Request for Disbursement Under the Rapid Credit Facility, and Proposal for a Staff-Monitored Program
Request for Disbursement Under the Rapid Credit Facility, and Proposal for a Staff-Monitored Program
Our Gambian authorities thank staff for the recent frank and productive program discussions, and convey their appreciation to Management and Staff for their continued engagement, particularly during this period of political transition. The authorities broadly agree with staff’s assessment of the economy, and reiterate their strong commitment to achieve macroeconomic stability and promote inclusive growth.
The Gambia is facing formidable challenges, arising from a legacy of macroeconomic imbalances, occasioned by weak governance and a challenged public sector. In addition, irregular rainfall patterns have disrupted agriculture, significantly reducing crop production, while political uncertainty after the recent elections dampened tourism receipts. Consequently, the country is facing urgent balance of payments needs, projected at about 3 percent of GDP, and low levels of usable international reserves. This notwithstanding, the new democratically-elected government is committed to restoring the country’s political and economic situation and has already taken bold steps to avoid a crisis, restore fiscal stability, ensure debt sustainability, and implement critical reforms, subject to resource constraints.
For the medium term, they are finalizing the successor growth plan to the Accelerated National Response Plan (ANRP) for the period July- December 2017, the Program for Accelerated Growth and Employment (PAGE II, 2017-2010), to consolidate the gains made to address poverty, inequality, and private sector-led growth, among others.
II. Request for a Program
With a total financing gap of 15 percent of GDP, the authorities are requesting immediate support from the IMF under the Rapid Credit Facility (RCF) in an amount equivalent to 18.75 percent of quota, or SDR 11,662,500, to address the immediate balance of payment crisis. They are also requesting for a one year staff- monitored program (SMP), covering the period April 2017 to March 2018, to guide implementation of their economic program and build a good track record of performance. Thereafter, they intend to request for support under the Extended Credit Facility (ECF) arrangement to help maintain economic stability and make progress towards inclusive growth and poverty reduction over the medium term, consistent with their national development plan. The balance of the financing gap will be covered by donors’ commitment (7.2 percent of GDP), concrete fiscal measures by the authorities (5.3 percent of GDP), and domestic financing (1 percent of GDP). The authorities recognize that some key challenges are structural in nature and will take a while to resolve. Hence, they will be seeking a more expansive program.
III. Recent Economic Developments, Risks, and Outlook
Following a series of shocks and a challenging domestic and external environment, economic growth in 2016 is estimated to have declined to 2.2 percent, from 4.3 percent in 2015. Debt levels and interest payments have risen in tandem with the growing total public debt stock which rose from 105.3 percent of GDP in 2015 to 120 percent of GDP at end-2016. This followed several years of high deficits financed by domestic security issuances. Net domestic borrowing was estimated at 11.4 percent of GDP in 2016, while the related high debt service on domestic debt absorbed almost half of government revenue in 2016. Gross international reserves have fallen to 1.6 months of prospective imports. Other pressures include weak revenue collection due to the economic slowdown, and unbudgeted support for state-owned enterprises (SOEs).
Growth is projected to rebound to 3 percent in 2017, spurred by benign weather conditions and recovery in tourism and export sectors. Within the medium term, GDP growth, averaging 4.5 percent, will be supported by economic governance reforms, resumption of private sector growth, strong commercial farming, tourism growth, and rise in foreign direct investments. These improvements would be gradual, considering the lingering political after-effects.
Headline annual inflation reached 8.7 percent in March 2017, from 7.9 percent at the end of 2016, well above the Central Bank of The Gambia’s (CBG) target of 5 percent, driven by high food prices and the depreciation of the dalasi against the U.S. dollar, since November 2016. Inflation would abate to 7.1 percent by 2018, benefitting from the normalization of monetary policy and a rebound in agricultural production. The current account deficit narrowed in 2016 due to favorable terms of trade, decline in exports and moderate rebound in trade.
IV. Fiscal Policy and Public Financial Management
The authorities are faced with the challenge of tightening fiscal policy, while promoting growth and creating space for priority infrastructure and social spending. Nevertheless, they remain committed to fiscal sustainability, and agree that policy focus should be placed on aligning public spending with available resources and drastically reducing domestic borrowing and interest costs. They also appreciate the urgency of restructuring public enterprises, especially the Gambia Telecommunications Company Limited (GAMTEL), Gambia Telecommunications Cellular Company Limited (GAMCEL), and the National Water and Electricity Company (NAWEC), to place them on a sound financial footing and limit their drain on the budget. To determine the level of financial distress within the sector, the authorities commissioned audits of all SOEs, and consequently published their audited financial statements on the Ministry of Finance and Economic Affairs’ website. They are also working with the World Bank in an exercise to consider options for divestiture, in addition to restructuring.
To restore fiscal management and enhance credibility, the authorities have legislated a budget for 2017, consistent with stabilization objectives to contain the deficit to 2.5 percent of GDP in 2017, from 9.8 percent in 2016, as well as reduce the financing gap. As further attestation of their commitment to reforms, the authorities have, among others, reduced expenditure in the 2017 budget by about 1 percent of GDP, with substantial cuts in the budget of the Presidency; ensured all fees and revenue sources are channeled to the budget, including from petroleum fee concessions; and have taken steps, with the help of the World Bank, to liberalize fuel supply to NAWEC which has witnessed a reduction in the cost of fuel by 15 percent. With respect to SOEs, the government has issued a circular stating that the government would not approve any more guarantees in their favor, unless consistent with the tenets of the Public Finance Act. In addition, they have transferred the oversight role of GAMTEL, from the Presidency to the Ministry of Information and Communication Infrastructure to restore viability and improve its competitiveness.
Several reforms have been undertaken regarding public financial management (PFM), including putting in place policies to reduce the bloated vehicle fleet; strengthening accountability; reducing fuel and maintenance cost; generating receipts from the sale of excess cars; and initiating a nationwide payroll verification audit of the civil service and security forces. They are also considering streamlining ministries and sub-vented agencies, downsizing and rationalizing embassies, and streamlining memberships in non-financial international organizations.
V. Debt Management
The authorities have noted the recent DSA which suggests that The Gambia is at high risk of debt distress. While the authorities recognize challenges to debt repayment, they are taking bold steps to restore debt sustainability, including avoiding contracting new non-concessional debt and reducing interest charges, while all outstanding CBG lending has been consolidated into a 30-year bond. With the help of the Fund and the World Bank, they have also launched the preparation of a domestic debt strategy that would include curbing net domestic borrowing, extending maturities and possibly lowering interest costs, and gradually reducing the ratio of domestic debt to GDP. The debt strategy will be implemented within the course of the proposed SMP. Further, the authorities are in negotiations with commercial banks to restructure NAWEC’s loans. With these initiatives, interest rates which averaged 17 percent in 2016 have since April 2017 declined to 11.5 percent.
On the external front, the authorities have engaged official creditors with a view of debt restructuring at concessional terms. Any additional public investments would be financed through external grants and concessional loans. They are committed to stabilize external payment arrears and do not intend to contract or guarantee any new non-concessional external debt. To further tighten controls on borrowing, the government has committed to consult with the Fund before contracting and guaranteeing any new concessional external loans.
VI. Monetary and Financial Sector Policies
Monetary policy effectiveness has been undermined by monetization of the fiscal deficit over time. Going forward, monetary policy will aim to bring down inflation within target over the medium term. The authorities are committed to maintain exchange rate flexibility to absorb external shocks and increase the resilience of the economy. Regarding CBG’s independence, amendments are expected to be submitted to parliament by end 2017. At the same time, the CBG’s Board is expected to be fully constituted and an Audit Committee set up.
Though large exposures to the banking sector present considerable risks, the authorities’ policy to consolidate current facilities, limit borrowing, and contain SOE financing is expected to help curb vulnerabilities. To ensure stability in the sector, the CBG has stepped up monitoring of the impact of recent debt policies and initiated work on upgrading the bank resolution framework. It is also developing its crisis management capabilities.
The difficult balance between efforts to restore stability and the need to boost growth underscores the critical importance of the support of the international community. In addition to the vital support provided by the Fund, our Gambian authorities appreciate the substantial financial support pledged by several cooperating partners, including the World Bank, the European Union, and the African Development Bank. This will support the authorities’ efforts to move swiftly on stabilization and reforms, and help unlock other resources essential for the country’s achievement of its comprehensive development agenda.
The Gambian authorities express their strong commitment to prudent fiscal and monetary policies, sustained debt management practices, and deeper structural reforms to boost competitiveness, promote inclusive growth, and accelerate poverty reduction. They remain optimistic that growth will pick up in 2017 as tourism and trade recover, reforms become broadly institutionalized, and investors return. The Fund’s support through the RCF and in building a track record for an ECF would be critical in playing a catalytic role in unlocking funding from other donors and providing impetus to the implementation of the country’s economic reform agenda.