November 27, 2000

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler,

1.  The attached memorandum of economic and financial policies (MEFP) of the government of The Gambia describes the progress made in implementing the 1999/2000 program supported by the second annual arrangement (October-September) under the Poverty Reduction and Growth Facility (PRGF), which was approved by the Executive Board of the Fund on November 19, 1999. The MEFP also sets out the objectives and policies that the government intends to pursue during 2000/01 for the program for the third annual arrangement under the PRGF, and for the medium term. The government intends to make the contents of this letter, and those of the attached MEFP and Technical Memorandum of Understanding (TMU) available to the public and authorizes you to arrange for them to be posted on the IMF website, subsequent to Board approval.

2.  In support of these objectives and policies, the government of The Gambia hereby requests the third annual arrangement under the PRGF. Since the second annual arrangement expired on November 18, 2000, we request that the undisbursed amount from the third loan under the second annual arrangement equivalent to SDR 1.718 million be rephased and made available during the third annual arrangement. Thus, the third annual arrangement will be in an amount equivalent to SDR 10.305 million and the government requests the first disbursement in an amount equivalent to SDR 3.435 million following approval by the Fund's Executive Board. The government is also requesting the extension of the three-year commitment period from June 28, 2001 to end-December 2001. Moreover, in support of the economic program, the government will also be requesting support from the World Bank and from bilateral and multilateral donors and creditors.

3.  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.

4.  The government of The Gambia believes that the policies and measures set forth in the attached memorandum are adequate to achieve the objectives of the program, but it will take any further measures that may prove necessary to this end. During the period of the third annual PRGF arrangement, the government will consult with the Managing Director on the adoption of any measures that may be appropriate, at the initiative of The Gambia or whenever the Managing Director requests such a consultation. Moreover, after the period of the third annual arrangement and while The Gambia has outstanding financial obligations to the Fund arising from loans under that arrangement, The Gambia will consult with the Fund from time to time, at the initiative of the government or whenever the Managing Director requests consultation on The Gambia's economic and financial policies.

Sincerely yours,

Attachments: Memorandum on Economic and Financial Policies for 2000/01 and
Technical Memorandum of Understanding

THE GAMBIA

3.  In 1999, real GDP grew by 6.4 percent thanks to the robust performance of the tourism and agricultural sectors. The good harvest contributed to a moderation in end-of-period inflation to 1.8 percent compared with a target of 2 percent. The external current account deficit (excluding official transfers) remained at about 11½ percent of GDP in 1999 as the significant decline in imports, following the introduction of preshipment inspection,1 more than offset the impact of weaker export performance. Gross official reserves also fell short of the 1999 target. The Dalasi depreciated further in real effective terms by 2.3 percent in 1999, after a cumulative depreciation of 4.3 percent during 1997-98.

4.  Slippages occurred in the implementation of the 1999 budget; the deficit (excluding grants) was 4.8 percent of GDP, exceeding the revised target of 3.1 percent of GDP. This was mainly the result of a shortfall of 1.2 percent of GDP in customs duty receipts in the fourth quarter of 1999, but recurrent expenditure, including interest payments, also exceeded the program target. The budget deficit was financed in part by domestic borrowing, and outstanding government domestic debt rose by 1 percentage point of GDP to about 27 percent at end-1999.

5.  Given the fiscal slippages in 1999 and continued shortfalls in customs receipts through the first quarter of 2000, 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 government were not observed. However, the gross official reserve target for March 2000 was met, as the Central Bank limited its intervention in the foreign exchange market; gross official reserves increased to SDR 78 million (5¾ months of imports). Efforts by the Central Bank to mop up commercial banks' excess liquidity through open market operations were unsuccessful as banks' excess reserves increased to about 6 percent of the banks' total liabilities by end-March 2000. Interest rates on treasury bills declined from 14 percent in 1998 to 12.5 percent by end-1999. The health of the banking sector continued to improve, with nonperforming loans declining to 15 percent of total loans by end-December 1999 compared with 26 percent at the beginning of 1998. Banks have also been provisioning fully for nonperforming loans.

6.  During the first half of 2000, the government implemented several corrective measures designed to bring the fiscal deficit (excluding grants) in line with the program target. These included: (i) an 8 percent increase in diesel prices and an average 28 percent increase in the domestic duty-free prices of petroleum products, both effective February 2000; (ii) the removal of the preshipment inspection (PSI) scheme, effective July 1, 2000 (this is expected to result in a recovery of revenue during 2000 estimated at 0.6 percent of GDP, owing to a pick-up in imports and to collection of delayed duty payments); (iii) the collection of tax arrears from the proceeds of the sale of two hotels that have tax arrears; (iv) an undertaking of a comprehensive census of government arrears vis-à-vis public enterprises in February 2000, followed by steps to settle these arrears on a bilateral basis with public enterprises (by end-September, the government had paid a total of D 24 million to settle outstanding domestic arrears); (v) the issuance in May 2000 of a circular stopping further creation of below-the-line (BTL) accounts and imposing stringent reporting and control procedures on existing BTL accounts; and (vi) the completion by the Accountant General's Office (AGO) of the reconciliation of treasury accounts with those of the Central Bank. Moreover, by end-September, the government had fully collected (through automatic salary deductions) the D 19.8 million (0.4 percent of GDP) salary advances to civil servants that was granted in March 2000 for the Tabaski religious festival.

7.  The external and fiscal outturn through end-September reflect improved performance, despite a delay in the disbursement of external grants; as a result, all quantitative performance criteria for end-September 2000 were observed. However, a number of pressures have emerged that are likely to result in additional government recurrent expenditures during 2000, estimated at 0.9 percent of GDP. These comprise: (i) purchases of medicines and vehicles, (ii) travel expenses and allowances for expatriate health workers, (iii) higher-than-programmed maintenance costs, as a result of two consecutive years of inclement weather; and (iv) higher-than-projected domestic interest payments (0.6 percent of GDP) because of the delay in external grant disbursements. Consequently, the overall budget deficit for 2000 is now projected at about 3.5 percent of GDP, compared with the program target of 2.6 percent.

8.  During the last quarter of 2000, the government has applied a part of the European Union (EU) grant (1.1 percent of GDP, which was received in October) to make a first installment payment to settle the GGC property dispute (see below). The balance, together with some of the privatization receipts, will be applied to reduce the government domestic debt by an estimated 0.2 percent of GDP, and the government intends to adhere to the program target to eliminate arrears (0.5 percent of GDP) to the public enterprises.

9.  The outlook for the balance of 2000 reflects a number of positive developments. Increased agricultural acreage, together with better use of fertilizers and improved seeds as well as good rains, have led to an upward revision in real GDP growth to 5¼ percent. Inflation will remain low at 2¾ percent, notwithstanding the pass-through of the increased prices for domestic petroleum products. While the recovery in tourism is likely to be slow, the trade sector has performed well, reflecting the removal of the PSI in July and further reduction and simplification of the external tariff regime in August (see below). Moreover, the settlement of the dispute over the GGC property is likely to boost the share of marketed (and recorded) groundnut exports with the expected increased activity in The Gambia by international groundnut marketing companies (see below). However, domestic credit expansion and broad money growth are likely to exceed the program targets for end-December 2000, reflecting stronger than expected economic activity, especially in agriculture and the reexport trade. The recovery in the level of imports is expected to contribute to an increase in the external current account deficit (excluding official transfers) to about 12¼ percent of GDP.

10.  The government has also implemented a number of structural measures including: (i) the sale of the Atlantic Hotel in 1999 and the Trust Bank Building in February 2000 (part of the proceeds from these have been earmarked for repayment of domestic debt); and (ii) the maximum external tariff rate was lowered from 20 percent to 18 percent, effective August 2, 2000, including a reduction in the number of tariff bands from 18 to 3 and the import-weighted average tariff rate was reduced slightly to 12 percent. Of the remaining six structural benchmarks, two were met broadly on schedule. The implementation of ASYCUDA and the releasing of the national accounts to a later date were delayed for reasons beyond the control of the government and are now expected to be completed by April 2001. The restructuring and privatization of public enterprises has been delayed by technical problems, but progress has been made with supporting legislation (Table 12).

11.  In July 2000, the government approached Alimenta (the parent company of the GGC whose property was seized by the government in January 1999) seeking an out-of-court settlement. Agreement was reached in October under which the government agreed to pay a total of US$11.4 million to Alimenta to settle the uncontestable past obligations, the value of the seized property, as well as lost earnings. To this end, the government is committed to making three payments, the first of which was effected in November in the amount of US$3.5 million, while the second (about US$5.5 million) and third (about US$2.5 million) installments will be paid by end-June and end-July 2001, respectively.

12.  The government is in discussions with donors to seek additional financial assistance, likely in the context of the planned roundtable meeting before mid-2001, to settle these obligations on a timely basis. Following payment of the first installment and receipt of a bank guarantee, for the balance, Alimenta will withdraw the case from arbitration by the International Center for the settlement of Investment Disputes. Both the Denton Bridge and Kaur groundnut processing plants will revert to government ownership and will be accessible for use by new marketing firms entering into the Gambian market. The government expects that settlement of this dispute should go a long way to restoring investor confidence in the Gambian economy and intends to privatize the two processing plants as part of the planned marketing reforms.

III.  Objectives and Policies for 2001-2003

13.  The government intends to play a more active role in setting the economic objectives and policies for the medium-term, which will be informed by a substantially broadened participation of Gambians, especially the poor. To this end, the government has consulted extensively in reviewing its Strategy for Poverty Alleviation (SPA) that was launched in 1994. The government is formulating a new, more comprehensive SPA II (see below). In the meantime, it has completed an interim PRSP that has been forwarded to the Fund and the World Bank that provides the government's broad context of the objectives and policies for 2001-2003. Within this framework, the government's overall macroeconomic objectives are to (i) achieve real GDP growth of about 5.5 percent a year; (ii) contain inflation at about 2½ percent a year; (iii) contain the external current account deficit (excluding official transfers) to 10 percent of GDP by 2003; and (iv) maintain gross external reserves above 5¼ months of imports of goods and services. Consistent with these objectives, investment is projected to increase from an estimated 19¼ percent of GDP in 2000 to 21.5 percent by 2003.

IV.  The Program for 2000/2001

14.  The government intends to continue with efforts to enhance expenditure allocation to the social sectors and improve public finances through further reduction in the overall deficit (excluding grants) to about 3.5 percent of GDP in 2000 and contain it at that level in 2001. The budget for 2001 was approved by the cabinet in October and is now before parliament. The government has formulated a contingency budget for 2001 (about 1.5 percent of GDP) to be funded by the likely interim debt relief under the enhanced HIPC Initiative, which should provide added support for its efforts to reduce poverty. It also intends to implement reforms to strengthen revenue and the budgetary process. Total revenues are projected to increase slightly to about 20.3 percent of GDP, reflecting measures to improve tax administration through computerization and the full implementation of the automated system for customs data (ASYCUDA), and better coordination among the tax departments. In addition, the government has started to implement the recommendation of the Fund resident budget advisor to introduce regular reconciliation of the accounts of the revenue departments with those of the Central Bank and stiffen sanctions against the issue of bad checks so as to improve tax compliance.

15.  On the expenditure side, the aim is to reduce the level of primary recurrent expenditure from an estimated 13.3 percent of GDP in 2000, to about 13 percent in 2001 through stringent control on wages and other charges, excluding the additional outlays on poverty reduction measures that would be financed by the likely interim HIPC debt relief. The 2001 budget provides for stricter guidelines on promotions to enable increased hiring and training of agricultural and social sector workers, together with increased allocations for infrastructural maintenance and priority sectors such as health and education. Capital expenditure is slated to increase from an estimated 6½ percent of GDP in 2000 to 7 percent in 2001.

16.  The government will continue to implement measures to improve the timely reporting and control of expenditure, especially on the below-the-line (BTL) accounts, which until May 2000 were not subject to review by internal audit. These measures, together with the ongoing computerization of the office of the Accountant General, should also facilitate timely reconciliation of the treasury and central bank accounts and improve coordination of macroeconomic policies. The implementation of these reforms will be assisted by the IMF resident budget advisor.

17.  Further improvement in public financial transparency is expected from the planned significant reduction in the backlog in the auditing of the government accounts. To this end, the focus will be the public accounts for 1992-97, whose audit is pending because of missing records as a result of several commissions of inquiry that may have misplaced some documents. A resolution of this impasse needs to be agreed to permit progress with the preparation and audit of the accounts for subsequent years to eliminate the remaining backlog. Effective September 2000, the Department of State for Finance and Economic Affairs has introduced guidelines that link the release of budgetary allocations to the submission of better quality and timely annual budget proposals, so as to provide incentives to the rest of the public sector and facilitate overall budget preparations.

18.  Starting with fiscal year 2001, the government will establish a Poverty Reduction Fund (PRF), a comprehensive accounting framework for public expenditure targeted at poverty reduction, including expenditures funded from the interim debt relief under Enhanced HIPC Initiative and reduction in domestic interest payments (see below). The PRF is a virtual accounting framework and will be part of the regular budget and subject to all the regular budgetary procedures.

19.  The monetary program will aim at containing end-of-period inflation at about 2½ percent during 2000-01 and maintaining foreign reserves at about 5¼ months of imports. The growth in money supply is projected at 8½ percent by 2001 in line with nominal GDP growth, from about 15¾ percent in 2000. The programmed government net repayment to the banking sector, including divestiture proceeds, would allow private sector credit to grow by 11 percent in 2000 and 22 percent in 2001.

20.  Reforms in the financial sector will aim at improving the operation of the money market and enhance efficiency of the banking system. The government intends to speed up the implementation of the liquidity forecasting system following the technical assistance received from a Fund expert in May 2000. Steps will be taken to introduce a book-entry system by end-June 2001 to make the current, paper-intensive auction of securities more cost-effective and to facilitate tenders on a weekly, instead of bi-weekly basis, to improve liquidity management. To complete the transition to market-determined interest rates, effective October 2000, the Central Bank abolished the 5 percent floor on deposit interest rates.

21.  The Gambia has joined other regional countries in signing the "Accra Declaration" to establish a monetary zone by 2003. Discussions are continuing among the partner countries to work out the details of the specific measures that will need to be coordinated to achieve the various targets and objectives with regard to economic convergence.

22.  To reduce foreign exchange transactions costs, especially in the reexport trade sector, the Central Bank has been considering introducing foreign currency deposits (FCD), a move supported by private banks. However, in November 1999, an MAE technical expert, concluded that all but one of the five banks were then ill-equipped to handle this new product. Accordingly, the Central Bank has adopted a cautious time-table, allowing for training of bank staff and issuing guidelines, including foreign exchange exposure limits, before introducing FCDs by mid-2001. The Central Bank will step up efforts to improve the functioning of the foreign market, including through appropriate intervention.

23.  The Central Bank will continue to strengthen its regulatory and supervisory role in the financial sector through staff training and an improved legal framework with the expected parliamentary approval of the Financial Institutions and Insurance Bills before end-2000. It will also continue enforcing the requirement for banks to maintain full provisioning for nonperforming loans and maintain their capital ratios above the legal requirement of 8 percent. Of concern, are the recent problems in retiring a part of the groundnut crop financing loans for the 1999/2000-crop season. The Central Bank will work closely with banks to address this problem, including measures to improve management and the monitoring of activities in crop marketing. The settlement of the GGC dispute should also provide an opportunity to attract more experienced groundnut marketing companies into the country.

24.  To address the problem of the large stock of government domestic debt, (27 percent of GDP at end-1999), whose service absorbs more than 20 percent of government domestic revenue, the government has focused on efforts to reduce the fiscal deficit to sustainable levels. Furthermore, the government has used proceeds from privatization and a part of the European Union grant to reduce domestic debt and is actively discussing with the World Bank a program to further reduce the stock of domestic debt. Since a sizable part of this debt is held by commercial banks, it will be important to avoid an injection of liquidity in the economy. A solution may lie in establishing an offshore entity that would take over the debt, or through debt/equity swaps for selected public institutions.

25.  To speed up the modernization of business-related legislation and regulation, the government has introduced 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 in October 2000 and opening four regional courts. The Department of State for Justice recently increased its legal drafting staff to significantly relieve a severe bottleneck in this area. Following the cabinet approval in late 1999 of an interim procurement code to enhance transparency and efficiency in government purchases, the government is seeking technical assistance to complete the drafting of a new comprehensive code that meets the latest international standards. Currently the government is receiving technical assistance from the Commonwealth Secretariat to develop a competition policy, which, once approved, will provide a basis for a Competition Bill, that in turn will foster an environment that is conducive to competitive business activities. The Commonwealth Secretariat has also assisted in drafting a Regulatory Bill, currently under review by the Department of State for Justice, pending its submission to the cabinet by end-2000 and to parliament by early 2001. This omnibus bill will establish a multisectoral regulatory agency and a legal framework to accompany the proposed privatization of utilities and transport sectors, and regulation of the petroleum sector.

26.  Regarding the public enterprise sector, the Privatization Agency Bill, which was submitted to the cabinet in April 2000 and was submitted to parliament for approval in October 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 Understanding (MOU) 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 domestic payment arrears, and insist that all public enterprises fully meet their tax, debt service, and dividend obligations. With regard to GAMTEL, steps have been taken to separate its broadcasting activities from the telecommunications business by establishing an interim board for the former pending their establishment into a separate legal entity. The government is considering several options to privatize GAMTEL, which will be finalized after consultations with the World Bank.

27.  In agriculture, the institutional reforms in the marketing arrangements of the groundnut crop to replace the ad hoc arrangements during 1999/2000 remain a priority. To this end, the government has succeeded in reaching a settlement with Alimenta. Moreover, the government is continuing to work with the EU and the Agri-business Service Plan Association (ASPA, farmers and buyers) to improve the marketing of the groundnuts and encouraged ASPA to publicly announce producer prices early in the planting season; timely crop financing arrangements for local crop buyers will also be promoted. With EU assistance, the government will continue to provide improved seed varieties, fertilizer and credit facilities, the latter through the six-year US$10 million IFAD Rural Finance and Community Initiative. Significant support for the fishing sector will be provided by projects, worth some US$8 million, to build cold storage (at Tanji village) and artisanal facilities in The Gambia by 2001.

28.  The government is implementing a governance program adopted during the March 2000 Roundtable meeting in Banjul, including reforms to (i) strengthen the constitutional and electoral processes; (ii) strengthen the parliamentary structures and processes; (iii) promote civic education and enhance civil participation in the political process (iv) improve the legal and judicial processes; (v) decentralize and reform the local government system; and (vi) improve the management and transparency of public finances. A number of these reforms are being implemented in the context of the PRSP process as discussed in detail in the I-PRSP, which has been forwarded to the World Bank and the Fund.

29.   As part of implementing the PRGF-supported program, the government intends to put in place measures that comprise a structural performance criterion and structural benchmarks outlined in the attached Table 11.

30.  In the past year, the government has undertaken a participatory review of the lessons learned from the 1994 Strategy for Poverty Alleviation (SPA). The review included civil society organizations, local and central government, the Fund, the World Bank, and other donors. The government now intends to formulate a new more comprehensive strategy, the Strategy for Poverty Alleviation II (I-SPA II) learning from the experiences of SPA I. The interim SPA II has been submitted as the interim PRSP, thereby building on the strong existing country ownership developed during SPA I. The I-SPA II was prepared in consultation with the civil society organizations and local authorities. Regional workshops were convened (in early October) and a national workshop was conducted in Banjul in late October and was opened by H.E. The President Alhaji Yahya Jammeh. The workshops were complemented by the results of a Participatory Poverty Assessment (PPA), where the poor were directly consulted in a systematic way. The PPA is part of a three year project whose first annual report was issued in August 2000. The SPA II (PRSP) is expected to be finalized by end-2001 and will draw on the second annual PPA report and a donor Roundtable meeting planned by mid-2001, as well as updated sectoral and other studies (on gender, agriculture, education, and health issues), including public expenditure reviews that may also cover the Department of State for Local Government.

31.  In the meantime, the budget for 2001 provides for increased allocations for the social sectors and for development expenditure. The contingency budget has identified other key social measures that could be funded from the enhanced HIPC Initiative debt relief and possibly a reduction in domestic debt service. As indicated above, the government is in the process of establishing during 2001 a comprehensive accounting framework to monitor public resources that will be directed toward poverty reduction.

32.  The government is aware that 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, it intends to intensify collaboration with donors, including the Fund, to ensure timely access to technical assistance. In order to increase and/or maintain the available pool of skilled social sector workers, the government will undertake a study to review the possibility of extending the retirement age for civil servants from 55 to 60-62 for the Departments of State for Education and Health on a pilot basis.

33.  In the context of the economic policies detailed above, the external current account deficit (excluding official transfers) is projected to increase slightly to about 12 percent of GDP in 2000 then decline to about 12 percent in 2001. The volume of total exports is projected to increase by about 9 percent and 15 percent in 2000 and 2001 respectively, reflecting a recovery in groundnut production, fish exports, and the re-export trade and for 2001 in the tourism sector. It is also expected that high quality nuts will comprise a larger proportion of groundnut exports. Total import volumes are projected to grow by about 2 percent in 2000, largely because of the recovery in the re-export trade following the substantial reduction in the scope of preshipment inspection and the lowering of the external tariffs. For 2001, the growth of import volume is projected at 13 percent. In view of the modest recovery in groundnut prices, the terms of trade for domestic exports and imports are projected to remain virtually unchanged in 2000 and to improve slightly in 2001. Receipts from tourism are projected to decline by 3½ percent because of the low summer activity in 2000 and to recover by 18 percent in 2001 with the implementation of new investment projects. Assistance from donors is projected to increase and to cover the modest financing gap (including the pending payments to Alimenta) for 2001. This will permit an increase of gross official reserves by an amount equivalent to SDR 3.4 million in 2000 and by SDR 6 million in 2001 to a level equivalent to about 5¼ months of import cover.

34.  For 2002-03, import volumes are expected to grow at around 3 percent, while exports and tourism receipts are expected to grow more quickly as the improved investment climate attracts foreign investment in the agriculture and tourism sectors. As a result, the current account deficit (excluding grants) is expected to decline to 10 percent of GDP by 2003. In the capital account, project-related loans are expected to increase, while foreign direct investment inflows are expected to rebound from the low levels of 2000-01. Inflows will be sufficient to provide for a moderate increase in reserves to maintain a cover of 5¼ months of imports of goods and services.

35.  The government remains committed to a liberal trade and exchange system. To this end, it reduced the maximum external tariff and rationalized the tariff system. The government is discussing with the World Bank possible budgetary assistance to compensate for further reductions in the import weighted tariff rate. These measures, together with the virtual elimination of preshipment inspection in July and the pursuit of a market-based flexible exchange rate, should continue to benefit The Gambia's external competitiveness and facilitate the recovery in the important re-export trade.

36.  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 and World Bank staff in improving the external debt data that was used to assess The Gambia's eligibility under the enhanced HIPC Initiative. Meanwhile, it is expected that by early 2001, understandings will be reached on the debt owed to the Norwegian export guarantee agency arising from a government-guaranteed loan to the Senegambia Beach Hotel.

37.  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. Based on these recommendations, the government intends to implement a range of concrete actions in the period ahead, including (a) the establishment of a balance of payments unit in the Central Bank and improved bank and financial sector reporting of balance of payments and monetary data; (b) the rebasing of the national income accounts to 1998 in place of the prevailing base of 1976/77; (c) the conducting of a 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). 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 generating the broader quality data essential for a successful pursuit of an enhanced poverty reduction strategy and is determined to intensify efforts towards this endeavor.

V.  Program Monitoring and Review

38.  To monitor policy implementation under the program, a number of quantitative performance criteria and benchmarks for end-March 2001, a structural performance criterion, and quantitative benchmarks have been identified. The proposed quantitative performance criteria comprise the following (Table 10): (a) a ceiling on net bank credit to the central government; (b) a ceiling on net domestic assets of the Central Bank; (c) a floor on the basic primary balance of the central government, defined to exclude interest payments and foreign-financed investment spending; (d) the nonaccumulation of external payment arrears of the central government; (e) a floor on the minimum the official international reserves; (f) a ceiling on new nonconcessional external debt contracted or guaranteed by the public sector for maturities over 1 year; and (g) a zero ceiling on the outstanding stock of short-term external debt owed or contracted by the public sector (excluding normal import-related credits). The criterion on the nonaccumulation of external payments arrears applies on a continuous basis. Limits on items (a)-(g) above for end-March 2001 will serve as quantitative performance criteria; the benchmarks for end-June and end-September 2001 are indicative. Definitive targets for end-June and quantitative performance criteria for end-September 2001 will be set at the time of the first review. In addition, a number of measures have been identified as structural performance criteria and benchmarks Table 11). Furthermore, quarterly financial indicators will be established on total government revenue and the wage bill.

39.  In addition, policy implementation under the third annual PRGF arrangement will be assessed by two reviews. Disbursement of the second loan under the third annual PRGF arrangement will be conditional on the observance of the end-March 2001 performance criteria and the completion of the first review no later than July 1, 2001. The disbursement of the third loan will be subject to the observance of the end-September 2001 performance criteria and completion of the second review no later than December 1, 2001.

1.  This memorandum sets out the understandings between the Gambian authorities and staff of the International Monetary Fund (IMF) regarding the definitions of quantitative and structural performance criteria and benchmarks for the third annual arrangement under the Poverty Reduction and Growth Facility (PRGF), as well as the related reporting requirements. A table with the latest actual data for the monetary aggregates, as well as the preliminary estimates for July 2000 used for the derivation of the flows for the program period, is attached (Tables 6 and 7).

II.  Quantitative Performance Criteria: Definitions and Reporting Standards

2.  Definition. Net international reserves (NIR) are defined as reserve assets less liabilities to foreign residents of maturity of 1 year or less and less borrowing from the IMF. Gold holdings will be valued at U.S. dollar market prices, together with foreign currency holdings, at the bilateral exchange rates prevailing on July 31, 2000. The NIR shall be converted into dalasis at the exchange rate prevailing on July 31, 2000 (estimated at D 16.4993 per SDR). Reserve assets are defined for this purpose as external assets readily available to, or controlled by, the Central Bank of The Gambia (CBG). Pledged or otherwise encumbered reserves assets, including, but not limited to, reserves assets used as collateral or guarantee for third-party external liability, are to be excluded.

3.  Adjustment clauses. The floor on the net international reserves of the central bank will be adjusted upward (downward) by the amount of disbursed external budgetary support (comprising non-project-related loans and grants) at the end of each quarter in excess (in shortfall) of the programmed amounts in the budget (Table 10).

4.  Supporting material. Net international reserves of the central bank will be transmitted on a weekly basis within ten days of the end of each week; the net foreign assets of the commercial banks and external budgetary support will be transmitted on a monthly basis within six weeks of the end of each month.

5.  Definition. The net domestic assets of the central bank are defined as the difference between reserve money (the sum of currency outside banks and all deposits of the commercial banks, excluding deposits of the central government) and the net foreign assets of the central bank, converted at the foreign exchange rate specific in paragraph 2. Net foreign assets are defined as NIR plus other claims on and liabilities to foreign residents.

6.  Adjustment clauses. The ceiling on net domestic assets of the central bank will be adjusted downward (upward) by the amount of disbursed external budgetary support (comprising non-project-related loans and grants) at the end of each quarter in excess (in shortfall) of the programmed amounts in the budget (Table 10).

7.  Supporting material. Net domestic assets of the central bank will be transmitted on a monthly basis within four weeks of the end of each month.

8.  Definition. The net claims on the central government by the central bank are defined as claims on the central government by the central bank less deposits of the central government with the central bank.

9.  Adjustment clauses. The ceiling on net claims on the central government by the central bank will be adjusted downward (upward) by the amount of disbursed external budgetary support (comprising non-project-related loans and grants) at the end of each quarter in excess (in shortfall) of the programmed amounts in the central government budget (Table 10).

10.  Supporting material. Data on cumulative government revenue and expenditure, on the net central government position with the central bank, and on treasury bills outstanding, as well as, on data on external loans and grants to the government, will be transmitted on a monthly basis within six weeks of the end of each month.

11.  The basic primary balance is defined as government domestic revenue (tax and non-tax) minus total expenditure and net lending, excluding interest payments and externally financed capital expenditure.

12.  Definition. External payments arrears are defined as the stock of external arrears on loans contracted or guaranteed by the public sector (as defined below in paragraph 14), except on debts subject to rescheduling or a stock-of-debt operation.

13.  Supporting material. An accounting of nonreschedulable external arrears by creditor countries (if any), with detailed explanations, will be transmitted on a monthly basis within four weeks of the end of each month. This accounting would include, separately, arrears owed by the central government and other public sector entities to Paris Club creditors, non-Paris Club creditors, and other creditors.

14.  Definitions. In this memorandum, the public sector consists of the central and regional governments and other public agencies, including the Central Bank of The Gambia. This performance criterion is on the contacting or guaranteeing of external debt with original maturity of 1-12 years by the public sector.¹ Excluded from this performance criterion is debt with a grant element of at least 35 percent. The grant element is to be calculated by using currency-specific discount rates reported by the OECD (commercial interest reference rates): for maturities of less than 15 years, the grant element will be calculated based on six-month averages of commercial interest rates, and, for maturities longer than 15 years, the grant element will be calculated based on ten year averages.

15.  Supporting material. A comprehensive record, including a loan-by-loan accounting of all new concessional and nonconcessional debt contracted or guaranteed by the public sector, with detailed explanations, will be transmitted on a quarterly basis within four weeks of the end of each quarter. Nonconcessional external debt over one year includes financial leases and other instruments giving rise to external liabilities contingent or otherwise on concessional terms.

16.  This performance criterion is the outstanding stock of external debt with original maturity of less than one year owed or contracted by the public sector.² Excluded from this performance criterion are normal import-related credits.

17.  Supporting material. A comprehensive record of all external debt with original maturity of less than one year owed or contracted by the public sector, with detailed explanations, will be transmitted on a quarterly basis within four weeks of the end of each quarter.

III.  Prior Actions and quantitative performance criteria and benchmarks

18.  To monitor policy implementation under the program, a prior action and a number of quantitative benchmarks have been proposed, over the course of the program, as well as quantitative performance criteria and benchmarks for end-March 2001 (see Table 11). The prior action entails the approval of an appropriate budget for 2001 by the cabinet. The proposed quantitative performance criteria will comprise the following: (i) a ceiling on net bank credit to the central government; (ii) a ceiling on net domestic assets of the Central Bank of The Gambia; (iii) a floor on the basic primary balance of the central government, defined to exclude interest payments and foreign financed investment spending; (iv) the nonaccumulation of external payment arrears; (v) a floor on net official international reserves; (vi) a ceiling on new nonconcessional external loans contracted or guaranteed by the public sector in the maturity ranges of 1-5 years and 1-12 years; and (vii) a zero ceiling on the outstanding stock of short-term external debt owed or contracted by the public sector (excluding normal import-related credits). The criterion on the nonaccumulation of external payments arrears will be applied on a continuous basis. Limits on items (i)-(vii) above for end-March 2001 will serve as quantitative performance criteria. In addition, the reform measures indicated in Table 11 have been adopted as structural performance criteria and benchmarks for the program.

IV.  Structural Performance Criteria and Benchmarks

Lastly, the authorities will notify the African Department of the Fund of developments on structural performance criteria and benchmarks as soon as they occur. The authorities will provide the following documentation, according to dates in Table 11, elaborating steps taken to (i) establish and begin to implement a comprehensive accounting framework to monitor expenditure on poverty reduction, including expenditure funded from enhanced HIPC Initiative debt relief; (ii) initiate a register of establishment involved in balance of payments transactions and complete implementation of surveys of these establishments; (iii) extend the mandate of the external debt unit of the Department of State for Finance and Economic Affairs and have it start to also compile publicly guaranteed external debt, other external contingent liability of the government, and domestic debt; (iv) complete the full installation of the automated system for customs data (ASYCUDA II) and use it also to generate trade data reclassified by economic categories; (v) complete the rebasing of the national accounts to 1998; (vi) establish the regulatory framework, issue guidelines, and authorize commercial banks to establish foreign currency deposits; and (vii) introduce the book-entry system for treasury bill auctions and finalize plans for introducing longer-term treasury bills and government bonds.

V.  Other Elements of the Program

19.  Definition. The Gambian authorities shall establish a program-monitoring committee composed of senior officials from the Department of State for Finance and Economic Affairs (DOSFEA), CBG, and other relevant agencies. The committee shall be responsible for monitoring the performance of the program, recommending policy responses, informing the Fund regularly about the progress of the program, and transmitting the supporting materials necessary for the evaluation of performance criteria and benchmarks. The committee shall provide the Fund with a progress report on the program on a monthly basis within four weeks of the end of each month, using the latest available data.

VI.  Data Requirements

20.  Reporting standard. the monthly disaggregated consumer price index will be transmitted within four weeks of the end of each month.

21.  Reporting standard. A consolidated budget report of the central government comprising (i) the revenue data by each major item, including those collected by the Commissioner of Taxes and the Customs Department, as well as privatization's transfers to the budget; (ii) details of the recurrent and capital expenditure of the central government; (iii) details of budget financing (domestic and external), which will be transmitted on a monthly basis within six weeks of the end of each month; and (iv) details on government outstanding arrears outstanding, as of end-September 2000 and end-December 2000, including payments and other arrangements to discharge them (these data will be transmitted on a monthly basis within six weeks of the end of each quarter). The government's arrears amounted to D 26.9 million as of end-December 1999.

22.  Reporting standard. The balance sheet of the central bank and the consolidated balance sheets of the commercial banks will be transmitted on a monthly basis within six weeks of the end of each month. The results of the treasury bill auctions will be transmitted on a biweekly basis within five business days. The stocks of government securities, balances in the divestiture account, detailed information on interbank loans (terms, duration, and participating institutions), and interest rate developments will be transmitted on a monthly basis within two weeks of the end of each month.

23.  Reporting standard. The following standard will be adhered to: (i) the interbank market exchange rate, as the simple average of the daily-weighted average buying and selling rates, will be transmitted on a weekly basis within five business days of the end of the week; (ii) the results of foreign exchange auctions (on a weekly or more frequent basis) will be transmitted on a weekly basis within five business days of the end of each week; and (iii) balance of payments data will be transmitted on a quarterly basis within six weeks of the end of each quarter.