Public Information Notice: IMF Concludes Article IV Consultation with Gambia
July 12, 1999
|Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.|
On June 18, 1999, the Executive Board concluded the Article IV consultation with Gambia.1
BackgroundDuring 1998 and the early part of 1999, The Gambia made significant progress in a number of areas in implementing its economic and financial reform program, which was supported by the first annual arrangement under the Enhanced Structural Adjustment Facility (ESAF). The economy sustained real GDP growth of 5 percent in 1998 while inflation remained at about 1 percent . Moreover, the authorities reduced and simplified the external tariffs and took measures aimed at improving the soundness of the banking system. However, fiscal performance weakened in the last quarter of 1998 with revenue shortfalls and expenditure overruns. Moreover, after unsuccessful negotiations, the government took over the assets of the Gambia Groundnut Corporation (GGC) in January 1999 and became directly involved in the marketing of groundnuts. The government has started to implement measures to strengthen the budget for 1999 and has initiated contacts with the GGC to negotiate a settlement of the outstanding issues.
Real GDP grew by about 5 percent in 1998 as favorable weather conditions resulted in improved agricultural output. The reexport trade increased significantly despite the adverse impact of the instability in Guinea-Bissau. While construction activity picked up, and the tourism and related services continued their strong expansion, fisheries production fell sharply, owing to structural difficulties in the sector. With the benefit of ample food supply, average inflation remained low at about 1 percent in 1998.
The external current account deficit (excluding official transfers) is estimated to have widened to 11 ¼ percent in 1998, reflecting high imports and a significant deterioration in the terms of trade. Both groundnut shipments and the reexport sector expanded strongly and offset declines in cotton and fish exports. The overall balance of payments improved as private capital inflows offset shortfalls in disbursements of external project assistance; and gross official reserves increased to SDR 75 ½ million at end-1998, providing the equivalent of 5¼ months of import cover.
Fiscal policy was tightened through September 1998 but, with slippages during the fourth quarter, the overall deficit (on a commitment basis and excluding grants) for the year as a whole (4 ½ percent of GDP) was somewhat above the target. However, the deficit including grants, at 2 ½ percent of GDP, was lower than in 1997 and compared to the budget target. Total government revenue decreased to 18¾ percent of GDP in 1998, owing to lower customs and nontax receipts. As of July 1, 1998 the maximum duty rate was reduced from 90 percent to 25 percent (except for alcohol, tobacco, and vehicles) and the number of import duties from 30 to 18. Moreover, on January 1, 1999, the maximum import tariff rate was reduced to 20 percent. On the expenditure side, there were sizable overruns during the last quarter of 1998, and total government expenditure and net lending (excluding interest payments and foreign-financed public investment) exceeded the target ceiling.
The growth of broad money fell from 22 percent in 1997 to about 10 percent in 1998 but exceeded the nominal GDP growth rate. The net domestic assets of the banking system decreased in 1998 as the fiscal deficit was financed more by recourse to nonbank financing and net bank credit to the government declined to below the targeted level. Credit to the private sector expanded further, by 15 percent, mainly to the trade and transport sectors. With the easing of inflation pressures, the treasury bill rate declined in a number of steps from 16 percent in September to 14 percent by end-December.
Reforms to strengthen the financial sector included the government's agreement with a major commercial bank on the settlement of D 45 million (equivalent to US$4.2 million) of nonperforming loans of the ex-Gambia Cooperative Union (GCU). Moreover, the central bank reached an agreement with all banks on a program to achieve full provisioning in the course of 1999. To facilitate bankruptcy and collateral liquidation procedures, a commercial chamber in the High Court was established in October 1998.
Limited progress was made with regard to other structural measures. In the groundnut sector, the authorities decided to liquidate the GCU in April 1998 and cleared a small outstanding debt to the Senegalese groundnut company (Sonacos) in order to increase competition in crop marketing. There were delays in the implementation of a new investment incentive system, as well as the adoption of a new procurement code and a new divestiture strategy for the public enterprise sector. However, in April 1999, the government, with support from the World Bank and the participation of the private sector, convened a workshop in Banjul to inform the drafting of a comprehensive divestiture strategy.
Executive Board Assessment
Executive Directors noted the progress that had been made in a number of areas during 1998, but expressed concern about the slippages in implementing the ESAF-supported program. In particular, Directors were concerned about recent fiscal developments and about the government's seizure of the assets of the privately owned Gambia Groundnut Corporation (GGC). Directors noted the damaging effects of this seizure on the confidence of private investors, which ran counter to the authorities' declared policy of stimulating the private sector. They feared that, unless rapidly and decisively reversed, recent developments threatened to undo the gains of the last two years and derail the medium-term economic and financial strategy.
Directors agreed that a cohesive and consistent approach to economic and financial policymaking was essential, and welcomed the authorities' commitment to improve policy coordination. They also welcomed the setting up of a cabinet committee to resolve the differences with the GGC. Noting the contacts that had already taken place between the parties, Directors stressed that, given the key role of the groundnut sector, it was important to make timely progress in resolving this dispute in order to allow the 1999/2000 crop to be marketed smoothly, as well as to restore the confidence of the private sector regarding the government's overall policy intentions.
Regarding fiscal policy, Directors were concerned about the relatively high level of domestic public debt, whose servicing absorbed a substantial share of revenues. They considered that a determined effort was called for to increase the primary fiscal surplus, to establish the domestic debt on a clearly declining path, and thereby to make room for needed increases in development and social spending. Against this background, Directors welcomed the implementation of the supplementary measures to strengthen the 1999 budget and limit government domestic borrowing requirements. Directors emphasized the need to increase revenues by strengthening tax administration and reducing customs exemptions, and to control expenditures through a more efficient programming of the investment budget, by curbing non-priority outlays, and by containing recruitment of public sector employees.
Directors urged a continuation of tight monetary policy through use of indirect instruments, and of reforms in the financial sector, including increased competition and implementation of Fund technical assistance recommendations. Directors expressed concern that, although nonperforming loans had declined, they still represented a large share of banks' total loans, which, along with still high interest rates, impeded credit expansion to the private sector.
Directors welcomed the government's firm commitment to maintain The Gambia's liberal trade and exchange system, and concurred with the authorities' assessment that the current level of the exchange rate is appropriate and that the country remains broadly competitive. They urged the authorities to maintain the pace of reforms in line with those envisaged in neighboring countries.
On structural reforms, Directors stressed the importance of enhancing competition and avoiding direct government involvement in groundnut marketing; incorporating transparent and non discriminatory investment incentives in the tax code; adopting a procurement code; implementing a clearly defined divestiture and regulatory strategy for the public sector; and, more generally, improving governance. Significant progress in implementing measures along these lines would demonstrate the authorities' resolve, and provide a basis for resuming discussions on the second annual ESAF arrangement. At the same time, it would facilitate a normalization of relations with donors and a resumption of assistance, which is critical to The Gambia's achieving its medium-term economic objectives.
Directors noted the efforts being made by the authorities to address the substantial weaknesses in The Gambia's economic and financial database.