-
Report No. 5693-GM
The GambiaDevelopment Issues and Prospects
September 6, 1985
Western Africa Regional Office
FOR OFFICIAL USE ONLY
,~~,~~~., '' '; - -'
Documesnt of the World Bank
This document has a restricted distribution and may be used by
recipientsonly in the performance of their cfificial duties. Its
contents may not otherwisebe disclosed without World Bank
authorization.
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
-
CURRENCY EQUIVALENTS
Currency Unit: Dalasi (D)
Exchange Rates I/
Pre-February 1984 £1.00 = D 4.00After February 1984 £1.00 = D
5.00
Annual Average, D/US$(Fiscal Years)
1981 1.851982 2.131983 2.461984 3.081985 4.15
WEIGHTS AND MEASLRES EQUI-VALENTS
Metric British/US
1 meter 3.28 feet (ft)1 kilometer (km) = 0.62 mile (mi)1 square
kilometer (km2 ) = 0.386 square mile (sq mi)I kilogram (kg) 2.2
pounds (lb)i metric ton (m ton) = 2,204 pounds (lb)
I liter (1) 0.22 UTS gallon (gal)
FISCAL YEAR
Government July 1 - June 30Gambia Produce MarketingBoard (GPMB):
October I - September 30
1/ The Gambian Dalasi is pegged to the Pound Sterling. On
February 23,1984, the dalasi underw-ent a 25 percent devaluation
vis-a-vis thepound. In addition to this change, currency
equivalents for thedalasi vis-a-vis the U.S. dollar over the period
covered in thisreport have been heavily affected by movements of
the pound againstthe U.S. dollar. All conversions to U.S. dollars
or SDRs in thisreport have been made at the average exchange rate
prevailing duringthe fiscal vear in question.
-
_ i _ BFOR OMCUL USE ONLY
PREFACE
The last economic memorandum on The Gambia wasissued in December
1980. 1/ This report examinesdevelopments since then and is based
on the findings ofan economic mission which visited The Gambia in
December1984. The members of the mission were Barbara Brims(mission
chief and principal author), Moba-u.d-HassanOrdoubadi (assistant
economist), Anne Harrison (economicstatistlcs), David Davis
(tourism consultant) and HeidiMatbiesen (fisheries consultant). The
report wasprocessed through all stages by Marie-France Sacks.
The draft memorandum was discussed with theGovernment in June
1985.
11 World Bank, The Gambia: Country Economic Memorandum,Report
No. 3094-GM, December 23, 1980.
Thb4ocume ha a rticed dbudon ad qa be tued by recipin nl in the
PefOnuM Ofthei officia dude Its cms may not oherwi be dimdo withot
Wodd Dak au_kzado.
-
- ii -
TABLE OF CONTENTS
Page No.
ADDITIONAL SOURCES
............................................... v
ACRONYMS AID ABBIEVIAOONS .. vi
COUNTRY DATA SHEET .. vii
SUMMARY AND CONCLUSIONS ...................................
lx
I. ECONOMIC STRUCTURE AND DEVELOPMENT CHALLENGES .............
1
II. RECENT DfYVELOPHENTS IN PERSPECTIVE ........................
5
A. Production and Exports: An Overview ................... 5B.
Origins and Nature of the Crisis ....................... 8C.
Government Adjustment Efforts, 1980-84 ................. 14D.
Current Situation and Response ......................... 15E. The
External Debt Problem .............................. 17
III. PUBLIC FINCES. .21
A. Evolution of Central Government Finances . . 211. The Period
1974/75-1979/80 .212. The Period 1980/81-1981/82 .213. The Period
since 1982/83 .23
B. Major Problems and Implications ...-------------------- -
251. Emerging Revenue Constraints .252. Expenditure Pressures
........................ .... 273. Direct Cost Recovery
................................ 334. Economic Pricing
.................................... 34
C. Conclusions ............................................
35
IV. PUBLIC INVESTMENT .. 37
A. Past Investment .. 37
1. Sectoral Allocation ................................. 38
2. Absorptive Capacity ................................. 393.
Recurrent Costs ..................................... 40
B. The 1984/85-1987/88 PIP. .. . . . 41
V. PUBLIC ENTERPRISES .. 44
A. Performance and Problems ............................... 44B.
The Case of GPMB .. 46C. Implications for Action
................................ 49
-
- iii -
TABLE OF CONTENTS (Continued)
Page No.
VI. DEVELOPMENT POTENTIAL AND SECTORAL ISSUES .................
51
A. Agriculture ............................................ 511.
Past Performance .................................... 512. Growth
Potential .................................... 543. Institutions
........................................ 59
B. Fisheries .............................................. 601.
Resources and Production ............................ 602.
Development Strategy and Required Actions ........... 62
C. Manufacturing Industry .. 631. Composition and Growth of
Output .................... 632. Structure of Ownership
.............................. 653. Potential and Issues
...................... 66
D. Tourism .. .................... 671. Trends
...................... 672. Institutions and Infrastructure . 693.
Economic Impact and Prospects . 70
VII. PROSPECTS AND IMPLICATIONS .. 72
A. Background . 72
B. Recovery Scenario .. 731. Main Assumptions . 732. Results .
77
C. Conclusions . 81
D. Recommended Actions .. 821. Improving the Productivity of
Public Investment . 822. Public Sector Reform . 833. Stimulating
Growth and Employment in
Productive Sectors . 84
E. The Government Economic Recovery Program (ERP) . 87
F. The Role of Donors . 88
ANNEX I Comments on the Priorities of the 1984/85-1987/88 PIP .
89
ANNEX II List of Public Enterprises . 92
ANNEX III The Projections: A Methodological Note . 93
STATISTICAL APPENDIX . 102
map
-
-iv -
LIST OF TEXT TABLES
Page No.
Table 1: Composition of Exports .. 7
Table 2: Domestic and Reexport Trade . .10
Table 3: Selected Economic Indicators, 1982/83-1984185. 16
Table 4: Structure of External Debt . .18
Table 5: Projected Debt Service and Possible Relief
fromRescheduling .19
Table 6: Snumary of Central GovLrnment Finances .22
Table 7: Projected and Actual Public Investment, by Sector ....
38
Table 8: Proposed PIP, and PIP with
Modifications,1984/85-1987188 .43
Table 9: Financial Returns to Labor for Upland Crops,by Zone, in
1985 .54
Table 10: Value Added in Manufacturing, by Branch .. 64
Table 11: Tourist Arrivals, Bed Capacity, and HotelOccupancy
Rates .68
Table 12: Recovery Scenario: Selected Indicators .78
Table 13: Projected External Financing Requirements .79
Table 14: Financing Gap under Alternative Scenario . .80
LIST OF CHARTS
Chart 1: GDP, Agriculture and Groundnuts . . 6
Chart 2: Consumer Price Index, 1975-85. 13
Chart 3: Composition of Recurrent Expenditure ................ .
28
Chart 4: Government Wages and Salaries .. 30
Chart 5: Groundaut Prices and Area under Cultivation1979-84
........................................... 53
Chart 6: Projected World Prices for Groundauts andThe Gambia's
Main Imports ....... ................... 75
-
ADDITIONAL SOURCES
WORLD BANK SECTOR REPORTS ON THE GAHBIA
- Agricultural Sector Issues Report (forthcoming)
- Financial Sector Review, Report No. 4766-GX, May 1985
- The Gambia: Issues and Options in the Energy Sector,Report No.
4743-QGK, November 1983
- Transport Sector Memorandum, Report No. 3973-GM,May 1983
- Education Sector Memorandum. Report No. 3734-GM,December
1981
- Basic Needs in The Gambia, Report No. 2656-GM,January 1980
CEM BACKGROUND PAPERS (white cover drafts)
- "The Tourism Sector," D. Davis, February 1985
_ "The Fisheries Sector," H. Mathiesen, February 1985
- 'A Review of Economic Statistics in The Gambia,"A. Harrison,
February 1985
- "The Gambia: Health Sector Report," Dr. S. Goings,December
1984
-
- vi -
ACRONYMS AND ABBREVIATIONS
AfDB - African Development BankADB - Agricultural Development
BankADP II - Second Agricultural Development ProjectBADEA - Arab
Bank for Economic Development of AfricaCBG - Central Bank of The
GambiaCCCE - Caisse Centrale de Cooperation Economique
(France)CECAF - Committee for Eastern Central Atlantic
FisheriesCFAF - Communaute Financiere Africaine FrancECOWAS -
Economic Community of West African StatesEEC - European Economic
CommunityEEZ - Exclusive Economic ZoneFAO - Food and Agricultural
OrganizationFMC - Fish Marketing CorporationFFMC - Fish Processing
and Marketing CorporationGCU - Gambia Cooperative UnionGCDB -
Gambia Commercial and Development BankGNIC - Gambia National
Insurance CorporationGPA - Gambia Port AuthorityGPMB - Gambia
Produce Marketing BoardGUC - Gambia Utilities CorporationGRT -
Gambia River Transport CompanyIBRD - International Bank for
Reconstruction and DevelopmentIDA - International Development
AssociationIMF - International Monetary FundKfW - Kreditanstalt fur
WiederaufbauLIBOR - London Interbank Offer RateLIB - Livestock
Marketing BoardMEPID - Ministry of Economic Planning and Industrial
DevelopmentNIB - National Investment BoardNTC - National Trading
CorporationNPE - National Partnership EnterpriseOECD - Organization
for Economic Cooperation and DevelopmentODA - Official Development
AssistanceOMVG x Organisation pour la mise en valeur du Fleuve
GambiaOMVS - Organisation pour la mise en valeur du Fleuve
SenegalOPEC - Organization of Oil Producing and Exporting
CountriesRDP - Rural Development ProjectSSHFC - Social Security
Housing and Finance CorporationSTABEX - Stabilization Fund for
Exports (EEC)USAID - U.S. Agency for International DevelopmentWAMU
- West Africa Monetary UnionWHO - World Health Organization
-
- vii - .
C Y DATA - PE Gage I of 2
A_EA POPULATIO nEum (1985)
Total 113 Sq. K. 0.7 d1lliOc Caid-1984) 62 per sq.
kmAgricultural 43 Sq. Km. Rate of C arwth 3.25 159 per sq. km
agriacltural land
POPULATION HAAiC EALT.HCiude BIrth Rate (per 1,000) 49 per
Physicia (1978) 12,310Crude Death Rate (per 1,000) 23 P tin per
Hospital Bed S6Age 14 and Unde () 42 Infnt ortality Rote (per
1,000) 200Urban Populati () 30
INCOME DISTRIBInOK DISTRIBUIN OF LAD PSof National ITnco Not
available
Hiujest QuttileLowest Quintile .
AC TO SAFE WATER (1980) ACCSS TO EETRICITYUrba(S) 86 S of
PopulaCion - otal.
-aral (negigible)
N1T 1ON EDMCAETO (1980-82)~S~I: 7tnake as S of Requirents 86
Adult L a ReS 20Per Capita Protein Intake (grms/day) 51 Primary
School EnrollmtS 56 *
GNP PER CAPITA in 1984 : SS260
CROSSNATIONAL PlODUCR IN 1984 c/ AIIAL RAZE OF GURTO M¶%.
Contant Prices)
8sC min. S 1975-79 CAy.) 19798'. 1984
GLP at Narket Prices 188 100 3.8 1.9 -7.6Gross Dcamestic Inveset
31 16 21.8 -7.6 -32.6Gross National Savings -1 -1CUrrent Account
Balance -32 -17Exports of Goods, NFS 111 59 31.5 -1.7 3.LZTmports
of Goods, NFS -138 -73 .4 .2 -1.0
OUMTT EMMET AND PRODUGIIVI IN 1984 S/
Value Added dJ Labor Force V.A. Per WorkerUSS Mln. _ hous iad S
13SS
Agriclture 54 28 232 70 233 39Industry 25 13 30 9 833
141Services and Unallocated _l7 59 69 21 L.696 286
Total I Average 196 100 331 100 592 100
CENBtAL CDVERNM FINANCE D. Min. Percent of GOP_____c 1984 c/
1979 C/
Current Receipts 128 21 23Current Expenditure 141 23 2LCurrenc
Balance -13 -2 2Capital Expenditure 70 12 12Overall Balance -83 -14
-10
a/ Unless otberwise noted, social indicators refer to any year
between1981 and 1983.
bI Per capita GNP estimate calculated by the same converslon
technique asthe World Bank Atlas, 1985 edition.
c/ Fiscal year ending June 30th.11 At factor costs.
Not available
-
- viii -
Page 2 of 2CWU r DATA - MDE GANBIA
1980 1981 1982 1983 1981(millions of Dalasis, Outstanding
End-June)
NKIEY. CREDl= AND PRICES
Money Supply 76 90 104 135 140Bank Credit to Government (net) 27
55 37 75 81Bnek Credit to Private Sector 91 98 105 131 143Bank
Credit to Public entities 56 69 98 142 161
(Percentage or index Numbers)
Money as % of GDP 17.9 21.9 23.0 Z5.6 23.2General Price Index
(1980-1984) 100.0 108.0 116.9 127.7 147.6
Annual Percentage Change in:
General Price Index 5.0 8.0 8.2 9.3 15.6Bnmk Credit to
Goveriment (net) - 103.7 -32.7 102.7 -8.0Bank Credit to Private
Sector 7.7 7.1 24.8 9.2Bank Credit to Public entities - 23.2 42.0
44.9 13.4
BALANCE OF PAYHENS MERHANDISE EXPORTS (1981-84 AVERAGE)
1982 1983 1984 (USS Min.) %'USS millions)
Exports of Goods, NF5 100.3 105.6 111.2 Groundnuts 22.5
85.9Imports of Goods, NES 142.3 131.7 138.0 Fish and Fish Products
2.1 8.0Resource Gap -42.0 -26.1 -26.8 All Other Goods 1.6 6.1
Domestic Exports l792 TOTnterest Payments andOther Factor
Payments (net) -5.4 -9.1 -8.0 Reexports a/ 58.0Private Transfers
(net) 3.0 2.6 2.4 Total rIercEandise exports 84.2
Balance on Current Account -44.3 -32.5 -32.4 EXIRA DEBT AS OF
DECEMBER 31. 1984USS Mln.
Direct Investment .5 -. 1 .1Official Transfers and Grants 43.8
35.3 30.4 Public Debt, Incl. Guaranteed 263.3Public K & LI
Borrowing (net) 30.1 13.5 18.5 Non-Guaranteed Private Debt
Disbursements 34.7 20.3 25.1 Total Outstanding and Disbursed
263.3Amortization 4.6 6.8 6.6
Other Capital (net) -46.9 -48.0 -28.3 DEBT SERVICE RATIO FOR
198. SChange in Official Reserves -16.8 -31.8 -18.2 Public Debt,
Incl. Guaranteed 22.3
(net) (+ - increase) Non-Guaranteed Private DebtTotal
Outstanding and Disbursed 22.3
Net Foreign Assets -65.9 -92.0 -106.5(end June)
Petroleum Imports 14.0 13.0 14.5 IBRDIIDA LENDN AS OF JUNE 30 H
1985USS KiLn.
Oustanding and Disbursed M-2Undisbursed 21.1Outstanding Incl.
Undisbursed 321
RATE OF EXCHANGEAnnual Averages End Period
1981 1982 1983 1984 April19
U55 1.00 - Dalasis 1.97 2.29 2.64 3.58 4.02
a/ Includes staff estimates of unrecorded reexports.
-
- ix -
SUMMARY AND CONCLUSIONS
1. On February 18, 1985, the Republic of The Gambia observed
itstwentieth anniversary. In two decades since Independence the
country hasmade significant strides in building up an economic and
socialinfrastructure - schools, roads, clinics, public
administration - leftseriously und'rdeveloped during the colonial
period. Today 50Z of Gambianchildren have access to primary
schooling; the well-designed health caresystem is a model for other
developing countries; and the country possessestransport and other
basic infrastructure capab'e of supporting thedevelopment of The
Gambia's productive potential for decades to come.
2. At the outset of its third decade, bowever, The
Gambia'sachievements are both outweighed and threatened by the
cumulative failureof the economy to achieve its growth potential
and a worsening financialcrisis that is forcing both the Government
and the donor community to focuson emergency stabilization rather
than long-term development. Rapidpopulation growth - The Gambia's
population more than doubled between 1965and 1985 - combined with
the poor performance of the economy has meant anunremitting erosion
of per capita income, which declined by 16% in realterms between
1975 and 1985. The estimated per capita income in 1984 ofUS$260
places The Gambia amo-_g the lowest income countries in the
world.
3. In light of The Gambia's present crisis, this report has
twoobjectives: (i) to identify the areas of economic potential that
couldreverse The Gambia's decline over the medium term, and (ii) to
examine themacroeconomic and sectoral policies required to achieve
that potential. Itis intended to serve as a framework for
discussions between the Governmentof The Gambia and the
international aid community on a joint strategy forsustainable
economic recovery. The report assumes that the donor communityw-ill
maintain a relatively high level of financial support to The
Gambiafor the forseeable future but, given the overall trend of
declining netresource transfers to sub-Saharan Africa 1/, this
continued support willdepend upon the Governmeat' s adoption of a
comprehensive and seriousprogram of structural reform.
4. Chapters I and II of the report provide a summary review
ofdevelopments in the economy since 1979 and the near-term outlook,
andexamine the impact of the Government's recent adjustment
efforts. TheGambian economy has deteriorated sharply over the past
six years due to acombination of structural changes and cyclical
factors. Underlying the-.Teak overall growth performance (1.8% per
year in real terms) has been asignificant downward trend in
groundnut production, which remains the majorsource of cash income
for the almost two-thirds of the Gambian populationengaged in
agriculture and continues to account for 85-90% of totaldomestic
exports. Whereas the declines in groundnut production in 1980
and1981 had their origin in severe droughts and adverse terms of
trade, those
1/ See Toward Sustained Development: A Joint Program of Action
forSub-Saharan Africa, IBRD, August 1984.
-
- zc -
experienced since 1984 are largely attributable to internal
factors, suchas the cumulative public sector deficits which have
eroded the government'sability to set adequate producer prices or
to ensure the efficient supplyof seeds and fertilizers.
5. Poor domestic export performance and persistent current
accountdeficits in excess of foreign aid flows have placed growing
pressure onthe overall balance of payments. The inability of the
Central Bank since1981 to guarantee conversion of dalasis deposits
iuto foreign exchange hasled to a rapid loss of confidence in the
banking system by the tradingcommunity and substantial outflows of
private capital. As a result, thecountry has accumulated growing
arrears on external payments, which by thisyear equalled 35% of
GDP. Despite mLcroeconomic adjustments attempted in1984 - including
a 25% devaluation - the foreign exchange crisis hasbecome
increasingly acute: supplies of fuel and other essential importsare
severely disrupted; the country is unable to make debt
servicepayments; and desperately scarce foreign exchange commands
an increasingpremium on the parallel (black) market.
6. Three critical structural changes underlie the rapid
economicdeterioration since 1979. Foremost among these is the
dramatic expansionof the public sector over the past decade - a
major cause of chronicfiscal imbalances, examined in Chapter III.
Between 1976 and 1980, thecivil service doubled in size and total
government expenditure increased bymore than 25% per year. The
level of public sector employment is nowseriously out of line with
the long-term potential of the productive base;today, the economy
is spending almost twice as much on civil service wagesand salaries
as on income to groundnut producers. This imbalance betweenthe
overextended public sector and the productive,
export-generatingactivities required to sustain it is the most
profound source ofdisequilibrium in the Gambian economy at present
and hence must be seen asthe starting point for structural
adjustment.
7. The Gambia faces serious constraints to further revenue
growthdue to the Government's heavy reliance on income from import
duties. Atthe sam time, as explained in Chapter III, changes in the
structure ofrecurrent expenditures since 1979/80 have substantially
accentuated tLedownward inelasticity of expenditures. One such
change is the rapidescalation of debt service obligations: from 5%
of budget outlays in1980/81 to 28X in the current fiscal year.
Therefore, to restore fiscalequilibrium, the emphasis over the next
several years needs to be on theexpenditure side, although there is
some scope for additional revenuemobilization through direct cost
recovery (particularly from fees andcharges in the health sector)
and economic pricing to eliminate consumersubsidies and to reduce
operating losses of parastatals. The prime targetfor expenditure
control should be the government wage bill. It isimportant,
however, that this be achieved insofar as possible
throughreductions in the number employed rather than continued
compression of realwages, in order to safeguard the efficiency of
public administration.
8. The second critical long-term problem is the failure
ofsuccessive public investment programs to diversify the productive
base andplace the economy on a higher growth path. The reasons for
this. examined
-
-xi -
in Chapter IV, include: (i) overinvestment in transport relative
to other,directly productive sectors; (ii) too rapid expansion of
infrastructurein all sectors, exceeding the country's absorptive
capacity; and (iii)inadeqxate attention to the recurrent cost,
import cost and debt serviceimplications of investments and The
Gambia's long-term capacity to sustainthese. The Government has
prepared a public investment program for theperiod 1984/85-1987/88
which, although based on a sound overall strategy -a shift from new
infrastructure investments to rehabilitation andmaintenance of
existing capital assets - exceeds what is feasible in thecurrent
economic climate. Modifications are needed, as itemized in
thereport, to strengthen the program's focus on (i) quick gestation
projectsproducing traded goods and (ii) sectoral rehabilitation
projectsincorporating increased donor support for recurrent
costs.
9. The accumulated external debt of The Gambia - the
thirdconstraint to development - is now equivalent to about 200Z of
GDP. Morethan 50% of this amount is owed to multilateral
organizations and, thus, isnot eligible for rescheduling. Most of
the associated debt servicerepresents a direct burden on public
finances; although a significant sbareof the debt is
government-guaranteed borrowing by parastatals, very few ofthese
are in a position to service their debts. In addition, The
Gambiahas accumulated significant arrears to both commercial and
officialcreditors, including the INF. The estimated debt service
ratio for 1985/86is on the order of 50% of domestic exports of
goods and services, notcounting outstanding arrears.
10. Chapter V analyzes the failure of parastatal enterprises
tocontribute to public savings, to provide efficient and expanding
levels ofbasic services, and to contribute to the diversification
and growth ofproductive sectors. The major problems are the
Government's imposition ofnon-commercial objectives and inadequate
tariff policies, both of whichcould be addressed by the use of
'performance contracts" to clarifygovernment-enterprise relations
and establish an environment of managerialand financial
accountability. The fundamental challenge, however, is toreconsider
the role of these entities in the Gambian economy and to developan
appropriate "privatization" strategy.
11. Chapters VI and VII focus on prospects for the future. The
areasoffering the greatest potential are agriculture, fishing,
manufacturing.and tourism. Agriculture, of course, is the key.
Despite good qualitysoils and unexploited arable land, Gambian
agricultural production hasstagnated over the past decade (0.8Z
real growth p.a.). Although poorrainfall has played a role in this,
it is clear that other factors havepredominated, specifically: (i)
the inability of the deficit-riddenparastatal marketing board to
offer farmers a groundnut price competitivewith the essentially
free-market prilces paid by private traders forfoodcrops; and (ii)
the poor organization and inefficiency of institutionswhich serve
the sector, resulting in late delivery of seeds and otheressential
inputs, high post-harvest losses due to inadequate storage
andinefficient marketing, and excessive losses in processing. In
addition,periodic government forgiveness of farmer loans has
seriously underminedthe development of a financially sustainable
system of agricultural credit.The Gambia's comparative advantage is
highest in groundnuts and rainfed
-
- xii -
cereals; cotton and irrigated rice production are not
economically viableat present. The imperative for the coming years
is to restore groundnutproduction to 150,000/tons per year (the
average a decade ago) from thecurrent depressed level of 75,000
tons. This will require, above all,improved price incentives.
12. Unquestionably, the problems outlined above are
severe.Nevertheless, macroeconomic projections presented in Chapter
VII indicatethat a program of adjustment could lead to higher
output growth, a reversalof declining per capita incomes, and a
restoration of balance of paymentsequilibrium. The elements of such
a program (presented in detail in thechapter) would be: price
incentives and institutional reforms to stimulateagricultural
production and foster growth in other productive sectors,public
finance reforms, improvements in the productivity of
publicinvestment, and measures to increase the efficiency of
parastatals. An"economic recovery scenario" based, inter alia, upon
adoption of suchreforms was modelled. The results showed that a
recovery of real GDP tothe 1983 level by 1990 and sustainable
growth of about 3.22 per yearthereafter could be achieved with a
modest increase in external assistance.External financing
requirements were calculated after allowing fordisbursements from
the existing project pipeline and assuming acontinuation of the
current level of technical assistance and relatedgrants, but
witbout assumptions regarding new aid or debt rescheduling. Inthis
way, the need for fresh medium and long-term loans emerged
clearlyfrom the projections as a residual. The gap so calculated
(excluding anyamounts needed to liquidate current arrears) worked
out to about US$20million in 1985/86. rising to US$37 million in
1989/90 and US$62 million in1994/95, in current dollars. 2/
13. The gap obtained from the projections can be financed in
severalways - througb disbursements from fresh MLT commitments;
through debtrescheduling; or tbrougb exceptional balance of
payments financing, eitherdonor grant aid above and beyond the
levels assumed or credit from the IMF.It should be underlined that
the form and terms of the financing obtainedaffect dramatically the
capital requirements for subsequent years. Iffinanced on
non-concessional terms, accumulated interest on the gapfinancing
from previous years leads to a total a-nual borrowing requirementof
about US$170 million by 1995, i.e., more than US$100 million
infinancing charges from previous years on top of the projected
1994/95 gapof US$62 million. If, however, it is financed through a
combination ofdebt rescheduling and new commitments on highly
concessional terms, the
2/ A sensitivity analysis found that less pessimistic
assumptions aboutworld groundnut prices (the recovery scenario
assumed a significantdeclining world price trend) substantially
improved the results,implying 25% lower annual capital
requirements. Under an alternativehypothesis in which the continued
rapid growth of food crops hadsubstitution effects on groundnut
production, the results worsenec 1slightly, and capital
requirements were about 10% higher.
-
- xiii -
overall financing requirement in 1995 is only US$70 million. If
someportion of the gap is covered by exceptional grant aid - over
and abovethe basic level of grants assumed in the projections - the
cumulativeexternal capital requirements and The Gambia's long-term
debt burden arereduced still further. Obviously, this last scenario
strengthens thecountry's prospects for long-term, sustainable
economic growth.
14. The results of the projections and the accompanying
sensitivityanalysis suggest that the recovery scenario depicted is
not unrealisticfrom the standpoint of either groundnut production
and prices or externalassistance. Basically, over the next ten
years, The Gambia's externalcapital requirements - other than
technical assistance and associatedgrants - would average roughly
US$45 million a year in current dollars,under the assumption of
concessional aid flows. In constant 1985 dollars,the annual capital
requirement would be on the order of US$30 million,which is not
significantly different from the average annual ODA inflowover the
1980-83 period of US$26 million.
15. Over the past few months, the Gambian Government has
demonstratedan increased awareness of the need for comprehensive
econom-c policyadjustments and a determination to take firm
measures to rehabilitate theeconomy. In June, the authorities
established a special task force on theeconomy, charged with
preparing a draft Economic Recovery Program (ERP).The draft ERP
corresponds to a significant degree to the adjustment
programrecommended in this report and covers measures to stimulate
key productivesectors, especially agriculture (increased producer
prices, liberalizationof input distribution, measures to streamline
key institutions);comprehensive reforms of the public sector
(restructuring of the civilservice, expenditure control, parapublic
enterprise rehabilitation); reformof the exchange system; improved
monetary and credit policies and financialsector rehabilitation;
and revision of the public investment program toincrease its focus
on production of tradeables and the rebabilitation ofexisting
infrastructure. Staff of the Ministries of Finance and Planningand
the Central Bank are continuing to elaborate the ERP and are
developinga detailed matrix indicating the timing of proposed
actions and thespecific agencies responsible for implementation.
While the ERP requiresfurther refinement, it appears to provide a
sound framework formacroeconomic and sectoral policies over the
next 3-5 years.
16. Equally important as the definition of adjustment
measures,however, is their implementation. The Government's
promptness inannouncing several important measures outlined in the
ERP during July is,therefore, encouraging. These included, inter
alia: substantial increasesin producer prices, decontrol of rice
imports and of the consumer riceprice, initiation of a
comprehensive audit of government employment.financial
restructuring of the government development bank, and eliminatonof
fertilizer subsidies by the end of 1985.
17. Yet, as the medium-term projections developed for this
reportclearly showed, even a comprehensive and sustained adjustment
effort on thepart of the Government cannot alone restore positive
per capita incomegrowth. A commitment on the part of The Gambia's
donors is also required.It should be underlined that the
effectiveness, and therefore size, of the
-
- xiv -
assistance required is crucially dependent upon its timeliness.
While TheGambia's development problems are fundamentally of a
long-tern nature, theprospects for addressing them effectively wi}l
depend to a significantextent upon the promptness and judiciousness
of actions to deal with thepressing short-term problems.
-
I. ECONOMIC STRUCTURE AND DEVELOPMENT CHALLENGES
1.1 The Republic of The Gambia, with a population of roughly
700,000in 1983, is the smallest country on the African continent,
occupying anarrow, 350 km long strip on botb banks of the Gambia
River. The country,whose width does not exceed 50 km, is completely
surrounded by the Republicof Senegal. The Gambia's unusual
geograpby is an accident of politicalhistory: control of the river,
the most navigable waterway in West Africa,was retained by the
British for strategic reasons, while surroundingterritories were
colonized by the French. As a consequence, The Gambiacuts across
the settlements of about half a dozen different tribes, most
ofwhich are also present in Senegal.
1.2 The Gambia has no important mineral or other natural
resources,and the production base is, therefore, extremely narrow.
About two-thirdsof the population is engaged in agriculture
(subsistence farming, livestockraising and cultivatioa of
groundnuts for export). Manufacturing activityis limited, with the
principal activities being groundnut crushing, a fewsmall bakeries.
a brewery, a tannery, two brick plants, a lime juice plant,and soap
and plastics production. Fisbing resources exist but appear to
besubstantially underexploited at present. The country is beavily
dependenton trade, importing about half of its food supplies, all
of its fuel andcapital gtoods and most other manufactured goods.
Exports are highlyconcentrated, with a single commodity, groundnut
products, accounting for85-90% of the value of domestic exports (as
distinct from reexports).Other domestic exports include small
amounts of fish, bides and skins,cotton, and palm kernels.
1.3 Outside of agriculture, the most important features of
theeconomy are its tourism industry (tourist arrivals have doubled
since 1982with the availability of new hotel capacity), and a
well-developedcommercial sector, which for most of The Gambia's
bistory has been involvedin entrepot trade, or the transshipment of
imported food and consumer goodsto other countries in the region.
This reexport trade expanded rapidly inthe 1970s, as The Gambia
maintained its traditional open-trade policy,while neighboring
countries increasingly resorted to higb tariffs andquotas to
protect inefficient, import-substituting domestic
industries.Although the vast majority of reexports are not
officially recorded, it isestimated that some 40% of The Gambia's
total goods imports are reexported,and that reexports are
substantially higher than the value of The Gambia'sdomestic
exports. As virtually all of the goods are sold
forfully-convertible CFA francs, the reexport activity is
undeniably animportant source of foreign exchange; however, in many
respects the tradeis an "enclave" activity, with limited links to
the domestic financialsystem. Yet the duties paid on imports that
are subsequently reexportedconstitute a very important share of
total government revenue.
1.4 The Gambia's small size, substantial trade openness and
heavydependence upon a single export crop make it an inherently
vulnerableeconomy, highly sensitive to shortfalls in agricultural
production causedby drought and to changes in the terms of trade.
Since 1975, the countryhas experienced one of the lowest GDP growth
rates (1.8% per annum) of any
-
country in Africa not affected by war or civil strife. The
estimated percapita income in 1984 of US$260 places The Gambia
among the mostimpoverished countries in the world. The apparent
acceleration ofpopulation growth over the past decade (to as much
as 3.4% per year) 1/,means that per capita income in The Gambia bas
declined by roughly 1.6% peryear, bringing about a 16Z erosion of
average real welfare over the pastdecade. Life expectancy, at 42
years, is among the lowest in the world.Infant and child mortality
rates remain tragically high: it is estimatedthat only one out of
every three infants born in The Gambia survives to agefive.
Maternal mortality rates are also among the highest
recordedanywhere. Close to 80% of the population is illiterate; the
shortage oftechnically and managerially skilled labor is severe;
and the overallproductivity of the work force is seriously
undermined by the highincidence of chronic infectious diseases and
seasonal malnutrition.
1.5 A major issue for the coming decade is posed by The
Gambia'spolitical relations with Senegal. An attempted coup in 1981
made itnecessary to invoke a mutual defense pact with Senegal for
militaryassistance. In the aftermath, the two countries signed a
far-reaching setof protocols establishing the Senegambia
Confederation and committing themto expanded mutual defense and
national security arrangements,establishment of joint foreign
policy organs, and eventual integration ofthe two economies,
including adoption of a coomon currency andbarmonization of tariffs
and import duties. Because of the importance ofentrepot activity in
the Gambian economy, the commitment to customsintegration, in
particular, raises complex issues. Two bilateralnegotiating
committees (one on customs, the other on monetary issues) havebeen
established to work out specific proposals. While monetary issues
arestill being discussed, progre-- has recently been made in the
customsnegotiating committee, which 1. agreed on a proposal for
establishment ofa Senegal/Gambia free trade area 2/ as a first step
towards customsintegration; the proposal is now being considered by
the two Governments.Background studies indicate that a free trade
area could be modestlybeneficial for both countries but is nct
expected to have a major impact onthe pattern of trade between the
two. As it is expected to take some timeto implement a free trade
area, it is assumed - for the purposes of mostof this report --
that full customs and monetary integration will not beachieved
before the end of this decade.
1.6 The Gambia confronts obvious development challenges and,
since1975, has attracted high levels of foreign assistance for
successive public
1/ Until data from the 1983 census are more fully analyzed, it
is notpossible to isolate the relative importance of in-migration
and highfertility rates in The Gambia's rapid population growth;
both areimportant.
2/ Under the proposal, all goods produced (defined as having a
certainpercentage domestic value added) in either The Gambia or
Senegal couldbe traded duty-free.
-
- 3 -
investment programs aimed essentially at diversification of the
economy andimprovement of average welfare. Total "official
development assistance"(ODA) to The Gambia has averaged close to
US$70 per capita for almost adecade - one of the highest levels in
Africa and close to twice the levelof per capita aid to neighboring
Senegal. During periods of severedrought, The Gambia has received
even higher levels of emergency aid. Withthis foreign support to
supplement low domestic savings, The Gambia hasbeen able to sustain
a relatively high level of investment (more than 20%of GDP per
annum) for almost a decade.
1.7 The failure of past investment to place the economy on a
highergrowth path, the reasons for which are examined in Chapter
IV, is one ofthe most serious aspects of the country's present
situation. Moreover, theacceleration of The Gambia's investment
effort in the mid-1970s inducedmajor changes in the structure of
the economy. Foremost among these wasthe rapid growth of the public
sector, largely because, given the country'slow level of
development, investment was initially channeled into basiceconomic
and social infrastructure (roads, schools, agricultural
extensionstations, health clinics, etc.) and civil servants were
rapidly recruitedto furnish new services. Between 1976 and 1980,
established posts in thegovernment doubled and by 1981J82, the
share of GDP absorbed by governmentexpenditures increased to 41Z.
By 1983. the public sector (governmentadministration and public
enterprises) accounted for two-thirds of totalmodern wage
employment. In the absence of adjustment, the largerinfrastructure
base and civil service will automatically dictate very highand
growing levels of public expenditures in the future.
1.8 Heavy borrowing in recent years for investments and to
sustaincurrent consumption has saddled The Gambia with an
extraordinarily highlevel of debt relative to GDP (200%) and to its
current capacity togenerate foreign exchange. This problem, which
did not exist when thecountry launched its first major investment
program a decade ago, placesthe country's current development
efforts in a context of increasingbalance of payments pressure,
with foreign obligations increasing farfaster than the likely
near-term growth of Gambian exports orimport/substituting
activities. For the immediate future, the country'sdebt service
obligations will most likely have to be met by furtherexternal
assistance -- in the form of rescheduling or exceptional balanceof
payments support. For the medium term, the establishment and
expansionof efficient foreign exchange earning (or saving)
activities is imperative.
1.9 The rapid growth of the public sector has also attracted
highurban migration, and population growth in the capital area
(Banjul/KomboSt. Mary) between 1973 and 1983 swelled to 10% per
annum. Banjul/Kombo St.Mary and periurban Brikama today hold 30% of
the total population, asopposed to 15% a decade ago. These trends
have created a highly dualisticeconomy over the past decade:
average incomes in the urban modern sector,dominated by government
wage earners, are approximately four times higherthan average rural
incomes, and there are major disparities in consumptionpatterns,
especially in the marginal propensity to consume imported goodsand
in the demand for public services. The political strength of the
urbanpopulation, moreover, is likely to make adoption of structural
adjustmentmeasures difficult, particularly those which involve
short-term consumption
-
cnts and sbifts in income distribution. Yet adjustment has
becomeinevitable; the Gambian economy has become severely
destabilized over thepast six years. and the continued growth of
government consumption at ratessix to eigbt times higher than the
growth of productiLve sectors cannot besustained.
-
-5-
II. RECENT DEVELOPMENTS IN PERSPECTIVE
A. Production and Exports: An Overview
2.1 The Gambian economy remains beavily dependent upon
agriculturewhicb, in 1984/85, accounted for 29Z of GDP, compared to
32Z in 1974/75.Year-to-year variations in agricultural production
over this period,however, were substantial, especially for
groundnuts, and explain most ofthe sizeable annual variations in
overall GDP (Chart 1). Underlying thefluctuations there has been a
significant downward trend in groundnutproduction over the past
decade, which has been the major factor in thevery poor performance
of the agricultural sector (0.8% per year real growthover the
decade) despite encouraging increases in food crop production.The
real growth of the overall economy averaged 1.8Z per year over
thedecade. However, this is well below the growth of population and
to asignificant extent reflects the rapid expansion of
governmentadministration over the period. The only productive
sectors to growconsistently were livestock, manufacturing. and
tourism. According toavailable data, the livestock sector appears
to have registered a veryimpressive growth of roughly 7% per year
between 1974/75 and 1984/85.Manufacturing has also shown modest
growth, particularly over the last fiveyears, despite the declines
registered by other segments of industry, suchas public utilities
and construction. However, by 1984/85, manufacturingstill accounted
for only 9% of GDP.
2.2 After 1981/82, tourism grew rapidly, as new hotel capacity
becamavailable and the sector rebounded from the depressed level
experiencedafter contractual difficulties with major charter
operators and thepolitical instability of 1981. By 1984/85, major
botels were operating atcapacity during the high season. Even with
the very impressive expans:Lmof tourist arrivals over the past
three years, tourism still generates arelatively small share of GDP
directly (value added from hotels andrestaurants was approximately
2% of GDP in 1984/85), but the totalcontribution of the sector
(including indirect effects on artisasalproduction, transportation
and commerce) is estimated to be 3-4 timeshigher.
2.3 The Gambia's net foreign exchange earnings derive from
threebroad sources: "domestic" goods exports, wbich are at present
exclusivelyagricultural products and largely groundnuts; profits on
'reexports" ofimported food items and consumer goods; and net
receipts from tourism. Allthree categories are subject to
substantial fluctuations from year to year.Out of a total of US$ 82
million in gross receipts from exports of goodsand nonfactor
services in 1984/85, net receipts were estimated US$44million; of
this, domestic exports accounted for roughly 50%, earnings
onreexports represented 30% and tourism net receipts about 20%
(Table 1). Itshould be recall,d, however, that a substantial
element of estimation ispresent in all export and balance of
payments statistics for The Gambia.
-
-6-
CHART 1
GDP, Agriculture and Grounduuts(Value added at factor cost,
1976/77 prices)
/J/ GDP'W
M4 F- Agr Itu
50~~~~~~~~~Ao zoG
0- i ~~Groundnuts .0_ I I B I I i | f 1975 19 V 97 1978 1T
1801911 198Z 19M 194 15
I [.1Slb YSZ
So-arce: Appendix Table 2.2
-
due to the fact that reexports are on the order of US$40-60
million a yearbut at least two-thirds of them are unrecorded.
1/
2.4 The composition of merchandise exports remains
highlyconcentrated, as can be seen from Table 1, with groundnut
productscontinuing to represent 85-90Z of domestic exports. The
dollar value of
Table 1: COMPOSIIION OF EXPORTS(% distribution)
Average1974/75-1979/80 1980181 1981/82 1982/83 1983184
1984/85
Groundnut Products 91 76 S1 90 92 85
shelled and unshelled 52 31 53 68 51 49
oil, unrefined 29 36 18 19 34 32meal and cake 0 8 10 3 7 4
Palm kernels and nuts 1 2 0 1 1 0
Fish and fisb preparation 6 15 11 5 4 7
Other Products 2 7 8 4 3 8
Total Domestic Exports 100 100 100 100 100 100
Memorandum Items (millions of USS)
Total exports of goods n.a. 81 82 85 88 61
Domestic Exports 44 22 20 29 34 19
Reexports a/ n.a. 59 62 56 54 42
Exports of Non-factor services n.a. 22 18 21 23 21
Total Exports (G&NFS) n.a. 103 100 106 1i 82
Total Imports (G&NFS) n.a. 175 142 132 138 115
a/ Includes mission estimates of unrecorded reexports.
Source: Central Statistics Department, MEPID, except for
unrecorded reexports.
I/ The balance of payments statistics presented in this report
weredeveloped by the mission after careful examination of trade
data anddetailed estimates of domestic consumption; they are
different fromprevious official government statistics, however, in
that reexports,and therefore total goods exports, are substantially
higher thanpreviously estimated.
-
- 8 -
groundnut exports in recent years. however, has been well below
the averagelevel of the mid-1970s, and reacbed a record low in
1984/85. Fish exportswere also disappointingly stagnant and well
below The Gambia's fisheriespotential; to some extent, though, this
is believed to reflectunderreporting. Livestock exports to Nigeria
and Gabon grew over theper_od and may expand still further in
coming years; however, sucb exportsstill represent less than 5Z of
the total value of domestic experts.
2.5 Reexports fluctuated over the period, growing rapidly in
1979/80,dec ining dramatically in 1980/31, recovering in 1981/82
and increasingsubstantially again in 1983/84 (21%). The reasons for
these sharpfluctuations are not clear. A number of different
factors affect thereexport trade, including overall purchasing
power in neighboring countries,changes in Gambian and neighboring
countries' tariffs and/or importlicensing policies, and the degree
of border patrolling by neighboringSenegal, through which all
reexport goods must pass. Ten to twelvestaples 2/ dominate the
trade, although the relative quantities of thesechange considerably
from year to year. The most striking shift over the pastfew years
has been the decline in textile reexports and the fast growth ofthe
trade in sugar, which has tripled in volume since 1980/81.
Althoughtrade in the above items is the most highly organized,
other food items andbasic consumer goods imported into The Gambia
also are believed to bereexported to a significant extent.
2.6 Gross foreign exchange receipts from tourism have
expandedsteadily, by almost 50Z a year, with the rebound in tourist
arrivals since1981/82. However, an estimated 50% of gross tourism
receipts are used tofinance imported goods (including the import
component of electricity usedby Oe hotels). Until the sector
increases its linkages with localsuppliers of foods and other
goods, net foreign exchange earnings fromtourism in The Gambia will
remain lower than in other countries, where 60%or higher retention
of gross foreign exchange receipts is the norm. Theseissues are
discussed further in Chapter VI.
2.7 It sbould be underlined that the gains from tourism have
beenoutweighed by the growing deficit on other services and income
payments. Alarge part of this net deficit stems from interest
payments on medium andlong-term debt, which have tripled over the
last two years and areprojected to rise still faster in the future.
The Gambia's seriousexternal debt problem is discussed later in
this chapter.
B. Origins and Nature of the Crisis
2.8 The Gambia"s current financial crisis is the result
ofdevelopments concerning the balance of payments, on the one hand,
and themanagement of the public sector, on the other. Until the
late 1970s, TheGambia was able to maintain broad balance of
payments equilibrium in largepart thanks to the stabilizing role
played by the public sector,
2/ Sugar, textiles, tomato paste, cigarettes and unmanufactured
tobacco,used clothing, batteries, tea, flour, and corrugated iron
sheets arethe most important items.
-
- 9 -
specifically the central government and The Gambia Produce
Marketing Board(GPKB), a parastatal organization. The Marketing
Board, which hadgradually built up financial reserves from 1960 on,
3/ was able to maintainstable or moderately increasing prices to
farmers over the period, therebyencouraging production for export.
Althoughb producer prices were keptfairly stable, farm incomes were
not, and income declines in years of badharvests tended to depress
the demand for imports along with the fall inexports. The
Government maintained a surplus on its current budget, which,along
with foreign grants and highly concessional aid, was used to
financea modest level of public investment. Even when a more
ambitious level ofinvestment was initiated under the first
development plan (1975/76-80/81),public sector surpluses initially
financed an important share ofexpenditures (see Chapter V).
2.9 However, after 1979, the public sector shifted from a
positionof overall surplus to significant and grow-ing deficits
(discussed inChapter III) and this substantially exacerbated the
inherent instability ofthe Gambian economy. The public sector no
longer acted as a buffer againstclimatic factors or exogenous
shocks but, instead, became an additionalsource of disequilibrium.
Public sector employment and developmentexpenditures grew rapidly
and contributed to large increases in imports(more than 30% a year
between 1977 and 1980), due to the high importconsumption of the
fast-growing urban population, especially public sectorwage
earners, and the high (over 60%) import component of
generalgovernment expenditures and development projects. These
factors created a"structural deficit" in The Gambia's trade, as can
be seen from Table 2;domestic exports, even in a good year, were
increasingly unable to generateforeign exchange sufficient to cover
the cost of domestic imports(principally fuel, foodstuffs, and
capital goods). Moreover, as urbanpurchasing power was largely
independent of agricultural production, thedemand for imports was
no longer significantly curtailed in years ofreduced export
earnings from groundnuts. At the same time, softening worldprices
for groundnuts and the hike in world oil prices combined to cause
aserious deterioration in The Gambia's terms of trade; by 1982183,
the termsof trade index stood at one-third the level of
1976/77.
2.10 These factors were instrumental in producing substantial
tradedeficits after 1979, which were the dominant factor in the
severedeterioration of the overall current account from 1979 to
1982. After1981/82, a steady compression of imports is apparent
wbich caused themerchandise trade balance to improve somewhat.
However, the growingdeficit on the services account associated with
escalating debt serviceobligations kept the current account
substantially in deficit. After TheGambia's net foreign assets
became negative in 1979 for the first time inthe country's history,
recourse to foreign borrowing was heavy, with
3/ Total GPMB reserves grew from D3.4 million in 1962/63 to a
peak ofD101.8 million 1977/78.
-
- 10 -
Table 2: DOMESTIC AND REEXPORI TRADE(In millions of USS)
1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85
TOTAL IMPORTS (CIF) 112 162 149 I13 107 112 86of which:
Domestic imports 81 112 109 69 71 75 57of which:- fuel 11 14 21
14 13 15 13- capital goods 25 34 27 15 15 19 12
Goods for reexport a/ 31 50 40 44 36 37 29
TOTAL EXPORT5 (FOB) 82 112 81 82 85 89 61of which:
Domestic exports 35 36 22 20 29 34 19
Reexports a/ 47 76 59 62 56 54 42
DOMESTIC TRADE BALANCE -46 -7 -87 -49 -42 -41 -38
REEXPORT TRADE BALANCE +16 +26 +19 +18 +20 +17 +13
Memo Item
CURHRET ACCOUNT BALANCE -31 -49 -71 -44 -32 -32 -39
a/ Goods for reexport were estimated on the basis of information
obtainedfrom private traders and from the Ministry of Finance and
Trade whichsuggests that 80-85% of all imports of sugar, tobacco,
tomato paste,textiles, used clothing, tea, batteries, corrugated
iron sheets and flour,and 50% of all imports of soap, cement,
manufactured garments, footwear,matches, milk products and washing
blue are reexported. Some reexports ofrice were also estimated. The
estimated value of reexports includes anallowance for duties paid
on the imported items and a markup of about 20%.
Sources: Trade data from Central Statistics Department; mission
estimatesof reexports.
-
- 11 -
external public debt 4/ increasing from US$ 158 million in 1979
to US$ 312million by June 1985 (equal to 200Z of 1984/85 GDP).
2-11 Severe adjustments that might otherwise have been necessary
wereto some extent averted by the volume of exceptional foreign aid
madeavailable to The Gambia in response to the 1980-1981 droughts
and the 1981political disturbance. Total net resource flows peaked
at US$91 million in1980/81, almost double the average level of
previous years; the inflow offoreign resources in botb 1979/80 and
1980/81 was close to 40% of TheGambia's GDP. As a result of this
assistance (about half of which wasgrant aid), the country was able
not only to maintain annual investment atmore than 25% of GDP but
also to avoid a decline in consumption. Thelatter continued to grow
in real terrs, increasing to over 1.00% of GDP in1980/81.
2.12 Although GDP growth recovered in 1981/82 and 1982/83
withimproved groundnut production, this concided with a sharp
decline in worldprices and The Gambia was unable to recover balance
of paymentsequilibrium. The improvement in the current account
registered in 1981/82and 1982/83, moreover, was not as great as the
decline in official aidflows, which quickly dropped back to more
normal levels (roughly US$55-60million per year). As a result, the
overall balance of payments came underincreasing pressure and,
after 1980/81, the growing inability of theCentral Bank of The
Gambia to guarantee conversion of dalasis deposits intoforeign
exchange led to a rapid loss of confidence in the banking system
bythe trading community. Since tnen, very little of the foreign
exchange(maLJiy CFAF) earnings from the reexport trade have been
made available tothe domestic banking system. Most of the estimated
US$10-15 million peryear surplus on reexports has been transferred
directly to foreign banks 5/or :hanneled into the active parallel
foreign exchange market whichdeveloped abcut this time. By 1982/83,
the private short-term capitalaccount (including errors and
omissions) became highly negative, thusexacerbating the overall
balance of payments deficits that have beenregistered in each of
the last six years.
2.13 This evolution has had a number of effects. The holding
ofreexport earnings outside the domestic banking system has cost
the latter asubstantial foreign exchange float, which previously
helped cushion some ofthe seasonality of foreign exchange earnings
(deriving primarily from the
4/ Government and government-guaranteed medium and long-term
debtoutstanding, including undisbursed portions, plus outstanding
use ofIMF credit.
5/ The Central Bank of The Gambia permits the free transfer of
foreignexchange by authorized foreign currency dealers, of which
there areabout 10-15, both private individuals and commercial
banks.Substantial currency transfers appear to be handled in this
way, viatwice-weekly air shipments to London and Switzerland. There
is amonthly reporting requirement to inform the Central Bank of all
suchtransactions, but compliance, even by commercial banks, is
weak. TheGovernment-owned GDCB is particularly behind in its
reporting.
-
- 12 -
January-June marketing of the groundnut crop). As a consequence,
arrearson external payments bave accumulated rapidly since 1980,
increasing frompractically nil to over US$54 million (equal to 35%
of GDP) by June1985 6/. In a vicious cycle, the prevalence of
arrears bas caused suppliersto increase their prices to cover
expected delays in payment, furtherexacerbating the trade
deficit.
2.14 By 1984, the situation had deteriorated to the point that
theofficial exchange rate for the dalasis, which had been pegged at
D 4.00 to1 pound sterling since 1974, could not be maintained. In
February 1984,the Government implemented a 25% devaluation, to D
5.00 per 1 poundsterling. The principal initial effects of the
action have been: (a) asignificant real compression of domestic
imports, wbich declined by anestimated 27% from 1983/84 to 1984/85;
(b) a substantial improvement in the1983/84 financial position of
the GPMB and its ability to offerremunerative prices to groundnut
producers; and (c) probable prevention ofa widening parallel market
discount on the dalasis. Imports of :apital andmanufactured goods
for domestic consumption appear to have beenparticularly squeezed -
to a level wbich, in 1984/85, was 20% lower inreal terms than in
1979/80. Similarly, despite a significant expansion ofGUC power
generation capacity over the past several years, 1984/85
fuelimports in real terms are almost 10% below the level of
1981/82.
2.15 Major benefits from devaluation can only be achieved
ifaccompanied by policies of fiscal and monetary restraint and if
gains fromdevaluation are passed on to exporters, or in The
Gambia's case,agricultural producers. Crop prices were increased in
June 1984, but the112 increase for groundnuts was considerably less
than the amount of thedevaluation and not competitive with prices
offered in neighboring Senegal,particularly in light of the black
market premium on the CFAF. The GPMBattempted to remedy the
situation with a further 24% increase in the
roundnut price in late January 1985, but by that time a
substantial partof the crop had already been sold. The mission
estimates that 10-15,000tons of groundnuts may have been sold in
Senegal in 1984/85.
2.16 Restraint of total domestic liquidity is also essential in
orderto reap benefits from devaluation and to coatrol inflation. In
thisrespect, the January 1985 public sector wage ircrease, the
1984/85 budgetdeficit (excluding grants) of D 110 million, cc 17%
of GDP, and the rapid(34%) growth of the money supply in 1984/85
all significantly underminedthe exchange adjustment. By June 1985,
domestic inflation had acceleratedto 22% for the fiscal year, with
a 16% increase in consumer prices of localitems and a 33Z increase
in prices of imported items (Cbart 2). As aresult, by August 1985
the real effective excbange rate bad appreciatedsignificantly.
6/ The arrears accumulated prior to 1982/83 were associated with
privatecommercial transactions, and there has been some reduction
in thisstock over the past few years. Since 1983, however, the
Governmenthas accumulated growing arrears on official debt service,
which nowaccount for about 35Z of the total arrears
outstanding.
-
-13 -
CHART 2
CONSUMER PRICE INDEX, 1975-85(PY 1.977=109)
Z30 -Increase in Conumer Prices,
zz YCalendar Tear 1984 (percent)
290 N
16,0 -
150 - /~
LocaI Imported Other130 Items Food Imports
120
110
90
I0
1975 1976 197? 1978 1979 191 1951 1. 193 1954 1955
FISCAL IY4aS
Change in Consumer Price Index (Z)
1976 1977 1978 1979 1980 1981 1982 1983 1984 1985
20.3 16.4 10.2 7.2 5.0 9.0 8.2 9.3 15.6 21.7
Source: Central Statistics Department
-
- 14 -
C. Government Adjustment Efforts, 1980-84
2.17 Since the initial balance of payments crises of 1980 and
1981,the Government has made several attempts to adjust the
economy, includingnegotiation of two Stand-by Arrangements with the
IMF. In 1981, theGovernment received SDR 9 million in "compensatory
financing" from the IIFand two Trust Fund loan disbursements. These
were followed by a one-yearStand-by Arrangement of SDR 16.9 million
adopted in February 1982. TheStand-by Program aimed at lowering the
public sector deficit throughreductions in consumer subsidies and
selective tax increases, andstimulating production through higher
purchase prices for groundnuts andrice. Specific measures included
a rise in petroleum prices to coverimport costs, increases in
electricity tariffs, and the introduction ofpetroleum-related taxes
both to discourage consumption and to increasefiscal revenues. To
stimulate increased domestic savings, the program al1 oincluded a
significant rise in interest rates on commercial bank depositsand
the removal of interest rate ceilings on loans and overdrafts.
2.18 The 1982/83 Program achieved many of its desired effects.
Thefiscal deficit was reduced from 21% to 14% of GDP although,
significantly,this was entirely accomplished through increased
taxes and a drastic (50Zin real terms) compression of expenditures
on material and currentsupplies; Government wages and salaries
actually increased by almost 10%under the program. There was a
decline in petroleum imports, attributableto the price cnanges, and
an increase in savings deposits, as desired.There also appears to
have been a significant supply response to theproducer price
increases; groundnut area planted rose to the highest levelever
(120,000 ha) and production reached a record 150,000 tons.
2.19 Unfortunately, however, these results coincided with
thedisastrous effects of a 43% decline in world groundnut prices in
1982. Thehigher price offered to farmers absorbed two-thirds of the
realized exportprice, plunging the GPMB deeply into deficit and
forcing it to borrowbeavily (D 67 million between June 1982 and
June 1983) to cover itsoperating and marketing costs. As this level
of borrowing could not beaccomodated by the commercial banks, the
Government was forced to grant theGPMB direct access to Central
Bank financing at the Government lending rateof 82. This greatly
diminished the impact of the monetary measuresintroduced to curb
commercial bank credit expansion, as the GPMB and thecentral
government are the heaviest borrowers in the country, accountingfor
more than half of total credit outstanding. Total liquidity
increasedrapidly between June 1982 and 1983 as a result of a
doubling in credit tothe Government needed to compensate for
declining external aid flows, and adramatic (180%) increase in
credit to the GPMB. Squeezed by this demand,credit to the private
sector suffered.
2.20 Despite the recovery of world prices and groundnut exports
in1983/84, the economic situation continued to deteriorate as a
result ofpoor foodcrop production which necessitated heavy rice
imports. Capitalflight and the continued decline of net aid in-lows
put pressure on theoverall balance of payments and led the
authorities to negotiate a furtherStand-by Arrangement in early
1984. Policy adjustments under the 15-month,SDR 12.8 million
Stand-by Program (covering the period April 1984-July1985) included
the 25% devaluation and producer price increases mentionedearlier
(para. 2.15), plus stiff price increases to reduce subsidies on
-
- 15 -
rice, fertilizers and public transport. Fiscal measures included
increasesin import duties on petroleum products, tobacco products,
alcoholicbeverages and automobiles, plus an increase in the basic
import tax andexcise taxes. On the expenditure side, the Government
adopted a hiringfreeze except for pressing emergencies. and limits
on supplementaryappropriations. Monetary adjustments included
further increases ininterest rates on deposits and guidelines to
limit commercial bank creditto the private sector.
2.21 Although the Government implemented all of the agreed
measures,it was not able to meet the June 1984 targets for
reductions in externalarrears and net credit to the Government, the
GPMB, and the private sector.As a result, after one disbursement of
SDR 2.63 million, the program waseffectively suspended. (The
Government has recently taken steps to settleits accumulated
arrears to the IMF and to initiate discussion of a possiblenew
Stand-by program.)
D. Current Situation and Response
2.22 The macroeconomic adjustments undertaken in early
1984constituted a notable effort by the Government to redress The
Gambia'sexternal and fiscal deficits. However, the exceptionally
low (45,000 tonsmarketed) 1984/85 groundnut crop caused real GDP to
decline by 9% andseriously exacerbated the acute shortage of
foreign exchange.Significantly, although rainfall was uneven in
some parts of the country,the low groundnut crop appears to have
been less the result of drougbt thanof inadequate price incentives
and institutional weaknesses, wbich continueto have a crippling
effect on the economy. According to the Ministry ofAgriculture,
several thousand hectares were prepared for groundnutcultivation
but could not be planted due to the late distribution of seeds.Pest
infestation was also unusually severe, in part associated with
thelack of fuel and pesticides for the Ministry's crop protection
services. Asa result, many of the potential benefits of the 1984
devaluation as well asof the high world groundnut prices were not
realized, demonstrating thecritical importance of effective
institutions as well as price incentivesfor economic recovery.
2.23 In recent months, The Gambia's situation has become
increasinglyserious, as can be seen from the macroeconomic
indicators in Table 3.Record low groundnut export revenues (US$16
million) and increasingexternal debt service due (US$18 million,
including IMF charges andrepurchases) in 1984/85 have produced a
further deterioration of thecurrent account deficit: from 17% of
GDP in 1983/84 to 25% in 1984/85. Asnet capital inflows were not
sufficient to finance this deficit, additionalexternal arrears
accumulated. The acuteness of The Gambia's presentsituation can
scarcely be exaggerated: supplies of fuel and otheressential
imports are severely disrupted; the country is unable to make
-
- 16 -
Table 3: SELECTED ECONOMIC IINDICATORS, 1982183-1984/85
1982/83 1983/84 1984/85GDP at market prices
(D million at current prices) 527.6 603.7 646.5(real Z increase
over previousyear) 14.7 -7.5 -8.7
Groundnut production (tons) 151,000 113,000 75,000 a/Marketed
output (tons) 127,000 93,000 45,000
Domestic Exports (USS million) 28.4 34.5 18.6
Current Account Deficit(USS millions) -32.5 -32.4 -39.0(% of
GDP) 15% 17% 25%
Debt Service Ratio b/ 25% 32Z 49%
Stock of External Arrears,end of period c/
CUS$ million) 32.1 46.1 54.1(% of GDP) 15% 24% 35%
Overall Budgetary Deficit (excl. grants)(D million) -73.5 -83.3
-109.9(Z of GDP) 14% 14% 17%
Growth of Domestic Credit 45% IJ% 3%- to Government (net) 102%
7% 18%- to GPMB 182Z 8% -17%- to other parastatals and
private sector 2% 13% 9%
Growth of Money Supply 30% 4% 342
Inflation Rate 9.3% 15.6% 21.7%
Average Exchange Rate(D per US$) 2.46 3.08 4.15
a/ Mission estimate of 1984/85 production. Government estimates
rangefrom 65,000 tons to 92,000 tons.
b/ Ratio of total debt service (on medium and long term debt,
short termdebt, and IMF repurchases and charges) to domestic
exports of goodsand non-factor services.
c/ Excluding recurring arrears to the IMF, which, as of
September 7,1985, totalled SDR 4.4 million.
-
- 17 -
debt service payments; and desperately scarce foreign exchange
commands anincreasing premium on the parallel (black) market.
7/
2.24 Against this backdrop, the Government in recent months
appears tohave become convinced of the need for a comprehensive set
of macroeconomicpolicy adjustments. In June 1985, it moved quiecly
to begin designing, inconsultation witb the World Bank, an Economic
Recovery Program (ERP),intended to establisb the broad outlines of
macroeconomic and sectoralpolicies for the next several years. In
July, an IMF mission visited TheGambia and agreed with the
Government on many of the specific policyadjustments needed,
including a fundamental reform of the exchange system.All of these
measures are discussed in Chapter VII.
E. The External Debt Problem
2.25 The Gambia's current foreign exchange crisis is linked in
severalimportant ways to the size and structure of the country' s
external debt.Obviously, the sheer size of the current stock of
medium and long-termpublic debt (US$312 million, or 200Z of GDP)
bas serious implications forthe future balance of payments. In
addition, there are several I mediateissues:
2.26 Structure. As can be seen from Table 4, more than 50% of
theGambia's debt outstanding is owed to multilateral organizations
and, thus,is not eligible for rescheduling. However, most of this
debt is on bighlyconcessional terms and, except for IMF credit
(discussed below), does notat present constitute a large debt
service burden - only 14Z of scheduleddebt service in 1985/86. The
amounts due to multilateral creditors willincrease steadily in
coming years.
2.27 Only a small share (11%) of the Gambia's debt was torrowed
fromprivate creditors (mostly for hotel construction over the
period 1979-82),but the much harder terms of this debt has made it
(along with payments tothe IMF) the principal factor in the rapid
increase of debt serviceobligations. This debt and debt to
bilateral donors are eligible forrescheduling and, as can be seen
from Table 5, some short-term debt reliefcould be obtained from
this source over the next several years. Under theassumptions
described in Table 5, total debt service payments could bereduced
by US$ 5-8 million a year for the next five years, roughly 30X
ofthe amounts due. Although far from a panacea, a rescheduling of
1985/86debt service and arrears on 1983/84 and 1984/85 payments
clearly needs tobe pursued.
7/ In December 1984, the parallel excbange rate for CFAF was
reported asapproximately 15% above the official rate; parallel
rates for poundsterling and U.S. dollars appeared to be slightly
higher, 20% overofficial rates. By June 1985, the premium on
foreign currency of alltypes had increased to 30-35%; by August
1985, the spread was close to50%.
-
- 18 -
Table 4: STRUCTURE OF EXTERNAL DEBT a/(as of end June 1985)
Percent ofUS$ million Total
A. Suppliers credit b/ 12.2 4
B. Financial institutions 22.2 7
C. Multilateral loans c/ 171.7 55
D. Bilateral loans 80.8 26of which - Paris Club countries
18.5
- OPEC countries 47.2- oth::i 15.2
E. TOTAL, MLT DEBT 286.9 92
F. DMF, use of credit outstanding 24.8 8
TOTAL, including DMF 311.7 100
a/ Medium and long-term (MLT) debt, including undisbursed, and
outstandinguse of Fund Credit (line F). Table does not include
short-term debt (lessthan one year maturity).
bI Norway only.
cI Includes IMF Trust Fund.
Sources: World Bank DRS, IMF. and mission estimates.
2.28 Arrears to the IMF. The Gambia accumulated subtantial
arrears tothe Fund during 1985 and will have great difficulty in
meeting the sizeablepayments (roughly SDR 1 million per month) due
in 1985186 and most of1986/87. The existence of arrears at present
is the major issue precludingapproval of a new Standby arrangement.
The problem is double-edged becausein order to obtain any debt
relief from official rescbeduling as discussedabove, the country
must have an ongoing Standby Program. It is difficultto see bow
this conundrum can be resolved without exceptional
externalassistance.
2.29 Short-term debt. In addition to arrears on public debt
serviceand to the IMF, The Gambia has a stock.of approximately
US$12 million incommercial arrears, and about US$23 million in
Central Bank arrears to theWest Africa Clearing House and several
other lenders. Neither of these iscoanted in the debt service
projections above; however, a schedule fortheir progressive
liquidation obviously will have to be developed.
-
- 19 -
Table 5: PROJECTED DEBT SERVICE AND POSSIBLERELIEF FROM
RESCHEDULING a/
A. Debt Service Due 1985186 1986/87 1987188 1988/89 1989190
Maltilateral, non reschedulable 4.0 5.4 6.2 7.0 7.3
IMF (Charges and Repurchases) 13.7 8.5 6.3 4.6 1.7
Other, reschedulable 9.8 12.1 l1.4 I1.2 12.4Principal 5.2 8.0
7.8 7.9 9.6Interest 4.5 4.1 3.7 3.2 2.8
Total 27.5 26.0 23.9 22.8 21.4
B. Debt Service after Rescheduling
Multilateral, non rescheduLable 4.0 5.4 6.2 7.0 7.3
IMP (Charges and Repurchases) 13.7 8.5 6.3 4.6 1.7
Other, Reschedulable 3.7 4.4 4.8 5.3 5.8
TOTAL TO BE PAID 21.4 18.3 17.3 16.9 14.8
C. DEBT RELIEF (A-B) 6.1 7.7 6.6 5.9 6.6
a/ Estimates are based on assumed annual rescheduling, beginning
in1985/86, of OOZ of the maturing principal and 33.3% of the
interestpayments due to three classes of creditors: (a) all
financialinstitutions (London Club), (b) Paris Club countries, and
(c) otherbilateral creditors (China, Kuwait, Saudi Arabia, U.A.E.).
Therescheduling terms assumed are ten years maturity with five
years ofgrace for the rescbeduled amounts, and moratorium interest
of 82. Acash down payment of 2.5% of the consolidation amount in
each of thefirst two years is also assumed. Although these
rescheduling terms aresimilar to recent Paris Club agreements with
otber countries, itcannot be assumed that actual agreements with
creditors would offerthis degree of relief.
-
- 20 -
2.30 Public finance impact. Altbough a significant share of
theGambia's external public debt is government-guaranteed borrowing
byparastatals and, in some cases, private parties, very few of
these atpresent are in a position to service their debts directly.
As a result,more than 85Z of scheduled external debt service
payments are made directlyfrom the government budget. The rapid
escalation of debt serviceobligations (from 5X of total recurrent
outlays in 1981/82 to 28% thisyear) bas put severe pressure on
other recurrent expenditure items. Theimplications of this are
discussed in Chapter III.
2.31 The brief exposition in this section leads to two
finalobservations. First, given the proportion of The Gambia's debt
that is notreschedulable, it is clear that gross disbursements from
multilateraldonore will have to expand significantly in coming
years in order tomaintain the - - flow of resources to The Gambia.
Indeed, it is theincrease in amortization which has accounted for
most of the decline in netaid flows since 1982; gross MLT
commitments have rew'iined relativelyconstant. Second, at the ssme
time that higher MLT disbursements arecalled for, in the current
situation, it is obvious that new borrowingsmust be on highly
concessional terms. The grant element in new MLTcommitments to The
Gambia has been on the order of 50% for the last twoyears; donors
shouald, to the extent possible, seek to soften the terms
ofassistance even further.
-
- 21 -
III. PUBLIC FINANCES
3.1 As noted earlier, the critical structural change in the
Gambianeconomy over the past decade has been the dramatic expansion
of the publicsector. The next three chapters examine the evolution
of public finances,the issues wbich have emerged, and their
implications for The Gambia. Thecurrent chapter focuses on the
growth, management and financing of thecentral government
administration. The next chapter examines the impact ofpast and
current public investment programs. The performance of
publicenterprises is discussed in Chapter V.
A. Evolution of Central Government Finances
3.2 Over the past decade, three phases in the evolution of
centralgovernment finances may be distinguished: (i) 1974/75 to
1979/80; (ii)1980/81 to 1981/82; and (iii) 1982/83 to the
present.
1. The Period 1974175 - 1979/80
3.3 This was a period of rapid and uninterrupted expansion, as
TheGambia's relatively low levels of taxation (wbich averaged 10 of
GDP priorto 1974/75) gave way to steady increases in tax rates as
well as theintroduction of new taxes. Rapidly expanding revenues
supported anextraordinary growth of central government expenditure;
between 1974/75 and1979/80, current outlays increased by 22Z a year
and public investmentexpanded even more rapidly, by 37% a year
(Table 6). Expenditure growth wasalmost exclusively related to the
expansion of technical ministries directlyinvolved in development,
particularly Agriculture, Education, Health andPublic Works;
general adc'inistration (Presidency, Finance. Foreign Affairs,etc.)
declined as a sbare of total recurrent expenditures over this
period.The overall growth in outlays was spearheaded by the rapid
expansion of thecivil service. For much of the period, public
sector surpluses (on therecurrent budget and savings mobilized from
the public enterprises,particularly the GPMB) were used to help
finance public investment, coveringroughly 20% of annual capital
expenditures.
2. The Period 1980/81-1981/82
3.4 The above pattern changed abruptly with the severe droughts
of1980 and 1981. Government revenues plunged for the first time in
a decade,because of the fall in groundnut exports and a slowdown of
the reexporttrade associated with depressed purchasing power in
drought-affectedneighboring countries. The Government sharply
curtailed the growth ofrecurrent expenditures in 1980/81, but
investment was maintained and theoverall fiscal deficit swelled to
19% of GDP. To cover the deficit, theGovernment increased foreign
borrowing; net foreign loan disbursements, manyfrom short-term
commercial credits at "LIBOR plus" rates of interest,doubled in
1980/81 and financed about two-thirds of the overall
fiscaldeficit.
-
_ 22 -
Table 6: SULMR OF CENTRAL GOVERNET FINANCES(in millions of
current dalasis)
Est.
1974175 1979/80 1980,81 1981/82 1982/83 1983184 1984185
Current revenues 32.4 9b.2 80.2 91.4 105.6 127.6 147.8
Current expenditures a/ 33.1 87.7 89.3 116.1 112.6 140.6 147.0
b/
Current surplus/deficit -0.7 +10.5 -9.1 -24.7 -7.0 -13.0
+0.8
Development expenditures 11.1 53.1 69.8 68.8 66.5 cJ 70.3
110.7
Net lending -0.7 +2.0 -0.5 - - - -
Total expenditures 43.5 142.8 158.6 184.9 179.1 210.9 257.7
Overall surplus/deficit -31.1 -44.6 -78.4 -93.5 -73.5 -83.3
-109.9
FinancingForeign 7.4 40.6 74.4 91.5 48.1 47.2 71.6
Loans (net) 5.3 29.8 50.1 34.7 31.2 21.2 40.3Grants 2.1 10.8
24.3 56.8 16.9 26.0 31.3
Domestic 3.7 4.0 4.1 2.1 25.4 15.6 12.6BankinRg system 1.6 -0.3
7.3 -1.7 23.7 5.4 5.7Non-bank dJ 2.1 14.3 3.2 3.8 1.7 10.2 6.9
Increase in Arrears - - - - - 20.5 25.7
Memo ItemsTotal Public Debt Service e/ 0.6 4.7 4.3 8.5 22.8 26.4
43.5Total expenditure/GDP (%) 20 35 38 41 34 35 40Overall
deficit/GDP (%) 5 11 19 21 14 14 17
GDP, currentmarket prices 221.1 425.0 411.6 451.4 527.6 603.7
646.5
a/ Includes interest payments on a comuitment basis. Payments
not actually made appear in item marked,Increase in Arrears.
b/ Includes D 3.9 million in expenditure which could not be
allocated between current and developmentbudgets.
c| 1982/83 development expenditure reported by Accountant
General is D 43.8 million. The estimate ofD 66.5 million is taken
from the IDF.
d/ Mainly from parastatals, such as GPMI, SSHFC, etc.e/ As
presented in the Gambian budget format, including interest and
amortization. In table above,
only interest is included in current expenditures; amortization
is presented under net loan financing.
Sources: Appendix Table 5.1, Government of The Gambia budgets
and IMF.
-
- 23 -
3.5 Public finance performance was mixed in 1981/82. Despite a
secondpoor grounduut harvest, the Government made some progress in
restoringrevenues. However, in the aftermath of the July 1981
political disturbance,the government wage bIll shot up more than
202 showing the effects ofincreased security expenditures plus a
13% across-the-board raise in civilservice wages and salaries; this
pushed expenditures far above budgetaryrevenues. The Government
held investment spending constant (in nominalterms), but the
overall fiscal deficit was still massive, rising to 21Z ofGDP.
Commercial credit dried up quickly after the political
instability,but the country was able to attract an exceptional
inflow of foreign grantaid which financed 60% of the 1981/82
overall fiscal deficit.
3. The Period since 1982/83
3.6 The years 1980/81 and 1981/82 were clearly exceptional in
twomajor respects: (i) the magnitude of the fiscal disequilibria,
whichresulted from successive droughts and civil unrest; and (ii)
the high levelsof foreign financing available to the country during
the crisis. In theperiod since 1982/83, however, certain
longer-term trends are discernible.These and some of the issues
they raise for future government policy are:
- a return to the pattern of steady tax increases and rapid
revenuegrowth, but with increasing indications that this growth
cannot besustained;
- strong and growing pressures for recurrent expenditure in
excessof budgetary revenues;
- constraints on the growth of public investment due to
theGovernment's inability to generate budgetary savings; and
- the inflationary consequences of excessive recourse to
domesticcredit for the financing of fiscal deficits.
3.7 Current revenues recovered substantially in 1982/83,
principallybecause of the rebound in the reexport trade and
improved tax yieldsassociated with the realignment of import duty
rates. (Despite recordgroundnut production, tax receipts from
groundnut exports were severelydepressed by the decline in world
prices.) The overall increase inrecurrent revenues (16%), however,
was more than offset by the sharp fall inforeign grant financing,
as aid flows returned to normal levels. TheGovernment was,
therefore, forced to implement abrupt expenditure cuts,compressing
both current and investment outlays in nominal terms(approxi-mately
13% each in real terms). Significantly, the compression ofrecurrent
expenditures in 1982/83 was accomplished almost entirely througb
areduction in outlays for materials and supplies in order to
accommodateanother increase in civil service wages and salaries as
well as a sharpincrease in debt service. Despite expenditure cuts,
the overall fiscaldeficit remained relatively high at 14% of GDP
and, with the GPMB's reservesdepleted, the Government was forced to
borrow heavily from the domesticbanking system. Net credit to the
Government doubled between June 1982 andJune 1983, and credit to
the GPMB grew by an explosive 180%, producing
-
- 24 -
highly inflationary overall credit growth of 45Z in a twelve
month period(Appendix Table 9.2).
3.8 New tax measures introduced in 1983/84 pushed revenues up
20Z butwere more than offset by rapid expenditure growth, due to
increases ingovernment wages and salaries, and public debt service.
The severe pressureon government operations resulting from the
compression of materials andsupplies in the preceding fiscal year
also forced an upward adjustment ofthese outlays in 1983/84. Net
foreign disbursements remained at the levelof 1982/83 and were not
sufficient to cover the overall fiscal deficit,which remained
unchanged at 14% of GDP. The Government attempted to avoidrecourse
to Central Bank financing by floating a three-year, D 16.5
millionissue of government "development stock" in March 1984 which
raised fundsfrom parastatals, commercial banks and a few private
investors. However,even this was not enough to finance the deficit
and the Government for thefirst time began to accumulate arrears.
The recovery of world groundnutprices in 1984, on the other hand,
significantly eased the GPMB's financialsituation and the overall
growth of domestic credit slowed to 10% over thefiscal year
1983/84.
3.9 The budget for 1984/85, developed in the context of
negotiationswith the IMF on the short-lived Stand-by program,
constituted the firstcomprehensive attempt at expenditure
restraint. Goverment wages andsalaries were held to 2% nominal
growth, or a decline of over 15% in realterms. Current purchases of
goods and other services were similarlycompressed in real terms.
The only elements of recurrent expenditureincrease were debt
service, which rose by a staggering 65%, and currenttransfers,
because of a large mandated contribution to the
SenegambiaConfederal administration.
3.10 Despite the lapse of the Stand-by program, the Government
appearsto have made strong efforts to limit domestic credit
expansion and attemptedto cover 1984/85 expenditures with another
round of sigp'ficant taxincreases (expected to boost revenues by
27% over 1983/84) and non-bankborrowing. Due to the extremely poor
1984/85 groundnut harvest and sharplylower export duties and
difficulties in collecting some of the new taxesintroduced,
however, estimated revenue growth (16%) was substantially lo--'than
envisaged. While recurrent expenditure remained on target, ievelow
voutlays were about 25% higher than estimated, mainly for projects
in thetransport sector. As a result, the overall fiscal deficit cor
1984/85increased to 17% of GDP. The increase in the deficit,
however, beingassociated vith development expenditures, was largely
financed by increasedforeign inflows. In September 1984 a further
(D 10 millio-n) GambianGovernment issue was floated and was
oversubscribed. As with the March 1984bond, the terms of this issue
(15Z interest and a very sbort maturity) 1/make it a costly source
of financing. Moreover, the extent to which this"non-bank"
borrowing represents a net mobilization of domestic saviags in
1/ The first government development stock issue in November 1979
had paid8.5% interest and had a ten year maturity.
-
- 25 -
support of government operations is far from clear, as one of
the largestsubscribers has been the GPMB which, itself, remains
heavily indebted to theCentral Bank. 2/ In essence, the GI(B
(which, like the Government, hasdirect access to Central Bank
financing at 8% interest) is borrowing fromthe Central Bank at 8%
to lend to the Government at 15Z.
B. Major Problems and Implications
1. Emerging Revenue Constraints
3.11 The Gambia's rapid growth of tax revenues in excess of GDP
growtb(or very higb tax buoyancy) has been possible because of the
importance ofthe reexport trade and the fact that taxes derived
from reexports are to alarge extent borne by foreign rather than
Gambian consumers. Import dutiesgenerate a very high (70Z) share of
total tax revenues in The Gambia, and itis estimated that re-export
items account for 50-60% of dutiable imports. 3/Thus, although
total government revenues in 1984/85 equalled 23% of GDP,
TheGambia's actual domestic "tax effort" is closer to 15% of GDP,
which isstill high for a non-mineral-exporting developing country.
Heavy relianceon revenues from import duties Implies clear limits
to long-term revenuegrowth. As the impetus for the reexport trade
comes from the differentialbetween the after-duty price of consumer
goods in The Gambia and prices inneighboring countries, it is
obvious that yields from tariff increases maybe quite elastic and,
in fact, this already appears to be a problem. 4/
3.12 The Government bas been careful in its tariff policy, but
pressureto generate revenue bas pushed the average duty rate on
non-government'..mports up steadily in recent years, to close to
36% by 1983/84 and evenhigher as a result of duty increases adopted
in 1984185 =d 1985/86.Althougb high taxes on petroleum imports
weigh heavily in this average, theaverage tariff burden in The
Gambia is not as low as is commonly believed.Given the level of
import taxation already achieved on re-