Statement by an IMF Mission to The Gambia and Halifa Sallah’s Analysis

 

According to Press Release No. 10/206 issued by the IMF Mission to the Gambia on May 20, 2010, an International Monetary Fund (IMF) mission led by Mr. David Dunn visited The Gambia during May 7-20, 2010, to conduct discussions for the 2010 Article IV consultation and the seventh review of The Gambia’s program under the Extended Credit Facility (ECF)1. The mission met with Minister of Finance, Momodou Foon, Minister of Trade, Employment, and Regional Integration, Abdou Kolley, Minister of Energy, Mrs. Sira Wally Ndow-Njie, Minister of Information and Communication Infrastructure, Alhaji A. Cham, and Governor of the Central Bank of The Gambia (CBG), Momodou Bamba Saho, other senior officials of the government and the CBG, and representatives of the business community, civil society, and The Gambia’s development partners.

 

Mr. Dunn, Mission Chief for The Gambia, made the following statement in Banjul:

"The Gambian economy has performed well in recent years. Real Gross Domestic Product (GDP) at factor cost grew by an average of nearly 6½ percent during 2007-2009, while annual inflation averaged less than 5 percent. Despite the global economic crisis in 2009, and a sharp drop in tourism receipts and remittances, real GDP growth remained strong, at just over 5 percent, led by the continued rebound in agriculture. Inflation fell to less than 3 percent at end-2009, largely reflecting a tightened monetary stance for much of the year and steady local prices for food and fuel, even though global prices for these commodities had picked up. Despite a modest up-tick in early 2010, inflation has remained low at 4.1 percent in April. Gross international reserves remain at a comfortable level, after reaching nearly 6½ months of imports at end-2009. Although tourism and remittances are expected to remain soft in 2010, real GDP is projected to grow at about 5 percent, led by solid growth in a number of key sectors, including agriculture. Inflation is expected to remain low at about 5 percent."

 

In our view the IMF Mission is not helping the Gambian authorities to realise the dangers of economic contraction. He has admitted that remittances have dropped as well as the receipts from Tourism. However, Mr Dunn indicated that real GDP growth remain strong. Now what is responsible for the growth? According to him, the growth is "led by rebound in agriculture."

 

Economists however must rely on concrete details and not mere estimates to draw conclusions. It is very difficult to know how far one could say that agriculture has been able to address the problem of economic contraction. A close look at the statistics confirms how difficult it is to make any objective deductions from the records. In short, in response to a question posed by Sidia at the National Assembly, the Minister of Finance indicated that they had purchased 29,592 Metric Tonnes of groundnuts at a price of 251.5 Million dalasi. Foroyaa‘s own investigation indicates that what is purchased for the current trade season amounted to 21,125 .740 Metric Tonnes. However during the 2010 budget speech of the Minister it was projected that 140000 Metric Tonnes of groundnuts would be produced. It would be interesting to know what figures the IMF Mission relied on to indicate that a boom in agricultural production has covered up the contractions of other sectors. This is the first point.

 

Let me move to the next. According to Mr Dunn, "inflation fell to less than 3 percent at end-2009, largely reflecting a tightened monetary stance for much of the year and steady local prices for food and fuel, even though global prices for these commodities had picked up. Despite a modest up-tick in early 2010, inflation has remained low at 4.1 percent in April."

 

This does not reflect a thorough understanding of the inflationary trend in the Gambia otherwise Mr Dunn would not have attributed the figures to tightened monetary stance. Objective analysis would reveal that the inflationary trend is cushioned by government policy not to allow the prices of fuel to fluctuate in accordance with the rise and fall of the price of fuel in the international market. The price of fuel has been permanently kept on the high side. Hence its impact on inflationary trends has become constant until there is an extraordinary rise in fuel prices in the world market. In the same vein, there are other ways of increasing prices without it being noticeable. Bread is kept at 3 dalasi but its weight would drop and so on and so forth.

 

The Central Bank has to take note of the fact that the Value of the Gambian dalasi is not determined by the foreign exchange being earned through exports. Gambia sells very little to earn foreign currency. The Country’s currency is backed by earnings from remittances, tourism and transit economy which enable many people in the sub-region to transit foreign currency through the Gambia. Hence any drop in the transit trade, remittances and earnings from tourism could lead to foreign exchange scarcity and a drop in the value of the dalasi. This could lead to high cost of imports which will give rise to inflationary pressures.

 

The Gambia has still not addressed the question of investment into the productive base of the economy. This is why the revenue base is still narrow. This deprives the government of the revenue needed to finance development projects. This is why it relies on loans and grants for such development projects. It is therefore no surprise that it went into a debt crisis. Despite debt relief the revenue base is still inadequate in addressing the consumption needs of the Government. The following observation by Mr Dunn confirms that view:

 

"Interest costs, especially on domestic debt, continue to consume a considerable share of government revenues. Overruns in government spending led to a significant fiscal deficit and substantial domestic borrowing in 2009, which added pressure on T-bill yields and interest costs. While the fiscal outturn in the first quarter of 2010 was better than anticipated, it was insufficient to recoup the large fiscal slippages in 2009. As a result, the program target on the ceiling on the cumulative basic fiscal balance for March 2010 was exceeded by nearly GMD 90 million (or about 0.3 percent of GDP). To ease pressure on interest rates and to create savings from a lower debt burden, the government is committed to returning to the programmed fiscal path for 2010."

 

It is therefore clear that without the development of the productive base of the economy the issue of debt relief would amount to a mere window dressing. In short, as of January 2010 the total debt of the Country is still 16.8 billion dalasi. The internal debt is 6.13 billion which shows the means the government is using to cover up its budget deficits. What is sheltering the Gambian economy is the transit economy. This however is not sustainable. The fact of the matter is that the people are finding it more difficult to earn enough to live in dignity while government is finding it more difficult to get the revenue needed to meet its obligations. The rest of the observations of the mission could be taken for what they are worth. It reads

 

"The mission welcomed the Central Bank of The Gambia’s commitment to maintaining low inflation. In light of the CBG’s relatively comfortable stock of international reserves, the mission recommended that as its balance sheet grows, the CBG could gradually increase its holding of government securities purchased in the secondary market, rather than accumulate additional international reserves. This would not only allow a modest rebalancing of the CBG’s portfolio, but would also enable the CBG to eventually introduce repo instruments and further improve liquidity management. The CBG is also well placed to use sales of a limited amount of its foreign exchange reserves, rather than sales of T-bills, to sterilize liquidity generated by donor financed government spending.

 

"As part of the Article IV discussions on surveillance—the main role of the IMF under its original mandate—the mission extensively reviewed developments in the financial sector, including supervision by the CBG. The mission welcomed the expansion of much needed financial services in The Gambia and actions by the CBG, such as the planned increases in the minimum capital requirement, to ensure soundness in the system. In addition, the Gambian authorities have begun work to reconcile the Government’s net position with the CBG and, as set out in the 2008 CBG Act, maintain a strictly formal financial relationship between the two institutions. This will further strengthen the CBG as the foundation of the financial sector.

 

"With regard to the ECF-supported program, overall performance against the March 2010 targets was good, except for the fiscal slippage. The mission welcomes the authorities’ corrective actions to strengthen fiscal discipline and budget procedures.

 

"The mission wishes to express its gratitude to the authorities for their hospitality and the constructive spirit in which the discussions were held. The Executive Board of the IMF is expected to discuss the report of the mission in August 2010."

 

1 The ECF is a concessional IMF facility for low-income countries. ECF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in the country’s Poverty Reduction Strategy Paper. ECF loans carry a zero interest rate until end-2011 and an annual interest rate [of no more than 0.5 percent] thereafter, and are repayable over 10 years with a 5½ -year grace period on principal payments.