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ECONOMYWATCH: A stitch in time saves nine

Sep 11, 2013, 10:05 AM | Article By: Osman Kargbo

The Monetary Policy Committee (MPC) of the Central Bank of The Gambia has rung the alarm bells regarding the depressing state of the Gambian dalasi and its consequence on the general economy.

The MPC has therefore called for a supportive fiscal policy, rising interest rates and a rebound in agriculture.

This is because these are the possible antidotes to the health of the economy in the short to medium term, after a thorough diagnose was carried out on it.

Whereas agriculture is experiencing steady recovery waking from the 2011 drought and interest rate is being increased by the CBG to suppress or control inflation, fiscal adjustment is highly needed to achieve debt sustainability and eventually reduce the domestic debt burden.

It is very much essential to give this aspect urgent consideration as it requires exigent action because the MPC made it loud and clear, though with commendation for government’s prudent fiscal stance, that the larger-than-budgeted fiscal deficit in the economy has affected progress towards fiscal consolidation and contributed to the widening of the current account deficit. That means that though fiscal deficit was budgeted for in the fiscal year covering January to December 2013, the deficit that is presently being experienced in the economy is larger than the one budgeted for.  It also means that amends should be made somewhere, which the CBG via the MPC is calling for.

Before going further into the ramifications of the larger-than-budgeted fiscal deficit, let me quickly state tersely what is fiscal policy or management. Fiscal policy can be defined as the deliberate changes in levels of government expenditure, taxes, and other revenues and the borrowing in order to achieve such national economic goals or objectives as price stability, full employment, growth in the Gross Domestic Product and balance of payments equilibrium.

Government expenditures and taxes as well as revenues are the primary instruments of fiscal policy. Fiscal policy is one of the elements of economic policy generally. The other elements of economic policy are monetary, external, industrial, price and incomes, environmental policies, etc. The implementation of any of these economic policy elements affects government revenue or expenditure.

Coming back to the issue of fiscal deficit, it is essential to note that the fiscal operations of governments can be designed to exert three impacts on aggregate demand in the economy. Economists defined these impacts as fiscal policy stances. These are a balanced budget, a budget surplus or a budget deficit.

A budget surplus means that the total current revenue of the government exceeds the total expenditure for a given year; a balanced budget implies that the total tax revenue is equal to the total expenditure of the government for a given period, and a budget deficit implies that the total expenditure exceeds the current revenue for a given period.

The stance of a budget deficit is said to be expansionary aimed at improving aggregate demand and growth in an economy.

Budget deficit is an indication that the tax revenue has fallen short of the total expenditure and such deficit must be financed.

The appropriateness of deficit should be assessed in the context of financial resources that are utilized within the overall macroeconomic environment and the policy objectives, states economist Jeffrey M. Davis. Jeffrey also advocates that the consideration for a prudent fiscal deficit should include:

a.         Productive use of deficit finance to ensure  that future income can be generated  to cover  the servicing cost (debt service obligations) of any debt incurred;

b.         Deficit can be more easily absorbed by countries with high rates of domestic private savings and well-developed capital markets, and

c.         More generally, a prudent fiscal policy can be defined as maintaining the public deficit at a level consistent with other macroeconomic objectives such as controlling inflation, promoting private investment and maintaining external credit worthiness, hence, the concept of deficit sustainability.

It is often regarded as a general rule that as the level of public debt rises, it creates problem of debt burden with adverse consequence for domestic stability, as well as economic growth.

It is therefore essential to note that the achievement of rapid economic growth, development and poverty alleviation is feasible with sound fiscal policy; that is, a fiscal policy that is designed and implemented with discipline, accountability and transparency.

However, when the fiscal policy management results in macroeconomic instability; that is, high inflationary pressures in the goods and financial markets, low GDP growth, unemployment, low per capita income and rising incidence of poverty, the problems can be traced to fiscal mishap of various forms.

In The Gambia, the situation is really not as bad as those in other countries of the region, as indicated in the MPC report, nevertheless, a stitch in time saves nine.



Allotment letter: A letter addressed to a subscriber to an issue of shares informing him of the number of shares that has been allotted, accompanied by a cheque for the balance of subscription monies if the issue has been oversubscribed or a request for a payment of the amount due as appropriate.

Balloon payment: The final payment on a loan that is substantially larger than earlier payments.  Designed to defer the burden of debt repayment.

Comprehensive business income tax: A type of corporation tax in which there is no allowance for interest payment to be deduced from the profits on which tax is levied.

Deposit insurance:  A form of insurance providing compensation to lenders with deposits with financial institutions in the event of failure to the bank or other institution.

Floating Charge: An assignment of the total assets of a company or individual as collateral security for a debt as opposed to particular assets, when such an assignment is known as a ‘fixed charge’ or ‘mortgage’.

Giro:  A means by which money is transferred from one bank account to another without the use of a cheque. Also termed ‘bank giro’.

Intellectual assets: Non-physical assets that represent the firm’s knowledge. This includes expertise, knowledge, patients and research programmes.

Sinking fund: Provision for repayment of debt, including the redemption of a security by the issuer, by accumulating a fund through regular payments that, with interest, will amortize the loan.

Amortize:  To pay off debt over time or to provide for the replacement of an asset by building up a sinking fund.

Systemic risk: A situation in which problems in any one financial institution or market may spread, widely endangering the whole system.

Source: The Penguin International Dictionary of Business and Finance

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