Abstract
KEY ISSUES Background. The Gambian economy is facing urgent balance of payments needs triggered mostly by the impact of the regional Ebola outbreak on tourism. Although the country remains Ebola free, the regional outbreak is expected to cut by more than half tourism receipts for the 2014/15 season. During 2014?15, the impact of the shocks on the balance of payments, offset in part by lower global fuel prices, is estimated to be $40 million (over 5 percent of 2015 GDP). Policy slippages and persistent financial difficulties in public enterprises have exacerbated the problems and pushed The Gambia’s ECF arrangement off track. In their Letter of Intent the authorities have notified the Fund of their decision to cancel the arrangement. Request. The authorities are requesting support under the RCF—in an amount of SDR 7.775 million or equivalent to 25 percent of quota—to cope with the urgent balance of payments needs and a one-year staff-monitored program (SMP) to guide policy implementation before returning to a successor ECF arrangement, provided policies remain on track. Main policy commitments. The authorities have taken a number of upfront policy actions. The approved 2015 budget envisages lowering net domestic borrowing (NDB) to 1 percent of GDP in 2015 from 12¼ percent in 2014, anchored by a set of revenue and expenditure measures, and complemented by some $22 million in external budget support. The authorities have taken steps to resolve the financial problems of key public enterprises and intend to take measures to secure their medium-term fiscal consolidation and poverty reduction objectives. Staff’s view. Staff supports the authorities’ request. Staff views the package of measures articulated in the attached letter of intent as representing a considerable effort. The RCF disbursement would augment the authorities’ own strong adjustment efforts, help catalyze additional donor financing, and give the authorities the time needed to develop their medium-term adjustment plans. The SMP will provide the Gambian authorities an opportunity to establish a track record before moving to a successor ECF to which they aspire. A period of monitoring will also allow the time needed to assess the impact of the shocks fully and hence better tailor the objectives of a successor ECF arrangement.
Introduction
The Gambian authorities extend their appreciation to staff for the constructive policy dialogue and broadly share the thrust of the staff report. They are especially thankful to the Executive Board and Fund Management for their continued support and policy guidance against the backdrop of a challenging domestic and international environment. Cognizant of options to restore fiscal prudence and maintain macroeconomic stability while promoting inclusive growth, they have embarked on improving macroeconomic management through increased fiscal consolidation and public financial management reforms. Accordingly, measures to enhance domestic revenue mobilization have been introduced while commitment to prudent expenditure management has been renewed.
While The Gambia remains Ebola free, the indirect impact of the Ebola outbreak in the sub-region through tourism and trade has been significant. In addition, the poor crop harvest due to the drought has led to lower exports. In light of these developments, the external shocks have exerted additional pressure to the already fragile fiscal and external positions. Consequently, the 2nd ECF Review could not be completed before the program expires in May 2015. However, given the significant weakening of the balance of payments position due to the severe impact of the shocks, the authorities are requesting IMF support under the Rapid Credit Facility (RCF). They also wish to pair the RCF with a Staff Monitored Program to enhance implementation of their planned fiscal adjustment measures and the Program for Accelerated Growth and Employment (PAGE).
Recent economic developments, outlook and policies
The Gambian economy has been severely impacted by the drought and crop failure. The situation has been made worse by the regional effect of the Ebola outbreak, which has cut tourism receipts by more than half for the 2014/15 season. As a result, real GDP is estimated to contract by ¼ percent in 2014 and a slower recovery is projected for 2015. Consumer price developments show an acceleration in inflationary pressures as inflation rose to 7 percent in January 2015 from 5.5 percent in earlier months. The external current account deficit including budget support widened relative to a year earlier. Gross international reserves in months of import cover declined to 3.6 at end-2014 from 5.2 at end-2013.
My authorities’ principal policy objective over the near and medium term is to maintain a stable macroeconomic environment to support robust and sustainable inclusive growth. GDP growth is expected to return to trend in the medium term as government pursues prudent fiscal and monetary policies, and increase investment in infrastructure and agriculture. The external current account deficit is expected to narrow in the medium term, on account of the expected recovery in exports and increase in services. Gross international reserves are projected to increase to 5.1 months of imports of goods and services by the end of 2018. The exchange rate is expected to maintain its relative stability over the medium term, while inflation is targeted at 5 percent.
On the fiscal front, the authorities are committed to implement strong fiscal measures, both on the revenue and expenditure sides. This is a necessary condition which will complement the efforts of the Central Bank in its conduct of monetary policy. Government has made the commitment not to take-up any contingent liabilities on behalf of any Public Enterprises (PEs) going forward and existing liabilities incurred by PEs will be restructured for eventual repayments. In addition, government has undertaken to reform all PE’s to improve efficiencies and put them on a sound financial footing. This will include among others, helping institutions like the National Water and Electricity Company to improve collection of outstanding payments.
Fiscal policy
My Gambian authorities remain committed to ensuring fiscal discipline to reduce the deficit and domestic borrowing in order to maintain medium-to long-term fiscal sustainability. To this end, the budget was anchored on limiting NDB to 1 percent of GDP by year-end. This will generate savings, rebuild buffers and support macroeconomic stability and growth. Given the challenges in scaling-up resources to effectively implement PAGE, far-reaching policy measures will be pursued to strengthen mobilization of domestic resources to complement donor financing of government programs and projects. In addition, the authorities plan to introduce performance contracts, management contracts, and leasing as part of the public sector reform. Furthermore, my authorities have established the Public Private Partnership (PPP) Unit in the Ministry of Finance and Economic Affairs and a PPP policy has already been developed to provide the framework for government to partner with the private sector in national development.
On the expenditure front, my authorities are committed to pursuing tight expenditure controls while switching spending towards their strategic priority infrastructure and social sector projects. Accordingly, the authorities have started implementing the plan to reduce embassies, restrict travel of civil servants and will introduce a comprehensive vehicle policy. Furthermore, the strategic planning exercise in all ministries to facilitate more efficient allocation of public finances is expected to be completed by 2016.
Debt management policy
My authorities are concerned that the recent debt sustainability analysis conducted by the IMF and World Bank indicates that the country faces heightened overall risk of debt distress. Cognizant of the threats to debt sustainability, external financing of infrastructural and other social sector projects will be at concessional terms, while innovative ways of mobilizing external resources are crafted. On the domestic front, as market conditions allow, the authorities will endeavor to extend the maturity of domestic public debt by introducing longer-term instruments such as bonds aimed at reducing rollover risks. Finally, the authorities remain committed to their ambitious fiscal consolidation plan to bring down the public debt level and the T-bill rates.
Monetary policy
The monetary policy stance will be geared towards ensuring macroeconomic stability. In this regard, further strengthening of the monetary policy framework will be pursued including, through continued improvement of liquidity forecasting and management. In addition, the fiscal authorities will collaborate with the central bank by participating in the regular meetings of the interagency committee and by improving its weekly forecasting of the public sector borrowing requirement. Furthermore, monetary operation will be deepened to enhance the effectiveness of monetary instruments in sterilizing domestic liquidity.
Financial sector policy
The banking sector continued to be sound, safe and resilient. There has been strong asset growth and increased competition in deposit mobilization. Also, solvency remains strong and all banks were within the capital adequacy ratio prudential limit.
Looking ahead, the monetary authority will pursue series of structural reforms to guarantee financial stability. This will include developing a national crisis resolution framework, which will be extended to cross border in the sub-region. Plans are underway to migrate from a hybrid (compliance and risk-based) to a fully risk-based supervisory framework, once the architecture to implement risk-base supervision is completed. In addition, the central bank will continue to conduct top-down stress testing using simple sensitivity-based models to assess the resilience of the banking system to various shocks. Furthermore, an electronic reporting system for commercial banks for the timely reporting of data as well as facilitation of onsite and offsite supervision has been established. Finally, capacity for macro-prudential analysis will continue to be enhanced.
Conclusion
The authorities remain commitment to sound macroeconomic management and inclusive growth underpinned by prudent public financial management. In this context, they intend to direct policy efforts towards narrowing the budget deficit as the key to reducing the debt burden and related interest payments. They appreciate the support from the Fund and the international community and count on the continuation of such support to realize their development goals.