The Gambia
2008 Article IV Consultation and Third Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, and Request for Waiver of Performance Criteria: Staff Report; Staff Supplement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for The Gambia
Author: International Monetary Fund
Publication Date:
03 Oct 2008
eISBN:
9781451815627
ISBN:
9781451815627
Language:
English
Keywords:
ISCR; CR; bottom; government; PRGF loan; Gambia; development partner; balance of payments; article IV consultation; current account deficit; revenue effort; Debt relief; Capital spending
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The Gambia’s 2008 Article IV Consultation and Third Review Under the Poverty Reduction and Growth Facility are discussed. A sharp appreciation of the dalasi in 2007 has mitigated the impact of increases in world food and oil prices. The authorities’ response to the continuing rise in these world prices has been measured; while eliminating sales tax on the rise, they have raised other taxes to compensate for the revenue loss. Petroleum product prices have been adjusted to eliminate an implicit subsidy and bring them in line with import costs.

Abstract

The Gambia’s 2008 Article IV Consultation and Third Review Under the Poverty Reduction and Growth Facility are discussed. A sharp appreciation of the dalasi in 2007 has mitigated the impact of increases in world food and oil prices. The authorities’ response to the continuing rise in these world prices has been measured; while eliminating sales tax on the rise, they have raised other taxes to compensate for the revenue loss. Petroleum product prices have been adjusted to eliminate an implicit subsidy and bring them in line with import costs.

I. Introduction

1. Since the 2006 Article IV consultation, The Gambia has maintained macroeconomic stability and made progress toward achieving debt sustainability. Fiscal performance has improved, and monetary policy has been geared to maintaining low inflation. Satisfactory performance under the PRGF-supported program helped the country reach the HIPC completion point in December 2007 and thus benefit from substantial debt relief. Although debt relief has reduced The Gambia’s external debt stock by more than half (from 110 percent to 50 percent of GDP at end-2007), staffs of the Fund and World Bank assess the country to be at high risk of debt distress.

2. Per capita GDP has been growing, but poverty remains widespread. Over the last five years, annual growth in per capita GDP has averaged 3.7 percent. Based on the results of the 2003 household expenditure survey, the government estimates over 60 percent of the population live below the poverty line.

3. The Gambia’s second PRSP (PRSP II) provides the framework for the authorities’ economic development program during 2007-11 (MEFP ¶18). PRSP II reiterates the strategic priorities of the first PRSP, including: (i) macroeconomic stability and effective public resource management; (ii) promotion of pro-poor growth and employment through private sector development; and (iii) improved provision of basic services. PRSP II contains intermediate targets toward achieving the Millennium Development Goals (MDGs). The authorities have highlighted the importance of strengthened capacity in the public service for the successful implementation of PRSP II.

4. With the PRGF-supported program broadly on track, staff’s discussions with the authorities focused on policies for sustaining macroeconomic stability, maintaining external stability, and boosting long-term growth. The growth discussions centered on trade and other policies to enhance The Gambia’s international competitiveness. The discussions also touched on the authorities’ progress in reaching their poverty reduction objectives.

5. The authorities’ response to rising world food and oil prices has been measured. While reducing the sales tax on rice imports from 15 percent to 5 percent in July 2007 and eliminating it altogether in May 2008, the authorities increased other taxes (on car parts and used vehicles) to compensate for the revenue loss. The pump prices of petroleum products were increased in May 2008 by 10–24 percent to remove an implicit budget subsidy that had emerged in the preceding months. Thus, the fiscal impact has so far been limited. Appreciation of the dalasi helped cushion the impact on inflation but has lowered growth prospects for 2008.

II. Recent Developments and Performance under the Program

A. Recent Economic Developments

6. Real GDP growth has averaged about 6½ percent a year since 2004. Growth has been led by the construction, tourism and telecommunications sectors, facilitated by a steady inflow of foreign direct investment and remittances. Performance of the agriculture sector—critical for achieving the authorities’ poverty reducing objectives—has been mixed. In particular, groundnut output fell substantially in the 2007/08 season largely due to a poor pattern of rainfall. At the same time, anecdotal evidence suggests increased output of nontraditional crops—mainly cashew nuts and horticultural products. The Gambia’s overall growth performance compares favorably with other countries in the region.

Average Real GDP Growth and Inflation in Selected Sub-Saharan African Countries, 2004–07

(Percent)

article image
Source: IMF, Regional Economic Outlook, April 2008.

For inflation, excluding Zimbabwe.

7. Inflation abated after a spike in 2007 (Figure 1). Disruptions in the supply of foodstuffs from neighboring countries and rising import costs (e.g., rice) pushed the annual rate of inflation from less than 1 percent in December 2006 to 6–7 percent during most of 2007. However, tight monetary policy and appreciation of the dalasi helped to contain inflation pressures and lower the annual rate to 2.2 percent in June 2008.

Figure 1.
Figure 1.

The Gambia: Inflation, Exchange Rate, and Monetary Developments

Citation: IMF Staff Country Reports 2008, 324; 10.5089/9781451815627.002.A001

Sources: Gambian authorities and staff estimates.
uA01fig01

Gambia - Fiscal Indicators

(Percent of GDP)

Citation: IMF Staff Country Reports 2008, 324; 10.5089/9781451815627.002.A001

8. The overall fiscal balance improved from a 7 percent of GDP deficit in 2006 to a 0.2 percent of GDP surplus in 2007. This was achieved through a sharp fall in expenditures and net lending. Current expenditures fell by 2 percent of GDP, due primarily to a fall in domestic interest rates. Capital expenditures fell more rapidly; spending on externally financed projects fell by 5½ percent of GDP mainly due to a dispute between a contractor and a consultant that delayed the disbursement of grants for an (EU)-funded roads project (MEFP ¶4). The overall balance continued to be in surplus in the first quarter of 2008. Increased expenditure on wages—in line with the budget and aimed at helping the government retain and attract skilled employees—has been offset by a decline in external interest payments (due to debt relief) and in externally financed capital expenditures.

9. A significant slowdown in broad money growth in 2007 reflected improved government finances and stagnant lending to the private sector. Broad money growth fell from 26 percent in 2006 to 7 percent in 2007. Reserve money exhibited an even more pronounced slowdown—from 24 percent expansion in 2006 to a 4 percent decline in 2007. In June 2007, to counter emerging inflationary pressures, the CBG raised its rediscount rate from 14 percent to 15 percent. In March 2008, in response to tight monetary conditions and against a backdrop of falling inflation, the CBG reduced the statutory minimum reserve requirement of banks from 16 percent to 14 percent.

10. Yields on treasury bills have fallen substantially over the last four years but commercial banks’ lending rates remain sticky. Successful disinflation allowed the weighted yield on treasury bills to fall from over 25 percent in early 2005 to around 12 percent currently. By contrast, commercial banks’ lending rates have been stuck above 20 percent. Banks cite high operating costs and credit risks as factors behind the high lending rates and wide interest rate spread.

uA01fig02

The Gambia: Selected Interest Rates, First Quarter 2005-Fourth Quarter 2007

(Percent per annum)

Citation: IMF Staff Country Reports 2008, 324; 10.5089/9781451815627.002.A001

Source: Gambian authorities.

11. After remaining relatively stable from 2004 to 2006, the dalasi appreciated significantly in 2007 and early 2008. A sharp appreciation in the third quarter of 2007 appears to have been triggered by several banks unwinding long open foreign currency positions at the same time. Intervention by the CBG halted the appreciation and the dalasi weakened somewhat in the fourth quarter. For 2007 as a whole, the dalasi appreciated by 18 percent and 24 percent in nominal and real effective terms, respectively. The dalasi appreciated by 8 percent against the U.S. dollar in the first half of 2008, reflecting strong inflow of remittances and reduced debt service payments.

uA01fig03

Nominal and Real Exchange Rates

Citation: IMF Staff Country Reports 2008, 324; 10.5089/9781451815627.002.A001

12. The external current account deficit (including official transfers) widened from 11½ percent of GDP in 2006 to 12½ percent in 2007. Current transfers (mainly remittances and official transfers) fell by 4 percent of GDP, helping push down imports by about 3 percent of GDP. The deficits were financed largely by inflows of foreign direct investment. Gross official reserves increased by US$23 million in 2007, reaching 5½ months of imports at year-end.

B. Performance Under the Program

13. Performance has been satisfactory. The authorities have made solid progress on fiscal consolidation, lowering interest rates and creating fiscal space for growth-promoting and poverty-reducing expenditures. The government has improved public financial management, especially budget execution, and the CBG has strengthened its governance. The authorities made less progress deepening financial intermediation and improving the quality of economic statistics.

14. The authorities met all of the quantitative financial performance criteria for end-March 2008 (MEFP Table A1). The cumulative basic balance through end-December 2007 fell slightly short of the indicative target, but by March 2008, it was back on target. The indicative target on new external borrowing was met, and the government is ahead of schedule on elimination of domestic budgetary arrears by end-2008.

15. Four of eight structural performance criteria were implemented on time (MEFP Table A2). The two special audit reports on program monetary data (due at end-December 2007 and end-June 2008) were submitted to Fund staff with slight delays. The other two—making the credit reference bureau (CRB) fully operational, and the establishment of a register of government expenditure commitments for projects largely financed by external resources—were partially implemented. The CRB has been established but concerns about the legal basis for sharing customer information have prevented it from becoming fully operational (MEFP ¶14). The authorities have launched a review of the Financial Institutions Act with a view to amending it to allow the CRB to share customer information among banks. With regard to the register of expenditure commitments, Department of State for Financial and Economic Affairs (DoSFEA) collected information in different formats with varying degrees of completeness (MEFP ¶13). During the mission, the authorities designed a uniform format for compiling data on each project or loan, and the establishment of the register has now been set as a prior action for Board consideration of the PRGF third review. The authorities are requesting waivers for the structural performance criteria that were not observed.

III. Key Policy Challenges

16. Policy discussions addressed the following challenges to meeting the authorities’ macroeconomic objectives: (a) coping with rising world food and oil prices; (b) maintaining external stability; (c) promoting growth and reducing poverty; (d) ensuring fiscal sustainability; (e) making monetary policy more effective; and (f) enhancing financial intermediation.

A. Coping with Rising World Food and Oil Prices

17. Appreciation of the dalasi in 2007 helped contain the impact of rising world food and oil prices on inflation. Most of the food consumed in the country is imported. The authorities indicated that available stocks of rice—the main staple—should last through September. They noted that, already, the domestic price of rice was beginning to increase and that this trend would be reinforced if world prices continue their upward trajectory and/or the dalasi weakens.

18. The impact on the balance of payments is projected to be more pronounced in 2008 than in 2007 (Table 5B). The current account is projected to worsen by almost 2 percent of GDP. An up tick in inflation is also expected in the second half of 2008.

19. To forestall pressures on the price of rice, the authorities eliminated the sales tax on rice imports and took accompanying compensating revenue measures. The mission discussed possible further measures to mitigate the impact on the most vulnerable households, including expanding existing social programs such as school feeding programs. Staff recommended the government avoid general subsidies, noting they tend to be ineffective and have created budgetary problems in other countries.

20. The mission welcomed the recent adjustment of pump prices of petroleum products to avoid a massive implicit budget subsidy.1 Staff agreed that the budget could not afford to subsidize petroleum products and urged the authorities to regularly review retail prices to keep them in line with world prices. The government intends to continue to cross-subsidize kerosene through petrol and diesel prices (MEFP ¶6).

B. Maintaining External Stability

21. Staff assesses the value of the dalasi to be broadly in line with fundamentals. The mission discussed with the authorities the preliminary results of a Selected Issues Paper (SIP) that assesses The Gambia’s external stability (Box 1). Examination of balance of payments flows suggests the current account deficit is sustainable. The external sustainability approach suggests that the exchange rate is overvalued by about 8 percent while the macroeconomic balance approach suggests overvaluation of 11 percent. The equilibrium real exchange rate approach yielded results ranging from a slight overvaluation to a significant undervaluation. The analyses are hampered by severe data weaknesses, but, on balance, staff concludes that the exchange rate is broadly in line with fundamentals. The authorities welcomed the analysis and reiterated their policy of allowing the dalasi’s value to be determined in the foreign exchange market. They stressed that official intervention occurs mainly to maintain adequate international reserves or to smooth fluctuations in the exchange rate (MEFP ¶30).

Assessing External Stability in The Gambia

Different approaches to assessing The Gambia’s external stability yield different results. The external sustainability (ES) approach indicates a real depreciation of about 8 percent would be required to stabilize the NFA to GDP ratio at its current level while the macroeconomic balance approach suggests a depreciation of 11 percent is needed. The equilibrium real exchange rate (ERER) approach suggests a range of results from a 2-percent overvaluation to 33-percent undervaluation in 2007.

The Balance of Payments and REER. Except for a sharp fall in reserves in 2001, the overall balance of payments has registered surpluses averaging 2 percent per year since 1997. The current account deficit increased substantially beginning in 2004. However, this was caused by additional investment in the tourism and telecommunication sectors. After the switch to a floating exchange rate regime in 1986, the REER remained within 10 percent of its average level until 2000. A burgeoning fiscal deficit and loose monetary policy caused the REER to fall 50 percent between 2000 and 2003. Fiscal consolidation and tight monetary policy allowed the REER to stabilize from 2003 to 2007. Comparison with other countries in the region indicates the fall in the REER is consistent with lower productivity growth in The Gambia.

Underlying current account, external sustainability and macroeconomic balance approaches. The underlying current account balance is defined as the observed current account balance stripped of temporary factors. The underlying current account deficit is estimated at 11.7 percent of GDP in 2007 compared to the actual deficit of 12.5 percent of GDP.

The external sustainability approach calculates the current account balance that stabilizes the NFA to GDP ratio at today’s level. As a result of debt relief, The Gambia’s net foreign liabilities ratio fell from just under 200 percent of GDP during 2003-2006 to 56 percent of GDP at end-2007. Staff calculates the current account deficit that would stabilize the NFA ratio—given projected average nominal growth of 10 percent—at 5.9 percent of GDP. Based on estimated elasticities, The Gambia’s real exchange rate would need to depreciate by about 8 percent to bring the underlying current account deficit down to the level needed to stabilize the NFA-to-GDP ratio. The macroeconomic balance approach estimates a current account norm based on The Gambia’s economic fundamentals compared with other countries. This approach indicates a current account norm of 4 percent of GDP is appropriate for The Gambia, requiring a 11 percent depreciation.

Equilibrium real exchange rate (ERER). A single-country estimation indicates a very small overvaluation of the dalasi at end-2007. A panel regression using coefficients from 28 oil-importing sub-Saharan African countries2, indicates the real exchange was 33 percent below its fundamental value in 2007, implying that economic fundamentals cannot explain the drop in the dalasi between 2000 and 2003. The external terms of trade for goods and services, productivity relative to trading partners (defined as relative per capita real GDP), and government consumption relative to trading partners yield statistically significant estimations for both single country and panel regressions. Statistical significance notwithstanding, the outcome of this approach is subject to data uncertainties and a relatively short sample period (only 19 annual observations for estimating the REER using single-country estimation techniques).

uA01fig04

Single-country estimation of ERER

Citation: IMF Staff Country Reports 2008, 324; 10.5089/9781451815627.002.A001

uA01fig05

Panel estimation of ERER

Citation: IMF Staff Country Reports 2008, 324; 10.5089/9781451815627.002.A001

22. The Gambia remains at high risk of debt distress because of the high level of outstanding debt and the country’s vulnerability to shocks. An update of the LIC DSA undertaken by staff found that lower-than-expected external borrowing in 2007 and thus far in 2008 has improved key debt ratios.3 Thus, the NPV of debt-to-GDP ratio now falls comfortably below the threshold of 30 percent over the 20 year projection horizon. However, the NPV of debt-to-exports ratio still peaks at 138 percent of GDP, well above the threshold of 100 percent.

uA01fig06

NPV of debt-to-GDP ratio

Citation: IMF Staff Country Reports 2008, 324; 10.5089/9781451815627.002.A001

uA01fig07

NPV of debt-to-exports ratio

Citation: IMF Staff Country Reports 2008, 324; 10.5089/9781451815627.002.A001

23. The authorities indicated that they were awaiting assistance from the Commonwealth Secretariat to undertake an independent DSA which would provide input to their national debt strategy. Staff urged the authorities to expedite the formulation of their strategy and to rely mainly on grants to finance their development plans. Staff noted that The Gambia’s debt and debt service ratios are among the highest in the group of countries that have recently reached the HIPC completion point and benefited from MDRI assistance (Figure 2). The authorities responded they expect to have the debt strategy in place by end-February 2009, will ensure that new loans have a minimum grant element of 45 percent, and will respect the indicative limit on new borrowing for 2008 (MEFP ¶33).

Figure 2.
Figure 2.

External Debt Indicators before and after HIPC and MDRI Relief 1

Citation: IMF Staff Country Reports 2008, 324; 10.5089/9781451815627.002.A001

Source: IMF and World Bank staff estimates.1/ The dotted and solid lines represent the thresholds for “medium” and “poor” performers, respectively.

C. Promoting Growth and Reducing Poverty

24. Enhancing the country’s international competitiveness is central to the authorities’ strategy for promoting growth. Surveys and studies suggest a broad agenda of reforms is needed to address structural constraints to growth. The Gambia ranked 131 out of 178 in the World Bank’s Doing Business Indicators for 2008 and 102 out of 131 countries in the World Economic Forum’s Competitiveness Indicators for 2007–08 (Box 2). The Gambia ranked highly on employing workers, trade, and enforcing contracts. Problem areas included paying taxes, protecting investors, innovation, health, and education. A 2006 Investment Climate Assessment done by the World Bank found that firms ranked electricity, access to credit, land access, and a heavy tax burden as the most important obstacles to doing business in the country. A Diagnostic Trade Integration Study led by the World Bank and completed in 2007, concluded that The Gambia’s role as a regional entrepot was eroding, and made wide ranging recommendations to boost the country’s international competitiveness (MEFP ¶19). The mission noted that most of the recommendations of the various studies fall outside the remit of the Fund, but highlighted tax policy as an area where the Fund could offer assistance.

The Gambia: Survey-Based Measures of Competitiveness

article image
sources: World Bank, Doing Business 2007, 2008 and World Economic Forum, Global Competitiveness Index 2007, 2008
uA01fig08

Ranking on the ease of doing business

Citation: IMF Staff Country Reports 2008, 324; 10.5089/9781451815627.002.A001

25. In addition to promoting pro-poor growth, the authorities are committed to boosting poverty-reducing expenditures in the budget. The PRSP specifies that 25 percent of government revenues and 30 percent of departmental budgets should be spent on priority sectors including agriculture, education, health, and the environment. The ratio of priority spending to government revenues has risen but remains below 21 percent. The government achieved the target for the departmental budgets in 2005 and 2006.

uA01fig09

Priority Spending as a Percent of Domestic Revenues

Citation: IMF Staff Country Reports 2008, 324; 10.5089/9781451815627.002.A001

uA01fig10

Priority Spending as a Percent of Departmental Budgets

Citation: IMF Staff Country Reports 2008, 324; 10.5089/9781451815627.002.A001

26. Progress towards the Millennium Development Goals has been mixed (Figure 3 and Table 7). The Gambia has achieved gender equality as measured by the female to male primary school enrollment ratio and made significant progress on boosting primary school enrollments. Primary and secondary health care have expanded significantly and increased immunization has reduced mortality rates. However, the incidence of poverty has not declined, undernourishment is still a serious problem, and the incidence of malaria and tuberculosis remain high.

Figure 3.
Figure 3.

The Gambia: Progress on Selected Millennium Development Goals

Citation: IMF Staff Country Reports 2008, 324; 10.5089/9781451815627.002.A001

Source: World Bank Development Indicators.

27. Financial and technical assistance from The Gambia’s development partners will be critical for the successful implementation of PRSP II. PRSP II highlights capacity weaknesses, policy slippages, and shortfalls in the delivery of aid as important factors in the poor outcomes under the first PRSP. The government presented PRSP II to a Donor Round Table Conference in February 2008, and spearheaded the establishment of an in-country Development Partners Coordination and Consultation Mechanism (MEFP ¶35–¶37). The in-country forum will be used to monitor and analyze progress using a Results Matrix that contains quantitative indicators and targets matched to PRSP objectives.

D. Ensuring Fiscal Sustainability

28. Continued fiscal consolidation will enable the authorities achieve public debt sustainability (see section III of Supplement 1). Overall fiscal deficits are projected to average 2.7 percent of GDP during 2008–13. With external financing averaging 3½ percent of GDP and domestic surpluses measuring ¾ percent of GDP, domestic debt falls by more than half from its end-2007 level of 28 percent of GDP. This allows room for some increase in domestic borrowing in the event of a shortfall in external assistance.

29. At about 21 percent of GDP, The Gambia’s revenue effort is good, but reforms are needed to make tax revenues buoyant. Improvements in revenue administration have been important in boosting government revenues over the last four years. Reforms included the creation of the Gambia Revenue Authority (GRA), establishment of a large taxpayer unit, and the introduction of taxpayer identification numbers. With the GRA now fully operational, gains from improved administration may be reaching their limit. More attention should be paid to broadening the tax base and making the tax system buoyant. The lack of buoyancy is explained by the dominance of import taxes in revenues and by the increasing proportion of imports exempt from customs duties. The authorities agreed to review the scope for reducing these exemptions.

The Gambia: Dutiable and Non-Dutiable Imports, 2004–07

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30. The fiscal impact of an Economic Partnership Agreement (EPA) with the EU should be manageable. The Gambia is involved in ongoing negotiations with the EU as part of the Economic Community of West African States. The mission presented the preliminary results of an empirical analysis of the potential revenue loss from an EPA, and advised the authorities to pursue commitments by the EU to compensate partners for net revenue losses.4 The analysis suggests that:

31. The government is considering options for a comprehensive civil service reform program, drawing on studies funded by the World Bank and other donors. It is seeking to build the capacity of the civil service to formulate and implement policies and to deliver public services efficiently. Over time, low pay and difficult working conditions have led to an exodus of professional and managerial staff which has severely undermined the functioning of the service. The reform program is expected to cover pay and benefits, career development, and job security issues (MEFP ¶23). On the basis of the available analytical studies, staff believes the macroeconomic framework can support a substantial increase in the wage bill. However, staff emphasized that the pay reform should be targeted to retaining and attracting professional and managerial staff. The authorities agreed, but said increases will be needed at lower grades too to move them towards a living wage. The government will decide on the details of the pay reform as part of the preparation of the 2009 budget.

32. Introduction of the Integrated Financial Management Information System (IFMIS) has improved expenditure management, but more reforms are needed to strengthen public financial management. In particular, the process of budget formulation needs to be strengthened to ensure that budget allocations are realistic and in line with priorities. The establishment of a register to track government’s own commitments for capital projects funded largely by donors is a key part of structural reforms under the PRGF-supported program.

E. Making Monetary Policy More Effective

33. Monetary operations are guided by a money targeting framework, using broad money as the intermediate target and reserve money as the operating target. Weekly treasury bill auctions are the CBG’s main instrument for achieving its target. The CBG uses a short-term liquidity forecasting framework to determine weekly monetary operations. Announcements about the rediscount rate at the end of bimonthly Monetary Policy Committee meetings are also used to signal its policy stance.

34. A high degree of uncertainty about monetary policy transmission mechanisms hampers monetary operations. The primary objective of monetary policy in The Gambia is price stability, and the CBG has done a good job of reining in inflation. However, a recent MCM technical assistance mission noted that the shallowness of the money market, and an environment of uncertainty about the stability, persistence and relative importance of the possible channels of monetary transmission constrain monetary policy. The mission discussed with the CBG the findings of the MCM mission as well as staff analysis that suggests that the demand for broad money may not be stable, thus casting doubt on its appropriateness as nominal anchor for monetary policy. In this regard, the mission suggested that CBG supplement its money targeting framework with a range of indicators (including the outlook for inflation and exchange rate developments).

35. The almost exclusive reliance on treasury bills for monetary operations has generated conflicting signals about monetary policy. Treasury bills have been effective at mopping up liquidity when the authorities have been willing to let interest rates rise (and signaled that willingness by raising the rediscount rate). However, the CBG’s ability to inject liquidity through the treasury bill market has been constrained by low balances in the sterilization account. Hence, on occasion, even though the liquidity forecasting framework called for injecting liquidity, the CBG issued new bills to rollover maturing bills. Staff recommended the CBG consider foreign exchange operations as an additional instrument to influence dalasi liquidity. In the judgment of staff, there is scope for higher growth in reserve money (closer to program projections) without re-igniting inflation.

uA01fig12

Reserve Money

(millions of dalasis)

Citation: IMF Staff Country Reports 2008, 324; 10.5089/9781451815627.002.A001

36. The mission discussed a work program for enhancing the monetary policy framework. The main elements are: (i) enhancing short-term liquidity forecasting by improving projections of government revenues and expenditures; (ii) carrying out analytical work to better understand the transmission mechanism of monetary policy; (iii) developing leading indicators of economic activity; and (iv) improving data quality, especially on output and interest rates of commercial banks.

F. Enhancing Financial Intermediation

37. The financial sector is sound and competition has been increasing. The entry of two new banks in 2007 brings the number of commercial banks operating in The Gambia to ten. The banks are generally profitable, adequately capitalized, and highly liquid, although profitability and liquidity ratios fell during the third quarter 2007 as banks suffered valuation losses associated with the steep appreciation of the dalasi. Interest rate spreads are high, though not out of line with levels in other countries in sub-Saharan Africa. Nonperforming loans, at 12–14 percent, are moderate by regional standards. However, the loan-to-deposit ratio (41 percent) is relatively low in part due to high risks associated with a weak legal system (MEFP ¶10).

Selected Sub-Saharan African Countries: Selected Financial Sector Indicators, 2008 1/

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Source: IMF, International Financial Statistics and Monthly Country Briefs.

Most recent data available (2007 for interest rate spreads and early 2008 for others).

Excluding The Gambia.

38. Reforms are underway to deepen financial intermediation. Making the Credit Reference Bureau operational should reduce lending risks. The authorities are also reviewing several laws (including the Financial Institutions and Mortgage Acts) to remove legal impediments to financial intermediation. The CBG reported progress in strengthening capacity in banking supervision (with technical assistance from the Fund), and in implementing the Prompt Corrective Action framework introduced in July 2007 to monitor the health of banks. After the sharp appreciation of the dalasi in late 2007, the CBG has tightened enforcement of prudential regulations on banks’ foreign currency net open positions. The CBG decided to lower banks’ reserve requirements partly to lower the cost of funds to the banks and lower barriers to financial intermediation.

IV. Program Discussions

A. Medium-Term Macroeconomic Framework

39. Revisions to the medium-term macroeconomic framework (Tables 1–5) take account of the changes in the international environment and staff’s reassessment of the outlook for external financing (including new budget support from the World Bankamounting to about US$7 million in 2009). The main features of the updated framework compared to the second review are: (i) a downward revision in GDP growth of about 1 percent in 2008 and ½ percent in 2009 due to the impact of global downturn and dalasi appreciation on tourism and remittances and poor output in the groundnut sector; (ii) inflation about one percent higher in 2008—due to the pass through of higher food and energy prices—but returning to a downward path in 2009; (iii) maintenance of the surplus on the fiscal basic balances for 2008 and 2009 of about 1½ percent of GDP but lower interest rates leading to a more rapid decline in domestic debt; (iv) broad money growth of 12 percent, slightly higher than nominal GDP growth; and (v) a deterioration in the current account balance including official transfers in 2008 due to higher world food and oil prices.

Table 1.

The Gambia: Selected Economic and Financial Indicators, 2004–13

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

Computed based on values in U.S. dollars.

Excluding reexports and imports for reexport.

Including advances to the government in foreign currencies.

Weighted average for all maturities based on weekly auction data for the month of December; and for 2008, data are for June 2008.

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.

Reflects HIPC and MDRI debt relief delivered at end-2007.

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

Table 2.

The Gambia: Central Government Operations, 2004–13

(Millions of dalasis, unless otherwise indicated)

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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.

Table 2.

The Gambia: Central Government Operations, 2004–13

(Percent of GDP)

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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.