The Gambia : Economic Adjustment in a Small Open Economy

Eric Verreydt, Michael Hadjimichael, and Thomas Rumbaugh

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 1992
• eBook ISBN: 9781557752307

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Contents

Preface

I. Introduction

II. Overview of Recent Economic Performance

Adjustment

Policies Policy Implementation

Developments Since 1985/86

III. Growth, Saving, and Investment

Developments in Output

Developments in Saving and Investment

IV. External Adjustment

Exchange Reform and Exchange Rate Policy

External Trade and Tariff Reform

Diversification of Exports

V. Fiscal Adjustment

Tax Policy

Expenditure Policy

Developments in the Budget Balance

VI. Monetary Policy and Financial Sector Reform

Monetary Policy Objectives and Instruments

Monetary Developments Since 1985/86

Monetary Policy, Exchange Rate Policy, and Inflation

Financial Sector Reform

VII. Public Enterprise Reform

VIII. Social Impact of Adjustment

IX. Concluding Remarks

References

Tables

Section

II

1. External Assistance

2. Selected Economic and Financial Indicators

3. Balance of Payments

III.

4. Gross Domestic Product by Kind of Economic Activity

5. National Income, Savings, and Investment

IV.

6. Foreign Exchange Earnings

V.

7. Central Government Operations

8. Structure of Government Revenue

9. Structure of Government Expenditure

10. Functional Classification of Current Expenditure by Key Ministries

11. Alternative Measures of the Budget Balance

VI.

12. Monetary Survey

Charts

Section

II.

1. Exchange Rate Developments

2. Developments in Output and Prices

3. External Developments

III.

4. Sectoral Composition of Real GDP

IV.

5. Composition of Foreign Exchange Earnings, 1982/83–1991/92

V.

6. Fiscal Developments, 1982/83–1991/92

7. Structure of Revenue and Expenditure, 1982/83–1991/92

VI.

8. Monetary Developments, 1984/85–1991/92

9. Developments in Broad Money, the Exchange Rate, and Prices

The following symbols have been used throughout this paper:

• … to indicate that data are not available;
• — to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;
• – between years or months (e.g., 1991–92 or January-June) to indicate the years or months covered, including the beginning and ending years or months;
• /; between years (e.g., 1991/92) to indicate a crop or fiscal (financial) year.

“Billion” means a thousand million.

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

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

Adjustment Policies

A notable feature of the adjustment efforts has been the emphasis on strengthening the supply response of the economy and enhancing the efficiency of resource allocation by removing price distortions and government controls, introducing a market-determined exchange rate, and liberalizing the marketing arrangements for groundnuts.

To encourage a return of the foreign exchange proceeds to the official banking system, as well as to stimulate the production of exportables, a flexible exchange rate system was introduced in January 1986 in the context of an interbank market, replacing the peg of the dalasi (the national currency) to the pound sterling. To deepen the foreign exchange market, the enforcement of the Exchange Control Act was suspended at the same time, resulting in a de facto lifting of the exchange restrictions on current and capital international transactions, and licensed foreign exchange bureaus were established in April 1990. The only remaining exchange restriction related to the existence of external payments arrears, which were gradually eliminated in the period to July 1990. Overall, the interbank foreign exchange market has functioned smoothly, resulting in an effective absorption of the parallel foreign exchange market and the virtual elimination of the spread between the exchange rates prevailing in the two markets. Under the new exchange rate regime, the dalasi depreciated by 57 percent in nominal effective terms during 1986, but appreciated gradually by some 18 percent by early 1990 (Chart 1); since then, it has remained broadly stable, fluctuating within a narrow range. The nominal exchange rate adjustments, combined with tight financial policies and progress in lowering inflation has improved The Gambia’s external competitiveness markedly. In real effective terms, the dalasi depreciated by 44 percent during 1986, and even though it appreciated somewhat in the period to mid-1989, it has since gradually fallen back to its level at the end of 1986.²

Chart 1. Exchange Rate Developments

(Indices, 1980= 100)

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

¹ Weights are based on Direction of Trade Statistics (DOTS) for 1988–90, and a reduced subset of trading partners (excluding Brazil and Argentina, in particular, compared with the INS index).

The depreciation of the dalasi facilitated marked increases in real producer prices for groundnuts and other cash crops in 1985/86. In fact, to induce a reversal of cross-border sales of groundnuts to a neighboring country, where producer prices have been kept high through government subsidies, producer prices in The Gambia were initially set higher than export prices, necessitating sizable budgetary support to the Gambia Produce Marketing Board (GPMB) to cover operating costs. Groundnut producer prices were lowered in subsequent years to eliminate the need for government subsidies, as well as to reflect the weakening in world groundnut oil prices. In order to liberalize the marketing arrangements for groundnuts, the system of guaranteed producer prices for groundnuts was abolished with effect from the 1989/90 crop year and replaced with new arrangements under which the GPMB announces a groundnut purchase price at the beginning of the crop year, based on commercial criteria and without any government involvement. In addition, the export monopoly of the GPMB was lifted in October 1990. The subsidies on fertilizers and other agricultural inputs were also eliminated, and the marketing of these inputs liberalized in the early stages of the reform efforts. In addition, all other price controls were lifted, while public utility tariffs and retail prices for petroleum products have been adjusted frequently to reflect changes in the underlying cost structures.

An integral part of the adjustment efforts since 1985/86 has been the pursuit of a restrictive fiscal policy, aimed at lowering the budget deficit (excluding grants) and raising government savings, as well as fostering economic activity. On the revenue side, policies have focused on broadening the tax base, strengthening tax administration, and rationalizing the structure of taxation. Tax reforms have been directed at improving economic incentives and enhancing efficiency and equity in the economy. The reforms included the introduction of a sales tax, reductions in the marginal rates of personal income taxation, abolition of the taxes on exports, and reductions in import tariffs so as to move toward a low and uniform rate of protection, while preserving the tariff incentives for the re-export trade. On the expenditure side, policies have sought to increase the efficiency of public investment by focusing on the rehabilitation of the basic economic and social infrastructure, while also reorienting current expenditure to facilitate higher provisions for operations and maintenance and social services. In the latter regard, special emphasis has been placed on raising the share in total current spending of outlays on education and health, given the importance attached under the program to improving the country’s human capital and paving the way for long-term growth. To facilitate such a restructuring of government spending, the growth of the civil service wage bill has been kept modest.

Overall, the budget deficit (excluding grants) was reduced from a peak of 17 percent of GDP in 1987/88 to an estimated 4 percent in 1991/92. This was achieved despite a boost in government expenditure caused by special budgetary provisions for the repayment of public enterprise debts to the domestic banking system and the takeover by the Government of nonperforming bank loans. The improvement in the fiscal position, together with the available net inflows of external assistance, has allowed the Government to make sizable net repayments to the banking system, thereby accommodating the legitimate financing needs of the private sector and supporting the anti-inflationary stance of monetary policy. The latter has been primarily directed at lowering inflation to a low level comparable to that of trading partner countries, while also achieving the targeted improvement in the overall balance of payments position and the associated buildup of gross official reserves, in a framework consistent with the targeted expansion in output. To this end, a broadly restrictive monetary and credit policy has been pursued. At the same time, the effectiveness of financial intermediation was enhanced through the lifting of interest rate controls in September 1985, the introduction of an auction system for issuing treasury bills in July 1986, and, more important, a shift to an indirect system of monetary control in September 1990. Since 1986/87, interest rates have been maintained through open market operations at positive levels in real terms (measured in relation to inflation during the previous 12 months) and with appropriate differentials vis-à-vis interest rates abroad, thereby encouraging financial savings and supporting the exchange rate policy.

External policies, for their part, have been aimed at broadening the export base and at containing the...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Preface
• I. Introduction
• II. Overview of Recent Economic Performance
• III. Growth, Saving, and Investment
• IV. External Adjustment
• V. Fiscal Adjustment
• VI. Monetary Policy and Financial Sector Reform
• VII. Public Enterprise Reform
• VIII. Social Impact of Adjustment
• IX. Concluding Remarks
• References
• Tables
• Footnotes