For more information, see The Gambia and the IMF

Enhanced Structural Adjustment Facility
Policy Framework Paper, 1998-2000

I. Introduction
1. Until mid-1993, The Gambia had made significant progress in reducing financial imbalances, liberalizing the economy, and strengthening the basis for durable economic growth. Under the Economic Recovery Program (1985) and the Program for Sustained Development (1990), strong policies and a broad range of economic reforms were put in place, including (1) a tight fiscal policy involving improved expenditure control and a broadening of the tax base; (2) a restrictive monetary policy; (3) the strengthening of economic incentives, including the lifting of most price controls and the introduction of a market-determined exchange rate in the context of a liberalized trade and payments system; and (4) the divestiture of a number of public enterprises and the strengthening of the financial position and operations of enterprises remaining in the public domain. The implementation of these policies was supported by the international community, in particular by the International Monetary Fund with a three-year arrangement under the Enhanced Structural Adjustment Facility (ESAF) that expired in November 1991, and by the World Bank through structural and sectoral lending, including the second structural adjustment loan (SAL II), which was completed in June 1992.

2. Since mid-1993, however, the Gambian economy has suffered from a series of adverse shocks, an unduly expansionary fiscal stance, increasing structural weaknesses, and diminished private sector confidence. Moreover, the military change of government in July 1994 prompted the suspension of new project aid and the cancellation of budgetary assistance by most of The Gambia's traditional donors and creditors. Real GDP fell by 3½ percent in 1994/95 (July-June) and, although the economy recovered in 1995/96, economic growth has remained low since then. At the same time, the monetary authorities maintained a tight monetary policy, thereby containing inflation and preserving a large measure of exchange rate stability.

3. Following the completion of presidential and legislative elections in early 1997, the government took a number of corrective measures to restore economic stability and began to normalize relations with donors. In particular, the overall budget deficit (excluding grants) was brought down from 11½ percent of GDP in fiscal 1996/97 to 7¾ percent in calendar-year 1997 as a whole. In 1998-2000, the authorities are determined to take the necessary steps to achieve macroeconomic stability and establish the conditions for strong and durable economic growth. They will bring the unsustainable budget deficit down further to allow a much-needed reduction of the domestic public debt and adhere to strict demand management to keep inflation low. Furthermore, to create an environment conducive to outward-oriented private sector activities, the authorities will implement structural reforms, including an ambitious reform of external tariffs; a significant improvement of the soundness of the banking system and a deepening of financial intermediation; the modernization of the legal and regulatory framework for economic activities; a strengthening of public resource management and good governance; and a resumption of public enterprise reform. The economic program will also involve the implementation of ambitious plans to improve education and health, as well as the living standards of the most disadvantaged social groups. The Gambia seeks the support of the donor community for the implementation of this new program of macroeconomic stabilization, accelerated growth, and sustainable development.


II. Economic Developments During the Period 1994-97

4. During the last four years, the economic and financial situation in The Gambia deteriorated significantly as the economy was hit by a number of adverse external and internal shocks. The impact of these shocks was compounded by policy slippages, notably in the fiscal and structural areas. Real GDP growth during 1993/94-1996/97 averaged only 1½ percent. Thus, with population growing at some 3 percent, real per capita income declined by some 6 percent over the period. Preliminary information for calendar-year 1997 indicates that real GDP growth rebounded to almost 5½ percent from less than 1 percent in fiscal 1996/97, reflecting a weather-related recovery of groundnut production from the record-low crop in 1996 and a further strong expansion in the tourism and related services sectors. The tight monetary policy stance maintained over the last four years helped to contain inflation below 5 percent and preserve a large measure of exchange rate stability, but at the cost of very high real interest rates. Average inflation in 1997, as measured by the consumer price index (CPI), remained low at 2¾ percent.

5. Following the reinforcement of border and transit trade controls by Senegal in 1993, The Gambia's reexport trade shrank appreciably. The cumulative decline in reexports from 1992/93 to 1995/96 was 32 percent, and recovery since then has been slow. In addition, the military coup d'état in July 1994 prompted the suspension or cancellation of assistance by most traditional donors, while negative travel advisories by key tourist-source countries caused receipts from tourism to drop by 60 percent in 1994/95 from the previous fiscal year. Although the tourism industry recovered in subsequent years, the record earnings level of 1993/94 was only slightly surpassed in 1997.

6. The fiscal position deteriorated sharply, in particular during the transition to presidential and legislative elections, resulting in an unsustainable upsurge of the budget deficit (excluding grants) from 2¼ percent of GDP in 1992/93 to 12 percent in 1995/96 and 11½ percent in 1996/97. Total government revenue fell from 23¾ percent of GDP in 1992/93 to 17¾ percent in 1995/96, reflecting the downturn in economic activity, the shrinking of the reexport trade, the drop in tourist arrivals, and the granting of import duty exemptions. This downward trend was partly reversed in 1996/97 as total government revenue increased to almost 19½ percent of GDP, mainly as a result of higher tax receipts from a broadening of the tax base and better taxpayer compliance. Total government expenditure and net lending was contained until 1994/95 at less than 26 percent of GDP despite an increase in the wage bill of 1 percentage point of GDP. However, total government spending in 1995/96 and 1996/97 rose to more than 30 percent of GDP, owing largely to sizable foreign-financed, project-related extrabudgetary expenditures, a significant increase in capital spending, and a further expansion of the wage bill.
1 During 1997, which marked the transition from a fiscal-year to a calendar-year budget cycle beginning in 1998, fiscal policy was tightened appreciably, and the budget deficit (excluding grants) was reduced to 7¾ percent of GDP. Although there were slippages during the last quarter of the year, total government expenditure and net lending was brought down from 30¾ percent of GDP in 1996/97 to 27 percent in 1997. Total government revenue remained at 19¼ percent of GDP, despite efforts to strengthen the tax administration and further improve taxpayer compliance.

7. To finance its fiscal deficits from 1994/95 onward, the government has borrowed heavily from the domestic banking and public enterprise sectors by utilizing the proceeds of the issuance of treasury bills. Faced with the mounting fiscal imbalances, the Central Bank of The Gambia sold large amounts of treasury bills to absorb part of the excess reserves of the commercial banks. As a result, the total outstanding stock of domestic debt increased from 13¼ percent of GDP at end-1994 to 22½ percent by end-1997. As the treasury bill rate remained at the high level of 16 percent, domestic interest payments rose steeply from 11½ percent of total government revenue in 1994/95 to 19½ percent in 1997. As a result, expenditure in the priority areas of education, health, and infrastructure came under considerable pressure. Moreover, the resulting high real interest rates led to a severe crowding out of private sector investments, contributing to low economic growth.

8. Until 1996, broad money growth had remained broadly in line with the increase in nominal GDP. In 1997, however, the growth rate of broad money accelerated sharply to 22¼ percent from 6¼ percent in 1996. Credit to the private sector, notably in the trade and tourism sectors and crop credit, expanded by 27 percent, which suggests that confidence has begun to return after the elections. At the same time, there was a further increase of net bank credit to the government, as the fiscal situation remained weak. The net foreign assets position of the banking system also improved by almost 6½ percent of the beginning-of-period broad money stock, owing partly to higher receipts from tourism. Interest rates changed little over 1994-97 and continue to be significantly positive in real terms. The spread between deposit and lending rates also remained quite large, with interest rates in the range of 9-15 percent for deposits and 19-25½ percent for loans. The large spread is the result of a number of factors, including the oligopolistic structure of the banking sector and the narrowness of the domestic money market; the weakness of the commercial banks' loan portfolio; the lengthy legal process facing banks when liquidating loan collateral; and the resulting risk-averse attitude of the banks.

9. The soundness of the commercial banking system improved during 1997 but remained weak as nonperforming loans, in particular to the groundnut and tourism sectors, amounted on average at year's end to 27 percent of the banks' loan portfolio; meanwhile, actual provisions covered on average only 46 percent of provisions required against the outstanding amount of nonperforming loans. At the same time, the commercial banks were in compliance with the liquid asset and capital adequacy requirements, except for two smaller banks. The authorities are aware of the need to strengthen the soundness of the banking system, including through stricter enforcement of the provisioning requirements regarding nonperforming loans.

10. The external current account deficit (excluding official transfers) widened from 13¾ percent of GDP in 1993/94 to more than 20 percent in 1995/96, reflecting the decline in reexport trade, falling receipts from tourism, and higher imports for foreign-financed public works. Subsequently, the current account deficit narrowed again to 11½ percent of GDP in 1997 as imports for public construction fell sharply. The volume of domestic exports fell by almost 11 percent in 1997, owing mainly to a drop in groundnut shipments following the disappointing 1996 crop year. At the same time, the terms of trade improved significantly, and the services account turned positive as tourism receipts continued to rise. All external debt service obligations were met in a timely fashion. However, the overall balance of payments position weakened in 1997 from 1995/96, because of substantially lower disbursements of project-related loans. As a result, gross official reserves stabilized at end-1997 at about SDR 70 million, equivalent to 5¼ months of import cover. The CPI-based real effective exchange rate of the dalasi has remained relatively stable in recent years, but it is estimated to have appreciated by about 4½ percent in 1997. Between December 1996 and February 1998, the dalasi depreciated by 6¾ percent against the U.S. dollar and 8 percent against the pound sterling, but it appreciated by 6 percent vis-à-vis the CFA franc. The spread between the interbank and the parallel market exchange rates remained low at about 2 percent.

11. On the structural front, serious weaknesses have contributed to the deterioration of the economic situation. Government control over the operations of public enterprises has slipped, and the public enterprise sector's involvement in the financing of some government investments has hampered the efficiency of resource allocation. The Gambia Telecommunications Company (GAMTEL) has undertaken a television project that is financed by an external loan, for which the debt service constitutes a considerable financial burden. The National Water and Electricity Company (NAWEC) continued to experience difficulties in providing an adequate and regular supply of low-cost electricity. However, an increase in capacity was recently realized with private sector participation. Finally, the groundnut sector is facing serious difficulties, as the Gambia Cooperative Union (GCU) is crippled by nonrepayment of agricultural loans as a result of past mismanagement, and the provision of seeds, fertilizer, and extension services has been inadequate.


III. Strategy and Objectives for 1998-2000

12. Although the government has started to take corrective actions, it recognizes that much remains to be done to restore macroeconomic stability and lay the foundation for sustained, strong economic growth. A number of major financial and structural bottlenecks continue to constrain the economy, which is still highly vulnerable to adverse external shocks. In particular, the large fiscal deficit and domestic public debt keep real interest rates at a prohibitive level for most private investment; the number of import tariffs (31) and the maximum duty rate (90 percent) are too high; government expenditure control and public investment programming remain weak; the soundness of the banking system continues to be worrisome, and financial intermediation is limited; the cumbersome legal and regulatory framework for private sector activity leads to high transaction costs; energy costs are among the highest in the region and hamper the development of the industrial sector; and the groundnut sector is in decline. In addition, economic development is held back by high population growth, a strong rate of urban migration, inadequate investment in human capital, and the degradation of the environment. The lessening of these bottlenecks will require strong macroeconomic policies and far-reaching structural reforms, as well as additional support from the international donor community.

13. The government of The Gambia is fully committed to addressing forcefully the above-mentioned constraints in order to increase real per capita income and make significant inroads on poverty. Consistent with its long-term development program formulated in the Vision 2020 document, the government will adhere to a strategy that emphasizes achieving macro-economic stability, maintaining an appropriate, market-based incentive structure, and stimulating private sector activities. In the period ahead, the focus will be on (1) consolidating government finances through a further reduction in the budget deficit and an improvement in the structure of government revenue and expenditure, including a reduction of import tariffs; (2) resuming and deepening structural reforms tailored to encourage private sector development, attract foreign investment, and facilitate economic diversification; (3) strengthening the institutional capacity of the public administration; and (4) implementing a comprehensive social agenda, especially in the education and health sectors. The government will follow closely the progress made toward regional integration among the member countries of the West African Economic and Monetary Union (WAEMU), with a view to safeguarding The Gambia's competitive position. In addition, the monitoring of economic developments and policy implementation will be strengthened. To this end, the High-Level Economic Committee will meet monthly to review developments and decide, should the need arise, on appropriate corrective action to ensure attainment of the program targets.

14. In the fiscal area, further progress toward financial viability is needed, given the unsustainable burden of the domestic public debt and the strong reliance on external trade taxes. A main focus of the medium-term fiscal strategy will therefore be on improving government domestic revenue performance to compensate for the lower customs revenue that will arise from the envisaged reduction and rationalization of import tariffs. Government expenditure will also need to be strictly contained and its composition prioritized in order to limit the share of the wage bill and low-priority outlays while providing adequate resources for essential social services, the maintenance of basic infrastructure, and public investment.

15. On the structural front, the government will decisively improve the environment for private sector activity. The main areas for action will include (1) streamlining business regulations and improving the legal and judicial environment for economic activities, including the investment incentive system; (2) deepening financial intermediation and upgrading the soundness of the banking system through strengthening of the supervisory regime and its legal framework; (3) reforming public administration to foster good governance in the provision of public services; (4) resuming public enterprise reform; (5) reforming the energy sector; and (6) strengthening the agricultural sector, including the rehabilitation of the groundnut sector. A summary of the government's policies under the economic program is provided in
Table 1.

16. In line with this overall strategy, and based on the projected inflows of external assistance and the medium-term outlook for the external environment, the main macroeconomic objectives of the program for 1998-2000 are to (1)  achieve real GDP growth of 4½-5 percent a year, following the projected growth of real GDP of some 3¾ percent in 1998; (2) keep annual inflation, as measured by the CPI, at about 3 percent; (3) reduce the external current account deficit (excluding official transfers) from 11½ percent of GDP in 1997 to less than 10 percent by 2000; and (4) keep gross official reserves above five months of import cover (Table 2). The expansion of economic activity is expected to result mainly from a further recovery in agricultural production, made possible by the planned rehabilitation of the groundnut sector, assuming normal weather conditions; a further expansion of activities in the tourism sector and the strengthening of its linkages with the rest of the economy; and a gradual revival of the reexport trade following the recent reopening of the border with Senegal. To achieve these objectives, gross investment is targeted to increase from 17½ percent of GDP in 1997 to 20¾ percent in 2000. In particular, the implementation of the above-mentioned measures to create a better business climate should contribute to an increase in nongovernment investment of some 4½ percentage points to 13¾ percent of GDP by 2000 while improving its efficiency. At the same time, the gross domestic savings rate would need to rise from 6¼ percent of GDP in 1997 to 11½ percent by 2000, largely on account of the targeted increase in government savings.


IV. Macroeconomic Policies

A. External Policies

17. A major objective of the economic program is to better integrate The Gambia into the world economy while sustaining its external position. To this end, the authorities are convinced of the need to rationalize the import tariff structure by significantly reducing the number of import duties and reducing their rates. Beginning in 1999, The Gambia will introduce a strongly simplified import tariff structure, with duty rates ranging from 0 percent to less than 20 percent. The zero-duty rate will be applied to a limited number of essential commodities only. At the same time, all duty exemptions not required by international treaties will be abolished, and a limited number of excise taxes (on alcohol, tobacco, and vehicles) introduced to dampen the negative impact on government revenue. Before deciding on the implementation of the tariff reform in the context of the 1999 government budget, the authorities will prepare a study on the modalities and quantitative impact on government revenue, in consultation with the Fund and the World Bank. Given the geographic location of The Gambia, the new import duty structure will take into account the planned tariff reform in the WAEMU's member countries. In line with the reform, the authorities will reduce, as of July 1, 1998, the maximum duty rate from 90 percent to 25 percent, except for alcohol, tobacco, and vehicles, and reduce the number of import duties from 31 to 19. This action would lower the unweighted average duty rate (excluding petroleum products) from 13½ percent in 1997 to 13 percent on a full-year basis in 1998.

18. The external current account deficit (excluding official transfers) is targeted to narrow further toward levels that can be financed by net inflows of private capital and concessional external project aid. This will facilitate the attainment of the target for gross official reserves of above five months of import cover. Such an official reserve position is considered necessary to maintain market confidence in The Gambia's liberal exchange and trade system, which, in particular, is free of restrictions on the making of payments and transfers for current international transactions, by providing a cushion for potential adverse exogenous shocks. The flexible exchange rate policy will be continued in the context of the interbank exchange market. With the emphasis of financial policies on keeping inflation low and comparable with that in trading-partner countries, the nominal and real effective exchange rates are expected to remain broadly stable.

B. Fiscal Policy

19. To increase government savings and bring about a much-needed stabilization and then reduction of the government's domestic debt, fiscal policy will aim at reducing the overall fiscal deficit (excluding grants) from 7¾ percent of GDP in 1997 to 4 percent in 1998, and further to 2 percent by 2000. Against the backdrop of the significant reduction in import tariffs, attainment of this objective will require a sizable increase in domestic government revenue collection, as well as the strict control of government expenditure. During the program period, total government revenue is thus targeted to increase by 1 percentage point of GDP, while total government expenditure and net lending should decrease by 5 percentage points of GDP. Prudent cash-flow management should allow a significant reduction in the stock of treasury checks in transit (float) at year's end and prevent any accumulation of domestic or external payments arrears. In this context, the authorities could gradually relax monetary policy, allowing real interest rates to fall while keeping inflation under control and without weakening the official external reserve position.

20. Steps will be taken to significantly increase domestic revenue, with a view to largely offsetting the potential loss of revenue resulting from the planned tariff reform, the nonrecurrence of exceptional capital gains tax receipts in 1997, and the allocation of the airport levy to the Airport Authority. At the tax department, these actions include the expanded application of the single taxpayer registration number; perseverance with the control of taxpayers to further improve compliance; increased tax coverage of the self-employed and small-scale enterprises; and the payment of the tax on fringe benefits at parastatals by employers instead of employees. Furthermore, the sales tax unit at customs will be strengthened; the sales tax will be extended to cover private professionals; and an excise tax will be introduced for selected products that would benefit from the tariff reduction (alcohol, tobacco, and vehicles). At customs, the functioning of the computerized customs information system (ASYCUDA) will be improved; the control of customs declarations will be strengthened; and all duty exemptions will be abolished, while those explicitly provided for by international agreements would be granted only through a tightly controlled system of treasury checks. During the program period, the authorities intend to establish a semi-autonomous revenue board with a performance-based pay structure and independent auditing. Finally, beginning in 1998, government service charges have been raised by 5 percent and the full compliance of parastatals as regards their corporate tax, interest payments, and dividend obligations will be enforced.

21. To achieve the targeted fiscal adjustment, the government is fully committed to implementing a very tight spending policy, predicated on adhering to strict budgetary discipline. In view of the spending overruns during the last quarter of 1997, total government spending will be kept below the level approved in the 1998 budget. It is now envisaged that total government expenditure and net lending will be reduced from 27 percent of GDP in 1997 to 23½ percent in 1998, and to 22 percent in 2000. The wage bill and all low-priority outlays, including on travel, will be strictly contained in order to provide adequately for health, education, and the public investment program (PIP). In particular, the wage bill for 1998 provides for neither a general wage increase nor for net recruitment, with the exception of the hiring of teachers and nurses. Spending on health and education is targeted to increase in line with the recommendations of the public expenditure reviews in these sectors. At the same time, sufficient budgetary allocations will be made to the Gambia Local Fund to enable the adequate provision of counterpart funds in foreign-financed investment projects. The government will take the necessary steps to strengthen the budgeting and expenditure control procedures, as well as the timely monitoring of fiscal developments. In particular, all automatic spending authorizations (below-the-line accounts) that refer to preceding budget exercises will be withdrawn. Finally, the authorities are committed to establishing full budgetary transparency and to refraining from any extrabudgetary spending.

22. Public investment in recent years has suffered from the suspension of the PIP as of 1994/95. Therefore, the government will attach the highest importance to improving the programming, budgeting, and monitoring of public investment, giving priority to investments in the directly productive sectors, infrastructure, and human resources development. The government will adopt before end-December 1998, in consultation with the World Bank, a three-year rolling PIP for the period 1999-2001, in the context of a viable financing plan and taking into account recurrent cost implications. With World Bank assistance, the government will also develop a three-year rolling PIP system with a focus on (1) establishing a comprehensive framework for preparing and implementing the PIP, consistent with sound macroeconomic policies; (2) aligning the PIP with clearly defined sectoral development priorities on the basis of rigorous project analyses and effective aid coordination; and (3) developing operational materials, including manuals. The government will conduct annual PIP reviews, in consultation with the World Bank.

C. Monetary Policy and Financial Sector Reform

23. The main objective of monetary policy will continue to be the containment of annual inflation at about 3 percent while maintaining an adequate level of gross official reserves. The exchange rate will continue to float freely, and the central bank will limit its interventions to smoothing out seasonal fluctuations and to meeting its external reserves objective. The monetary program aims at keeping broad money growth in line with nominal GDP. Accordingly, the rate of growth of broad money is projected to decline from some 22 percent in 1997 to less than 8 percent in 1998-2000. The demand for credit to the private sector is expected to expand at rates exceeding the growth rate of broad money, as the targeted reduction in the domestic indebtedness of the government is expected to lead to a gradual decline in interest rates.

24. The monetary authorities will follow closely the excess reserves of the banking system and continue to rely on indirect instruments, in particular auctions of treasury and central bank bills. To enable the central bank to sterilize excess reserves more effectively, more reliance will gradually be placed on the issuance of central bank bills for monetary policy purposes. Liquidity management will aim at ensuring that short-term domestic interest rates remain positive in real terms, with appropriate differentials vis-à-vis interest rates abroad. During the program period, the central bank will substantially improve the functioning of primary and secondary markets. Regarding the primary market, more frequent auctions of wider maturities of the eligible paper will be held, the current, paper-based book-entry system will be computerized to lower the cost of secondary trading, and noncompetitive auctions will be introduced for selected participants. To develop secondary markets, the central bank will limit the period open for the rediscounting of treasury bills, start signaling changes in money market conditions by adjusting its rediscount rate between auctions, and initiate the establishment of a formal secondary market in treasury bills, interbank deposits, and foreign exchange. The monetary authorities will refrain, however, from acting as a market maker. Moreover, after sufficient preparation and the strengthening of the liquidity management framework, the central bank will gradually shift the thrust of its liquidity operations from primary auctions to short-term repurchase agreements with commercial banks. In the area of secondary market development, the authorities will request technical assistance from the Fund.

25. To increase the efficiency of financial markets further and spur the development of secondary markets, and in line with the 1994 Fund technical assistance report on improving financial markets and monetary policy implementation, reserve requirements will be unified, liquidity requirements will be gradually reduced, and compliance with both regulations will be required on an average biweekly, rather than daily, basis. In addition, interbank deposits will be excluded from the deposit base used for reserve calculation. Financial market transparency will be promoted through timely publication of interest and exchange rates, and of commercial banks' fees and charges. Finally, the central bank will allow commercial banks to accept foreign currency deposits, conditional on their financial situation and the observance of the related supervisory requirements and foreign exchange exposure limits, which will replace the current ceilings on foreign exchange holdings by commercial banks in early 1999.

26. The Gambian financial sector has remained highly concentrated in recent years, and the government views an expansion in the number of financial institutions, including banks, as essential to enhancing competition within the sector and stimulating financial intermediation. The failed Meridien Bank, control of which was assumed by the central bank in 1995, was restructured and recapitalized as the Trust Bank and will be offered for sale during 1998. The monetary authorities recognize the importance of leasing companies, as well as of informal loan and savings schemes (such as the Village Savings and Credit Associations (VISACAs)). Of the 23 VISACAs currently operating, 6 are registered with the central bank, which will continue to offer assistance by disseminating recommended operating rules and organizing education campaigns.

27. The monetary authorities consider the strengthening of banking supervision and the regulatory framework essential to improving the soundness of the deposit money banks and enhancing financial sector competition. During 1998-99, the focus will be on accelerated write-offs of long-standing bad loans and increased provisioning to achieve full compliance with the supervisory regulations. With the completion of an audit, the authorities are reaching a settlement with the GCU and a major commercial bank on a significant amount of nonperforming loans to the groundnut subsector.
2 In addition, the central bank will agree with the banks on a short-term program to build up provisions. Appropriate penalties, such as limiting the access to rediscount facilities, will be introduced during 1999 for those banks that do not comply with the provisioning regulations and capital adequacy requirements. The staff of the banking supervision department at the central bank will be expanded in order to increase the frequency to at least once a year of on-site examinations of commercial banks, which will be held according to a fixed timetable. Moreover, to simplify bankruptcy and collateral liquidation procedures, a commercial chamber in the High Court will begin operations before end-October 1998. Finally, the central bank will develop a prudential regulatory framework for the insurance industry.


V. Structural and Sectoral Policies

A. Private Sector Development

28. The government considers the private sector, both domestic and foreign, as the engine of sustainable growth. In particular, the authorities are committed to maintaining the liberal price system; streamlining procedures for the registration of businesses ("one-stop shop"); and establishing a public and private sector partnership forum, while strengthening the role of an independent Chamber of Commerce. The authorities are also preparing a reform of the system of investment incentives by integrating it into the tax code and putting in place facilities for accelerated depreciation and loss compensation, and, for new enterprises, by phasing in the corporate tax over a period of three years. Such a system could be implemented by end-1998, following the completion of a study by United Nations experts, and in consultation with the Fund and the World Bank.

29. The government is committed to improving the legal and judicial environment for private sector activities, and to strictly enforcing the rule of law. It will approve in 1998 new business-related legislation, including the Companies Act, the Contract Act, the Partnership Act, and the Business Registration Act, with a view to modernizing the legal framework and ensuring the transparency of business transactions. Furthermore, the government will adopt in 1999 an improved labor law, allowing for more flexibility in the labor market. Adequate budgetary allocations for the administration of justice will be provided, and an action plan will be developed to improve courtroom productivity and reduce the backlog of pending civil and commercial cases. Complementary actions include the modernization of company and court registry management, and the better training of judges in commercial law. Finally, the authorities will follow closely the progress made in the harmonization of the general business law in Africa (OHADA Treaty).

B. Public Sector Management

30. To provide public services more effectively, the government will renew its civil service reform efforts, with a view to establishing a leaner, better-focused, and better-motivated civil service. Savings derived from possible reductions in the size of the public service could then contribute to improving the remuneration of qualified personnel. In this regard, the government will continue the staff inspection program; base civil service income policy on the availability of budgetary resources, economy-wide productivity gains, and changes in the cost of living; and develop a new job evaluation and merit-based pay system.

31. To strengthen expenditure budgeting and control, as well as the capacity for policy design and implementation, the government is committed to (1) adopting and implementing the new procurement code; (2) computerizing expenditure control and the Accountant General's Department; (3) conducting annual sectoral public expenditure reviews; (4) allocating adequate resources for the preparation of economic statistics, notably the national accounts and the balance of payments; and (5) continuing training efforts to improve economic management capacity. In the medium term, the government will develop and implement a framework for administrative reform and a strategy for institutional capacity building, with technical assistance from the World Bank and other donors. These programs will be aimed at improving, on a sustainable basis, the efficiency of the civil service; increasing institutional capacity; and enhancing the probity of public services by combating corruption. In 1998, the government will also adopt a program on good governance, including local government reform and decentralization, which will be implemented during the program period.

C. Public Enterprise Reform

32. During the 1985-93 period, the number of public enterprises was reduced from 19 to 7, of which 6 enterprises had signed three-year performance contracts. Subsequently, however, the performance contract system was abandoned, which adversely affected the financial relationship between the sector and the government, and two management-lease contracts were terminated. The government is committed to continuing the reform process in the public enterprise sector, based on the following strategy: (1) regularize the financial relations between the government and a number of key public enterprises by signing memoranda of understanding as a framework for evaluating performance and good governance; (2) develop a regulatory framework to promote competition in the area of public utilities, including telecommunications, increase private sector participation, and ensure consumer protection; (3) support commercialization of public enterprises by eliminating subsidies and transfers, and ensuring the autonomy of boards of directors; and (4) adopt by end-November 1998 a new divestiture strategy, including the establishment of a legal framework to ensure transparency.

33. The government has signed six memoranda of understanding at end-March 1998 with the Gambia Ports Authority (GPA); NAWEC; the Gambia Civil Aviation Authority (GCAA); the Social Security and Housing Finance Corporation (SSHFC); the Gambia Public Transport Corporation (GPTC); and GAMTEL. Also, the government will settle the cross debts with the parastatals before end-May 1998, and it will adopt a timetable for settling the remaining debts. In 1998, the Trust Bank will be offered for sale. The divestiture of the Atlantic Hotel and the sale of the government's share in Novotel will be prepared before end-1999. In addition, the government printing office and the post office will be transformed from government departments into autonomous organizations. The strategy for greater private sector involve-ment in the operation of the port, airport, and GAMTEL will be developed and implemented in the context of the Gateway project, with the World Bank's assistance. The strategy for NAWEC will form part of an energy sector reform plan to be developed in consultation with the World Bank. The Department of State for Finance and Economic Affairs (DOSFEA) will continue to serve as the central coordinating agency in charge of monitoring public enterprises, and it will improve the reporting of comprehensive data on their financial position, including foreign accounts, on a semiannual basis. Finally, the capital budgets of public enterprises will continue to require prior approval by DOSFEA.

D. Agriculture and Natural Resources

34. The government's medium-term strategy for the agriculture and natural resources sector aims at raising rural incomes through diversified production; ensuring food security; conserving the natural resource base; and generating incremental export earnings. Consistent with these objectives, sector policies and programs will continue to emphasize the creation of an enabling environment for the private sector, the stimulation of agricultural credit schemes, and the stemming of rural-urban migration. The government will continue to (1) implement market-based pricing policies for all inputs and outputs; (2) foster the private sector's role in the provision of inputs and services; (3) strengthen local governments, community groups, farmers' organizations, and women's groups to take charge of irrigation systems and local infrastructure; (4) strengthen and streamline extension and research services, focusing specifically on a farming-system approach; (5) promote the production and marketing of high-value products (e.g., vegetables, fruits, fish, and shrimp) for urban, tourist, and export markets; (6) promote upland production, including of sorghum, cassava, and maize, to help meet food-security needs; (7) establish a conducive environment for the development of rural financial systems, including microcredit financing; (8) allocate adequate resources to develop basic rural infrastructure; and (9) carry out the institutional reforms and develop the human resources necessary to facilitate broad-based participation in the development process, including land reform.

35. The government is committed to implementing determined actions to rehabilitate the groundnut subsector, with assistance from the European Union. Particular emphasis will be placed on reaching an agreement among all parties concerned on settling the large stock of nonperforming agricultural loans (amounting to some D 41 million) outstanding between the GCU and a commercial bank. In this context, the GCU will be liquidated. Within the framework of the Agribusiness Service Plan, steps will be taken to maintain producer prices in line with world market prices; promote the availability and distribution of high-quality seeds and fertilizers; strengthen research and extension services; and gradually develop a new, autonomous agricultural credit system, strictly managed on commercial terms.

36. To increase production, employment, and exports of the still underutilized fisheries subsector, the government will continue to foster a greater role for the private sector. To this end, the government's policy will seek to (1) build the capacity to regulate and monitor industrial fishing to optimize exploitation in a sustainable manner in the exclusive economic zone; (2) rationalize the issuance of fishing licenses; (3) support artisanal fishermen and groups of women fishmongers to increase productivity and improve market access; (4) encourage sustainable community management of small-scale fisheries; and (5) encourage the development of fish and shrimp farming. In addition, the government will update a study to assess the feasibility of establishing a fisheries port.

37. The government is keenly aware of the need to manage natural resources and protect the environment in order to sustain long-term economic growth. The key environmental issues include inadequate management of renewable and nonrenewable natural resources; forest depletion through bushfires; rapid population growth; and growing urban environmental problems, including inadequate sanitation. The government will continue to implement the National Environmental Action Plan in order to (1) build national capacity to regulate and monitor the rational utilization and management of natural resources and punish misuse; (2) strengthen land and tree tenure security for communities and individuals; (3) enforce actions to control bushfires, including education and community participation; and (4) formulate and implement programs to manage coastal resources, including protection against sand mining along the coastline.

E. Industry and Tourism

38. The manufacturing sector is small and little diversified. Private investment in manufacturing has been limited, focusing on import substitution activities for the narrow domestic and regional market. To foster private investment in export-oriented activities in the context of the Gateway project, including an industrial estate with agroprocessing facilities, the government will introduce legal, regulatory, and incentive frameworks for reexports and for the establishment of an export processing zone (EPZ) at the port and airport of Banjul; in connection with the EPZ, greater flexibility in the labor legislation governing the port of Banjul will be introduced.

39. Although vulnerable to external shocks, tourism is a dynamic sector in the economy, with considerable potential for further growth and employment creation. The government assigns high importance to the creation of a conducive environment for private sector investment. In addition, the government will continue to allocate budgetary resources, along with increasing private sector contributions, to the marketing of The Gambia as a tourist destination; to improve the incentive system to encourage private hotels and restaurants to enhance the quality of services; and to review the use of the tourism development area so as to allow the construction of new hotels and conference facilities. The government will also assign high priority to improving the sanitation infrastructure in the greater Banjul area, and to developing human resources.

F. Telecommunications, Energy, and Transport

40. To increase the access to, and reduce the cost of, telecommunications in The Gambia, the government will establish a regulatory framework to deregulate the sector and increase private sector participation in the industry, with the assistance of the World Bank. In the meantime, the government will restructure GAMTEL by separating its telecommunications business from the radio and television activities. In addition, to alleviate the current and debt-service costs for GAMTEL's broadcasting operations, a levy on receivers will be introduced. The government will also build its capacity to regulate and monitor the technical aspects of the industry.

41. The government is determined to increase, in an economic and environmentally sound manner, the supply of electrical power, petroleum products, and household fuels in support of more rapid economic growth and an improved quality of life for the Gambian population. In 1998, the government will prepare an energy sector strategy with World Bank assistance. The strategy will seek to promote measures to reduce the cost of energy and eliminate monopolies and oligopolies in the fuelwood trade and in the petroleum and electricity sectors.

42. With regard to electrical power, the government is committed to further improving the operations and financial management of NAWEC, in order to augment its generating capacity and rehabilitate and extend the transmission and distribution network. The government will establish the regulatory framework for the sector, with a view to increasing competition and to further opening up the capital of NAWEC to a strategic partner. With regard to petroleum products, the government will develop its regulatory capacity while allowing the private sector to continue to play the key role in the subsector. To foster competition, the government will improve the legal framework and incentive regime, including the guarantee of open access to petroleum storage facilities. The government will also increase its capacity to regulate and monitor the technical aspects of the industry, in particular with regard to safety standards for unloading, storing, and distributing of petroleum products. Finally, the authorities will complete, before end-June 1998, a study on the price and taxation structure of petroleum products with a view to adjusting retail prices to changes in world market prices, while safeguarding an adequate level of government revenue.

43. The energy policy will seek to reduce the heavy dependence on fuelwood by introducing more efficient cooking stoves; expanding the sustainable production of bio-energy sources; implementing a sustained program of forest regeneration and afforestation; and introducing petroleum fuel substitutes for fuelwood, taking into account cost and access considerations. To this end, the management of forestry resources will be transferred to local communities. Finally, the government will promote the use of solar energy in hotels and public buildings.

44. Deficiencies in road maintenance have, over the years, led to a deterioration of the national road network. The government will adopt an effective road maintenance policy and establish a Highway Authority based on recommendations of a 1997 study. In addition, the government will adopt a national transport policy, with a view to setting up the regulatory framework and establishing investment priorities in the sector. The government will seek external concessional aid for this purpose, in line with the PIP project selection criteria. In the postal subsector, the government will promote the private sector's role in providing inland package delivery and pickup services.


VI. Human Resource Development

A. Population and Health

45. Considerable progress has been achieved in enlarging the scope of the primary health care program and the expanded program of immunization by reaching a greater number of communities. The government's policy objective is to consolidate achievements in the provision of primary and secondary health services so as to improve the delivery of, and access to, health services, particularly for vulnerable groups. To address major challenges facing the health sector, the government intends to (1) improve the management and efficiency of health delivery services within the context of its decentralization policy; (2) promote greater community participation in health policy development, and in the financing and management of health care units; (3) promote collaboration with nongovernmental organizations (NGOs); (4) enhance health facilities and medical equipment and stimulate the distribution and use of generic drugs; (5) emphasize human resources development, including nurse-training programs; and (6) promote the provision of tertiary health care services by the private sector and greater cost sharing. Health promotion through information, education, and communication campaigns will also be emphasized.

46. The government recognizes, based on the preliminary outcomes of the public expenditure review (PER) in the health sector, that distortions in intrasectoral resource allocation have favored the tertiary level of care at the expense of priority primary health care objectives. To address this issue, the government will implement the health PER recommendations in consultation with the World Bank; ensure that budgetary allocations to primary and secondary health care will, at a minimum, be preserved in real per capita terms; gradually phase in additional health facilities, including the Farafenni and Bwiam hospitals, based on the availability of bilateral technical cooperation to provide equipment and health specialists at minimal cost; ensure further cost-saving measures and cost recovery in the hospital sector; and promote the development of mutual health insurance organizations.

47. The high rate of population growth and the low level of family planning are serious factors hindering The Gambia's socioeconomic development (
Table 3). The current population growth rate is estimated at 3 percent, and the total fertility rate has remained high. The government recognizes the macroeconomic and social implications of these indicators and is fully committed to enlarging the scope of family planning services and ensuring the integration of these services into the primary health care system.

B. Education

48. The government will continue to implement the National Education Policy (NEP) for 1988-2003, which aims at providing educational opportunities for all its citizens. The recently enhanced and extended NEP aims at the provision of a nine-year basic education for all, especially the poor and girls, and at an improvement in learning outcomes. To this end, the NEP targets, by the year 2006, a 98 percent gross enrollment ratio in primary education (grades 1-6), and a gross enrollment ratio of 70 percent in grades 7-9. These objectives are partly based on the ongoing trend, which shows that the primary gross enrollment ratio rose to 70 percent in 1996/97 from 65 percent in 1994/95.
3 To improve learning outcomes, the policy aims at making sufficient textbooks and teaching materials available to children and upgrading teacher education and the curriculum.

49. Considerable progress has been made in the 1990s in increasing budgetary resources for education. As a result, the share of education in the recurrent budget rose from about 15 percent in 1990/91 to 21 percent in 1996/97. However, student-teacher ratios are low, and inadequate resources are spent on instructional materials, compared with expenditure on scholarships for tertiary education, school bus services, and the school feeding program. Based on the preliminary outcomes of the public expenditure review in the education sector, the government will undertake measures to rationalize expenditure at all levels of education; increase student-teacher ratios; lower the cost to parents of basic education; involve students and businesses in financing vocational and technical training; and introduce a management information system. The government will proceed prudently with the development of tertiary education by upgrading the Gambia Technical Training Institute, the Management Development Institute, and the Gambia College.

C. Poverty Alleviation

50. The government attaches high priority to poverty alleviation. The Strategy for Poverty Alleviation (SPA), adopted in 1994, is based on macroeconomic and sectoral policies aimed at promoting equitable economic growth and improving social services to the poor. The strategy, endorsed by the donor community at the 1994 roundtable meeting, comprises four pillars: (1) enhancing the productive capacity of people; (2) improving access to, and quality of, social services; (3) building capacities at the local level; and (4) promoting participatory communication. In the context of the SPA, the government will emphasize the provision of public services to the poor and a national dialogue on poverty alleviation. To facilitate the national dialogue and channel SPA resources to the beneficiaries, the government has established the Strategy for Poverty Alleviation Coordination Office (SPACO) at DOSFEA. The authorities will focus on building the capacity of SPACO with donor assistance; fostering local institutional capacity to identify and implement development programs and projects; and establishing and monitoring poverty indicators.


VII. Financing Requirements and Debt Sustainability

51. The above-described adjustment and reform strategy, including the envisaged trade reform, is aimed at improving The Gambia's competitiveness and integration into the world economy while ensuring its medium-term financial viability. The volume of total exports is expected to grow on average by 6½ percent annually during 1998-2000, in light of a strong recovery of groundnut exports, the recent reopening by Senegal of the border to transit trade, and an expansion of nontraditional exports. The total volume of imports is expected to grow by about 4¼ percent a year, mainly reflecting a strong increase in project-related imports, higher nongovernment investment, and tourism-related imports. The terms of trade for exports and imports for domestic use are projected to significantly improve in 1998, owing to lower international petroleum and other import prices, but these would deteriorate during the remainder of the program period, as groundnut and fish export prices are expected to decline. Furthermore, the earnings from tourism are expected to continue to increase. As a result, the external current account deficit (excluding official transfers) is projected to narrow from 11½ percent of GDP in 1997 to less than 10 percent in 2000.

52. External financing requirements for 1998-2000 amount to SDR 157½ million, of which SDR 51 million is needed in 1998 (
Table 4). These requirements will be largely financed by the resumption of assistance from multilateral and bilateral donors and lenders to The Gambia's development projects, in the form of transfers and concessional long-term loans. There remains nevertheless a residual financing gap for 1998-2000 estimated at SDR 26¼ million, which would be covered by the use of Fund resources under the ESAF and budget support from the European Union and other donors.

53. The Gambia's total outstanding external public debt amounted to US$421.9 million at end-December 1997, or 103 percent of GDP (Table 5). Debt owed to multilateral creditors represented approximately 79 percent of the total stock of outstanding debt, including about 2½ percent to the International Monetary Fund and 40 percent to the World Bank. Debt owed to official bilateral creditors accounted for almost 20 percent of the total outstanding, including about 8 percent to Taiwan Province of China and less than 5 percent to Paris Club creditors. All debt-service obligations on rescheduled debt to Paris Club creditors have been fulfilled. Projected debt service is estimated at US$20.8 million in 1998, including US$6.0 million in interest. Some 70 percent of the debt service is due to multilateral creditors. Debt- service obligations in 1998 represent about 10 percent of exports of goods and nonfactor services, and 25 percent of total government revenue.

54. A loan-by-loan external debt sustainability analysis was conducted jointly by the Gambian authorities and the IMF and World Bank staff. These detailed calculations indicate that, at end-1997, the net present value of the external public debt amounted to 115 percent of exports of goods and nonfactor services. In 2000, the net present value of the external public debt and the total debt service are estimated at 104 percent and 8 percent of the exports of goods and nonfactor services, respectively. This analysis therefore suggests that The Gambia's two external debt ratios will remain well below the critical thresholds used as eligibility criteria for the Initiative for Heavily Indebted Poor Countries (HIPC Initiative), even in the absence of traditional debt-relief mechanisms. The debt-service burden would thus appear to be sustainable. However, it is a heavy burden, particularly from the budgetary standpoint, making it more difficult to increase expenditures for the priority sectors of education and health.

55. To continue to improve its external debt service profile, The Gambia will keep seeking grants and loans on concessional terms. Accordingly, the government will neither contract nor guarantee any new nonconcessional external loans (that is, loans not entailing a grant component of at least 35 percent). Similarly, the government will neither contract nor guarantee any external loans with maturities of less than one year, with the exception of normal import credits. It will subject any loan contracted or guaranteed by the government to prior approval from DOSFEA, and it will ensure that the recommendations in the World Bank consultant's report on the debt-reporting system are fully implemented. The government will not accumulate any external payments arrears.

1 Extrabudgetary expenditures in 1995/96, 1996/97 and the first semester of 1997 amounted to 4¾ percent, 3¾ percent, and 1½ percent of GDP, respectively, and reflected the undertaking of a number of infrastructure projects, including a new airport terminal, a hospital, several secondary schools, and an arch at the entrance to Banjul.
2 Excluding these nonperforming loans, the total stock of nonperforming loans at end-1997 stood at below 20 percent of total loans. Moreover, the provisioning shortfall amounted to less than 20 percent of total provisions required against nonperforming loans.
3 The primary net enrollment ratios in 1994/95 and 1996/97 were 53 percent and 58 percent, respectively. The gross enrollment ratio includes total enrollment, whereas the net enrollment ratio includes only students between the ages of 7 and 12.