On 13 October 2006 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with The Gambia, and also assessed the country’s performance under the staff monitored program (SMP).

According to a press release from the Department of State for Finance and Economic Affairs, sent to this paper on 18 October, The Gambia has achieved macroeconomic stability over the last two and a half years.

Real GDP growth increased from a “drought-induced decline” in 2002 to an annual average of 5.7 per cent per year for 2003-05, the release stated, adding that year-on-year inflation fell to low single digit levels in 2005 and stayed below 2 per cent in the first six months of 2006.

It also stated that the overall fiscal deficit increased from 5.7 per cent of GDP in 2004 to 8.6 per cent in 2005, reflecting lower revenues and higher domestic interest payments.

The IMF Executive Board Assessment Reads:

Executive Directors commended the authorities on stabilizing the economy over the last two and a half years, which helped achieve low inflation and respectable economic growth.

Directors noted, however, that the country continues to face severe challenges, in view of the high debt burden, narrow productive base, vulnerability to exogenous and policy-induced shocks, and widespread poverty. In these circumstances, and recalling the stop-go policies of the past, Directors urged the authorities to make a long-term commitment to a reform agenda that would promote higher growth and reduce poverty.

They considered that such an agenda should include improving fiscal discipline, strengthening governance and accountability in the management of public resources, deepening the financial system, and enhancing the investment climate to foster private sector development.

While recognizing that continued technical assistance will help support these efforts, Directors noted that more effective use of such assistance would enhance capacity building.

Directors were encouraged by The Gambia’s performance under the Staff Monitored Program (SMP) that ended in March 2006.

They especially welcomed the progress made by the Central Bank of The Gambia (CBG) in addressing governance problems that had contributed to monetary policy lapses several years previously, and commended its success in reducing inflation and building up reserves.

Directors called for full implementation of the new Act designed to strengthen the operational independence of the CBG.

Directors noted the authorities’ concern that high interest payments are crowding out Poverty Reduction Strategy Paper (PRSP) priority expenditures, but considered that the authorities need to exercise fiscal discipline to address this concern.

They stressed that limiting the government’s domestic borrowing is critical for lowering interest rates, and consequently creating fiscal space for increasing growth-promoting and poverty-reducing public spending.

In that context, they expressed disappointment that, subsequent to the SMP, fiscal slippages have emerged in connection with The Gambia’s hosting of an African Union summit.

Directors stressed that the authorities should strengthen public financial management, including through the Integrated Financial Management Information System.

In particular, it would be crucial to avoid expenditure overruns, extra-budgetary expenditures, and over-commitments on externally financed projects with substantial local counterpart funding requirements.

Directors urged the authorities to extend the commitment control system beyond its current pilot phase to all spending units.

They highlighted the need to better integrate the PRSP into the budget process, and to ensure that the resources released by the debt relief contribute effectively toward reducing poverty.

Directors observed that, although the financial sector is relatively sound, financial intermediation is low. They noted that a high degree of concentration and high profit ratios in the banking system suggest room for more competition, but noted that structural impediments to lending should also be addressed.

Directors encouraged the authorities to review laws that discourage lending, and to take steps to improve the efficiency of the court system and facilitate the establishment of a credit reference bureau.

Directors were of the view that The Gambia’s floating exchange rate regime has served the country well and that the current level of the real effective exchange rate is broadly appropriate.

At the same time, they underscored the importance of structural reforms to enhance external competitiveness and reduce the vulnerability of the economy to exogenous shocks. In this regard, they welcomed the authorities’ request for assistance from the World Bank in the formulation of a program to improve the investment climate.

Improvement in education and health would also strengthen capacity building and enhance productivity.

Several Directors expressed concern about the recent weakness in the groundnut sector, and recommended that the remaining impediments to its efficient operation be removed.

Directors noted that stress test in the debt sustainability analysis undertaken jointly by Fund and World Bank staff suggest that The Gambia will likely remain at a moderate risk of falling back into debt distress even if debt relief under the MDRI is provided.

They underscored the importance of reliance on non-debt creating flows and further efforts to strengthen debt management.

Directors also noted the importance of strengthening domestic revenue mobilization to supplement, and reduce dependency on, external resources.

Directors expressed concern about the severe data deficiencies that hamper the analysis of economic developments.

They urged the authorities to speed up work on using the results of the 2003 household budget survey to improve the quality of the national accounts and the consumer price index.

Additional steps are also necessary to improve the quality of balance of payments statistics along the lines recommended by the Fund.

Directors generally considered that there is a basis for proceeding to discuss with the authorities a program that could be supported under a three-year PRGF arrangement.

They expected that a new arrangement would provide a framework for consolidating the implementation of sound macroeconomic policies and also assist the authorities make progress toward the HIPC Completion Point in order to benefit from debt relief. Directors urged the authorities to redouble their reform efforts, noting that credible fiscal consolidation and improved governance would be important for a new PRGF arrangement.