The Gambia
economy achieved robust growth with low-to-moderate inflation in recent years,
despite the global economic crisis. Real GDP growth averaged around 6 percent a year during 2008-10, driven mainly
by agriculture.
Tourism and
remittances, however, were hit hard by the global crisis. Meanwhile, inflation
ranged between 2 and 7 percent (year-on-year), 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.
Despite having
received extensive debt relief, The Gambia continued to face a heavy debt
burden, especially because of rising domestic debt. As of end-2010, domestic debt
had risen to almost 30 percent of GDP. Interest on domestic debt has consumed
an increasing share of government revenues (18 percent of government revenues
in 2011).
Moreover, most
domestic debt consists of short-term Treasury bills, which poses substantial
rollover risks. Despite a large reduction in its 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.
The banking
sector expanded at a rapid pace in recent years. Between 2007 and 2010, the
number of banks doubled (to 14), helping to fuel a deepening of financial
intermediation. During this period, credit to the private sector and public
enterprises relative to GDP grew by about 4 percentage points, to nearly 17
percent of GDP.
The new banks
generated substantial foreign direct investment. The expansion in the banking
sector, however, strained the CBG’s supervisory capacity, while intense
competition among a high number of banks in a relatively small market
contributed to increased risks to the banking system.
Progress on
reducing poverty has been mixed. The government’s recent initiative to provide
greater support to agriculture is expected to have contributed to reducing the
incidence of poverty, as most of the poor live in rural areas. The Programme
for Accelerated Growth and Employment (PAGE) is also expected to promote
inclusive growth as it places emphasis on agriculture, as well as investment in
infrastructure.
Economic
development in 2011: maintaining growth, while restoring fiscal discipline
The Gambian
economy has continued to perform well in 2011, but vulnerabilities persist. In
particular, poor weather conditions have weakened the expected expansion in
agriculture. Still, real GDP is expected to grow by about 5 percent partly due to early indications of
an upturn in tourism. Year-on-year inflation stood at 4.4 percent in December
2011.
The Gambian
authorities have made significant progress restoring fiscal discipline in 2011.
By employing a strict cash budgeting approach to limit spending to available
resources, government’s net domestic borrowing (NDB) was contained at just over
2 percent of GDP in 2011. At the same time, the government has refrained from
central bank financing of the deficit. The improved fiscal discipline has
contributed to a drop in T-bill yields in recent months.
However, the
authorities have yet to stop the steady erosion of government revenues (relative
to GDP). Lost revenues from fuel taxes,
mainly because of the failure to fully implement the new fuel pricing formula,
accounted for most of the revenue shortfall in 2011. Poor tax compliance and
falling duties on non-fuel imports also contributed to the poor revenue effort.
Economic
outlook: Bright but with risks
Prospects for
the Gambian economy over the near-and-medium term are good. Under the baseline
scenario (not reflecting the PAGE), real GDP growth is projected to continue to
grow at a robust pace (5 percent a year), led by agriculture, a gradual, but
sustained recovery in tourism and construction, and telecommunications. This
outlook is predicated on a gradual fiscal adjustment to reduce the burden and
risks of domestic debt.
The fiscal adjustment
would ensure the CBG’s independence to focus on maintaining annual inflation
around its objective of 5 percent, while also easing pressure on interest rates
and avoiding crowding out of the private sector.
The external
current account deficit is expected to narrow to about 13 percent of GDP by
2016, financed primarily by FDI, project grants, and concessional loans.
However, as the
authorities seek to maintain the coverage of gross international reserves at
around 5 months of imports, a financing gap would arise.
This scenario
is subject to some risks. First and foremost, fiscal shocks - such as
unanticipated revenue shortfalls and higher-than-budgeted spending - could
threaten macroeconomic stability. The Gambian economy is also vulnerable to terms
of trade and weather-related shocks.
Curbing
government’s domestic borrowing should be the anchor for macroeconomic policies
over the medium term.
Fiscal
Adjustment:Near-term discipline and medium-term reforms
The authorities
have chosen to pursue a gradual fiscal adjustment, aiming to reduce NDB to
about-------- percent of GDP a year
in 2014 and beyond. This adjustment can be viewed as a two-broader reform
agenda encompassing tax policy, revenue administration, and public financial
management (PFM).
In the
near-term, IMF Staff advised the authorities to main fiscal discipline: To reap
the benefits of a gradual fiscal adjustment - notably an easing of pressure on
inflation and T-bill yields - as early as possible, it is necessary to build
credibility in the authorities’ commitment to the adjustment path.
On the revenue
side, staff recommended near-term measures to reverse the drop in revenues that
occurred in 2011, including an immediate adjustment of fuel prices.
The
authorities’ views: The authorities were concerned about the lack of donor
support for the elections, but were confident that they could reallocate
resources if needed. Similarly, they believed that claims of contingent
liabilities and extra-budgetary spending could be contained.
Although
spending on many budgeted items has been trimmed, the authorities reiterated
that they strive to meet key targets for poverty reducing expenditures, such as
the 20 percent share of total current expenditures going toward basic and
primary education.
To improve tax
compliance, the government set up a Committee of Enquiry on Tax Evasion. At the
same time, the Gambia Revenue Authority (GRA) has stepped up implementation
of administrative measures in line with recommendations by Fund technical
assistance.
Medium-term
fiscal adjustment to support long-term growth
In addition to
permanently reducing the high costs and rollover risk of the government’s
domestic debt, the medium-term fiscal adjustment could incorporate reforms for
tax policy, revenue administration, and public financial management that would
enhance the effectiveness of government and The Gambia’s international
competitiveness.
Staff advocated
a comprehensive tax reform to help rebuild government revenues, while boosting
the efficiency of the tax system. In this regard, the Staff welcomed the plan
to launch the VAT in January 2013. Through Fund technical assistance, the VAT
Policy Paper and the VAT Bill have been drafted, but a number of legislative
and administrative steps need to be taken before it can be successfully
implemented. Widespread taxpayer education is also necessary.
Monetary Policy
and Financial Sector Stability
The remarkable
progress in recent months toward eliminating fiscal dominance and effectively
strengthening the independence of the CBG provides an opportunity to vastly
improve the conduct of monetary policy. Banks are generally well capitalized
and liquid, although system-wide averages can mask potential problems in
individual banks. With 13 banks competing for a small customer base,
profitability has shrunk and NPLs have increased.
Fund technical
assistance is helping the CBG expand its toolkit for banking supervision with
stress-testing capability.
Exchange Rate
Policy
The mission
encouraged the authorities to continue to follow a highly flexible exchange
rate policy, using foreign exchange market interventions only to maintain
orderly market conditions.
Poverty
Reduction and other Structural Reforms
The PAGE seeks to reduce poverty by boosting
economic growth and employment with a stepping up of investment in
infrastructure and government support for agriculture, education, and health;
but financing the PAGE is a big challenge.
The DSA
indicates that if concessional terms are observed (minimum grant element of 35
percent), there is scope for up to US$30 million a year of additional borrowing
over the next five years, while still maintaining debt sustainability.
Staff’s advice:
Staff encouraged the authorities to build support for the PAGE among donors and
as well as private sector participation in infrastructure investment. Staff
also cautioned against greater recourse to domestic borrowing and noted that,
by adhering to the fiscal adjustment, eventually fiscal savings would be
available for PAGE priorities from the reduced interest costs on domestic debt.
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