Public Information Notice No. 00/65

Public Information Notice: IMF Concludes Article IV Consultation with The Gambia

August 15, 2000

On July 19, 2000, the Executive Board concluded the Article IV consultation with The Gambia.¹

Background

Overall economic performance in The Gambia during 1999 and the early part of 2000 was mixed. The country made important gains in implementing economic and structural reforms, which were supported by the second annual arrangement under the Poverty Reduction and Growth Facility (PRGF). The economy benefited from robust real GDP growth with low inflation, while important reforms, including a further reduction in external tariff, increase in petroleum product prices, privatization of public enterprises, and improvements in budgetary expenditure reporting and control, were implemented. However, there were policy slippages in implementing the government budget through the first quarter of 2000. Through mid-2000, the government implemented corrective budgetary measures, that are expected to bring fiscal performance back on track to a sustainable level of the deficit and net government borrowing from the banking system. This outcome should also make it feasible to maintain a prudent monetary policy for the year and permit further improvement in the external sector.

In 1999, real GDP growth increased to 5.6 percent from about 5 percent in 1998, with favorable weather contributing to a strong recovery in agricultural production to complement a robust performance in the tourism sector. The good harvest in 1999 also helped to contain the end-of-period inflation (based on the low-income consumer price index) below the program target of 2 percent.

The external current account deficit (excluding official transfers) is estimated to have declined to 10.5 percent of GDP in 1999 from 11.5 percent in 1998, mainly because of lower imports following the introduction of a preshipment inspection scheme effective October 1999 and the 2.5 percent depreciation of the real effective exchange rate of the dalasi. The overall balance of payments surplus moderated somewhat as private capital inflows declined; gross official reserves increased only slightly to SDR 78 million at the end of 1999, providing the equivalent of about six months of import cover.

The implementation of the budget was problematic during 1999 as the favorable impact of the midyear corrective measures was subsequently more than offset by a shortfall in customs receipts during the fourth quarter following the introduction of a preshipment inspection scheme. Consequently, the overall deficit (on a commitment basis and excluding grants) increased to 4.8 percent of GDP and was significantly above the target for the year. The deficit including grants, at 3.5 percent of GDP, exceeded the program target and was also higher than in 1998. Total government revenue decreased as a ratio to GDP to 17.8 percent, as lower customs receipts more than offset the increase in nontax revenue. Effective January 1, 1999, the maximum import tariff rate was reduced to 20 percent, and the tariff bands were reduced from 18 to 8. On the expenditure side, other recurrent expenditure, including on domestic interest payments, exceeded the target by about 1 percent of GDP.

Monetary policy was largely accommodating as domestic credit expansion, both to the government and the private sector, exceeded the targets through end-March 2000. Efforts by the central bank to mop up commercial banks' excess reserves through sales of securities were largely unsuccessful as banks' excess reserves increased slightly through end-March 2000. Moreover, the treasury bill rate declined from 14 percent in December 1998 to 12 percent by end-March 2000, broadly in line with the decline in inflation over the same period.

A number of reforms were implemented to strengthen budgetary performance, including the identification of, and measures to pay off, government arrears and the introduction of reporting and control safeguards on all government expenditure. The preshipment inspection scheme was abolished effective July 2000. In addition, petroleum product prices were increased, there was a further privatization of public enterprises, and the interim groundnut marketing arrangements were made with donor assistance, excluding direct government involvement.

Executive Board Assessment

Executive Directors noted that the authorities had achieved some broadly encouraging results on the macroeconomic front through the first half of 2000, and that performance with respect to structural reform had been satisfactory. However, there had been policy slippages in the fiscal area. In response, the authorities had taken corrective actions to bring their financial policies back on track.

Directors observed that the measures proposed by the authorities for the balance of 2000 appropriately aim at strengthening the key sectors of the economy, public finances, and the external position. Other planned measures focus on strengthening structural reforms to improve the environment for private sector activity, and to enhance the delivery and monitoring of public services. These measures are essential to restore macroeconomic stability, foster sustained growth, and contribute to a lasting reduction in poverty in The Gambia.

Directors urged that fiscal performance be strengthened. On the revenue side, the reduction in the external tariff is a welcome development, but success will depend also on concerted measures to improve the coordination and efficiency of the tax departments. On the expenditure side, the challenge remains to complete the reforms initiated with Fund technical assistance to improve expenditure reporting and control.

Directors noted that the pursuit of prudent monetary policy remains important to maintain the low level of inflation. They added that emphasis should continue to be on an improved and expanded use of indirect instruments, taking advantage of Fund technical assistance. To consolidate and deepen reforms in the financial sector, the authorities should expedite passage of the pending legislation to strengthen the supervisory and regulatory roles of the central bank. Directors welcomed the authorities' intention to introduce reforms aimed at further improving competition among banks.

They noted that the authorities need to strengthen governance, including through the expeditious settlement of the Gambian Groundnut Corporation (GGC) property dispute. Directors welcomed the recent roundtable meeting to consider a broad range of issues on governance, and stressed the importance of the timely implementation of the comprehensive reform program adopted by the government.

Directors urged the authorities to accelerate implementation of structural reforms, underscoring the need to enhance private sector activity and promote economic diversification. They emphasized the need to improve business legislation, particularly the privatization of public enterprises, and, given their importance in the economy, to put in place a sustainable marketing arrangement for groundnuts without direct government involvement as well as measures to enhance activity and employment in the tourism sector. Directors welcomed the further reduction in the external tariff, which should help to maintain the country's external competitiveness.

Directors took note of the measures that would enhance the participatory process and facilitate preparation of an interim Poverty Reduction Strategy Paper (PRSP) before the end of the year, and a full-fledged PRSP during 2001. The next steps include updating the poverty reduction strategy to make it more comprehensive and enhancing the delivery and monitoring of public services, especially to the poor.

Pointing to the Gambia's high external debt burden, Directors noted the preliminary debt sustainability analysis (DSA), which suggested that The Gambia may qualify for assistance under the enhanced HIPC initiative. They indicated that they would welcome an early preliminary HIPC document seeking their views on the timing of a possible early decision point, provided performance remains on track.

Directors observed that progress has been made in improving economic and financial data and commended the authorities for their commitment to participate in the General Data Dissemination Standard. They urged the authorities to continue their efforts to improve the timeliness and quality of data.

Directors welcomed the authorities' intention to intensify collaboration with donors, including the Fund, to ensure timely access to technical assistance-particularly in the areas of statistics and building institutional capacity. These are all the more essential in view of the required articulation and implementation of policies in the PRSP.