The Gambia
Fourth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, and Request for a Waiver of Nonobservance of Performance Criterion, Augmentation of Access, and Modification of Performance Criteria: Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for The Gambia
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This paper presents key findings of the Fourth Review for the Gambia under the three-year arrangement under the Poverty Reduction and Growth Facility (PRGF). The Gambia remains at high risk of debt distress. Overall performance under the PRGF-supported program has been satisfactory, but downside risks to achieving program objectives have increased. IMF staff supports the authorities’ requests for a waiver for nonobservance of the fiscal basic balance performance criterion, augmentation of access, and modification of quantitative performance criteria for end-March 2009.

Abstract

This paper presents key findings of the Fourth Review for the Gambia under the three-year arrangement under the Poverty Reduction and Growth Facility (PRGF). The Gambia remains at high risk of debt distress. Overall performance under the PRGF-supported program has been satisfactory, but downside risks to achieving program objectives have increased. IMF staff supports the authorities’ requests for a waiver for nonobservance of the fiscal basic balance performance criterion, augmentation of access, and modification of quantitative performance criteria for end-March 2009.

I. Introduction

1. Over the last two years, the Gambian authorities have maintained macroeconomic stability and the economy has sustained robust growth. Improved fiscal performance in 2007 and tight monetary policy kept inflation at single-digit levels in spite of rising world food and oil prices. Real GDP growth averaged 6.1 percent a year, with tourism, construction, telecommunications and agriculture leading the way.

2. The global financial crisis and associated recessions in Europe and the US have clouded The Gambia’s medium-term economic outlook. There are indications that remittances and tourism-related inflows have slowed, putting pressure on international reserves and the exchange rate. Policy discussions centered on the 2009 budget and debt sustainability. An updated DSA indicated that the country remains at high risk of debt distress.

3. Although fiscal performance and the international reserves position weakened significantly in the fourth quarter of 2008, overall performance under the PRGF-supported program has been satisfactory. All the quantitative performance criteria for end-September 2008 were met except for the fiscal basic balance (MEFP Table A1). The fiscal target was missed due to lower-than-expected revenues. The authorities are requesting a waiver for the nonobservance of this performance criterion based on their decision to maintain retail prices of petroleum products at their current levels in spite of the decline in world prices (MEFP ¶12). All structural conditions due by end-December 2008 were implemented on time (MEFP Table A2).

4. Modifications are proposed to the program for 2009 on account of a revenue shock and the impact of the global financial crisis on The Gambia’s balance of payments. Based on an uncertain revenue outlook and external pressures that led to a sharp decline in international reserves in 2008Q4, three quantitative performance criteria for March 2009 (net domestic assets of the CBG, fiscal basic balance and net usable reserves) have been relaxed compared to the targets under the third review. A structural performance criterion has been introduced to address the emergence of new domestic arrears on government utility payments.

5. The authorities are requesting an augmentation of access under the current arrangement to rebuild international reserves and mitigate the risk of a more severe impact of the global financial crisis than currently projected. The augmentation in the amount of SDR6.22 million—equivalent to about 2 weeks of imports—would bring total access under the three-year arrangement to 65 percent of quota. It is to be disbursed in two equal installments at the completion of the fourth and fifth reviews.

II. Recent Developments

6. A rebound in agricultural output kept real GDP growth at around 6 percent in 2008. Aided by good rains, groundnut production increased by 25 percent after declines in 2006 and 2007. Other important growth areas were communications and electricity. Growth in tourism and construction—leading growth sectors in recent years—slowed markedly, while trade-related services contracted. Declines in tourism-related income and remittances weakened domestic demand.

uA01fig01

Real GDP Growth

(percent, year-on-year)

Citation: IMF Staff Country Reports 2009, 092; 10.5089/9781451815665.002.A001

7. Inflation rose in the second half of 2008 as the effect of dalasi appreciation waned. Tight monetary policy and appreciation of the dalasi in the second half of 2007 lowered year-on-year inflation to 1.4 percent in April 2008. Since then, inflation has been rising, reaching 6.6 percent in November. After sharp appreciations in the third quarter of 2007 and in early 2008, the dalasi has weakened since March 2008.1 In the 12 months ending in March 2008, the dalasi appreciated 30 percent against the US dollar and 15 percent against the euro. From March to December 2008, it depreciated 38 percent against the dollar and 10 percent against the euro, mainly due to declining foreign exchange receipts from tourism and remittances. In line with its stated objective of reducing volatility in the exchange rate, the CBG purchased foreign exchange early in the year when there appeared to be excess supply in the interbank market, and sold foreign exchange later in the year to partially offset shortages.

uA01fig02

Exchange Rates

Citation: IMF Staff Country Reports 2009, 092; 10.5089/9781451815665.002.A001

uA01fig03

Inflation, year-on-year

Citation: IMF Staff Country Reports 2009, 092; 10.5089/9781451815665.002.A001

8. Domestic credit expansion boosted broad money in 2008. Broad money grew by about 20 percent in the twelve months ending in November 2008, compared to 8 percent a year earlier. The modest growth in 2007 reflected strong government revenue performance and privatization receipts which substantially reduced the banking system’s net claims on the government. The growth in 2008 was driven in about equal measure by credit expansion to government and to the private sector. In contrast to broad money, growth in reserve money remained subdued at about 6 percent in the twelve months to December 2008. The impact of a significant fall in the CBG’s net foreign asset position was offset by the government running down deposits it built up last year. In October 2008, concerned about a deteriorating fiscal outlook, the CBG raised the treasury bill rediscount rate from 15 to 16 percent.

9. Fiscal performance weakened in 2008. The overall balance turned from a small surplus in 2007 to a 1½ percent of GDP deficit in 2008, mainly due to lower import tax revenues. About two-thirds of the decline came from taxes on non-oil imports, reflecting the relatively appreciated value of the dalasi in the first three quarters of 2008 (compared to the same period in 2007) and possibly a decline in imports for re-export (which comprise consumer goods that attract high import duties). Revenue from petroleum products also fell, as adjustment in retail prices did not keep pace with rising world prices. Furthermore, measures to compensate for revenue loss from the elimination of sales tax on rice imports proved less effective than expected (MEFP ¶6). On the expenditure side, primary current expenditures increased in line with the program; higher wages were offset by lower “other charges”. Interest payments fell by 1 percent of GDP, about ½ percent of GDP less than projected. Capital expenditures fell, driven by lower disbursements of external aid. The basic balance surplus was 1.2 percent of GDP lower than targeted. Gross interest-bearing domestic debt fell from 28 percent of GDP at end-2007 to 25½ percent at end-2008.

uA01fig04

Fiscal Balance

(% GDP)

Citation: IMF Staff Country Reports 2009, 092; 10.5089/9781451815665.002.A001

Summary of Central Government Operations, 2007–08

(Percent of GDP)

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10. The external current account deficit including official transfers widened by about 3½ percent of GDP in 2008—1¾ percent of GDP higher than programmed—on account of adverse shocks. The rise in world prices of food and oil increased The Gambia’s import bill. Staff estimates the magnitude of the price shock at about 5 percent of GDP, assuming import volumes remained at 2007 levels. There appears to have been some adjustment in the volume of non-oil imports as retail prices of consumer items rose in the second half of the year.2 International oil and food prices declined in the second half of the year, but the impact of this improvement in the terms of trade was offset by a slowdown in remittances, travel income, and earnings from re-export services. These developments and a decrease in foreign direct investment inflows led to a balance of payments deficit of 5.2 percent of GDP (compared to near balance projected under the third review), and reduced official international reserves from 5.5 months of imports at end-2007 to 3.9 months at end-December 2008 (compared to a programmed 4.9 months).

uA01fig05

Sources of Financing the Current Account Deficit

(% GDP)

Citation: IMF Staff Country Reports 2009, 092; 10.5089/9781451815665.002.A001

III. Policy Discussions

A. Medium-Term Macroeconomic Framework

11. The policy discussions were guided by a revised medium-term macroeconomic framework that took account of the impact of the global financial crisis on The Gambia’s balance of payments. Compared to the framework underlying the third review, growth is lower, inflation is slightly higher, and current account deficits are wider. The main objectives and assumptions underlying the updated framework are:

  • recovery in real GDP growth from 4.6 percent in 2009 to at least 5 percent from 2010, based on modest growth in agriculture and a rebound in tourism and construction;

  • annual inflation rate of 6 percent in 2009 and 5 percent or less from 2010, reflecting lower world commodity prices and a relatively stable exchange rate;

  • reduction in domestic public debt from about 25½ percent of GDP at end-2008 to 17 percent at end-2011, by containing the government’s borrowing requirement; and

  • reduction in the external current account deficit (including grants) from 16 percent of GDP in 2008 to about 13 percent in 2009 and to 11½ percent in 2011, based on a recovery in tourism and growth in non-traditional exports.

B. The Impact of the Global Financial Crisis on the Balance of Payments in 2009

12. Slowdowns associated with the global financial crisis are adversely affecting the inflow of tourism income and remittances to The Gambia. Compared to the projections in the third review, the current account deficit (excluding grants) has widened by a cumulative 1.8 percent of GDP in 2008 and 2009, notwithstanding a 2 percent of GDP fall in the oil bill (see text table). Projections of travel income have been lowered by 3.7 percent of GDP and of remittances by 2.5 percent of GDP in 2008 and 2009. On the capital account, foreign direct investment is now expected to be lower by 1 percent of GDP cumulatively over 2008–09. The overall balance of payments deficit is estimated to be wider by 5 percent of GDP in 2008 and by almost 2 percent of GDP in 2009. As a result international reserves are expected to fall markedly.

Summary Balance of Payments, 2007-2009

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13. Confronted with this adverse balance of payments and international reserves outlook, the authorities are requesting an augmentation of access under the current PRGF arrangement. This would allow them to raise international reserves back to 4 months of imports, and provide some cushion should the international downturn prove more severe than expected. In view of the deterioration of the reserve position, and the risk that the shocks to the current account in 2009 may be larger than projected if the international downturn intensifies, the staff supports the authorities’ request for augmentation. The authorities are also seeking additional external grants to meet their higher balance of payments needs (MEFP ¶34).

C. Fiscal Policy

14. Fiscal policy discussions focused on steps to prevent a further deterioration of the fiscal balance in 2008 and ensure sustainable fiscal policy in 2009 and beyond. The authorities agreed to maintain retail prices of petroleum products at current levels, in spite of falling world prices, to boost revenues. For the 2009 budget, the authorities adopted an appropriately conservative revenue forecast (MEFP ¶20). Petroleum revenues are forecast to increase significantly, but this is partially offset by lower revenues from non-oil imports, reflecting a declining re-export trade (MEFP ¶15). Total revenues are projected to reach 19.3 percent of GDP in 2009 compared with the earlier programmed level of 21.1 percent. Given uncertainty about the revenue base and the authorities’ concern that tax rates are high, discussions of specific revenue measures were postponed to the next review. It is expected that recommendations of an IMF tax policy mission requested by the authorities will provide the basis for such measures.3 On the expenditure side, the authorities adjusted their original spending plans to bring them in line with the revised outlook for revenues and grants. In particular, they have deferred a substantial wage increase that was part of civil service reform (MEFP ¶28) and are restraining domestically financed capital expenditures. Staff and the authorities agreed to lower the target for the basic balance surplus from a programmed 1.5 percent of GDP to 0.2 percent of GDP (see Table 2). Two-thirds of this deterioration is due to higher interest payments on domestic debt, because of a lower projected decline in the debt stock. The programmed surplus on the basic primary balance only falls by 0.1 percent of GDP. In the near future, technical assistance will be provided to analyze in greater detail the causes of the revenue decline in 2008 and policy options for boosting fiscal revenue in a sustainable manner over the medium-term.

Table 1.

The Gambia: Selected Economic and Financial Indicators, 2006–13

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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 2A.

The Gambia: Central Government Operations, 2006-13

(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.

Change in arrears for 2008 includes an additional D25m for repayments to the National Water and Electricity Company (NAWEC).

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 2B.

The Gambia: Central Government Operations, 2006-13

(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.

Change in arrears for 2008 includes an additional D25m for repayments to the National Water and Electricity Company (NAWEC).

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.

15. Disbursement of external grants and loans is expected to pick up in 2009. The authorities are working with the EU to speed up disbursements on a large roads project funded by EU grants (MEFP ¶21). The World Bank and African Development Bank will be providing budget support grants to the government for the first time in 2009. With regard to external loans, following the ratification of four loans by the National Assembly in October 2008 (MEFP ¶24), disbursements should pick up in 2009.

16. New domestic arrears have emerged (MEFP ¶23). They arise from the failure of some government agencies to pay bills from the National Water and Electricity Corporation (NAWEC). A preliminary estimate put the arrears at D83 million (0.5 percent of GDP). The government claims that NAWEC owes back taxes. A structural performance criterion requiring verification of the mutual claims and agreement on a time table for clearing them, has been established under the program (MEFP Table A3).

A. Debt Sustainability

17. An updated joint Fund-Bank DSA re-affirmed the conclusion from a year earlier that the country remains at high risk of debt distress after HIPC and MDRI relief.4 The level of debt remains high in relation to exports, and sensitivity analyses show that the country is highly vulnerable to external shocks. While the NPV of debt-to-GDP ratio falls comfortably below the sustainable threshold over the 20 year projection horizon, the NPV of debt-to-exports ratio breaches the policy threshold throughout the projection period. With respect to domestic debt, the government is projected to run primary basic surpluses of 4–6 percent of GDP over the medium term which will put the debt on a sustainable path.

Figure 1:
Figure 1:

PV of Debt to GDP ratio

Citation: IMF Staff Country Reports 2009, 092; 10.5089/9781451815665.002.A001

Figure 2:
Figure 2:

PV of Debt to Exports Ratio

Citation: IMF Staff Country Reports 2009, 092; 10.5089/9781451815665.002.A001

18. In order to mitigate the risk of debt distress, staff urged the authorities to expedite the formulation of a national debt strategy and to rely mainly on grants to finance their development plans. The authorities said formulation of the debt strategy will be part of a program to strengthen debt management capacity with support from the World Bank and African Development Bank (MEFP ¶23).

E. Monetary and Exchange Rate Policies

19. Staff welcomed the CBG’s commitment to contain inflation at low single-digit levels using all instruments at its disposal. Monetary policy is based mainly on a money targeting framework, but the CBG also announces a policy interest rate (the treasury bill rediscount rate) to signal changes in the policy stance. The liquidity forecasting framework that guides monetary operations has facilitated sound decisions and produced low inflation. However, policymakers do not have timely access to all relevant information, including those related to government operations. In this connection, staff urged greater coordination between the CBG and the Department of State for Finance and Economic Affairs.

20. Staff endorsed the CBG’s periodic intervention in the foreign exchange market to provide liquidity and avoid excessive short-term movements of the exchange rate. Officials stressed that the CBG does not target a particular level of the exchange rate. This is consistent with the IMF classification of the country’s exchange arrangement as “managed float with no predetermined path for the exchange rate.”

F. Promoting Growth and Reducing Poverty

21. Discussion of growth focused on measures to improve the investment climate. Staff welcomed a review of the Investment Promotion Act currently underway. It advised that applications for investment incentives be carefully scrutinized, but that once approved, the incentives should be provided in a predictable way. The authorities asked that the tax policy technical assistance mission they have requested from the Fund provide advice on rationalization of central and local government taxation to ease the tax burden on businesses (MEFP ¶20). The authorities noted that the country’s financial system is sound, and that the entry of new banks has increased competition in the sector (MEFP ¶9). Staff expressed concern that the growing number of banks—eleven in operation, and five awaiting licenses—was stretching the CBG’s supervision capacity. The authorities said they would review entry requirements for new banks.

22. PRSP implementation needs strengthening. The Annual Progress Report (APR) for 2007 reveals continuing implementation problems and an inadequate monitoring framework (MEFP ¶31).5 The government reiterated its commitment to increase the share of budgetary resources allocated to poverty-reducing expenditures in line with PRSP priorities.

23. The Gambia’s progress towards meeting the Millennium Development Goals (MDGs) is mixed. The target of reducing poverty to 15 percent of the population is unlikely to be achieved, but significant strides have been made in other areas. For example, subtantial progress has been made toward universal primary education while gender parity in primary and lower basic schools has been attained.

IV. Program Issues

24. Staff supports the authorities request for modification of three quantitative performance criteria for end-March 2009 (MEFP ¶35). The floor on the fiscal basic balance has been lowered to accommodate the 2008 revenue shock. The net usable reserves floor has also been lowered in response to the shock to travel income, remittances, earnings from re-export trade and foreign direct investment. The ceiling on net domestic assets of the CBG has been raised in line with the modifications to the fiscal and international reserves targets. All quantitative targets have been extended through end-2009 (MEFP Table A1).

25. Structural conditionality remains geared to supporting the authorities’ effort to strengthen capacity for formulating and implementing macroeconomic policies (MEFP Table A3). Areas of focus include public financial management and compilation of timely economic statistics.

26. Staff supports the authorities request for an augmentation of the PRGF arrangement. The authorities are requesting an augmentation equivalent to SDR6.22 million (20 percent of quota) to be disbursed in two equal tranches. This will return the coverage of international reserves at end-2009 to about four months of imports (still less than the 4.6 months previously targeted), helping avert a disruptive adjustment in case the adverse impact of the global slowdown on the balance of payments is larger than currently projected. The Gambia’s indicators on the capacity to repay the Fund remain strong (Table 7).

Table 3.

The Gambia: Monetary Survey, 2006-13

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Sources: Gambian authorities; IMF staff estimates and projections. Note: MDRI debt relief, incorporated for end-2007, has increased net foreign assets and decreased net domestic assets by D335 millions (at current exchange rate).

Excluding advances to the government in foreign currencies.

These advances reflect previously unrecorded public spending and borrowing in 2001, financed by the Central Bank of The Gambia (CBG), and the previously unrecorded depletion of foreign exchange reserves in 2001-03 as reported by the authorities on October 28, 2003.

In March 2003, the government instructed the CBG to lend the equivalent of D137 million in U.S. dollars to a newly created public enterprise and the previously unrecorded of offshore oil deposits.

Claims on foreign exchange bureaus reflect the delayed delivery of foreign currency purchased on a spot basis.