Public Information Notice No. 02/115

Public Information Notice: IMF Concludes 2002 Article IV Consultation with The Gambia

October 8, 2002

On July 8, 2002, the Executive Board concluded the Article IV consultation with The Gambia.¹

Background

Overall economic performance in The Gambia during 2001 and the early part of 2002 was mixed. The economy benefited from robust real GDP growth with moderate inflation. Notable progress was also achieved in the settlement of the property dispute with Alimenta² (the last payment of US$5 million out of a total of US$11.5 million was in August 2001). Important gains were made in implementing economic and structural reforms. However, there were budgetary slippages leading to a sizeable increase in the overall budget deficit. Presidential, national and local elections were held in late 2001 and early 2002 and the full Poverty Reduction Strategy Paper (PRSP) was finalized and forwarded to the Fund and the World Bank in May 2002.

In 2001, real GDP growth was 6 percent, underpinned by strong performance of agriculture, tourism, and the construction sectors. Average annual inflation (based on the low-income consumer price index) edged up to 4½ percent, slightly above the target of 4 percent, driven by higher imported inflation (via the depreciation of the dalasis) and expansionary fiscal policies.

The external current account deficit (excluding official transfers) is estimated to have increased to 14¾ percent of GDP in 2001 from 12 percent in 2000, reflecting one-off importation of electricity generators to improve generation and distribution; reexports were slowed by cross-border difficulties. The real effective exchange rate of the dalasi depreciated by 8 percent during 2001, contributing to an improvement to the external competitiveness of The Gambia. The non-disbursement of donor grants (equivalent to 1.6 percent of GDP) contributed to the decline in gross official reserves to SDR 81.4 million at the end of 2001 (against SDR 86.3 million in 2000), equivalent of about 4.9 months of import cover.

The overall fiscal deficit (excluding grants) increased to 8¾ percent of GDP in 2001 from about 3½ percent in 2000. The deficit including grants, at 7.6 percent of GDP, significantly exceeded the target of about 3 percent, reflecting delayed receipt of donor grants. The government incurred one-off expenditures comprising (a) repayment to commercial banks related to the 1999/2000 groundnut financing; (b) D15 million to rehabilitate the former Alimenta assets in order to facilitate groundnut marketing; and (c) on-lending to a public enterprise to improve the supply of electricity; and (d) election-related outlays. Additionally, there were revenue shortfalls, including in customs revenue (1.3 percent of GDP), reflecting weak performance in tax administration and financial problems of public enterprises, as the latter built sizeable arrears to the government.

Monetary policy was accommodating as domestic credit expansion, both to the government and the private sector, exceeded the targets at end-2001. Through end-2001, net credit to the government increased by 8.3 percent of GDP, which was significantly above the target, while credit to the private sector increased by 12.8 percent. However, broad money growth, which accelerated to about 35 percent in 2000, moderated to 19.4 percent in 2001, reflecting measures to mop up banks' excess reserves. Reserve money, mainly currency outside banks, also exceeded the program target. The treasury bill rate was raised from 12.5 percent in August to 15 percent by October 2001.

Notwithstanding some delays, there was significant progress in implementing structural reforms and arrangements to access technical assistance to strengthen the limited institutional capacity. A number of reforms were implemented to strengthen budgetary performance, including the closing of public accounts for 1991/92-1999, developing an accounting framework to monitor expenditure on poverty reduction, including expenditure funded from the enhanced HIPC Initiative debt relief, developing a framework to facilitate timely reconciliation of treasury cash books with the accounts of central bank, and bringing a number of below-the-line accounts under budgetary control and reporting procedures. Donors provided financial support for public expenditure reviews in key social sectors (agriculture, education, and health) to ensure a better linkage of sector policies to budgetary priorities in the PRSP. In the financial sector, the authorities took further steps to broaden and deepen the money market, with the introduction of longer maturity treasury bills and the book-entry system to facilitate the trading of treasury bills and other securities. As part of the effort to promote attractiveness of The Gambia as a regional entrepôrt and financial center, commercial banks were allowed to open foreign currency-denominated deposits for their customers.

Consistent with the PRSP objectives, the National Assembly enacted key legislation to encourage private sector activities, including the Privatization, Regulatory and Procurement Acts. To complement these efforts, Cabinet approved a fast-track privatization program for a number of public enterprises that do not require regulation, including the former Alimenta assets. There were also renewed emphasis on implementing agricultural marketing reforms and providing extension services, improved inputs, and access to credit for farmers with support from donors.

The authorities intensified their efforts to access technical assistance in order to strengthen the implementation of broad-based structural reforms. This was achieved partly through better coordination of donor technical assistance, to which the Fund is contributing through the Technical Assistance Action Plan (TCAP) to strengthen the formulation and implementation of policies. Moreover, in July 2001 the World Bank approved the World Bank's Capacity Building for Economic Management Project to help strengthen key economic institutions.

The full PRSP was submitted to the Fund and the World Bank in May 2002, and the authorities also achieved significant progress in implementing triggers for the enhanced HIPC Initiative Completion Point, especially in key social sectors (education and health). There were efforts to redirect government spending to social sectors (agriculture, education and health), as witnessed by increased capacity at training institutions for agricultural extension specialists, lower basic education teachers, and primary health care technicians. Moreover, the girls' scholarship program, which started in 2001, on a pilot basis in two poor regions, has become a great success in increasing girls' enrolment, especially among the poor households; plans are underway to extend the scholarship to all poor households in the country.

Executive Board Assessment

Directors noted that The Gambia's economic performance during 2001 had been mixed. Positive developments included continued robust real GDP growth, moderate inflation, the preparation of a comprehensive PRSP, and the settlement of the property dispute with Alimenta. Commendable progress was also achieved in implementing the enhanced HIPC Initiative completion point triggers, notably on education and health. However, Directors noted with concern that, partly due to one-off factors, fiscal slippages, which continued through the first quarter of 2002, had undermined earlier progress toward fiscal consolidation. They also noted the widening of the external current account deficit.

Against this backdrop, Directors welcomed the steps taken by the authorities to reverse the recent fiscal slippages, as well as their renewed commitment to press ahead with reforms aimed at achieving a durable improvement in fiscal performance. Building on earlier progress, the 2002/03 program will also deepen broad-based economic and financial sector reforms to strengthen the foundations for private sector confidence and investment, and for poverty reduction. Directors were encouraged that, with donor relations improved, these reforms should benefit from closely coordinated technical assistance, and, in this context, looked forward to the TA program to be presented at the upcoming donors' roundtable meeting. The Fund's Technical Cooperation Assistance Plan to enhance macroeconomic policy formulation and implementation will be an important contribution in this regard.

Directors urged the authorities to adhere strictly to their plans to strengthen fiscal performance in line with the revised targets of reducing the overall deficit (excluding grants) to 5 percent of GDP in 2002, and to about 2 percent by 2005. On the revenue side, efforts should aim at a sustained improvement in the institutional capacity of the tax administration, including the customs administration. Strict implementation of the measures to eliminate tax and other arrears owed to the government by a number of public enterprises, as well as perseverance with reforms to improve tax efficiency and reduce tax exemptions will also be crucial.

Directors welcomed recent steps to contain public spending, and urged the authorities to maintain tight controls over expenditures from below-the-line accounts. Going forward, the authorities should give a high priority to budgetary reforms to enhance transparency and accountability of public expenditure, as this will also be crucial to ensure satisfactory implementation of the poverty reduction strategy and the enhanced HIPC Initiative assistance. In particular, Directors encouraged the authorities to press ahead with the appointment of an Auditor General with substantive responsibilities to audit public accounts on a timely basis, and to collaborate effectively with donors in improving and broadening public expenditure reviews, with a view to developing a medium-term expenditure framework encompassing all major expenditure programs.

Directors supported the Central Bank of The Gambia's continued pursuit of a prudent monetary policy, which aims at maintaining low inflation and strengthening external reserves while providing adequate room for private sector credit growth. They agreed that the emphasis should continue to be on an improved and expanded use of indirect instruments, taking advantage of Fund technical assistance. Directors noted the steps taken to strengthen the management capacity of the Continent Bank, but urged the authorities to act expeditiously to address the Bank's financial problems, including completion of a resolution plan to establish the full cost to the budget of either recapitalization or liquidation of the bank. They looked forward to the enactment of the anti-money laundering bill, and of measures to strengthen the central bank's supervisory functions and enhance its independence.

Directors welcomed the full PRSP, which benefited from a highly participatory process and provides the building blocks for the poverty-reducing policies and reforms incorporated in the PRGF-supported program. They urged the authorities to continue with work to refine sector priorities, further articulate and strengthen the governance component of the PRSP, and improve the macroeconomic and social data that will help assess the impact of adjustment and reform on the poor.

Directors underscored the importance of continued efforts to consolidate and broaden structural reforms, which are key to stimulating private sector activity and accelerating a reduction in poverty. Priorities include improvements in business legislation, establishment of a framework for the regulation of public enterprises, and continuation of the privatization program. They also urged the authorities to make further progress toward a sustainable marketing arrangement for groundnuts with minimal government involvement.

Directors commended the authorities' commitment to a liberal trade and exchange system. They considered that continuation of a flexible exchange rate policy remains appropriate for maintaining the country's external competitiveness in the context of the planned prudent financial policies.

While The Gambia provides data to the Fund that meet the requirements for effective surveillance and program monitoring, Directors welcomed The Gambia's participation in the General Data Dissemination System and encouraged the authorities to continue their efforts to reduce reporting delays and to upgrade the quality of data used for economic analysis.