July 7, 2000

Mr. Horst Köhler
Managing Director
International Monetary Fund
700 19th Street N.W.
Washington, D.C. 20431
U.S.A.

Dear Mr. Köhler:

1. In the context of its continued reform efforts to promote economic growth and poverty alleviation, the government of The Gambia adopted a medium-term economic and financial program (April 1, 1998-March 31, 2001), supported under a three-year arrangement under the Poverty Reduction and Growth Facility (PGRF).¹ This letter, which supplements our letter of November 8, 1999, reviews performance under the first half of the second annual PRGF arrangement approved by the Executive Board on November 19, 1999 (EBS/99/201; 11/8/99, Correction 1). It also outlines the government's objectives and policies for the balance of 2000. Against this background, it notes that most of the quantitative performance criteria for end-March 2000 and all of the structural performance criteria were observed and requests waivers for the nonobservance of the end-March 2000 quantitative criteria with respect to (a) net bank credit to the central government; (b) net domestic assets of the central bank; and (c) basic primary balance of the central government (see para. 6).

2. The government is aware that overall performance under the second year PRGF-supported program has so far been mixed. Notwithstanding robust real GDP growth with low inflation and good progress in implementing a number of structural reforms, there were budgetary slippages during the fourth quarter of 1999 through the first quarter of 2000. The government is therefore determined to consolidate the overall economic gains made in 1999 and so far in 2000 and undertake corrective measures to address the policy slippages in order to achieve strong momentum toward realizing its medium-term economic and financial objectives. In fact, significant progress has already been made in implementing corrective measures, including structural reforms and the posting of a long-term Fund budget advisor to Banjul to strengthen budget implementation.

3. In 1999, real GDP growth, estimated at 5.6 percent, exceeded the program target. There was better performance across the board, especially in tourism with an estimated growth of 34 percent in visitors. In agriculture, good rains contributed to an increase of 67 percent in groundnut production, to about 123,000 metric tons, while production of other crops increased by 21 percent. The good harvest in 1999 contributed to a moderation in the end-of-period inflation (based on the low-income consumer price index) to below the program target of 2 percent. The decline in imports following the introduction of the preshipment inspection scheme (see below) and the depreciation of the real effective exchange rate of the dalasi by 2.3 percent, contributed to a lower external current account deficit (excluding official transfers) of about 10½ percent of GDP during 1999, compared with 11½ percent in 1998. Gross official reserves were below the end-1999 target by SDR 4.3 million, but the end-March 2000 quantitative performance criterion with respect to the floor on the net foreign assets of the central bank was observed as the central bank curtailed its intervention in the foreign exchange market.

4. Budget implementation during 1999 suffered a number of setbacks despite the introduction of midyear measures to consolidate the fiscal deficit. Instead, the overall fiscal deficit (excluding grants) increased to 4.8 percent of GDP compared with the program target of 3.1 percent. The original budget for 1999 was supsequently weakened by the larger-than-envisaged adverse revenue impact of a reduction in the maximum import duty rate to 20 percent effective January 1, 1999, and by a cut in petroleum product prices aimed at passing through the decline in world market prices. To rectify this, the government adopted supplementary measures in June to strengthen customs revenue collection and contain recurrent expenditure. However, there was a supsequent shortfall in revenue from customs duty and sales tax on imports during the fourth quarter equivalent to 1.2 percent of GDP, following the introduction of the preshipment inspection scheme on imports in October 1999.² On the expenditure side, the wage bill for 1999 slightly exceeded the target because of higher payments for statutory gratuities, pensions, and the hiring of new teachers. Overall, other recurrent expenditures exceeded the program target by D 46 million (0.9 percent of GDP), including additional domestic interest payments. Thus, net government borrowing from the banking system exceeded the program target by an equivalent of 4¾ percent of the beginning-of-the-period money stock.

5. Domestic credit expansion, both to the government and the private sector, exceeded the program targets significantly by end-December 1999 and through end-March 2000. The growth in private sector credit during the first quarter of 2000 was entirely accounted for by financing of the marketing of the groundnut crop, as credit to the rest of the private sector declined by 3 percent. Attempts by the central bank to mop up commercial banks' excess reserves were not effective. The treasury bill rate declined from 14 percent in December 1998 to 12 percent by end-March 2000, broadly in line with the decline in inflation during the same period.

6. The quantitative performance criteria for end-March 2000 with respect to net bank credit to the central government, net domestic assets of the central bank, and the basic primary balance of the central government were not observed (Table 1) largely as a result of the fiscal slippages in the fourth quarter of 1999 and the mid-March salary advance to civil servants.³ However, the implementation of structural measures was encouraging. In particular, a comprehensive survey of government arrears as of end-June 1999 and end-December 1999 was completed, earlier than programmed, by mid-February, while the reconciliation of the Treasury accounts from September 1997 to December 1999 with those of the central bank was completed ahead of schedule by end-March 2000 (Table 2).

7. Other key reforms are generally on schedule (Table 2). The original budget for 2000 incorporated a reduction in the maximum external tariff from 20 percent to 18 percent, effective from July 1, 2000, and the customs department has been working out details to reduce the number of tariff brackets from eight to three as envisaged in the program. The budget also provided for an average 20 percent increase in petroleum product prices, effective January 1, 2000, and granted the Secretary of State for Finance the flexibility to adjust the petroleum product prices on the basis of an existing formula without going back to parliament. The government privatized the Atlantic Hotel in December 1999 and sold the Trust Bank Building in February 2000. In response to the late 1999 crisis with groundnut marketing, the government reached agreement with the European Union (EU) on the details for the financing of the 1999/2000 groundnut crop without any direct government involvement, while providing for EU to reimburse a part of the marketing costs.

8. The outlook for 2000 has been dimmed by a sharp decline in tourist arrivals—originally triggered by the year-2000 (Y2K) anxieties in late December 1999—and the weakness in the distributive trade sector as a result of the preshipment exercise.⁴ There have also been problems in marketing the large groundnut crop from 1999, with delays in evacuating the crop, and paying farmers, and some reluctance by domestic banks to continue participating in crop financing. On this basis, real GDP growth is projected to ease to just below 5 percent during 2000. Measured inflation is projected to continue at below 3 percent. As detailed in paragraph 20, the external current account deficit (excluding grants) is projected to improve to 10¼ percent of GDP.

9. The fiscal program for 2000 was revised to take account of recent developments. Thus, even though the budget for 2000 (approved by parliament on January 5) incorporated revenue measures equivalent to 0.8 percent of GDP in excess of the program target, policy slippages during the fourth quarter of 1999 and other developments adversely affected the overall budgetary projections for 2000.⁵ Accordingly, the original budget projections for 2000 were revised to reflect (a) lower customs duty receipts (D 48 million or 0.9 percent of GDP) as a result of the adverse impact of preshipment inspection; (b) lower domestic sales tax owing to the lower hotel occupancy so far in 2000, the likely summer closure of a number of hotels, and the damage to the Gambia Telecommunications Company Limited (GAMTEL) property during the students' riots in April; (c) higher wages and salaries to cover the hiring of, and double shifts for, teachers; and (d) higher other recurrent expenditures, including domestic interest payments, to provide for growing public services and the timely discharge of government payments. With these changes, the overall fiscal deficit (excluding grants) would reach 3.8 percent of GDP and give rise to considerable government borrowing from the banking system.

10. In order to address the deteriorating fiscal situation and restore macroeconomic stability, the government has implemented revenue measures amounting to D 65.7 million (1.2 percent of GDP), of which D 15.7 million was covered by the further increase in diesel prices (8 percent) and an average 28 percent increase in the duty free prices of petroleum products effective February 2000. The remaining gap has been filled by (a) abolishing the preshipment inspection scheme effective July 1, 2000 leading to an estimated recovery of D 30 million in customs duty; and (b) selling the Kombo Beach and Mariatou hotels, thereby permitting the government to recover an estimated D 20 million in tax arrears. With these measures, the overall fiscal deficit (excluding grants) will be brought back to 2.6 percent of GDP, with net government repayment to the banking system estimated at 0.8 percent of GDP, both largely in line with the original program.

11. To supplement these measures, the government has accelerated budgetary reforms to improve performance. On the revenue side, in addition to the external tariff reforms, the customs department will complete the implementation of the automated system for customs data (ASYCUDA) in July 2000. Further steps have been taken to improve coordination between the revenue departments and to effect the timely reconciliation of their accounts with those of the central bank in order to facilitate revenue collection. Moreover, the government is discussing with the World Bank a capacity-building project under which they could receive long-term technical assistance to strengthen the Central Revenue Department. On the expenditure side, the government issued a circular on May 10 providing for a reform in the accounting practices that would permit comprehensive reporting and control of government expenditure, especially on the "below-the-line (BTL) accounts" that have proliferated over the years. Timely information on these accounts will also allow faster reconciliation of treasury and central bank accounts, which, in turn, will facilitate macroeconomic policy coordination. The Fund long-term budget expert expected to return to Banjul in July should play a key role in these and other reforms to strengthen institutional capacity.

12. Furthermore, the government is implementing measures to deal firmly with the reemergence of the cross arrears of the government and the public enterprises, which had been cleared in 1998. As of end-December 1999, the government had accumulated arrears of D 26 million (0.5 percent of GDP) to public enterprises, while the latter had accumulated an estimated D 21 million in arrears to the government. A program for the mutual settlement of these arrears, with quarterly targets leading to their elimination by end-2000, is being implemented.

13. A key objective of monetary policy during 2000 is to maintain low inflation and strengthen external reserves. To these ends, the government will pursue sustained prudent fiscal policies, and a tight monetary policy (while providing adequate credit to the private sector), and promote greater exchange rate flexibility, consistent with a further buildup of official reserves. Accordingly, through sales of securities, the central bank will seek to moderate the growth of broad money from an estimated 24 percent at end-March 2000 to below 12½ percent by end-2000. In a broader context, the participation of smaller banks in the financing of the marketing of the 1999/2000 groundnut crop reflects the greater competition that is developing in the banking system. This development, in turn, should benefit the arrangements that are being made to finalize the setting up of a short-term liquidity forecasting system as well as the related arrangements to transform the Treasury Bill Committee into an Open Market Operations Committee, supported by the May 2000 technical assistance provided by a short-term Fund expert.

14. The central bank is undertaking various measures to strengthen its regulatory and supervisory role over the financial sector. These include the finalization of the Financial Institutions Act and the Insurance Act for their expected July presentation for parliamentary approval. With the benefit of Fund technical assistance, further progress has been made in preparing for the introduction of foreign currency deposits and improving the reporting of financial data (monetary and balance of payments). The monetary authorities will ensure that banks maintain full provisioning for nonperforming loans and maintain their capital adequacy ratio above the legal requirement of 8 percent.

15. In April 2000, The Gambia, together with five other countries in West Africa,⁶ signed the "Accra Declaration" to establish a common currency region by 2003. The primary convergence criteria specify that the six countries must achieve inflation of under 10 percent by 2000 and 5 percent by 2003 in a "fast-track" program to create a single currency. Other criteria include a foreign currency reserve cover target of at least three months of imports by end-2000 and six months by end-2003; a limit on central bank financing of the budget deficit of 10 percent of the previous year's tax revenue; and a budget deficit (excluding grants) target of 5 percent of GDP by 2000 and 4 percent by 2002. Details of the specific measures that will need to be coordinated to achieve these targets have yet to be discussed and agreed by the relevant authorities.

16. The modernization of business-related legislation and regulation needs to be speeded up, and the government is pushing for additional reforms in the judicial system to reduce the backlog of court cases, including those in the commercial branch of the high court, by increasing the number of high court judges by 50 percent by October 2000 to facilitate the opening of four regional courts. Following the October 1999 cabinet approval of an interim procurement code to enhance transparency and efficiency in government purchases, the government is taking steps to expedite access to technical assistance in order to complete the drafting of a new comprehensive code that meets the latest international standards. Pending a comprehensive tax reform, the government has drafted an interim Investment Bill—currently under review in the Department of State for Justice—which will also provide the legal framework for the export processing zone that is to be supported by the proposed World Bank Trade Gateway project. During May 2000, the government initiated discussions with the Commonwealth Secretariat, with the aim of developing a competition policy, and eventually drafting a Competition Bill, to provide an environment that is conducive to competitive business activities.

17. Regarding the public enterprise sector, the Privatization Agency Bill, which was supmitted to the cabinet in April 2000 and will be supmitted to parliament for approval in June 2000, provides for the establishment of an agency that will oversee privatization. This bill duly recognizes the existence of a divestiture account at the central bank into which the government intends to deposit the proceeds from privatization. In 2000, a minimum of D 24 million will be transferred from the divestiture account to pay some of the government's domestic debt. In the meantime, the government intends to rigorously implement the terms of the memoranda of understandings (MOUs) that were agreed upon with a number of public enterprises in 1998. Thus, the government will take the necessary measures to prevent any further accumulation of payment-arrears, and insist that all public enterprises fully meet their tax, debt-service, and dividend obligations. With regard to GAMTEL, in April 2000, the cabinet decided to separate GAMTEL's broadcasting activities from the telecommunications business as a first step toward privatizing the enterprise.

18. In agriculture, implementing the institutional reforms in the marketing arrangements of the groundnut crop to replace the ad hoc arrangements during 1999/2000 remain a priority. In this regard, the government intends to continue to work with the EU and the Agri-Business Service Plan Association (ASPA), comprising farmers and buyers, to improve the marketing of the groundnuts and encourage ASPA to adhere to a schedule to publicly announce producer prices early in the planting season; timely crop financing arrangements will also be promoted. The government intends to make timely arrangements to provide suitably improved seed varieties, and fertilizer and credit facilities, the latter through the IFAD Rural Finance and Community Initiative. Significant support for the fishing sector will be provided by projects, funded by some US$8 million, to build cold storage and artisanal facilities in The Gambia.

19. With regard to governance, in March 2000, the government held a roundtable meeting on governance in Banjul, and committed itself to (a) strengthening the constitutional and electoral processes; (b) strengthening the parliamentary structures and processes; (c) promoting civic education and enhancing civil participation in the political process (d) improving the legal and judicial processes; (e) decentralizing and reforming the local government system; and (f) improving the management and transparency of public finances. Within this broader framework, the government has continued to seek the settlement of the seizure of the Gambia Groundnut Corporation with its parent company, Alimenta. Senior government officials met with Alimenta's representatives in Geneva in February 2000, and the International Center for the Settlement of Investment Disputes (ICSID) held its first meeting on this dispute in March 2000; bilateral contacts are continuing to expedite settlement of the matter.

20. On the basis of the economic policies detailed above, the external current account deficit (excluding official transfers) is projected to narrow slightly to about 10¼ percent of GDP in 2000. The volume of total exports (including reexports) is projected to increase by about 15 percent, reflecting a recovery in groundnut production, fish exports, and the reexport trade. It is also expected that the groundnut exports will contain a larger proportion of high-quality nuts. Import volumes are projected to grow by about 7 percent largely because of the recovery in the reexport trade following the removal of the preshipment inspection scheme and the reduction in the external tariff. The terms of trade are projected to remain virtually unchanged in 2000. Receipts from tourism are projected to decline by 6 percent because of the anticipated low summer activity. Assistance from donors is projected to increase, resulting in an increase of gross official reserves of SDR 9.8 million in 2000 to a level equivalent to about six months of import cover.

21. The government remains committed to a liberal trade and exchange system. To this end, it will further reduce the external tariff to a maximum rate of 18 percent effective July 1, 2000 and number of bands in the tariff system from eight to three, thereby cutting the import-weighted average tariff rate from 12 percent to 11.8 percent (neutral revenue scenario). These measures, together with the pursuit of a market-based flexible exchange rate, should benefit The Gambia's external competitiveness and facilitate the recovery in the important reexport trade. To further improve its debt-service profile, The Gambia will need to continue to manage its external debt prudently and rely exclusively on external grants or long-term loans on highly concessional terms. Moreover, the government will continue to meet its external debt-service obligations in a timely manner. It has also made progress in collaborating with the Fund staff in improving the data that will be used for the debt sustainability analysis (DSA) in order to assess The Gambia's eligibility under the enhanced HIPC Initiative and looks forward to a favorable outcome. Meanwhile, it is expected that by August 2000 agreement will be reached on the debt owed to the Norwegian export guarantee agency arising from a government-guaranteed loan to the Senegambia Beach Hotel.

22. On May 8, the government convened a meeting on the poverty reduction strategy (PRS) and the PRSP process for donors and nongovernmental organizations (NGOs) in Banjul. The discussion focused on (a) the role of the World Bank, the Fund, donors, and NGOs in facilitating the PRSP process; (b) preparations for the various intermediate steps, such as the organization of participating fora and a donor roundtable meeting on the poverty reduction strategy; (c) the establishment of a task force (including government agencies, donors, representatives of the private sector, and NGOs) to oversee the work of the Strategy for Poverty Alleviation Coordination Office (SPACO) in coordinating the National Poverty Alleviation Program (NPAP) and the various aspects of the PRSP process; and (d) the reactivation of the High-Level Economic Coordinating Committee (HILEC) to oversee the NPAP. During the meeting, SPACO elaborated upon its ongoing efforts to update the NPAP based on a number of studies, including the first annual report on the Participatory Poverty Assessment (PPA). The PPA, in particular, should provide community action programs that are expected to be incorporated in the NPAP. The government has received favorable commitments from donors and NGOs to support its efforts in this area through December 2000. These contributions, along with output from other sources, should inform the interim PRSP, expected by the last quarter of 2000, while a full PRSP is planned for mid-2001. The updating of the comprehensive poverty reduction strategy will place a considerable burden on institutional capacity and necessitate further reforms to improve the delivery and monitoring of enhanced public services. In this regard, the government intends to intensify collaboration with donors, including the Fund, to ensure timely access to technical assistance.

23. The Gambia's economic and financial statistics remain in need of improvement, especially with regard to the major components of the balance of payments, the national accounts and prices, public investment, the public enterprise sector, and employment. The government has benefited from the recommendations of various recent Fund technical assistance missions to strengthen the compilation of economic data, including (a) the establishment of a balance of payments-unit in the central bank and the improved bank and financial sector reporting of balance of payments and monetary data; (b) the proposed rebasing of the national income accounts to a more recent date than the prevailing 1976/77, base year; (c) the proposed household expenditure survey to provide a basis for the compilation of a comprehensive price index; (d) the full implementation of ASYCUDA, inter alia, to improve balance of payments data compilation; and (e) the participation in the Fund's General Data Dissemination System (GDDS) and use of the framework it provides to improve the quality, timeliness, and transparency of data provision. The Gambia has also benefited from recent Fund and World Bank technical assistance to strengthen the external debt data. While these steps are likely to yield significant improvements, the government faces much greater challenges in meeting the broader quality data essential for successful pursuit of an enhanced poverty reduction strategy and it is determined to intensify efforts towards this endeavor.

24. To monitor policy implementation under the program, prior actions and a number of quantitative benchmarks have been set, the latter for end-June 2000, as well as quantitative performance criteria and benchmarks for end-September 2000 (see Table 1). The prior actions entail (a) the setting up of a monitoring program for the payment of government arrears to public enterprises and the observation of the end-June 2000 target leading to the elimination of such arrears by end-2000; (b) issuance of a government circular to curtail the creation of BTL accounts (which lack reporting and control measures) and to impose monitoring and control safeguards on existing BTL accounts and; (c) abolition of the preshipment inspection scheme. The proposed benchmarks will comprise the following: (a) a ceiling on net bank credit to the government; (b) a ceiling on net domestic assets of the central bank; (c) a ceiling on the basic primary balance of the central government, defined to exclude interest payments and foreign financial investment spending; (d) the nonaccumulation of external payments-arrears; (e) a minimum level of net official international reserves; (f) a limit on new nonconcessional external loans contracted or guaranteed by the government in the maturity ranges of 1-5 years and 1-12 years; and (g) a zero ceiling on the outstanding stock of short-term external public debt (excluding normal import-related credits). The nonaccumulation of external payments arrears will be applied on a continuous basis. Limits on items (a)-(g) above for end-September 2000 will serve as quantitative performance criteria. In addition, the reform measures indicated in Table 2 have been adopted as structural benchmarks for the second half of the year.

25. The government believes that the policies described in this letter are adequate to achieve the objectives of the economic and financial program during 2000 but will, if necessary, take any further measures deemed appropriate for this purpose. During the remaining period of the second annual PRGF arrangement, The Gambia will continue to consult with the Managing Director on the adoption of any measures that may become appropriate, at the initiative of the government or whenever the Managing Director requests such a consultation.

26. The government of The Gambia will provide the Fund with such information as the Fund requests in connection with the progress made in implementing the economic and financial policies and achieving the objectives of the program.

27. The government of The Gambia intends to make these understandings public and authorizes you to arrange for this document to be posted on the IMF website, supsequent to Board approval.

Yours sincerely,

Attachments

¹ By the decision of the IMF Executive Board in November 1999, the Enhanced Structural Adjustment Facility (ESAF) was replaced by the Poverty Reduction and Growth Facility (PRGF).
² A preshipment inspection scheme was introduced at the government's initiative on a six-months trial basis. In the event, BIVAC introduced the scheme without adequate preparation, and administrative delays and high charges (1.4 percent of c.i.f. value or a minimum of US$250, without exemptions) adversely affected imports and reexports.
³ In March 2000, the government awarded a one-month salary advance of D 19.8 million to civil servants for the Tabaski religious festival, which was not discussed with the staff in September 1999 for incorporation into the program. While this advance had an adverse impact on the end-March quantitative performance criteria, it should not significantly affect the 2000 budget outturn, as repayments are effected through automatic salary deductions and should be completed by end-September 2000.
⁴ The slow tourism recovery in 2000 also reflects concerns arising from civil disturbances during the period through April 2000.
⁵ The program had provided for an average 6 percent increase in the domestic petroleum product prices, while the 2000 budget raised these prices by an average of 20 percent. The budget also incorporated miscellaneous nontax measures, which accounted for the balance of the revenue in excess of those in the program target.
⁶ The other countries are Ghana, Guinea, Liberia, Nigeria, and Sierra Leone.