The Gambia: 2017 Article IV Consultation and First Review under and Extension of the Staff-Monitored Program with the Gambia

2017 Article IV Consultation and First Review Under and Extension of the Staff-Monitored Program with the Gambia

Abstract

2017 Article IV Consultation and First Review Under and Extension of the Staff-Monitored Program with the Gambia

Background

1. The Gambia is a small, fragile country which just transitioned to a democratically elected government after 22 years of autocratic rule (Box 1). With a population of two million and GDP per capita of $469 in 2016, the country’s development has been hampered in recent years by weakening governance and institutional capacity (Figure 1).

Figure 1.
Figure 1.

The Gambia: Social and Fragility Indicators, 2005–16

Citation: IMF Staff Country Reports 2018, 099; 10.5089/9781484350201.002.A001

Sources: Gambian authorities; World Bank, United Nations; and Fund Staff estimates.

2. Reliant on rain-fed agriculture, tourism and trade, The Gambia’s economy is vulnerable to exogenous shocks and carries the burden of economic mismanagement of the previous regime. Lack of economic diversification, combined with the absence of an efficient irrigation system, makes national production sensitive to external demand and weather-related shocks. In addition, more than two decades of poor economic management, including frequent fiscal slippages, sizable unbudgeted bailouts of SOEs, weak PFM, and massive embezzlement by the previous regime have resulted in high public debt and financial sector vulnerabilities.

3. The political situation is now stable and the new administration is committed to restoring economic stability and debt sustainability. The parliamentary elections in April 2017 resulted in an absolute majority in support of the new government, creating a more supportive political environment for reform, though maintaining cohesion in the seven-party ruling coalition will be key to maintaining political stability and achieving consensus around policy objectives. Local elections are scheduled for April 12, 2018.

4. The authorities are taking steps to strengthen governance and the rule of law, and fight corruption. The president and all cabinet members have declared their assets to the Ombudsman. Public expenditure reviews are underway with help from the World Bank, and a security forces reform has recently been kicked off. The authorities are also working on setting up a Truth, Reconciliation and Reparation Commission as well as a Human Rights Commission, and on the legal framework for an Anti-Corruption Commission, with UNDP support. A Commission of Inquiry has been set up and is unearthing previously unknown instances of embezzlement and theft by the former regime. The work of the commission will provide an important input to the special audits of SOEs. While the authorities are still investigating the financial dealings of the former president and his associates, they haven frozen their remaining assets in The Gambia and are also pursuing recovery of assets held abroad, with support from the World Bank’s StAR Initiative—meanwhile the United States has also frozen assets of the former president. The Gambia was readmitted to the Commonwealth in February 2018.

5. Support from the international community is indispensable to return to macroeconomic stability and debt sustainability. In July-August 2017, the authorities received significant financial support including from the Fund ($16.2 million RCF disbursement), and budget support from the World Bank ($56 million) and the EU (€25 million) to support economic and structural reforms including tackling political, governance and corruption related vulnerabilities. The AfDB is now expected to disburse US$ 7.5 million in early Spring 2018. The EU has recently indicated plans to scale up support for 2018-21 from €40 million to €100 million. The authorities have requested an extension of the Staff Monitored Program (SMP) approved in June 2017 which aims to support the authorities in restoring fiscal and debt sustainability and building a track record of performance for the eventual transition to an ECF to which the authorities aspire. An international donor conference is planned for May to raise funds in support of the recently finalized National Development Plan (NDP) as well as to help foster debt sustainability. The costing of the NDP is expected to come out around $1.8 billion, which would have to be provided mostly in the form of grants as borrowing space is extremely limited and would need to be reserved for the very highest priority projects.

Strategy for Addressing Fragility

The Gambia is marked by five aspects of fragility. First, the country is exiting from 22 years of Jammeh rule and embarking upon a historic transition to democracy. A newly elected government took power in January 2017, after a tumultuous election and political impasse, and early parliamentary elections were held in April 2017. Second, decades of Jammeh rule have weakened economic institutions and institutional capacity, which has hampered effective macroeconomic management. Third, The Gambia is also economically fragile, stemming from high susceptibility to weather-related shocks, past fiscal slippages and theft of funds by the previous regime. Fourth, limited recent progress on improving socio economic indicators may accentuate frailties in The Gambia’s social fabric, such as inter-tribal rivalries. Fifth, provision of vital infrastructure and services, such as reliable electricity, is weak.

The strategy for engagement with The Gambia entails capacity building efforts aimed at rebuilding resilience going forward. Actions such as ensuring that all previously-diverted revenue streams and public expenditures are brought on-budget, SOE reform and improving fiscal oversight of SOEs to put them on a sound financial footing, aim to increase fiscal transparency and improve basic infrastructure provision. At the same time, reducing net domestic borrowing and improving the effectiveness of monetary policy will strengthen macroeconomic management. Furthermore, technical assistance aimed at alleviating capacity limitations will focus on buttressing fiscal institutions; strengthening monetary policy tools and financial sector supervision; and enhancing statistical capacity.

6. Policy recommendations from the 2015 Article IV consultation are now being implemented (Text Table 1). Follow up by the previous regime was weak, except for rescinding the exchange rate directive. The new administration is now implementing the previous recommendations, including by boosting fiscal savings, targeting low domestic borrowing and reforming the energy and telecom sectors, securing donor support, and shoring up financial stability. The authorities have also implemented an impressively broad range of measures, including as part of their SMP commitments ((MEFP ¶6).

Text Table 1.

Implementation of Fund Advice from the 2015 Article IV Consultation

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Recent Economic Developments

7. The economy has started to recover, following the sharp growth slowdown in 2016 (Figures 2-3; Table 1). Economic growth slowed down sharply from 4.3 percent in 2015 to 2.2 percent in 2016, and in early 2017, reflecting a bad harvest, foreign exchange scarcity, and a drop-in tourism due to the political turmoil after the presidential elections in December 2016. For 2017 overall, a recovery has been under way and economic growth is projected at 3.5 percent. While the agricultural season may turn out not as good as initially hoped for, tourism bookings for the ongoing high season are strong. Port congestion as well as other anecdotal evidence indicate a strong rebound in trade supported by much improved foreign exchange supply and relations with Senegal, and there is keen interest from foreign direct investors in energy, tourism, agriculture and transportation. Headline inflation has reversed its rising trend and declined from 8.8 percent in January 2017 to 6.4 percent in January 2018, reflecting the stabilization of the dalasi and a gradual decrease in food prices. With much-improved fiscal discipline and external financial support, the Dalasi has remained stable since April and gross international reserves increased from 1.6 months of import cover at end-2016 to 2.9 months at end-2017.

Figure 2.
Figure 2.

The Gambia: Recent Economic Developments, 2012–17

Citation: IMF Staff Country Reports 2018, 099; 10.5089/9781484350201.002.A001

Sources: Gambian authorities; and IMF staff estimates and projections.
Figure 3.
Figure 3.

The Gambia: Fiscal and Financial Sector Indicators, 2012–17

Citation: IMF Staff Country Reports 2018, 099; 10.5089/9781484350201.002.A001

Sources: Gambian authorities; and IMF staff calculations.
Table 1.

The Gambia: Selected Economic Indicators, 2015-23

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

8. Higher project support has been driving up public investment. External project support through September 2017 has been much higher than previously anticipated, with both grant and loan disbursements exceeding expectations significantly as implementation of several large projects has accelerated. Higher disbursements of project grants and loans reflect the accelerated implementation of projects contracted prior to the SMP during 2011-17, mainly of a few large projects.1 Accordingly, the authorities also expect much higher project grant and loan disbursements in 2018-19, and correspondingly higher public investment.2

Economic Outlook and Risks

9. Over the medium term, the economy is expected to embark upon a more robust growth path. This assumes continued strong policy implementation, effective fiscal reforms including ensuring debt sustainability, and normal weather conditions. The new administration is committed to further national development through the planned strong expansion of reliable and affordable electricity by 2020, and increasing the economy’s productivity by promoting irrigation and commercial agriculture, light manufacturing especially crop-processing, and tourism, and continued infrastructure investment. Externally, greatly improved relations with Senegal and other countries offer much promise for trade and foreign investor interest and, more generally, regional integration and convergence with the fast-growing sub-region.

10. Economic growth is expected to accelerate in both the baseline and an alternative scenario projection (Text Table 2). The baseline projection incorporates higher project disbursements driving up public investment in 2017-19 and boosting growth to slightly above 5 percent in 2018/19 before gradually declining again (Figure 4). The alternative scenario assumes that grant-only funding for the NDP implementation will be forthcoming but implementation would be stretched out.3 High levels of government investment persist much longer than in the baseline scenario, with the public investment rate remaining close to 15 percent of GDP until 2024, and remaining above baseline levels until throughout. Total new external project support (in addition to the existing pipeline) reaches USD 1.8 billion over the period 2018-30, broadly consistent with the overall NDP costing. Growth in this scenario would accelerate to a peak of around 6 percent in 2020/21 before gradually declining again.

Figure 4.
Figure 4.

The Gambia: Medium Term Outlook, 2016-23

Citation: IMF Staff Country Reports 2018, 099; 10.5089/9781484350201.002.A001

Sources: Gambian authorities; and IMF staff calcualtions.
Text Table 2.

The Gambia: Economic Performance and Medium-Term Projections

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

11. The projected growth path remains subject to significant upside as well as downside risks and is thus fairly conservative (Table 9). Presuming steadfast implementation of sound policies, upside risks include a stronger rebound following the country’s recent structural break, faster convergence with the West-African Monetary and Economic Union sub-region which continues growing at more than 6 percent, the tripling of electricity supply by 2020, and progress in addressing the debt overhang. Strengthened governance and anti-corruption measures would also have a positive economic impact, including supporting much higher inflows of aid, FDI and remittances. On the downside, external risks include slower global growth and withdrawal of correspondent banking relations. Domestically, continued political stability and commitment to fiscal consolidation and debt sustainability are needed, along with financial sector stability.

Table 2.

The Gambia: Statement of Central Government Operations, 2015-23

(Millions of local currency)

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

Equals the sum of project grants, external project loans, and changes in project accounts.

The difference between financing and the overall balance of revenue and expenditures. In 2017 and beyond, is the remaining financing gap.

Overall balance, excluding statistical discrepancy, less expenditures financed by project grants and external borrowing.

Basic balance, excluding interest payments.

Table 3.

The Gambia: Statement of Central Government Operations, 2015-23

(Percent of GDP)

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

Equals the sum of project grants, external project loans, and changes in project accounts.

The difference between financing and the overall balance of revenue and expenditures. In 2017 and beyond, is the remaining financing gap.

Overall balance, excluding statistical discrepancy, less expenditures financed by project grants and external borrowing.

Basic balance, excluding interest payments.

Table 4.

The Gambia: Monetary Accounts,1 2015-23

(Millions of local currency; unless otherwise indicated)

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

End of period.

Includes public enterprises and the local government.

Including valuation.

Table 5.

The Gambia: Monetary Accounts,1 2015-23

(Percent change; unless otherwise indicated)

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

End of period.

Table 6.

The Gambia: Balance of Payments, 2015-23

(Millions of U.S. dollars, unless otherwise indicated)

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