Abstract
The Czech Republic’s strong fundamentals helped to sustain economic growth with low unemployment and underpin strides toward convergence with EU-15. Executive Directors welcomed the euro accession strategy and the sustained implementation of the Maastricht criteria, which would provide a solid foundation for euro adoption. They commended the sound financial system and prudent monetary policies and supported policy tightening to counter rising inflation pressures. Directors highlighted the need to sustain fiscal consolidation, promote labor participation, and lower structural unemployment in alleviating fiscal adjustment.
The Gambian authorities thank the Fund Executive Board and management for their continued engagement and support. They are grateful for the constructive policy dialogue and advice proffered by staff during the review missions and other consultations. The authorities are in general agreement with the thrust of the staff reports.
The Gambia's performance under the program has continued to be strong, comfortably meeting all the quantitative performance criteria. All but one of the structural measures for the second half of 2007 have either been implemented or are on track. The missed performance criteria was related to the submission of monthly budget execution reports to the Fund due to difficulties in reconciling data from the IFMIS-based budget reports and the analytical fiscal tables. The authorities have since taken corrective action and are therefore requesting a waiver.
The authorities are also seeking completion point under the enhanced HIPC initiative so that the country may be eligible for debt relief under both HIPC and MDRI. This will significantly alleviate The Gambia's public debt position. The Gambia has fully met nine of the eleven HIPC completion point triggers and are requesting waivers for the two triggers which were partially met. These were triggers related to an annual increase of at least 5 percent in the share of births attended by trained antenatal personnel and the bringing to the point of sale of public assets in the groundnut sector. Births attended by trained personnel increased from 44 percent in 1998 to 56.3 percent in 2005, but the target set for the trigger did not anticipate a long lag before completion point. The authorities believe that achieving this increase, which compares favorably in the region, meets the spirit of this trigger. With regard to the privatization of public assets in the groundnut sector, the authorities' previous efforts failed to attract interest from reputable investors in the sector. Consequently, in consultation with the World Bank, IMF and EU they developed and are implementing a roadmap with the strategic focus on fully liberalizing the sector.
1. Recent Economic Developments
The Gambia's economic performance remained strong with real GDP growth estimated at 7 percent in 2007. Growth has been broad-based and mainly supported by the construction, telecommunications, and tourism sectors. Following acceleration due to increased food prices in the first half of the year, inflation has stabilized at around 6.0 percent during the second half of the year.
During the first three quarters of 2007, stronger than anticipated fiscal performance was realized, due to the higher revenue collection which was facilitated by improvements in tax administration as well as some expenditure restraint. The fiscal basic balance registered a surplus of around 4 percent of GDP from January through September. The strong fiscal performance made it possible to significantly reduce the stock of arrears and to fully repay the loans contracted from public enterprises in 2006. However, a shortfall in donor support for an ongoing development project led to the emergence of $2.3 million arrears, which the government will fully repay in 2008.
After remaining relatively stable in the first half of 2007, the dalasi appreciated sharply against all major currencies in the third quarter. Given that the macroeconomic fundamentals remained strong, the appreciation observed in the third quarter was mainly driven by changes in market sentiments. Following the CBG intervention, which started in September, the situation in the foreign exchange market has stabilized. The dalasi is expected to remain relatively strong in the medium-term.
The external current account deficit narrowed further in 2007 as a result of the strong tourism earnings, improved export performance, increased private transfers and donor financing for new infrastructure projects. Foreign direct investment and official borrowing continued to finance the current account deficit, while allowing for the maintenance of an appropriate level of net international reserves.
2. Performance under the program
The authorities' commitment to improved macroeconomic management and successful implementation of the program has resulted in strong overall performance. All the quantitative targets for end-September were comfortably met, with some even exceeding targets. All but one of the structural measures for the second half of 2007 have either been implemented or are on track. The government accounts for 2006 were submitted to the Auditor-General three months ahead of schedule, and the Central Project Management and Aid Coordination Directorate at DoSFEA has become operational. The one measure that was not met, which constitutes performance criteria for which the authorities are requesting a waiver, was the submission of monthly budget execution reports to the Fund due to difficulties in reconciling data from the Integrated Financial Management Information System (IFMIS) based budget reports and the analytical fiscal tables. The authorities have since rectified the situation and submitted the corrected reports to the Fund.
3. Macroeconomic policies
The Gambia's macroeconomic policies continue to be geared toward consolidating macroeconomic stability and fostering conditions conducive to high and sustainable growth as well as poverty reduction. The considerable progress achieved towards macroeconomic stability in recent years bears testimony to the authorities' commitment to prudent macroeconomic management.
Fiscal policy
Maintenance of prudent fiscal policies and consolidation of recent gains in macroeconomic stability remain at the top of the authorities' economic agenda. Fiscal policy will be aimed at containing public debt and related interest payments to sustainable levels as well as avoiding inflationary pressures that might be associated with excessively high aggregate demand. Fiscal performance is expected to remain broadly in line with the original program over the medium term albeit with a lower cumulative fiscal basic balance surplus for 2007-2009 than in the original program due to the higher scheduled public expenditures. However, some of the increase in public spending will be financed by the recent privatization proceeds, and therefore will not generate additional debt.
Overall revenue performance is expected to continue to be strong, supported by robust economic activity and the authorities' persistent efforts to improve tax administration. However, the recent sharp appreciation of the dalasi is expected to have some negative effect on revenue performance through a reduction in international trade taxes, as well as a possible decline in corporate tax receipts as a result of the losses incurred by commercial banks in their foreign exchange operations. Higher customs duty collections on oil imports and lower debt service payments are likely to offset the effect of these potential revenue losses.
On the expenditure side, spending will be affected by the planned increase in civil service salaries, starting in 2008 fiscal year to attract and retain highly qualified staff in order to stem the high rate of attrition of professional staff in the public sector. The wage bill is anticipated to increase from 4.5 percent of GDP in 2007 to 5.1 and 6 percent of GDP in 2008 and 2009 respectively. The second phase of salary increases will be implemented within the context of a comprehensive civil service reform program, which is under preparation with the support of the World Bank.
The authorities will continue to make every effort to align budget priorities with the PRSP as well as to enhance the efficiency and transparency of fiscal operations. The introduction of IFMIS in January 2007 has strengthened commitment controls and facilitated the execution of the budget in line with budget appropriations as well as the monitoring of PRSP related spending. The authorities are also taking steps to strengthen the system for allocation and monitoring of government counterpart funds to externally-financed capital projects. They will maintain their efforts to enhance accountability in the use of public resources and improve the quality of public projects.
The authorities are committed to prudent management of external debt and plan to prepare a comprehensive debt management strategy by end-July 2008. Until it is able to undertake its own independent debt sustainability analysis (DSA), the government has established indicative limits, under the PRGF-supported program, on contracting of new debt in 2008 and 2009. However, these limits will be revisited in the context of program reviews and the result of the government's own DSAs. New borrowing will also be limited to highly concessional terms, with a minimum grant element of 45 percent.
Monetary Policy and financial sector
In pursuit of the monetary policy objective of maintaining price stability the Central bank of Gambia (CBG) will continue to use a money targeting framework and to use the rediscount rate to signal changes in its policy stance. The CBG remains committed to maintaining a flexible exchange rate system. However, it will intervene in exchange markets to prevent disorderly adjustments and according to its well-defined intervention policy.
In order to further enhance the CBG's capacity in execution of monetary policy, the authorities will continue to strengthen the CBG's operational independence by ensuring compliance with the provisions of the CBG Act (2005) on its capital requirements and limits on lending to government. The recapitalization of the CBG has already started and will be done over a five-year period. The government and the CBG have been implementing an Action Plan to bring government borrowing from the CBG within the legal limit of 10 percent of the previous year's tax revenue by the end of 2007. As of end-October 2007, government borrowing from the CBG was well within the limit.
The CBG continues to place great importance in improving its internal controls and intends to adopt International Financial Reporting Standards (IFRS) as its accounting framework. Currently, a gap analysis between current accounting policies and the requirements of IFRS is being conducted and an Action Plan for moving to IFRS over a three-year period is envisaged to be completed by December 2007.
The authorities recognize the importance of coordination of monetary and fiscal policies and have agreed on a framework for doing so. To facilitate this, the Department of State for Finance and Economic affairs (DoSFEA) and the CBG have signed a memorandum of understanding to guide domestic debt management and monetary operations. To enhance the effectiveness of monetary policy and mitigate the constraints to the CBG's monetary operations arising from low balances in the treasury bill special deposit account, the government intends to gradually replenish the account for the amounts it withdrew in January 2007 to jump-start IFMIS. A mechanism for doing so will be agreed on by the CBG and DoSFEA.
While the financial sector in The Gambia continues to be sound, 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. Banks are expected to provide data on their customers and to begin accessing the database by the end of 2007. The credit bureau is expected to be operational by end-March 2008. The authorities are continuously strengthening prudential supervision of banks. To this end they have introduced the Prompt Corrective Action (PCA) framework for monitoring bank compliance and performance against a number of critical indicators.
4. HIPC Completion Point
The authorities are seeking completion point under the enhanced HIPC initiative so that the country may be eligible for debt relief under both HIPC and MDRI. This will significantly alleviate The Gambia's public external debt position, lowering it from the current from around 84 percent of GDP to approximately 25 percent of GDP after HIPC and MDRI debt relief.
Of the eleven HIPC completion point triggers, only two-an annual increase of at least 5 percent in the share of births attended by trained antenatal personnel and the bringing to the point of sale of public assets in the groundnut sector-were partially met. The government is requesting waivers for these two triggers. Births attended by trained personnel increased, but the target set for the trigger did not anticipate a long lag before completion point. Since completion point was delayed, the government believes that achieving an increase from 44 percent in 1998 to 56.3 percent in 2005, a figure that compares favorably in the region, meets the spirit of this trigger.
The government has taken corrective action to move beyond the requirement to bring the public sector groundnut processing plants to the point of sale. Previous efforts to attract private investors have been unsuccessful. At the same time a consensus has emerged among stakeholders that revitalization of the sector-crucial for poverty reduction and growth-should go beyond the simple sale of assets that does not address core weaknesses in the sector. To rehabilitate the sector, the government has adopted a comprehensive Groundnut sub sector Roadmap Implementation Framework, based on various recent studies undertaken with support from the World Bank, EU and IMF. As part of this roadmap, the government has taken several actions ahead of the 2007/08 season, including the opening of all aspects of operations in the sector to the private sector and assigning responsibility for managing key aspects of the sector, including the setting of producer prices, to the Agribusiness Service Plan Association (ASPA).
5. Conclusion
In conclusion, we would like to reiterate the authorities' commitment to the sound macroeconomic management and growth promotion as a step toward improving the livelihood of the Gambian people. They appreciate the support they continue to receive 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 the pursuit of their macroeconomic policy objectives. Debt relief will go a long way in creating some fiscal space which will facilitate allocation of resources to development and poverty reducing activities.