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.
Introduction
1. The Gambian authorities request a waiver of the nonobservance of the fiscal basic balance target; modification of three performance criteria for end-March 2009; completion of the fourth review; and augmentation of access under the PRGF. They agree with the main thrust of the staff report and request Directors’ support for their requests. The authorities thank the staff for the candid and constructive policy dialogue during the mission.
Recent economic developments
2. The Gambian economy continues to record buoyant performance because of disciplined macroeconomic policy implementation and strong effort in carrying out structural reforms. Real GDP growth was propelled by agriculture, communications and electricity. However, during the second half of 2008, The Gambia was buffeted by two shocks: the recent high, albeit subsiding, food and fuel prices; and the global economic and financial crisis. The shocks have triggered a rise in annual inflation from 1.4 percent in April 2008 to 7.3 percent in November 2008 and a slowdown in real GDP growth from 6.3 percent in 2007 to an estimated 6 percent in 2008. The impact on the real economy includes significant decline in tourism receipts, remittances and official transfers, and sharp depreciation pressure on the dalasi in recent months. As a result, the balance of payments and fiscal positions have deteriorated significantly, including a decline by about two months in import cover since December 2007.
Program performance
3. All but one quantitative performance criteria for end-September 2008 were met; the fiscal basic balance target was missed narrowly because The Gambian economy was hit by a revenue shock. Also, all structural measures for end-September 2008 and end-December 2008 were met.
Objectives and policies going forward
4 The authorities remain committed to consolidating macroeconomic and financial stability, sustaining high growth, and reducing poverty. They are considering several fiscal, monetary, financial sector and exchange rate policies, as well as structural reforms. The macroeconomic policies for 2009 are as outlined in the Memorandum of Economic and Financial Policies (MEFP). The main objectives and assumptions underlying the medium term macroeconomic framework are: real GDP growth rates of 4.6–6 percent a year; inflation falling to 6 percent in 2009 and to 5 percent in 2010; a reduction in government’s domestic debt from 25.5 percent of GDP at end-2008 to 17.3 percent at end-2011; external current account deficits(including official transfers) falling from about 16 percent of GDP in 2008 to about 12 percent in 2011; and rebuilding international reserves to cover at least 4 months of imports.
Fiscal policy
5. The authorities have maintained fiscal prudence. However, the economy suffered a revenue shock and higher domestic debt interest payments in 2008. The authorities have curtailed planned expenditures in light of the lower-than-expected revenues in the fourth quarter of 2008. They have maintained the retail price of petroleum products at current levels to allow some recovery of revenue despite the fall in world oil prices. The authorities have requested for technical assistance from FAD to assess the revenue shock. Going forward, the authorities will take appropriate action on the basis of FAD mission findings.
6. The Gambia remains at high risk of debt distress despite the HIPC and MDRI relief. Over the medium term, the authorities remain committed to reducing the ratio of domestic debt to GDP and safeguarding fiscal sustainability. Following the completion of several debt sustainability analyses, the authorities plan to strengthen the Debt Directorate and prepare a comprehensive national debt strategy by September 2009.
Monetary policy and financial sector reform
7. The primary objective of monetary policy is to maintain price stability, guided by the monetary targeting framework. The significant part of the run-up in prices in 2008 can be attributed to high, albeit subsiding, global food and fuel prices. Monetary policy tools will continue to be used to anchor inflation expectations by, inter alia, managing the growth of monetary aggregates and/or adjusting the policy rate to reflect the monetary policy stance. The subsiding of international commodity prices in the wake of the global financial crisis may help reduce inflation further. In the context of the global financial crisis, the Central Bank of The Gambia (CBG) will continue to rely on an appropriate mix of sterilization instruments to manage liquidity. In determining an appropriate monetary policy stance, the CBG will take into account trends in the real economy and financial markets, growth in monetary aggregates and implementation of monetary operations, and the inflation target. Furthermore, the CBG is refining its liquidity forecasting and management framework.
8. Going forward, stepping up the coordination of monetary and fiscal policies, the strengthening the CBG’s financial position and the signing a memorandum of understanding will enhance the effectiveness of monetary policy.
9. The CBG will carefully monitor developments in the banking system, particularly in light of the global financial crisis. The Gambia’s financial system has been relatively insulated from the global financial crisis, but the increasing risk aversion from investors and the spiral effects of a depressed global economy could present significant challenges. The banks have remained sound, stable, profitable and sufficiently capitalized as a result of strengthened prudential supervision, and effective contract enforcement by the courts.
Exchange rate policy
10. The exchange rate of the dalasi remains market-determined. However, interventions in the foreign exchange market will continue, mainly to prevent undue exchange rate volatility.
Structural reforms
11. The authorities recognize and remain committed to resolving a number of challenges to sustain high growth. These challenges include restoring The Gambia’s competitive advantage as a regional hub through continued modernization of the port, customs, and river and road transport; diversifying the economy; and improving the business and investment climate. In this regard, the authorities are committed to implementing the recent recommendations of “A Diagnostic Trade Integration Study (DTIS)” to make The Gambia an attractive regional hub.
12. The authorities remain committed to reducing poverty significantly. In this regard, they have designed and are implementing a second Poverty Reduction Strategy Paper (PRSP II) spanning the period 2007-2011. The PRSP II provides the framework for poverty reduction and a path for meeting MDGs by 2015 by focusing on five pillars: (i) creating an enabling environment for rapid and sustainable economic growth; (ii) enhancing the capacity and output of productive sectors; (iii) improving the coverage of basic social services and social protection for the poor and vulnerable; (iv) enhancing governance systems and building the capacity of local communities and civil society organizations to play an active role in economic growth and poverty reduction; and (v) mainstreaming cross-cutting development issues, including gender and the environment. In addition, the authorities are reviewing the existing Investment Promotion Act and related tax legislations to boost business and investor confidence in the economy. Furthermore, they are intensifying economic diversification into the areas of tourism, agriculture, fishing, and agro-industry, and facilitating private sector-led growth of new high-value agricultural exports.
Conclusion
13. The Gambian authorities are committed to maintaining macroeconomic and financial stability, sustaining high real GDP growth, and attaining MDGs by implementing the PRSP II. Because The Gambian economy has been hit by an exogenous revenue shock, the authorities request for a waiver of the nonobservance of the fiscal basic balance target. Reflecting the impact of the global economic slowdown and financial crisis, they are requesting for modification of three performance criteria for end-March 2009. Because the Gambian economy has been buffeted by the current sharp global economic slowdown and financial crisis, there exists a balance of payments financing gap for which the authorities request augmentation of access under the PRGF.