Annual CPI inflation accelerated significantly from 1.6% in May 2008 to 5.9% in May 2009, and the 12-month average inflation rate accelerated to 5.8% in May 2009 from 4.9% a year ago.
Food and drinks recorded an average inflation of 7.1% in May 2009, up from 1.9% a year ago. Non-food items recorded annual inflation of 4.5% in May 2009 compared to 1% a year ago and contributed 29.2% to inflation. Among other groups, in May 2009, clothing and textiles recorded annual inflation of 4.7%, housing and utilities 5.5%, restaurants and hotels 5.8% and house rent 3.1%. Anti-inflationary Measures
Despite a significant rise of international prices of food and petroleum products and substantial increase of salaries of civil services at home in 2008, the 12-month average CPI inflation rate moderated to 4.5% in 2008, compared to 5.4% in 2007, thanks to the combined fiscal and monetary measures undertaken by the government and the Central Bank of Gambia.
Hardening of international prices of food products and petroleum oil, and disruptions in the supply of foodstuffs from the neighboring countries put pressures on consumer prices in the Gambia since 2007. Government responded by reducing the sales tax on rice imports from 15% to 5% in July 2007 and eliminating it altogether in May 2008.
To avoid revenue loss, the authorities increased taxes on car parts and used vehicles. Pump prices of petroleum products were increased in May 2008 by 10–24% to remove an implicit budget subsidy that had emerged in the preceding months and to bring them in line with import costs.
To check effective demand and inflationary pressures on the economy the CBG raised the bank rate from 9% to 10% in June 2007 and raised its rediscount rate from 14% to 15% in June 2007 and further to 16% in October 2008. In March 2008, in response to tight monetary conditions and against a backdrop of falling inflation, the CBG reduced the statutory minimum reserve requirement of banks from 16% to 14%. Appreciation of the dalasi helped cushion the impact on inflation to some extent in 2008, but this exchange rate advantage has been lost in 2009 due to Dalasi depreciation.
Projection of CPI inflation during June-December 2009 indicates that inflation is expected to decelerate continuously during the remaining months of the year and the year-end inflation is expected to range around 4.3 percent.
Government Fiscal Performance in Jan-June 2009
The government’s fiscal performance has been mixed in Jan-June 2009 compared with that in Jan-June 2008. In Jan-June 2008 total revenues and grants declined by 1.2%, as tax revenues decreased by 3.8% and non-tax revenues declined by 2.3% over Jan-June 2007. On contrast, Jan-June 2009 has witnessed 15.5% increase in total revenue and grants aided by 13.3% increase in taxes, 8.9% increase in non-tax revenues and 64% increase in grants. During Jan-June 2009, total expenditures and net lending has increased by 20.4% over Jan-June 2008 due to 18% increase in personnel emoluments, 55.2% increase of capital expenditure and 6.3% increase by interest payments over Jan-June 2008. Overall, there is a fiscal deficit of D197.7 million, and basic surplus of D70.2 million in Jan-June 2009, compared to a fiscal deficit of D86 million and basic surplus of D70.2 million in Jan-June 2008.
External Debt
As per the latest Joint Fund-Bank Debt Sustainability Analysis (DSA), the stock of external debt declined substantially at end-2007 following HIPC and MDRI debt relief. At the end of 2006, prior to completion point, the stock of nominal external public debt was US$676.7 million (133.1 percent of GDP). Multilateral creditors accounted for 84 percent of this debt, with IDA as the largest creditor (39 percent of total outstanding debt). At end-2007, post-completion point, the stock of external public debt fell to US$299.4 million (46.0 percent of GDP).
In January 2008, Paris Club creditors agreed to cancel outstanding claims (US$13 million in PV terms at end-2006) on The Gambia. Bilateral agreements have been signed with Paris Club creditors and Kuwait. Agreements on the delivery of debt relief have also been reached with the EU/EC, OPEC Fund for International Development (OFID), the Islamic Development Bank (IsDB), and the International Fund for Agricultural Development (IFAD) but are still pending with the Economic Community of West African States (ECOWAS), Saudi Arabia, Taiwan Province of China, Libya, China, and India.
The current DSA concludes that The Gambia remains at a high risk of debt distress after HIPC and MDRI debt relief due to the high level of debt as well as the country’s vulnerability to shocks. The World Bank’s Country Policy and Institutional Assessment (CPIA), classifies The Gambia as a “poor performer” based on an average of the ratings for the preceding three years and the table below presents the policy-dependent debt burden thresholds. The PV of debt-to-GDP and the PV of debt-to-revenue ratios remain comfortable. Debt service payments remain manageable throughout the projection period, rising no higher than 10 percent of exports and revenue. But, the PV of debt-to-exports ratio breaches the debt-burden threshold for a protracted period.
Given continuing risks, the staffs urge authorities to prepare a medium-term debt management strategy (including the debt of public enterprises and contingent liabilities). Staffs also recommend that the authorities continue to rely on a combination of grants and highly concessional borrowing in external financing and exercise restraint in contracting new loans. The major risks to The Gambia’s debt sustainability include lower than expected economic and export growth, higher than expected new borrowing, and a deterioration in fiscal balance. In light of these risks, staffs underline the importance of sustained policy and governance reforms.
Domestic Debt and Treasury Bills Outstanding
At the end of May 2009, outstanding domestic debt stood at D5.6 billion (amounting to 28.4% of GDP), down by 5.5% from the outstanding domestic debt at D6 billion (amounting to 33.3% of GDP) a year ago. The share of Treasury bills increased from 80.4% at the end of May 2008 to 84.5% at the end of May 2009, share of Sukuk Al-Salam from 0.8% to 1.4% and that of Government bonds increased from 4.2% to 4.4% over the period. On contrary, the share of Non-interest bearing Treasury Notes declined from 14.6% to 9.7% over the period
As per the analysis made by the CBG, the Gambia’s domestic debt is unsustainable. Out of three sustainability indicators given in Table-2.8.2, only one indicator viz. debt to revenue ratio is satisfied. However, debt to GDP ratio may be satisfied during 2009.
As regards holders, commercial banks held 65% followed by parastatals 21%, other non-banks 14% and CBG 5.4% at the end of May 2009.
At end May 2009, Treasury Bills were the major instrument accounting for 93% of interest bearing domestic debt, followed by government bonds (5.4%) and Sukuk Al Salam (1.6%).Commercial banks were the major purchasers of Treasury Bills (68%) followed by Parastatals (17%) and other non-banks (15%) at the end of May 2009.
Treasury Bills Yields
Yields on treasury bills fluctuated widely in recent months. Despite significant decline of CPI inflation from 7% in January 2009 to 5.9% in May 2009, Average yield on the 91-day increased from 10.5% in Jan 2009 to 12.5% in May 2009, yield of 182-day bills increased from 12.1% to 13.8% and that of 364-day bills increased from 14.4% to 15.3% over the period.
This implies that the margins of yields over inflation rates are increasing over time and need to be corrected by adopting appropriate monetary policies.Money Supply in May 2009
Annual growth rate of broad money supply (M3) accelerated from 7.5% in May 2008 to 17.3% in May 2009. On the supply side, 17.3% growth in money supply in May 2009 was supported by 18.1% growth in currency, 10.4% growth in demand deposits, 10.8% growth in savings deposits and 38.1% growth in time deposits.
On the demand side, growth was mainly due to 35% growth in domestic credits, while net foreign assets decreased by 6.1% over a year ago. Domestic credit increased from D6.1 billion in May 2008 to D7 billion in May 2009, supported by 44% growth in government borrowing, 67% growth in credits to public entities and 33.3% growth in credits to the private sector, over a year ago.
Interest Rates and Central Bank Policy Rates
Interest rate on government treasury bills declined from 31% in 2003 to 14.9% in 2006 and further to 13.7 per cent in 2007. It ranged in between 13.1% to 14.7% during 2008. The bank rate of the Central bank declined from 29% in 2003 to 9% in 2007, but was raised to 10% at the end of 2007 to check effective demand and inflationary pressures on the economy.
The Central bank rediscount rate declined from 34% in 2003 to 14% in 2004. In order to counter emerging inflationary pressures, the CBG raised its rediscount rate from 14% to 15% in June 2007, In response to tight monetary conditions and against a backdrop of falling inflation, the CBG reduced the statutory minimum reserve requirement of banks from 16% to 14% in March 2008. Given the acceleration in inflation and the weakening of the Dalasi, the MPC decided to increase the Rediscount Rate by one percentage point to 16.0% in October 2008.
Despite significant fall of the yields on treasury bills in recent years, maximum short-term deposit rates and commercial banks’ lending rates remain very high, and there exist wide interest rate spreads. Successful disinflation allowed the weighted yield on treasury bills to fall from over 25% in early 2005 to 14.6% in January 2009. By contrast, commercial banks’ lending rates remained sticky above 20% due to high operating costs and risks of bank credits. Appropriate monetary policies are necessary to reduce the maximum short-term deposit rates and the lending rates.
BOP Situation in 2009
Provisional balance of payments estimates for the first quarter of 2009 indicate an overall deficit of D468.9 million (US $17.9 million) compared to D7.42 million (US $0.34 million) in the first quarter of 2008. The current account deficit, including official transfers, amounted to D234.3 million compared to a surplus of D4.94 million a year ago. The capital and financial account widened from a deficit of D12.36 million in the fourth quarter of 2008 to D234.53 million in the first quarter of 2009.
Revised balance of payments projections by the CBG indicate an overall deficit of D13.8 million (US$0.5 million) in 2009 compared to D811.30 million (US$30.3 million) in 2008. The current account deficit, including official transfers is expected to widen to D3.8 billion (19% of GDP) in 2009 from D3.6 billion (17.8% of GDP) in 2008. The capital and financial account balance is expected to improve from a surplus of D2.7 billion in 2008 to D3.8 billion in 2009.
Foreign Exchange Reserves
The volume of transactions in the inter-bank foreign exchange market totaled D33.3 billion (US$1.4 billion) in January-May 2009 compared to D36.5 billion (US$1.7 billion) a year ago. At end-May 2009, gross international reserves stood at D2.6 billion (US$119.7 million) equivalent to 4.0 months of import cover.
Exchange Rate
During the last one year, the Dalasi depreciated against major international currencies traded in the inter-bank market except the British Pound, reflecting the impact of the global financial crisis on remittances and tourism as well as increased demand for foreign exchange to meet the high cost of imports. During 2009 also the Dalasi has depreciated against major currencies in every month until May 2009 over the corresponding month in 2008. At the end of May 2009, Dalasi has appreciated marginally against British Pound by 0.1%, while it depreciated by 29.7%, 16.9% , 12.4% and 4.3% against US$, CHF, Euro and CFA respectively over May 2008.
