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The Gambia and the IMF
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On March 8, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with The Gambia.1
Economic performance in The Gambia deteriorated substantially in 2002-2003. A collapse of the groundnut harvest in 2002 led to a contraction of real GDP by 3 percent while also affecting export revenues in 2003. At the same time, poor execution of monetary and fiscal policy, reflecting serious deficiencies in governance, caused the exchange rate to depreciate and inflation to surge: the dalasi depreciated by 60 percent in terms of the euro and by 45 percent in terms of the dollar in the two years to end December 2003, and the consumer price index rose by 18 percent in the year to December 2003. Critical quantitative performance targets and benchmarks under the IMF's Poverty Reduction and Growth Facility (PRGF) arrangement were missed and the program is now far off track.
In 2002, the reported overall fiscal deficit (excluding grants) reached 8.1 percent of GDP, compared with a target of 5.0 percent. Reserve money grew by 34 percent during the year, reflecting both the fiscal deficit and liquidity injections by the Central Bank of The Gambia (CBG) associated with foreign exchange losses. These losses resulted in part from questionable currency transactions by the CBG with local foreign exchange bureaus involving exceptionally wide spreads. The lax monetary conditions in turn gave rise to a 70 percent increase in credit to the private sector and a 35 percent increase in broad money during 2002.
The government instituted some corrective measures during 2002 and 2003. Fuel prices were raised substantially from October 2002 to eliminate associated fiscal losses and a new National Emergency Fiscal Committee was created to monitor and approve expenditure allocations on a weekly basis. The majority of below-the-line government accounts were also closed. These actions helped to curtail unbudgeted spending and restrict the growth of noninterest current expenditure below budget projections. Treasury bill yields were raised from 15 percent in July 2002 to 31 percent by September 2003 and, starting in April 2003; minimum reserve requirements on deposits held by commercial banks were extended to include foreign currency as well as dalasi deposits and were increased in two steps from 14 percent to 18 percent.
In 2003, the fiscal deficit is estimated to have declined to 6.0 percent of GDP, compared with a budget target of 4.5 percent. Domestic revenue is estimated to have undershot the budget in 2003 by 2.7 percent of GDP, almost entirely due to a weaker than expected performance by the Customs and Excise Department in the first nine months of the year, but there was also compression in public expenditure. The fiscal deficit (including grants) was financed in full by the central bank, fuelling an increase in reserve money of 63 percent during the year. Broad money grew by 43 percent.
The authorities informed the IMF staff in October 2003 of a series of substantial errors in data transmitted to the IMF for the period 2001-2003: (i) US$28.5 million of public spending from the foreign exchange reserves had not been recorded in central government or central bank accounts in 2001; (ii) the foreign exchange reserves had been wrongly credited during 2001-2003 with receipts of up to US$16 million from foreign exchange bureaus which had not been delivered, and (iii) nearly US$2 million in payments from the foreign exchange reserves for commissions on various external transactions had not been reported. Including these items in government accounts would, inter alia: (i) raise the level of public expenditure from 24 percent to 31 percent of GDP in 2001; (ii) raise the fiscal deficit (excluding grants) in 2001 from 8 percent to 15 percent of GDP; and (iii) reduce the level of gross official foreign exchange reserves at end-2003 from around 7 months of imports' cover to around 4½ months.
Progress with structural reforms in 2002-03 was limited. To facilitate export growth, the Trade Gateway Project was launched with World Bank support and The Gambia Investment and Free Zones Authority was established. The Gambia became eligible in January 2003 for preferential access under the U.S. African Growth and Opportunities Act. However, little was achieved on privatization or on the improvements in central bank governance and statistics identified under the Technical Cooperation Action Plan with the IMF.
Weaknesses persisted in all areas of fiscal management. In particular the planning, execution and monitoring of public expenditure was impeded by the failure to audit the fiscal accounts since 1991, to close and finalize the fiscal accounts beyond 1999, and to complete entries into the general ledger beyond November 2001.
In 2001, The Gambia ranked 149th on the human development index. It is likely that poverty has increased markedly since 2001, owing to the crop failures of 2002, rising inflation, and limited provision of income support and social services. Macroeconomic performance has fallen well short of the framework laid out in The Gambia's Poverty Reduction Strategy Paper (PRSP). The completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative cannot now be reached before 2005, at the earliest. The first progress report on the PRSP is scheduled for completion in early 2004.
Executive Board Assessment
Directors observed that sustained shortcomings in governance and the conduct of economic policy, compounded by poor weather in 2002, had contributed to a deteriorating macroeconomic performance in The Gambia in recent years. They noted, with concern that the rising rates of monetary growth since 2000, reflecting the Central Bank of The Gambia's financing of high fiscal deficits, quasi-fiscal expenditure, and central bank losses, had led to a sharp depreciation in the exchange rate and a surge in inflation. At the same time, policy and governance concerns held up external budgetary assistance. They saw these conditions as contributing to an increase in poverty and to setting back the country's medium-term development strategy.
Directors observed that restoring macroeconomic stability and re-establishing the conditions for sustainable growth and poverty reduction requires resolute actions on the authorities' part to improve governance, without which no sustained improvement in economic conditions is possible, and to enhance the management of fiscal and monetary policy, and to pursue structural reforms.
Directors stressed the urgency of combating incipient inflationary pressures by taking immediate measures to tighten fiscal and monetary policy. They observed that, despite efforts to rein in public expenditure through cash budgeting, fiscal slippages had continued throughout the period, boosted by large unbudgeted spending. They saw the need to rein in the budget deficit, which is projected to rise in 2004, to reduce financing demands on the CBG and crowding out of private investment.
In this regard, Directors welcomed the recent improvement in the control of cash outlays on non-interest, non-wage expenditures by the National Emergency Fiscal Committee (NEFCOM) and measures to strengthen tax administration. They looked forward to passage of the organic budget law and further controls over spending as well as the formation of the Revenue Authority and a large taxpayer unit in 2004, reinforced by further efforts to collect arrears and improve customs procedures and the administration of duty exemptions. Most Directors also recommended revenue raising measures, including broadening the sales tax base and raising its rate on imported goods, and enhancing taxation of the tourist and re-export sectors. They noted the importance of minimizing any potential adverse effects on the poor.
Directors also stressed the need to strengthen monetary policy, and the vital importance of improving the CBG's internal organization, procedures, and controls. To help achieve the monetary growth targets, they recommended that the authorities use greater flexibility in interest rates and strictly enforce reserve requirements. While recognizing the urgent need to increase holding of official bills by the private sector, some Directors advised separating liquidity management from government debt management, and in particular, reducing reliance on primary issuance of treasury bills for liquidity management. Directors underscored the importance of reviewing the Central Bank of The Gambia Act with a view to ensuring its conformity with a modern central bank law, and within this context, providing more operational independence for the CBG.
Directors expressed strong disappointment with the authorities for the serious misstatements in data previously provided to the Fund for the period 2001-2003, and the inadequate provision of detailed revisions to Fund staff. They welcomed the recently expressed willingness of the authorities to discuss measures with Fund staff to verify the CBG's financial statements and the foreign exchange reserves, but stressed the need to conduct a special audit covering the CBG's foreign exchange activities since end-2000 and a re-audit of the 2001 and 2002 financial statements. Directors also underscored the need for improvements in management of the CBG to prevent a recurrence of losses, such as those incurred in recent foreign exchange transactions.
Directors emphasized that the country's compliance with the Fund's safeguards assessment policy is critical to regaining access to Fund resources. They stressed the need for the CBG to comply rigorously with agreed disclosure and accounting procedures so that regular monitoring of monetary developments, including provision of data to the Fund, could be fully resumed.
To further strengthen disclosure, Directors also advocated immediate measures to bring the recording of government accounts up to date and to close expeditiously the accounts from 2000 onwards; they indicated that there should be no further delay in the auditing of the 1991-99 accounts. As poor economic data have seriously impaired the assessment of recent economic developments and policy adjustments, Directors emphasized the urgency of improving the quality of a wide range of economic statistics. They noted also their concern whether The Gambia is meeting the provisions of Article VIII, Section 5. Directors strongly urged the resumption of systematic publication of economic data.
Directors noted that medium-term prospects, in particular for raising the living standards of the poor, would continue to depend largely on the performance of agriculture, including groundnuts. They observed that a coordinated policy approach to ensure the security of high-quality seed supply and other agricultural inputs, and extended irrigation schemes and improved marketing arrangements could lessen substantially the adverse impact of inevitable weather-related shocks.
Directors also stressed the need for improved access to finance for smallholders, as well as, more generally, for small and medium-sized enterprises. They assessed that the recent sharp decline in the real exchange rate had substantially increased export incentives and had thereby improved prospects for the long-overdue diversification of the economy. They added that a resumption of the stalled privatization program and the implementation of measures under consideration to provide redress against abuse of property or contractual rights would further improve the business environment.
Directors regretted that the program supported by the PRGF had gone far off track during 2003, and that prospect for reaching the completion point under the enhanced HIPC Initiative had receded. They observed that if the authorities take actions to address the deteriorating economic situation and major governance issues, this would facilitate a resumption of discussions, leading to further possible support under a PRGF arrangement.
Directors noted that technical assistance, including that under the Technical Cooperation Action plan, would help improve the quality of monetary and fiscal institutions, and also of essential statistics. In view of the assistance the authorities have already received, they stressed that resolute action is now needed to implement previous recommendations.
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.
IMF EXTERNAL RELATIONS DEPARTMENT