Selected Issues

Abstract

Selected Issues

Fiscal Stress Tests for the Gambia1

The Gambia’s fiscal position in the past was adversely impacted by weather and pandemic related shocks; but also by weakened fiscal institutions and budgetary processes, and embezzlement of funds that are being addressed by the new democratically elected government. Even so, vulnerabilities to fiscal shocks from a variety of sources remain. Fiscal stress tests indicate that a tail-risk shock arising from an adverse macroeconomic shock from drought together with an Ebola-like pandemic would have adverse macrofiscal and macrofinancial impacts which would increase contingent liabilities, worsen government finances and make debt deeply unsustainable. Moreover, the fiscal shock would worsen the public sector’s balance sheet (net wealth) undermining existing buffers to absorb these losses. Reducing the likelihood and impact of fiscal shocks would require reform of the SOEs, strengthening fiscal institutions and the budget process, lengthening the maturity of domestic debt, and seeking greater access to external financial support which would need to be mostly in the form of grants.

A. Background

1. The Gambia’s efforts to break with policies of the past and strengthen public finances are critical to enable economic stabilization and economic growth. The Gambia is committed to desisting from the policies of the past regime which facilitated embezzlement of state resources, undermining the public finances. The authorities are strengthening fiscal institutions and increasing the credibility of the budgetary process by better aligning revenues with expenditures through expenditure control and revenue mobilization. Delivering sound public finances will help to create fiscal space from public sector balance sheets to enable policymakers to: (i.) provide support for aggregate demand consistent with macrofinancial stability; (ii.) scale up investment in line with national development priorities (NDP) (GoTG 2018); (iii.) ensure debt sustainability; and (iv.) respond to the broad range of other fiscal priorities and shocks that could emerge in the near future.

2. The Gambia’s past fiscal outturns have differed substantially from both budgeted and IMF staff’s fiscal projections. Deviations arose due to persistent fiscal slippages and shocks related to weather and pandemics, terms of trade, bad governance and embezzlement and resulting government support for SOEs (Figures 12). Failure to identify and prepare for such risks has caused additional

Figure 1.
Figure 1.

Public Debt to GDP Forecasts

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 100; 10.5089/9781484350218.002.A003

Source: IMF WEO & Staff Estimates.
Figure 2.
Figure 2.

Fiscal Risk Realizations (2012–2017)

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 100; 10.5089/9781484350218.002.A003

3. Fiscal stress tests provide a set of analytical tools and best practices to help Gambian policy makers understand and manage fiscal risks in tail-risk scenarios. In the past limited fiscal information and awareness has inhibited identification and management of fiscal risks. Fiscal stress tests provide the opportunity for the GoTG to assess the impact of specific adverse tail-risk scenarios government obligations higher public debts, and increased debt servicing requirements. and fully incorporate the macrofiscal and macrofinancial implications if these risks were to materialize. The toolkit enables authorities to embed their medium-term fiscal frameworks and medium-term debt strategies in a fiscal policy context where uncertainty around fiscal variables and debt metrics are better accounted for than through debt sustainability analysis alone. Given The Gambia’s already sizeable fiscal and debt vulnerabilities (public debt-to-GDP around 120 percent) the fiscal stress tests results highlight the importance of strong action on key fiscal reforms to address budgetary, SOE and other contingent liabilities risks.

B. Fiscal Stress Test Scenario

4. Public Sector Balance Sheets (PSBS) were constructed to better understand the current fiscal strength and capacity to absorb fiscal shocks ahead of the fiscal stress tests. While debt sustainability metrics provide useful indicators of the impacts of fiscal shocks on public sector resiliency these frameworks necessarily focus on a narrower set of liabilities and cashflows. A more comprehensive determination of public sector resiliency can be developed from a balance sheet type approach which takes into account a broader set of financial and non-financial asset and liabilities. For the first time a balance sheet for the GoTG as well as the broader public sector was constructed. The PSBS is an estimation of the value of the public sectors’ total assets and liabilities, with the difference being the value or net worth of public-sector equity. The comprehensive net worth (CNW) adds to current net worth the net worth of future discounted revenues and expenditures of both the government and broader public sector. The CNW also provides an ongoing and long-term signal of fiscal performance and resiliency. As CNW increases it indicates greater level of resilience to potential fiscal shocks that would otherwise need to be meet through changes in fiscal policy. CNW is negative (liabilities greater than assets) in The Gambia at −106 percent of GDP in 2018 which under the shock scenario (see below) deteriorates further to −332 percent of GDP. Details of the PSBS and its construction are not covered here due to space constraints. The focus here is more on the fiscal stress test itself.

5. The fiscal stress test builds upon the baseline projections and stresses them with a large macroeconomic shock. The starting point of the fiscal stress test builds upon the baseline fiscal projections2 and the PSBS. This baseline scenario is then stressed by a multifaceted macroeconomic shock that comprises three main components:

  • A large exogenous shock, in the form of a drought combined with an Ebola-like pandemic, that hits two of the key sectors of the economy—agriculture and --which adversely impacts real GDP.

  • Endogenous feedbacks to key macro parameters, such as interest and exchange rates, spillovers to other sectors of the economy and realization of increased contingent liabilities; and

  • Asset price shocks to housing and equity markets (which are of less importance in The Gambia).

6. The combined shocks cause real GDP to fall sharply, before rebounding in a V-shape. A large macro shock could comprise a pandemic element of almost two standard deviations and an agricultural one of medium intensity, of around one standard deviation. Assuming that both materialize in 2018, their combined effect would cause real GDP to drop in both 2018 and 2019 and by 20 percent in absolute terms relative to the baseline level. From 2020 to 2022, annual GDP growth would exceed the baseline and help closing some of this gap (Figure 3).

Figure 3.
Figure 3.

Fiscal Stress Impact on Key Macroeconomic Variables

Citation: IMF Staff Country Reports 2018, 100; 10.5089/9781484350218.002.A003

7. The agriculture shock is assumed to be concentrated in 2018. Bad harvests are confined to 2018, giving rise to a loss in the output of the sector and a surge in the price of domestic food products. In 2019, agricultural production would return to near normal levels, which translates into a sharp rebound in the growth rate of the sector. No long-lasting effects are assumed.

8. The pandemic lasts two years and takes a heavier toll, even after its conclusion. In contrast to the agricultural shock, the pandemic is far more persistent. The immediate effect in 2018/19 is reflected in a dramatic fall in the number of tourists by 60–70 percent relative to the baseline. While the pandemic is assumed to be over in 2020, the return of the number of tourists to the baseline level would be very gradual. Tourist markets are very dynamic and recovering the pre-crisis market share may be difficult, as other competing suppliers could have attracted some former clients of the Gambia, and perceptions are persistent. Tourism output is assumed to grow above the baseline from 2021 on.

9. The exchange rate depreciates sharply on the back of the drop of exports and a loss of confidence from foreign investors. The dalasi/US$ exchange rate has traditionally been volatile, with sudden and large depreciation bouts triggered by economic or political instability. The recession in the tourist sector would reduce the demand for national currency. These factors translate into a cumulative 20 percentage points depreciation between 2018 and 2019, putting pressure on import prices and weakening imports of non-basic goods. From 2020 a slight appreciation occurs once the worst of the crisis is behind, reducing the cumulative effect on the exchange rate to 13 percentage points off the baseline level.

10. Inflation is initially higher, driven by the dalasi depreciation and the rise in domestic food prices, though this is partly offset by the widening economic slack. Food accounts for almost half of the CPI basket and, given the low-price sensitivity of demand for these products, a high pass-through of the dalasi depreciation is very likely. This is further compounded by the effect of the drought on domestically grown products. Thus, agricultural products bring prices above the baseline in 2018–19. From 2020 the dalasi appreciation and economic slack help the CPI index to revert broadly back to the baseline.

11. The spike in gross financing needs and public debt combined with the currency depreciation put upward pressure on interest rates. The abrupt fall in activity induces a substantial deterioration in fiscal outcomes (higher contingent liabilities), as happened in peer countries, with a consequent increase in gross financing needs. The massive additional borrowing in dalasi requires increased issuances together with the expected depreciation of the local currency, will drive up interest rates. Taking account, the magnitude of the depreciation and previous interest rate spikes, the 12-month T-bill rate surges 10 percentage points above the baseline. After 2020, the interest rate falls, although the higher debt stock keeps it elevated.

12. Finally, asset prices fall sharply, with equity prices dropping by half, and house prices by a third. These have relatively little impact on demand, as few Gambian have direct holdings of equities, and houses are not a ready source of liquid wealth. Nevertheless, this impacts on the public and banking sectors’ balance sheets.

C. Fiscal Implications of Shock

13. The macro shock has severe implications for the fiscal position. In addition to the standard consequences of a fall in activity and tax bases resulting in steep reductions in tax revenues, the shock also generates non-linearities due to changes in the sectoral structure and, given the importance of tourism for revenue collection, will cause larger losses in revenues.

14. In response to the pandemic, grants from international donors are expected to increase. Budget support grants rise above the baseline both in nominal terms and as a share of GDP to a maximum difference of 4 percent of GDP in 2019. The temporary surge in grants only partially offsets the drop in domestic revenues in nominal terms but exceeds it as a percent of GDP due to nominal GDP falling by a greater amount (Figure 3).

15. Despite the sharp decline in GDP, primary expenditures would likely increase due to rigidities and transfers. Some expenditure items such as public wages, pensions and some externally financed public investment present downward rigidities and cannot be adjusted quickly. Public investment overall strongly increases until 2019, both in nominal and GDP terms, due to the depreciation of the dalasi which increases the value of externally funded loans and grants. The deep recession also requires the government to raise expenditure on transfers to the private sector, notably for the most vulnerable groups of the population. Health expenditures would also grow, as new medical staff and equipment would be needed to contain the pandemic, though this is assumed to be financed by emergency grants (no net impact on the deficit). Non-interest expenditure over GDP by the end of 2019 is 12 percentage points over the baseline. This clearly indicates the need for a consolidation, once the effects of the pandemic gradually fade away. This consolidation will be based both on current and capital expenditure.

16. Interest expense surges, because of both the soaring borrowing needs and the sharp increase in domestic interest rates. Substantially larger deficits require additional borrowing leading to higher interest payments.

D. Contingent Liabilities (CLs) and Fiscal Balance

17. Public finances are also hit by the realization of additional CLs on top of those in the baseline as the shock reduces SOEs revenues and increases concerns around their viability requiring public support. These include an increase in loan guarantees as well as capital injections into SOEs and the financial sector (see below). In addition, a non-macro related legal liability is realized (Para 19). The realization of contingent liabilities has three substantive effects on public finances:

  • Public debt of the government increases from an already high 120 percent of GDP in 2016 to more than 180 percent in 2020, as the government assumes guaranteed debts that were previously on the SOE balance sheets. The bulk of this is due to macro effects including revenue falls, increase in interest and exchange rates and valuation effects, while the realization of CLs adds a further 30 percentage points to which the lower GDP denominator also contributes.

  • The fiscal deficit increases due to capital injections (which are accounted for as capital transfers) and interest payments of assumed debt. The deficit (including contingent liabilities) is 16 percentage points above the baseline in 2019 reaching 20 per cent of GDP.

  • Gross financing needs increase from 37 percent of GDP in 2017 to 61 percent in 2020 as the government has to finance (and subsequently refinance) it’s higher deficits, as well as pay amortizations of assumed debts. This ratio is slightly higher than the previous peak in 2016 (60 percent). Refinancing risk remains a concern which is being tackled by authorities through longer term (3-year and 5-year bond issuances). About 1.6 bn. dalasi of 3-year bonds were issued in 2017 replacing an equivalent issuance in T-bills.

18. The main source of CLs for the government is SOEs. This sector forms an important part of The Gambian economy and comprises 13 enterprises, with total assets of 50 percent of GDP and 8,000 employees. Several SOEs perform badly and are heavily indebted, posing a drain to government resources with continuous deficits and payment arrears. Total unconsolidated liabilities of the sector in 2017 are estimated at 43 percent of GDP. Apart from the explicit guarantees of the central government (13.9 percent of GDP), the level of implicitly guaranteed liabilities poses another risk for the government. The impact on SOEs due to the stress test focused on the deterministic projection of the net operating cash-flows of the main SOEs in the baseline and stress scenarios, taking into consideration their specific business characteristics, such as cost structure, productive capacity and potential demand.

19. The CLs realization in the stress scenario may be broken down into three categories:3

  • The assumption by the government of 13.9 percent of GDP of existing CLs, made up largely by existing guaranteed debts, which under the stress scenario are unable to be serviced.

  • Capital injections of 19.4 percent of 2017 GDP over the period 2018–2025 provided by the government to make up cashflow shortfalls to ensure that key utilities remain operational. These translate into roughly 2.8 percent of GDP each year.

  • Pending legal claims. Although there is not yet an inventory of legal claims against the government, there are indications that pending claims to the central government could account for around 2.8 percent of GDP.

E. Fiscal Stress Tests and Macrofinancial Linkages and Channels

Gambian Financial Sector

20. Cross exposures across the fiscal, external, real and financial sectors in The Gambia mean that fiscal stress has significant spillovers. The fiscal shock articulated here impacts the Gambian financial sector through multiple macrofinancial linkages and channels. The impact on the financial sector then feedbacks to other sectors (external, fiscal, real) which can result in vicious or virtuous feedback loops, depending on the nature of the initial shock. The financial sector in Gambia comprises 12 commercial banks and 11 insurance companies (Mendy and Wu, 2018).

21. Total financial sector assets are worth 77 percent of GDP (SSA median of around 50 percent) with the banks playing a significant role in purchasing government’s domestic debt in the primary market. Much of these are being held in short term government debt (Treasury Bills – 74 percent of outstanding face-value of stock 13.1 billion GMD.4) Secondary to investments in government debt, and by some considerable margin, are loans to the private sector which are around 15 percent of total bank assets well below many regional SSA peers (Wezel 2018).

Fiscal Shocks and Sovereign-Bank Risks

22. Gambian banks’ high level of sovereign exposures results in a well-developed sovereign-bank nexus that is inherently risky. These risks are multidimensional, and include credit, interest, market and refinancing risk. The realization of these risks can affect The Gambian banking system through various sovereign-bank channels. These include (BIS 2017):

  • Macroeconomic channel, whereby the crystallization of sovereign risk could trigger a recession, which in turn could increase borrowers’ riskiness, increase NPLs and add to banks’ fragility and funding costs, resulting in a spiral of credit tightening that deepens the recession, independently of banks’ direct exposures to the sovereign.

  • Direct exposures channel, whereby increased sovereign risk (higher yields lower asset values) can inflict losses on banks’ sovereign exposures, weakening their balance sheets;

  • Collateral channel, where an increase in sovereign risk can reduce the value of sovereign collateral used by banks, raising funding costs and liquidity needs;

  • Sovereign credit rating downgrades, which generate cliff effects and may precipitate downgrades to the ratings of other entities in the economy given that sovereign ratings set a “ceiling” on other credit ratings;

  • Government support channel, where a weakening of the sovereign could reduce the funding benefits that banks derive from implicit and/or explicit government guarantees. A number of post-crisis reforms (e.g. resolution regimes) seek to weaken this channel;

23. These channels, in isolation or in combination, can make individual banks more susceptible to sovereign distress or failure, increasing the risk of contagion to the rest of the banking system. The causality can also run in the opposite direction: a banking crisis can increase sovereign risk. For example, if a government is expected to support the banks in a banking crisis, a strained banking system could erode the sovereign’s own creditworthiness as SOEs can (see earlier).5

24. The impact of the Fiscal Stress Test reduces the commercial banks’ level of capital and their ability to meet increased daily cash withdrawals. The impact of the stress test comes to fruition through two primary channels for the commercial banks’ in The Gambia. The first is a direct cost to the value of the banks’ assets and liabilities, and the second a cash shortage through increased demand -“run on the banks.” The fiscal stress test is initially realized through the commercial bank’s balance sheet through a multi-factor shock in terms of an increase in interest rates (interest rate risk) combined with a depreciation in the Dalasi (FX risk), along with an increase in non-performing loans (credit risk) and lower confidence in banks generally.

Fiscal Stress and Basic Financial Sector Impact

25. The multi-factor shock results in lower capital adequacy ratios (but still above regulatory minimums), but for some of the smaller local banks the demand for cash requires the government to recapitalize and provide liquidity support. The outcome of the shock sees the total commercial banking sector balance sheets contract by GMD 744 million or 1.8 percent of GDP due to the credit risk alone. For the Gambian banking system as a whole combining credit losses with net losses from increased interest rates and net FX losses from GMD depreciation result in aggregate losses of GMD 959 million (2.27 percent of GDP)6 with recapitalization needs from the losses amounting to GMD 367 million (0.8 percent of GDP). For all banks the average risk weighted capital adequacy ratio drops to 30.3 percent, down from the current baseline of 35.6 percent, but still well above the regulatory minimum of 10 percent (Figure 4). However, three of the local banks’ ratios drop below the 10 percent minimum and therefore require capital injections. Compounding this further is that one of these three banks doesn’t make it through the first day of the liquidity run, and as a result requires additional cash to honor its customer cash withdrawals (0.5 percent of GDP). In the absence of any safety net liquidity schemes the immediate capital requirements from the central government would mount to around 1.3 percent of GDP.

Figure 4.
Figure 4.

Bank Regulatory Capital Ratios

(Percent of RWA)

Citation: IMF Staff Country Reports 2018, 100; 10.5089/9781484350218.002.A003

Source: CBG & Staff Estimates

26. The basic multi-factor financial stress scenario implied by the fiscal stress indicates that a relatively modest level of capital would be required to have all the banks meet statutory requirements. However, there are bigger and more fundamental structural issues underlying the Gambian banking sector’s links with the government. A systemic risk nexus exists between sovereign and bank credit risk which is evident by the level of government debt held by the financial sector in The Gambia. In effect the current multi-factor financial shock implied by the fiscal stress underprices sovereign risk, namely the inherent risks in holding domestic sovereign debt7. That underpricing mainly occurs because the current international and domestic Gambian regulatory and supervisory framework applies zero-risk weights on domestic currency sovereign debt, as is the practice in other jurisdictions. If risk weights were positive and sovereign risks were more fully accounted for, the capital adequacy needs would be greater (see below) (Figure 5).

Figure 5.
Figure 5.

Bank Capital and Liquidity Needs

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 100; 10.5089/9781484350218.002.A003

Incorporation of Enhanced Sovereign Risk

27. The Gambia has a significant sovereign-bank nexus that suggests sovereign exposures are risky but that risk is not reflected in the current regulatory treatment of sovereign exposures. One way to better reflect that risk would be to assign positive risk weights on sovereign exposures in local currency. It is worth bearing in mind that while sovereign exposures carry risks they also play important roles in the banking system, financial markets and the broader economy.8 Any application of positive risk weights would also have to guard against procyclicality (i.e., if capital requirements increase too much in a sovereign distress episode, banks could reduce their exposures undermining banks debt stabilizing behavior for sovereign debt).

28. Properly calibrated risk weights on sovereign exposures could improve financial stability and market efficiency. A recent discussion paper by the Basel Committee on Banking Supervision (BCBS) suggest, among others, that positive risk weights properly calibrated to avoid unintended consequences and marginal risk-weight add-ons to avoid excessive holding of sovereign exposures by banks could be beneficial in that regard.9 Moreover, it could better balance banks’ sovereign holdings with provision of private sector credit reducing the prospects for crowding out of investment. In the case of the Gambia this would mean banks would apply a 9 percent risk weight on domestic currency sovereign exposures and marginal risk-weight add-ons that would account for exposure concentrations (percent of Tier 1 capital) from 100–300 percent and exposures greater than 300 percent.

29. Capturing sovereign risks more fully results in greater declines in capital buffers and recapitalization needs. Incorporating the above approach to capturing sovereign risk and distress through positive risk weights results in a decline in the capital adequacy ratio to 21.6 percent for all banks, with medium sized banks falling below the minimum capital threshold of 10 percent. Combining the sovereign distress from the fiscal stress test with the Basel risk-weight shock together with provisioning of the NAWEC bond10 results in much larger declines in capital adequacy with the average of all banks falling to 16.1 percent and seven large and medium sized banks falling below the minimum threshold. Capital adequacy of small banks is less impacted, in part due to their lower and less concentrated sovereign debt holdings11. Capitalization needs in absolute terms (GMD millions) and in percent of GDP are small but sizeable especially for smaller banks (Figure 67). For all banks recapitalization (excluding liquidity needs) amounts to GMD 707 million or 1.7 percent of GDP under a combined shock.

Figure 6.
Figure 6.

Capital Recapitalization Needs

(‘000s of GMD)

Citation: IMF Staff Country Reports 2018, 100; 10.5089/9781484350218.002.A003

Sources: CBG & Staff Estimates.
Figure 7.
Figure 7.

Capital Recapitalization Needs

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 100; 10.5089/9781484350218.002.A003

30. Macrofinancial analysis implies much lower capital buffers of Gambian banks under fiscal and sovereign stress. The macrofinancial analysis which incorporates both the fiscal multi-factor shock with greater sovereign risks emerging from the various channels of the sovereign bank nexus make clear that bank capital buffers are significantly smaller under fiscal and sovereign stress. Capital buffers would need to be raised and over time excessive holdings of sovereign debt would need to be reduced gradually to avoid destabilizing the domestic debt market. This would help to boost private sector credit as banks’ risk management capacity is strengthened without undermining credit underwriting standards. The fiscal and related financial stress scenario assumes that the government does not default—the latter would have sizeable capital and liquidity needs resulting in further (and much larger) implicit CLs from the financial sector than assumed here.

F. Key Policy Recommendations

31. The fiscal stress test results in very adverse macroeconomic, fiscal and macrofinancial outcomes with no capacity to absorb these given Gambia’s precarious debt position. The following key policy actions and support by donors will help the Gambian authorities build fiscal space and more resilient longer term public sector balance sheets to reduce the probability and/or impact of fiscal shocks and sovereign distress.

  • Strengthen the first line of fiscal defense. The GoTG will need to progress and follow-through on structural reforms to maintain fiscal sustainability over the medium term by better aligning revenues and expenditures, much lower domestic borrowing, resolution of government and cross arrears of SOEs, and reform and rehabilitation of SOEs.

  • Preserve debt sustainability and place debt on downward path. This will require implementing and regularly reviewing the authorities’ medium-term debt strategy, including progressive lengthening of the maturity of domestic debt to reduce refinancing risks; pursue external creditors for debt rescheduling and softening of terms on existing commitments; and mobilizing grants to finance investment on NDP priorities and to foster debt sustainability.

  • Increase resilience of GoTG finances. Identify policy options to increase resilience of the finances, including increased use of drought insurance, diversifying and expanding revenue bases and putting in place ex ante agreements with donors to provide funding and support in the event of a pandemic.

  • Conduct regular Fiscal and Financial Stress Tests. Incorporate macrofiscal models into the fiscal forecasting process and use them to undertake annual sensitivity analysis, and biannual fiscal stress test exercises, including in combination with financial stress tests. This would also help to establish a closer working relationship on fiscal and linked financial stability matters between MoFEA and the CBG to foster policy coordination.

  • Strengthen Gambian Banks Capital and Liquidity Buffers. The capital and liquidity buffers of Gambian banks should be further strengthened to ameliorate adverse macrofinancial spillovers and feedbacks from fiscal stress and linked sovereign distress thereby avoiding the establishment of a vicious sovereign-bank nexus loops.

  • Initiate a regular and frequent information exchange with major SOEs, to collect financial statements, financial plans and other relevant information to update the provided financial cash flow forecasting models. Use of these models to analyze, for each SOE, macrofiscal implications of the baseline and stress scenarios involving the Macroeconomic and Policy Analysis Unit and Directorate of Public-Private Partnership in MoFEA will be needed.

References

  • BIS (2017): The regulatory treatment of sovereign exposuresDiscussion Paper Basel Committee on Banking Supervision, Bank for International Settlements, December.

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  • Jason Harris, Alberto Soler, Mohamed Afzal Norat, Sybi Hida and Matthew Appleby (2017) The Gambia Fiscal Stress Test, Technical Assistance Report, October 2017, International Monetary Fund, Washington DC.

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  • Bernard Mendy and Frank Wu (2018), Financial Benchmarking of The Gambia, Selected Issues Paper, International Monetary Fund, Washington DC.

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  • Torsten Wezel (2018), The Gambia: The Assessment of Macrofinancial Linkages. Selected Issues Paper, International Monetary Fund, Washington DC.

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1

This work is based mainly on a Technical Assistance (TA) Report The Gambia Fiscal Stress Test by Jason Harris, Alberto Soler, Mohamed Afzal Norat, Sybi Hida and Matthew Appleby, October 2017 as well as additional analytical work on macrofinancial linkages and additional linked fiscal-financial stress tests based on recent views from the Basel Committee on Banking Supervision on sovereign exposures and risks (BIS 2017).

2

The baseline used here is from The Gambia: Request for Disbursement Under the Rapid Credit Facility, and Proposal for a Staff-Monitored Program-Press Release; Staff Report; and Statement by the Executive Director for The Gambia. http://www.imf.org/en/Publications/CR/Issues/2017/07/03/The-Gambia-Request-for-Disbursement-Under-the-Rapid-Credit-Facility-and-Proposal-for-a-Staff-45020.

3

The contingent liabilities quantified below are provided as a share of 2017 GDP and are consistent with the direct impact of around 20 percent of GDP presented in paragraph 42.

4

Latest estimate is 14.2 billion GMD as of January 2018.

5

On the other hand, banks can also act as shock absorbers in times of distress when they act as stable and willing investors in sovereign debt. Furthermore, sovereign defaults may be less likely to occur in countries where domestic agents/banks hold more domestic sovereign debt, as this concentrates the costs of a government default on resident citizens and banks, thus creating a commitment device for the sovereign. In addition, a high proportion of sovereign debt held domestically reduces the dependence on external investors, who are typically more prone to taking flight in the presence of shocks, thus potentially subjecting governments to refinancing risk.

6

Some banks gain from gains due to increased interest rates and depreciation given their balance sheet assets and exposures other banks lose, in net terms across all banks losses are greater than gains.

7

“The existing regulatory treatment of sovereign exposures is more favorable than other asset classes. Most notably, the risk-weighted framework includes a national discretion that allows jurisdictions to apply a zero percent risk weight for sovereign exposures denominated and funded in domestic currency, regardless of their inherent risk. This discretion is currently exercised by all members of the Committee. Sovereign exposures are also currently exempted from the large exposures framework. Moreover, no limits or haircuts are applied to domestic sovereign exposures that are eligible as high-quality liquid assets in meeting the liquidity standards. In contrast, sovereign exposures are included as part of the leverage ratio framework”. Basel Committee on Banking Supervision, Discussion Paper, “The regulatory Treatment of Sovereign Exposures,” December 2017, (BIS 2017).

8

“Sovereign exposures are used by banks for liquidity management, credit risk mitigation, asset pricing, financial intermediation and investment purposes. Banks’ holdings of sovereign exposures also play an important role as part of monetary policy operationalization. As banks are generally one of the main investors in government debt, they also play a role in the operationalization of fiscal policy.” (BIS 2017).

9

See BIS 2017 for full details of Pillar I, II and III revised measures as they pertain to the regulatory treatment of sovereign exposures and how to operationalize them.

10

The NAWEC bond is now serviced by the GoTG.

11

Sovereign debt exposure concentrations for Gambian banks range from 0–733 percent, with median concentration of 295 percent.

The Gambia: Selected Issues
Author: International Monetary Fund. African Dept.