On March 22, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with The Gambia.

The Gambian economy has started to recover, following the sharp growth slowdown in 2016. For 2017, economic growth is estimated at 3.5 percent with a better agricultural season and a strong rebound of tourism and trade. Headline inflation has declined from 8.8 percent in January 2017 to 6.4 percent in January 2018, reflecting the stabilization of the dalasi and a gradual decrease in food prices.

With much-improved fiscal discipline and external financial support, the Dalasi has remained stable since April and gross international reserves increased from 1.6 months of import cover at end-2016 to 2.9 months at end-2017. The Executive Board also granted a waiver.

The authorities’ commitment to the staff-monitored program (SMP) is strong. Performance under the program was broadly satisfactory, including good progress in implementing the structural agenda despite severe capacity constraints. The Managing Director approved the authorities’ request for an extension of the SMP by six months to end-September 2018. This will provide more time to establish a track record of performance for the transition to an arrangement under the Extended Credit Facility (ECF) to which the authorities aspire.

Over the medium term, The Gambia can achieve a more robust growth path. This will require continued strong policy implementation and effective fiscal reforms, including ensuring debt sustainability. The authorities are committed to further national development through the planned strong expansion of reliable and affordable electricity by 2020, and increasing the economy’s productivity by promoting irrigation and commercial agriculture, light manufacturing, tourism, and continued infrastructure investment.

Staff Report

Background

The Gambia is a small, fragile country which just transitioned to a democratically elected government after 22 years of autocratic rule. With a population of two million and GDP per capita of $469 in 2016, the country’s development has been hampered in recent years by weakening governance and institutional capacity.

Reliant on rain-fed agriculture, tourism and trade, The Gambia’s economy is vulnerable to exogenous shocks and carries the burden of economic mismanagement of the previous regime. Lack of economic diversification, combined with the absence of an efficient irrigation system, makes national production sensitive to external demand and weather-related shocks. In addition, more than two decades of poor economic management, including frequent fiscal slippages, sizable unbudgeted bailouts of SOEs, weak PFM, and massive embezzlement by the previous regime have resulted in high public debt and financial sector vulnerabilities.

The political situation is now stable and the new administration is committed to restoring economic stability and debt sustainability. The parliamentary elections in April 2017 resulted in an absolute majority in support of the new government, creating a more supportive political environment for reform, though maintaining cohesion in the seven-party ruling coalition will be key to maintaining political stability and achieving consensus around policy objectives. Local elections are scheduled for April 12, 2018.

The authorities are taking steps to strengthen governance and the rule of law, and fight corruption. The president and all cabinet members have declared their assets to the Ombudsman. Public expenditure reviews are underway with help from the World Bank, and a security forces reform has recently been kicked off. The authorities are also working on setting up a Truth, Reconciliation and Reparation Commission as well as a Human Rights Commission, and on the legal framework for an Anti-Corruption Commission, with UNDP support. A Commission of Inquiry has been set up and is unearthing previously unknown instances of embezzlement and theft by the former regime. The work of the commission will provide an important input to the special audits of SOEs. While the authorities are still investigating the financial dealings of the former president and his associates, they haven frozen their remaining assets in The Gambia and are also pursuing recovery of assets held abroad, with support from the World Bank’s StAR Initiative – meanwhile the United States has also frozen assets of the former president. The Gambia was readmitted to the Commonwealth in February 2018.

Box 1. Strategy for Addressing Fragility

The Gambia is marked by five aspects of fragility. First, the country is exiting from 22 years of Jammeh rule and embarking upon a historic transition to democracy. A newly elected government took power in January 2017, after a tumultuous election and political impasse, and early parliamentary elections were held in April 2017. Second, decades of Jammeh rule have weakened economic institutions and institutional capacity, which has hampered effective macroeconomic management. Third, The Gambia is also economically fragile, stemming from high susceptibility to weather-related shocks, past fiscal slippages and theft of funds by the previous regime. Fourth, limited recent progress on improving socio economic indicators may accentuate frailties in The Gambia’s social fabric, such as inter-tribal rivalries. Fifth, provision of vital infrastructure and services, such as reliable electricity, is weak.

Debt sustainability

An updated debt sustainability analysis (DSA) indicates that The Gambia is currently at high risk of external debt distress. While external debt stock indicators have deteriorated since the June 2017 DSA, and all five external debt burden indicators breach their indicative thresholds in the baseline scenario, external debt service indicators have improved in the near-term and the level of external concessional financing in place has increased. The outlook for total public debt and public gross financing needs has also improved, the latter significantly. However, vulnerabilities are substantial: the stress test results illustrate the country’s high vulnerability to shocks, total public debt is expected to remain elevated throughout the projection period, rollover risks associated with the short maturity of domestic debt are significant, and contingent liabilities related to SOEs debt pose additional risks. However, high and stable remittances provide a reliable source of foreign exchange, and an upcoming GDP rebasing may improve the debt stock indicators somewhat.

A higher level of external support, including grant-only financing of the NDP, could significantly reduce The Gambia’s debt vulnerabilities. An alternative scenario incorporates a restructuring of bilateral external debt, improvement of the terms of the lending pipeline, and an increase in grant-financing to fund the national development plan. This scenario assumes full financing of the NDP as outlined above, entirely through external grants, and incorporates assumed debt rescheduling by all bilateral and plurilateral creditors in line with the rescheduling provided by Saudi Arabia as well as a softening of terms on existing commitments to a grant element of 50 percent through a combination of reducing interest rates, extending maturity and grace periods, and substituting grants for loans. Under this scenario, the debt service indicators would immediately fall below their relevant thresholds, and remain at manageable levels throughout the projection period. The paydown of domestic debt in the early years would quickly reduce gross financing needs to more manageable levels. Nevertheless, the space for new external borrowing (even on highly concessional terms) is very limited and would need to be reserved for development projects with the highest priority.

Policy Discussions

The authorities remain committed to breaking with the economic mismanagement of the past regime, restoring macroeconomic stability and fiscal sustainability, and boosting growth. Their key economic objectives are to restore macroeconomic stability and attain sustained high and inclusive growth to promote socio-economic development. Starting from a very weak legacy position, this will require careful sequencing: (i) Restoring macroeconomic stability and fiscal sustainability, including through fiscal consolidation, SOE reform and external financial support; (ii) fostering debt sustainability by implementing the debt strategy and securing grants and limited highly concessional external loans; (iii) mobilizing resources for carefully prioritized social and infrastructure investment without endangering debt sustainability; and (iv) creating an environment conducive to private sector initiative, including by safeguarding financial stability, strengthening governance and fighting corruption.

Private sector development and inclusive growth

In recent years, The Gambia appears to have lost its competitive edge over neighboring and comparator countries. While the factors that have deteriorated the most include the macroeconomic environment (which is already being addressed) and sectors already identified in the NDP (education, health, infrastructure), access to financing clearly shows a massive deterioration reflecting the crowding out of the past as well as structural factors.

Structural measures could support private credit growth and access to financing. These include strengthening laws that protect property and creditor rights and their enforcement in a swift manner; promoting credit information systems and collateral registries, including strengthening the operational effectiveness of the credit reference bureau and movable collateral registry; and fostering financial literacy. Other measures to increase financial inclusion include establishing an SME financing scheme, expansion of banking access in rural areas, including through microfinance and mobile banking, and addressing gender inequality issues. Over the medium-term, these should be accompanied by appropriate regulatory and supervisory frameworks.

The Gambia currently lags its regional peers in addressing income and gender inequality gaps. Currently, The Gambia performs poorly compared with benchmark countries on income and gender inequality. While there have been positive gains, particularly in education and health outcomes, high rates of poverty and gender inequality persist, particularly in rural areas. Strengthening inclusion in The Gambia could improve real GDP per-capita growth by 0.5 percent of GDP, in addition to better social outcomes. Boosting female participation in the labor force and in decision making positions would be supported by removing legal inequalities, including in land tenure, prioritizing women’s education, and provision of infant care, among other measures.

New National Development Plan provides key strategic directions

A new National Development Plan (NDP) covering 2018-2021 has just been finalized. The NDP was formulated in a broad consultative process and aims at delivering “good governance and accountability, social cohesion, and national reconciliation and a revitalized and transformed economy”. It seeks to achieve this overarching goal through eight strategic priorities, including restoration of good governance and the rule of law; economic stabilization, accelerated growth and structural transformation; modernization of agriculture and fisheries, and promotion of tourism; improved education and health services; infrastructure development and restoration of energy services; and making the private sector the engine of growth. While the costing of the NDP is still ongoing, the authorities indicated that it will likely be around $1.8 billion. They hope to mobilize substantial grants to finance the NDP at the International Conference planned for May 2018.

Selected Issues paper

Financial benchmarking of The Gambia

 Although The Gambia has significantly developed its financial sector over the past decade, there are areas of financial inclusion, depth and efficiency requiring continued improvement. In the near term, efforts should focus on sustainable private credit expansion facilitated by strengthened risk management, promotion of healthy financial competition and a conducive business environment. However, it is essential that private credit growth is gradual without weakening credit underwriting standards and commensurate with current economic activities to prevent any financial stability concerns from future NPLs. To fully reap the economic benefits of financial development, policy priorities should also be given to strengthening the supervisory and regulatory framework and financial infrastructure, supporting also financial innovations, and improve financial literacy to support financial access.

Background

The Gambia’s financial sector is dominated by banks albeit with a significant presence of non-bank financial institutions (NBFIs). The sector is generally shallow and underdeveloped with no capital market. It comprises mainly banks, insurance companies, microfinance institutions, village savings & credit associations (VISACAs), credit unions and a state pension fund. The banking industry comprises 11 commercial banks and one Islamic bank. Although all banks are domestically-incorporated, eight of them are foreign subsidiaries of mainly Nigerian origin. One of the four domestically-owned banks (Mega Bank) is under the Central Bank of the Gambia’s (CBG) recovery and resolution procedures.

The banking system accounts for more than 80 percent of total financial assets of the financial sector and is itself highly concentrated. Four of the twelve banks 3 (based on assets size) are domestically systemically important banks (D-SIBs) and jointly account for about 69 percent of industry total assets and 74 percent of all deposits. Overall, the banking industry holds around 77 percent of all outstanding sovereign assets, and at least 41 percent (GMD 14.7 billion) of the industry’s assets are short-term government securities – mainly T-bills. This exposure is in addition to GMD 297.7 million in credit to the central and local governments, and public enterprises. Government’s heavy reliance on the T-bill market stems from protracted fiscal imbalances due to ballooning public expenditures, a low revenue base, and fiscal bailouts of struggling state owned enterprises (SOEs).

Empirical Analysis of Level of Financial Development

Financial Access

Despite its low level of financial development, The Gambia performs relatively well with respect to key access indicators at the national level. For instance, the country has a good level of financial access measured by indicators such as number of bank accounts per 1000 adults or number of bank branches per 100,000 adults. This was helped by the rapid rise in branch expansion in the last decade, with the number of banks doubling from seven in 2006 to fourteen in 2010. The period also coincided with the influx of new banks – partly due to the country’s aggressive policy of attracting foreign direct investment (FDI) at the time, partly due to increased competition among banks elsewhere in West Africa. Branch density stagnated from 2011 onwards, due in part to the exit of two banks and a weaker macroeconomic performance. However, notwithstanding recent gains in financial access, there is still significant room for improvement when it comes to the geographic dispersion of the financial institutions network. For instance, while 80 of the banking industry’s 87 branches are clustered in the Kanifing, Banjul, West Coast and the North Bank regions of the country, there are only four bank branches in the Upper River Region, one in the Lower River Region and no bank presence in the Central River Region. Similarly, with the exception of the North Bank and the Upper River regions which each have two ATM machines, 96 percent of the country’s 99 ATM machines are found within the Banjul, Kanifing and West Coast regions.

A comparison with the peer SSA and LIC countries also shows that The Gambia financial services coverage has surpassed many regional peers except with respect to private credit provision. The Gambia remains in the upper half of the rankings when benchmarked against SSA and LIC countries. Similar results were observed when benchmarked against other West African Monetary Zone (WAMZ) member countries in terms of number of branches per 100,000 adults. Moreover, it only lagged behind Ghana when assessed for the number of accounts per 1000 adults. A quantile regression analysis used to control for outliers in the data and the influence of non-policy related structural differences such as economic and demographic factors also shows similar performance. Notwithstanding, the country lags behind all its regional peers when assessed for financial inclusion based on percentage of firms with credit lines largely reflecting the crowding out effects of fiscal dominance.

Financial Depth

Efforts to improve financial deepening in The Gambia have stalled primarily due to fiscal crowding out and structural issues. The growing need for fiscal financing has led to a decline in private sector credit from 17.4 percent of GDP in 2011 to 12.8 percent of GDP in 2015, including by pushing up average lending rates to a high of around 28 percent in 2016. This has pushed the country’s performance with respect to private sector credit below the average for LICs and below its expected median (using the quantile regressions, after controlling for outliers in the data and the influence of non-policy related structural differences). Similarly, the performance of NBFIs, as indicated by insurance company assets-to-GDP ratio, trails the average for SSA, and the quantile regression shows that more recently the ratio was in line with the expected median through 2013 and then declined to the 25th percentile by 2015. By contrast, the country performs much better when financial depth was assessed based on the bank deposits-to-GDP ratio. The country’s score was above the regional average, the average for peer countries and its own expected median. While this very high ratio depicts good financial depth, it may also reflect limited alternative investment opportunities.

The structure of banks’ balance sheets is also holding back financial deepening. The industry’s liabilities are almost entirely short-term, which helps to explain the lack of appetite for long-term financing to avoid large maturity mismatches. Beyond this, difficulties in contract enforcement and foreclosures, software problems affecting both the credit referencing platform and the collateral registry, are a few of the structural problems that have an adverse impact on financial deepening.

Policies to Support Financial Development

Financial development facilitates efficient resource allocation and promotes economic growth. Moreover, recent analytical work has shown that there is significant scope for financial development to contribute to the new government ‘s drive to enhance inclusive growth. However, in order to achieve this objective, concrete efforts must be taken to address structural and policy challenges affecting the financial system as a whole. In addition to the policy recommendations in the previous section, the following could be considered:

• Strengthen the legal, regulatory and institutional frameworks to promote healthy financial competition and improve financial infrastructure. Efforts are needed to strengthen property and creditor rights protection, contract enforcement; to improve bank regulation and supervision in compliance with Basel Core Principles (BCP); strengthen the bank resolution and crisis management framework to allow the orderly exit of insolvent financial institutions; and upgrade the financial safety net, including the set-up of deposit insurance scheme in the long-run, to mitigate the associated impacts.

• Maintain a flexible adoption approach to financial innovations while being vigilant to and prepared to mitigate its potential risks. For example, support mobile banking for financial inclusion by revising the legal and regulatory frameworks while setting up new oversight standards and institutional arrangement for e-payment.

• Formulate a strategy for financial inclusion. The authorities should formulate a financial development plan and strategy with a view to reaching out to the unbanked part of the population. The plan will also support its social protection and women empowerment objectives contained in the current NDP. Such a plan could also include a strategy to support VISACAs and credit unions, and by extension, SME credit through credit guarantee schemes.