Public Information Notice No. 01/75

Public Information Notice: IMF Concludes 2001 Article IV Consultation with The Gambia

July 26, 2001

On July 13, 2001, the Executive Board concluded the Article IV consultation with The Gambia.¹

Background

Overall economic performance in The Gambia during 2000 and the early part of 2001 was mixed. The country made important gains in implementing economic and structural reforms, which were supported by the second and third annual arrangements under the Poverty Reduction and Growth Facility (PRGF). The economy benefited from robust real GDP growth with low inflation, while important reforms were implemented. They include a further reduction in the external tariff, the rescinding of the problematic preshipment inspection scheme, increases in petroleum product prices, and improvements in budgetary expenditure reporting and control. In October 2000, the government reached an out-of-court settlement with Alimenta (a private Swiss company), under which The Gambia will pay US$11.4 million by end-July 2001 to the company for the seizure of its property in early 1999. Accelerated payments to Alimenta, in addition to a payment to commercial banks for overdue crop financing loans and a weak customs revenue performance, contributed to fiscal slippages through March 2001. However, through mid-2001, the government implemented corrective budgetary measures that are expected to bring fiscal performance back on track to a sustainable level of the deficit and contain 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 2000, real GDP growth was 5.6 percent as a result of good rains, which boosted the production of groundnuts and other crops, and a robust performance in the construction sector. The good harvest in 2000 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 widened to 12 percent of GDP in 2000 from 11.5 percent in 1999, as imports recovered from the adverse impact of the preshipment inspection scheme (rescinded in July 2000) while reexports were slowed by cross-border difficulties. The real effective exchange rate of the dalasi depreciated by 4.8 percent during 2000, contributing to an improvement in the external competitiveness of The Gambia. The overall balance of payments surplus moderated somewhat as private capital inflows declined; gross official reserves increased only slightly to SDR 82.5 million at the end of 2000, providing the equivalent of about six months of import cover. Effective July 1, 2000, the maximum import tariff rate was reduced from 20 percent to18 percent, and the number of tariff bands was reduced from ten to three.

The overall fiscal deficit (excluding grants) was reduced to 3.6 percent of GDP in 2000 (virtually in line with the program target) from 4.75 percent in 1999 as a revenue shortfall, mainly in customs receipts, and a slight overrun in recurrent expenditure were largely offset by lower development expenditure because of lower external financing. The deficit including grants, at 1.4 percent of GDP, slightly exceeded the program target but was not as high as the level of 3.5 percent reached in 1999. Total government revenue increased as a ratio to GDP to 18.5 percent from 17.75 percent in 1999; recurrent expenditure as a share of GDP increased to 18.3 percent in 2000 from about 18 percent in 1999.

Monetary policy was largely accommodating as domestic credit expansion, both to the government and the private sector, exceeded the targets through end-March 2001. During 2000, broad money grew by 35 percent, considerably above the program target; it moderated to 14 percent at end-March 2001. Reserve money, mainly currency outside banks, also exceeded the program target. The treasury bill rate declined from 12.5 percent in December 1999 to 12 percent by December 2000; however, the trend was reversed, and the rate increased to 12.5 percent in February 2001.

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-whose flawed introduction and implementation resulted in significant loss of revenue- was abolished effective July 2000. In March 2001, Alimenta withdrew its property dispute with the government from the International Center for the Settlement of Investment Disputes after the government had paid about US$6.5 million and provided a bank guarantee for the outstanding balance of US$5 million.

Executive Board Assessment

Directors considered that the revised economic program for the balance of 2001 appropriately aims at strengthening policies in areas where slippages have occurred, and at deepening structural reforms to improve the environment for private sector activity and to enhance the delivery and monitoring of public services. Such an approach is essential to restore macroeconomic stability and contribute to a durable reduction in poverty.

On governance issues, Directors commended the authorities for the ongoing action to settle the property dispute with Alimenta. They encouraged the authorities to implement governance-strengthening measures under the PRSP by enhancing transparency and accountability in public resource management, including timely auditing of public accounts and adoption of the medium-term expenditure framework. They welcomed the central bank's initiatives to enact an anti-money laundering law and improve corporate governance of banks.

Directors stressed that fiscal performance needs to be consistent with the goal of maintaining a sustainable level of government domestic debt. On the revenue side, the improvement in customs administration, the increase in petroleum prices, and the curtailment of customs duty exemptions remain critical, especially in light of the recent external tariff reductions. Directors also stressed the need to rein in government expenditure in an election year, with particular emphasis on the wage bill. They also urged the authorities to continue building capacity in public expenditure management. They welcomed efforts to improve expenditure reporting and control as well as debt management, along with closure of the public accounts and the undertaking of public expenditure reviews in key sectors. They also commended the thrust to intensify collaboration with donors, which would ensure timely access to technical assistance support in these and other areas.

Directors underscored the importance of prudent monetary policy to maintain the low level of inflation. They noted that consolidation and deepening of reforms in the financial sector, including automation of trading in treasury bills and increased interest rate flexibility, would facilitate monetary control. They stressed also the need to maintain strong supervision of financial institutions, particularly the microfinance institutions.

The current level of the exchange rate was considered to be appropriate in the context of the prudent financial policies currently proposed, and the commitment to keep the rate sufficiently flexible so as to maintain the country's external competitiveness was welcomed. Directors commended the progress in reducing and rationalizing import tariffs.

Directors urged the authorities to expedite the implementation of structural reforms, with emphasis on improving business legislation and privatization of public enterprises and port services. They underscored the need for timely reforms in the marketing arrangement for groundnuts, including the privatization of the Alimenta assets in an open and transparent manner. These reforms would be crucial for eliminating direct government involvement in financing groundnut marketing.

Directors considered data quality and provision to be adequate for surveillance and program monitoring. They noted progress made in improving economic and financial data and encouraged the authorities to continue their efforts in this regard with timely technical assistance.