2005 reflected failures in internal marketing arrangements. A change in licensing requirements for the 2004/05 crop season removed the most established operator from the scene, leaving a then–new company—the Gambian Agricultural Marketing Corporation (GAMCO)—as the sole purchaser/processor. In addition to teething problems of a new company, breakdowns in the barges of the state–owned Gambia Groundnut Corporation disrupted the evacuation of the crop from depots to Banjul for processing.

Table 1.

The Gambia: Structure of the Balance of Payments

(In percent of GDP)

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Source: Gambian authorities and IMF staff estimates.

Estimated margins added to the cost of imports to account for services provided by enterprises based in The Gambia.

Includes unaccounted–for–loss in official reserves amounting to US$28.5 million (6.8 percent of GDP) in 2001.

The sum of official transfers and official loans (net).

3. Foreign direct investment (FDI) has replaced official loans as the principal source of financing for the current account deficit.The average level of FDI increased from about 3 percent of GDP during 1999–2003 to 11 percent during 2004–05. In the last few years, the bulk of FDI has gone to building tourism sector infrastructure. In general, availability of external financing in the form of loans and foreign direct investment appears to drive the current account deficit. A debt sustainability analysis conducted jointly by staffs of the Fund and World Bank indicated that The Gambia is debt distressed, and that it will remain at moderate risk of falling back into debt distress even after it receives debt relief under the Heavily Indebted Poor Countries and Multilateral Debt Relief Initiatives.3Thus, sustainability of the external position will be enhanced by greater reliance on nondebt-creating flows such as FDI.

4. The rest of the chapter is organized as follows. Section B reviews the evolution of several multilateral and bilateral real exchange rate indices for The Gambia, and summarizes the results of a regression analysis that tests for misalignment of the exchange rate. In section C, a brief discussion of the likely impact on re–exports of implementing the ECOWAS CET is followed by a more extensive examination of how The Gambia compares with other countries (especially in the ECOWAS sub–region) in survey–based assessments of the business environment or investment climate. The government’s recent efforts to improve the investment climate are highlighted in Section D. Section E presents conclusions.

B. Evolution of Exchange Rate Based Indicators

5. Changes in real effective exchange rate (REER) indices are often used to provide a first look at possible changes in external competitiveness.This approach presumes that the real exchange rate is constant, at least in the long run. More sophisticated approaches have been developed that revolve around various concepts of the equilibrium real exchange rate and factors that influence its evolution.4In this section, we review developments in several real exchange rate indices for The Gambia and report the results of a regression analysis that tests for misalignment of the real exchange rate based on the “fundamental effective exchange rate” (FEER) approach of Edwards (1989).

Multilateral and bilateral exchange rate indices5

6. Using 1986 as a point of reference, the evolution of the REER suggests no significant loss of competitiveness over most of the last ten years, and a gain in competitiveness in the last few years (Figure 1).As part of a comprehensive economic reform program aimed at improving The Gambia’s external competitiveness, the authorities devalued the dalasi and changed the exchange rate regime from a pound sterling peg to a floating system (based on an inter–bank foreign exchange market) in January 1986. After a substantial depreciation in 1986 and a partial recovery during 1987–88, the REER remained relatively stable until 2001. A marked depreciation in both the nominal and real effective exchange rates during 2001–03 reflected the impact of loose fiscal and accommodative monetary policies that fueled inflation and led to a depletion of international reserves. Average annual inflation rose from less than 1 percent in 2000 to 17 percent in 2003. A tightening of monetary policy from late–2003 stabilized the nominal exchange rate and reduced inflation to low single–digit levels in 2005. In the last two years, the REER has remained well below pre–2001 levels.

Figure 1.
Figure 1.

The Gambia: Evolution of Nominal and Real Effective Exchange Rate Indices

(1990=100)

Citation: IMF Staff Country Reports 2007, 126; 10.5089/9781451815559.002.A001

Source: IMF (Information Notice System)

7. A review of other real exchange rate indices paints a more varied picture (Figure 2).The real effective exchange rate in Figure 1 is based on the trade–weighted index calculated by the IMF.6This index understates the importance of services—especially tourism and re–export trade—in The Gambia’s external sector. To overcome this shortcoming, we constructed a real exchange rate index using countries of origin of tourists as weights, and also examined movements in real bilateral exchange rates vis–à–vis the U.K. (country of origin of most tourists), continental Europe (source of most imports), and the U.S. (the dollar is the most traded currency in the inter–bank foreign exchange market). The real dollar rate not only fluctuated more widely than the other bilateral rates, it also went back to pre–1986 levels during the second half of the 1980s and the early 1990s.

Figure 2.
Figure 2.

The Gambia: Selected Exchange Rate Indicators, 1980–06.

Citation: IMF Staff Country Reports 2007, 126; 10.5089/9781451815559.002.A001

Source: IMF (Information Notice System)

8. Comparisons of the real exchange rate indices for The Gambia and Senegal suggest significant shifts in relative competitiveness positions.Senegal is important as a destination for re–exports, a source of some imports, and a competitor in the groundnut export market. The charts presented inFigure 2suggest the following:

  • The evolution of the respective REER indices indicate three turning points. The first was the 1986 devaluation of the dalasi which enhanced The Gambia’s relative competitiveness position. The second was the devaluation of the CFA franc in 1994 which reversed the situation, making Senegal more competitive. The third, was the depreciation of the dalasi during 200 1–03 which again gave The Gambia a competitive edge.

  • Applying The Gambia’s trade weights to both countries—to assess The Gambia’s relative price competitiveness as if Senegal was competing on the same markets—suggests that the 1986 devaluation of the dalasi gave a comfortable price advantage to The Gambia. However, this advantage was canceled by the 1994 devaluation of the CFA franc and the bilateral real exchange rate remained in line until the dalasi plummeted during 200 1–03, restoring a price advantage to The Gambia.

  • We also applied the weights derived from the countries of origin of tourists visiting The Gambia to both countries, as if they competed for tourists in the same market. For the same tourist origins, prices in The Gambia became distinctly higher than prices in Senegal after the CFA franc devaluation. Subsequently, the real exchange rate depreciated until reaching a level close to the real exchange rate of Senegal.

An assessment of real exchange rate misalignment

9. This section reports the results of an estimation of The Gambia’s equilibrium REER.We draw on the FEER approach for the “fundamentals” that influence the path of the REER, estimated using the autoregressive distributed lag (ARDL) approach to co integration proposed by Pesaran and Shin (1999). The estimated model was as follows:

1n(REER)=bo+b1*1n(TOT)+b2*1n(GEGDP)+b3*1n(IMGDP)+b4*1n(PRD)+D2002

where ln denotes the natural logarithm of a variable; REER is the real effective exchange rate index; TOT is an index of the terms of trade for goods and services; GEGDP is the ratio of total government expenditure to GDP; IMGDP is the ratio of imports to GDP; PROD is an index of productivity calculated as The Gambia’s real GDP relative to that of its trading partners; and D2002 is a step dummy used to capture the plummeting of the dalasi during 200 1–03. Data limitations and degrees–of–freedom considerations dictated our choice and number of right hand side variables.7

10. The expected signs of the fundamentals are as follows:

  • Positive for the terms of trade; a positive TOT shock is expected to boost domestic demand, increase the price of nontradables relative to tradables, and hence lead to a real appreciation of the REER.

  • Ambiguous for government expenditure; the impact will depend on the composition (tradables vs nontradables) of government expenditure.

  • Negative for imports.

  • Positive for PROD, to the extent that it captures the Balassa–Samuelson effect.

11. The long–run relationship between REER and the fundamental variables was:8

1n(REER)=3.107+1.8391n(TOT)+0.6681n(GEGDP)0.8111n(IMPGDP)+1.4101n(PROD)0.367D2002.

All the variables were significant at conventional levels of confidence and the terms of trade, imports, and productivity had the expected signs. Government expenditure had a positive sign suggesting a relatively high nontradable component of government spending. A comparison of the paths of the actual and estimated equilibrium REER shows no sign of persistent misalignment (Figure 3).

Figure 3.
Figure 3.

The Gambia: Equilibrium REER

Citation: IMF Staff Country Reports 2007, 126; 10.5089/9781451815559.002.A001

C. Regional Integration and Investment Climate Issues

Regional Integratio

12. The Gambia liberalized its trade and investment regime earlier than other countries in the region. It opened up its financial sector to foreign investment in the late–1980s, and streamlined and reduced its import tariffs in the late–1990s. Lower import tariffs and an efficient and advantageously located port in Banjul, have encouraged the development of re–export trade. This involves importation of goods for re–export to markets in neighboring countries—mainly Guinea, Guinea–Bissau, Mali, and Senegal.

13. Implementation of the ECOWAS CET and an increase in the sales tax on imports will likely erode incentives for The Gambia’s re–export trade.A desire for greater integration within ECOWAS led to a decision that all countries in the sub–region adopt the common external tariff of the West African Economic and Monetary Union (WAEMU) and move toward harmonizing taxes.9Moving to the WAEMU CET and a higher sales tax has resulted in a 7 percentage point increase in applicable rates for consumption goods, which constitute the bulk of re–exports. There has been a 5 percentage point increase for all other categories of goods (Table 2). The increase in costs will probably have to be borne by traders. A lack of reliable data precludes an analysis of the impact so far in 2006, but there is anecdotal evidence that imports of textiles for re–export may be slowing down.

Table 2.

The Gambia: Import Duty and Sales Tax

(Percent)

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As of January

14. The authorities are aware of the possible adverse impact of the CET on re-export trade, but believe that the potential benefits of greater regional integration under ECOWAS will outweigh the costs.In particular, given its small population (around 1.5 million), they are hoping that the prospect of duty free access to the whole ECOWAS region with a population of about 230 million will provide a stimulus to investment, trade and growth. Under the ECOWAS free trade framework, goods with a minimum 35 percent valued added in the home country are able to export duty free within ECO WAS, once they satisfy appropriate rules of origin requirements.10

Investment Climate Assessments

15. Greater focus on an agenda emphasizing growth opportunities associated with regional integration has brought investment climate and competitiveness issues to the fore.While the merits of creating an environment conducive to foreign and domestic investment are almost universally accepted, there is no commonly accepted definition of “investment climate.” In reviewing The Gambia’s investment climate, this note has drawn on a variety of independent assessments and surveys conducted by several institutions—the World Bank, the World Economic Forum, the Heritage Foundation, and Fitch Ratings.

16. Along with most African countries, The Gambia is perceived poorly on global survey–based indicators of the business climate.In its first appearance in the World Bank’s annual “doing business” survey, The Gambia ranked 113thout of 175 countries in 2006. Areas in which The Gambia was weakest were taxation of companies, protecting investors, getting credit, and registering property; it ranked in the bottom 50 countries in each of these categories. At the other end of the spectrum, The Gambia ranked in the top 25 countries in two areas: employing workers, and trading across borders. Its rankings in other areas were as follows: 53rdin enforcing contracts, 73rdin dealing with licenses, 76thin closing a business, and 124thin starting a business.

17. The Gambia’s performance in relation to other African countries is mixed. It does relatively well in the “doing business” rankings (Table 3) and in the World Economic Forum’s Business Competitiveness Index (BCI) for 2005 (Figure 4), but not as well in the World Economic Forum’s Growth Competitiveness Index (GCI) for 2005 (Table 4). The GCI incorporates assessments of the quality of the macroeconomic environment, the state of the country’s public institutions, and the level of its technological readiness. The BCI focuses on the underlying microeconomic factors that determine an economy’s sustainable levels of productivity and competitiveness.

Table 3.

Doing Business Rankings–ECOWAS Countries (2006)1/

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Source: World Bank

The lower the number the more favorable the business climate.

Out of a total of 175 countries that were ranked.

Out of 45 Sub-Saharan Africa countries that were ranked.

Figure 4.
Figure 4.

World Economic Forum Business Competitiveness Index Rankings

(Selected African countries out of global sample of 116)

Citation: IMF Staff Country Reports 2007, 126; 10.5089/9781451815559.002.A001

Table 4.

Growth Competitiveness Index Rankings

(selected countries out of global sample of 117)

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Source: World Economic Forum

18. Governance plays a key role inthe development process and in determining the attractiveness of a country for FDI.We reviewed The Gambia’s ranking in the World Bank’s comparative governance indicators and the Heritage Foundation’s Index of Economic Freedom (IEF).11In the comparative governance indicators, relative to other countries in the region, The Gambia scores well on regulatory quality, and less well on government effectiveness, rule of law, and the control of corruption (Figure 5).12The Gambia is viewed as a laggard in perceptions of economic freedom; the IEF ranks the country 1 23rdout of 161 countries, characterizing it as “mostly unfree” and indicating a deterioration in the assessment for 2006 compared to 2005.

Figure 5.
Figure 5.

The Gambia: Selected Governance Indicators

Citation: IMF Staff Country Reports 2007, 126; 10.5089/9781451815559.002.A001

Source: Kaufmann, Kraay and Mastruzzi (2005).

19. The Gambia’s international credit rating has deteriorated.The Gambia secured an initial grade “B–minus” rating from Fitch Ratings in November 2002. At that time the relatively positive assessment was based on the country’s good external repayment record, and a favorable outlook for medium–term sustainability of its external debt, based on perceived good prospects for reaching the HIPC Initiative completion point quickly. The rating was revised down to “CCC” in January 2005, reflecting the deterioration in economic performance during 2002–03 and the inability of The Gambia to stay on track with an IMF–supported program, which has delayed progress toward the completion point. The “CCC” rating was affirmed in February 2006. Countries listed in The Gambia’s peer group include: Malawi (CCC); and Bolivia, Cameroon, Dominican Republic, Ecuador, Lebanon, Mali, and Moldova (B–minus).

D. Recent Measures to Improve The Gambia’s Investment Climate

20. Making The Gambia a gateway to West Africa and beyond is a long standing goal which the authorities have been pursuing with support from a World Bank–funded Gateway Project. The project aims to establish The Gambia as a globally competitive processing and export center by laying the foundation for expanded private investment in export–orientated production. Key measures include the establishment of a Free Zone and an improved institutional environment, as well as strengthening road and river transportation infrastructure.

Table 5.

The Gambia Gateway Project

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21. In support of these measures The Gambia has begun to strengthen its legal framework and the functioning of the legal system,including speeding up court proceedings, and bringing the country’s business regulatory framework into line with international standards. Recent developments include:

  • The establishment of a commercial court in 2005as part of a restructuring of the court system which resulted in the formation of different divisions. The commercial court is intended to help speed up dispute resolution. However, with only one judge, a large backlog of cases has built up. The authorities are seeking assistance from the Commonwealth Secretariat in the form of judges to work exclusively on clearing the backlog.

  • An Alternative Dispute Resolution (ADR) Act was passed in 2005, which the authorities hope will ease the pressure on the commercial court. Parties can now choose to include the ADR in business contracts. An ADR Secretariat is to be established.

  • A review of the Companies Actis underway with a view to make its coverage more comprehensive and to strengthen the provisions on financial statements and audits, including incorporating International Financial Reporting Standards.

E. Conclusions

22. Structural reforms hold the key to enhancing The Gambia’s externalcompetitiveness.Improvements in the investment climate are required to maintain growth of services (especially tourism), encourage export diversification, and secure continued inflows of FDI. In this context, market perceptions of The Gambia’s competitiveness and investment climate are mixed, indicating scope for improvements. Emerging priorities include:

  • Address perceived concerns with the investment climate, including issues related to the business tax regime, the functioning of the legal system, and reducing the cost of credit. Many of the same issues were identified in a Diagnostic Assessment of Investment Climate study prepared by the International Finance Corporation and the World Bank in 2004.

  • Strengthen the overall functioning of the government and regulatory regime so that The Gambia does not fall behind other countries in the region. Elements of this should include civil service reform and a more effective anti–corruption program.

  • Improve infrastructure. The energy and water sectors are viewed as major constraints to private sector investment and growth, and their infrastructure needs to be updated and expanded and operations reformed. Port physical facilities need to be continuously improved and efficiency of port services maintained, as these are major factors in the profitability of the re–export trade. Cheaper river transport mechanisms also deserve attention.

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  • Heritage Foundation, “2006 Index of Economic Freedom.” Available via internet: http://www.heritage.org/research/features/index

  • Kaufman, Daniel, Aart Kraay, and Massimo Mastruzzi, 2005, “Governance Matters IV: Governance Indicators for 1996-2004,” Policy Research Working Paper 3630 (Washington: The World Bank).

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  • Pesaran, M Hashem, and Yongcheol Shin (1999), “An Autoregressive Distributed Lag Modeling Approach to Cointegration Analysis,” Chapter 11 in S. Strom (ed.), Econometrics and Economic Theory in the 20th Century: The Ragnar Frisch Centennial Symposium (Cambridge, England; New York: Cambridge University Press).

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  • Secka, Mod, and others, 2003, “The Gambia: Preliminary Evidence and Issues to be Considered in Order to Formulate Appropriate Accompanying Measures for the Successful Implementation of an ECOWAS CET for The Gambia” (Banjul).

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  • Tsangarides, Charalambos, 2005, “The Evolution of Actual and Equilibrium Real Effective Exchange Rates in the CEMAC Region,” in IMF, Central African Economic and Monetary Community—Selected Issues, IMF Country Report No. 05/390 (Washington: International Monetary Fund).

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APPENDIX I

The Gambia: Balance of Payments, 1997-2005

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Source: The Gambian authorities and IMF staff estimates.
1/

Estimated margins added to the cost of imports to account for services provided by enterprises based in The Gambia.

2/

Includes unaccounted–for–loss in official reserves amounting to US$28.5 million (6.8 percent of GDP) in 2001.

Appendix II

The Gambia: Results of Estimation of Equilibrium Real Effective Exchange Rate

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1

Prepared by Andrew Gilmour, Tsidi Tsikata and Romain Veyrune. Magnus Saxegaard estimated the autoregressive distributed lag model discussed in Section B.

2

A detailed presentation of the balance of payments is contained in Appendix I.

3

See Appendix I in IMF Country Report No. 06/444.

4

For a recent comprehensive survey of the literature, see Driver and Westaway (2004).

5

This section updates some of the analysis in Beddies and Jones (1999).

6

The weights are based on exports and gross imports.

7

Other studies have included investment and capital flows as “fundamental” variables; see for example Tsangarides (2005).

8

See Appendix II for the full results for the long-run relationship as well as the Error Correction representation of the ARDL model.

9

ECOWAS members who are not members of WAEMU are The Gambia, Ghana, Nigeria, Guinea, Cape Verde, Liberia and Sierra Leone

10

See Secka and others (2003) for an assessment of the impact of the ECOWAS CET on The Gambia.

11

The IEF covers institutional factors perceived to determine economic freedom: corruption in the judiciary, customs service and government bureaucracy, nontariff barriers to trade, the fiscal burden on government, the rule of law, regulatory burdens on business, restrictions on banks, labor market regulations, and informal market activities.

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

    The Gambia: Evolution of Nominal and Real Effective Exchange Rate Indices

    (1990=100)

  • View in gallery

    The Gambia: Selected Exchange Rate Indicators, 1980–06.

  • View in gallery

    The Gambia: Equilibrium REER

  • View in gallery

    World Economic Forum Business Competitiveness Index Rankings

    (Selected African countries out of global sample of 116)

  • View in gallery

    The Gambia: Selected Governance Indicators