IMF Concludes Article Five Visit In Banjul
After the rude and abrupt executive interference in the setting of foreign exchange rates for the Dalasi, artificially letting it appreciate by close 70%, decreed by the Office of the President, many Gambians were put in a state of shock. Many of the informed and enlightened observers however suspected that the anomaly will not last long to warrant much concern. Twice before, in the last five years, government had tried it before but had to soon abandoned it with IMF pressures.
Since 2nd May 2015, when the financial decree was announced, apparently without consultations with the Central Bank, there is enough evidence that the financial climate in the country has been plunged into a state of freeze and inertia. There is hardly any physical foreign cash in the form of dollar, euro, pound or CFA notes physically in circulation or in transactions anywhere in the country nowadays.
The biggest losers have been and continue to be households dependent on periodic remissions from family members working abroad in foreign countries. More and more Gambian families live in such households each year and over the past four years annual documented remittances have surpassed the sum of FDI and external aid. The second biggest losers have been consumers in general’ because despite the fall in what they can now get for their dollars or Euros, prices of imported consumer goods have not stopped going up, not to say being reduced. Then follow a range of other categories who, one way or the other, have been suffering from the hammer-blows of that errant executive order.
Importers struggling to get enough dollars to continue their trade, investors unable to liquidate their assets and covert them to foreign currencies to be able to pack up and flee; Gambians and other residents struggling to get foreign currency to be able to fly out; aspiring pilgrims finding it tough to be able to make the pilgrimage to Mecca this September; visa applicants unable to collect and show evidence of liquidity in foreign currencies; the tourist sector, likely to be hit by a post-Ebola blow, scared off by the artificially high rate of the currency of a travel destination, etc, etc.
The IMF delegation on an Article Five visit landed in Banjul on the 9th June and departed last Monday 22nd June, as expected by everyone, didn’t mince its words of advice to to authorities in Banjul. In a press release issued upon the conclusion of its mission it “urges the authorities to rescind the recent exchange rate directive as soon as possible and return The Gambia to a flexible exchange rate policy, which has served the country well. “
Let us look at some of the rest of the Press Release No. 15/29, dated June 22nd , 2015. it reads “A mission from the International Monetary Fund (IMF) led by Bhaswar Mukhopadhyay, visited Banjul from June 9-22, 2015 to conduct discussions for the 2015 Article IV consultations and to take stock of performance under the Staff Monitored Program (SMP) approved in April 20151.
At the end of the mission Mr. Mukhopadhyay issued the following statement:
“The Gambian economy experienced sizable exogenous shocks in 2014 on top of persistent policy slippages. The regional Ebola outbreak is estimated to have cut tourism receipts for the 2014/15 season by more than half while the delayed summer rains in 2014 led to a 15 percent decline of the year’s crop with serious implications for food security. These shocks come in the wake of an extended period of weak policy implementation, putting additional pressure on the current account, fiscal deficits and public debt. Real GDP contracted by about 0.25 percent in 2014 while inflation increased to about 7 percent at end-2014 from 5.5 at end-2013. Gross international reserves declined from almost 5 months of imports at end-2013 to 3.7 months at end-2014 while public debt rose sharply to 100 percent of GDP as at end-2014.
“To support the Gambian economy the IMF disbursed $10.8 million in April 20152. The Gambian authorities also undertook to implement corrective policies with the broad objective of achieving a sound fiscal position over the medium-term, which IMF staff agreed to monitor at the authorities’ request. The Gambia’s other development partners committed to provide significant levels of assistance in support of the Gambian authorities’ policy efforts.
“The outlook for 2015 is, however, again clouded by policy slippages. Significant spending pressures have emerged since April 2015, and faced with pressures on the exchange rate at the onset of the lean season for foreign exchange receipts, the authorities issued a directive fixing the exchange rate at a level overvalued by more than 20 percent compared with prevailing market rates in May. The significant revenue fallout from this measure and the spending pressures have started to weigh on the government’s domestic borrowing.
“As a result, The Gambia’s external and fiscal sustainability are at a grave risk. Moreover, in the absence of urgent action, the social progress made in recent years is also under threat. The mission urges the authorities to implement quickly the measures identified in the 2015 budget. Furthermore, since the imposition of the exchange directives has materially damaged the economic prospects and fiscal situation facing The Gambia, the authorities must take additional steps in order to limit domestic borrowing. The mission also urges the authorities to rescind the recent exchange rate directive as soon as possible and return The Gambia to a flexible exchange rate policy, which has served the country well.
“The mission encourages the authorities to strengthen efforts to address the financial problems of the National Water and Electricity Company (NAWEC) and other public enterprises in order to limit their strain on the state budget. The authorities also need to get a firm grip on key public enterprises’ cash flow and establish promptly a monthly monitoring mechanism. Over the medium term, the authorities should also expeditiously firm up the medium-term restructuring strategy on the energy and telecommunication sectors.
After throwing a paragraph of normal cosmetic diplomatic appeasement that recognizes that The Gambia “has made visible progress in improving social indicators,” it warns that. “ there is still significant scope to enhance prospects for inclusive growth. The authorities are encouraged to delineate a strategy to reduce vulnerability to droughts so as to avoid repeated breaks in economic growth. In this regard, the government’s medium-term development plan currently being developed should prioritize continued investment in the country’s water management system to boost agricultural productivity and rural incomes.’
It also notes:
“There is significant room to enhance the business environment by simplifying the tax system, improving access to electricity and creating room for lending to the private sector in order to unlock private sector investment and growth. The mission encourages the Central Bank of The Gambia to continue leaning against inflationary pressures and stepping up measures to foster financial intermediation and safeguard financial sector stability.
And concludes: “The mission met with Finance Minister Abdou Kolley, Secretary General and Minister for Presidential Affairs Lamin Nyabally, Central Bank Governor Amadou Colley, other senior government officials, members of parliament, senior officials in public enterprises, and representatives of the private sector, civil society organizations, the banking sector, and development partners.”
Now compare the statement above and the less desperate one issued six months ago at the conclusion of the previous January 2015 Article Five Mission led by the same Mr. Mukhopadhyay. Press Release No. 15/06 No. 15/29, dated January 14th , 2015:
“A mission from the International Monetary Fund (IMF) led by Bhaswar Mukhopadhyay, visited Banjul from January 8-14, 2015. Though The Gambia remains completely free of Ebola, the crisis has caused a deep decline in tourism related activities, the economy’s principal foreign currency earner. The mission assessed the effects of this shock to the Gambian economy and explored the possibility of agreeing on a Rapid Credit Facility (RCF) arrangement with the IMF. The mission also discussed the Gambian authorities’ plans to address policy slippages over the past two years and the possibility of establishing a program monitored by the IMF (SMP). While the discussions have been fruitful, additional time is needed to reach a final agreement.
“At the end of the mission Mr. Mukhopadhyay issued the following statement:
“The Gambia has been spared from the Ebola outbreak, but the crisis has deterred tourists, reducing activity in the sector dramatically. A projected decline of about 60 percent in tourism, The Gambia’s principal export, will strain the country’s balance of payments. Delayed rains in 2014 are also causing distress in the economy, leading to a significant decline in crop production. Combating the effects of these shocks will require concerted policy effort as well as greater support from the international community.
“Even before the crisis, 2014 was a difficult year for the Gambian economy. The consequences of past fiscal slippages put pressure on the government budget, public enterprises, the private sector, and households. Government borrowing lifted interest rates, which increased interest payments considerably. Banks have restricted their lending to the private sector while higher debt burdens and import costs due to currency depreciation have weighed on the public enterprises. Difficulties in public enterprises have put further stress on the public budget. The local currency price of imported goods, especially basic foods, has risen.
“In light of substantially higher borrowing by the government and looming risks, it is imperative to reinforce corrective measures and to make bold choices about spending priorities. The mission welcomes the government’s determination to limit net domestic borrowing to one percent of GDP this year. This plan is being implemented in the budget but will require vigilance to keep spending on path and to respond to any emerging spending pressures by reducing lower-priority expenditures. The mission has engaged in discussion with the authorities about entering into a staff monitored program (SMP) with a view to a future lending arrangement.
“Implementation of reforms is also urgently needed to put the National Water and Electricity Company (NAWEC) and other public enterprises on a sound financial footing and limit their strain on the state budget. The mission welcomes the authorities’ commitment to a comprehensive restructuring of the energy sector. Similar efforts will be required for a number of other public enterprises that have recently experienced financial distress.
“The government has taken bold steps in its budget agreements, its reform agenda for public enterprises, and its rallying of the donor community. These efforts will need to continue to turn interest rates around and reduce pressure on the Dalasi.
“The mission thanks the authorities for the candid and constructive discussions during the mission, and looks forward to an active and continued dialogue with the aim of restoring macroeconomic stability as a foundation for economic development in The Gambia.
“The mission met with Finance Minister Kebba S. Touray, Central Bank Governor Amadou Colley, other senior government officials, public enterprises, the banking sector, and development partners.”
It was after this, following a visit by Gambia Central Bank officials to the IMF headquarters in the U.S.and a subsequent visit by IMF officials junior to Mr. Mukhopadhyay, that the IMF on the 2nd April 2015, approved “emergency financial assistance under the Rapid Credit Facility (RCF) in the amount equivalent to SDR7.775 million (about US$10.8 million) for The Gambia to enable the authorities to meet their urgent balance of payment and fiscal needs.”
What Gambia government authorities told the IMF in its application for such financial emergency relief, they never disclosed to citizens. To them government wanted them to believe that it considers everything was right, normal and in fact progressing, if citizens tended towards the belief that life was becoming harder and more difficult, they have only themselves to blame for mistrusting the official narrative and listening to opposition clamor.
The authorities, as usual kept nodding heads in agreements to whatever IMF officials were saying until they were sure the IMF US$10.8 million was in their hands before deciding to disregard all the advices, warnings and urges the Fund’s staff had been giving.
Just a month after IMF approval and a week after the amount was disbursed, President Jammeh announced his forex rate changes. To many Gambians, the move was a display of not only the madness of Jammeh’s policies but his disdain for the IMF as an international institution. Some Gambians are beginning to think that perhaps President Jammeh’s treatment of the institution is well deserved, given the long catalogue of violations of contracts and agreements with the Fund and other international organizations. In fact all throughout the twenty years of his rule the government of The Gambia has never kept any part of a bargain with the IMF all throughout a project, program or arrangement life span.
Look at what happened to the 2012 Extended Credit Facility, ECF:
“Press Release No. 12/191
May 25, 2012
The Executive Board of the International Monetary Fund (IMF) today approved a new arrangement for The Gambia under the Extended Credit Facility (ECF) in an amount equivalent to SDR 18.66 million (about US$28.3 million). The Board’s decision will enable an immediate disbursement equivalent to SDR 9.33million (about US$14.2 million).
The authorities’ program is aimed at meeting an acute balance of payments need arising from the recent crop failure due to drought, and helping to catalyze support from development partners for The Gambia’s new poverty reduction strategy, the Programme for Accelerated Growth and Employment (PAGE). Over the medium term, the authorities seek to ease the government’s heavy debt burden through fiscal adjustment, while implementing a strong economic reform agenda in support of the PAGE.
Following the Board’s discussion of The Gambia, Mr. Naoyuki Shinohara, Deputy Managing Director and Acting Chair, issued the following statement:
“The Gambian economy has made good progress in achieving strong growth and making a substantial reduction in poverty. However, major crop failure due to the drought has created hardship and calls for effective and timely delivery of assistance for the most vulnerable households.
“The Gambia’s heavy debt burden poses high costs for the government and risks for the economy. To address this problem, the authorities’ new ECF-supported program rightly focuses on fiscal adjustment to curb government’s domestic borrowing. Limiting external borrowing to concessional loans is also necessary to reduce the risk of debt distress. The authorities’ planned fiscal adjustment will require consistent strong implementation to build confidence and achieve fiscal savings. Rebuilding the government’s revenue base is key to fiscal adjustment, especially the upcoming introduction of a VAT and reductions in fuel subsidies.
“Progress toward eliminating fiscal dominance has enhanced the independence of the Central Bank of The Gambia and its capacity to conduct sound monetary policy. The central bank will continue to build capacity for effective financial sector supervision, particularly for stress testing.
“Financing the government’s new poverty reduction strategy, the Programme for Accelerated Growth and Employment, under tight budget constraints will be a challenge. In this regard, fiscal savings from lower interest on domestic debt and private sector participation in infrastructure investment could be helpful. To ensure that such investments are productive and to guard against potentially large contingent liabilities for the government, robust institutions and regulatory frameworks are critical. To support growth, reforms are needed in key sectors such as energy and telecommunications.”
Recent economic developments
The Gambian economy performed well during the previous ECF arrangement, which expired at the end of March 2011. During that period (2007–10), real GDP growth was robust and inflation was low-to-moderate, despite the global financial crisis and sharp food and fuel price shocks. Moreover, growth was inclusive and the incidence of poverty fell considerably. However, the fiscal deficit widened substantially in the latter years of
the program, due to a steady erosion of revenues and large extra-budgetary spending, leading to a sharp increase in costly domestic debt.
In the 2011–12 agricultural season, a severe drought resulted in a major crop failure, putting about one-fourth of the population at risk. Initially, the government will bear much of the cost of relief efforts, notably imports of food, seeds, and fertilizer. Despite this severe shock, the authorities have been able to maintain macroeconomic stability, thanks largely to an ample stock of official international reserves.
The crop failure will affect economic growth over the near and medium term. Real GDP is projected to contract by 1½–2 percent in 2012, reflecting effects of the crop failure carrying over into the first half of 2012. With a recovery in agriculture spread over 2–3 years, real GDP is projected at about 8–10 percent a year in 2013–14, provided there is an effective response to the drought by the government, aid agencies, and development partners.
However, this outlook depends on sound macroeconomic policies and is subject to a number of downside risks, mainly the heavy debt burden, a potentially prolonged weakness in the global economy, particularly in Europe, and possible terms of trade shocks, especially on food and fuel prices, and weather-related shocks.”
After government got the second tranche of the SDR 18.66 million (about US$28.3 million) government simply walked away from the arrangement failing to honor most of its obligations. IMF is normally a very tough institution to have to deal with but when it comes to countries with the least income and particularly if extraordinarily small and resource poor, it tends bend over backwards in order to accommodate them.
The IMF would not tolerate what it has been doing with The Gambia with a country like say Ghana, Senegal or Niger for instance.
We Gambians are grateful for this regard by the institution, but when the regard is misused by government to enable it wage a war of economic strangulation of citizens, we detest both government and the IMF.
Bhaswar Mukhopadhyay and his men left after strongly calling on government to rescind its May 4th executive order. We are watching to see when Jammeh will comply.