The Gambia
Sixth Review Under the Arrangement Under the Extended Credit Facility and Request for Extension and Augmentation of the Arrangement, and Waiver of Nonobservance of Performance Criterion: Staff Report; Staff Supplement; Press Release; Statement by the Alternate Executive Director for The Gambia
Author: International Monetary Fund
Publication Date:
09 Mar 2010
eISBN:
9781451937817
Language:
English
Keywords:
ISCR; CR; ECF arrangement; IMF Executive Board; Board's decision; monetary policy; debt service; debt relief; debt problem; interest rate; GDP estimate; Domestic debt; Global; private sector
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This paper discusses key findings of the Sixth Review Under the Extended Credit Facility (ECF) for The Gambia. Recent performance under the ECF-supported program continued to be broadly satisfactory. All quantitative performance criteria for end-September 2009 were achieved, except for the fiscal target, and there was good progress on the structural agenda. IMF staff recommends approval of the authorities’ request for a waiver for the nonobservance of the fiscal performance criterion based on corrective actions, notably the government budget for 2010 approved by the National Assembly with a near-zero basic balance.

Abstract

This paper discusses key findings of the Sixth Review Under the Extended Credit Facility (ECF) for The Gambia. Recent performance under the ECF-supported program continued to be broadly satisfactory. All quantitative performance criteria for end-September 2009 were achieved, except for the fiscal target, and there was good progress on the structural agenda. IMF staff recommends approval of the authorities’ request for a waiver for the nonobservance of the fiscal performance criterion based on corrective actions, notably the government budget for 2010 approved by the National Assembly with a near-zero basic balance.

I. Background—Progress Toward Sustained Macroeconomic Stability

1. The Gambia maintained robust economic growth and low inflation in recent years (Figures 1 and 2 and Tables 1–7). From 2006 to 2008, real GDP growth averaged 6.3 percent a year while annual inflation remained below 7 percent. Sound macroeconomic policies under the current three-year ECF arrangement and previous staff monitored program contributed to this strong performance—a marked turnaround from the economic volatility experienced earlier in the decade. Macroeconomic stability, however, remained vulnerable, partly because of large external current account deficits (16 percent of GDP in 2008, including official transfers). The Gambian dalasi weakened sharply against the U.S. dollar in late 2008, prompting the Central Bank of The Gambia (CBG) to intervene heavily. In real effective terms, however, the dalasi appreciated. At end-2008, gross international reserves stood at US$113 million (or 3.7 months of imports).

Figure 1.
Figure 1.

The Gambia: Recent Economic Developments

Citation: IMF Staff Country Reports 2010, 061; 10.5089/9781451937817.002.A001

Sources: Gambian authorities; and Fund staff estimates and projections.
Figure 2.
Figure 2.

The Gambia: Cross Country Comparison

Citation: IMF Staff Country Reports 2010, 061; 10.5089/9781451937817.002.A001

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

2. In December 2007, The Gambia reached the completion point for the (HIPC) Initiative, which together with the (MDRI), provided extensive relief on external debt. Although the external debt situation was much improved, The Gambia remained at high risk of debt distress; a result of additional borrowing since the HIPC decision point in 2001, which was not eligible for relief, weak capacity for debt management and policy implementation, and poor export performance.1 In particular, The Gambia’s competitive advantage in the re-export trade eroded significantly due to tariff harmonization across countries in the region Economic Community of West African States (ECOWAS) and improvements in port facilities in neighboring Senegal. Fiscal discipline reduced Government’s domestic debt relative to GDP during 2006–08 (to about 25 percent of GDP at end-2008), generating significant savings on interest payments. Still, domestic interest payments were burdensome (just over 3 percent of GDP in 2008).

II. Recent Economic Developments—Withstanding the Global Economic Crisis

3. Despite negative effects of the global crisis, the Gambian economy held up well in 2009. Real GDP growth is estimated to have fallen to 4.6 percent, a significant decline from recent years but a better outturn than previously projected.2 Sharp drops in tourism and remittances (down by about 10 percent and 20 percent, respectively), the latter of which is a key source of financing for residential construction, were counterbalanced by strong agricultural output, due to favorable weather and initial success in the government’s program to expand rice production. The 12-month inflation rate peaked at 7.0 percent in February, before dropping to 2½ percent toward the end of the year. A good harvest season, combined with lower global food prices and a small decline in regulated fuel prices, helped to drive down inflation. In addition, the CBG implemented a relatively tight monetary policy.

4. Fiscal discipline slipped in 2009, relative to initial budget objectives. Large overruns in government spending, mostly during the second quarter,3 led to unanticipated domestic borrowing and additional pressure on T-bill yields. Budget execution improved somewhat later in the year. However, mainly due to the obligatory re-purchase of equity in the previously privatized telecommunications company (GAMTEL) (0.6 percent of GDP),4 and to a lesser extent to the infrastructure spending in the Gambia Radio and Television Service (GRTS) (0.2 percent of GDP), additional overruns emerged in Q4. For the year as a whole, although revenue increased to 20.4 percent of GDP from 19.2 percent of GDP in 2008, the deficit in the basic balance (overall fiscal balance excluding grants and foreign-financed capital spending) widened from 0.8 percent of GDP in 2008 to 1.6 percent of GDP in 2009. A recovery in petroleum taxes—determined by the margin between regulated pump prices and world oil prices—drove the positive outturn for revenues. Expenditures reached 25.7 percent of GDP, up 3 percentage points from 2008, arising from sharply higher capital spending (domestically financed) and overruns on wages and allowances, which exceeded the original budget by about 2 percent and ½ percent of GDP, respectively. Foreign-financed capital spending, however, fell well short of budget projections.5

5. Monetary policy focused on reversing the rise in inflation in early 2009. The CBG held the rediscount rate at 16 percent throughout the year to signal a tight policy stance, while limiting reserve money growth to 8.5 percent in the first eleven months of 2009. Broad money and credit to the private sector expanded by 11 percent and 12 percent, respectively, during the first ten months of the year. The opening of several new banks has allowed for additional financing of both the public and private sectors from an increased capital base.6 The entry of new banks has boosted competition, but raised concerns about the sustainability of a crowded banking sector.

6. The current account deficit excluding official transfers widened slightly relative to GDP, mainly reflecting the sharp fall in remittances. Increased budget support grants (US$13 million) and financial flows into the banking sector contributed to financing the current account deficit and building up international reserves in 2009.7 In addition, the SDR allocation (US$39 million) and ECF disbursements (US$16 million) bolstered international reserves substantially. By end-2009, gross international reserves stood at a comfortable 6½ months of imports. Meanwhile, the dalasi was quite stable against the U.S. dollar throughout the year, trading within a tight range of GMD 26-27 per U.S. dollar with only minimal interventions by the CBG. In real effective terms, the dalasi appreciated by 2½ percent during the first ten months of 2009.

III. Recent Performance Under the ECF Program—Broadly Satisfactory

7. The authorities met all quantitative performance criteria for end-September 2009, except the fiscal measure (MEFP ¶3 and Table 1). The net domestic assets of the central bank were well below the ceiling and net useable international reserves exceeded the floor by a comfortable margin (US$11.5 million). The floor for the basic balance, however, was missed by a wide margin of GMD 353.4 million (equivalent to 1.6 percent of GDP). As a corrective action, the 2010 budget approved by the National Assembly in December 2009 has a near-zero floor on the basic balance (−0.1 percent of GDP), which would allow for a reduction in domestic debt to just under 23 percent of GDP by end-2010.

8. All structural benchmarks through December 2009 have also been implemented, except for a delay in submitting audited government accounts (MEFP ¶9 and Table 2). An initial medium-term debt management strategy paper was completed in September and submitted to Cabinet in November. Balance of payments statistics for the second quarter were published, with a slight delay, in October. The audited government accounts for 2005 and 2006 were submitted to the National Assembly in March 2009. Because of an ongoing effort to remove qualifications for past accounting discrepancies dating back to 1991, the audit of the 2007 accounts has been delayed. It is expected that they will be submitted to the National Assembly by June 2010.

IV. Policy Discussions

9. Discussions focused on the government budget for 2010, monetary and exchange rate policy, the influx of new banks, medium- and long-term public debt issues, and needed improvements to economic statistics. In addition to designing a macroeconomic policy framework that would preserve stability and support strong growth and poverty reduction, discussions sought to identify steps to ease pressure on T-bill yields with a view toward creating fiscal space for non-interest priority spending.

A. Medium-Term Macroeconomic Framework

10. The Gambian economy is projected to return shortly to a medium-term path with robust growth, while maintaining single-digit inflation—roughly in line with previous projections and recent pre-crisis trends (Text Table and Figure 3). The authorities agreed that a gradual trend toward modest fiscal surpluses would be the key to reducing the debt burden and generating savings on domestic interest payments in particular. The projections are based on a steady recovery from the global crisis and normal weather conditions for agriculture. The supporting policy framework refrains from a further buildup of international reserves over the next few years.

Figure 3.
Figure 3.

The Gambia: Medium Term Outlook

Citation: IMF Staff Country Reports 2010, 061; 10.5089/9781451937817.002.A001

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

The Gambia: Framework Assumptions

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Source: Fund staff estimates and projections.

B. Fiscal Policy

11. The government budget for 2010 aims to deliver a small reduction in outstanding domestic debt as a first step toward realizing significant savings from lower interest payments on domestic debt (Figure 4 and MEFP,¶ 12 and 13). Discussions focused on targeting a near-zero basic balance. As a result, new revenue measures, which are expected to yield GMD 110 million (0.5 percent of GDP), were introduced to counteract the revenue loss from petroleum taxes and from lowering the corporate tax rate. Furthermore, government trimmed proposals for non-core spending, including the investment project for GRTS.

Figure 4.
Figure 4.

The Gambia: Fiscal Outlook

Citation: IMF Staff Country Reports 2010, 061; 10.5089/9781451937817.002.A001

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

Government Expenditure on Wages and Salaries

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Source: IMF databases and Fund staff estimates and projections.

12. In line with the ongoing civil service reform, which is designed to attract and retain skilled staff, the government’s wage bill is budgeted to increase by 35 percent in 2010. The increase – originally planned for 2009, but delayed by a year due to budgetary constraints – is part of a comprehensive civil service reform strategy prepared with World Bank support.8 The wage bill is expected to increase further by 19 percent in 2011, the final year of the reform. The Gambia started the reform process with a comparatively low government wage bill and, even after the reform process, the wage bill and employment levels remain below the regional average (Text Table).

13. Tax reform is key for creating a more business enabling environment in The Gambia, while consolidating the revenue base. Revenue measures for 2010 take a modest step in this direction, notably reducing the corporate income tax rate from 35 percent to 33 percent, while increasing selected indirect taxes and fees (MEFP ¶14).9 However, given the severity of the situation, a more comprehensive tax reform is needed.10 In line with recommendations from the Fund’s mission on tax policy (March 2009), the government is considering moving toward a simpler tax system with relatively low tax rates, limited exemptions, and greater reliance on consumption taxes over the medium term. The mission also encouraged the authorities to convert the petroleum tax to an excise tax in order to reduce the volatility of collections from this import source of revenue, but they continued to oppose such a measure at this time. The authorities are keen to address issues on tax administration, including strengthening taxpayer services and enforcement of taxpayers’ rights (MEFP, ¶15).

14. Disciplined execution of the budget will be key to the success of the program and lower interest rates in 2010. In the near term, budget discipline relies on political will. Over the medium term, building greater institutional capacity in public financial management (PFM) would increase the effectiveness of the budget process and budget execution. With support from the EU and other development partners, the authorities intend to make rapid progress with the implementation of the PFM reform action plan, which was submitted to cabinet in December 2009. In addition, the Office of the Auditor General is working closely with the Ministry for Finance and Economic Affairs (MOFEA) to submit the annual audited government accounts to the National Assembly in a more timely manner. The MoFEA will also establish an internal audit office by June 2010 (structural benchmark).

C. Monetary and Exchange Rate Policies

15. The CBG will maintain a sufficiently tight monetary policy to keep inflation at around 5 percent, but nonetheless may be able to ease pressure on T-bill yields and interest rates more broadly. The comfortable level of international reserves, achieved largely by the SDR allocation, strengthens the CBG’s position to rely more on foreign exchange sales to sterilize the liquidity injections from donor-financed government spending—a policy more in line with a “spend and absorb” approach to donor assistance (MEFP ¶16 and 20).

16. The CBG will continue to focus on reserve money as its operational target to help contain broad money growth and inflation. Improving liquidity forecasting, including the establishment of an interagency committee to share timely information on fiscal operations (structural benchmark), would facilitate achieving monetary targets and bring greater stability and predictability to the local money market. This too could help ease pressure on interest rates.

17. Over the medium term, the CBG will explore measures to increase competition in the T-bill market, which would also lower yields. For example, reducing the frequency of T-bill auctions would raise the opportunity cost of unsuccessful bids. Before undertaking such measures, the CBG would need to develop additional liquidity management instruments, such as very short-term REPOs.

18. The CBG will continue to implement a floating exchange rate policy, limiting interventions to smooth market volatility (MEFP ¶22). Given an ample stock of international reserves, the CBG does not intend to further build up reserves. In this context, sales of foreign exchange for sterilization purposes would need to be highly systematic and predictable to minimize their influence on the exchange rate. For this, and other operational issues regarding liquidity management, the CBG requested technical assistance from the Fund.

19. Central bank independence is key to sound monetary policy. Staff urged the authorities to strengthen the CBG’s independence by observing the statutory limit on government overdrafts (MEFP, ¶23). In November 2009, government overdrafts stood at 25 percent of the previous year’s tax revenues, well above the statutory limit of 10 percent.11 Some technical measures could reduce the stock of overdrafts, as the government has substantial deposits in other accounts. However, to be effective, a one-time transfer of deposits to achieve compliance must be backed up by fiscal discipline that reduces government borrowing requirements.

D. Banking Sector Issues

20. The CBG is taking steps to boost supervisory capacity following the entry of several new commercial banks. Over the past two years, the number of banks has nearly doubled. Most of the new banks are subsidiaries of Nigerian institutions that are seeking to expand their regional networks. Bank executives indicated that competition for staff, deposits, and loans has increased significantly and the return on equity has dropped (from 4.8 percent in 2008 to 3.4 percent for the first nine months of 2009). Nonetheless, the banks are well capitalized. The ratio of tier I capital to risk weighted assets stood at 21.5 percent in the third quarter of 2009. While non-performing loans stood at 11.5 percent, this is similar to last year’s level, and they are fully covered by loan-loss provisions. Staff welcomed the CBG efforts to ensure a sound banking system, particularly the hiring of new banking supervision staff and the increase in capital requirements from D60 million in 2009 to D150 million at end-2010 and D200 million at end-2012 (MEFP, ¶21).

E. Debt Management and Sustainability

21. As described in the joint Debt Sustainability Analysis (DSA) Update by Bank and Fund staffs, The Gambia’s external debt position has deteriorated slightly since the HIPC completion point, and the country remains at high risk of debt distress.12 Substantial new external borrowing in 2008 and a stagnant export base have increased the already high external debt-to-exports ratio (Figure 5). Given current borrowing plans, the present value (PV) of external debt-to-export ratio is projected to breach the relevant vulnerability threshold of 100 percent—for a “weak performer” under the World Bank/IMF Low-Income Country Debt Sustainability Framework (LIC-DSF)—for a protracted period. Moreover, standard stress tests show that The Gambia is vulnerable to adverse developments with the PV of debt to exports and debt to GDP breaching their thresholds under some stress tests. Progress in reducing The Gambia’s domestic debt burden stalled in 2009, due to the large financing needs created by the expenditure overruns. Interest on domestic debt consumed nearly 16 percent of government revenues in 2009.

Figure 5.
Figure 5.

The Gambia: Debt Management and Sustainability

Citation: IMF Staff Country Reports 2010, 061; 10.5089/9781451937817.002.A001

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

22. The authorities are addressing The Gambia’s debt problem from various angles. In addition to making a strong effort to reduce domestic debt and to lower the interest on that debt, they agreed to restrict new external borrowing to sources that provide a generous grant element (45 percent or more). At the same time, the authorities are building their capacity to manage debt, including through the hiring of expert advisers. The external debt data base has been greatly improved, enabling more accurate analysis of debt sustainability, and an initial medium-term debt strategy has been developed (Box 1). Moreover, significant advances in the areas of PFM reform and the auditing of government accounts also contribute to the authorities’ capacity to implement policies and hence better plan for the government’s financing needs (MEFP ¶19).

Progress Toward a Medium-Term Debt Strategy

To better manage the government’s heavy debt burden, the Gambian authorities completed the preparation of a medium-term debt strategy (MTDS) in September 2009 (structural benchmark). The MTDS covers the period 2010–12 and marks an initial effort to explicitly weigh the costs and risks of five alternative debt financing scenarios under four stress tests.

Despite much higher real interest rates on domestic debt, the MTDS concludes that the lower risk of domestic debt versus external debt is worth the higher cost. The authorities agreed with the mission, however, that these conclusions were largely the result of biased assumptions. First, a hypothetical yield curve for dalasi denominated government securities is derived from the yield curve for U.S. government securities, such that the difference between the yield on a 3-month security and a 10-year security would be the same, even though the longest maturity in The Gambia is presently only one year. Second, the main shock under consideration was a major devaluation of the dalasi, but it is assumed that this has no impact on domestic inflation and yields on domestic debt. In contrast to the recommendations of their initial MTDS, the authorities have opted for a strategy to curb domestic debt to achieve savings from the high interest costs. The authorities agreed that the MTDS should be based on highly realistic assumptions and have requested technical assistance from the Fund to strengthen the strategy.

Because of the substantial rollover risks of the current stock of domestic debt, the mission agreed that the authorities should explore options for introducing longer-term domestic securities. But the mission cautioned that at this time yields are likely to be quite high and could add significantly to domestic interest costs.

F. Risks

23. The main economic risks to the program are:

  • Greater than expected impact of the global economic crisis. If tourism or remittances do not recover at least partially during 2010, the recovery in GDP growth would be delayed.

  • Fiscal shock. Tax revenues are vulnerable to shocks, especially the petroleum tax if world oil prices increase. Failure to maintain a disciplined budget execution would undermine the core objectives of reducing domestic debt and generating savings from lower domestic interest payments.

  • Shortfall in external assistance. Reduction or delays in disbursements could undermine growth and spending on poverty-reducing programs. Failure to improve the government’s capacity in PFM and auditing could have a negative impact on eligibility for donor funding.

  • Large external current account deficits. The Gambia remains vulnerable to possible terms of trade shocks and financing shortfalls (Figure 6).

Figure 6.
Figure 6.

The Gambia: External Outlook

Citation: IMF Staff Country Reports 2010, 061; 10.5089/9781451937817.002.A001

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

G. ECF Extension

24. Performance during the last three years under the ECF arrangement has been broadly satisfactory. Sound macroeconomic policies have contributed to robust GDP growth and low inflation in recent years, despite the adverse effects first of the commodity price boom, then of the global crisis. All previous reviews of the ECF have been completed and, following the second review in December 2007, The Gambia received debt relief under the HIPC Initiative and MDRI.

25. The authorities are requesting an extension of the current ECF arrangement for one year, to February 20, 2011. This will allow the authorities to consolidate the achievements of the current program while building domestic support for a new medium-term program that would emphasize tax reform, fiscal consolidation, capacity building in PFM and debt management, and improvements to the business environment. Augmentation of the current arrangement by 15 percent of quota (SDR 4.66 million) would contribute to reducing the risks arising from a large current account deficit and fluctuating financial account flows. The augmentation would be disbursed in two equal tranches, one each following the seventh and eighth review, respectively. The requested augmentation of the program has only a minor effect on the country’s debt service burden (Table 9).

H. Program Monitoring

26. In response to the request for an extension of the current ECF arrangement to February 20, 2011, quantitative performance criteria (see MEFP Table 1) and macro-critical structural benchmarks were agreed with the authorities. Structural benchmarks focus on public financial management, monetary policy, and statistics. These include: (i) taking steps to improve the annual budget process by building capacity at ministries’ planning units, (ii) adopting a MOU that ensures the regular flow of information on government revenue and expenditure to the T-bill committee, (iii) improving GDP estimates, and (iv) publishing balance of payments statistics (see below).

Structural Benchmarks, January-December 2010

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V. Staff Appraisal

27. During the past few years, covering the period of the ECF arrangement, the Gambian authorities pursued broadly sound macroeconomic policies which contributed to robust positive economic growth and low inflation. With the successful performance under the ECF-supported program, The Gambia reached the HIPC completion point in December 2007 and received extensive debt relief, including debt cancellations under MDRI. Despite some slippages in 2009, policy implementation remained broadly on track, which helped to minimize the negative impact of the global financial crisis. However, government’s additional financing requirements arising from expenditure overruns increased pressure on T-bill yields. Government domestic interest payments (relative to GDP) are among the highest in the region and consume valuable resources that could have been directed to other priorities.

28. The macroeconomic policy framework for 2010 aims to support growth and maintain stability, while reducing the cost of domestic debt in order to generate savings for other spending needs. The government budget recently approved by the National Assembly is a necessary first step. If executed well, net domestic borrowing would be negative, easing pressure on T-bill yields. But as was just demonstrated this past year, slippages in budget execution could erase potential savings.

29. The CBG is well placed to take appropriate steps to help reduce T-bill yields. International reserves stand at comfortable level, which allows for sterilization operations using sales of foreign exchange receipts from donors’ budget support, rather than sales of T-bills. The CBG will also strengthen its liquidity forecasting capabilities to ensure consistent liquidity management. For this to be successful, however, an effective interagency government committee will need to be established to provide timely information on fiscal operations. Also, with support from a disciplined execution of the 2010 budget, there could be scope for reducing the monetary policy interest rate.

30. As indicated by the joint DSA Update by Bank-Fund staff, The Gambia remains at high-risk of debt distress. Key external debt indicators are above or near the sustainability thresholds for a protracted period. Moreover, high yields on government securities have exacerbated the domestic debt burden. The authorities are making substantial progress, however, in building capacity to manage debt and to develop a meaningful medium-term debt strategy, which could lead to broader financing options in the future. At present, focusing on reducing domestic debt and limiting external financing to grants or highly concessional lending would be most productive.

31. Recent performance under the ECF-supported program has continued to be broadly satisfactory. All quantitative performance criteria for end-September 2009 were achieved, except for the fiscal target and there was good progress on the structural agenda. Staff recommends approval of the authorities’ request for a waiver for the nonobservance of the performance criterion on the fiscal basic balance based on corrective actions, notably the government budget for 2010 approved by the National Assembly with a near-zero basic balance.

32. Staff recommends completion of the sixth review of the ECF and approval of the authorities’ request for an extension and augmentation of the current arrangement.

Table 1.

The Gambia: Selected Economic Indicators

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

Data for 2009 are the actuals as of September.

Table 2.

The Gambia: Fiscal Operations of the Central Government

(In millions of local currency)

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

The difference between financing and the overall balance of revenue and expenditures.

After MDRI debt relief from 2007 onward.

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.

Change in arrears for 2008 includes an additional D25 million for repayments to the National Water and Electricity Company (NAWEC).

Table 3.

The Gambia: Fiscal Operations of the Central Government

(In percent of GDP)

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

The difference between financing and the overall balance of revenue and expenditures.

After MDRI debt relief from 2007 onward.

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.

Change in arrears for 2008 includes an additional D25 million for repayments to the National Water and Electricity Company (NAWEC).

Table 4.

The Gambia: Monetary Accounts 1/

(In millions of local currency; unless otherwise indicated)

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

End of period

Include public enterprises and the local government.

Including valuation.

Table 5.

The Gambia: Monetary Accounts 1/

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

End of period

Include public enterprises and the local government.

Including valuation.