Abstract
This 2015 Article IV Consultation highlights that The Gambia has experienced large balance of payments and fiscal imbalances, caused by persistent policy slippages in recent years and financial difficulties in public enterprises. The IMF supported the authorities' efforts through a Rapid Credit Facility (RCF) disbursement in early April 2015 and a Staff-Monitored Program (SMP). However, major policy slippages have occurred since the RCF disbursement, pushing the SMP off track and worsening the outlook considerably. In light of the elevated level of public debt, the government should prioritize infrastructure investments that help address poverty and improve the business environment. The authorities are encouraged to continue their efforts to improve supervision capacity to enhance financial stability.
On behalf of the Gambian authorities, we thank staff for the frank and constructive policy dialogue during this particularly challenging consultation cycle. The mission team and the IMF’s resident representative in The Gambia made commendable efforts to engage with the authorities, development partners and other stakeholders, which has greatly helped to inform the policy agenda going forward. The authorities appreciate the continuing engagement with the Fund and broadly agree with staff’s assessment of the economy, although with a more optimistic view of the outlook. We also thank Executive Directors and Management for their continued support and guidance. My Gambian authorities have conveyed their continued commitment to strong macroeconomic management, as well as to restoring macroeconomic stability and promoting inclusive growth.
Recent economic developments and outlook
Although The Gambia has remained Ebola free, the economy is still facing urgent balance of payments needs, triggered mostly by the impact of the regional outbreak on tourism, which contributes around 20 percent of GDP. The outbreak is estimated to have cut tourism receipts by more than half for the 2014/15 season. The overall impact of the shocks on the balance of payments during 2014/15 was estimated to be $40 million (over 5 percent of GDP in 2015, even taking into account the positive impact of lower global fuel prices). Gross international reserves have declined to cover less than two months of imports, from almost 5 months of imports at end-2013. In addition, the delayed rains in 2014 have led to a 15 percent decline in the year’s crop, pushing down real GDP and threatening food security. Nevertheless, according to the Gambia Bureau of Statistics, real GDP grew by 1.6 percent in 2014, an upward revision from the estimated 1.4 percent contraction.
Going forward, however, growth is expected to return to trend in the medium term, and could exceed 5 percent already in 2016, with strong policy implementation and the projected rebound in agricultural output and tourism, which together account for 40 percent of GDP. We note, in particular, that agricultural production is estimated to have declined by 8.4 percent, which is less severe than the 22.7 percent decline previously reported. Regarding the tourism sector, economic recovery in the EU, the low incidence of new Ebola cases in the region, and marketing and investment efforts in the sector should bolster performance. With the recovery in these two sectors, we expect the external current account deficit to narrow in the medium term. Gross international reserves would also be restored, while inflation could be expected to return to the targeted 5 percent, given the currently subdued international prices for food and fuel.
Performance under the Staff Monitored Program
As Executive Directors recall, The Gambia’s program under the Extended Credit Facility (ECF) was pushed off track and cancelled earlier this year. On April 2, the Board approved a disbursement of US$10.8 million under the Rapid Credit Facility (RCF), which was intended to support the authorities’ own adjustment efforts, and catalyze donor financing. The RCF disbursement was supported by a one-year SMP, under which my authorities committed to lowering net domestic borrowing (NDB) to 1 percent of GDP in 2015 from 12¼ percent in 2014. This would bring interest payments down, and create space to move to a more sustainable fiscal path. In addition, the authorities resolved to take steps to tackle the financial problems of key public enterprises and to secure their medium-term fiscal consolidation and poverty reduction objectives. About US$22 million was expected in external budget support.
My Gambian authorities believe that the Staff Monitored Program has been helpful in enhancing the implementation of the authorities’ planned fiscal adjustment measures and the government’s Program for Accelerated Growth and Employment (PAGE). Initially, the authorities were confident that they could maintain policy implementation in line with the main commitments under the program. However, there were some spending pressures in the face of the growing impact of the Ebola crisis, and except for the health sector support grant of $5 million from the World Bank, donor financing, including the expected budget support has not been forthcoming. Earlier in December 2014, the European Union (EU) announced that it was stopping around $16 million in development aid, based on non-program related issues.
Macroeconomic policies
Fiscal policy
Despite recent challenges, my Gambian authorities remain committed to fiscal consolidation. Over the past few years, they have demonstrated this by taking some sensitive measures, including adjusting fuel prices to eliminate subsidies, bringing utility tariffs closer to cost recovery level and continuing to make efforts to strengthen revenue collection and administration. Efforts in mobilizing revenue, in particular the introduction of the value added tax, have helped raise the revenue to GDP ratio from 16 percent in 2012 to 18 ¾ percent in 2014. The authorities have also been working to secure medium-to long-term fiscal sustainability, in particular to reduce the fiscal burden arising from financial difficulties in the key public enterprises. Noteworthy steps have been made to address the financial problems of the National Water and Electricity Company (NAWEC) and other public enterprises, especially GAMTEL and GAMCEL. The authorities are also undertaking efforts to switch spending toward strategic priority infrastructure and social sector projects. Accordingly, they have launched actions to restrict nonessential travel of civil servants, cut down on foreign missions, and introduce a comprehensive government vehicle policy.
The government remains steadfast in the implementation of expenditure measures outlined in the SMP to shore up the NDB target in 2015. In particular, executive approval has been secured to articulate these measures and develop a strategy for their implementation. On the proposed sale of government-owned land plots, an evaluator has been contracted to determine the value of the plots to be sold. Once the evaluation is complete, the land sales will begin in earnest. In addition, the government has helped NAWEC secure a second ECOWAS grant disbursement, which should help strengthen NAWEC’s financial position. The authorities are also developing a framework on the implementation of GMD 10 levy on each bill issued by NAWEC to buttress its cash flow.
The authorities are about to submit a paper to cabinet for consideration and approval on streamlining membership to non-financial international organizations. Once the proposal is approved by the cabinet, implementation will start. Furthermore, besides the downsizing of diplomatic missions, government has established a taskforce to review Foreign Service Regulations, with a view to minimizing staff-related costs. The authorities intend to seek approval on the new regulations for implementation at the start of 2016.
My Gambian authorities recognize the need to press on with the implementation of agreed measures identified in the MEFP and the 2015 budget, and to implement contingency measures in addition to those stipulated in the budget. They are also aware of the need to garner more support from the donor community to shore up external budget support. In this regard, discussions are underway with some nontraditional bilateral partners. The authorities are also considering measures to achieve deeper budget restructuring. Further measures under consideration, such as civil service reform, will require garnering further political support and caution before implementation. The authorities also recognize the importance of reform in the energy and telecommunications sectors.
The authorities have also engaged the World Bank to support the civil service reform program and the Bank has expressed interest in it. Work has commenced on the Project Design, and it is hoped that this would be concluded soon. The authorities are currently developing a strategy on streamlining and reducing the number of government ministries and agencies, with a view to ultimately reducing the size of the public sector. Once finalized, a concept note will be submitted to the Executive for approval.
Public debt management
The authorities are also taking steps to improve public debt management. In particular, the relevant departments of the Ministry of Finance and the Central Bank of the Gambia (CBG) coordinate regularly on both domestic and external debt to improve information exchange, which will lead to better forecasting of interest payments. The Ministry is also compiling a database on debt and contingent liabilities of SOEs.
Monetary policy and exchange rate policies
The CBG has steadfastly deployed available instruments to control inflationary pressures, managing to contain inflation has within the single digits at around 6.5–7.5 percent since late 2014. In May, the CBG raised the policy rate by one percentage point to 23 percent. In addition, the CBG has continued efforts to improve liquidity management and forecasting, including by strengthening its collaboration with the fiscal authorities.
The authorities recognized that the flexible exchange rate regime has served the country well and enhanced competitiveness over the years. The CBG was able to build-up reserves to five months of import cover. However, due to speculative activities in the domestic foreign exchange market, an Executive Directive was issued fixing the exchange rate with the US dollar at a level estimated to be 30 percent higher than the prevailing market rates. This is believed to be a temporary measure. Staff stresses the need to rescind the recent exchange rate directive and to return to a flexible exchange rate policy. The CBG has continued to maintain a tight monetary policy stance by maintaining high reserve required reserve ratio and has continued to tighten the foreign exchange net open positions of banks to increase the supply of foreign exchange. The CBG stands ready to tighten policy further should indications of exchange rate over-shooting emerge upon lifting of the Executive Directive.
The authorities are emphasizing the need to proceed with caution, carefully assessing the policy implications of any alternatives, to avoid policy reversals that, in themselves might be destabilizing. They cannot act on the staff’s recommendations without securing a consensus among the authorities on the assessment of macroeconomic risks.
Financial sector policy
As indicated in the staff report, the banking sector has continued to be sound and resilient, and it appears able to cope with increases in NPLs, although credit concentration risks have increased with the fiscal instability. Market risks are manageable for both interest and exchange rate risks, although prolonged high interest rates have been damaging to the private sector and SOEs. There has been strong asset growth and increased competition in deposit mobilization. In addition, solvency remains strong and all banks remain within the capital adequacy ratio prudential limit.
International Financial Reporting Standards (IFRS)
Commercial banks have been complying with the Directive issued by the CBG to submit their audited accounts in accordance with International Financial Reporting Standards. This was meant to enhance the quality of financial reporting. It followed a series of training programs for both CBG and commercial bank staff to enhance their knowledge on the reporting standards. Further, an electronic data submission system, the V-RegCoss, which was designed to further enhance the accuracy and transparency of reporting of commercial banks to the CBG, is functioning smoothly.
Financial Intelligence Unit
The Financial Intelligence Unit (FIU) started operating as an independent entity with the appointment of a new Director. The Unit, which was temporarily housed in the CBG of the Gambia, has now secured a new office with adequate funding and staffing to enable it to effectively carry out its mandate. The staff also took part in series of training and capacity building programs while the national AML/CFT strategy, action and implementation plan has been finalized in a bid to enhance efforts in combating money laundering and terrorist.
National Crisis Resolution Framework
The CBG is in the process of establishing a National Crisis Resolution Framework. A taskforce has been setup to conduct research on the design of the framework. The taskforce has completed and submitted its findings to the management of the Bank for review. The development of the Crisis Management and Resolution Framework (CMRF) was prompted by the decision of the Committee of Governors of the West African Monetary Zone (WAMZ) at its Convergence Meeting held on July 16, 2014. The decision provided that the College of Supervisors of the Zone should develop a harmonized framework for financial resolution in the sub-region. Each country would provide a draft crisis resolution framework, which would highlight any operational, legal and other challenges and/or impediments, including solutions towards integration into one broad resolution regime. All the frameworks would then be merged into a harmonized framework for the sub-region.
My authorities are aware of the heightened risks at this current juncture. They have thus intensified efforts on structural reforms to guarantee financial stability, including developing a national crisis resolution framework as outlined above, which will be extended to cross border in the sub-region. Plans are also underway to strengthen supervision, by migrating from a hybrid (compliance and risk-based) to a fully risk-based supervisory framework, once the architecture to implement risk-based supervision is completed. The CBG will continue to conduct top-down stress testing using simple sensitivity-based models to assess the resilience of the banking system to various shocks.
Inclusive growth and competitiveness
The Gambian authorities’ efforts to promote inclusive growth over the past few years are bearing fruit. As noted in the staff report, child and maternal health indicators have improved, as have those in education, and youth and female literacy. Nevertheless, poverty remains a concern and recent economic challenges have constrained the achievement of inclusive growth objectives. The authorities recognize the need to step up efforts to improve competitiveness, which will help boost inclusive growth. They have thus embarked on a number of projects to scale up investments in energy and transportation, including the Trans Gambia River bridge construction and a project to connect the regional hydropower grid.
The authorities recognize the vulnerability of the agricultural sector to drought and its overall impact on economic activity. As a result, the Government has identified some measures to mitigate the risks of drought on agriculture. Recently, the authorities signed a Drought Insurance Policy with the Africa Risk Capacity (ARC). Under this arrangement, resources would be made available immediately in the event of a drought to dampen the impact on economic activity. The government has also signed an agreement with the Islamic Development Bank, with the Drought Resilient Project also geared toward tackling drought-related shocks.
Conclusion
In closing, I would reiterate the strong appreciation of The Gambian authorities for the continuing support from the Fund. They have expressed their strong commitment to sound macroeconomic management and inclusive growth, which they recognize needs to be underpinned by solid public financial management. The authorities intend to continue pursuing policy efforts towards narrowing the budget deficit as a key foundation in efforts to reduce the debt burden and related interest payments. They are also committed to deepening structural reforms to boost competitiveness, promote inclusive growth and accelerate poverty reduction.