21 January 2012
The Executive Board of the International Monetary Fund (IMF) concluded its Article IV consultation meeting with the Gambian government early this week. The government of Yayah Jammeh has been struggling to control rising government expenditure and increasing public sector borrowing since 2009, leaving the economy much vulnerable to global economic shocks.
The Executive Directors of the IMF have commended Jammeh’s government “for making progress in poverty reduction and achieving strong growth and low inflation, despite a difficult global environment”.
But they expressed concern that; “although the outlook for the economy is generally positive, there are a number of risks, particularly the high cost and rollover risks of domestic debt.”
The IMF noted some positive strides taken by the Gambian authorities in curbing public sector spending and domestic borrowing, such as ‘the improved fiscal performance and government’s plans for additional fiscal consolidation in the period ahead’.
The IMF Directors informed the government, that; “comprehensive tax reforms, including an early introduction of the VAT and additional steps to increase tax compliance, are essential to rebuild government revenues. In particular, strengthening revenue administration and phasing out fuel subsidies would bolster the credibility of the authorities’ fiscal plans for the medium term.”
The role of the private sector in stimulating The Gambia’s economic growth and create jobs, amid continued global economic uncertainty, was highlighted by the IMF. It says that ‘the simplicity of business rules and regulations, low and broader tax base’, would help to improve business environment in the country.
But the IMF Directors also expressed concern that monetary policymaking should remain focused on controlling inflation by safeguarding price stability, and “encouraged the central bank to develop liquidity management instruments that would enhance the efficiency of the money market and reduce intermediation costs”.
The IMF would also like to see Jammeh’s government “maintain exchange rate flexibility, as well as the import coverage of international reserves”.
Concluding their meeting in Banjul, the IMF showed a vote of confidence in the country’s banking sector. It said that “the banking system is well capitalized and liquid”.
It noted the continuation of an ‘elevated non-performing loans ratio and other vulnerabilities in the banking sector, but welcomed the authorities’ intention to reinforce their oversight of the financial sector’.
Concerned about the government’s ever increasing spending on capital projects, and the need for a balanced economy, the IMF “welcomed the authorities’ new poverty reduction strategy, the Programme for Accelerated Growth and Employment (PAGE)”.
But it emphasized, however, that the financing of such projects should aim at safeguarding public sector debt sustainability, by encouraging greater private sector investment and participation in infrastructure projects.
Spotlight on The Gambian Economy
The Gambian economy has performed well in recent years, despite challenging global conditions. Real GDP growth averaged around 6½ percent a year during 2008-2010, driven mainly by a strong expansion in agriculture. Tourism and remittances, however, were hit hard by the global economic crisis.
In 2011, although there were signs that tourism was recovering, real GDP growth is estimated to have fallen slightly to 5½ percent, because of poor weather conditions adversely affecting agriculture in some areas of the country.
Inflation ranged between 2½ and 7 percent (year-on-year) in recent years, as the Central Bank of The Gambia (CBG) generally maintained a restrained monetary stance.
At times, this required extensive mopping up of liquidity generated by central bank financing of fiscal deficits. In recent months, inflation has fallen below 5 percent, aided by an improved fiscal performance.
The government’s fiscal deficit widened substantially during 2007–2010, resulting in a sharp increase in domestic debt. The deterioration of the fiscal balance was caused by a steady decline in government revenues and episodes of large spending overruns.
Extra-budgetary expenditures, including realized contingent liabilities, were major factors behind the surge in government spending, particularly in 2009 and 2010.
The Gambia continues to face a heavy debt burden. As of the end of 2010, domestic debt had risen to almost 30 percent of GDP.
Correspondingly, interest on domestic debt has consumed an increasing share of government revenues (18 percent in 2011). Moreover, most domestic debt consists of short-term Treasury bills, which poses substantial rollover risks.
Despite a large reduction in external debt under the Highly Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI) in December 2007, external debt indicators suggest that The Gambia is still at high risk of debt distress.
Domestic debt stabilized in 2011, as the fiscal deficit narrowed substantially. Although government revenues continued to fall (to about 14 percent of GDP), mainly due to lost revenues from fuel taxes, the government applied a strict cash-budgeting framework to control spending.
This has contributed to a reduction in T-bill yields in recent months, which could generate fiscal savings going forward.
The banking system in The Gambia has expanded at a rapid pace since 2007, with the number of banks nearly doubling (to 13). This contributed to a rapid expansion of much needed financial services.
It also strained the CBG’s resources for banking supervision. While banks are generally well capitalized and liquid, competition in a relatively small market has increased risks.
Credit quality and profitability weakened in 2009-2010, and high loan concentration is a concern. Similarly, several banks are vulnerable to liquidity risks from exposure to large depositors. In 2011, financial indicators have strengthened under the CBG’s intensive supervision.
The Gambia’s external current account deficit has widened in recent years, due to weak tourism receipts and remittances and high global commodity prices.
In 2011, strong exports of groundnuts early in the year combined with an upswing in tourism in the fourth quarter to narrow the deficit, despite a surge in the cost of fuel imports.
Official international reserves have remained at a comfortable level at over 5 months of imports.
The Gambia has made significant progress in implementing structural reforms, particularly in the areas of public financial management, debt management, and financial sector development.
Good progress has also been achieved toward meeting several of the Millennium Development Goals, most notably in health and education. However, poverty is still widespread.