The Gambia: Update on Joint IMF/IDA Debt Sustainability Analysis1
Author: International Monetary Fund
Publication Date:
03 Oct 2008
eISBN:
9781451815627
Language:
English
Keywords:
ISCR; CR; bottom; government; PRGF loan; Gambia; debt ratio; service-to-revenue ratio; NPV term; NPV of debt-to-exports ratio; NPV of debt-to-GDP; Fiscal stance; Debt sustainability analysis; Depreciation
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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.

The updated Debt Sustainability Analysis (DSA) confirms that The Gambia remains at high risk of debt distress after receiving HIPC and MDRI debt relief. In particular, the NPV of external debt-to-exports ratio remains above its threshold of 100 percent and standard stress tests show that The Gambia remains vulnerable to shocks to GDP and the exchange rate. The fiscal DSA shows public debt declining due to recent fiscal consolidation.

I. Background

1. This debt sustainability analysis (DSA) updates the last DSA presented to the Fund Board in December 2007 at The Gambia’s completion point. This update was prepared by IMF staff and reviewed by staff of the World Bank. The DSA is based on debt and debt service data reconciled for the completion point under the HIPC/MDRI initiative. These data were updated to reflect newly available debt data and a revised macroeconomic framework resulting from the 2008 Article IV consultation.

2. The Gambia reached the completion point under the enhanced HIPC Initiative and qualified for debt relief under the MDRI on December 19, 2007. At the end of 2006, prior to completion point, the stock of nominal external public debt was US$676.7 million (133.6 percent of GDP). Multilateral creditors accounted for 84 percent of this debt, with IDA as the largest creditor (39 percent of total outstanding debt). At end-2007, post-completion point, the stock of external public debt fell to US$299.4 million (46.5 percent of GDP). In January 2008, Paris Club creditors agreed to cancel outstanding claims (US$13 million in NPV terms at end-2006) on The Gambia. Bilateral agreements have been signed with Paris Club creditors France and Norway and agreement has been reached with non-Paris Club creditor Kuwait. Agreements on the delivery of debt relief are still pending with Paris Club creditors Austria, the Netherlands, and the EU-IDA and with non-Paris Club creditors the Saudi Fund for Development, Taiwan Province of China, Libya, China, and India. HIPC debt relief has been or is in the process of being delivered by all multilateral creditors with the exception of ECOWAS, which to date has not participated in the HIPC Initiative.2

Baseline Macroeconomic Assumptions Underlying the DSA

The medium-term assumptions in the baseline scenario are consistent with the IMF PRGF supported program. Key macroeconomic assumptions include continued robust growth, prudent fiscal and monetary policies, investment in infrastructure and tourism, and a scaling up of donor assistance.

Real GDP growth averaged 6½ percent over the past five years and is projected to remain at 5½ to 6 percent out to 2013. The main drivers of growth are expected to be tourism, construction, telecommunications, and banking. Inflation is projected to decline gradually from 6 percent in 2008 to 4 percent over the medium-term. This assumes the authorities maintain tight monetary policy to adjust to high food and energy costs over the medium to long-term.

Growth of exports of goods and services is expected to be driven by tourism and agricultural exports. Re-exports are expected to decline as a share of GDP as tariff harmonization and improvements in neighboring countries erode The Gambia’s competitive advantage. Export growth is expected to average 6¼ percent from 2008-2013 while import growth is expected to average 9¼ percent over the same period. Official transfers are expected to gradually recover to 3–4 percent of GDP over the medium-term. FDI is expected to remain strong while official loans fall from a peak of 4½ percent of GDP in 2009 to about 1–2 percent of GDP over the medium- to long-term. The non-interest current account deficit is projected to gradually declines from a peak of 14 percent of GDP in 2008 to 11 percent of GDP in 2012 and 6¼ percent of GDP in 2027.

The primary fiscal balance is projected to decline from a surplus of 5½ percent of GDP in 2007 to close to zero in 2027. The surplus is expected to drop in the near term due to a recovery in capital expenditures. Over the long-term, tax revenues are projected to remain close to 20 percent of GDP while poverty reducing expenditures are boosted in line with the fall in debt service payments. Donor support, including program and project assistance is expected to remain robust over the medium-term. Grant financing is expected to remain in the region of 3–4 percent of GDP over the medium-term before falling to an average of 2 percent over 2013–27. The grant element of new external borrowing is projected to remain at 45 percent.

II. External Debt Sustainability

A. Baseline

3. Under the baseline scenario, all but one of the NPV of debt indicators willremain below their corresponding thresholds for 2008–27 as a result of the HIPC/MDRI relief (Table 1 and Figure 1).3 The NPV of debt-to-GDP ratio falls to 22 percent in 2008—declining 3 percentage points from the predicted level at completion point as a result of delayed loan disbursements. New borrowing associated with increased investment raises the NPV of debt-to-GDP through 2012 before it declines as investment levels off and growth is sustained. The NPV of debt-to-revenue and the debt service ratios fall considerably beneath their respective thresholds. While they too increase through 2012, they remain at comfortable levels throughout the projection period.

Table 1.

The Gambia: External Debt Sustainability Framework, HIPC and MDRI Scenario, 2007-2027 1/

(In percent of GDP, unless otherwise indicated)

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Source: Staff simulations.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and p = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that NPV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the NPV of new debt).

Figure 1.
Figure 1.

The Gambia: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2007-2027

Citation: IMF Staff Country Reports 2008, 324; 10.5089/9781451815627.002.A002

Source: Staff projections and simulations.

Policy Dependent Debt Burden Thresholds under the Debt Sustainability Framework

(Applying to external public debt)

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The latest World Bank Country Policy and Institutional Assessment (CPIA) rates The Gambia a “poor performer”.

4. The NPV of debt-to-exports ratio breaches the debt-burden threshold for a protracted period. The NPV of debt-to-export ratio declined significantly to 114 percent in 2007 following full impact of HIPC and MDRI, but this is still above the indicative policy-dependent threshold of 100 percent. Furthermore, this ratio increases through 2012 due to new borrowing, and it stays above the threshold for a protracted period. It gradually gravitates towards the threshold over the medium term, due to sustained growth in receipts from tourism, re-export services, and agricultural exports.

B. Alternative Scenarios and Stress Tests

5. Alternative scenarios reveal that external debt indicators are vulnerable to substantial deterioration under a range of scenarios (Table 2, Figure 1).

Table 2.

The Gambia: Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed External Debt, 2007-27 including HIPC and MDRI

(In percent)

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Source: Staff projections and simulations.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

III. Public Debt Sustainability

C. Baseline

6. Domestic debt is expected to fall from 30.7 percent of GDP at the end of 2007 to 13.8 percent of GDP in 2012 and to 9.5 percent of GDP in 2027, reflecting sustained good fiscal performance. Recently fiscal performance has been aided by reforms to tax administration that are expected to maintain revenues close to 21 percent of GDP. Relatively restrained fiscal policy, as programmed for the medium term, should help lower domestic interest rates. Over the long term, the delivery of external debt relief and lower domestic interest rates should provide fiscal space to increase basic primary expenditures4 and offset a decline in externally-financed projects as a percent of GDP.

7. The NPV of public debt is projected to decline from about 56.0 percent of GDP in 2007 to 42.3 percent in 2012 and to 29.9 percent in 2027 (Table 3 and Figure 2). The biggest factor in the near term is a fall in the domestic debt. As a ratio of domestic revenues, the NPV of public debt is projected to fall from about 257 percent in 2007 to 141 percent at the end of the projection period.

Table 3.

The Gambia: Public Sector Debt Sustainability Framework, Baseline Scenario, 2001-2027

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and Fund staff estimates and projections.

[Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.]

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Figure 2.
Figure 2.

The Gambia: Indicators of Public Debt Under Alternative Scenarios, 2007-2027 1/

Citation: IMF Staff Country Reports 2008, 324; 10.5089/9781451815627.002.A002

Source: Staff projections and simulations.1/ Most extreme stress test is test that yields highest ratio in 2017.2/ Revenue including grants.

D. Alternative Scenarios and Stress Tests

8. Stress tests indicate that public debt ratios are sensitive to a depreciation in the near term and a shock to GDP growth in the long term, but not to most other adverse shocks (Table 4 and Figure 2).

Table 4.

The Gambia: Sensitivity Analysis for Key Indicators of Public Debt 2007-2027

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Sources: Country authorities; and Fund staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of 20 (i.e., the length of the projection period).

Revenues are defined inclusive of grants.

IV. Conclusion

9. The Gambia is at high risk of debt distress based on external debt burden indicators. The Gambia’s debt situation has improved since the last DSA due to an improvement in the overall fiscal balance in 2007 and a decline in new borrowing. But given continuing risks, it will be important for the authorities’ to finalize and implement the planned national debt strategy as soon as possible. Staff recommend that new borrowing be on highly concessional terms and that the authorities exercise restraint in contracting new loans. The major risks to debt sustainability include lower than expected economic and/or export growth, higher than expected new borrowing, or a deterioration in fiscal performance.

1

The last DSA was presented to the Fund Executive Board on December 19, 2007 (IMF Country Report No. 08/109, Appendix I) and to the World Bank Executive Board on December 20, 2007 (Enhanced HIPC Completion Point Document and MDRI, Report No. 41413-GM).

2

The debt relief agreement with the Islamic Development Bank has been negotiated and is in the process of being signed.

3

As outlined in the HIPC completion point DSA, outstanding debt at end-2007 before completion point is estimated at NPV US$439 million. Following completion point, HIPC assistance reduces the NPV of existing debt by US$92 million while MDRI results in an additional US$182.1 million reduction.

4

Defined as expenditures excluding interest payments and externally-financed projects.