Gambian economy growing despite heavy debt burden - IMF

Despite facing a number of challenges, notably a heavy debt burden and the prolonged global economic crisis, the Gambian economy has over the past few years achieved robust growth, an International Monetary Fund (IMF) mission led by David Dunn said yesterday.

The mission visited The Gambia from 18th October to 1st November 2011, and met with the minister of Finance and Economic Affairs, Governor of the Central Bank of The Gambia, senior government and CBG officials, political parties, civil society, and development partners, among others.

The mission falls under the Article IV consultations, which allows the IMF to conduct surveillance over the economic, financial and exchange rate policies of member countries.

Below we reproduce the statement made by the mission chief at the end of the visit:

“Over the past few years, the Gambian economy has achieved robust growth, despite the prolonged global economic crisis. The Gambia’s Gross Domestic Product (GDP) grew by around 6 and half percent a year during 2008 to 2011, driven mainly by agriculture. Tourism and remittances, however, were hit hard by the global crisis. This year, although tourism has begun to show signs of recovery, GDP growth is projected to slow down slightly (to about 5 and half percents), as poor weather conditions in some areas of the country have harmed crop production.

The 12-month inflation rate has dipped to about 4 percent in recent months and is projected to remain below 5 percent for 2011 as a whole. Gross international reserves remain at a comfortable level at just under 5 months of imports.

“The Gambia, however, continues to face a number of challenges, notably a heavy debt burden. In particular, large fiscal deficit in the recent years led to a surge in domestic debt, most of which consist of short term T-Bills that must be regularly re-financed. Interest on domestic debt is on the rise and now consumes 18 and half percent of government revenues.

Including obligations on external debts, interest consumes 22 and half percent of government revenues. To address the high cost and risks of this debt, the government has taken bold actions to curb new domestic borrowing. Indeed, the mission commends the government for exercising strong fiscal discipline so far this year - an election year - despite further revenue shortfalls. By strictly controlling spending, new domestic borrowing is on track to be just over 2 and half percent of GDP this year, down from about 4 and half percent of GDP in 2010. This improved performance has contributed to lower inflation and a drop in T-Bill yields (by about 3 percentage points since late year).

The government aims to continue making progress on easing it debt burden, by gradually reducing new domestic borrowing to about half percent of GDP by 2014. The government will also restrict external borrowing to concessional loans with soft terms.

The mission commends the government for observing strict limits on borrowing from the CBG, including the elimination of its overdraft. This has allowed the CBG to implement a more consistent proactive monetary policy. At last week’s meeting of the Monetary Policy Committee, the CBG lowered its policy interest rate for the first time in 2011, by one percentage point, to 14 percent. If inflation remains subdued, there may be scope for further cuts in the policy rate going forward.

Falling tax revenues is a major concern. Tax revenues (relative to GDP) have fallen steadily since 2007, and are down to less than 12 and half percent of GDP in 2011 (3 and half percentage points of GDP below their peak in 2007). At the same time, the tax base has eroded substantially, while the remaining tax payers face high tax rates. To improve this situation and restore revenues, the IMF mission strongly encourages the government to consider a comprehensive tax reform over the next few years, building upon the planned introduction of a value-added tax (VAT). Simplification would facilitate tax compliance, and major improvements in tax administration by the Gambia Revenue Authority (GRA) would be essential.

The mission recommends that government immediately implement fully its fuel pricing formula, including a specific excise tax, and rigorously adhere to the monthly price adjustments going forward. Implicit fuel subsidies led to substantial tax revenue losses, which could have been used for other priority programs that more directly benefit the poor.

The IMF mission observes that the Gambia’s banking system as a whole is well capitalized and liquid. Still, the CBG must remain vigilant with its supervision of the system. Banks’ non performing loans have begun to fall, but they are still high, and some banks continue to incur losses. We welcome the CBG’s ongoing efforts to build capacity to conduct stress testing for the banking system. The IMF will continue to support this effort with technical assistant.

The IMF mission also commends the CBG for taking immediate step to improve the performance of the Credit Reference Bureau (CRB), which started operating last year. To benefit from lower interest rates, it is important that borrowers established good credit histories. The CRB plays central role in informing banks about creditworthy clients.

The Gambia is making important progress in its fight against poverty, particularly in the areas of education and some health indicators. Progress on reducing income poverty is also anticipated from the inclusiveness of the strong growth of agriculture in recent years. The government plans to build on this progress with the launching in the coming months of the Programme for Accelerated Growth and Employment (PAGE) 2012-15. The mission commends the authorities for the serious effort in the preparation of the PAGE. However, given the government’s heavy debt burden and falling tax revenues, financing the PAGE faces some major challenges. To ensure that scarce resources are used effectively, the mission encourages the government to continue its ongoing progress on public financial management and transparency, especially in the budget process.

Although there is some scope for additional borrowing on concessional terms, greater assistance from donor grants would be most welcomed. Private sector participation is also an important option particularly in the energy sector, but it is critical that proper institutional arrangements are in place.

In the energy sector, despite some steps underway, NAWEC lacks financial stability and regulatory issues, such as cost recovery and automatic cost of fuel adjustments in electricity tariffs, need to be resolved. In this regard, the mission urges the government to work together with the World Bank to put in place an effective energy strategy as soon as possible.

The mission commends the authorities for preparing a budget policy paper for the 2012 budget and submission of the audited 2007 government accounts to the National Assembly on October 31st 2011. To reduce the current backlog, it is expected that the audited accounts for subsequent years will be prepared and submitted to the National Assembly at an accelerated pace. In 2012, the priority areas of public financial management include improving transparency in the budget process, strengthening budget execution, and building capacity in internal and external audit functions.

The mission wishes to express its gratitude to the Gambian authorities for their hospitality and the candid and constructive spirit in which the discussions were held.  The Executive Board of the IMF is expected to discuss the report of the mission in January 2012.