Abstract
The Gambian economy showed strong growth and low inflation during the global crisis under the Extended Credit Facility (ECF), despite a sharp drop in tourism and remittance receipts. Executive Directors appreciated the macroeconomic policy framework and stressed the importance of achieving the MDGs and targets on poverty-reducing expenditures. They encouraged strengthening of fiscal performance to anchor macroeconomic stability and reduce the debt burden. Directors strongly supported tax reform and welcomed budget procedures and their execution. Directors supported recent improvements in debt management and stressed the importance of debt sustainability.
This statement provides an update to the staff report for recent developments in the areas of fiscal performance, exchange rate policy, and inflation. These developments do not alter the overall thrust of the staff report, although the significantly smaller-than-anticipated fiscal slippage in 2010:H1 is a welcomed positive outturn.
1. The government achieved a surplus of GMD 41 million in the basic fiscal balance during the month of June—a significant turnaround from the substantial deficits incurred during April and May. As a result, the shortfall in the basic fiscal balance during 2010:H1, relative to the budget target, was about GMD 160 million (0.6 percent of GDP), rather than the estimated shortfall of about GMD 270 million (nearly 1 percent of GDP) underlying the fiscal projections for 2010 in the staff report. The fiscal slippage during 2010:H1 was the result of revenue shortfalls, while government spending was held to about 95 percent of budgeted allocations.
Staff welcomes this improved performance. Continued progress on strengthening the fiscal performance would be key to achieving the policy objectives of easing pressure on T-bill yields and generating fiscal savings.
2. In June, the Central Bank of The Gambia (CBG) intervened fairly heavily in the foreign exchange market.1 Since early July, however, the CBG has refrained from further interventions. After a brief appreciation in late June, the dalasi has since depreciated to its previous level against the U.S. dollar (about 29 GMD/USD) on the interbank market.
Despite the interventions, the CBG maintains an ample stock of international reserves. As of end July, gross reserves stood at US$163 million (5.3 months of imports). However, with the recent decline in reserves, the CBG may need to move up its eventual accumulation of reserves to maintain them at the target level of 5 months of imports, should imports grow as projected by staff.
3. After holding steady at 4.1 percent in June, the 12-month inflation rate increased to 6.2 percent in July, mainly because of a sharp price increases in various food staples, particularly sugar. Transportation prices also rose substantially, reflecting the full impact of the previous month’s increase in regulated fuel prices. Still, non-food inflation increased only slightly to 2.9 percent in July. As a result, inflation for 2010 as a whole may exceed the projection in the staff report (5 percent) by a small margin.
In late June, the Office of the President announced the introduction of new administrative procedures for international transactions in U.S. dollars and stated that the dalasi’s “natural” exchange rate was 27 GMD/USD. The procedures were soon removed and it is unclear whether they were ever actually put into effect. Staff is investigating whether these actions may have resulted in foreign exchange restrictions or if there were any other consequences of these announcements, although it appears that the market has remained orderly overall.