Public Information Notice No. 08/121

Public Information Notice: IMF Executive Board Concludes 2008 Article IV Consultation with The Gambia

September 22, 2008

On September 8, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with The Gambia.¹

Background

Over the last two years, The Gambia has maintained macroeconomic stability, sustained high growth and made progress toward achieving debt sustainability. Fiscal performance improved and monetary policy remained geared to maintaining low inflation. Real GDP growth, which has averaged 6½ percent a year since 2004, has been led by the construction, tourism and telecommunications sectors, facilitated by a steady inflow of foreign direct investment. However, performance of the agriculture sector-critical for achieving the government's poverty reducing objectives-has been mixed. In particular, groundnut output fell substantially in the 2007/08 season largely due to a poor pattern of rainfall.

Inflation has abated after a spike in 2007. Disruptions in the supply of foodstuffs from neighboring countries and rising import costs pushed the annual rate of inflation from less than 1 percent in December 2006 to 6-7 percent during most of 2007. In the first half of 2008, tight monetary policy and the lagged effect of a sharp appreciation of the dalasi in the third quarter of 2007 helped contain inflationary pressures from increases in world food and fuel prices. The annual rate of inflation fell to 2 percent in June 2008.

The central government budget improved markedly in 2007, going from an overall deficit of 7.8 percent of GDP in 2006 to a surplus of 0.5 percent of GDP in 2007. Total expenditure and net lending fell sharply, reflecting substantially lower externally financed capital expenditures than budgeted for 2007. The stock of public domestic debt fell from 32 percent to 28 percent of GDP.

The Gambia's external current account deficit widened from 11½ percent of GDP in 2006 to 12½ percent in 2007. While the trade balance remained unchanged, an improvement in the services balance was more than offset by a decline in remittances and official transfers. The deficits were financed largely by inflows of foreign direct investment.

The Gambia's external debt position was helped by the delivery of HIPC and MDRI debt relief at the end of 2007, resulting in the stock of external debt falling from 110 percent of GDP to 50 percent. However, The Gambia remains at high risk of debt distress because of the high level of outstanding debt and the country's vulnerability to shocks.

The Gambia's macroeconomic policies are being supported by a three year PRGF arrangement approved in February 2007. The program's objectives draw on the strategic priorities set out in The Gambia's second Poverty Reduction Strategy Paper which include: (i) macroeconomic stability and effective management of public resources; (ii) pro-poor growth and employment through development of the private sector; and (iii) improved provision of basic services.

Executive Board Assessment

Executive Directors commended the Gambian authorities for their prudent fiscal and monetary policies, which have laid a solid foundation for macroeconomic stability. Despite the increases in world food and fuel prices, growth has remained strong, per capita GDP has increased significantly, and inflation has been contained at low single-digit levels.

Directors agreed that The Gambia's major economic challenge will be to sustain strong growth and continue to reduce poverty, which remains widespread. They encouraged the authorities to continue prudent macroeconomic policies while boosting poverty-reducing government expenditures, in line with the targets in the country's PRSP, to make faster progress towards achieving the Millennium Development Goals.

Directors welcomed the authorities' measured response to the recent adverse international price shocks. The sales tax on rice-the principal staple food in the country-was eliminated to mitigate the impact of its rising cost, while compensating revenue-raising measures were implemented to safeguard the fiscal position. Directors commended the authorities for adjusting retail petroleum product prices to avoid budget subsidization. They recommended that any further support for the most vulnerable households, if needed, be provided through carefully-targeted programs rather than through general subsidies.

Directors acknowledged the authorities' solid revenue effort, underpinned by improved tax administration. They encouraged the authorities to undertake further reforms to broaden the tax base and make the tax system more buoyant. They suggested that the authorities review import duty exemptions with a view to reducing their scope. Further progress in strengthening public financial management will be desirable in order to ensure that budget formulation is realistic and in line with PRSP priorities.

Directors commended the Central Bank of The Gambia (CBG) for keeping inflation in check under challenging circumstances. In view of the uncertainties about the monetary policy transmission mechanism, most Directors encouraged the CBG to supplement it money targeting framework with a range of indicators, and to use foreign exchange operations as an additional instrument to influence domestic liquidity conditions.

Directors agreed that The Gambia's flexible exchange rate system has served the country well, with market interventions limited to preventing disorderly adjustment and replenishing foreign reserves, as needed. They took note of the staff's assessment that the real exchange rate of the dalasi appears to be in line with fundamentals. They encouraged the authorities to take steps to enhance the country's investment climate and international competitiveness, by addressing the heavy burden of central and local government taxation on business, and by investing in infrastructure, education, and health.

Directors considered that The Gambia's banking sector is fundamentally sound, while noting the substantial scope to further deepen financial intermediation. They welcomed the authorities' efforts to strengthen the prudential supervision of banks. They looked forward to the functioning of the national credit reference bureau, which should bolster the prudent extension of credit and support private sector development and growth.

Directors noted that HIPC and MDRI debt relief provided at end-2007 has improved significantly The Gambia's external debt indicators. Nonetheless, The Gambia remains at high risk of debt distress due to the high level of outstanding debt and the country's vulnerability to shocks. Directors urged the authorities to speed up the formulation of a national debt strategy and to rely primarily on grants to finance their development plans.

¹ Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.