Revised -- Public Information Notice: IMF Executive Board Concludes 2005 Article IV Consultation with The Gambia

September 8, 2005

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. The staff report for the Article IV consultation with The Gambia may be made available at a later stage if the authorities consent.

On July 18, 2005, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with The Gambia.1


The Gambia's economic performance since the mid-1980s has been uneven owing to exogenous shocks, macroeconomic and structural policy slippage, poor governance, and weak institutions. The economy's vulnerability to shocks stems from a lack of economic diversification. In addition, economic performance has been constrained by policy distortions and by recurrent weaknesses in fiscal policy. Expansionary policies have increased the government's recourse to domestic bank financing, which, in turn, has raised real interest rates, increased the domestic debt burden, and tended to crowd out private investment.

In 1998, the authorities entered into a three-year program under the Enhanced Structural Adjustment Facility (ESAF), which was converted into a Poverty Reduction and Growth Facility (PRGF) arrangement. In July 2002, the Board approved a new three-year PRGF arrangement (See News Brief No. 02/74 and Press Release No. 02/32), but the first review was not completed because of weak policy implementation and governance problems. It was discovered in 2003 that The Gambia had misreported to the Fund net international reserves by US$38.8 million at end-December 2001 and failed to record US$28.5 million in government expenditures. The Executive Board concluded that The Gambia had received two noncomplying disbursements, equivalent to SDR 3.435 million each in July and December 2001 (See Press Release No. 04/49). The authorities repaid these disbursements in 2004 in four equal installments, with the last payment made ahead of schedule.

The Executive Directors urged the authorities, during the Article IV consultation in 2004, to commission a reaudit of the Central Bank of The Gambia's (CBG's) 2001 and 2002 financial statements on terms of reference agreed with Fund staff. The Directors also stressed the need for a special audit of foreign exchange transactions between 2000 and 2003. These audits have now been completed and confirm the breakdown of internal controls at the central bank that were observed during the IMF's Safeguard Assessment mission conducted in November 2003. The audit reports restate general ledger balances for external reserves for various test dates between end-December 2000 and end-December 2003, which are significantly lower than the originally recorded balances. The auditors have issued a disclaimer indicating that they were unable to express an opinion on the 2001 and 2002 accounts largely because of the lack of documentation supporting several foreign exchange transactions.

Macroeconomic performance has strengthened over the past 18 months, particularly through end-2004, in response to strong financial policies. Despite an increase in groundnut production, real GDP growth slowed in 2004 to 5.1 percent (from 6.9 percent in 2003) due to lower growth in industry and services. Inflation reached 18 percent at end-2003 and declined to 5 percent by March 2005. The central bank's rediscount rate (policy rate) was reduced by 5 percentage points from September 2004 to 29 percent in March 2005.

The overall fiscal deficit (including grants and on a commitment basis) increased to 5¾ percent of GDP in 2004 from 4¾ percent in 2003, mainly due to much higher externally-financed capital expenditures. However, the basic primary surplus more than doubled to 9½ percent of GDP, indicating a significant tightening in domestic fiscal operations. Broad money growth declined from a peak of 43 percent on a 12-month basis in 2003 to 18 percent in 2004. The nominal exchange rate has been stable since 2003 when it depreciated by 25 percent in U.S. dollar terms.

The relatively high interest rates that were necessary to reverse the deterioration in the macroeconomic environment have, however, placed a heavy burden on domestic debt service, and on credit markets. The total domestic debt stock increased from around 25 percent of GDP in 2003 to 31 percent in 2004 and domestic interest payments have risen from 4½ percent in 2003 to 5¼ percent of GDP in 2004. The tightening in domestic financial policies has also severely depressed credit to the private sector. In 2004, the stock of such credit is estimated to have fallen by 6 percent.

The external current account deficit (including official transfers) deteriorated from 5 percent of GDP in 2003 to 12 percent in 2004, partly reflecting the worsening in the balance of trade, as strong import growth was driven by the recovery in output, the surge in donor-financed capital expenditures, foreign direct investment, and higher international oil prices. Gross international reserves rose by more than US$22 million or by over 30 percent in 2004 as increased foreign inflows and a stabilizing exchange rate allowed the central bank to increase its purchases in the interbank market.

Policies, however, weakened in the first quarter of 2005. There have been significant fiscal slippages owing primarily to unbudgeted expenditures of D 101 million (¾ percent of GDP). These expenditures have led to a substantial increase in the net debt of the government. Accommodating policies by the central bank led to excessive growth in monetary aggregates. Prospects for 2005 are further jeopardized by the decision to license a monopoly quasi-public enterprise, the Gambian Agricultural Marketing Corporation (GAMCO), to market and process groundnuts. This has had a near disastrous effect on exports of processed groundnuts, as GAMCO has been unable to raise the finances to purchase what was a bumper harvest for groundnuts. The mission estimates that a substantial proportion of groundnut exports could be lost in the 2004/05 crop season.

After a long delay, the authorities recently completed the first annual progress report of the Poverty Reduction Strategy Paper covering the period July 2002-December 2003. Progress on structural reforms has been mixed. The authorities have fallen behind in their schedule to privatize the Gambia Groundnut Corporation. On the fiscal side, the National Emergency Fiscal Committee (NEFCOM) had some positive effects in ensuring greater control over expenditures. Further, steps are being taken to strengthen the public expenditure management system. A new organic budget law has been passed and the financial regulations are currently being implemented. The authorities are in the process of developing a statistical strategy to be presented to donors. However, basic macroeconomic statistics remain weak.

Executive Board Assessment

Executive Directors observed that The Gambia's economic performance in recent years was marked by inconsistent implementation of sound macroeconomic policies, poor governance, exogenous and policy-induced shocks, and inappropriate policy responses to those shocks. Directors concurred that the main medium-term challenge for The Gambia is to make a decisive break from the past "stop-go" policies, and embark on a comprehensive economic program that would establish the conditions for sustainable growth and poverty reduction. Key elements of such a program should include measures to preserve macroeconomic stability and to achieve debt sustainability. The program should also incorporate reforms aimed at promoting faster growth and poverty reduction through improvements in the investment climate, and the strengthening of public expenditure management, governance, and accountability.

In this context, Directors commended the authorities for their implementation of strong financial policies over the past 18 months, which has led to an improvement in the basic primary fiscal surplus, a reduction in inflation, the stabilization of the exchange rate, and the rebuilding of international reserves. Directors noted that the improved macroeconomic conditions had paved the way for the recent easing in interest rates.

While welcoming this progress, Directors expressed disappointment with the fiscal slippage—stemming from extrabudgetary expenditures—that occurred in the first quarter of 2005. They urged the authorities to address it by fully implementing the proposed quarterly ceilings on discretionary expenditure, improving cash management, and enforcing the public enterprises' repayment of government loans. In this process, it will be important to avoid adverse effects on pro-poor spending. Directors also urged the authorities to phase out the subsidization of petroleum products by adjusting prices and enforcing the terms of the petroleum price mechanism, bearing in mind the social implications of the adjustment. In addition, they recommended strengthening revenues by improving tax administration, and broadening the tax base by phasing out tax exemptions.

Directors were encouraged by the recent implementation of reforms to promote enhanced fiscal transparency. They welcomed the passage of the organic budget law and encouraged the authorities to finalize implementation of the supporting financial regulations. They also noted the progress being made in auditing the government accounts, and urged the authorities to intensify efforts to bring the accounts up to date.

Directors commended the progress made in reducing inflation, and stressed that further fiscal consolidation would provide room for easing monetary policy and permit further reductions in interest rates. Directors concurred with the use of broad money as a nominal anchor for prices. They welcomed the progress made to enhance the conduct of monetary policy, and encouraged the authorities to move ahead with the introduction of new instruments designed to separate monetary operations from the financing of the budget, and by adopting other key recommendations made by recent Fund technical assistance missions. Also, Directors welcomed the increased attention being paid to better coordination of fiscal and monetary management, and saw the creation of the Monetary Policy Committee and Treasury Bill Committee as important first steps in this regard. Efficient use of Fund technical assistance in public expenditure management and in the domestic and foreign operations of the central bank, together with the strengthening of the authorities' statistical capacity, should help to further improve The Gambia's macroeconomic management capacity.

Directors expressed disappointment with the continued weaknesses in internal controls at the Central Bank, and stressed the need for the prompt and effective implementation of appropriate remedial measures. In this regard, they welcomed the recent adoption by the Central Bank of an Action Plan to strengthen internal controls drawing on the report of the new external auditors. The establishment of an Audit Committee, drafting of guidelines for foreign reserves management, as well as the recent reorganization of the Bank were also welcomed. In addition, Directors encouraged the authorities to fully implement the recommendations from the recent Safeguards Assessment, including the passage of the revised Central Bank Act designed to strengthen the Bank's operational independence.

Directors observed that the fundamentals of the financial sector appear sound with adequate capitalization and high profitability and liquidity ratios. They welcomed the reduction in nonperforming loans, and urged the authorities to pursue the further deepening of the financial sector, including by enhancing the legal framework and reinforcing creditor rights.

Directors agreed that the current level of the real effective exchange rate is appropriate, and that improvements in external competitiveness should be addressed through the removal of structural bottlenecks, which currently constrain productivity.

Directors concurred that The Gambia's external competitiveness and growth prospects would be enhanced by the adoption of a comprehensive structural reform strategy designed to reduce the costs and risks of doing business in the country, and removing key structural bottlenecks in the agricultural sector. They encouraged the authorities to accelerate the privatization program, and enhance the investment climate through fiscal, judicial, and legislative reforms, as recommended by the Foreign Investment Advisory Service and the World Bank's Diagnostic Assessment of the Investment Climate in The Gambia. In this connection, strengthening institutions and improving governance would be major priorities. In the groundnut sector, Directors expressed disappointment with the decision to license a public monopoly, The Gambia Agricultural Marketing Corporation to market and process groundnuts. They noted that the authorities had agreed to license firms to compete with the Gambia Agricultural Marketing Corporation, but emphasized that it will be essential to avoid further government intervention and accelerate implementation of the sectoral strategy agreed with major donors. including the privatization of the Gambia Groundnut Corporation.

Directors concurred that clear steps would be needed as part of a staff-monitored program (SMP). Directors agreed with staff that the main elements of an SMP should include implementation of an action plan to address the external auditor's recommendations to improve internal controls, and in that regard they welcomed the authorities' intention to conduct quarterly audits of the Central Bank's foreign reserve balances. They also agreed that emphasis will need to be placed on public financial management and accountability. Successful performance under an SMP could be expected to lead to a new PRGF arrangement and debt relief under the HIPC Initiative.

Directors welcomed the ex post assessment report and generally agreed with its main findings. They identified as key lessons to be learned for future program design the importance of structuring conditionality so as to give greater emphasis to the resolution of problems in public expenditure management and in the internal controls at the central bank. A few Directors noted the authorities' view that over ambitious targets may have contributed to program failures, and they saw a possible need for greater realism and streamlining of program conditionality. Directors also observed that governance problems and insufficient commitment to reforms had hampered program implementation over the course of the last two arrangements with the Fund and emphasized the need to continue strengthening transparency in the use of public resources.

The Gambia: Selected Economic Indicators







(Annual Percentage changes, unless otherwise indicated)

Domestic economy


Real GDP





Nominal GDP





GDP deflator





Consumer price index (period average)





Groundnut production
(in thousands of metric tons)






(In percent of GDP)

External sector


Current account balance


Excluding official transfers





Including official transfers






(Annual percentage changes, unless otherwise) indicated)

Exports, f.o.b. (in U.S. dollars)





Imports, c.i.f. (in U.S. dollars)






Money and credit (end-of-period stocks)


Broad money





Credit to the private sector and public enterprises





Reserve money





Treasury Bill rate (in percent; end-of-period)






(In percent of GDP)

Central government budget 1/


Balance, excluding grants





Balance, including grants





Total expenditure and net lending





Domestic revenue





Stock of domesti debt






(In millions of U.S. dollars, unless otherwise indicated)

Current account balance


Excluding official transfers





Including official transfers






Gross official reserves 2/





In months of imports, c.i.f.






(In percent of exports and travel income)

External debt service 3/





Sources: The Gambian authorities; and IMF Staff estimates.
1/ Adjustment have been incorporated for previously unrecorded public spending and borrowing in 2001, financed by the Central Bank of The Gambia.
2/ Adjustments have been incorporated for previously unrecorded depletion of foreign exchange reserves in 2001-03, as reported by the authorities on October 28, 2003.
3/ Servicing of public external debt after HIPC grants in percent of exports and travel income. In 2001, the increase in debt service reflects in part payments to Alimenta. Any accumulation of arrears is excluded.

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.


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