## 1. Economic Governance in The Gambia

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### Introduction and context
- Progress in late 1980s and early 1990s in reducing financial imbalances and liberalizing the economy; graduated from Fund financial support in early 1990s.
- July 1994 military change of government led to suspension of most external assistance, travel advisories reducing tourist arrivals, disruption to groundnuts marketing, and currency/exchange reforms in neighboring CFA zone countries that tightened border controls.
- Expansionary fiscal stance produced large budget deficits (excluding grants) averaging about 10 percent in 1994–96, high real interest rates, and crowding out of private investment.
- Transition to elected government in 1997 normalized donor relations and led to Fund support under the Enhanced Structural Adjustment Facility (ESAF).

### History of Fund arrangements and disbursements
- Lending history since 1986 (facility — approval date — expiration/cancellation — Amount Agreed (SDR million) — Amount Drawn (SDR million)):
  - Stand-by: 9/17/1986 — 10/16/1987 — 5.13 — 5.13
  - SAF: 9/17/1986 — 11/22/1988 — 10.86 — 8.55
  - ESAF: 11/23/1988 — 11/25/1991 — 20.52 — 20.52
  - ESAF/PRGF: 6/29/1998 — 12/31/2001 — 20.61 — 20.61 (o/w: noncomplying disbursements (6.87))
  - PRGF: 7/18/2002 — 7/17/2005 — 20.22 — 2.89
- Since 1998 The Gambia received modest disbursements (excluding the noncomplying disbursements) of SDR 16.6 million; outstanding Fund credit as of end-March 2005 was 50.2 percent of quota.
- The second PRGF arrangement (approved July 2002) had only one drawing; the first review was not completed and the program was off track since 2002.
- Misreporting of performance criteria data and noncomplying disbursements occurred in 2001; these were repaid in 2004.

### Program objectives (ESAF/PRGF and second PRGF)
- Key macroeconomic objectives:
  - Real economic growth of 5-6 percent annually
  - Inflation of below 4 percent per year
  - Sustainable external accounts including gross external reserves of 5-6 months of imports
- Instruments and structural priorities:
  - Consolidation of government finances, sound monetary policies, structural reforms for private investment and diversification, strengthening governance, implementing a comprehensive social agenda.
  - After I-PRSP (2000) and PRSP (2002), objectives expanded to include achieving debt sustainability and progress toward the Millennium Development Goals (MDGs).

### Macroeconomic outcomes and areas of progress
- Growth and inflation:
  - Real economic growth averaged 6 percent during the four years under the 1998–2001 ESAF/PRGF arrangement.
  - Annual inflation averaged 2.6 percent per year during the same period.
  - Agricultural sector grew at an annual average of about 10 percent (favorable weather and improved services to the groundnuts sector).
  - Adverse weather caused a 3 percent decline in real GDP in 2002; growth recovered to about 6 percent annual average in 2003–04.
  - Inflation surged to 17 percent in 2003.
- External accounts and trade liberalization:
  - External current account deficits (including official transfers) averaged 2.7 percent over the five years through 2002; gross international reserves were 6-7 months of import cover and above program targets except for 2001.
  - Maximum external tariff rate reduced from 98 percent to 18 percent and number of tariff bands from 30 to 6.
- Financial sector reforms:
  - Insolvent Trust Bank sold to private investors; additional banks licensed.
  - Passage and effective implementation of the Financial Institutions Act led to a sharp reduction in nonperforming loans and adherence to statutory capital adequacy and liquidity requirements.
  - Banks allowed to open foreign currency deposits; administered floor on deposit rates eliminated.
  - Separate insurance and money laundering Acts enacted in 2003; revision of the Central Bank Act initiated in 2001.

### Macroeconomic outcomes and areas of weakness
- Poverty and social indicators:
  - Poverty rate based on US $1 per day income level was 59 percent (1998 household budget survey; 2003 survey data not yet available).
  - Estimated population growth rate of 3 percent per annum; per capita GDP rose by 1–2 percent per year since 1998.
  - World Bank study indicates The Gambia will not meet key MDG targets on extreme poverty, child mortality reduction, and combating major diseases.
- Public finances and fiscal performance:
  - Overall deficit, excluding grants, rose to 16 percent of GDP in 2001, before declining to an annual average of 8.8 percent of GDP in 2002–04.
  - The 2001 deterioration driven by unbudgeted expenditure equivalent to 6.8 percent of GDP and significant revenue shortfalls—tax revenue declined by 3.2 percent of GDP in 2001.
  - Recurrent expenditure exceeded program targets in each year of the arrangements; cash budgeting introduced late 2002 but deficits remained about 7-10 percent of GDP in the last three years.
  - External grants and concessional loans were much lower than envisaged; fiscal financing largely through domestic debt issuance (treasury bills).
- Monetary expansion and central bank issues:
  - Broad money growth averaged 11 percent in 1998–99 but rose to 33 percent in 2000–03, creating inflationary pressure.
  - Principal factors: central bank lending to government and monetized losses by the central bank.
  - Current Central Bank Act does not clearly limit permissible investments and transactions; Minister of Finance can override central bank policy with no limits.
  - Proposed new Central Bank Act would set limits on total claims against the government at a maximum of 10 percent of the tax revenue of the previous fiscal year.
- Financial market development and credit access:
  - Credit to private sector about 13.8 percent of GDP and broad money to GDP ratio 27.4 percent in 2001–02.
  - Banks concentrated lending in distributive trade and personal loans (57 percent of outstanding bank loans at end-2002); spreads between lending and deposit rates of 12-14 percentage points in 2000–04.
- External sector and debt dynamics:
  - External current account deficit excluding official transfers averaged 16.2 percent of GDP in 2002-04, up from 10.4 percent in the preceding four years.
  - External debt rose from 130 percent of GDP in 2002 to 145 percent in 2003.
  - Ratio of external debt service payments to exports and travel income estimated at 15.9 percent in 2004, against 5 percent projected at decision point.

### Institutional and structural issues highlighted
- Public expenditure management (PEM) weaknesses:
  - Only 3 of 16 PEM performance benchmarks met (joint Fund/Bank assessment, June 2004); retrogression since 2001.
  - Last audited financial accounts of the government date back to 1991; no budget accounts closed since 1999.
  - Major fiduciary risk: long delay in closing the accounts and finalizing the general ledger.
- Central Bank governance gaps:
  - Statutory provisions insufficient to prevent government interference; no clear limits on investments/transactions; Governor or Board members removable without investigation or due process.
  - Ongoing audit of central bank losses by an international firm.
- Audit and accounting shortcomings:
  - No audited Annual Accounts produced since 1991 despite a 1997 Constitutional requirement for the Auditor General to report within six months of year-end.
  - Large unbudgeted expenditures amounting to 6.8 percent of GDP were made in 2001 and were not immediately apparent due to lack of oversight and controls.

### Exchange rate regime and central bank interventions
- Officially a free float but the CBG frequently intervened to influence the exchange rate.
- In the three years to 2003 the dalasi depreciated by 58 percent in real effective terms; CBG intervention was frequent and substantial, costly, and contributed to foreign exchange losses.
- Since the beginning of 2004 there has been an apparent shift to target an improvement in external reserves.

### Governance, public finances, and sectoral performance — structural reform outcomes
- Governance problems undermined investor and donor confidence and interrupted Fund support.
- Boxed governance issues (highlights):
  - Audited accounts not presented to the National Assembly since 1990; government accounts not finalized since 1999; no reliable in-year fiscal reporting.
  - Government seizure in January 1999 of The Gambian Groundnut Corporation (GGC) assets; arbitration settled after government paid US$11.4 million; EU provided about US$7 million grant aid to help settle the case.
  - Internal audit deficiencies at the central bank led to payments to bureaus for undelivered foreign exchange; US$11 million outstanding as of end-June 2003.
  - Central bank lending to government of US$28.5 million from foreign exchange reserves not reflected in accounts, leading to misreporting and noncomplying disbursements repaid in 2004.
- Sectoral outcomes:
  - Limited progress on diversification of agriculture and exports; industry contribution to real GDP stagnant.
  - Tourism recovery modest; 2004 arrivals and earnings not much higher than in 1994.
  - Groundnut sector rehabilitation constrained by 1999 government takeover of GGC assets and government involvement in inputs and marketing.
  - Privatization stalled since 1998 despite legal and institutional reforms.

### Compliance with program conditionality
- ESAF/PRGF (1998–2001):
  - Resources fully disbursed and all reviews completed except mid-year review in 1999.
  - Frequent requests for waivers on nonobservance of performance criteria.
  - Quantitative performance criteria on external payments arrears and external debt generally observed; many fiscal and monetary targets missed.
- PRGF (approved 2002):
  - Implementation difficulties acute: severe policy slippages, lack of accountability in public expenditure management; first review not completed and only one disbursement made.
  - Discovery in 2003 of unrecorded public expenditure in 2001 and illicit foreign exchange transactions led to misreporting and noncomplying disbursements (see Box 2).
- Structural conditions performance:
  - About 2/3 of structural benchmarks met on time under the ESAF/PRGF arrangement, 40 percent met on time under the first year of the second PRGF arrangement.
  - Structural conditionality was streamlined from 15 conditions on approval of the 1998 ESAF to 8 on approval of the PRGF arrangement in 2002.

### Box 2 — Noncomplying disbursements and corrective actions (summary)
- October 2003: government acknowledged misreporting to the Fund of data on 2001 performance criteria.
- Major data errors and unrecorded transactions:
  - US$28.5 million in payments by CBG on behalf of the government not accounted for in 2001 — overstated gross foreign exchange reserves since end-2001 by 45 percent of the revised end-2001 level and understated public spending and fiscal deficits by 6.8 percent of GDP.
  - Reserves overstated by up to US$16 million due to undelivered currency purchases credited during 2001.
  - Unrecorded US$1.84 million payment in 2003 to finance commissions on a US$28 million foreign currency loan.
- Result: two noncomplying disbursements of SDR 3.435 million each in July and December 2001.
- Executive Board decision (March 8, 2004): The Gambia to repay SDR 6.87 million plus accrued interest in four equal installments during 2004.
- Repayments made: April 7, June 30, September 30, and November 24, 2004 (latter ahead of schedule).

### Weaknesses in central bank internal controls and conduct
- Deficiencies in central bank legislation, internal controls, and auditing masked inappropriate transactions in reserve management, foreign exchange transactions, and lending to government.
- Monetary policy conduct in 2000–02 was accommodative or inactive; central bank actions contributed to excessive domestic liquidity, a sharp rise in inflation, and marked depreciation of the dalasi in 2001–03.
- Recommendation: strengthen internal audit and financial controls of the CBG; increase CBG autonomy via the Central Bank Act review; codify limits on government borrowing from the central bank and set clear procedures governing CBG operations.

### Ownership, data weaknesses, and technical assistance
- Insufficient national ownership and commitment to key reforms impeded program implementation; PRSP prepared consultatively but with limited participation and legislative oversight.
- Data weaknesses severely undermined program surveillance: lack of reliable and comprehensive data across macroeconomic and social areas.
- Technical assistance and institutional steps planned or underway:
  - Establish Interim Statistics Council to spearhead passage of the Statistics Act and eventual creation of an autonomous Bureau of Statistics.
  - Prepare a comprehensive statistics reform package for presentation to a donor roundtable meeting later in 2005.
  - Strengthen internal controls at the central bank and reconcile above- and below-the-line fiscal accounts; additional technical assistance likely needed.
- Recommendation: provision of technical assistance from the Fund, Bank, and bilateral donors critical to achieve structural reforms and strengthen economic management capacity.

### Key medium-term challenges and fiscal consolidation priorities
- Primary challenge: return to and maintain macroeconomic stability and achieve sustainable high broad-based economic growth.
- Required measures include:
  - Contain inflation to low single digits through fiscal consolidation, appropriate monetary and exchange rate policies, and strengthened structural reforms.
  - Improve agricultural performance, diversify the economy, enhance access to credit, develop the private sector, and limit government intervention.
- Fiscal consolidation priorities:
  - Establish efficient and effective revenue administration.
  - Ensure expenditure containment and meet accountability and transparency standards required for resumption of external budget assistance.
  - Large fiscal adjustment likely to entail a combination of revenue-raising measures, sustainable expenditure reductions, and resumption of external grants and concessional loans.
  - Improvements in revenue likely to be gradual owing to low administrative capacity.
- Debt metrics and risks:
  - Interest payments on domestic debt increased to 41.3 percent of tax revenue in 2003-04 and are expected to rise without further fiscal tightening.
  - Domestic interest payments were equivalent to 32.2 percent of tax revenues in 2003.
  - Domestic debt stock equivalent to 25.1 percent of GDP in 2003, compared to 13.4 percent in 1994/95.
  - Total domestic debt peaked at 38.1 percent of GDP in 2001.
- Recommendation: adopt an effective debt management strategy, including prudent domestic financial policies and reliance on non-debt creating inflows (private capital flows and external grants).

### Structural reforms, competitiveness, and private sector development
- Disappointing record on key structural reforms: groundnut sector, divestiture and commercialization, removal of obstacles to private investment, and civil service reform.
- Competitiveness constraints: inefficiencies of public utilities and overall production costs despite recent dalasi depreciation.
- Needed actions:
  - Reinvigorate structural reforms to improve efficiency and stimulate private investment and exports, particularly high value and nontraditional commodities.
  - Address access to finance, transportation and market access problems, and administrative, legal, and business environment limitations.

### Strategy for future Fund engagement and successor programs
- Fund engagement should support return to financial stability and establish a basis for growth, poverty reduction, and private sector development by:
  - Pursuing fiscal consolidation to reduce public debt burden.
  - Strengthening revenue mobilization.
  - Reestablishing expenditure priorities toward poverty-reducing outlays and advancing civil service reform.
  - Improving the financial sector, the groundnut sector, and the privatization and commercialization program.
  - Strengthening balance of payments resilience against external shocks.
  - Providing front-loaded technical assistance to rebuild institutional capacity and core macroeconomic data.
- Elements of a new Fund arrangement:
  - Strengthen accountability and transparency in use of public resources; follow-up on anti-corruption steps with permanent structures and systems.
  - Use prior actions and structural performance criteria (e.g., timely provision of audited government and CBG accounts) as effective conditionality.
  - Specify key structural reforms critical for sustainable growth and medium-term external viability.
  - Coordinate with World Bank and other donors on responsibilities for assistance in PEM, financial sector strengthening, and groundnut sector reforms.
  - Joint Fund and donor assistance to rebuild capacity in key financial institutions and provide front-loaded technical assistance.

### Further Fund program involvement and outlook (possible successor PRGF)
- Further Fund program involvement, including a possible successor PRGF arrangement, will depend on progress in the reform agenda.
- The authorities are working towards a Staff Monitored Program (SMP) once pre-conditions are met, especially transparency in fiscal and monetary authorities’ accounts, and expect the SMP would lead to renewed PRGF support when strengthened reforms are in place.
- The need for further Fund involvement beyond a possible successor PRGF will depend on:
  - progress in the reform agenda;
  - developments in external conditions; and
  - the private sector’s response to reforms.
- The Gambia has demonstrated that with appropriate financial policies the country could build external viability that would make a “non-financial” relation with the Fund possible over the medium term.

### Key economic and fiscal indicators (selected figures as presented)
- Real GDP growth (selected series): 3.7, 3.3, 1.7, 4.3, 5.2, 3.7
- Per capita GDP (at US$ 2000): 305, 192, 540, 310, 218, 525
- Inflation (period averages shown): 15.7, 20.8, 29.2, 6.1, 9.4, 17.6
- Fiscal (percent of GDP, selected):
  - Total revenue: 21.5, 16.0, 20.7, 17.9, 18.7, 22.7
  - Tax revenue: n.a., 12.0, 19.4, 15.7, 14.1, 21.8
  - Total expenditure: 29.2, 20.5, 25.7, 26.9, 21.8, 25.4
  - Overall balance, including grants: -1.7, -4.4, -5.1, -6.4, -3.6, -2.8
- Financing (percent of GDP):
  - Net foreign financing: 5.7, ......, ......, 1.6, 2.9, 1.5
  - Net domestic financing: 3/ -4.0, ......, ......, 4.7, 0.7, 1.3
- Monetary and financial indicators:
  - Broad money (percent change): 17.6, 25.9, 26.0, 21.7, 16.5, 22.2
  - Credit to private sector: 13.8, n.a., n.a., 12.3, 12.9, 34.8
  - Net credit to government: -7.4, n.a., n.a., 5.4, 6.8, 3.2
  - T-bill rate (percent): 25.8, 14.2, 14.8, 21.1, 11.1, 16.7
- External sector:
  - Current account balance (including official transfers): -1.0, -5.0, -1.7, -5.2, -6.5, -2.6
  - Gross international reserves (months of imports): 2.8, 2.3, 2.2, 5.3, 4.2, 3.5
  - External debt (percent of GDP): 88.5, 70.1, 42.0, 116.6, 79.5, 42.7

### Public Expenditure Management (PEM) and fiduciary risks — findings and reforms
- Long-standing PEM problems:
  - Long delays in producing a comprehensive general ledger and in reconciling bank data with cash books.
  - Large discrepancies between fiscal and monetary data due to nontransparent and inadequately reported “below-the-line” accounts.
  - Inadequate accounting coverage of foreign aid inflows.
- HIPC expenditure tracking assessment and AAP exercises:
  - The Gambia achieved benchmark status in five of fifteen indicators in 2001, but only three of sixteen indicators in 2004.
  - Placed in the lowest category of countries whose PEM system needs substantial upgrading.
- Technical assistance and reform progress:
  - Fund resident advisor in PEM in place from August 2000 for over three years; introduced interim flash fiscal reporting, new budget classifications, partial resolution of below-the-line accounts, improved accounting of external loans and grants, and closed 1992–99 final accounts.
  - Persistent weaknesses: 2000/02 final accounts not closed; general ledger not maintained; not all below-the-line accounts closed.
  - Fund drafted a new organic budget law in 2002, enacted in 2004.
  - World Bank launched a $15 million economic management reform project in 2001 (IFMIS, MTEF) with little progress; cited overcapacity in IFMIS design and delays in MTEF advisor assignment.
  - National Emergency Financial Committee (NEFCOM) established in September 2002 to oversee budget execution and control monthly allocations to departments.
- PEM-related structural benchmarks (selected; outcomes):
  - ESAF (Oct. 1999 – Sept. 2000): measures to curtail below-the-line accounts, census of government arrears, reconciliation of quarterly balances — Met.
  - PRGF (Oct. 2000 – Sep. 2001): establish accounting framework to monitor poverty-reducing expenditure — Not Met.
  - PRGF (July 2002–July 2003): reconciliation schedule between Accountant General and central bank (Target: July 2003) — Not Met; Closing of public accounts for 2000–2002 by end-2003 (Target: Dec. 2003) — Not Met; Publish reports on poverty-reducing expenditure (Target: Nov. 2002) — Met.

*Source: IMF staff assessment as presented in "1. Economic Governance in The Gambia" (content unit _cr0611).*

### 1. Economic Governance in The Gambia .......................................................................10

### 1. Economic Governance in The Gambia

### Introduction and Context
- The Gambia experienced considerable progress in reducing financial imbalances and liberalizing the economy in the late 1980s and early 1990s, and graduated from Fund financial support in the early 1990s.
- A military change of government in July 1994 led to suspension of most external assistance, travel advisories reducing tourist arrivals, disruption to groundnuts marketing, and currency/exchange reforms in neighboring CFA zone countries that tightened border controls.
- Expansionary fiscal stance led to large budget deficits (excluding grants) averaging about 10 percent in 1994–96, high real interest rates, and crowding out of private investment.
- Following a transition to elected government in 1997 the authorities normalized donor relations and sought Fund support under the Enhanced Structural Adjustment Facility (ESAF).

### History of Fund Arrangements and Disbursements
- Lending history since 1986 (facility, approval date, expiration/cancellation, Amount Agreed (SDR million), Amount Drawn (SDR million)):
  - Stand-by: 9/17/1986 — 10/16/1987 — 5.13 — 5.13
  - SAF: 9/17/1986 — 11/22/1988 — 10.86 — 8.55
  - ESAF: 11/23/1988 — 11/25/1991 — 20.52 — 20.52
  - ESAF/PRGF: 6/29/1998 — 12/31/2001 — 20.61 — 20.61 (o/w: noncomplying disbursements (6.87))
  - PRGF: 7/18/2002 — 7/17/2005 — 20.22 — 2.89
- Since 1998 The Gambia received modest disbursements (excluding the noncomplying disbursements) of SDR 16.6 million; outstanding Fund credit as of end-March 2005 was 50.2 percent of quota.
- The second PRGF arrangement (approved July 2002) had only one drawing; the first review was not completed and the program was off track since 2002.
- The program was marred by misreporting of performance criteria data and noncomplying disbursements in 2001, which were repaid in 2004.

### Program Objectives (ESAF/PRGF and second PRGF)
- Key macroeconomic objectives:
  - Real economic growth of 5-6 percent annually
  - Inflation of below 4 percent per year
  - Sustainable external accounts including gross external reserves of 5-6 months of imports
- Instruments: consolidation of government finances, sound monetary policies, structural reforms for private investment and diversification, strengthening governance, implementing a comprehensive social agenda.
- After I-PRSP (2000) and PRSP (2002), objectives expanded to include achieving debt sustainability and progress toward the Millennium Development Goals (MDGs).

### Macroeconomic Outcomes and Performance — Areas of Progress
- Real economic growth averaged 6 percent during the four years under the 1998–2001 ESAF/PRGF arrangement.
- Annual inflation averaged 2.6 percent per year during the same period.
- Agricultural sector grew at an annual average of about 10 percent (favorable weather and improved services to the groundnuts sector).
- Adverse weather caused a 3 percent decline in real GDP in 2002; growth recovered to about 6 percent annual average in 2003–04.
- Inflation surged to 17 percent in 2003, the highest in nearly two decades, accompanied by sharp depreciation of the dalasi vis-à-vis the U.S. dollar.
- Over the decade through 2004:
  - Average growth rate was higher than sub-Saharan Africa (SSA) but lower than African HIPC completion-point countries (list of eleven countries provided).
  - Average inflation was lower than SSA and African HIPC completion-point countries despite the rise since 2002.
- Financial sector reforms implemented:
  - Insolvent Trust Bank sold to private investors; additional banks licensed.
  - Passage and effective implementation of the Financial Institutions Act led to a sharp reduction in nonperforming loans and adherence to statutory capital adequacy and liquidity requirements.
  - Banks allowed to open foreign currency deposits; administered floor on deposit rates eliminated.
  - Improvements in government securities market, interbank money and foreign exchange markets.
  - Separate insurance and money laundering Acts enacted in 2003; revision of the Central Bank Act initiated in 2001.
- External current account deficits (including official transfers) averaged 2.7 percent over the five years through 2002 and gross international reserves were 6-7 months of import cover and above program targets except for 2001.
- Trade and payments remained liberal; maximum external tariff rate reduced from 98 percent to 18 percent and number of tariff bands from 30 to 6. Measures taken to promote re-export trade and transit shipments through Banjul port.

### Macroeconomic Outcomes and Performance — Areas of Weakness
- Poverty and social indicators:
  - Progress in reducing poverty since 1998 has been slow, particularly in rural areas.
  - Poverty rate based on US $1 per day income level was 59 percent (1998 household budget survey; 2003 survey data not yet available).
  - World Bank study indicates slow and uneven progress toward MDGs; country will not meet key targets for reducing extreme poverty, child mortality reduction, and combating major diseases.
  - Estimated population growth rate of 3 percent per annum; per capita GDP rose by 1–2 percent per year since 1998.
- Public finances and fiscal performance:
  - Initial improvement reversed in 2001; under the 2002 PRGF arrangement public accounts weakened and the program went off track.
  - Overall deficit, excluding grants, rose to 16 percent of GDP in 2001, before declining to an annual average of 8.8 percent of GDP in 2002–04.
  - The 2001 deterioration was driven by unbudgeted expenditure equivalent to 6.8 percent of GDP and significant revenue shortfalls—tax revenue declined by 3.2 percent of GDP in 2001.
  - Recurrent expenditure exceeded program targets in each year of the arrangements; cash budgeting introduced late 2002 but deficits remained about 7-10 percent of GDP in the last three years.
  - External grants and concessional loans were much lower than envisaged; fiscal financing largely through domestic debt issuance (treasury bills).
- Transparency, accountability, and public expenditure management (PEM):
  - Major risks: lack of transparency and accountability, difficulties in containing government expenditure, limited economic management capacity.
  - Last audited financial accounts of the government date back to 1991; no budget accounts closed since 1999.
  - Joint Fund/Bank assessment (June 2004): The Gambia meets only 3 of 16 PEM performance benchmarks; study found retrogression since 2001.
- Revenue performance:
  - Total revenue was programmed to rise from 20.9 percent of GDP in 1998 to 22.5 percent in 2001 but remained about 18 percent of GDP through 2000 and dropped to 15 percent in 2001.
  - Problems in tax and customs administration led to substantially lower-than-expected tax performance; reduction in average import duties did not improve compliance.
- Monetary expansion and central bank issues:
  - Broad money growth averaged 11 percent in 1998–99 but rose to 33 percent in 2000–03, creating inflationary pressure.
  - Principal factors: central bank lending to government and monetized losses by the central bank.
  - Large government borrowing from the Central Bank of The Gambia (CBG) increased domestic public debt.
  - Current Central Bank Act does not clearly limit permissible investments and transactions, nor protect against government interference; Minister of Finance can override central bank policy with no limits; Governor or Board members can be removed without investigation or due process.
  - Under the proposed new Central Bank Act, limits on total claims against the government would be set at a maximum of 10 percent of the tax revenue of the previous fiscal year.
- Financial market development and credit access:
  - Credit to private sector about 13.8 percent of GDP and broad money to GDP ratio 27.4 percent in 2001–02, indicating low financial development.
  - Banks concentrated lending in distributive trade and personal loans (57 percent of outstanding bank loans at end-2002), maintained spreads between lending and deposit rates of 12-14 percentage points in 2000–04, and invested in liquid assets.
  - Government interventions to provide credit to agriculture were unsuccessful and costly.
- External sector and debt dynamics:
  - External current account deficit (including official transfers) deteriorated substantially after 2002; more than doubled by 2004 relative to 2001.
  - External current account deficit excluding official transfers averaged 16.2 percent of GDP in 2002-04, up from 10.4 percent in the preceding four years.
  - External debt rose from 130 percent of GDP in 2002 to 145 percent in 2003.
  - Ratio of external debt service payments to exports and travel income estimated at 15.9 percent in 2004, against 5 percent projected at decision point.

### Institutional and Structural Issues Highlighted
- Weak PEM systems: only 3 of 16 performance benchmarks met; inability to track poverty-reducing public spending.
- Central Bank governance gaps: statutory provisions insufficient to prevent government interference; lack of clear investment/transaction limits; proposed reform to cap total claims at 10 percent of previous fiscal year tax revenue.
- Audit and accounting shortcomings: last audited government accounts dated 1991; no budget accounts closed since 1999; ongoing audit of central bank losses by an international firm.

*Source: IMF staff assessment as presented in "1. Economic Governance in The Gambia" (content unit _cr0611).*

### 19.      The exchange rate

### 19.      The exchange rate

### Exchange rate regime and central bank interventions
- The exchange rate regime in The Gambia is officially characterized as a free float, but the CBG has made frequent interventions in foreign exchange markets to influence the exchange rate.
- In the three years to 2003, as the dalasi depreciated by 58 percent in real effective terms, CBG intervention was frequent and substantial in an effort to slow down the depreciation of the dalasi.
- As these interventions were costly and contributed to considerable foreign exchange losses for CBG, there has been an apparent shift to target an improvement in external reserves since the beginning of 2004.

### Structural reforms — governance, public finances, and sectoral performance
- Economic governance problems persisted throughout the period under review, illustrated by:
  - pervasive lack of financial accountability and transparency in the fiscal accounts;
  - constant difficulties in raising domestic revenue owing to weaknesses in tax and customs administration, including ad hoc exemptions;
  - inadequate internal controls and audits of the central bank.
- Consequences:
  - Undermined investors’ confidence and impeded private sector development.
  - Eroded donor confidence, which ceased to provide budget support.
  - Erosion of economic governance was a principal factor limiting success under the arrangements and interrupting Fund support under the PRGF arrangement.
- Box 1 — Key governance and institutional issues:
  - Fiscal transparency and accountability limited: Audited accounts not presented to the National Assembly since 1990; government accounts not finalized since 1999; no reliable in-year fiscal reporting.
  - Government seizure in January 1999 of The Gambian Groundnut Corporation (GGC) assets without compensation; arbitration case settled out-of-court after government paid compensation of US$11.4 million; EU provided grant aid of about US$7 million to help settle the case.
  - Poor governance at the central bank during 2001-2003: internal audit deficiencies led to payments to private foreign exchange bureaus for purchases of undelivered foreign exchange; equivalent of US$11 million still outstanding as of end-June 2003.
  - Central bank lending to government of US$28.5 million from foreign exchange reserves not reflected in government or central bank accounts; led to misreporting to the IMF and noncomplying disbursements repaid in 2004.
  - Pre-shipment inspection regime introduced in 1998 then abolished in 2000 after precipitous decline in reexports; exemptions and concessions regime discretionary and fiscally unquantified.
  - Noncompetitive awarding of government contracts problematic; Gambia Public Procurement Agency (GPPA) created to implement new legal framework and review all large contracts.
- Sectoral and structural reform outcomes:
  - Limited progress on diversification of agriculture and exports; priorities for high-value products and cereals not realized.
  - Industry contribution to real GDP remained stagnant; private investment in export-oriented industries and free zones not fostered.
  - Tourism recovered from mid-1990s lows, but 2004 arrivals and earnings were not much higher than in 1994.
  - Groundnut sector rehabilitation constrained by 1999 government takeover of GGC assets; government involvement in inputs and marketing dampened growth prospects; nonrepayment of bank loans by The Gambia Cooperative Union (GCU) led to inadequate provision of seeds and fertilizer.
  - Private sector development weak; privatization stalled since 1998. Legal and institutional reforms (business legal framework upgrade, competition policy drafted, expansion of commercial High Court branches, public procurement Act) implemented but divestiture and commercialization progress slow.
  - Public service reforms not implemented comprehensively; quantitative ceilings maintained on public sector wages between 1998-2002 but frequently exceeded; low wages undermined administrative capacity and recruitment of skilled employees.
- Fund technical assistance areas during the period:
  - (i) public expenditure management;
  - (ii) tax administration;
  - (iii) monetary and foreign exchange operations and central bank reorganization;
  - (iv) national accounts statistics;
  - (v) financial sector supervision.
- Despite TA, major shortcomings remained in public expenditure management and in timeliness, quality, and publication of macroeconomic statistics—especially national accounts, government finance statistics, and balance of payments.

### Compliance with program conditionality
- Record under the ESAF/PRGF arrangement, 1998-2001, was mixed with significant implementation problems.
  - Resources committed under the arrangement were fully disbursed and all reviews completed except the mid-year review in 1999.
  - Reviews often accompanied by requests for waivers on nonobservance of performance criteria.
  - Weak management of public sector and central bank accounts led to frequent nonobservance of performance criteria on net bank credit to government and net domestic assets of the central bank.
  - Targets on fiscal performance (revenue, limits on public sector wages) and on the level of net foreign assets of the central bank were often not met.
  - Quantitative performance criteria on external payments arrears and external debt were generally observed.
- Under the PRGF arrangement approved in 2002, implementation difficulties became more acute:
  - Severe policy slippages and consequences of lack of accountability in public expenditure management meant the first review under the arrangement has yet to be completed and only one disbursement was made.
  - Fund relations strained by discovery in 2003 of unrecorded public expenditure in fiscal year 2001 financed by loans from the central bank, and illicit foreign exchange transactions by central bank officials—leading to misreporting of performance criteria and noncomplying disbursements repaid in 2004 (see Box 2).
- Performance on structural conditions:
  - Generally prior actions met on a timely basis but many performance criteria missed or met with delays necessitating waiver requests.
  - About 2/3 of structural benchmarks met on time under the ESAF/PRGF arrangement, and 40 percent met on time under the first year of the second PRGF arrangement.
  - Structural conditionality was streamlined: number of structural conditions fell from 15 on approval of the 1998 ESAF to 8 on approval of the PRGF arrangement in 2002.
  - The Gambia had fewer performance criteria and more structural benchmarks than the average for PRGF countries; more conditions on data issues compared to other PRGF arrangements.
- Box 2 — Noncomplying disbursements and corrective actions:
  - In October 2003, the government acknowledged misreporting to the Fund of data with respect to performance criteria under the 1998-2001 PRGF arrangement.
  - Misreporting relates to nonobservance of end-March and end-September 2001 performance criteria on net official international reserves, net domestic assets of the central bank, net lending to the central government, and the basic primary fiscal balance of the central government.
  - Substantial revisions to data on foreign exchange reserves and lending to the central government submitted during 2001-03 reflected three major errors:
    - No account had been taken in 2001 of payments made by the CBG of US$28.5 million in foreign currencies on behalf of the government. This led to an overstatement of gross foreign exchange reserves since the end of 2001 by 45 percent of the revised end-2001 level, and an understatement of public spending and fiscal deficits equivalent to 6.8 percent of GDP.
    - International reserves had erroneously been credited during 2001 and subsequently with currency purchased from foreign exchange bureaus that had not been delivered; reserves overstated by up to US$16 million.
    - The CBG paid an additional unrecorded US$1.84 million from the foreign reserves in 2003 to finance commissions on foreign currency loan for US$28 million from a foreign commercial bank, to secure a dollar deposit to mask the shortfall in reserves.
  - As a result, The Gambia received two noncomplying disbursements, equivalent to SDR 3.435 million each in July and December 2001.
  - On March 8, 2004, the Executive Board decided The Gambia should repay these disbursements (SDR 6.87 million) plus accrued interest in four equal installments during 2004.
  - These amounts were paid on April 7, June 30, September 30, and November 24, 2004—the latter ahead of schedule.

### Cooperation with the World Bank
- Fund-Bank collaboration was close during the ESAF/PRGF arrangement, particularly in preparing the Interim Poverty Reduction Strategy (I-PRS) and The Gambia’s full PRSP.
- The Bank led policy dialogue on key structural reforms in economic and social sectors, including private sector development, education, infrastructure, and legal and judicial reforms.
- Recently approved Bank projects included capacity building for economic policy formulation and management, and the trade gateway project to establish a free zone to develop an export-oriented production base.
- The Fund led on macroeconomic policy formulation and structural reforms; the World Bank did not grant budget support or program lending with broad structural conditionality in 1998-2004.
- Coordination issues:
  - Bank and Fund engagement in Public Expenditure Management (PEM) experienced overlap and coordination difficulties, possibly contributing to inadequate priority setting for effective conditionality.
  - Bank’s public expenditure reviews were infrequent despite urgent need to enhance fiscal management.
  - The planned Integrated Financial Management Information System (IFMIS) initiated in 2001 has not become operational; the Medium Term Expenditure Framework delayed and neither had much impact on improving accountability and transparency of public spending.
  - Placement of separate resident advisors at the treasury in 2000-01 reflected limited coordination; no audited accounts since 1991.

### Lessons for policies and program design
- Governance problems and insufficient commitment to key reforms hampered program implementation across arrangements.
  - Problems in government expenditure management (accounting, auditing, reporting) were pervasive and needed urgent attention to improve transparency of public resource use.
  - Weaknesses in PEM systems implied need for enhanced program monitoring and supervision.
- Policy design implications:
  - More stringent prior actions could have been designed to address PEM weaknesses, e.g., timely maintenance of a comprehensive general ledger and publication of audited accounts.
  - Interim flash fiscal reporting was not a reliable long-term approach for producing acceptable fiscal data for the Fund program.
  - Country-specific measures were required to close long overdue accounts as a middle-ground between World Bank long-term reforms and Fund interim measures.
- Further observations:
  - PEM systems remained well below required standards despite considerable technical assistance.
  - Resolution of PEM problems and internal controls at the central bank should have been given more prominence in program design and conditionality.
  - Successive arrangements since 1998 adopted a gradual and incremental approach to improving fiscal and central bank accounts; these gradual efforts made no measurable improvement in public and central bank account management.
  - Given the critical nature of improved accountability and transparency, Fund support could have been made conditional on prior actions to ensure audited government accounts were made available on a timely basis and that CBG accounts were considerably improved.
  - Government and Fund staff overestimated revenue projections and underestimated implementation difficulties.
  - Implementation delays occurred across significant reform areas: passage of legislation, redesign of customs and tax procedures, restructuring of headquarters, recruitment and training, upgrading customs computer system, and improvements to field office facilities.
  - Consequently, programmed improvements in revenue mobilization under the ESAF/PRGF arrangement and the second PRGF arrangement did not materialize.

*Source: IMF staff report (excerpt provided).*

### 35.      Weaknesses in the internal controls of the central bank and in the conduct of its

### _cr0611 - 35.      Weaknesses in the internal controls of the central bank and in the conduct of its

### Weaknesses in central bank controls and conduct
- Deficiencies in central bank legislation, internal controls, and auditing masked inappropriate transactions in:
  - Management of the country’s external reserves
  - Foreign exchange transactions
  - Lending to government
- Conduct of monetary policy, particularly in 2000-02, was accommodative or inactive.
- The Bank’s transactions contributed to excessive injection of domestic liquidity that led to:
  - A sharp rise in inflation
  - A marked depreciation of the local currency in 2001–03
- Recommendation: Strengthen internal audit and financial controls of the CBG and increase CBG autonomy through acceleration of the on-going review of the Central Bank Act (started in 2001). Codify limits on government borrowing from the central bank at levels consistent with international best practices and clearly set procedures governing CBG operations.

### Ownership, data, and technical assistance
- Insufficient national ownership and commitments to key reforms impeded program implementation:
  - The Gambia’s PRSP was prepared through a consultative process but with limited participation and legislative oversight.
  - Lack of timely public information on economic and financial developments indicates narrow program ownership.
  - Introduction of a cash budget system signaled that commitment to reform in public resources was insufficient and had to be strengthened after the PRGF arrangement went off track.
  - Authorities renewed commitment to adjustment has been a factor in stabilization efforts since late 2002.
- Data weaknesses severely undermined program surveillance:
  - Lack of reliable and comprehensive data constrained program monitoring and remedial action formulation.
  - Limitations in quality and timeliness extend to all areas of macroeconomic and social data.
  - Early measures to address statistical deficiencies could have yielded positive results.
- Ongoing and planned technical assistance and institutional steps:
  - Plans to establish an Interim Statistics Council to spearhead passage of the Statistics Act and eventual creation of an autonomous Bureau of Statistics.
  - Preparations underway for a comprehensive statistics reform package, to be costed and presented to a donor roundtable meeting later in 2005.
  - Ongoing initiatives to strengthen macroeconomic management, including strengthening internal controls at the central bank and reconciliation of above- and below-the-line fiscal accounts, for which additional technical assistance might be needed.
- Recommendation: Provision of technical assistance from the Fund, Bank, and bilateral donors will be critical to achieve key structural reforms and strengthen economic management capacity.

### Key medium-term challenges
- Primary challenge: Return to and maintain macroeconomic stability and achieve sustainable high broad-based economic growth.
- Required measures include:
  - Contain inflation to low single digits through fiscal consolidation, appropriate monetary and exchange rate policies, and strengthened structural reforms.
  - Improve agricultural performance, diversify the economy, enhance access to credit, develop the private sector, and limit government intervention in key sectors.
- Fiscal consolidation priorities:
  - Establish efficient and effective revenue administration.
  - Ensure expenditure containment and meet accountability and transparency standards required for resumption of external budget assistance.
  - The large fiscal adjustment will likely entail a combination of revenue-raising measures, sustainable expenditure reductions, and resumption of external grants and concessional loans assistance.
  - Improvements in revenue are likely to be gradual owing to low administrative capacity.
  - Successful expenditure containment and resumption of external budgetary support will be subject to visible improvements in PEM.
  - Sustainable expenditure reduction will allow for higher outlays for priority (PRS) sectors and reduce domestic financing pressures.
- Debt burden and debt-service metrics:
  - Interest payments on domestic debt increased to 41.3 percent of tax revenue in 2003-04 and are expected to rise without further fiscal tightening.
  - Domestic interest payments were equivalent to 32.2 percent of tax revenues in 2003.
  - Domestic debt stock was equivalent to 25.1 percent of GDP in 2003, compared to 13.4 percent in 1994/95.
  - Total domestic debt peaked at 38.1 percent of GDP in 2001.
- Recommendation: Adopt an effective debt management strategy, including prudent domestic financial policies and reliance on non-debt creating inflows (private capital flows and external grants).
- Public expenditure management and governance:
  - Major concerns include significant delays in preparation and auditing of public accounts, poor budget preparation, weak internal controls and audits, and execution of expenditures outside the normal budgeting process.
  - Implementation of solutions has been problematic in the past.
  - Recommendation: Ensure good governance, accountability, and transparency in public resource management; strengthen PEM systems.

### Structural reforms and competitiveness
- Record on key structural reforms has been disappointing:
  - Reforms in the groundnut sector and agriculture in general
  - Divestiture and commercialization program
  - Removal of obstacles to private investment and private sector development
  - Civil service reform
- Competitiveness constraints include inefficiencies of public utilities and overall production costs despite recent dalasi depreciation.
- Needed actions to promote broad-based growth and external sustainability:
  - Reinvigorate structural reforms to improve efficiency and stimulate private investment and exports, particularly in high value and nontraditional commodities.
  - Address access to finance, transportation and market access problems, and administrative, legal, and business environment limitations.

### Strategy for future Fund engagement
- The Fund’s engagement should support The Gambia in returning to financial stability and establishing a basis for growth, poverty reduction, and private sector development through:
  - Pursuing fiscal consolidation to reduce the public debt burden.
  - Strengthening revenue mobilization.
  - Reestablishing expenditure priorities toward poverty-reducing outlays and advancing civil service reform.
  - Improving the financial sector, the groundnut sector, and the privatization and commercialization program.
  - Strengthening balance of payments resilience against external shocks.
  - Providing front-loaded technical assistance to rebuild institutional capacity and provide core macroeconomic data essential for policy formulation and monitoring.
- Elements of a new Fund arrangement should include:
  - Measures to strengthen accountability and transparency in use of public resources; follow-up on anti-corruption steps with permanent structures and systems to combat misuse of public resources and economic crimes.
  - Readiness to utilize prior actions and structural performance criteria, such as timely provision of audited government and CBG accounts, as effective conditionality.
  - Specification of key structural reforms critical for high sustainable growth and medium-term external viability (remove constraints on private sector development, improve public utilities, strengthen privatization, promote trade and economic diversification).
  - Coordination with the World Bank and other donors on responsibilities for assistance with critical reforms in PEM, financial sector strengthening, and groundnut sector reforms to avoid duplication and assist effective delivery.
  - Joint Fund and donor assistance to rebuild capacity in key financial institutions and front-loaded technical assistance to rebuild institutional capacities and core macroeconomic data provision.

*Source: IMF staff report text provided.*

### 47.      Further Fund program involvement including the possible successor PRGF

### 47.      Further Fund program involvement including the possible successor PRGF

### Summary and outlook
- Further Fund program involvement, including the possible successor PRGF arrangement, will depend on progress in the reform agenda.
- The current state of The Gambia’s economy and its vulnerabilities to external shocks indicate that the country will need continued donor assistance in the medium term.
- A reduction in vulnerabilities and progress in the reform agenda are instrumental to the country’s exit strategy from use of Fund resources.
- The authorities are working towards a Staff Monitored Program (SMP), once pre-conditions are met, especially transparency in both the fiscal and monetary authorities’ accounts, and expect the SMP would lead to renewed Fund support under a PRGF arrangement at the appropriate time with strengthened economic and financial reforms in place.
- A new arrangement with the Fund would be important for the government’s efforts to reengage with donors and seek financial and technical assistance.
- The need for further Fund program involvement beyond the possible successor PRGF arrangement will depend on:
  - progress in the reform agenda;
  - developments in external conditions; and
  - the private sector’s response to reforms.
- While drawing conclusions on long-term needs is premature, The Gambia has proven in the past that with appropriate financial policies the country could build external viability that would make a “non-financial” relation with the Fund possible over the medium term.

### Key economic and fiscal indicators (selected figures as presented)
- Real GDP growth (selected series): 3.7, 3.3, 1.7, 4.3, 5.2, 3.7
- Per capita GDP (at US$ 2000): 305, 192, 540, 310, 218, 525
- Inflation (period averages shown): 15.7, 20.8, 29.2, 6.1, 9.4, 17.6
- Fiscal (percent of GDP, selected):  
  - Total revenue: 21.5, 16.0, 20.7, 17.9, 18.7, 22.7  
  - Tax revenue: n.a., 12.0, 19.4, 15.7, 14.1, 21.8  
  - Total expenditure: 29.2, 20.5, 25.7, 26.9, 21.8, 25.4  
  - Overall balance, including grants: -1.7, -4.4, -5.1, -6.4, -3.6, -2.8
- Financing (percent of GDP):  
  - Net foreign financing: 5.7, ......, ......, 1.6, 2.9, 1.5  
  - Net domestic financing: 3/ -4.0, ......, ......, 4.7, 0.7, 1.3
- Monetary and financial indicators:  
  - Broad money (percent change): 17.6, 25.9, 26.0, 21.7, 16.5, 22.2  
  - Credit to private sector: 13.8, n.a., n.a., 12.3, 12.9, 34.8  
  - Net credit to government: -7.4, n.a., n.a., 5.4, 6.8, 3.2  
  - T-bill rate (percent): 25.8, 14.2, 14.8, 21.1, 11.1, 16.7
- External sector:  
  - Current account balance (including official transfers): -1.0, -5.0, -1.7, -5.2, -6.5, -2.6  
  - Gross international reserves (months of imports): 2.8, 2.3, 2.2, 5.3, 4.2, 3.5  
  - External debt (percent of GDP): 88.5, 70.1, 42.0, 116.6, 79.5, 42.7
- (Source noted in tables: IMF, World Economic Outlook, Winter 2005 database.)

### Program performance and conditionality (high-level)
- Historical program targets and outcomes under 1998–2001 ESAF/PRGF and 2002–04 PRGF arrangements show mixed results in macroeconomic performance, fiscal balances, and monetary indicators.
- Examples of reported outcomes and targets across years (selected):  
  - Real GDP growth outcomes and program targets varied (examples shown: 3.8, 6.5, 4.8, 4.2, 6.4, 5.0, ... ).  
  - Inflation (period average) reported series include 3.0, 1.1, 3.0, 2.5, 3.8, 3.0, 2.5, 0.9, 2.5, 2.5, 4.5.  
  - Fiscal aggregate examples: Total revenue series 20.9, 18.6, 21.1, 21.0, 17.9, 21.4, 21.7, 18.5, 22.5, 23.6, 15.1.  
  - Overall balance, including grants, examples: -2.7, -2.4, -1.7, -1.7, -3.5, -0.7, -0.9, -1.4, -0.2, -1.1, -13.9.
- Compliance with quantitative program targets (1998–2001; 2002 PRGF) shows numerous instances of both “Met” and “Not met” across indicators such as net domestic assets, net bank credit to government, basic primary balance, payments arrears, total domestic government revenue, government wage bill, net foreign assets of the central bank, and external borrowing ceilings.

### Structural conditionality and reform implementation (selected)
- Structural conditionality under ESAF and PRGF programs included prior actions, structural performance criteria, and structural benchmarks (examples):  
  - Prior actions (Apr-98): Elimination of all discretionary customs duty exemptions (Met); Withdrawal of all automatic spending authorizations that refer to preceding budget exercises (Met); Completion of public expenditure review for education sector (Met); Settlement of cross debts between government and public enterprises (Met).  
  - Structural performance criteria and benchmarks included: Reduction of maximum duty rate to 25 percent (except for alcohol, tobacco and vehicles) and reduction of number of import duties to 19 (Jul-98: Met); Adoption of new divestiture strategy for public enterprise sector (end-Nov 1998: Not met); Extension of the sales tax to professionals (end-Jun 1998: Not met); Completion or implementation targets for ASYCUDA, rebasing national accounts, public enterprise restructuring, and improving treasury/market operations (various dates; mixed Met/Not met outcomes).  
  - PRGF prior actions (Oct-00) included submission to parliament of supplementary budget measures and Cabinet approval of the 2002 budget incorporating debt relief expenditures (both Met).

### Public Expenditure Management (PEM): findings from Annex I
- Serious weaknesses in budget execution and treasury functions are long standing; identified PEM problems included:  
  - long delays in producing the general ledger, which was not comprehensive, and in reconciling bank data with cash books;  
  - large discrepancies between fiscal and monetary data in monthly fiscal reports, partially resulting from a large number of nontransparent and inadequately reported “below-the-line” accounts; and  
  - inadequate coverage in the accounting of foreign aid inflows.
- A 1999 technical assistance mission concluded: “Payments from below-the-line accounts affect and make government balances unreliable especially when there is no bank reconciliation, and may well be a major cause for expenditure indiscipline.”
- Despite a 1997 Constitutional requirement for the Auditor General (AG) to report on annual government accounts within six months of the end of the preceding financial year, no audited Annual Accounts have been produced since 1991.
- A Fund resident adviser assisted authorities in closing financial accounts up to 1998/99; these were submitted to the AG only in 2001. To date (as of the report), no audited accounts have been submitted to Parliament and subsequent annual accounts remain to be finalized.
- HIPC expenditure tracking assessment and action plan (AAP) exercises in 2001 and reassessed in 2004 measured PEM performance against 15 (2001) and 16 (2004) benchmarks:  
  - The Gambia achieved benchmark status in five of the fifteen indicators in 2001, but only three of the sixteen indicators in 2004, placing it in the lowest category of countries whose PEM system is in need of substantial upgrading.  
  - Both studies highlighted significant weaknesses in budget execution (lack of internal controls or bank reconciliation) and reporting, with continued delays in presenting audited statements.  
  - These studies support the conclusion of the 2003 Country Financial Accountability Assessment (CFAA) that significant PEM weaknesses persist.

*IMF staff report content as provided in the source PDF.*

### 2001. However, due to shortcomings in the records with the AGD based on which these

### _cr0611 - 2001. However, due to shortcomings in the records with the AGD based on which these

### Fiduciary risks and public expenditure management (PEM) weaknesses
- The Auditor General did not start his work due to shortcomings in the records with the AGD and has requested donor assistance.
- The World Bank concluded: “the greatest fiduciary risk associated with budget execution and monitoring is the long delay in closing the accounts and finalizing the general ledger. This significantly weakens expenditure control and legislative oversight.”
- Problems in PEM attributed to a combination of poor governance, weak systems and extremely scarce capacity.
- In 2001 large unbudgeted expenditures amounting to 6.8 percent of GDP were made; these expenditures were not immediately apparent or brought to account because of lack of independent oversight and controls, such as regular audits, comprehensive bank reconciliation and the production of financial statements.

### Technical assistance, reforms, and implementation status
- Fund resident advisor in PEM in place from August 2000 for over three years; some progress made but slower than anticipated.
- Main developments achieved:
  - introducing an interim flash fiscal reporting system;
  - developing new budget classifications;
  - partially addressing long-existing problems associated with the below-the-line accounts;
  - improving accounting of external loans and grants;
  - closing the 1992–99 final accounts.
- Persistent weaknesses:
  - the 2000/02 final accounts were not closed as anticipated;
  - the general ledger was not maintained;
  - not all identified below-the-line accounts were closed.
- Fund support: drafted a new organic budget law in 2002, which was enacted, after some delay, in 2004.
- World Bank support:
  - launched a $15 million economic management reform project in 2001, with major components the introduction of a computerized financial management system (IFMIS) and a medium-term expenditure framework (MTEF).
  - Little progress since project inception, attributed to overcapacity in design of the IFMIS project and a long delay in the assignment of the MTEF advisor.
- A bilateral donor provided support to build capacity in the Auditor General’s department since 1998.
- The National Emergency Financial Committee (NEFCOM) was established in September 2002 to oversee execution of the budget and to control monthly allocations to departments.

### Evolution of PEM-related conditionality under Fund programs
- PEM conditions under Fund programs were progressively tightened.
- The first year of the ESAF arrangement did not set PEM-related prior actions or structural benchmarks; only measures were World Bank proposed expenditure reviews in health and education and some basic civil service reform.
- As PEM problems became more evident, additional structural benchmarks were agreed, reflecting a gradual approach from closing below-the-line accounts to ensuring timelier reconciliation and closing of the accounts.
- Staff reports consistently recommended prioritizing strengthening the capacity of public financial management.

### PEM-Related Structural Benchmarks, 1998–2002 (selected)
- ESAF (Oct. 1999 – Sept. 2000)
  - 1. Issue a government circular to curtail the creation of "below-the-line" (BLT) accounts and to impose reporting and control safeguards on existing BLT accounts. — Target date: Nov. 1999 — Met
  - 2. Comprehensive census of government arrears outstanding as of end-June 1999. — Target date: Feb. 2000 — Met
  - 3. Ensure completion by Accountant General's Office of reconciliation of its quarterly balances from September 1997 to December 1999. — Target date: June. 2000 — Met
- PRGF (Oct. 2000 – Sep. 2001)
  - 1. Establish and begin to implement a comprehensive accounting framework to monitor expenditure on poverty reduction (Structural Performance Criteria). — Target date: Dec. 2000 — Not Met
- PRGF (July 2002–July 2003)
  - 1. Agreement on a schedule for the reconciliation of the Accountant General’s cash books ands the general ledger with the accounts of the central bank, and regular updating of the general ledger to a more recent date- with a lag of two months. — Target date: July 2003 — Not Met
  - 2. Closing of public accounts for 2000–2002 by end 2003 — Target date: Dec. 2003 — Not Met
  - 3. Publish reports on the poverty-reducing expenditure — Target date: Nov. 2002 — Met

*Source: _cr0611 - 2001. However, due to shortcomings in the records with the AGD based on which these*

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