Abstract
This paper discusses key findings of the First Review Under the Poverty Reduction and Growth Facility (PRGF). Overall performance under the program has been strong. All but one of the quantitative performance criteria and indicative targets were met. Fiscal performance has been impressive, reflecting higher-than-projected revenues and strengthened expenditure control. However, two structural performance criteria were not observed. The medium-term macroeconomic framework underlying the program has been modified slightly. Maintaining fiscal discipline remains key to lowering domestic public debt and protecting poverty-reducing expenditures.
Introduction
On behalf of our Gambian authorities, we would like to thank staff for the candid discussions during the last consultations on the review of the country's performance under the PRGF arrangement and 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.
Performance Under the Program
The Gambia's performance under the program has been generally robust, with all but one of the quantitative performance criteria and indicative targets having been met and six of the eight structural performance criteria being observed. The government ensured that its stock of domestic arrears was reduced significantly by making payments above indicative targets. However, it missed performance criterion on non-accumulation of new external arrears to the World Bank and the African Development Bank due to capacity constraints in debt management. With regard to structural performance, the submission of a special audit report on monetary data was late due to delays in the confirmation of external balances held abroad. The establishment of the Central Project Management and Aid Coordination Directorate (CPMACD) was partially implemented and is now expected to become fully operational by October. The authorities are requesting a waiver for the three missed performance criteria.
The significant progress towards macroeconomic stability in recent years bears testimony to the authorities' commitment to prudent macroeconomic management. Overall economic performance has largely been in line with program objectives. However, the economy's vulnerability to external shocks and public debt remains high. The authorities remain committed to the full implementation of the PRGF supported program and hope to fulfill the remaining HIPC completion point trigger and qualify for debt relief under the enhanced HIPC and MDRI by the end of 2007.
Recent Economic Developments
The robust macroeconomic performance realized since 2004 continued to be sustained, with real GDP estimated to be slightly above 6 percent in 2006 and expected to reach 7 percent in 2007. Growth has been generally broad based, supported mainly by the construction, telecommunications and tourism sectors. Inflation accelerated during the first quarter of 2007 but remained in the single-digits. Inflationary pressures emanated largely from external factors such as the increases in world market prices, especially for rice and temporary disruptions in imports of some food stuffs. The significant slowdown in money supply and the slight nominal strengthening of the dalasi that occurred during the first half of the year augured well with the containment of inflation. In real and nominal effective terms, the dalasi continued to be stable.
Fiscal performance strengthened further in 2007, building on the improvement in performance attained in 2006. 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. Interest payments fell from 46.7 percent of current spending in 2005 to about 35.6 percent at the end of 2006, as a result of lower interest rates.
As a result of the record growth in tourism earnings, and the rebound of groundnut exports following their collapse in 2005 on account of a failure in marketing arrangements, the external current account deficit (including official transfers) narrowed significantly in 2006. Foreign direct investment and official concessional loans continued to be the main source of financing for the current account deficit. The overall external position remained comfortable, with gross international reserves equivalent to about four months of imports.
Macroeconomic Policies for 2007 -2009
The authorities remain fully committed to maintaining strong macroeconomic policies, which will be important towards consolidating the gains of recent achievements. In this regard, they will ensure that, the second PRGF supported program, which is consistent with the government’s PRSPII, is implemented successfully, to facilitate preservation of fiscal discipline, containment of inflation and sustainability of current account. The authorities are confident that the PRGF supported program, which was approved by the IMF Board on February 21, 2007 and aims at consolidating macroeconomic stability and fostering conditions conducive to high and sustainable growth as well as poverty reduction, is fully consistent with the government’s broad objectives.
In the medium term (2007-09), the program envisages a real GDP growth of 6-7 percent, a decline in annual inflation to 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 13.5 percent of GDP in 2006 to 12.5 percent of GDP in 2009, supported by strong growth in tourism earnings. Gross official reserves will be maintained at the equivalent of about five months of imports.
Fiscal Policy
The authorities remain committed to the maintenance of prudent fiscal policies and consolidating recent gains in macroeconomic stability. In this regard, they will continue to maintain fiscal discipline in order to contain domestic borrowing and reduce the domestic public debt and related interest payments to sustainable levels. The overall fiscal balance is expected to improve significantly, registering a surplus in 2007 while the surplus on the basic balance will increase more than twofold. These fiscal surpluses will enable the country to pay off some of the recently discovered domestic expenditure arrears. The reduction in domestic debt will ease budgetary pressure imposed by the currently high interest payments. The authorities therefore, plan to contain domestic borrowing and to finance the future budget shortfalls through concessional borrowing and grants.
On the revenue side, the authorities will increase their revenue effort through efficiency gains from further improvements in tax administration. The Gambia Revenue Authority will also continue to implement measures to broaden the tax base and increase tax compliance. Tax policy will be based on the principle of revenue neutrality, avoid any distortions and will endeavor to maintain an attractive investment climate. The authorities recognize the importance of avoiding ad hoc tax changes but the recent reduction in the sales tax on rice could not be avoided due to the seriousness of the social impact of the high prices of rice. The tax reduction was revenue neutral as it was offset by the increase in sales tax on automobile spare parts.
Expenditure policy will strife to align budget priorities with the PRSP as well as to enhance the efficiency and transparency of fiscal operations. The authorities are making efforts to improve the budget formulation processes. Their efforts to implement measures to strengthen expenditure management have started to bear fruits. The introduction of the Integrated Financial Management Information System (IFMIS) in January 2007 has facilitated the execution of the budget in line with budget appropriations as well as the monitoring of PRSP related spending through the generation of monthly reports. IFMIS will be instrumental in curtailing the emergence of new expenditure arrears that could arise as a result of unbudgeted expenditures.
The authorities are taking further steps to improve transparency, comprehensiveness and timeliness in reporting. The CPMACD has been established and will be fully operational by October 2007. The responsibilities of CPMACD will include compiling comprehensive information on aid flows into the country and the uses to which the resources are put. A reporting framework for public enterprises has been strengthened to facilitate monitoring of fiscal risk and improve fiscal transparency. With regard to the improvement of accountability, substantial progress has been made in the clearance of the backlog of unaudited government accounts. The 2005 accounts were submitted to the Auditor General in July 2007 and it is expected that by the end of the year, the 2006 accounts will also have been submitted.
Monetary Policy and Financial Sector
The monetary targeting framework will continue to be used in pursuit of the price stability objective, building on the recent success in bringing inflation down to the low single digits. In order to further enhance the Central Bank of Gambia’s (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). In this regard, the CBG will be recapitalized to the tune of D100 million over a period of five years, covering 2006–2010. The Government has already paid D20 million of this and plans to pay an equivalent amount by the end of the year. The authorities have (since June 2007) taken measures to substantially reduce government borrowing from the central bank with the aim of bringing it down to the legally stipulated limit of 10 percent of the previous year’s tax revenue by the end of 2007. A plan on how this will be executed has been jointly developed by the CBG and the government.
In order to enhance the effectiveness of monetary policy the government has agreed to refrain from using the proceeds of treasury bills issued by the Central Bank for monetary policy purposes and has agreed to block the proceeds in a special account established for this purpose.
In line with the action plan approved by the CBG board in 2005, the CBG will continue to strengthen internal controls. The CBG intends to adopt the International Financial Reporting Standards (IFRS) as its accounting framework. It is also undertaking reforms aimed at strengthening its operations as well as financial supervision.
The financial sector in The Gambia continues to be sound. However, financial intermediation remains weak 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. The credit bureau is expected to be operational by end-March 2008.
Capacity Building
The reform efforts of the government of The Gambia have been very adversely affected by capacity constraints. The implementation of the PRSPI for example, was very negatively affected by inadequate capacity. The authorities have requested for technical assistance in budget planning, execution and control from PFM diagnostics mission, which they also hope would contribute to their efforts to enhance transparency and in the use of government funds. We hope that the request by the central bank to improve the monetary policy framework, debt management and banking supervision will receive favorable consideration by the IMF.
HIPC Completion Point
The Gambia has met all the HIPC completion point triggers except for the privatization of public assets in the groundnut sector. This was a due to the failure of the authorities’ previous efforts to attract interest from reputable investors in the sector. In line with the general consensus and drawing from experiences of other countries, which suggest that privatization alone may not be sufficient to turn the sector around, the authorities have, with assistance from the World Bank, adopted a comprehensive Groundnut Sector Roadmap Implementation Framework to rehabilitate the sector. The roadmap facilitates free entry of private investors into all areas of the sector and the government withdrawal from licensing and producer price setting roles. The Gambia Groundnut Corporation (GGC) will be placed under a performance based management contract from July 2008. Government will takeover the ground nut sector related loans to the tune of D157 million that are in default.
The authorities have already established satisfactory performance for at least six months under the PRGF supported program; the fulfillment of the remaining HIPC completion point trigger will facilitate reaching completion point and make the country eligible for debt relief under both HIPC and MDRI. This will alleviate The Gambia’s public debt situation. It is hoped that the completion point will be reached by the end of 2007.
Conclusion
In conclusion, we would like to reiterate the authorities’ commitment to the successful implementation of the program, which underpins consolidating progress made towards macroeconomic stability and growth promotion. They appreciate the support they have so far received from Fund and the international community and hope they can count on the continuation of such support to alleviate the enormous capacity and financial constraints that they face in their pursuit of their macroeconomic policy objectives.