occasional paper100

OCCASIONAL PAPER 100

The Gambia:Economic Adjustment

in a Small Open Economy

Michael T. Hadjimichael, Thomas Rumbaugh, and Eric Verreydt,with Philippe Beaugrand and Christopher Chirwa

INTERNATIONAL MONETARY FUNDWashington DC

October 1992

©International Monetary Fund. Not for Redistribution

© 1992 International Monetary Fund

Cataloging-in-Publication Data

Hadjimichael, Michael T.The Gambia : economic adjustment in a small open economy /

Michael T. Hadjimichael, Thomas Rumbaugh and Eric Verreydt withPhilippe Beaugrand and Christopher Chirwa. — Washington, DC :International Monetary Fund, 1992.

p. cm. — (Occasional paper, 0251-6365 ; 100)Includes bibliographical references.ISBN 1-55775-230-31. Structural adjustment (Economic policy) — Gambia. I. Rumbaugh,

Thomas. II. Verreydt, Eric. III. Title. IV. Series : Occasional paper(International Monetary Fund) ; no. 100.HC1070 .H23 1992

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Contents

Preface

I. Introduction

Page

II. Overview of Recent Economic Performance

Adjustment PoliciesPolicy ImplementationDevelopments Since 1985/86

III. Growth, Saving, and Investment

Developments in OutputDevelopments in Saving and Investment

3

356

II

1113

IV. External Adjustment

Exchange Reform and Exchange Rate PolicyExternal Trade and Tariff ReformDiversification of Exports

16

161717

V. Fiscal Adjustment

Tax PolicyExpenditure PolicyDevelopments in the Budget Balance

19

192227

VI. Monetary Policy and Financial Sector Reform

Monetary Policy Objectives and InstrumentsMonetary Developments Since 1985/86Monetary Policy, Exchange Rate Policy, and InflationFinancial Sector Reform

28

28293232

VII. Public Enterprise Reform

VIII. Social Impact of Adjustment

IX. Concluding Remarks

References

35

37

39

41

iii

V

I


CONTENTS

Tables

Section

II.

III.

IV.V.

VI.

1. External Assistance2. Selected Economic and Financial Indicators3. Balance of Payments4. Gross Domestic Product by Kind of Economic Activity5. National Income, Savings, and Investment6. Foreign Exchange Earnings7. Central Government Operations8. Structure of Government Revenue9. Structure of Government Expenditure

10. Functional Classification of Current Expenditure byKey Ministries

11. Alternative Measures of the Budget Balance12. Monetary Survey

Charts

Section

II.

III.IV.V.

VI.

1. Exchange Rate Developments2. Developments in Output and Prices3. External Developments4. Sectoral Composition of Real GDP5. Composition of Foreign Exchange Earnings, 1982/83-1991/926. Fiscal Developments, 1982/83-1991/927. Structure of Revenue and Expenditure, 1982/83-1991/928. Monetary Developments, 1984/85-1991/929. Developments in Broad Money, the Exchange Rate,

and Prices

68

10121518212224

252630

479

1418202329

33

The following symbols have been used throughout this paper:

. . . to indicate that data are not available;

— to indicate that the figure is zero or less than half the final digit shown, or that the itemdoes not exist;

- between years or months (e.g., 1991-92 or January-June) to indicate the years ormonths covered, including the beginning and ending years or months;

/ between years (e.g., 1991/92) to indicate a crop or fiscal (financial) year.

"Billion" means a thousand million.

Minor discrepancies between constituent figures and totals are due to rounding.

The term "country," as used in this paper, does not in all cases refer to a territorial entitythat is a state as understood by international law and practice; the term also covers someterritorial entities that are not states, but for which statistical data are maintained andprovided internationally on a separate and independent basis.

iv


Preface

This paper is based on the staff report and the background paper prepared inconnection with the consultations between the Fund and The Gambia in 1992 andincludes information available through May 1992. The authors are indebted toAnupam Basu, Christian Brachet, Evangelos Calamitsis, Jean Clement, ChristianFrancois, and Susan Schadler for their valuable comments and suggestions. Theyalso would like to thank Janet Bungay for editorial advice, Yvette Conell andAbdul Mahar for secretarial assistance, and Juanita Roushdy of the External Rela-tions Department for editing and coordinating the paper for publication. Theauthors bear sole responsibility for any factual errors.

The opinions expressed in the paper are those of the authors and should not beconstrued as those of the Government of The Gambia, Executive Directors of theIMF, or other members of the IMF staff.

V


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I Introduction

The Gambia is a very small country located onthe west coast of Africa, surrounded on three

sides by Senegal, extending inland at widths vary-ing from 24 to 48 kilometers along the banks of theRiver Gambia, with a total area of 10,700 squarekilometers. With a population of about 890,000,which is rising at a rate of 3.4 percent a year, TheGambia has one of the highest population densitiesin the world (estimated at 207 inhabitants persquare kilometer of agricultural land in 1991). Ithas also a fairly undeveloped human capital base,with an illiteracy rate of 75 percent and a primaryschool enrollment rate of 56 percent (in 1987).

The Gambia has an open economy with limitednatural resources and is one of the least developedAfrican countries, with a per capita income esti-mated at present at $325. The traditional mainstayof economic activity has been the production andexport of groundnuts, although in recent years sig-nificant progress has been made in diversifying pro-duction and exports toward tourism and tradeservices. Most of the population work in agricul-ture, which accounts for about 20 percent of realGDP; industry contributes 12 percent of valueadded, with the rest accounted for by services.

The Gambia became independent in 1965 andsince then has been governed by a democratic mul-tiparty parliamentary system, with free electionsheld at regular intervals.1

During the first ten years after independence,broadly stable macroeconomic conditions weremaintained with modest rates of economic growth.In the decade to 1985/86, however, external shocksand inappropriate domestic policies caused eco-nomic and financial performance to deterioratemarkedly. In particular, unfavorable weather, erra-tic world groundnut prices, and inadequate realproducer prices led to a sharp decline in the domes-tic output of groundnuts. During the same period,the involvement of the public sector in the econ-omy increased sharply, through the creation of sev-eral public enterprises, particularly in the industrial

1For an overview of recent political developments, see Sallah(1990).

and trading sectors, and the size of the CentralGovernment rose markedly, entailing, inter alia, adoubling of the size of the civil service. The result-ing large expansion in government current expen-diture, coupled with a surge in governmentdevelopment expenditure, contributed to a widen-ing of fiscal imbalances. The expansionary stance offiscal policy and an increasingly overvalued cur-rency boosted the demand for imports and dis-couraged the surrender of export proceeds to theofficial banking system, inducing a growing exter-nal indebtedness and a depletion of gross officialreserves. As a consequence, the growth of outputin the directly productive sectors of the economy(i.e., excluding government services) remained low,inflation accelerated, and major external dis-equilibria emerged. Although the pressures on theexternal current account position were alleviatedsomewhat by large inflows of external assistanceand some partial adjustment measures in the early1980s, the imbalances reached critical proportionsby the end of 1985/86. Gross official reserves fell tothe equivalent of less than a week of imports,external public debt climbed to 113 percent ofGDP, and external payments arrears peaked atSDR 88.2 million (almost one and one half timesthe 1985/86 export earnings, including net re-exports and travel income), of which SDR 10.3 mil-lion represented overdue obligations to the Fund.

In response to the rapidly deteriorating situation,the Gambian authorities in June 1985 began toimplement a comprehensive adjustment program,the Economic Recovery Program (ERP), aimed atrestoring financial equilibrium and laying the foun-dation for sustainable economic growth. In 1990,the ERP was succeeded by the Program for Sus-tained Development (PSD), which continued thethrust of ERP policies, while renewing efforts tostimulate private sector development. The Gam-bia's adjustment efforts have been supported bysuccessive arrangements from the Fund, compris-ing two annual arrangements under the structuraladjustment facility (SAF) during 1986/87-1987/88(July/June) and a three-year arrangement underthe enhanced structural adjustment facility (ESAF)

1


I INTRODUCTION

during 1988/89-1990/91, as well as a stand-byarrangement and a drawing under the compensa-tory financing facility during 1986/87. The totalcumulative use of Fund resources by The Gambiaamounted to the equivalent of SDR 38.91 million,or 227.5 percent of quota. Substantial financial andtechnical assistance has also been provided by theWorld Bank, including two structural adjustmentcredits, and by other bilateral and multilateraldonors.

With successful implementation of a broad rangeof financial and structural reforms, The Gambia'seconomic and financial performance has improved

considerably since 1985/86. The Gambia's experi-ence is a good example of economic adjustment,even though it is recognized that more remains tobe done, as a number of major structural andinstitutional constraints continue to hamper theeconomy. Following the expiration of the three-year ESAF arrangement in November 1991, theGambian authorities requested a continuation ofthe close policy dialogue with the Fund andmonitoring by the Fund of The Gambia's economicand financial policies for 1992/93, as well as theupdating of the policy framework paper to coverthe period 1992/93-1994/95.

2


II Overview of Recent EconomicPerformance

The economic strategy since 1985/86 has beenaimed primarily at substantially reducing the

involvement of the public sector in the economy,encouraging the development of the private sector,lowering domestic and external imbalances, andfostering economic growth. Accordingly, the strat-egy has entailed mainly (1) the early restoration ofan appropriate structure of relative prices and astrengthening of economic incentives in the contextof a market-oriented approach; (2) the implemen-tation of restrictive fiscal and monetary policies;and (3) the introduction of complementary struc-tural reforms, particularly in the public enterpriseand financial sectors.

Adjustment Policies

A notable feature of the adjustment efforts hasbeen the emphasis on strengthening the supplyresponse of the economy and enhancing the effi-ciency of resource allocation by removing price dis-tortions and government controls, introducing amarket-determined exchange rate, and liberalizingthe marketing arrangements for groundnuts.

To encourage a return of the foreign exchangeproceeds to the official banking system, as well asto stimulate the production of exportables, a flex-ible exchange rate system was introduced in Jan-uary 1986 in the context of an interbank market,replacing the peg of the dalasi (the national cur-rency) to the pound sterling. To deepen the foreignexchange market, the enforcement of theExchange Control Act was suspended at the sametime, resulting in a de facto lifting of the exchangerestrictions on current and capital internationaltransactions, and licensed foreign exchangebureaus were established in April 1990. The onlyremaining exchange restriction related to the exis-tence of external payments arrears, which weregradually eliminated in the period to July 1990.Overall, the interbank foreign exchange markethas functioned smoothly, resulting in an effectiveabsorption of the parallel foreign exchange marketand the virtual elimination of the spread between

the exchange rates prevailing in the two markets.Under the new exchange rate regime, the dalasidepreciated by 57 percent in nominal effectiveterms during 1986, but appreciated gradually bysome 18 percent by early 1990 (Chart 1); sincethen, it has remained broadly stable, fluctuatingwithin a narrow range. The nominal exchange rateadjustments, combined with tight financial policiesand progress in lowering inflation has improvedThe Gambia's external competitiveness markedly.In real effective terms, the dalasi depreciated by44 percent during 1986, and even though it appreci-ated somewhat in the period to mid-1989, it hassince gradually fallen back to its level at the end of1986.2

The depreciation of the dalasi facilitated markedincreases in real producer prices for groundnutsand other cash crops in 1985/86. In fact, to induce areversal of cross-border sales of groundnuts to aneighboring country, where producer prices havebeen kept high through government subsidies, pro-ducer prices in The Gambia were initially sethigher than export prices, necessitating sizablebudgetary support to the Gambia Produce Market-ing Board (GPMB) to cover operating costs.Groundnut producer prices were lowered in subse-quent years to eliminate the need for governmentsubsidies, as well as to reflect the weakening inworld groundnut oil prices. In order to liberalizethe marketing arrangements for groundnuts, thesystem of guaranteed producer prices forgroundnuts was abolished with effect from the1989/90 crop year and replaced with new arrange-ments under which the GPMB announces a

2Based on the IMF's Information Notice System, under whichthe effective exchange rate index is calculated as the ratio of thedalasi to a trade-weighted basket of the currencies of 20 indus-trial and developing trading partner countries, expressed in acommon currency. A n alternative effective exchange rate index,calculated with updated weights based on trade statistics for1988-90, covering a subset of trading partners (excluding, nota-bly, Brazil and Argentina), suggests a slightly more depreciatingt«end for the dalasi since 1989 (see Chart 1).

3


II RECENT ECONOMIC PERFORMANCE

140

Alternative NEER index (DOTS)' U.S. dollars per dalasi

0 ' ' ' ' ' ' ' ' ' ' ' ' LJ1980 '81 '82 '83 '84 '85 '86 '87 "88 '89 '90 '91

Sources: International Monetary Fund, Information NoticeSystem (INS); International Financial Statistics (IFS).

I Weights are based on Direction of Trade Statistics (DOTS) for1988-90, and a reduced subset of trading partners (excludingBrazil and Argentina, in particular, compared with the INS index).

groundnut purchase price at the beginning of thecrop year, based on commercial criteria and with-out any government involvement. In addition, theexport monopoly of the GPMB was lifted in Octo-ber 1990. The subsidies on fertilizers and otheragricultural inputs were also eliminated, and themarketing of these inputs liberalized in the earlystages of the reform efforts. In addition, all otherprice controls were lifted, while public utility tariffsand retail prices for petroleum products have beenadjusted frequently to reflect changes in the under-lying cost structures.

A n integral part of the adjustment efforts since1985/86 has been the pursuit of a restrictive fiscalpolicy, aimed at lowering the budget deficit(excluding grants) and raising government savings,as well as fostering economic activity. On the reve-nue side, policies have focused on broadening thetax base, strengthening tax administration, andrationalizing the structure of taxation. Tax reformshave been directed at improving economic incen-tives and enhancing efficiency and equity in theeconomy. The reforms included the introduction ofa sales tax, reductions in the marginal rates of per-sonal income taxation, abolition of the taxes onexports, and reductions in import tariffs so as tomove toward a low and uniform rate of protection,while preserving the tariff incentives for the re-export trade. On the expenditure side, policies

have sought to increase the efficiency of publicinvestment by focusing on the rehabilitation of thebasic economic and social infrastructure, while alsoreorienting current expenditure to facilitate higherprovisions for operations and maintenance andsocial services. In the latter regard, specialemphasis has been placed on raising the share intotal current spending of outlays on education andhealth, given the importance attached under theprogram to improving the country's human capitaland paving the way for long-term growth. To facili-tate such a restructuring of government spending,the growth of the civil service wage bill has beenkept modest.

Overall, the budget deficit (excluding grants) wasreduced from a peak of 17 percent of GDP in1987/88 to an estimated 4 percent in 1991/92. Thiswas achieved despite a boost in government expen-diture caused by special budgetary provisions forthe repayment of public enterprise debts to thedomestic banking system and the takeover by theGovernment of nonperforming bank loans. Theimprovement in the fiscal position, together withthe available net inflows of external assistance, hasallowed the Government to make sizable netrepayments to the banking system, thereby accom-modating the legitimate financing needs of the pri-vate sector and supporting the anti-inflationarystance of monetary policy. The latter has been pri-marily directed at lowering inflation to a low levelcomparable to that of trading partner countries,while also achieving the targeted improvement inthe overall balance of payments position and theassociated buildup of gross official reserves, in aframework consistent with the targeted expansionin output. To this end, a broadly restrictive mone-tary and credit policy has been pursued. At thesame time, the effectiveness of financial inter-mediation was enhanced through the lifting ofinterest rate controls in September 1985, the intro-duction of an auction system for issuing treasurybills in July 1986, and, more important, a shift to anindirect system of monetary control in Septem-ber 1990. Since 1986/87, interest rates have beenmaintained through open market operations atpositive levels in real terms (measured in relationto inflation during the previous 12 months) andwith appropriate differentials vis-a-vis interestrates abroad, thereby encouraging financial savingsand supporting the exchange rate policy.

External policies, for their part, have been aimedat broadening the export base and at containing thedebt-service burden by maintaining a liberalexchange and trade system, preserving externalcompetitiveness, and pursuing a prudent externaldebt-management policy. As indicated above, withthe emphasis of financial policies on bringing infla-

Chart I. Exchange Rate Developments(Indices, 1980= 100)

120

100

80

60

40

20

Real effective —exchange rate (REER)

Alternative REER index (DOTS)1 -

4

CFA francs per dalasiNominal effective

exchange rate (NEER)


Policy Implementation

tion under control, me nominal effective exchangerate has been kept reasonably stable, after an initialmarked decline, in the context of a flexibleexchange rate regime, despite occasional fluctua-tions. This flexibility has cushioned the impact onthe economy of the deterioration in The Gambia'sexternal terms of trade (excluding re-exports) andhas helped preserve the gains in competitiveness.In its foreign borrowing policy, the Governmenthas relied exclusively on official grants and conces-sional long-term loans, avoiding any recourse to, orguaranteeing of, external loans on commercialterms; short-term foreign borrowing has also beenlimited to normal import-financing purposes.

These policies have been complemented by abroad range of structural reforms designed toenhance the efficiency of the economy and stimu-late private sector activity. Under the public enter-prise reform program, public sector activities thatcould be more efficiently carried out by the privatesector have been scaled back markedly, throughthe divestiture of some 20 enterprises (almost60 percent of the total number of public enter-prises). In addition, several measures have beentaken to improve the financial position of theenterprises remaining in the Government's port-folio, including the signing of performance agree-ments. In the financial sector, the reform effortshave focused on improving the efficiency of theintermediation process and encompassed the take-over by the Government of nonperforming bankloans, measures to strengthen bank supervision,and the restructuring of the largest commercialbank (The Gambia Commercial and DevelopmentBank (GCDB)), which was owned by the Govern-ment, culminating in its privatization in June 1992.Furthermore, a tourism development area has beendesignated and a new Investment Code wasenacted in 1988, providing a range of fiscal incen-tives to private investment in export-oriented andimport-substituting activities.

Sectoral strategies have been aimed at stimulat-ing the supply response of the economy andexploiting the development potential that exists inthe agricultural sector, small-scale manufacturing,fisheries, tourism, entrepot trade, and other ser-vices, supported by the World Bank and otherbilateral and multilateral donors. Given the impor-tance of agriculture for the well-being of most ofthe population, special emphasis has been placedon developing this sector. In particular, policieshave been directed at enhancing efficiency ingroundnut production, processing, and marketing,as well as diversifying into other cash crops andhorticulture, and continued expansion of foodcrops; these objectives were to be attained throughimproved applied research and extension services,

and an expanded role of the private sector in out-put marketing and input supply. Sectoral policieshave also focused on improving basic health andeducation services, reducing the high rate of popu-lation growth, and protecting the environment.

The Gambia's economic strategy has been sup-ported by considerable technical and financialassistance from the international donor com-munity. The provision of such assistance, par-ticularly of concessional long-term project andprogram loans, has responded quickly to the intro-duction of comprehensive adjustment measures bythe Gambian authorities. Total aid disbursementsrose from SDR 38 million (19 percent of GDP) in1985/86 to an annual average of SDR 52 million(25 percent of GDP) in the subsequent five years(Table 1).

Policy ImplementationPolicy implementation has been guided by a set

of quarterly financial benchmarks and performancecriteria, relating to the net domestic assets of thebanking system (the Central Bank since Septem-ber 1990), net credit to the Government by thebanking system, gross credit to the GPMB, grossofficial reserves, the contracting or guaranteeing ofnew foreign loans by the Government, and the out-standing stock of external payments arrears; quan-titative benchmarks on current governmentexpenditure (excluding debt-service payments andcontributions to the development fund) have alsobeen set for the last four fiscal years. In addition,several structural benchmarks and structural per-formance criteria have been set, relating mainly tothe divestiture of public enterprises. Overall, policyimplementation has been broadly satisfactory.Occasional financial slippages and delays in theimplementation of certain structural reforms havecaused the nonobservance of a few quantitativeand structural benchmarks, but the nonobservanceof these benchmarks has resulted mainly fromexogenous factors, shortfalls or delays in externalassistance, and slippages in the implementation offiscal and monetary policies induced by special fac-tors or, in a couple of cases, pressures on govern-ment expenditure. On some occasions, there havebeen delays in sterilizing the impact on money sup-ply of higher-than-expected inflows of foreignexchange earnings from tourism and re-exports. Inall cases of deviations from the programmed path,the authorities have been quick to adopt correctivemeasures to help bring the program back on track,usually after consultations with the Fund.

The program for 1986/87-1988/89, supported bytwo annual arrangements under the SAF and thefirst annual arrangement under the ESAF, were

5



Table I. External Assistance1

GrantsLoans

Project loansProgram loans

Total

GrantsLoans

Project loansProgram loans

Total

1982/83

23.817.117.1

—40.9

10.57.67.6—

18.1

1983/84

23.715.115.1

—38.8

11.97.67.6—

19.4

1984/85

28.612.212.2

—40.8

14.96.36.3—

21.2

1985/86

31.06.66.6—

37.6

15.83.43.4—

19.2

1986/87

(In millions

32.437.112.125.069.5

(In percent

19.822.6

7.415.242.4

1987/88

of SDRs)

36.214.312.6

1.750.5

of GDP)

20.07.97.00.9

27.9

1988/89

31.810.010.0

—41.8

15.04.74.7—

19.8

1989/90

34.320.110.99.2

54.4

15.49.04.94.1

24.4

1990/91

31.913.99.54.4

45.8

13.15.73.91.8

18.8

1991/92

Est.

34.919.410.19.4

54.3

14.27.94.13.8

22.1

Sources: Data provided by the Gambian authorities; and IMF staff estimates.1 Including commodity aid and technical assistance.

implemented broadly on schedule. Economic per-formance weakened somewhat during the first halfof 1989/90, the program for which was supportedby the second annual ESAF arrangement. A dis-ruption of the re-export trade, due to regionalpolitical disturbances, a decline in tourist arrivals,and a shortfall in nonproject grant receipts, cur-tailed the supply of foreign exchange to the inter-bank foreign exchange market and exerteddownward pressure on the exchange rate of thedalasi. As a result, the quantitative targets for grossofficial reserves were not observed and the mone-tary program was shifted off track. With a tighten-ing of fiscal policy during the second half of1989/90, together with a depreciation of the dalasiearlier in the fiscal year, and a recovery in touristarrivals and re-exports, the momentum of adjust-ment was regained.

The program for 1990/91, supported by the thirdannual ESAF arrangement, was on track for mostof the fiscal year. The quantitative benchmarks andperformance criteria for the first three quarterswere met. However, delays in implementing someenvisaged structural reforms caused a postpone-ment of the disbursement of the second tranche ofSAC II from the World Bank, including the associ-ated cofinancing. Among the delayed reforms werethe strengthening of the management of theGPMB and of customs administration and thecompletion of public expenditure plans for the pri-

ority sectors of the economy. The resulting majorshortfall in external assistance, combined with anoverrun in government current spending, led to thenonobservance of several of the quantitativebenchmarks for the end of June 1991.

The impact of these developments on economicperformance was aggravated during the first half of1991/92: additional shortfalls in external assistance,unrelated to policy implementation, and sizableoverruns in government expenditure induced aworrisome acceleration in monetary expansion. Asa consequence, several of the indicative quantita-tive benchmarks for the period were not met. Inresponse, the authorities introduced a package ofcorrective measures in March 1992, with specialemphasis on tax reforms and other measures tostrengthen the fiscal stance, designed to bring theprogram back on track.

Developments Since 1985/86

The implementation of the authorities' economicstrategy has resulted in an impressive improvementin The Gambia's economic and financial perfor-mance, thus laying the foundation for a sustainableexpansion in output. During the six-year period to1991/92, a steady growth in real GDP wasrecorded, inflation declined, and the overall bal-ance of payments balance switched from deficits to

6



sizable surpluses, facilitating the gradual elimina-tion of all outstanding external payments arrearsand the buildup of a comfortable level of gross offi-cial reserves. The external objectives and, to alesser extent, the inflation targets of the programssupported by the SAF/ESAF arrangements weremet, but actual real GDP growth fell somewhatshort of the program targets, particularly duringthe last two fiscal years, owing largely to exogenousfactors.

In particular, despite unfavorable weather, whichled to a stagnation of agricultural output, real GDPgrew on average by 3.4 percent a year, in line withthe rapid growth of the population (Chart 2 andTable 2).3 The vagaries of the weather, togetherwith the downward trend in world groundnutprices, led to sharp fluctuations from year to year ingroundnut production. Excluding agriculture, realGDP grew on average by 4.4 percent a year, asactivity in the industrial and services sectorsexpanded strongly, particularly in the dynamictourism and trade sectors, including the re-exporttrade. End-of-period inflation, as measured bychanges in the consumer price index, declined from70 percent in 1985/86 to 5 percent in 1990/91,before rising again to 12 percent in 1991/92; inannual average terms, the inflation rate has beenmore stable, falling from a peak of 46 percent in1986/87, reflecting largely the impact effect of theexchange rate adjustment, to a range of9-11 percent in the subsequent five years.

The Gambia's external position has improvedsubstantially since 1985/86. The gains in competi-tiveness and the enhanced price incentives haveencouraged a diversification of the production andexport bases, which has more than offset theadverse impact on total foreign exchange proceedsof the virtual stagnation in groundnut exportreceipts. The increased availability of foreignexchange has facilitated a strong expansion indomestic imports, reflecting to a large extent theincreasing project-related imports financed bydonors under the public investment program.Overall, the external current account deficit,excluding official transfers, has been contained atabout SDR 30-35 million throughout the periodsince 1985/86, implying a reduction in relation toGDP from a peak of 22 percent in 1986/87 to anestimated 14 percent in 1991/92 (Chart 3 and

Chart 2. Developments in Output andPrices(Annual percentage changes)

1983/84 1985/86 1987/88 1989/90 1991/92

80Prices

1983/84 1985/86 1987/88 1989/90 1991/92

Sources: Data provided by the Gambian authorities; and IMFstaff estimates.

Table 3). This deficit has, on average, been coveredfully by the inflows of official transfers, while thenet disbursements of concessional official loans andthe increasing inflows of private investment—reflecting in large part direct investment in thetourism and horticultural sectors—have allowedsizable overall balance of payments surpluses to berecorded in every fiscal year since 1985/86. Thesesurpluses, together with the exceptional financingavailable from the Fund, as well as debt reschedul-ings and debt relief,4 have facilitated a gradualrepayment of all outstanding external paymentsarrears and a strong buildup of gross officialreserves. The latter rose from a mere SDR 1.4 mil-

3Based on revised GDP data. In December 1991, revisednational accounts statistics were released by the Central Statis-tics Department, indicating changes in the composition and thelevel of real GDP, as well as a significant upward adjustment inthe GDP deflator; thus, by 1990/91 nominal GDP was 34 per-cent higher than previously estimated.

4 Outstanding arrears and debt-service obligations amountingto SDR 17.0 million were rescheduled by Paris Club creditors inSeptember 1986, while arrears and debt of SDR 14.3 millionwere rescheduled by London Club creditors in January 1988.Debt relief of about SDR 21.9 million, in the form of cancella-tion of debt-service payments on bilateral loans falling due dur-ing 1989-98, was also granted by France in 1989.

20

10

0

-10

-20

-30

Output

Real GDP

60

40

20

0

Consumer prices (annual average)

Consumer prices (end of period)

7

Agricultural output



Table 2. Selected Economic and Financial Indicators

1991/92

National income and prices1

GDP at constant pricesGDP deflatorNominal GDP (in millions of dalasis)Consumer price index (period average)Consumer price index (end of period)

External sectorExports, f.o.b. (in SDRs)2

Imports, f.o.b. (in SDRs)2

Terms of trade2

Nominal effective exchange rate3

Real effective exchange rate3

Government budgetRevenue and grantsTotal expenditure and net lending

Current expenditureDevelopment expenditure

Money and creditNet domestic assets4

Credit to the Government4

Credit to the private sector4

Broad moneyVelocity (GDP/average broad money)Interest rate on treasury bills5

(in percent; end of period)

Investment and savingsGross investmentGross national savings

Of which: domestically generated6

Government budgetSurplus or deficit (-), excluding grants7

Surplus or deficit (-), including grants7

Revenue and grants

External sectorCurrent account balance

Excluding official transfersIncluding official transfers

External debt outstanding, including the IMF

External debt service9

Including the IMFExcluding the IMF

Current account balanceExcluding official transfersIncluding official transfers

Overall balance of paymentsExternal payments arrears (end of period)Gross official reserves (end of period)

(in equivalent months of imports, elf)

1982/83

14.61.7

605.89.3

11.5

15.1-4.7

4.92.01.2

-17.4-3.2-3.1-3.3

89.324.119.235.14.6

7.5

22.320.8

(10.3)

-12.1-9.320.2

-12.0-1.596.3

19.916.7

-27.1-3.3

-28.520.5

2.70.4

1983/84

-8.210.4

617.815.621.1

II.117.662.0-3.7-0.5

25.417.824.9

5.7

34.62.9

-8.23.24.5

9.5

22.716.3(4.4)

-10.2-6.024.9

-18.2-6.4

108.9

19.616.4

-36.4-12.7-18.5

51.05.40.6

1984/85 1985/86 1986/87

(Annual percentage changes,

1.622.1

781.921.812.4

-27.9-22.1-14.2-13.0

-5.2

17.724.4

7.755.2

10.310.60.4

32.94.3

9.5

21.217.9(3.0)

-11.6-7.523.1

-18.1-3.3

118.5

1

21.512.5

-34.9-6.3-5.657.4

1.90.3

4.135.6

1,085.235.070.4

-4.6-1.6

-41.4-15.7

-1.2

50.39.8

22.4-16.5

121.14.5

13.524.54.9

15.0

15.414.7

(-1.1)

-10.2-4.725.0

-16.5-0.7

112.9

In percent

25.015.0

-32.3-1.3

-11.688.2

1.40.2

2.833.2

1,486.046.222.3

-5.66.6

-0.5-43.6-18.5

78.390.076.568.2

-131.8-72.6

-4.143.9

5.3

19.0

(In percent

19.617.5

(-2.3)

-15.7-5.132.6

-21.8-2.1

122.6

1987/88 1988/89 1989/90

unless otherwise specified)

1.78.2

1,635.512.49.2

6.11.7

-1.54.97.4

I.I10.134.414.9

-21.28.45.5

20.54.5

16.8

of GDP)

15.519.5

(-0.5)

-16.8-7.230.0

-16.03.9

122.6

4.313.8

1,942.310.88.0

30.123.20.18.24.2

15.3-16.2-19.3-19.8

-8.4-19.7

8.28.34.8

18.0

17.619.4(4.4)

-4.11.8

29.1

-13.21.9

101.4

of net exports and travel income)

104.271.0

(In millions

-35.8-3.425.841.8 „10.9

1.4

49.638.0

of SDRs)

-29.17.1

13.732.220.4

2.6

49.441.6

-27.84.05.1

14.216.4

1.7

5.214.8

2,345.210.214.0

20.224.8-5.5

2.1-8.9

16.738.822.422.6

-18.6-0.0

6.117.04.9

17.5

20.617.9(2.5)

-8.2-1.728.1

-18.1-2.787.7

8

52.945.6

-40.3-6.020.10.2

25.42.1

1990/91

2.312.1

2,689.49.15.4

10.311.22.74.6

-3.3

2.9-8.0

4.114.6

-35.9-32.8

7.916.95.1

18.5

19.319.2(6.1)

-4.11.3

25.2

-13.2-0.182.0

23.816.4

-32.3-0.421.1

—44.9

3.4

Est.

4.011.4

3,117.211.512.4

5.15.0

-0.2-4.7-3.6

26.819.610.68.9

-52.8-60.4

7.94.75.0

18.5

19.019.3(5.1)

-3.92.8

27.6

-13.90.3

85.6

22.317.8

-34.20.8

23.1—

67.94.9

Sources: Data provided by the Gambian authorities; and IMF staff estimates.'Based on the revised national accounts statistics, which involve a significant upward adjustment in nominal GDP since 1981/82.including re-export trade.3Annual average data. For 1991/92 the data relate to the first eight months of the fiscal year.4ln percent of broad money at the beginning of the period.5Data for 1991/92 relate to the rate prevailing as of April 1992.6Gross national savings minus official transfers.including special provisions.8Net exports defined as total exports minus imports used for re-exports.9Debt service paid, including cash payments for arrears reduction after 1985/86, and after debt relief.

8


Chart 3. External Developments

- 3 5

- 2 5

15

0 - Current account deficit(Including official transfers;

left scale)-5

1982/83 1984/85 1986/87 1988/89 1990/91

20Overall Balance of Payments and

15 _ Official Reserves

10-

5

0

-5

-10

-151982/83 1984/85 1986/87 1988/89 1990/91

Overall balance(In percent of GDP;

left scale)

Gross official reserves(In months of imports;

right scale)

5

4

3

2

1

0

120

100

80

60

40

20

01982/83 1984/85 1986/87 1988/89 1990/91


'Inflows of official transfers and long-term concessional loans.


lion (less than a week of total imports) at the end ofJune 1986 to an estimated SDR 68 million at theend of June 1992, or the equivalent of 4.9 monthsof total imports.

The Gambia's external debt and debt-serviceposition has also improved appreciably in recentyears. As the arrears were being repaid, the exter-nal public debt declined from SDR 221 million(113 percent of GDP) at the end of June 1986 toSDR 196 million (88 percent of GDP) by the end ofJune 1990, before rising to an estimated SDR 211million (86 percent of GDP) by the end ofJune 1992. Debt-service payments, on the otherhand, inclusive of obligations to the Fund and ofcash payments for arrears reduction and after debtrelief, fell as a ratio of current foreign exchangeearnings (i.e., domestic exports plus travel incomeand net re-exports) from a peak of 104 percent in1986/87 to 22 percent by 1991/92. The external cur-rent account deficit in relation to GDP and thedebt-service ratio are expected to continue todecline over the medium term, while gross officialreserves are projected to rise further to more thanfive months of total imports. With the normaliza-tion of its relations with external creditors and theimprovement in its external accounts achieved sofar, The Gambia has reached a position where it nolonger needs exceptional balance of paymentsfinancing, but continues to require sizable, thoughdeclining, inflows of foreign assistance in relationto GDP.

Notwithstanding the improvement in its eco-nomic and financial performance, The Gambiacontinues to be confronted with major structural,institutional, and financial constraints, as it remainshighly vulnerable to adverse external develop-ments and heavily dependent on foreign financialassistance. In addition, the country continues toface a number of deep-rooted developmental con-straints, such as high population growth, under-developed human capital, paucity of naturalresources, and degradation of the environment.These constraints are being addressed in the con-text of the country's ongoing reform efforts.

External assistance(right scale)

25

20

15

10

5

5

45

9

Current Account Deficit and ExternalAssistance Current account deficit

(Excluding official transfers;left scale)

Debt-Service Payments

Including obligations to the IMF

Excluding obligationsto the IMF



1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91

Sources: Data provided by the Gambian authorities; and IMF staff estimates.1Structural adjustment credits; including cofinancing.2Including private suppliers' credits and errors and omissions.3Cash payments in connection with the Paris Club and London Club reschedulings.4ln respect of Paris Club rescheduling.5Based on the revised GDP data.6End of period.7ln percent of exports and travel income less imports used for re-exports.8Including cash payments for arrears reduction, and after debt relief.

1991/92

Est.

Exports, f.o.b.Of which: groundnuts

re-exportsImports, f.o.b.

For domestic useOf which: oil products

For re-exports

Trade balance

Interest (net)Other services (net)

Of which: travel income

Private unrequited transfers (net)Current account balance, excluding

official transfers

Official unrequited transfers (net)Current account balance, including

official transfers

Capital accountOfficial loans (net)

Project loansWorld Bank SACs1

AmortizationPrivate capitalShort-term capital2

Overall balance

FinancingGross official reserves (increase - )Purchases/loans, IMFRepurchases/repayments, IMFChange in arrears (increase +)Exceptional financing3

Bank of England deposits4

Memorandum items

Current account balanceIn percent of GDP5

Excluding official transfersIncluding official transfers

Gross official reserves6

In millions of SDRsIn months of total imports

Debt service78

Including the FundExcluding the Fund

77.5(22.8)(48.0)

-81.7-54.4

(. . . )-27.3

-4.2

-27.1(14.2)

4.2

-27.1

23.8

-3.3

-25.210.817.1

—-6.3

-36.0—

-28.5

28.51.68.8

-6.724.8

——

-12.0-1.5

2.70.4

19.916.7

86.1(31.7)(50.8)

-96.1-67.2

(. . . )-28.9

-10.0

-6.2-24.6(18.4)

4.4

-36.4

23.7

-12.7

9.58.7

15.1—

-6.40.8

-15.3-18.5

18.5-2.7

2.6-0.719.3

——

-18.2-6.4

5.40.6

19.616.4

62.1(15.9)(42.6)

-74.9-50.6

(. . . )-24.3

-12.8

-8.1-18.6(18.5)

4.6

-34.9

28.6

-6.3

5.75.2

12.2—

-7.00.5

-5.0-5.6

5.63.6—

-4.36.4——

-18.1-3.3

1.90.3

21.512.5

59.2(8.5)

(46.6)-73.7-47.1(-8.2)-26.6

-14.5

-12.6-10.1(20.6)

4.8

-32.3

31.0

-1.3

-10.3-4.6

6.6—

-11.22.0

-7.7-11.6

11.60.4—

-9.120.3

——

-16.5-0.7

1.40.2

25.015.0

(In millions

55.9(9.8)

(43.8)-78.6-53.6(-5.6)-25.0

-22.7

-14.9-4.3(27.5)

6.0

-35.8

32.4

-3.4

29.228.512.125.0-8.6

5.0-4.325.8

-25.8-9.511.2-4.4

-29.03.02.9

of SDRs)

59.3(13.5)(42.2)

-79.9-55.8(-6.2)-24.1

-20.6

-10.4-4.6(28.0)

6.6

-29.1

36.2

7.1

6.66.5

12.61.7

-7.82.5

-2.413.7

-13.7-9.5

7.2-4.2-6.9

1.5-1.8

(In units indicated)

-21.8-2.1

10.91.4

104.271.0

-16.03.9

20.42.6

49.638.0

111(13.2)(59.2)

-98.4-63.4(-5.7)-35.0

-21.2

-8.7-3.9(31.4)

6.0

-27.8

31.8

4.0

I.I0.4

10.0—

-9.62.4

-1.75.1

-5.14.06.8

-3.2-11.6

—- I . I

-13.21.9

16.41.7

49.441.6

92.7(12.9)(73.8)

-122.8-77.6

(-11.2)-45.2

-30.1

-9.0-7.7(30.4)

6.5

-40.3

34.3

-6.0

26.110.310.99.2

-9.88.47.4

20.1

-20.1-9.0

6.8-3.1

-14.8——

-18.1-2.7

25.42.1

52.945.6

102.3(11.1)(85.3)

-136.6-84.4

(-16.5)-52.2

-34.3

-5.2-1.1(39.7)

8.4

-32.3

31.9

-0.4

21.56.09.54.4

-7.97.57.9

21.1

-21.1-19.5

3.4-4.8-0.2——

-13.2-0.1

44.93.4

23.816.4

107.4(10.2)(90.2)

-143.4-88.2

(-15.9)-55.2

-36.0

-5.5-1.1(41.1)

8.5

-34.2

34.9

0.8

22.310.210.19.4

-9.27.64.6

23.1

-23.1-23.4

3.4-3.1

———

-13.90.3

67.94.9

22.317.8

Table 3. Balance of Payments

10


Ill Growth, Saving, and Investment

T he growth potential of the Gambian economyhas improved markedly since 1985/86 with the

removal of distortions in the structure of relativeprices, the strengthening in economic incentives,including the introduction of a market-determinedexchange rate, and the rehabilitation of economicinfrastructure. These policies have encouraged adiversification of the production base primarilytoward services (such as regional trade and tour-ism) and to a lesser extent manufacturing, whilebroadening at the same time the base of agri-cultural output. Notwithstanding the progressmade in diversifying economic activity, the outputbase of the economy remains fragile; it continues tobe sensitive to changes in the weather, as well asexternal and regional developments.

The attainment of broad macroeconomic sta-bility and the improved economic incentives havealso contributed to a marked recovery in grossinvestment and domestically generated grossnational savings from their low levels in 1985/86.The increase in gross investment was accompaniedby an enhancement of its efficiency, particularly ofgovernment investment, thus supporting the strongexpansion in output. The strengthening of the sup-ply response of the economy facilitated theimprovement in the savings performance, as well asin the external current account position, withoutundue restraint of domestic absorption. Notwith-standing the recovery in savings and investment inrelation to GDP, savings and investment are stilllower than their levels in the early 1980s andremain too modest to sustain a satisfactory expan-sion in economic growth and generate adequateemployment opportunities for The Gambia'srapidly growing labor force. In view of this, thepolicies currently in place are aimed at stimulatingprivate sector savings and investment, whilestrengthening further government finances andmaintaining macroeconomic stability.

Developments in OutputReal GDP leveled off during the second half of

the 1970s, but rose markedly in the early 1980s,

peaking in 1982/83, largely as a result of a steepexpansion in groundnut production. Activity inagriculture fell sharply (26 percent) in the subse-quent year, owing mainly to unfavorable weather,and recovered only modestly by 1985/86; this,together with a sluggish growth in industry and ser-vices, led to a similar trend in real GDP (Table 4).Following the introduction of the economic recov-ery program, real GDP grew steadily, at an annualaverage rate of 3.4 percent during the six-yearperiod to 1991/92. During that time, real GDPgrowth was strongly influenced by the generallyunfavorable weather and a marked decline inworld groundnut prices, which led to a stagnationin agricultural output. The decline in real valueadded in agriculture was particularly strong in1990/91, amounting to 14 percent, and despite anestimated increase of 5.4 percent in 1991/92, agri-cultural activity in that year was barely higher thanin 1985/86. However, a marked expansion in realvalue added in the industrial and services sectors,averaging 4.5 percent and 4.1 percent a year,respectively, cushioned the adverse effects on totalreal GDP, thus facilitating a stabilization of realper capita income in the face of strong populationgrowth. The Gambia's growth performance since1985/86 compares favorably with the average for allsub-Saharan African countries, where it amountedon average to only 2.1 percent a year, significantlybelow the estimated annual rate of populationgrowth (3 percent).5

Within the agricultural sector, a modest declinein real value added in crop production was offsetby higher activity in the livestock, forestry, andfishery subsectors. Groundnut production fluctu-ated sharply from year to year, again owing largelyto the vagaries of the weather and, in part, to adownward trend in real producer prices. In particu-lar, after peaking at over 151,000 tons in 1982/83,groundnut production fell to 75,000 tons at thebeginning of the adjustment efforts in 1985/86,

5 For a review of recent trends in developing countries, seeInternational Monetary Fund (1992).

11


Ill GROWTH SAVING AND INVESTMENT

Table 4. Gross Domestic Product by Kind of Economic Activity

AgricultureCrop Production

Of which: groundnutsLivestockForestryFishingMining and quarrying

IndustryManufacturing

Of which: groundnutsConstructionElectricityWater

ServicesTrade

Of which: groundnut tradeHotels and restaurantsTransportCommunicationsFinance and insuranceReal estate and business servicesOther servicesPublic administrationLess: imputed bank charges

GDP at factor costIndirect taxes (net)GDP at constant prices

AgricultureCorp Production

Of which: groundnutsLivestockForestryFisheriesMining and quarrying

IndustryManufacturing

Of which: groundnutsConstructionElectricityWater

ServicesTrade

Of which: groundnutsHotels and restaurantsTransportCommunicationsFinance and insuranceReal estate and business servicesOther servicesPublic administrationLess: imputed bank charges

GDP at factor costIndirect taxes (net)GDP at constant market prices

1982/83

27.822.411.73.80.4I.I0.0

10.76.00.94.40.20.2

49.619.28.02.16.10.81.95.71.7

15.03.0

88.111.9

100.0

1983/84

22.416.58.24.10.51.30.0

11.35.7035.20.20.2

53.119.37.13.18.10.90.26.41.9

16.12.8

86.813.2

100.0

-26.0-32.6-35.4

-1.08.17.93.3

-3.4-12.6-64.7

9.13.5

-10.1

-1.7-8.0

-19.332.820.7

3.9-88.0

1.93.2

-1.6-13.9

-9.62.1

-8.2

1984/85

24.418.5834.00.51.40.0

10.64.40.25.80.20.2

52.416.54.03.58.91.00.66.32.0

14.91.3

87.412.6

100.0

1985/86

(In

24.818.05.74.40.51.80.0

11.05.50.25.10.20.2

52.916.63.53.9831.32.76.42.0

13.11.5

88.711.3

100.0

(Sectoral growth

10.513.82.7

-1.43.29.33.2

-4.1-21.2-52.9

13.52.5

15.8

0.2-13.1-41.8

16.611.820.4

145.11.23.8

-6.1-53.2

2.3-2.9

1.6

5.81.8

-28.513.73.7

37.43.7

8.029.4

1.7-8.513.47.5

5.15.1

-10.814.1-2.029.9

383.85.54.5

-8.219.5

5./-6.8

4.1

1986/87

percent

25.819.28.44.30.51.80.0

12.35.90.35.90.20.2

52.217.93.33.69.12.03.46.32.0

10.32.3

90.39.7

100.0

rates at

7.09.4

51.80.13.60.83.6

14.711.772.7[8.510.16.4

1.410.8-3.4-4.211.855.526.40.63.2

-19.262.8

4.6-11.4

2.8

1987/88

of real GDP)

24.718.69.04.50.51.10.0

11.46.70.34.10.30.2

54.418.14.23.79.53.53.26.22.0

10.62.4

90.69.4

100.0

1988/89

23.417.17.14.50.51.30.0

1 1.76.3035.00.20.2

51.615.6

1.63.78.24.33.06.22.0

11.02.4

86.813.2

100.0

1989/90

23.917.88.94.50.51.10.0

11.96.1035.30.20.2

52.116.62.93.28.15.03.06.12.0

10.52.4

87.912.1

100.0

constant prices; in percent)

-2.4-1.7

8.77.33.5

-35.73.5

-6.015.016.0

-28.413.96.0

6.12.5

32.45.16.4

80.7-3.6

1.04.34.54.1

2.0-1.4

1.7

-1.2-4.1

-18.04.83.4

20.73.4

7.8-2.616.726.0-9.2

3.1

-1.0-10.1-60.6

4.8-9.930.1-1.4

3.03.78.34.6

0.045.4

4.3

7.310.032.1

3.63.3

-12.53.3

6.72.7

47.411.910.3-0.7

6.012.088.5-9.4

4.021.44.63.56.8

5.7

6.5-3.3

5.2

1990/91

Est.

20.113.55.04.50.51.60.0

12.05.80.15.60.30.3

54.915.91.84.28.76.43.46.12.0

10.52.4

86.913.1

100.0

-14.0-22.6-42.6

3.63.4

48.510.0

2.8-3.3

-69.88.0

23.622.7

7.8-2.0

-36.833.810.330.217.52.61.52.92.8

1.210.423

1991/92

Est.

20.4

5.24.50.51.50.0

11.75.50.05.70.303

55.216.2

1.84.48.66.63.46.12.0

10.32.4

87.312.7

100.0

5.46.78.03.0

3.0

1.9- I . I

-86.75.02.02.0

4.66.28.08.02.08.02.04.02.02.02.0

4.41.24.0

Sources: Data provided by the Gambian authorities; and IMF staff estimates.

12


Developments in Saving and Investment

before rising again to almost 130,000 tons in1989/90. With a severe drought in 1990/91,groundnut production fell again to 74,000 tons andrecovered only modestly to 84,000 tons in 1991/92.During the same period, groundnut oil prices inworld markets displayed a pronounced year-on-year variability, falling overall from SDR 962 a tonin 1982/83 to SDR 565 a ton in 1991/92. As a conse-quence, the real producer price (purchase pricesince 1989/90) for groundnuts fluctuated as well,along a generally declining trend; by 1991/92, it was27 percent lower than in 1982/83. The variability ingroundnut production, together with changes in theproducer price differential with a neighboringcountry,6 has affected the quantity of groundnutsprocessed domestically by the GPMB, and thusactivity in the manufacturing and trading sectors.

The services sector has benefited most fromthe improved macroeconomic environment andstrengthened economic incentives, including thegains in external competitiveness. Within the ser-vices sector, strong increases have been recordedsince 1985/86 in activity in the trade (including re-exports), tourism, transport and communications,and finance and insurance subsectors, amounting onan annual average basis to 4.9 percent, 5.5 percent,11.5 percent, and 7.1 percent, respectively. The tra-ditionally liberal trade regime maintained by TheGambia, combined with the lifting of exchange con-trols and the introduction of a market-determinedexchange rate, boosted the expansion of re-exportsto the subregion. Regional political developmentshave, on balance, also enhanced the importance ofThe Gambia as an entry point for regional trade. Abroad range of basic consumer goods (such as rice,green tea, sugar, tomato paste, tobacco, footwear,and textiles) are usually imported into The Gambia,where they are sold wholesale to visiting tradersfrom several neighboring countries. While thedevelopment of the re-export sector has had limitedemployment and income linkages to the rest of theeconomy, with the exception perhaps of the trans-port and communications and in part the bankingsectors, it has had a major impact on foreignexchange earnings.

The Gambia's climate and sandy beaches offeran attractive and cheaper alternative to Mediterra-nean countries for many European tourists. As aresult, the tourism sector has expanded markedly

6Groundnut producer prices in Senegal have tended to be lesssensitive to changes in the world market price for groundnuts,resulting in a generally sizable positive differential vis-a-vis pro-ducer prices in The Gambia (amounting to about 50 percent in1991/92), which has encouraged cross border sales ofgroundnuts.

in recent years, aided in part by the fiscal incentivesoffered by the 1988 Development Act to domesticand foreign investors. The number of foreign-owned and -operated hotels has risen substantially,facilitating an increase in the number of touristsfrom 78,000 in 1985/86 to 109,000 in 1991/92,mainly under air charter tourist packages. Whilethe import requirements of activity in the tourismsector remain fairly high, the strong expansion ofthe sector has boosted employment in the formalsector of the economy and activity in the con-struction sector, and has encouraged the develop-ment of related services, such as restaurants.

The industrial sector of The Gambia comprisesmainly manufacturing and construction. Valueadded in the public utilities sector has traditionallybeen rather modest. Activity in the manufacturingsector has expanded on average by 3.5 percent ayear since 1985/86, albeit from a low base. Thedevelopment of the sector continues to be con-strained by the small size of the economy, the lim-ited availability of domestic raw materials, thefrequent disruptions in the supply of electricity,and the weak managerial and technical expertiseavailable in the country. Activity in the con-struction sector, on the other hand, has benefitedfrom the emphasis of the public investment pro-gram on economic infrastructure and the con-struction of new hotels and of private houses forrent (mainly to expatriates).

The share of the industrial sector in total realGDP rose marginally from 11 percent in 1985/86 to12 percent by 1991/92, while that of the servicessector expanded from 53 percent to 55 percent,respectively. With the stagnation of activity in theagricultural sector, its share declined markedly,from 25 percent in 1985/86 (28 percent in 1982/83)to only 20 percent by 1991/92 (Chart 4). Althoughdata on employment and the labor force are notavailable, it is believed that at least 60 percent ofthe labor force has traditionally been employed inthe agricultural sector. The deteriorating incomeprospects in the rural areas have encouraged a highrate of urban migration, estimated at 6 percent ayear. Although data are not available, it is esti-mated that the pace of employment generation inthe urban areas may not have kept up with therapidly increasing labor supply, resulting in increas-ing urban underemployment and unemployment.

Developments in Saving andInvestment

Tentative estimates of saving and investmentbalances indicate that both gross investment andthe domestically generated gross national savings

13


I l l GROWTH, SAVING, AND INVESTMENT

(i.e., excluding foreign grants) have recoveredmarkedly from their low levels in 1985/86 (Ta-ble 5).7 In particular, after declining from 10 per-cent of GDP in 1982/83 to a negative levelequivalent to 1 percent of GDP in 1985/86, domes-tically generated savings rose to 5 percent of GDPby 1991/92. Similarly, gross national savings fell inrelation to GDP from 22 percent in 1982/83 to15 percent in 1985/86, before recovering to 19 per-cent by 1991/92.8 Notwithstanding this recovery,both saving and investment in The Gambia are stilltoo low to sustain a satisfactory growth in output,implying a continuing need to rely heavily on for-eign savings (external current account deficit,excluding official transfers), as well as on foreigngrants. While declining, the use of foreign savingsby The Gambia and the value of foreign grantsamounted each to the equivalent of 14 percent ofGDP in 1991/92, a level not unduly high given TheGambia's stage of economic development.9

The expansion in domestic savings reflected con-tributions from both the government and privatesectors, but the recovery in gross investment ema-nated entirely from the private sector (includingthe public enterprise sector). The improvement inthe Government's savings performance, from1 percent of GDP in 1985/86 to 3 percent in1991/92, was associated with a decline in govern-ment investment as a ratio to GDP from 7 percentin 1985/86 (9 percent in 1982/83) to 5 percent in1991/92. This resulted in a significant reduction inthe Government's net financial deficit and contrib-uted importantly to the strengthening of The Gam-bia's external current account position. It should berecognized, however, that while governmentinvestment declined relative to GDP, its efficiencyhas increased markedly through a more rigorousselection of investment projects and a greateremphasis on the rehabilitation of the basic eco-nomic infrastructure, thus supporting the recordedreal GDP growth. The net financial deficit of theprivate sector, on the other hand, has been rathervolatile. This reflected to a large extent the lumpi-

Chart 4. Sectoral Composition of Real GDP(In percent of GDP)


ness of investment projects undertaken in the late1980s in the tourism sector and the tendency ofprivate savings to change from year to year so as tocushion private consumption levels from the fluc-tuations in private disposable income caused by theswings in agricultural output and the external termsof trade. The still modest level of private savingsreflects largely the low levels of real per capitaincomes, the impact of the traditional extendedfamily system, and, in part, the weak developmentof the domestic financial system, notwithstandingthe restoration of positive real interest rates.10

While data on the breakdown of private savingsbetween personal and corporate savings are notavailable, it is believed that they comprise mainlyprofits by the business sector; part of these profitsmay have actually been placed abroad, given theabsence of restrictions on capital movements andthe foreign ownership of several enterprises in TheGambia, particularly in the tourism and tradesectors.7The estimates of saving and investment balances are derived

from partial indicators of sectoral expenditure patterns andthus, are unavoidably subject to a large margin for error.

8The Gambia's investment ratio compares favorably with thatof other sub-Saharan African countries, which amounted to17 percent of GDP in 1991, but is lower than the average for alldeveloping countries (excluding Eastern Europe and the formerU.S.S.R.), was estimated at 26 percent of GDP.

9To a large extent, the high level of foreign grants relative toGDP reflected sizable technical assistance.

10Although the empirical evidence suggests that interest ratepolicies have small effects on savings rates, maintenance ofnegative real interest rates for prolonged periods could lead to aflight out of financial savings. For a review of interest rate pol-icies in developing countries, see International Monetary Fund(1983) and Aghevli and others (1990).

14


::l---s :/••::••:.•••-..• •:?•••••••••• ••••'.)•::•.. :\: :•.:•.:--,;>•': • r ;, :-

^ •.;.; • ••:••..;,••;•....••• -:;.;::^^^^^^^^^^^^^^^^^^^^^^^ffi^^^^^^^liiiiii^iiiiiiiii^iiiisiii

1990/91 1991/92

GDP at market pricesGNP at market pricesUnrequited transfers, net1

Of which: official transfers

Gross disposable national income

Total consumptionPrivate consumption2

Government consumption3

Gross national savingsGovernment savings4

Private savings2

Domestically generated savings5

Gross domestic investmentGovernment investment6

Private investment2

External current account balanceIncluding transfersExcluding transfers

Government financial balance7

Government savings4

Government investment ;

Private financial balance2-7

Private savingsPrivate investment

1982/83

100.0• i oo.o

12.410.5

I 12.4

91.671320.2

20.8

13.1

10.3

22.39.3

13.0

-1.5- 1 2 . 0

-12.1- 2 . 8

9.3

0.113.113.0

1983/84

100.096.914.111.9

II 1.0

94.770.224.5 •

16.3. . 8.1

8.2

4.4

22 79.7

13.0

- 6 . 4• - 1 8 2

— 13.5- 3 . 89.7

- 4 . 782

13.0

1984/85

100.095.817.214.9

II 3.0

95.173.721.5

17.912.45.5

3.0

21.211.99.3

-3 .3-18.1

-143-2.511.9

, -3.85 593

1985/86

100.088.518315.8

106.8

92.1• 73.8

183

14.717.1

-2.4

-I.I

15.47.18.2

-0.7-16.5

-5.91.37.1

-10.6-2.4

8.2

1986/87

100.085.523.419.8

108.9

91.466.225.2

17.516.60:9

- 2 3

19.66.9

1.2.6

-2.1• - 21 .8

-10.1- 3 . 2

69

-11.70.9

12.6

1987/88

100.089.223.620.0

112.8

93363.230.1

19.5.10.0

9.4

-0 .5

S5.56.78.8

3.9- 1 6 . 0

- 1 6 . 6 .- 9 . 9

6.7

0.69.48.8 •

1988/89

100.091.417.915.0

S093

89.969320.6

S9.417.42.0

4.4

17653

123

. S.9-13.2

-2.92.453

- 1 0 . 22.0

123

1989/90/

100.091.618315.4

109.9

92.071.420.6

17.916.11.8

2.5

20.65.1

15.5

- 2 . 7-18.1

- 4 . 40.75.1

- 1 3 . 71.8

15.5

Est.

100.094.016.513.1

I 10.5

91.472.918.5

19.213.953

6.1

1935.1

14.2

-0.1- 1 3 . 2

- 4 30.85 1

- 8 . 95.3

14.2

Est.

100.093.917.6S4.2

IS 1.5

92.274317.9

S9317.12.2

5.1

19.053

13.7

03- 1 3 . 9

- 2 3• 2.9• 5 3

-I 1.52.2

13.7

Sources: Data provided by the Gambian authorities; and IMF staff estimates.1 Consists of both official and private transfers.includes public enterprises.3Government current expenditure, less capital component of recurrent budget, plus current component of development budget.4Domestic revenue (excluding capital revenue), less government consumption.5Gross national savings, excluding official transfers.6DeveIopment expenditure (excluding net lending), plus capital component of recurrent budget, less current component of development budget.7Pomestically generated financial balances.

is: ©International Monetary Fund. Not for Redistribution

IV External Adjustment

A n integral element of the Government's eco-nomic strategy has been the establishment of

a market-determined exchange rate and the liber-alization of the exchange and trade system. Bothaspects were viewed as critical for strengtheningeconomic incentives and achieving a viable balanceof payments position.

Exchange Reform and ExchangeRate Policy

As indicated in Section II, the peg of the dalasito the pound sterling was replaced in January 1986with a flexible exchange rate system in the contextof an interbank market. At the same time, theimplementation of the Exchange Control Act wassuspended, resulting essentially in the lifting of allthe restrictions on current, as well as capital, inter-national transactions. The liberalization of theexchange system was completed in July 1990, withthe elimination by then of all the outstanding exter-nal payments arrears.11

Under the flexible exchange rate system, theexchange rate of the dalasi is determined freely bythe supply and demand for foreign exchangebetween the authorized foreign exchange dealersand their customers, and among the dealers them-selves (interbank market). Dealers are required toobserve limits on their net holdings of foreignexchange, and amounts in excess of these limitshave to be offered to the interbank market or soldto the Central Bank. The Central Bank holds aweekly fixing session with the participation of allforeign exchange dealers; the rate determined atthis session is used mainly for statistical valuationpurposes and applies only to transactions takingplace at that time among the participants.12 The

11 The provisions of the Exchange Control Act are not beingimplemented; it is expected that the Act will be repealed in thenear future, following the envisaged enactment of a RevisedCentral Bank Act during the second half of 1992.

12For a detailed review of the functioning of flexible exchangerate systems introduced by developing countries in recent years,see Quirk and others (1987).

fixing sessions have also provided a forum for thedealers to exchange views on, and share assess-ments of, developments in the foreign exchangemarket. The number of authorized dealers was ini-tially limited to the three commercial banks, but ithas since been significantly increased, following theestablishment of foreign exchange bureaus inApril 1990. With the strong expansion of the re-export trade, the foreign exchange market has beendeepened further, as a sizable volume of tradetransactions in The Gambia is conducted in CFAfrancs.

The foreign exchange market has functionedfairly smoothly, resulting in the effective absorp-tion of the parallel exchange market and a virtualelimination of the differential between the ratesprevailing in the two markets; the spread has actu-ally narrowed to less than 2 percent. Foreignexchange transactions between banks have tendedto be modest, while transactions between autho-rized dealers and their customers have expandedsubstantially. Despite the lifting of controls on cap-ital movements, the foreign exchange market inThe Gambia has remained essentially a flow mar-ket, in the sense that supply and demand is linkedmore to current transactions rather than changes inthe desired outstanding stocks of foreign exchangeand dalasis (asset market). Nonetheless, it is esti-mated that the restoration of positive real interestrates on dalasi-denominated assets has encouragedcurrency substitution away from foreign exchangeinto domestic currency.

Exchange rate policy has focused on establishingand maintaining an appropriate market-deter-mined exchange rate, so as to reverse the sizableovervaluation of the dalasi that had taken placeprior to 1986 and thus stimulate the production andexport of tradable goods. This has resulted in amajor initial depreciation of the dalasi in real effec-tive terms. The real effective exchange rate hassince then been maintained broadly stable throughappropriately restrictive fiscal and monetary pol-icies, aimed at lowering inflation to a low level,comparable to the average for the main tradingpartner countries. Over the past couple of years,

16


Diverssification of Exports

this emphasis of policies has facilitated a broadlystable nominal effective exchange rate of the dalasias well In this context, to support the exchangeirate policy and help minimize the incentives forprivate capital outflows, interest rates in The Gam-bia have been maintained, through open marketoperations, at positive levels in real terms and withappropriate margins above interest rates abroad.These differentials have tended to be sizable,exceeding at times the inflation differentials andthe ex post depreciation of the dalasi against thecurrencies of major industrial countries.13 InMay 1992, the treasury bill rate in The Gambiaamounted to 18.5 percent, some 14.5, 8.0, and8.5 percentage points higher than comparableinstruments denominated in U.S. dollars, poundssterling, and French francs, respectively.

The Central Bank does not intervene in theinterbank market with a view to influence themovements in the exchange rate. However, it hastended to be a net purchaser of foreign exchangefrom the market so as to achieve quarterly quan-titative targets for the level of gross officialreserves, specified under the Government's adjust-ment program. For the most part, these purchasesby the Central Bank have not had an undue impacton the prevailing exchange rate in the interbankmarket. On one occasion (in late 1990), however,when an unexpected decline in tourist arrivals anda disruption in the re-export trade affected adver-sely the supply of foreign exchange, the CentralBank's efforts to meet its gross reserve targets ledto a marked depreciation of the dalasi.

Until mid-1990, the pace of accumulation ofgross reserves by the Central Bank had been rathermodest, given the need to gradually eliminate theoutstanding external payments arrears. In particu^-lar, gross official reserves rose from the equivalentof less than a week of total imports in June 1986to 2.1 months in June 1990, but have since thenrisen to an estimated 4.9 months of imports byJune 1992, or 7.9 months of domestic imports. Sucha level of reserve coverage is considered by theGovernment as necessary to facilitate the mainte-nance of a liberal exchange system, while providinga cushion against adverse exogenous shocks, giventhe country's vulnerability to changes in theweather, declines in the terms of trade, shortfalls inexternal assistance, and regional developments.

External Trade and Tariff ReformThe Gambia has traditionally maintained a lib-

eral trade system, free of import quotas and othertrade restrictions in the importation or exportation

of any good other than groundnuts. The monopolyof the GPMB in the exportation of groundnuts waseliminated in January 1990. Since then, privatetraders have been allowed to use the processingfacilities of the GPMB for the decortication ofdomestically purchased groundnuts for export. TheGambia's import tariff structure has tended to belower than in neighboring countries, contributingto the development of the re-export trade. As partof the adjustment efforts since 1985/86, the tariffstructure has been rationalized, with a view toachieving over time a low and uniform level ofprotection.

Soon after the introduction of a flexibleexchange rate system in 1986, all specific importduties were converted into ad valorem equivalents.Moreover, the overall structure.of customs dutieshas since been modified to avoid the excessive tax-ation of intermediate inputs and other anomalies,while average duty rates have been lowered. Thegeneral duty rate of 6 percent applied to all importswas eliminated following the introduction of anational sales tax in 1988, and the level of specificduties was reduced from an average of about36' percent (excluding petroleum) in 1985/86 toabout 20 percent by 1990/91. Most imports are nowtaxed at rates below 24 percent, with the majorexceptions being petroleum products, motor vehi-cles, beer and alcohol, and soap. Beer and soapmanufacturing are the only industries in The Gam-bia that are protected by relatively high importduties. Petroleum products are subject to a 10 per-cent sales'tax, and a variable duty that is deter-mined by the difference between the administeredpump price, specific allowances to distributors, andthe import costs. Currently, import duties on petro-leum products range from about 170 percent to2.50 percent. The 10 percent duty onexports ofgroundnut products was eliminated in 1989, thusreducing the vulnerability of the fiscal position tofluctuations in groundnut production, as well asimproving production incentives to farmers. Tariffpolicy in The Gambia has also sought to encouragedomestic trading activity by maintaining relativelylow tariffs on commodities that are typically re-exported. In addition to the 10 percent sales tax,tariffs on these commodities generally range fromzero to 10 percent.

Diversification of Exports

As highlighted in Sections II and III, strength-ened economic incentives, particularly the estab-lishment of a market-determined exchange rateand the associated gains in external competitive-ness, together with the maintenance of a liberaltrade regime and regional developments, have

17

13For a more detailed study of this issue, see Walsh (1991).


IV EXTERNAL ADJUSTMENT

Table 6. Foreign Exchange Earnings

GroundnutsOther domestic

exportsNet re-exportsTravel income

Total

GroundnutsOther domestic

exportsNet re-exportsTravel income

Total

1982/83

22.8

3.617.114.2

57.7

39.5

6.229.624.6

100.0

1983/84

31.7

3.617.018.4

70.7

44.9

5.124.026.0

100.0

1984/85

15.9

3.614.218.5

52.2

30.4

6.927.235.4

100.0

1985/86

8.5

4.215.520.6

48.8

1986/87

(In millions

9.8

2.314.627.5

54.3

1987/88

; of SDRs)

13.5

3.614.128.0

59.2

1988/89

13.2

4.718.431.4

67.7

(Shares in the total; in percent)

17.4

8.631.842.2

100.0

18.1

4.326.950.7

100.0

22.8

6.123.847.3

100.0

19.5

7.027.246.4

100.0

1989/90

12.9

5.921.130.4

70.4

18.4

8.430.043.2

100.0

1990/91

1 I.I

5.924.439.7

81.1

13.7

7.330.148.9

100.0

1991/92

Est.

10.2

7.025.841.1

84.1

12.1

8.330.748.8

100.0


Chart 5. Composition of Foreign ExchangeEarnings, 1982/83-1991/92(In percent of net exports plus travel income)

50

45

40

35

30

25

20

15

101982/83 1984/85 1986/87 1988/89 1990/91

Groundnutproducts

Re-exports

Travel income


given rise to a notable diversification of the produc-tion and export bases of the Gambian economy.

The strong expansion of the tourism sector hasresulted in a doubling, between 1985/86 and1991/92, of travel receipts, which have replacedgroundnut exports as the most important source offoreign exchange earnings. At the same time, re-exports have become the second largest source offoreign exchange earnings. Other domestic exports(i.e., fish, cotton, and horticultural products) havealso expanded markedly, albeit from a very lowbase. Consequently, the share of groundnuts intotal foreign exchange earnings from domesticexports, net re-exports, and travel income declinedfrom a peak of 45 percent in the early 1980s to anestimated 12 percent in 1991/92, while the shares oftravel income and net re-exports rose from 24 per-cent and 26 percent to 49 percent and 31 percent,respectively (Chart 5 and Table 6).

18


V Fiscal Adjustment

I n the decade to 1985/86, following the launchingof The Gambia's first five-year development

plan in 1975, public sector involvement in the econ-omy increased substantially through the creationof public enterprises, the liberal provision ofgovernment-guaranteed loans at subsidized inter-est rates, and a large expansion in the size of theCentral Government. Although a substantial in-crease in revenue mobilization occurred in thisperiod, it was outpaced by a steep rise in expendi-ture, particularly with respect to the wage bill andpublic investment. The large increases in the wagebill reflected a doubling in the size of the civil ser-vice. In 1975, there were 4,000 civil servants and2,000 nonpermanent staff. By 1985 these numbershad risen to 10,700 civil servants and 5,000 nonper-manent staff.

The large expansion in the size of the civil ser-vice, and the overly ambitious public investmentprogram, contributed to a substantial deteriorationin the fiscal position, which together with theexogenous shocks that hit The Gambian economyin the early 1980s, gave rise to mounting fiscalimbalances. The prolonged Sahelian drought of1980-81 drastically affected government revenue,and the impact of the 1979 oil price hike and therising inflation and interest rates in industrial coun-tries further aggravated the domestic economic sit-uation. In response, some cuts in currentexpenditure were effected, but the relatively highlevels of public investment were maintained. Thisexpenditure was increasingly financed by foreignborrowing, including substantial use of short-termloans. The overall fiscal deficit widened to theequivalent of 12 percent of GDP in 1982/83. As aresult, the Government's inability to service itsexternal debt obligations gave rise to a significantbuildup of external payments arrears. Despitesome improvement in revenue mobilization duringthe three-year period to 1985/86, the overall budgetdeficit was only contained by a sharp reduction inexpenditure on operations and maintenance, whichled to a deterioration in the physical infrastructure.By 1985/86, the fiscal deficit still exceeded 10 per-cent of GDP (Chart 6 and Table 7).

The ambitious public investment program, withthe exception of investment in the tourism sector,reflected poor evaluation and selection of invest-ment projects and contributed only marginally toraising the growth prospects of the economy. Inaddition, the creation of an inefficient public enter-prise sector, together with prices administered atsubsidized levels, led to the accumulation of largepublic enterprise debts to the domestic bankingsystem, which will place a substantial burden on thefiscal position in subsequent years. For example,the external debt of several public enterprises hasinvariably been serviced by the Government.

These problems have been directly addressed inthe context of the adjustment efforts pursued since1985/86. An integral objective of these efforts hasbeen a scaling back of the role of the public sectorin the economy with a view to creating a favorableclimate for private investment. To this end, fiscalpolicy has been aimed at lowering the budget defi-cit, raising government savings, and encouragingeconomic activity through tax reforms and moreefficient public investment that has focused ondeveloping the basic economic and socialinfrastructure. Fiscal policy has also played a rolein alleviating the social impact of adjustment and ofpoverty in general.

Tax Policy

Tax policies during the period since 1985/86 havebeen directed at broadening the tax base, strength-ening tax administration, and rationalizing thestructure of taxation, so as to improve economicincentives and enhance the efficiency and equity ofthe tax system. These efforts have been aided bythe positive impact on the tax base of the deprecia-tion of the dalasi, the increasing volume of imports,and the rising level of economic activity. The keytax reforms implemented included a restructuringof customs duties, the repeal of export taxes, theintroduction of a national sales tax, reductions inmarginal tax rates on personal income, andincreases in specific excise duties and charges.

19


V FISCAL ADJUSTMENT

Budget Balance and Government Savings

-12

Government savings(Excluding grants)

-16

Budget balanceN (Excluding grants and special provisions)

1982/83 1984/85 1986/87 1988/89 1990/91

40Revenue and Expenditure

1982/83 1984/85 1986/87 1988/89 1990/91


In the first two years of the adjustment efforts,domestic revenue benefited from the markedbroadening of the tax bases, with tax reforms lim-ited to a restructuring of import tariffs; as indicatedin Section IV, all specific duties were convertedinto ad valorem rates, while the structure ofcustoms duties was rationalized and the averageduty rates lowered. Until 1987/88, the bulk ofdomestic revenue (over 70 percent) emanated fromtaxes on international trade (Table 8).

To reduce the reliance on this source of taxreceipts, a national sales tax of 10 percent wasintroduced in 1988, applying to all goods producedor imported into The Gambia. Exemptions to thesales tax include goods for educational andreligious purposes; foodstuffs other than wine,alcohol, and candies; production equipment; medi-cal supplies; butane gas and gas cookers (forenvironmental reasons); packaging of goods forexport; and air freight on exported Gambian pro-

duce. Since The Gambia has little domestic produc-tion of manufactured goods, the coverage of thesales tax has gradually been extended to covermost services, including the tourism industry. As aresult, revenue from taxes on goods and servicesrose sharply, from 1 percent of GDP in 1987/88 to6 percent of GDP in 1988/89 and to 8 percent ofGDP in 1991/92; its share in total domestic revenueincreased from 7 percent in 1987/88 to 40 percent in1990/91, before easing to 36 percent in 1991/92,accompanied by a reduction in the share of taxeson international trade to 44 percent by 1991/92(Chart 7). However, a substantial portion ofdomestic indirect tax receipts is still derived frominternational trade, as approximately 80 percent oftaxes on goods and services is generated from thesales tax on imports.

Another key tax reform was a rationalizationand restructuring of the personal income tax sys-tem with a view to improving private sector incen-tives. With effect from January 1, 1988, a standarddeduction of D 5,000 has been introduced; margi-nal income tax rates have been lowered to a rangeof 10-35 percent (previously rates ranged from2 percent to 75 percent), and the number ofbrackets has been reduced from 12 to 5; all incomein kind has been made taxable; and stiffer provi-sions for enforcement have been established. Thereforms of the income tax system have generallybeen revenue neutral, as taxes on income and prop-erty have remained at about 2.5-3.0 percent ofGDP. Nontax revenue has also remained broadlyconstant in relation to GDP, while capital revenuehas increased slightly, reflecting revenue generatedfrom the divestiture of public enterprises.

Overall, the implementation of these tax reformscontributed to an increase in domestic revenue inrelation to GDP from 20 percent in 1985/86 to apeak of 23 percent in 1988/89. Since then, however,domestic revenue declined steadily in relation toGDP, falling to 20 percent by 1991/92, largely as aresult of the slowdown in the growth of economicactivity, the impact of the reductions in customsduty rates on key commodities that feature promi-nently in the re-export trade (duty rates werereduced to zero for some commodities), and awidespread granting of discretionary customs dutywaivers by the Government. In response to thesedevelopments, as well as to an overrun in currentgovernment expenditure in 1991/92, far-reachingreforms of customs duties and direct taxationbegan to be implemented in March 1992. Thereforms were designed to strengthen tax admin-istration, broaden the tax base, and furtherimprove economic incentives. In particular, thesereforms involved (1) the discontinuation of all dis-cretionary and temporary customs duty waivers not

Chart 6. Fiscal Developments,

1982/83-1991/92(In percent of GDP)

Budget balance(Including grants)

35

30

25

20-

15

Current expenditure

Total expenditure and\ net lending

Domestic revenue

0

-4

-8

20


Tax Policy

Table 7. Central Government Operations

Total revenue and grants

RevenueTaxes on income and propertyTaxes on goods and servicesTaxes on international tradeOther taxesNontax revenue and capital revenue

Foreign grants1

Total expenditure and net lending

Current expenditurePersonal emoluments, pensions,

and allowancesInterest

InternalExternal

Other chargesGoods and servicesMaintenance and equipmentSubsidies and transfersOther expenditure

Transfers to parastatalsOf which: The Gambia Produce

Marketing BoardDevelopment expenditure and

net lendingDevelopment expenditureNet lending

Of which: Managed FundUnallocated expenditure

Change in arrears (decrease - )

Surplus or deficit (—)Excluding foreign grantsExcluding foreign grants

and special provisions2

Including foreign grants

Financing

Foreign (net)BorrowingRepayments

DomesticBanking systemNonbankSinking fund for debt relief

Domestic revenueTotal expenditure and net lendingSurplus or deficit (-)

Excluding foreign grantsExcluding foreign grants

and special provisionsIncluding foreign grants

1982/83

122.4

105.613.44.7

73.50.2

13.8

16.9

179.0

112.5

52.911.7

39.7

8.2

(1.2)

66.566.5

—( - )——

-73.5

-73.5-56.6

56.6

31.236.7-5.525.423.7

1.7—

17.429.6

-12.1

-12.1-9.3

1983/84

153.6

127.617.56.7

91.10.4

12.0

26.0

210.9

140.6

55.117.3

58.5

9.8

(...)

70.370.3

—( - )—

20.5

-62.8

-62.8-36.8

36.8

21.232.1

-10.915.65.4

10.2—

20.734.1

-10.2

-10.2-6.0

1984/85

180.8

148.524.514.297.40.5

11.9

32.3

262.3

151.4

58.929.218.211.053.0

10.2

(0.4)

109.1109.1

—( - )1.9

23.2

-90.6

-90.6-58.3

58.3

38.059.9

-21.920.314.55.8—

19.033.6

-11.6

-11.6-7.5

Sources: Data provided by the Gambian authorities; and IMF staff estimates.'Foreign grants correspond to official unrequited transfers i

1985/86

271.8

212.731.711.0

147.80.5

18.9

59.1

288.0

185.3

63.138.216.222.067.738.49.4

15.94.0

16.3

(12.4)

94.891.1

3.7

( - )7.9

-35.0

-110.3

-110.3-51.2

51.2

7.136.6

-29.544.120.423.7

—

19.626.5

-10.2

-10.2-4.7

1986/87

(In millions

484.7

328.341.418.3

245.40.7

22.1

156.4

547.0

327.0

64.775.526.648.995.447.414.526.7

6.891.4

(83.0)

221.8153.368.5

(72.6)-1.8

-14.1

-232.8

-77.2-76.4

76.4

241.4301.0-64.2

-165.0-165.0

——

(In percent

22.136.8

-15.7

-5.2-5.1

1987/88

of dalasis)

490.1

333.544.322.3

234.80.9

27.2

156.6

602.5

439.6

71.466.919.147.9

137.469.325.037.75.5

163.9

(130.7)

173.4176.1-2.7

(-2.7)-10.6

-5.4

-274.4

-143.7-117.8

117.8

73.8129.1-60.4

44.027.420.1-3.5

of GDP)3

20.436.8

-16.8

-8.8-7.2

n the balance of payments less technical assistance grants.

1988/89

565.3

450.558.8

121.1228.6

1.235.9

114.7

504.6

354.8

101.685.323.362.0

152.986.324.541.50.7

15.0

(13.2)

138.8141.1-2.3

(-2.3)11.0

-25.5

-79.6

-79.635.1

-35.1

14.591.4

-76.9-49.7-77.7

31.6-3.5

23.226.0

-4.1

-4.11.8

1989/90

659.6

508.467.6

171.4217.1

I.I43.6

151.2

700.6

434.4

133.395.342.652.7

165.379.828.645.311.540.5

(40.5)

262.1173.089.1

(-2.4)4.1—

-192.2

-81.2-41.0

41.0

116.4209.5-93.1-75.4

-0.1-6.3

-69.0

21.729.9

-8.2

-3.5-1.7

1990/91

678.5

533.370.7

214.2235.2

1.2-2.6

145.2

644.8

452.4

144.8104.550.354.2

203.196.434.867.34.6

( - )

194.9198.3-3.4

(-1.1)-2.5

—

-111.5

-68.133.7

-33.7

91.1154.1-63.0

-124.8-164.1

44.3-5.0

19.824.0

-4.1

-2.51.3

2Special provisions consist of D 72.6 million for the creation of the Managed Fund and D 83.0 million in budgetary support for the GPMB in 1986/87, D 130.7budgetary support for the GPMB in 1987/88, D 1 11.0 million for the liquidation of public enterprise debt in 1989/90,1990/91, and an estimated D 51.0 million for the replacement of the net

3Based on the revised GDP data.nonperforming assets o

1991/92

Est.

860.1

650.581.8

234.3289.5

I.I40.8

209.5

771.4

500.2

153.0108.857.651.2

238.4112.035.869.820.8

(—)

266.6216.0

50.6(-1.4)

4.6—

-120.9

-69.988.6

-88.6

163.3242.7-79.4

-251.9-302.0

50.0—

20.924.7

-3.9

-2.22.8

million forD 43.4 million for the covering of the Central Bank's losses in

jf the The Gambia Commercial and Development Bank in 1991/92.

21


V FISCAL ADJUSTMENT

1991/92

Domestic revenueTax revenue

Taxes on income and propertyTaxes on goods and servicesTaxes on international tradeOther taxes

Nontax revenueCapital revenue

Foreign grants

Total revenue and grants

Tax revenueTaxes on income and propertyTaxes on goods and servicesTaxes on international tradeOther taxes

Nontax revenueCapital revenue

Total domestic revenue

Sources: Data provided by the Gambian authorities;

1985/86

19.617.62.91.0

13.6—1.70.35.4

25.0

89.814.95.1

69.50.28.91.3

100.0

and IMF

1986/87

22.120.6

2.81.2

16.5—1.5—

10.5

32.6

93.212.65.6

74.80.26.70.1

100.0

staff estimates.

1987/88

(In

20.418.52.71.4

14.40.11.70.29.6

30.0

(In percent

90.613.36.7

70.40.38.11.2

100.0

1988/89 1989/90

percent of GDP)

23.221.1

3.06.2

11.80.11.80.25.9

29.1

of total domestic

91.013.126.950.8

0.38.01.1

100.0

21.719.52.97.39.3—1.90.36.4

28.1

revenue)

89.913.333.742.7

0.28.61.5

100.0

1990/91

19.819.42.68.08.7—

-0.10.55.4

25.2

97.713.240.244.1

0.2-0.5

2.8

100.0

Est.

20.919.52.67.59.3—1.30.16.7

27.6

93.312.636.044.5

0.26.30.5

100.0

explicitly provided for under the 1988 Develop-ment Act or by international agreements (e.g., fordiplomats and project-related imports financed bydonors); (2) a stricter monitoring of the conces-sions granted under the Development Act; (3) atightening of the arrangements for "direct deliv-ery" of imported goods, under which the paymentof customs duties can be deferred for specifiedperiods; (4) a rationalization of the customs clear-ing procedures, including computerization, so as toeliminate anomalies and the potential for abuse;and (5) the preparation by the Commissioner ofIncome Tax of more rigorous assessments of theturnover and tax liability of individual corpora-tions. While the full effects of these measureswould be felt over time, some improvement in taxcollections has already been evidenced in the lastquarter of 1991/92.

Expenditure Policy

Within the context of a strategy designed toreduce the overall fiscal deficit, expenditure pol-icies since 1985/86 have been aimed at lowering

total expenditure and net lending in relation toGDP, as well as at changing the composition oftotal government spending in favor of outlays onthe priority areas. In this regard, the primary focusof the adjustment efforts has been to reduce therelative size of the civil service wage bill, eliminatethe substantial implicit and explicit transfers topublic enterprises, and improve the efficiency ofpublic investment, in order to increase budgetaryprovisions for operations and maintenance, thesocial sectors, and investment on the rehabilitationand development of the basic economic and socialinfrastructure.

These policies have succeeded in reducing totalexpenditure and net lending as a proportion ofGDP from 27 percent in 1985/86 to an estimated25 percent by 1991/92 (Table 9). During some ofthe intervening years, however, expenditure rosesharply. In 1986/87 and 1987/88, it reached a peakof 37 percent of GDP, when the Government tookover nonperforming bank loans and made provi-sions for the liquidation of public enterprise debt.The composition of expenditure also changed inthis period: personal emoluments, transfers toparastatals, and development expenditure and net

Table 8. Structure of Government Revenue

22


Expenditure Policy

lending all declined as a proportion of GDP. Inparticular, the locally financed component ofdevelopment expenditure was reduced from 4 per-cent of GDP in 1985/86 to 1 percent of GDP in thesubsequent years. On the other hand, expenditureon "other charges" rose from 6 percent of GDP in1985/86 to 8 percent in 1991/92, reflecting, in part,increased provisions for operations and mainte-nance and the social sectors.

The principal reform initiated at the outset of theadjustment efforts was a restructuring of the civilservice pay and employment structure, with WorldBank support. The first stage took place in early1986 and involved the removal of 2,600 temporaryworkers (out of a total of 5,000), a reduction in thebudgetary provision for vacant posts to tokenamounts, and the elimination of the practice oftransferring funds from other expenditure catego-ries to wages and salaries.14 The second stage,instituted in August 1986, involved the retrench-ment of 900 civil servants (about 9 percent of thetotal), the addition of 300 temporary staff, and theelimination of 800 vacancies from the roster ofestablished posts. Since the completion of theretrenchment exercise, the Government hasattempted to keep the overall size of the civil ser-vice broadly constant; however, control of civil ser-vice employment has not always been adequate,and staffing levels have increased in certain years.At the end of December 1991, the number ofestablished posts in the civil service stood at about9,500, or some 11 percent lower than in 1985.Within a declining total,- the number of teacherswas raised markedly, so as to prevent increases- in,if not lower, the already high pupil-to-teacher ratioin the face of rising school enrollments.

During the implementation of the retrenchmentprogram, and while a pay and grading exercise wasbeing carried out, civil service salaries were frozen.The change to a new grade structure, whichreduced the number of grades-from 19 to 12, tookplace in October T988, and a general pay increaseof 67 percent was awarded in January 1989—thefirst pay increase in the civil service since July 1985.Following this discrete adjustment, there were nofurther increases in civil service salaries untilJuly 1991, when a 6 percent increase was awarded.As a. consequence, the growth in average wage earn-ings has not kept up with the increase in consumer

14Budgetary provisions are based on established posts andtherefore include provisions for vacant posts. The process oftransferring funds from other expenditure categories to wagesand salaries was eliminated in order to prevent expenditure sav=ings from elsewhere in the budget being used to hire additionaltemporary workers.

80Taxes on International trade

40-

Government Revenue(In percent of domestic revenue)

Taxes on goods and services

Other taxes and2 0 — Taxes on income and property —^— mnta% reveme

1982/83 1984/85 1986/87 1988/89 1990/91

Government Current Expenditure50 _(ln percent of total current expenditure).

1982/83 1984/85 1986/87 1988/89 1990/91


prices, undermining efforts to attract and retainskilled civil servants. Current government pay pol-icy calls for annual increases in civil service wagesbased on the targeted average rate of Inflation, theneed to attract and retain qualified personnel, over-all productivity gains In the economy, and the avail-ability of domestic budgetary resources.

The civil service reform program in The Gambiawas Implemented relatively quickly and efficientlyIn comparison with the experience of some otherWest African countries.15 But a bigger challengehas been to follow through on the short-term gainsby developing a small, productive, and highly moti-vated civil service. This objective remains elusive,.and the Government continues to have problemsrecruiting and retaining qualified personnel

15For a comparison of the experience with civil service reformof The Gambia, Ghana, and Guinea, see de Merode (1991). Fora comprehensive review of Ghana's adjustment efforts, seeKapur and others (1991).

4 0 -

30 -

2 0 -

1 0 -

0

Interest

Transfers to parastatals

Personal emoluments

Other charges

Chart 7. Structure of Revenue andExpenditure, 1982/83-1991/92

60

23


V FISCAL ADJUSTMENT

Table 9. Structure of Government Expenditure

Current expenditurePersonal emoluments, pensions, and

allowancesInterest due

InternalExternal


Transfers to parastatalsDevelopment expenditure and net lending

Development expenditureNet lending


Current expenditurePersonal emoluments, pensions, and

allowancesInterest due

InternalExternal


Transfers to parastatalsDevelopment expenditure and net lending

Development expenditureNet lending


1985/86

17.1

5.83.51.52.06.23.50.91.50.41.58.78.40.3

26.5

64.3

21.913.35.67.6

23.513.33.35.51.45.6

32.931.6

1.3

100.0

1986/87

22.0

4.45.11.83.36.43.21.01.80.56.2

14.910.34.6

36.8

1987/88

(In p26.9

4.44.11.22.98.44.21.52.30.3

10.010.610.8-0.2

36.8

1988/89 1989/90

percent of GDP)

18.3

5.24.41.23.27.94.41.32.1—0.87.17.3

-0.1

26.0

18.5

5.74.11.82.27.03.41.21.90.51.7

11.27.43.8

29.9

(In percent of total expenditure and net

59.8

11.813.84.98.9

17.48.72.74.91.2

16.740.528.012.5

100.0

73.0

11.8II.13.27.9

22.811.54.16.30.9

27.228.829.2-0.4

100.0

70.3

20.116.94.6

12.330.317.14.98.20.13.0

27.528.0-0.5

100.0

62.0

19.013.66.17.5

23.611.44.16.51.65.8

37.424.712.7

100.0

1990/91

16.8

5.43.91.92.07.63.61.32.50.2—7.27.4

-0.1

24.0

lending)

70.2

22.516.27.88.4

31.515.05.4

10.40.7—

30.230.8-0.5

100.0

1991/92

Est.

16.0

4.93.51.81.67.63.61.12.20.7—8.66.91.6

24.7

64.8

19.814.17.56.6

30.914.54.69.12.7—

34.628.0

6.6

100.0


While adequate control on total governmentexpenditure has broadly been established since1985/86, difficulties in controlling certain expendi-ture items that are centrally administered (otherthan the wage bill, such as external travel) contin-ued for some time, necessitating expenditure cutsin other areas of current spending.16 This has

16Similarly, during the early 1980s, the pressures of the deteri-orating economic and financial environment led to reductions inexpenditure in areas where effective political interest groupscould not be formed to protect their budgetary allocations. As aresult, expenditure reductions tended to affect outlays on opera-tions and maintenance and to some extent recurrent spendingon health and education.

meant that the Ministries of Health and Education,among others, have been held for some yearsbelow their budgetary allocations. These problemshave been addressed during the last three yearsand the situation has improved considerably. Giventhe importance attached by the Government todeveloping human capital, and notwithstanding thepursuit of continued fiscal adjustment, the budget-ary allocations for improvements in the quality ofsocial services have been significantly increased; inparticular, the combined share of recurrent outlayson education and health in total current spending(excluding interest payments), after havingdeclined from 27 percent in 1985/86 to 13 percent

24


Expenditure Policy

Table 10. Functional Classification of Current Expenditure by Key Ministries

1991/92

1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 Budget

Office of the PresidentMinistry of AgricultureMinistry of Works and

CommunicationsMinistry of Education, Youth,

Sports, and CultureMinistry of Health, Labor, and

Social WelfareMinistry of DefenseMinistry of External AffairsOther

Total current expenditure1

Office of the PresidentMinistry of AgricultureMinistry of Works and

CommunicationsMinistry of Education, Youth,

Sports, and CultureMinistry of Health, Labor, and

Social WelfareMinistry of DefenseMinistry of External AffairsOther

Total current expenditure

11.110.7

11.2

24.2

10.59.4

10.2

24.8

(In millions of dalasis)

22.0 28.8 36.313.3 14.5 14.3

15.0

28.4

16.8

44.3

16.7

60.8

34.817.4

18.2

71.1

31.319.3

13.8

76.8

14.75.96.9

62.3147.0

7.57.3

7.6

16.5

10.04.04.7

42.4100.0

17.98.6

13.2157.0251.6

4.23.7

4.1

9.9

7.13.45.2

62.4100.0

20.7II.119.3

242.9372.7

(In percent

5.93.6

4.0

7.6

5.63.05.2

65.2100.0

25.417.921.7

100.2269.5

of current

10.75.4

6.2

16.4

9.46.68.1

37.2100.0

30.223.421.6

135.8339.1

expenditure)

10.74.2

4.9

17.9

8.96.96.4

40.1100.0

34.831.224.6

115.8347.9

10.05.0

5.2

20.4

10.09.07.1

33.3100.0

38.936.325.0

123.5365.0

8.65.3

3.8

21.0

10.79.96.9

33.8100.0

Sources: Data provided by the Gambian authorities; and IMF staff estimates.1Government current expenditure excluding interest.

in 1987/88, was raised steadily to 32 percent by1991/92 (Table 10).

Government transfers to public enterprises andnet lending have been strongly influenced by theGovernment's groundnut pricing policy and thereform efforts in the public enterprise and financialsectors. As indicated in Section II, producer pricesfor groundnuts were deliberately set high in theearly stages of adjustment, so as to encourage areversal of cross-border sales of groundnuts, thusnecessitating sizable budgetary subsidies to theGPMB to cover its operating costs during 1986/87and 1987/88. Similarly, as part of the efforts torestructure certain key public enterprises andimprove their financial performance, the financialliabilities of these enterprises to the state-ownedcommercial bank (the GCDB) were repaid by theGovernment in 1989/90, thus boosting the budget-ary provisions for net lending in that year. In addi-tion, in the context of the efforts to restructure the

GCDB and prepare it for privatization, the Gov-ernment took over in 1986/87 the GCDB's nonper-forming loans to other public enterprises that hadbeen guaranteed by the Government, as well as theremaining nonperforming loans (net of GCDB'sliquid assets) in late 1991/92. Finally, the budget for1990/91 provided for special transfers to the Cen-tral Bank to cover its operating losses sustained inearlier years; thereafter, the Central Bank's netprofit position was explicitly incorporated in thebudget as part of nontax receipts. As a result ofthese special provisions, the outlays on governmentsubsidies to public enterprises and net lending fluc-tuated markedly from year to year. In particular,subsidies to public enterprises rose from 1.5 per-cent of GDP in 1985/86 to a peak of 10 percent in1987/88 but were brought down to zero by 1990/91.

Further improvements in the budgetary pro-cedures are expected in the period ahead as a resultof the ongoing work to develop public expenditure

25


VF

ISC

AL A

DJU

ST

ME

NT

Table I I. Alternative Measures of the Budget Balance(In percent of GDP)

1991/92

Total revenue and grantsRevenue

Of which: capital revenueForeign grants

Total expenditure and net lendingCurrent expenditure

Of which: interestDevelopment expenditure

Of which: locally financedNet lending

Unallocated expenditure

Change in arrears (decrease - ) '

Overall balance (-)

Excluding foreign grantsExcluding foreign grants

and special provisions2

Including foreign grants

Current budget balance3

Excluding grantsIncluding grants

Primary budget balance4


Primary budget balance5


1982/83

20.217.4

2.8

29.618.61.9

11.0

—

—

—

-12.1

-12.1-9.3

. . .

. . .

-10.2-7.4

. . .

. . .

1983/84

24.920.7

4.2

34.122.82.8

11.4

—

—

3.3

-10.2

-10.2-6.0

. . .

. . .

-10.7-6.5

. . .

. . .

1984/85

23.119.0

4.1

33.619.43.7

14.0

—

0.2

3.0

-11.6

-11.6-7.5

. . .

. . .

-10.8-6.7

. . .

. . .

1985/86

25.019.60.35.4

26.517.13.58.43.70.3

0.7

-3.2

-10.2

-10.2-4.7

2.37.7

-3.42.0

2.37.8

1986/87

32.622.10.0

10.5

36.822.05.1

10.30.94.6

-0.1

-0.9

-15.7

-5.2-5.1

0.110.6

-9.60.9

4.214.8

1987/88

30.020.40.29.6

36.826.94.1

10.81.0

-0.2

-0.6

-0.3

-16.8

-8.8-7.2

-6.72.8

-12.4-2.8

-3.46.2

1988/89

29.123.20.25.9

26.018.34.47.3I.I

-0.1

0.6

-1.3

-4.1

-4.11.8

4.710.6

1.67.5

8.214.1

1989/90

28.121.70.36.4

29.918.54.17.40.93.8

0.2

—

-8.2

-3.5-1.7

2.89.3

-4.12.3

6.412.8

1990/91

25.219.80.55.4

24.016.83.97.41.0

-0.1

-0.1

—

-4.1

-2.51.3

2.57.9

-0.35.1

5.911.3

Est.

27.620.90.26.7

24.716.03.56.90.91.6

0.1

—

-3.9

-2.22.8

4.711.4

-0.46.3

7.414.2

Sources: Data provided by the Gambian authorities; and IMF staff estimates.1 Represents the repayment of government external payments arrears.2For a breakdown of special provisions see Table 7, footnote 2.3Total revenue, minus capital revenue, less current expenditure.4Total revenue, minus total expenditure and net lending (excluding interest).5Total revenue, minus current expenditure (excluding interest), net lending, and the locally financed portion of development expenditure.

26


Developments in the Budget Balance

programs in key ministries. In this context, publicexpenditure programs were completed in 1991/92for the priority sectors of education, health, agri-culture, and public works and communication. It isenvisaged that the public expenditure programswould be updated and rolled forward on an annualbasis; their coverage would be broadened to coverall expenditure categories, thus facilitating greaterconsistency between the public investment pro-gram and the outlays for operations and mainte-nance provided for in the recurrent budget.

During the adjustment period, the Governmenthas made use of a three-year rolling public invest-ment program, which has emphasized the need toprovide adequate infrastructure and support ser-vices for the development of the private sector andthe promotion of human resource development.Public investment thus has focused on infrastruc-ture (transport, communications, and public util-ities), agriculture and natural resources, health, andeducation. The public investment program for eachyear is established taking into account resourceavailability, debt-servicing capacity, and the overallstance of fiscal policy. In collaboration with theWorld Bank, selection criteria for investment proj-ects have been developed with a view to increasingthe efficiency of public investment. These criteriaentail (1) the completion of an adequate feasibilitystudy; (2) the prospect of attaining an economicrate of return (where calculable) of at least 15 per-cent (projects in the social sectors, where an eco-nomic rate of return cannot be determined, areselected on the basis of least cost alternatives);(3) compatibility of the recurrent cost implicationswith future recurrent budgets; and (4) compat-ibility with medium-term balance of paymentsobjectives. The increased rigor in project selectionhas also helped to mobilize external financial sup-port for public investment; the share of the

development budget financed by local resourceshas fallen significantly since 1985/86.

Developments in the Budget Balance

Overall, the budget deficit (excluding foreigngrants) widened initially from 10 percent of GDPin 1985/86 to a peak of 17 percent in 1987/88, buthas since declined to an estimated 4 percent ofGDP by 1991/92. The evolution of the budget defi-cit has been strongly influenced by the impact ofthe special provisions indicated above, which havemasked the extent of the underlying improvementin the fiscal position achieved through the expendi-ture and tax policies pursued since 1985/86. Exclud-ing these special provisions, as well as foreigngrants, the budget deficit declined fairly steadilyfrom 10 percent of GDP in 1985/86 to an estimated2.2 percent by 1991/92. The budget for 1992/93provides for a further reduction in the deficit to2 percent of GDP.

The substantial strengthening in the fiscal posi-tion since 1985/86 is also illustrated by the evolu-tion of other measures of the budget deficit. Inparticular, the current budget surplus, excludinggrants, increased from 2.3 percent of GDP in1985/86 to 4.7 percent by 1991/92 (Table 11), con-sistent with an increase in government savings (ona national accounts basis) from 1.3 percent of GDPto 2.9 percent, respectively (Table 5). More impor-tant, the primary budget surplus, excluding foreigngrants and the externally financed portion ofdevelopment expenditure, rose from 2.3 percent ofGDP to 7.5 percent. Overall, despite the severity ofthe fiscal imbalances at the onset of the adjustmentefforts, the relatively quick introduction of severalkey adjustment measures paved the way for therestoration of a fiscal position consistent with a sta-ble overall macroeconomic framework.

27©International Monetary Fund. Not for Redistribution

VI Monetary Policy and FinancialSector Reform

M onetary policy since the inception of TheGambia's Economic Recovery Program has

been directed at (1) reducing inflation, whichhad

accelerated sharply in 1984/85 and 1985/86; (2) re-plenishing the country's foreign exchange reservesfrom their initial very low level; (3) supporting theexchange rate policy; and (4) accommodating thetargeted expansion in real GDP.

Monetary Policy Objectives andInstruments

Consistent with the targeted accumulation ofgross official reserves and the large inflows ofexternal financial assistance envisaged under theprogram, the expansion of broad moneythroughout the period since 1985/86 has been pro-grammed to reflect an improvement in the net for-eign assets of the banking system, while the netdomestic assets of the banking system have beentargeted to decline steadily. This reduction was tobe achieved through large net repayments by theGovernment to the banking system, which wouldalso make room for an adequate expansion ofcredit to the nongovernment sector, within the con-text of a restrictive overall credit policy.

Given the limited development of the domesticmoney market during the early years of the pro-gram, the Government has unavoidably relied ondirect policy instruments—namely, quantitativecontrols on credit expansion by individual banks—for influencing credit and monetary developmentsand thus observing the ceilings on the net domesticassets of the banking system, net credit to the Gov-ernment, credit to the GPMB, and the floors on thegross official reserves of the Central Bank (in for-eign currency terms). However, to enhance the effi-ciency of monetary control and, in particular, tosupport the exchange rate policy and encouragedomestic financial savings, the controls on bankdeposit and lending interest rates were lifted inSeptember 1985, including the discontinuation of

subsidized lending rates for crop financing;17 thebank cash-reserve requirements have been tight-ened;18 and an auction market for treasury billswas introduced in July 1986. After the CentralBank had gained experience and confidence inmanaging domestic liquidity, the system of creditceilings was abolished and an indirect system ofmonetary control was introduced with effect fromSeptember 1990.19 Since then, the Central Bankhas been exercising control over credit and mone-tary developments by observing limits on its netdomestic assets and by maintaining tight domesticliquidity conditions through open marketoperations.

In its liquidity management policy, throughoutthe period since 1985/86, the Central Bank hasbeen aiming to ensure that domestic interest rateswere kept at levels that were positive in real termsand that appropriate differentials were maintainedfrom interest rates abroad. Such a policy was con-sidered essential for the smooth functioning of theinterbank foreign exchange market, given the lift-ing of all exchange restrictions, including for capitaltransactions, and the large foreign exchange flowsassociated with the re-export trade.

Monetary policy reforms have been comple-mented by parallel efforts to strengthen the finan-cial intermediation process. These efforts havefocused initially on the restructuring and eventual

17The only control on interest rates that has been retainedrelates to a requirement that bank interest rates on three-monthdeposits be set at 3 percentage points below the prevailing inter-est rate on treasury bills, so as to ensure that the returns onbank deposits do not become too low.

18In September 1985, the required bank cash-reserve ratiowas raised from 6 percent to 10 percent for demand depositsand from 4 percent to 8 percent for time and savings deposits. In1986/87, the required cash-reserve ratio for demand depositswas raised further to 24 percent, while the required total liquidassets (including bank cash reserves) were raised to the equiv-alent of 30 percent of total bank deposits.

19The Gambia was the first sub-Saharan African country toshift to an indirect system of monetary control. Malawi andGhana introduced a similar system in January 1991 and Jan-uary 1992, respectively.

28


Monetary Developments Since 1985/86

privatization of the largest commercial bank, theG C D B , which had been experiencing financial dif-ficulties (including a large portfolio of nonperform-ing loans). More recently, attention has beendirected at improving bank supervision and revis-ing the financial sector legislation.

Monetary DevelopmentsSince 1985/86

Monetary policy during the period since 1985/86has been broadly successful in reducing inflation,stabilizing the exchange rate, and facilitating theattainment of the real GDP and balance of pay-ments objectives. As indicated in Section II, devia-tions from the initial program targets for thesevariables and the intermediate targets for mone-tary aggregates have been caused primarily byexogenous factors—such as weather developments,regional disturbances, and shortfalls or delays inexternal assistance—and to a lesser extent bydomestic policy slippages.

While the 12-month rate of growth of broadmoney has decelerated markedly since 1985/86, ithas displayed sizable fluctuations from year to year.In particular, in the aftermath of the introductionof a flexible exchange rate system in early 1986,broad money growth accelerated from 25 percentin the year ended June 1986 to 44 percent byJune 1987, before declining steadily to 8 percent byJune 1989 (Chart 8 and Table 12). The externalshocks that took place in the first half of 1989/90induced a reacceleration of monetary expansion to22 percent by December 1989, but the tightening offinancial policies and the recovery in exportreceipts in the second half of the fiscal year contrib-uted to bringing broad money growth back to4 percent by March 1991. However, the shortfallsin external assistance (whose monetary impact wasnot completely offset by a lower improvement inthe net foreign assets position of the banking sys-tem) and the fiscal slippages in late 1990/91 and thefirst half of 1991/92 led to a worrisome pickup inthe growth in broad money to 25 percent by De-cember 1991. The corrective fiscal measures imple-mented in response to this slippage were expectedto facilitate large net repayments by the Govern-ment to the banking system, which would allow asignificant contraction in the outstanding stock ofbroad money during the last quarter of 1991/92.

With the benefit of hindsight, it would appearthat the excessive expansion in reserve money thattook place in 1985/86, 1986/87, and more recently,during the first half 1989/90 and during the periodfrom March to December 1991 was translated pri-marily into a buildup of excess bank cash reserves

140120

100

80

60

40

20

0

Growth in Monetary Aggregates(In percent; end-of-period data)

-201984/85 1986/87 1988/89 1990/91

3 0 Yields on 91 -Day Treasury Bills25 "(In percent; annual basis)

-51987/88 1988/89 1989/90 1990/91 1991/92


and in part in an acceleration in the rate of growthof broad money, and thus had a much smallerimpact on exchange rate and price developments.The effects of fluctuations in the rate of growth ofbroad money on output growth appear also to havebeen modest in the short term, as output develop-ments in The Gambia tend to be dominated by theeffects of changes in the weather and otherexogenous factors rather than by changes indomestic demand. The observed limited impact ofthe sharp variability in domestic liquidity condi-tions (i.e., reserve money and excess bank cashreserves) on the growth of broad money and, inturn, exchange rate and price developments couldbe attributed to a number of factors special to TheGambia.

First, the monetary slippages emanated almostentirely from difficulty in adhering to the targetedceilings on net credit to the Government from the

Chart 8. Monetarv Developments

1984/85-1991/92

Reserve money

Broad money Narrow money

20

15

10

5

0

Nominal

Real

29


Table 12. Monetary Survey

Net foreign assetsMonetary authorities

Foreign assetsForeign liabilities

Commercial banks

Net domestic assetsDomestic credit

Claims on the Government (net)Claims on the rest of the

economyGPMB1

Other public enterprisesPrivate sector

Other items (net)

Revaluation account

SDR allocation

Broad moneyMoneyQuasi-money

Memorandum itemsNominal GDP (in millions of dalasis)

(percentage change)Velocity (GDP/average broad money)Percentage change from previous year:

Net domestic assetsClaims on the Government (net)Claims on public enterprisesClaims on the private sectorBroad money

Contribution to the growth ofbroad money2

Net foreign assetsNet domestic assets

1982/83

-179.7-179.7

(18.3)(-198.0)

—

312.8344.3

73.6

270.7(101.4)

( - )(169.3)-31.5

—

—

133.1(. . . )( . . . )

605.815.54.6

39.147.590.612.635.1

-54.289.3

1983/84

-298.5-300.6

(24.4)(-325.0)

2.1

358.9396.6

77.5

319.1(111.3)

(49.4)(158.4)-37.7

96.5

-19.5

137.4(77.5)(59.9)

617.82.04.5

14.75.3

58.5-6.4

3.2

-89.334.6

1984/85

-282.5-300.8

(14.9)(-315.7)

18.3

373.1415.2

92.0

323.2(93.0)(71.2)

(159.0)-42.1

125.6

-33.6

182.6(96.5)(86.1)

781.926.54.3

4.018.72.20.4

32.9

11.610.3

1985/86

(In

-584.7-595.4

(11.4)(-606.8)

10.7

594.2501.3100.3

401.0(132.8)

(84.6)(183.6)

92.9

237.4

-19.5

227.4(129.5)

(97.9)

1,085.238.84.9

59.39.0

32.415.524.5

-165.5121.1

1986/87 1987/88

millions of dalasis; end of period)

-313.2-333.4

(97.7)(-431.1)

20.2

294.4326.0-64.9

390.9(156.0)

(60.7)(174.2)-31.6

392.8

-46.8

327.2(192.4)(134.8)

(In units i

1,486.036.9

5.3

-50.5-164.7

-0.3-5.143.9

119.4-131.8

-176.0-192.1(255.8)

(-447.9)16.1

224.9256.2-37.5

293.7(56.0)(45.5)

(192.3)-31.3

392.2

-46.8

394.3(222.1)(172.2)

ndicated)

1,635.510.14.5

-23.642.3

-53.210.420.5

41.9-21.2

1988/89

-149.8-155.8(232.4)

(-388.2)5.9

191.6241.9

-115.2

357.1(75.1)(57.4)

(224.5)-50.3

433.5

-48.3

427.0(235.2)(191.8)

1,942.318.84.8

-14.8-207.5

30.716.88.3

6.6-8.4

1989/90

-146.3-166.9(281.9)

(-448.8)20.6

112.0174.4

-115.3

289.7(28.1)(11.2)

(250.5)-62.4

590.3

-56.5

499.4(282.0)(217.5)

2,345.220.74.9

-41.5-0.1

-70.411.617.0

0.8-18.6

1990/91

143.4115.1

(553.3)(-438.2)

28.3

-67.258.1

-279.4

337.5(37.7)(10.1)

(289.8)-125.3

564.4

-56.5

584.1(334.3)(249.8)

2,689.414.75.1

-160.0-142.3

21.615.716.9

58.0-35.9

1991/92

Est.

426.2391.2

(862.3)(-471.2)

35.0

-375.7-273.3-632.3

359.0(9.0)

(13.8)(336.2)

-102.4

624.7

-63.5

611.7(350.1)(261.6)

3,117.215.95.0

-459.1-126.3

-52.116.04.7

48.4-52.8

Sources: Data provided by the Gambian authorities; and IMF staff estimates.'The Gambia Produce Marketing Board.2Twelve-month change as a ratio of the beginning-of-period money stock.

<

2Ozm

"00rn-<>zDz>zn>rinmO

O737JmTl

oZ

rr


Monetary Developments Since 1985/86

banking system, or difficulty in attaining the grossofficial reserve targets. With the exception of occa-sional overruns of credit increases to the GPMB,the expansion of bank credit to the private sectorand public enterprises has invariably been belowtarget. Thus, to the extent that the slippages in thegovernment financial performance were quicklycorrected, the monetary overhang was pari passuabsorbed.

Second, the weak development of financial mar-kets in The Gambia and the associated high trans-action costs, a feature that is common to manydeveloping countries, seem to have limited the abil-ity of economic agents to quickly dispose of any"undesired" buildup in money balances by pur-chasing more goods or foreign exchange.20 As aconsequence, the temporary monetary overhangshave been reflected in fluctuations in the share ofcurrency outside banks in broad money and com-pensating changes in the income velocity ofcirculation.

Third, excess bank cash reserves could notquickly result in an increase in bank credit, as theexpansion of credit to the private sector in TheGambia is largely demand determined, given thelimited size of unmet credit demand from credit-worthy customers. The existence of a large port-folio of nonperforming bank loans to the privatesector may also have restrained the commercialbanks from taking on new customers without ade-quate documentation and collateral. The bulk ofbank credit to the private sector in The Gambia isrelated to tourism and trade financing, particularlyfor re-exports. Traders involved in the re-exporttrade tend to finance most of their imports fromtheir own funds or with foreign suppliers' credits,prompted in part by the high cost structure of thedomestic banking system, limiting their domesticborrowing to the financing of the domestic cur-rency costs of their operations.

The latter feature of the credit market in TheGambia has tended to insulate the banking systemfrom the impact of the normal leads and lags asso-ciated with the rather volatile re-export trade, thusrestraining the fluctuations in domestic liquidityconditions. At the same time, however, the lower-than-otherwise demand for domestic credit and,indirectly, dalasi-denominated financial assets bythe private sector has limited the development ofthe domestic money market. The latter has tendedto be characterized by sizable excess liquid assets

20This view is supported by the fact that, while the share inbroad money of currency outside banks has declined somewhatin recent years, it remains high, amounting to 33 percent inMarch 1992.

held by banks, mainly in the form of governmentsecurities. Notwithstanding the increasing interestof the nonbank sector to invest in financial assets,the demand for treasury bills at the biweekly auc-tion has been narrowly based, while interest ratebids have tended to move only modestly in relationto changes in the inflation rate and the relativetightness or laxity of domestic liquidity conditions.As a result, the interest rate on three-month trea-sury bills has moved in recent years within a verynarrow range, of 17-20 percent, giving rise to pro-nounced fluctuations in real interest rates, eventhough the latter have remained generally at posi-tive levels. The Central Bank has on occasion par-ticipated in the treasury bill auctions by placingbids for the purchase of a small portion of the totalamounts of bills offered, so as to signal to the mar-ket, by influencing the average treasury bill interestrate, its preferences with regard to the level ofinterest rates in the money market. As indicatedabove, maintenance of appropriate margins aboveinterest rates abroad has been considered neces-sary to support the exchange rate policy.

Overall, despite the lifting of interest rate con-trols in 1985 and the variability in domestic liquid-ity conditions, interest rates in The Gambia haveremained rather rigid. In response to the new pol-icy environment, the three commercial banksraised initially their lending rate structure andlowered somewhat their deposit rates, thus increas-ing their interest rate margins from less than10 percent to around 12-14 percent throughout theperiod since 1986. The widening of interest ratemargins reflected in part an attempt by the banksto offset the impact on their financial position ofthe difficulties faced by several public and privateenterprises to service their financial obligations tothe banking system, mainly to the largest commer-cial bank (which was owned by the Government).In addition, difficulties in liquidating collateral tobank loans and long delays in enforcing financialcontracts have added a sizable risk premium tobank lending rates. Bank deposit and lending rateshave tended to be even less volatile than treasurybill rates, notwithstanding the variations in thebanks' liquidity position since 1985/86. For exam-ple, the maximum lending rate on bank loans to thetrading sector declined gradually from 30 percentin June 1986 to 26.5 percent at present, while theinterest rate on three-month bank deposits fellfrom 18 percent to 12.5 percent, respectively.

The relative rigidity in the interest rate structureis attributable to a number of factors: (1) the thindomestic money and credit markets, the limitedavailability of financial instruments for investment,and the absence of a domestic capital market;(2) the oligopolistic and noncompetitive nature of

31


VI MONETARY POLICY AND FINANCIAL SECTOR REFORM

the banking system (two of the three banks in thebanking system have in fact been making substan-tial profits, in excess of 200 percent of their capitalbase per year); and (3) the weak arrangements forbank supervision.21 For similar reasons, interestrate variability has also been limited in some otherAfrican countries that have lifted their controls oninterest rates in recent years.22

Monetary Policy, Exchange RatePolicy, and Inflation

The emphasis of interest rate and reserve man-agement policies on broadly stabilizing the nominaleffective exchange rate, in the context of the policyof preserving external competitiveness, has con-tributed to a reduction in inflation. Given the open-ness of the economy and the expanding regionaltrade for goods imported through The Gambia, themain channel for the transmission of the impact ofchanges in the stance of monetary policy to pricedevelopments has been the evolution of theexchange rate of the dalasi, particularly of the bilat-eral rate vis-a-vis the C F A franc.

The increasing importance of the re-export tradehas strengthened the sensitivity of the domesticprices of consumer goods that are prominent in thistrade—mainly foodstuffs, clothing, and footwear—to developments in the demand and prices of thesegoods in the subregion. These consumer goods areimported in large quantities into The Gambia and,for the most part, are sold wholesale in the capitalcity of Banjul to visiting traders from the sub-region. The bulk of these goods is included in theconsumer price index (CPI) of The Gambia;23 theCPI is actually measured on the basis of prices pre-vailing in Banjul and in two adjacent urban areas.As a result, price developments in The Gambia areto a substantial and increasing extent determined

by changes in the nominal demand for the re-export goods by consumers in the subregion and,accordingly, are less sensitive to changes in mone-tary conditions in The Gambia. As the prices forthe re-export goods are denominated in terms ofC F A francs, consumer prices in The Gambia havetended to be strongly influenced by changes in thedalasi/CFA franc exchange rate (Chart 9). Thisinfluence could more easily be discerned in periods,such as the first half of 1991/92, when the dalasiweakened markedly against the C F A franc, eventhough the nominal effective exchange rateremained broadly stable. The impact on consumerprices of these developments, as well as of occa-sional disturbances in the supply of certain keyfood items, has tended to be accommodated bychanges in the velocity of circulation.

Notwithstanding the increasing influence ofchanges in the dalasi/CFA franc rate on pricedevelopments and the relatively low inflation pre-vailing in the neighboring C F A franc countries, aformal linking of the dalasi to the C F A franc so asto provide a nominal anchor for price movementsand inflation expectations in The Gambia has notbeen considered a desirable option by the Govern-ment.24 Bilateral trade between The Gambia andthe C F A franc zone is minimal (in terms of domes-tically produced goods), while The Gambia's tour-ism market and the prices and demand for itstraditional and nontraditional exports are deter-mined primarily by developments in European andother industrial countries. Accordingly, exchangerate policy remains focused on preserving overallexternal competitiveness. With the emphasis offinancial policies on lowering inflation to a low ratecomparable to that for the main trading partnercountries, this objective is consistent with minimalchanges in the nominal effective exchange rate.Given the link between the C F A franc and theFrench franc, stability of the nominal effectiveexchange rate would be equivalent to a stabledalasi/CFA franc rate, insofar as cross rates amongthe currencies of the major industrial countriesremain broadly unchanged.

Financial Sector Reform

The banking system of The Gambia at the startof the reform efforts consisted of the Central Bankof The Gambia and three commercial banks: the

21 Recent developments in the economic literature suggestthat under conditions of uncertainty and asymmetric informa-tion between borrowers and creditors, and as long as banks areless risk-averse than their customers, it would be optimal forbanks to keep their lending rates relatively stable and below thelevels that would equilibrate the supply and demand for credit,so as to avoid financing riskier projects, and thus maximizeprofits. For details, see Stiglitz and Weiss (1981) and Villanuevaand Mirakhor (1990).

22For a review of the recent experience with interest rateliberalization in The Gambia, Ghana, Kenya, Malawi, andNigeria, see Turtelboom (1991).

23The combined weight of these items in the CPI of TheGambia is believed to be fairly high. This is suggested by thefact that imported food and beverages account for 23.9 percent,and imported clothing, textiles, and footwear for another14.9 percent of the CPI basket of goods.

24For a recent assessment of the C F A franc zone, seeBoughton (1991). A comprehensive review of analytical issueswith regard to exchange rate policy in developing countries isprovided by Aghevli, Khan, and Montiel (1991).

32


Financial Sector Reform

40

30

20

10

0

-10

-201987/88 1988/89 1989/90 1990/91 1991/92

Sources: Data provided by the Gambian authorities;International Monetary Fund, Information Notice System andInternational Financial Statistics; and IMF staff estimates.

1Nominal effective exchange rate (dalasis per foreign currencyunit).

Gambia Commercial and Development Bank(GCDB); the Standard Chartered Bank of TheGambia; and the International Bank for Com-merce and Industry, which is a local branch of aSenegalese bank. A third foreign-owned bank, theContinent Bank, has recently been licensed. Otherfinancial institutions included the Gambia NationalInsurance Corporation, the Government SavingsBank, and the Social Security and Housing FinanceCorporation. A n Agricultural Development Bankwas created in 1981, but it soon encountered severefinancial difficulties that led to a freezing of itsactivities in 1982 and to its eventual liquidation in1989.

The centerpiece of the financial sector reformefforts since 1985/86 has been the rehabilitation ofthe GCDB. The G C D B had run into severe finan-cial difficulties in the late 1970s and early 1980s,owing to a growing share of nonperforming loansand inadequate capitalization, and thus to growingrecourse to refinancing from the Central Bank. Arestructuring program was carried out between1986/87 and 1988/89 with technical assistance fromthe World Bank, which provided for new capitalinjections by the Government, the consolidation ofoutstanding debt to the Central Bank, and thereplacement with government securities of thenonperforming loans to public enterprises and tothe private sector that had been guaranteed by theGovernment. The nonperforming loans werepassed on to a new government agency, the Man-

aged Fund, which has been responsible for theirrecovery.

The management of the GCDB was reinforcedin 1990 and, following an audit of accounts, itsshare capital was increased again in July 1990 andthe bank was converted into a public limited lia-bility company in preparation for its privatization.The GCDB was finally offered for sale in July 1991,and an agreement was reached in early 1992 with arecently established local affiliate of a foreign bank(Meridien Bank) for the purchase of a large shareof the GCDB's assets and liabilities. The effectiveprivatization of the G C D B was concluded at theend of June 1992, when the remaining nonperform-ing assets, net of certain liquid assets of the GCDBand of its liabilities to the Central Bank, werereplaced with government financial instruments.The nonperforming assets of the GCDB, togetherwith the remaining nonperforming loans in thehands of the Managed Fund, have been transferredto a newly set up government entity, the AssetManagement and Recovery Company. The latterhas received a strong mandate from the Govern-ment to recover as many of these debts as possible.

With a view to updating the legislative frame-work and bringing it more in line with the mone-tary policy reforms introduced in recent years, theCentral Bank Act and the Financial InstitutionsAct were revised during the past two years, withtechnical assistance from the Fund. The revisedActs, which are scheduled to be presented to Par-liament during the second half of 1992, allow forthe introduction of central bank financial instru-ments so as to enhance the effectiveness of liquid-ity management and strengthen the provisions forbank supervision. Amendments to the BankruptcyAct and the Sheriff Act are also currently beingconsidered, so as to strengthen the procedures forthe enforcement of financial contracts and facilitatethe liquidation of collateral to bank loans. Thebank supervision capacity of the Central Bank hasalso been strengthened with technical assistancefrom donors. The privatization of the GCDB andthe revised financial legislation are expected tostimulate competition in the banking system of TheGambia and help narrow the existing large marginsbetween bank deposit and lending rates.

The sequencing of monetary policy and financialsector reforms in The Gambia has been dictated bythe adjustment needs of the economy and thelengthy process of preparing certain reforms, likethe restructuring of the GCDB. The lifting of inter-est rate controls ahead of a strengthening of com-petition in the banking system and of thearrangements for bank supervision was necessaryto support the establishment of a flexible exchangerate system and the liberalization of exchange con-

33

Chart 9. Developments in Broad Money,the Exchange Rate, and Prices(Annual percentage change)

Dalasi/CFA franc rate

Broad money

Consumerprices

NEER1


VI MONETARY POLICY AND FINANCIAL SECTOR REFORM

trols on current and capital international transac-tions. While desirable, the restructuring andprivatization of the GCDB could not be completedearlier, given the complexity of the initial financialdifficulties and the need to identify and adequatelydocument the existing nonperforming loans; short-ages of skilled staff and the limited interest shownby foreign financial institutions to invest in thebanking system of The Gambia have complicatedthis task. Similarly, an enhancement of the arrange-ments for bank supervision and of the bank capitalrequirements could not be achieved without atime-consuming revision of the existing financial

legislation.25 Appropriately, the abolition of creditceilings and the shift to an indirect system of mone-tary control were effected only after the CentralBank had acquired adequate experience in openmarket operations. The effectiveness of this systemof monetary control and the development of thedomestic money market would be strengthenedfurther by the envisaged introduction of new finan-cial instruments by the Central Bank.

25For the optimal sequencing of financial sector reforms, seeVillanueva and Mirakhor (1990), Leite and Sandararajan(1990), and Wong (1991).

34


VII Public Enterprise Reform

A t the beginning of the adjustment process, thepublic enterprise sector in The Gambia was

largely inefficient, characterized by overstaffingand major financial and managerial weaknesses.This had given rise to pressures on governmentfinances and to difficulties in servicing on scheduledomestic and foreign loans undertaken by theseenterprises. The public enterprise sector hadexpanded markedly during the period prior to1985/86, to comprise 6 financial enterprises and 28nonfinancial enterprises, of which 19 were fullyowned by the Government.26

One of the key components of the structural pol-icies implemented by the Gambian authoritiessince 1985/86 has been the reform of the publicenterprise sector, with support from the WorldBank. The broad objectives of the reform programhave been to reduce the involvement of the publicsector in activities that could more effectively becarried out by the private sector, and to improvethe effectiveness and financial performance of thepublic enterprises that would remain for the timebeing in the public sector. The reform of the publicenterprise sector was expected to (1) allow theGovernment to focus attention on key strategicenterprises that were considered crucial for thesuccess of the overall adjustment efforts (e.g., theGPMB, the GCDB, and the Gambia Utilities Cor-poration (GUC)); (2) minimize pressures on theGovernment to provide new loans and equity topublic enterprises; (3) free government managerialand financial resources and redirect them to prior-ity areas identified under the adjustment program;(4) help generate cash proceeds for the budgetthrough the sale of public enterprises; and(5) create an enabling environment for new privateinvestment, management, and technology in theprivate enterprise sector of The Gambia, thusenhancing efficiency, promoting greater competi-tion, and instilling market discipline. Overall, thepublic enterprise reforms, together with the

26Data on the financial position of the public enterprise sectoras a whole are not available.

improvement in the macroeconomic environment,were expected to stimulate private sector activityand help achieve the output and employmentobjectives of the Economic Recovery Program.

The public enterprise reform program hasentailed an ambitious divestiture program and abroad range of policy and institutional reforms toimprove the managerial autonomy and account-ability of the enterprises remaining in the Govern-ment's portfolio. The Government has alsocommitted itself to avoiding the creation of anynew, or investing further in any existing, commer-cial public enterprises. The overall coordination ofthese efforts and the supervision and monitoring ofthe operations of public enterprises has beenassigned to the National Investment Board.

Under the divestiture program, 20 enterpriseswere divested during the period from 1985/86 toearly 1992 through a range of modes of divestiture.In particular, 13 were sold outright or were offeredfor sale, 4 were leased to the private sector, and 3were liquidated; in addition, a government depart-ment, the Civil Aviation Department, has beentransformed into an autonomous entity. As aresult, the number of financial public enterpriseswas reduced from 6 to 3, while the number of non-financial enterprises was reduced from 28 to 11; thenumber of fully owned enterprises has in fact beenbrought down from 19 to 6. As the enterprisesoffered for sale have not as yet all been sold, thecumulative budgetary proceeds from the privatiza-tion program since 1985/86 have amounted toD 36.5 million, equivalent to about 1.2 percent ofthe GDP in 1991/92.

For the enterprises remaining in the Govern-ment's portfolio, several measures have been takento improve financial performance, including (1) theliberalization of pricing and procurement policies,facilitating significant upward adjustments in utilitytariffs to help cover underlying operating costs;(2) a strengthening of the management of severalkey enterprises, such as the GPMB, the GUC, andthe GCDB, including through external technicalassistance; (3) the restructuring of the enterprises'financial liabilities through the takeover by the

35


Government of nonperforming liabilities to domes-tic commercial banks and foreign creditors, as wellas the repayment by the Government of sizableliabilities of certain major enterprises to the Cen-tral Bank; (4) the adoption by the Government of afirm policy not to subsidize the operating costs ofpublic enterprises; (5) support of the rehabilitationand investment programs of a few key enterprises,like the GUC and the GPMB, by external assis-tance; and (6) retrenchment of surplus staff in someenterprises.

These measures were complemented with thesigning of three-year performance contracts withall but one of the remaining fully government-owned enterprises, incorporating specific monitor-able financial and other targets. The monitoring

and assessment of the performance under thesecontracts has been entrusted to the NationalInvestment Board. The system of performancecontracts, combined with the other reform mea-sures, has contributed to a marked strengthening inthe financial position of several public enterprises.

While the implementation of the public enter-prise reform program has been very successful andthe results achieved are encouraging, several prob-lems remain, most notably in the provision of elec-tricity and other utility services by the GUC, whichwill continue to be addressed in the period ahead.In particular, it is envisaged that the managementof the GUC will be leased to private operators andthat the GPMB will be offered for sale during thesecond half of 1992.

VII PUBLIC ENTERPRISE REFORM

36


VIII Social Impact of Adjustment

The Gambia's adjustment efforts since 1985/86have contributed to a steady growth in real

GDP and the stabilization, on average, in real percapita incomes, despite the stagnation in agri-cultural output. The increased availability of for-eign exchange has facilitated greater imports ofbasic consumer and intermediate goods. The stronggrowth in activity in the industrial and services sec-tors stimulated the expansion of employmentopportunities in the urban and formal sectors ofthe economy.

The benefits from economic growth have not,however, been evenly distributed to all segments ofthe society. The leveling off of agricultural outputin the face of a rapidly expanding population, cou-pled with the marked decline in real groundnutproducer prices, has resulted in a significant deteri-oration in the living standards of the rural popula-tion. These adverse effects reflected entirely theimpact of unfavorable weather and the collapse ofgroundnut prices in world markets, and could notbe attributed to the reform measures implementedby the authorities.27 At the same time, the increas-ing urban migration has strained the provision ofbasic utility services (such as water and electricitysupply) in the capital city of Banjul, as well as inother major urban areas, and has given rise to ashortage of affordable housing. While the livingstandards of traders and those employed in theurban areas have improved, the living conditions ofthe urban unemployed and underemployed hasmost likely worsened.

27The income position of groundnut farmers may have beenalleviated in part by the sales of groundnuts across the border,where groundnut producer prices have in general been higherthan those prevailing in The Gambia; the consumption ofgroundnuts by households in the rural areas may have alsoalleviated the impact of declining incomes on their nutritionalintake, given the high calorie and protein content of groundnuts.The adjustment costs borne by individual farmers may have alsobeen alleviated by the informal social security system that existsin many villages of The Gambia (complementing the traditionalextended family system), whereby available staple food itemsare redistributed among participants through the local mosques;for more details on the informal social security system, see vonBraun (1991).

In the context of the overall economic strategy,fiscal policy has played a key role in alleviating theimpact of adjustment on the most vulnerablegroups in the short term and reducing poverty overthe longer term.28 The adjustment efforts pursuedby the Government have focused on stimulatingprivate sector activity and maximizing employmentopportunities in both the rural and urban areas, aswell as on improving the provision of basic educa-tion and health services and rehabilitating the eco-nomic and social infrastructure. Moreover, greateremphasis has been placed on the provision of agri-cultural extension and research services, and onimproving the marketing arrangements for agri-cultural produce. As indicated in Section V, theshare of outlays on education and health in totalcurrent government spending has been raisedsharply in recent years. With donor assistance, theprovision of health services in rural areas has beenimproved. Seven regional health centers have beenupgraded to improve and expand services in ruralareas, and maternal and child health services,including family planning, have been expanded.National immunization campaigns against child-hood diseases have contributed to raising thenational immunization average from 55 percent inthe mid-1980s to 70 percent at present. A drugrevolving fund was also established in 1988/89, witha view to generating sufficient resources for main-taining essential drugs and medical supplies at ade-quate levels.

To aid the retrenched civil servants, a specialcompensation package was provided to employeeswho had at least five years service, consisting of 1.2months of salary for each year of service, over andabove the normal pension benefits. In addition, acivil service resettlement program was establishedto provide (1) employment counseling; (2) accessto basic entrepreneurial training and more spe-cialized technical training, if appropriate; and

28For the role of fiscal policy in improving income distribu-tion under Fund-supported programs, see International Mone-tary Fund (1986).

37


VIII SOCIAL IMPACT OF ADJUSTMENT

(3) credit for the establishment of small businessventures in priority areas, such as agriculture, fish-ing, small-scale manufacturing, and tourism-relatedcrafts.

Although the overall results of the adjustmentefforts since 1985/86 have been positive, the Gov-ernment has been aware of the hardships faced bythe poorest segments of the population and hasbeen monitoring closely the social impact of thereform program. In this context, women have beenclearly identified as a particularly vulnerable groupbecause of their relative economic and social statusand the lag with which benefits reach them. AWomen in Development project, financed by theWorld Bank and currently being implemented, isdesigned to (1) improve women's productivity andincome earning potential; (2) strengthen govern-ment institutions to enable them to deal effectively

with women's issues; and (3) contribute to bringing achange in the Gambian society's perception of therole of women. With donor assistance, a SocialDimensions of Adjustment Project is also beingimplemented, with a view to establishing a data baseand developing analytical capabilities for the prepa-ration of action programs aimed at improving theliving standards of the poorest. In addition, high pri-ority is being attached to reducing The Gambia'shigh rate of population growth, which is perceived asundermining the country's development objectives.To this end, a comprehensive national populationpolicy is close to being completed, which empha-sizes, in addition to the need to improve and expandthe family planning and health services, a broadrange of population-related issues, such as educa-tion, the environment, internal and internationalmigration, and employment.

38


IX Concluding Remarks

The Gambia has made considerable progresssince the mid-1980s in laying the foundation

for a sustainable expansion of output through thesuccessful implementation of a wide range of finan-cial and structural reforms, supported by successivearrangements from the Fund and structural adjust-ment credits from the World Bank. As a result, bythe end of the three-year ESAF arrangement, TheGambia's internal and external imbalances hadbeen reduced and a comfortable external positionhad been attained, consistent with no need forexceptional balance of payments financing, mainlyas a result of the significant progress made in diver-sifying the production and export bases.

This impressive performance can be attributedto four main factors: first, the strong commitmentby the Gambian authorities to the adjustment pro-cess, as evidenced by their willingness to takeprompt and appropriate corrective measures in theface of changing external circumstances anddomestic policy slippages; second, the reliance on amarket-oriented approach, entailing the early res-toration of an appropriate structure of relativeprices and the strengthening of economic incen-tives, notably through the shift to a market-determined exchange rate, the liberalization of theexchange and trade system, the lifting of all pricecontrols, and the restoration of positive real inter-est rates; third, the pursuit of restrictive fiscal andmonetary policies and the implementation of abroad range of structural reforms, including thescaling down of the size of the public sectorthrough a far-reaching privatization program; andfinally, the provision of substantial technical andconcessional financial assistance from the interna-tional donor community.

The sequencing of the policy reforms has beenappropriate and critical for the positive results thathave been achieved. The removal of the distortionsin the relative price and overall incentive structure,and most notably the establishment of a market-determined exchange rate, at the outset of theadjustment efforts has fostered the diversificationof the economy. It has also allowed The Gambianot only to cushion the adverse effects of sharp

declines in both the volume and price of its princi-pal export commodity, groundnuts, but also toimprove markedly its external position and nor-malize relations with its foreign creditors. In addi-tion, the implementation of a broad range ofadjustment measures in virtually all policy areashas sustained a sizable inflow of external financialassistance—notwithstanding the delays experi-enced in implementing some structural reforms—as well as improved The Gambia's macroeconomicsituation and maintained real per capita incomesagainst formidable odds and despite the stagnationof agricultural output.

The Gambian economy, nonetheless, remainsvulnerable to adverse external developments andchanges in the weather, while it continues to beheavily dependent on external assistance. As theexperience in recent years has demonstrated, themacroeconomic situation remains fragile, sensitiveto regional developments, which have a pro-nounced effect on the re-export trade, and todelays or shortfalls in annual aid disbursements,which tend to exacerbate the effects of any finan-cial policy slippages. The reforms already imple-mented and those under preparation appear also tohave strained the public sector's management andimplementation capacity, particularly at the sec-toral level where significant delays or slippagesfrom the envisaged policy path have beenrecorded. This experience clearly underscores theimportance for the Gambian authorities ofstrengthening budgetary discipline and policyimplementation, as well as of enhancing themonitoring of economic developments.

In addition, it is recognized that the base of out-put growth remains somewhat fragile, despite thecommendable progress already made in diversify-ing production and exports. As the experience dur-ing the past few years has demonstrated, theattainment of a satisfactory growth in real per cap-ita income depends critically on the existence offavorable weather, while the re-export trade, whichprovides a large share of tax receipts and accountsfor an increasing share of output, is strongly influ-enced by regional political developments and

39


IX CONCLUDING REMARKS

changes in the tariff structures of neighboringcountries.

It is clear that much remains to be done to con-solidate the gains already made and address moreforcefully the deep-rooted developmental con-straints that confront the Gambian economy. Thehigh rate of population growth, an underdeveloped

human capital base, the paucity of naturalresources, and the degradation of the environmentcontinue to impede additional gains in real percapita income. While the development processwill unavoidably be a protracted one, an impor-tant head start to this end has already beenmade.

40


References

Aghevli, Bijan B., and others, The Role of National Sav-ing in the World Economy: Recent Trends and Pros-pects, IMF Occasional Paper, No. 67 (Washington:International Monetary Fund, March 1990)., Mohsin S. Khan, and Peter J. Montiel, ExchangeRate Policy in Developing Countries: Some Analyti-cal Issues, IMF Occasional Paper, No. 78 (Washing-ton: International Monetary Fund, March 1991).

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Quirk, Peter J., and others, Floating Exchange Rates inDeveloping Countries: Experience with Auction andInterbank Markets, IMF Occasional Paper, No. 53(Washington: International Monetary Fund,May 1987).

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41


OCCASIONAL PAPERS

Recent Occasional Papers of the International Monetary Fund

100. The Gambia: Economic Adjustment in a Small Open Economy, by Michael T. Hadjimichael, ThomasRumbaugh, and Eric Verreydt. 1992.

99. Mexico: The Strategy to Achieve Sustained Economic Growth, edited by Claudio Loser and EliotKalter. 1992.

98. Albania: From Isolation Toward Reform, by Mario I. Blejer, Mauro Mecagni, Ratna Sahay, RichardHides, Barry Johnston, Piroska Nagy, and Roy Pepper. 1992.

97. Rules and Discretion in International Economic Policy, by Manuel Guitian. 1992.

96. Policy Issues in the Evolving International Monetary System, by Morris Goldstein, Peter Isard, Paul R.Masson, and Mark P. Taylor. 1992.

95. The Fiscal Dimensions of Adjustment in Low-Income Countries, by Karim Nashashibi, Sanjeev Gupta,Claire Liuksila, Henri Lorie, and Walter Mahler. 1992.

94. Tax Harmonization in the European Community: Policy Issues and Analysis, edited by George Kopits.1992.

93. Regional Trade Arrangements, by Augusto de la Torre and Margaret R. Kelly. 1992.

92. Stabilization and Structural Reform in the Czech and Slovak Federal Republic: First Stage, by Bijan B.Aghevli, Eduardo Borensztein, and Tessa van der Willigen. 1992.

91. Economic Policies for a New South Africa, edited by Desmond Lachman and Kenneth Bercuson with astaff team comprising Daudi Ballali, Robert Corker, Charalambos Christofides, and James Wein.1992.

90. The Internationalization of Currencies: An Appraisal of the Japanese Yen, by George S. Tavlas andYuzuru Ozeki. 1992.

89. The Romanian Economic Reform Program, by Dimitri G. Demekas and Mohsin S. Khan. 1991.

88. Value-Added Tax: Administrative and Policy Issues, edited by Alan A. Tait. 1991.

87. Financial Assistance from Arab Countries and Arab Regional Institutions, by Pierre van denBoogaerde. 1991.

86. Ghana: Adjustment and Growth, 1983-91, by Ishan Kapur, Michael T. Hadjimichael, Paul Hilbers,Jerald Schiff, and Philippe Szymczak. 1991.

85. Thailand: Adjusting to Success—Current Policy Issues, by David Robinson, Yangho Byeon, and RanjitTeja with Wanda Tseng. 1991.

84. Financial Liberalization, Money Demand, and Monetary Policy in Asian Countries, by Wanda Tsengand Robert Corker. 1991.

83. Economic Reform in Hungary Since 1968, by Anthony R. Boote and Janos Somogyi. 1991.

82. Characteristics of a Successful Exchange Rate System, by Jacob A. Frenkel, Morris Goldstein, andPaul R. Masson. 1991.

81. Currency Convertibility and the Transformation of Centrally Planned Economies, by Joshua E.Greene and Peter Isard. 1991.

80. Domestic Public Debt of Externally Indebted Countries, by Pablo E. Guidotti and Manmohan S.Kumar. 1991.

79. The Mongolian People's Republic: Toward a Market Economy, by Elizabeth Milne, John Leimone,Franek Rozwadowski, and Padej Sukachevin. 1991.

78. Exchange Rate Policy in Developing Countries: Some Analytical Issues, by Bijan B. Aghevli, MohsinS. Khan, and Peter J. Montiel. 1991.

77. Determinants and Systemic Consequences of International Capital Flows, by Morris Goldstein,Donald J. Mathieson, David Folkerts-Landau, Timothy Lane, J. Saul Lizondo, and Liliana Rojas-Suarez. 1991.

42


Occasional Papers

76. China: Economic Reform and Macroeconomic Management, by Mario Blejer, David Burton, StevenDunaway, and Gyorgy Szapary. 1991.

75. German Unification: Economic Issues, edited by Leslie Lipschitz and Donogh McDonald. 1990.74. The Impact of the European Community's Internal Market on the EFTA, by Richard K. Abrams,

Peter K. Cornelius, Per L. Hedfors, and Gunnar Tersman. 1990.73. The European Monetary System: Developments and Perspectives, by Horst Ungerer, Jouko J.

Hauvonen, Augusto Lopez-Claros, and Thomas Mayer. 1990.72. The Czech and Slovak Federal Republic: An Economy in Transition, by Jim Prust and an IMF Staff

Team. 1990.71. MULTIMOD Mark II: A Revised and Extended Model, by Paul Masson, Steven Symansky, and Guy

Meredith. 1990.70. The Conduct of Monetary Policy in the Major Industrial Countries: Instruments and Operating Pro-

cedures, by Dallas S. Batten, Michael P. Blackwell, In-Su Kim, Simon E. Nocera, and Yuzuru Ozeki.1990.

69. International Comparisons of Government Expenditure Revisited: The Developing Countries,1975-86, by Peter S. Heller and Jack Diamond. 1990.

68. Debt Reduction and Economic Activity, by Michael P. Dooley, David Folkerts-Landau, Richard D.Haas, Steven A. Symansky, and Ralph W. Tryon. 1990.

67. The Role of National Saving in the World Economy: Recent Trends and Prospects, by Bijan B.Aghevli, James M. Boughton, Peter J. Montiel, Delano Villanueva, and Geoffrey Woglom. 1990.

66. The European Monetary System in the Context of the Integration of European Financial Markets, byDavid Folkerts-Landau and Donald J. Mathieson. 1989.

65. Managing Financial Risks in Indebted Developing Countries, by Donald J. Mathieson, David Folkerts-Landau, Timothy Lane, and Iqbal Zaidi. 1989.

64. The Federal Republic of Germany: Adjustment in a Surplus Country, by Leslie Lipschitz,Jeroen Kremers, Thomas Mayer, and Donogh McDonald. 1989.

63. Issues and Developments in International Trade Policy, by Margaret Kelly, Naheed Kirmani, MirandaXafa, Clemens Boonekamp, and Peter Winglee. 1988.

62. The Common Agricultural Policy of the European Community: Principles and Consequences, by JuliusRosenblatt, Thomas Mayer, Kasper Bartholdy, Dimitrios Demekas, Sanjeev Gupta, and LeslieLipschitz. 1988.

61. Policy Coordination in the European Monetary System. Part I: The European Monetary System: ABalance Between Rules and Discretion, by Manuel Guitian. Part II: Monetary Coordination Withinthe European Monetary System: Is There a Rule? by Massimo Russo and Giuseppe Tullio. 1988.

60. Policies for Developing Forward Foreign Exchange Markets, by Peter J. Quirk, GrahamHacche, Viktor Schoofs, and Lothar Weniger. 1988.

59. Measurement of Fiscal Impact: Methodological Issues, edited by Mario I. Blejer and Ke-Young Chu.1988.

58. The Implications of Fund-Supported Adjustment Programs for Poverty: Experiences in SelectedCountries, by Peter S. Heller, A. Lans Bovenberg, Thanos Catsambas, Ke-Young Chu, andParthasarathi Shome. 1988.

57. The Search for Efficiency in the Adjustment Process: Spain in the 1980s, by Augusto Lopez-Claros.1988.

56. Privatization and Public Enterprises, by Richard Hemming and Ali M. Mansoor. 1988.55. Theoretical Aspects of the Design of Fund-Supported Adjustment Programs: A Study by the Research

Department of the International Monetary Fund. 1987.

Note: For information on the title and availability of Occasional Papers not listed, please consult the IMF Publications Catalog orcontact IMF Publication Services.

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occasional paper100

Documents