The Gambia: Joint IMF/World Bank Debt Sustainability Analysis

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. Background

1. This debt sustainability analysis (DSA) updates the DSA undertaken jointly by the staffs of the Fund and the Bank in December 2007 in the context of The Gambia’s completion point under the enhanced HIPC initiative. The DSA is based on debt and debt service data prepared for the completion point document, updated to reflect recent debt data and a revised macroeconomic framework following discussions for the fourth review under the Poverty Reduction and Growth Facility (PRGF). The last DSA concluded that The Gambia is at high risk of debt distress even after receiving HIPC and MDRI debt relief.

2. The stock of external debt declined substantially at end-2007 following HIPC and MDRI debt relief. At the end of 2006, prior to completion point, the stock of nominal external public debt was US$676.7 million (133.1 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 (46.0 percent of GDP). In January 2008, Paris Club creditors agreed to cancel outstanding claims (US$13 million in PV terms at end-2006) on The Gambia. Bilateral agreements have been signed with Paris Club creditors and Kuwait. Agreements on the delivery of debt relief have also been reached with the EU/EC, Opec Fund for International Development (OFID), the Islamic Development Bank (IsDB), and the International Fund for Agricultural Development (IFAD) but are still pending with the Economic Community of West African States (ECOWAS), Saudi Arabia, Taiwan Province of China, Libya, China, and India.

3. The current DSA concludes that The Gambia remains at a high risk of debt distress after HIPC and MDRI debt relief due to the high level of debt as well as the country’s vulnerability to shocks. Due to delays in contracting new loans, the level of external borrowing during 2007-08 was lower than projected in the HIPC completion point LIC-DSA. However, the level of debt remains high because of the reliance on external borrowing to finance the country’s critical infrastructure projects. Over the 20 year projection horizon, the PV of debt-to-GDP ratio remains below the sustainable threshold while the PV of debt-to-export ratio remains above the debt distress threshold (Figure 1). Compared with the completion point LIC-DSA, the PV of debt-to-GDP ratio has fallen due to the lower level of projected external borrowing, particularly over the medium term. At the same time, the growth rate of exports has been marked down due to the impact of the global financial crisis. Thus, compared with the completion point LIC-DSA, the PV of debt-to-exports is lower over the medium-term (where the lower borrowing dominates) but higher over the long-term (where lower export growth dominates).

Figure 1:
Figure 1:

PV of Debt Ratios

Citation: IMF Staff Country Reports 2009, 092; 10.5089/9781451815665.002.A002

Source: IMF and World Bank Staff estimates.

II. Underlying Assumptions

4. The macroeconomic framework takes into account the impact of the global economic and financial crisis in 2008 and 2009 and is consistent with the PRGF-supported program (Box 1). Recent developments in the global economy are expected to adversely affect economic activity in The Gambia in 2009 mainly through reduced tourist receipts and remittances. Economic activity is expected to return to trend over the medium term as the authorities pursue prudent fiscal and monetary policies and investments in agriculture, infrastructure and tourism increase.

Baseline Macroeconomic Assumptions Underlying the DSA

Real GDP growth is expected to decline from 5.9 percent in 2008 to 4.6 percent in 2009 as a result of the global economic slowdown. From 2010 onward, GDP is projected to rebound to about 5 percent of real growth per year, which is still below the previous projections. The main contributors to growth will be tourism, construction, telecommunications, and banking.

Inflation is expected to remain in single digits. Higher commodity prices in 2008 are expected to be passed through to the domestic economy with a delay. Inflation is projected to increase from an annual average of 5 percent in 2008 to 7 percent in 2009 before declining to 4 percent in 2013, and remain at that level over the projection horizon as the authorities maintain tight monetary policy.

Growth of exports of goods and services is expected to slow in 2009 due to the downturn in global economic activity. Export growth is projected to decline by 4 percentage points in 2009 but then recover to 9 percent for 2010-2013, driven by a rebound in tourism. In the long term, export growth is expected to stabilize at about 7 percent per annum. 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 in this activity. Imports of goods and services are projected to increase by about 5.5 percent on average over the period 2010-2028, mostly due to growing demand for investment imports from both the government and the private sector. Official transfers are projected to decrease gradually and gross borrowing is projected to stabilize at slightly above 3 percent of GDP.

The primary fiscal balance is projected to decline from a surplus of 2.5 percent of GDP in 2008 to an average surplus of 1.3 percent over the next five years and close to balance thereafter. The surplus is expected to drop overtime due to a recovery in capital expenditures. Over the long-term, revenues are projected to rise to about 21½ 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 4 percent of GDP over the medium-term before falling to an average of 2 percent over 2013-2028. The grant element of new external borrowing is projected to remain at 45 percent.

5. The Gambia’s program with the IMF includes limits on the amount and terms of new borrowing to prevent a build up of debt to levels that may be unsustainable over the medium term. Under the PRGF program, the authorities have committed to a minimum grant element of 45 percent in all new external loans contracted or guaranteed by the government. The program also has indicative quarterly limits on the total amount of new borrowing. In addition to the PRGF limits, the risk that non-concessional loans may lead to a rapid re-accumulation of debt, and thus undermine The Gambia’s sustainability prospects, is mitigated by IDA’s Non-Concessional Borrowing Policy (NCBP), which applies to IDA-only, post-MDRI countries that are grant-eligible and complements the IMF’s concessionality requirements.2

III. External Debt Sustainability

A. Baseline

6. The trends in debt indicators under the baseline scenario remain similar to those estimated in the previous DSA. The World Bank’s Country Policy and Institutional Assessment (CPIA), classifies The Gambia as a “poor performer” based on an average of the ratings for the preceding three years and the text table presents the policy-dependent debt burden thresholds. New borrowing associated with increased investment raises the PV of debt-to-GDP through 2017 before it declines as investment levels off and growth is sustained. The PV of debt-to-revenue and the debt service ratios fall considerably below their respective thresholds. While they increase through 2012, they remain at comfortable levels throughout the projection period. Debt service payments remain manageable throughout the projection period, rising no higher than 10 percent of exports and revenue.

7. The PV of debt-to-exports ratio breaches the debt-burden threshold for a protracted period (Table 1 and Figure 2). This ratio peaks at about 147 percent in 2011 as new borrowing increases. The PV of debt-to-export ratio gradually declines towards the threshold over the medium term as sustained growth in the tourism, construction, and telecommunication sectors boosts exports.

Table 1:

External Debt Sustainability Framework, Baseline Scenario, 2005-2028 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 - r(1+g)]/(1+g+r+gr) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and r = 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 PV 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 PV of new debt).

Figure 2.
Figure 2.

The Gambia: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2008-2028/

Citation: IMF Staff Country Reports 2009, 092; 10.5089/9781451815665.002.A002

Source: Staff projections and simulations.1/ The most extreme stress test is the test that yields the highest ratio in 2018. In figure b. it corresponds to a Combination shock; in c. to a Non-debt flows shock; in d. to a Combination shock; in e. to a Terms shock and in picture f. to a Terms shock
Text table 1.:

Policy Dependent Debt Burden Thresholds under the Debt Sustainability Framework Applying to External Debt

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B. Alternative Scenarios and Stress Tests

8. Alternative scenarios show that external debt indicators would deteriorate substantially under a range of shocks. The scenarios producing the largest shock to the PV of debt-to-GDP and the PV of debt-to-revenue ratios consists of a combination of shocks or a one time 30 percent nominal depreciation (tests B5 and B6 in Table 2). For the PV of debt-to-exports ratio a shock to the external non debt financing flows in 2009 and 2010 would increase the PV of debt-to-exports by 66 percentage points in 2010. The scenario producing the most extreme shock for the debt service to exports and to revenue ratios is new public sector borrowing at less favorable terms (A2 in Table 2). All the debt indicators would worsen under the less favorable terms scenarios (Figure 2). Debt indicators would converge slowly back to the baseline in the combination scenario while indicators would not converge in the less favorable terms scenario.

Table 2.

The Gambia: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2008-28 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.

9. The Gambia’s debt dynamics would deteriorate sharply if borrowing was less concessional. The “less favorable terms” scenario (Figure 2 and Table 2), assumes that The Gambia contracts loans with an average grant element of 30 (rather than 45) percent between 2008-2028.3 All debt indicators deteriorate substantially over the medium term under this scenario. The PV of debt-to-export ratio breaches the 100 percent threshold by a wide margin throughout the projection period. The PV of debt-to-GDP ratio would also breach its threshold of 30 percent from 2014, peaking at 33 percent and only returning to the policy threshold at the end of the projection period. This indicates that The Gambia will have to depend largely on grants and highly concessional borrowing to finance its development efforts. It also emphasizes the need for developing a prudent borrowing plan associated with a medium-term debt management strategy (MTDS).

10. A one-time 30 percent depreciation of the exchange rate results in the PV of debt-to-GDP ratio breaching the 30 percent threshold for much of the projection period (Table 2). Compared with other shocks this scenario results in the second highest ratio of the PV of debt-to-GDP in the medium term and the highest ratio of the PV of debt-to-revenues in 2028.

11. A combination of adverse economic shocks would also result in a significant rise in debt ratios (Table 2). A combination of shocks to the output base, exports and the non-debt creating flows in the balance of payments would yield a significant deterioration in the debt ratios. Under this scenario, the debt-to-export ratio would peak at 196 percent in 2011.

IV. Public Debt Sustainability

A. Baseline

12. Domestic debt is expected to fall from 30.8 percent of GDP at the end of 2008 to 14.8 percent of GDP in 2013 and to 10.4 percent of GDP in 2028, reflecting sustained fiscal discipline. Between 2005 and 2007, fiscal performance improved as reforms to tax administration boosted revenues by 2½ points of GDP. Unfortunately, a decline in taxes on international trade lowered revenues in 2008. Over the medium-term revenues are expected to rise gradually from 18½ to 21½ percent of GDP. Relatively restrained fiscal policy, as programmed for the medium term, should help lower domestic interest rates. Over the long term, the full 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.

13. The PV of total public debt is projected to decline from about 55 percent of GDP in 2008 to 43 percent in 2013 and to 31 percent in 2028 (Table 3 and Figure 2). The biggest factor in the near term decline is a fall in the domestic debt. As a ratio of domestic revenues and grants, the PV of public debt is projected to fall from about 281 percent in 2008 to 138 percent at the end of the projection period.

Table 3.

The Gambia: Public Sector Debt Sustainability Framework, Baseline Scenario, 2002-2028

(In percent of GDP, unless otherwise indicated)

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B. Alternative Scenarios and Stress Tests

14. Stress tests indicate that public debt ratios are most sensitive to further increases in public debt in the near term and a shock to GDP growth over 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 2008-2028

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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 length of the projection period.

Revenues are defined inclusive of grants.

  • With a 10 percent of GDP increase in public debt above the baseline in 2009, the PV of debt-to-GDP ratio would rise from 55 percent in 2008 to 63 percent in 2010 and the PV of debt-to-revenue ratio would gradually fall from its 2008 level of 281 percent compared with a sharp fall to 221 in 2010 under the baseline. However, the effects would be mitigated over time and an increase in other debt-creating flows is not significantly worse than other shocks by 2028.

  • Under a permanently lower output growth rate (4.3 percent instead of 5 percent), the PV of total debt-to-GDP ratio would increase from 55 percent in 2008 to 61 percent in 2028, as opposed to declining to 31 percent under the baseline scenario. Similarly, the PV of debt-to-revenues would be 272 percent in 2028 compared to 138 under the baseline and the debt service-to-revenue ratio would almost triple from 13 to 37 percent.

  • A combination of shocks to growth and the primary balance or a one-time 30 percent real depreciation result in a moderate worsening of debt ratios compared to the baseline. Under the former, the PV of debt-to-GDP ratio would be 40 percent in 2028 while under the latter it would be 42 percent. Under the baseline, this ratio would be 31 percent.

  • Because the primary balance was in surplus in 2008, the alternative scenario based on the primary balance being unchanged would result in a rapid decline in The Gambia’s public debt ratios with all debt eliminated by 2026. For similar reasons, the historical scenario would result in a more rapid decline in debt ratios than the baseline (Figure 3).

Figure 3.
Figure 3.

The Gambia: Indicators of Public Debt Under Alternative Scenario, 2008-2028

Citation: IMF Staff Country Reports 2009, 092; 10.5089/9781451815665.002.A002

Sources: Country authorities; and Fund staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2018.2/ Revenues are defined inclusive of grants.

V. Conclusion

15. The Gambia is at high risk of debt distress based on external debt burden indicators. While The Gambia’s level of borrowing during 2007-08 was lower than projected in the HIPC completion point DSA, primarily due to an improvement in the overall fiscal balance and a decline in new borrowing, the PV of external debt-to-exports ratio breaches the policy dependent threshold throughout the projection period. Total public debt is projected to fall by 30 percentage points of GDP over the projection period, driven in large part by a reduction in domestic debt. Given continuing risks, the authorities are urged to prepare a medium-term debt management strategy (to include the debt of public enterprises and contingent liabilities) at the earliest opportunity. Staffs also recommend that the authorities continue to rely on a combination of grants and highly concessional borrowing in external financing and exercise restraint in contracting new loans. The major risks to The Gambia’s debt sustainability include lower than expected economic and/or export growth, higher than expected new borrowing, and a deterioration in fiscal performance. In light of these risks, staffs underline the importance of sustained policy reform.

1

The last joint IMF/IDA 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 minimum grant element required under the NCBP is 35 percent or higher, should a higher minimum level be required under an existing IMF arrangement. The policy is complementary to other policies and tools that the Bank and Fund have in place to help countries maintain debt sustainability, such as the LIC Debt Sustainability Framework, the Debt Management Performance Assessment (DeMPA) tool, and the toolkit for developing Medium-Term Debt Management Strategies (MTDS). See “IDA’s Non-Concessional Borrowing Policy: Review and Update”, Resource Mobilization Department, (FRM), The World Bank, June 2008.

3

To be considered concessional in Fund arrangements, loans should have a grant element of at least 35 percent. Concessional financing for the Gambia is defined as loans with a grant element of 45 percent or higher.

4

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

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
Author: International Monetary Fund