IMF Executive Board Concludes 2006 Article IV Consultation with The GambiaPublic Information Notice (PIN) No. 06/119
October 20, 2006
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 October 13, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with The Gambia, and also assessed the country's performance under a staff monitored program (SMP).1
The Gambia has achieved macroeconomic stability over the last two and a half years. Real GDP growth rebounded from a drought-induced decline in 2002 to an annual average of 5.7 percent per year for 2003-05. Underpinned by a tight monetary policy stance, year-on-year inflation-as measured by the consumer price index-fell to low single digit levels in 2005 and stayed below 2 percent in the first six months of 2006. Though treasury bill yields and bank lending rates have fallen, they remain very high in real terms. The average yield on treasury bills fell from 30 percent at the end of December 2004 to 14.5 percent at the end of June 2006.
The overall fiscal deficit increased from 5.7 percent of GDP in 2004 to 8.6 percent in 2005, reflecting lower revenues and higher domestic interest payments. A two-month closure of the border with Senegal depressed customs revenues, and higher domestic debt at the end of 2004 resulted in a substantial increase in domestic interest payments. In 2005, interest payments accounted for 47 percent of current expenditure (43 percent of domestic revenue). PRSP-related spending in 2005 (23 percent of domestically financed expenditures) fell short of the level envisaged in the budget (30 percent).
The updated fiscal outlook for 2006 suggests a greater fiscal adjustment effort compared to 2005, but a shortfall when compared to the 2006 budget. In particular, higher-than-budgeted expenditure on the African Union summit held in Banjul in July 2006 is the principal factor behind projected overspending amounting to about 1½ percent of GDP.
The external current account deficit (including official transfers) widened significantly from 5 percent of GDP in 2003 to about 15 percent in 2005, due mainly to higher imports. In addition, groundnut exports collapsed in 2005 as a result of failures in internal marketing arrangements. A bright spot in the current account was strong growth in tourism earnings; tourist arrivals rose by more than 20 percent in 2005. The current account deficit was financed by increased inflows of foreign direct investment (FDI) and official concessional loans. The ratio of nominal external debt to GDP fell from 145 percent at the end of 2004 to 136 percent at the end of 2005.
The dalasi appreciated modestly in nominal and real effective terms during 2004-05 after massive depreciations in 2001-03. The appreciation reflects a tighter monetary policy stance and increased inflows of remittances, transfers, and FDI. The economy has stayed relatively competitive; tourism receipts (the main source of foreign exchange earnings) have increased sharply and gross international reserves are at a comfortable level, equivalent to four months of imports.
The Gambia is classified as a Heavily Indebted Poor Country (HIPC). It reached the decision point under the HIPC Initiative in December 2000 and is eligible for debt relief under both the Enhanced HIPC Initiative and the Multilateral Debt Relief Initiative (MDRI) when it reaches completion point. The results of a debt-sustainability analysis undertaken as part of the Article IV consultation indicate that the country is currently debt-distressed with all the key debt and debt service indicators well above indicative thresholds. Stress tests suggest that The Gambia will remain at moderate risk of debt distress even after MDRI relief.
A combination of exogenous shocks, fiscal slippages, and accommodating monetary policy stance derailed The Gambia's last Poverty Reduction and Growth Facility (PRGF)-supported program soon after it was approved in 2002. Following delays in implementing measures to address weaknesses revealed by a Safeguards Assessment, the PRGF arrangement expired in July 2005 without a single review being completed.
In order to re-establish a track record of policy implementation with the IMF, the authorities undertook an SMP spanning October 2005-March 2006. Performance under the program was satisfactory. All structural benchmarks were implemented, although some with a delay. In particular, guidelines and procedures to strengthen internal controls at the Central Bank of The Gambia (CBG) are being implemented, and steps have been taken to clear a backlog of unaudited government accounts. Performance against quantitative targets was mixed; fiscal targets for December 2005 were missed, but the slippages were made up by the end of March 2006.
Executive Board Assessment
Executive Directors commended the authorities on stabilizing the economy over the last two and a half years, which helped achieve low inflation and respectable economic growth. Directors noted, however, that the country continues to face severe challenges, in view of the high debt burden, narrow productive base, vulnerability to exogenous and policy-induced shocks, and widespread poverty. In these circumstances, and recalling the stop-go policies of the past, Directors urged the authorities to make a long-term commitment to a reform agenda that would promote higher growth and reduce poverty. They considered that such an agenda should include improving fiscal discipline, strengthening governance and accountability in the management of public resources, deepening the financial system, and enhancing the investment climate to foster private sector development. While recognizing that continued technical assistance will help support these efforts, Directors noted that more effective use of such assistance will enhance capacity building.
Directors were encouraged by The Gambia's performance under the Staff-Monitored Program that ended in March 2006. They especially welcomed the progress made by the Central Bank of The Gambia in addressing governance problems that had contributed to monetary policy lapses several years previously, and commended its success in reducing inflation and building up reserves. Directors called for full implementation of the new Act designed to strengthen the operational independence of the CBG.
Directors noted the authorities' concern that high interest payments are crowding out Poverty Reduction Strategy Paper (PRSP) priority expenditures, but considered that the authorities need to exercise fiscal discipline to address this concern. They stressed that limiting the government's domestic borrowing is critical for lowering interest rates, and consequently creating fiscal space for increasing growth-promoting and poverty-reducing public spending. In that context, they expressed disappointment that, subsequent to the SMP, fiscal slippages have emerged in connection with The Gambia's hosting of an African Union summit.
Directors stressed that the authorities should strengthen public financial management, including through the Integrated Financial Management Information System. In particular, it would be crucial to avoid expenditure overruns, extra-budgetary expenditures, and over-commitments on externally financed projects with substantial local counterpart funding requirements. Directors urged the authorities to extend the commitment control system beyond its current pilot phase to all spending units. They highlighted the need to better integrate the PRSP into the budget process, and to ensure that the resources released by debt relief contribute effectively toward reducing poverty.
Directors observed that, although the financial sector is relatively sound, financial intermediation is low. They noted that a high degree of concentration and high profit ratios in the banking system suggest room for more competition, but noted that structural impediments to lending should also be addressed. Directors encouraged the authorities to review laws that discourage lending, and to take steps to improve the efficiency of the court system and facilitate the establishment of a credit reference bureau.
Directors were of the view that The Gambia's floating exchange rate regime has served the country well and that the current level of the real effective exchange rate is broadly appropriate. At the same time, they underscored the importance of structural reforms to enhance external competitiveness and reduce the vulnerability of the economy to exogenous shocks. In this regard, they welcomed the authorities' request for assistance from the World Bank in the formulation of a program to improve the investment climate. Improvements in education and health would also strengthen capacity building and enhance productivity. Several Directors expressed concern about the recent weakness in the groundnut sector, and recommended that the remaining impediments to its efficient operation be removed.
Directors noted that stress tests in the debt sustainability analysis undertaken jointly by Fund and World Bank staff suggest that The Gambia will likely remain at a moderate risk of falling back into debt distress even if debt relief under the MDRI is provided. They underscored the importance of reliance on non-debt creating flows and further efforts to strengthen debt management. Directors also noted the importance of strengthening domestic revenue mobilization to supplement, and reduce dependency on, external resources.
Directors expressed concern about the severe data deficiencies that hamper the analysis of economic developments. They urged the authorities to speed up work on using the results of the 2003 household budget survey to improve the quality of the national accounts and the consumer price index. Additional steps are also necessary to improve the quality of balance of payments statistics along the lines recommended by the Fund.
Directors generally considered that there is a basis for proceeding to discuss with the authorities a program that could be supported under a three-year PRGF arrangement. They expected that a new arrangement would provide a framework for consolidating the implementation of sound macroeconomic policies and also assist the authorities make progress toward the HIPC completion point in order to benefit from debt relief. Directors urged the authorities to redouble their reform efforts, noting that credible fiscal consolidation and improved governance would be important for a new PRGF arrangement.