Report No. 5693-GM

The GambiaDevelopment Issues and Prospects

September 6, 1985

Western Africa Regional Office

FOR OFFICIAL USE ONLY

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Documesnt of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their cfificial duties. Its contents may not otherwisebe disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit: Dalasi (D)

Exchange Rates I/

Pre-February 1984 £1.00 = D 4.00After February 1984 £1.00 = D 5.00

Annual Average, D/US$(Fiscal Years)

1981 1.851982 2.131983 2.461984 3.081985 4.15

WEIGHTS AND MEASLRES EQUI-VALENTS

Metric British/US

1 meter 3.28 feet (ft)1 kilometer (km) = 0.62 mile (mi)1 square kilometer (km2 ) = 0.386 square mile (sq mi)I kilogram (kg) 2.2 pounds (lb)i metric ton (m ton) = 2,204 pounds (lb)

I liter (1) 0.22 UTS gallon (gal)

FISCAL YEAR

Government July 1 - June 30Gambia Produce MarketingBoard (GPMB): October I - September 30

1/ The Gambian Dalasi is pegged to the Pound Sterling. On February 23,1984, the dalasi underw-ent a 25 percent devaluation vis-a-vis thepound. In addition to this change, currency equivalents for thedalasi vis-a-vis the U.S. dollar over the period covered in thisreport have been heavily affected by movements of the pound againstthe U.S. dollar. All conversions to U.S. dollars or SDRs in thisreport have been made at the average exchange rate prevailing duringthe fiscal vear in question.

_ i _ BFOR OMCUL USE ONLY

PREFACE

The last economic memorandum on The Gambia wasissued in December 1980. 1/ This report examinesdevelopments since then and is based on the findings ofan economic mission which visited The Gambia in December1984. The members of the mission were Barbara Brims(mission chief and principal author), Moba-u.d-HassanOrdoubadi (assistant economist), Anne Harrison (economicstatistlcs), David Davis (tourism consultant) and HeidiMatbiesen (fisheries consultant). The report wasprocessed through all stages by Marie-France Sacks.

The draft memorandum was discussed with theGovernment in June 1985.

11 World Bank, The Gambia: Country Economic Memorandum,Report No. 3094-GM, December 23, 1980.

Thb4ocume ha a rticed dbudon ad qa be tued by recipin nl in the PefOnuM Ofthei officia dude Its cms may not oherwi be dimdo withot Wodd Dak au_kzado.

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TABLE OF CONTENTS

Page No.

ADDITIONAL SOURCES ............................................... v

ACRONYMS AID ABBIEVIAOONS .. vi

COUNTRY DATA SHEET .. vii

SUMMARY AND CONCLUSIONS ................................... lx

I. ECONOMIC STRUCTURE AND DEVELOPMENT CHALLENGES ............. 1

II. RECENT DfYVELOPHENTS IN PERSPECTIVE ........................ 5

A. Production and Exports: An Overview ................... 5B. Origins and Nature of the Crisis ....................... 8C. Government Adjustment Efforts, 1980-84 ................. 14D. Current Situation and Response ......................... 15E. The External Debt Problem .............................. 17

III. PUBLIC FINCES. .21

A. Evolution of Central Government Finances . . 211. The Period 1974/75-1979/80 .212. The Period 1980/81-1981/82 .213. The Period since 1982/83 .23

B. Major Problems and Implications ...-------------------- - 251. Emerging Revenue Constraints .252. Expenditure Pressures ........................ .... 273. Direct Cost Recovery ................................ 334. Economic Pricing .................................... 34

C. Conclusions ............................................ 35

IV. PUBLIC INVESTMENT .. 37

A. Past Investment .. 37

1. Sectoral Allocation ................................. 38

2. Absorptive Capacity ................................. 393. Recurrent Costs ..................................... 40

B. The 1984/85-1987/88 PIP. .. . . . 41

V. PUBLIC ENTERPRISES .. 44

A. Performance and Problems ............................... 44B. The Case of GPMB .. 46C. Implications for Action ................................ 49

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TABLE OF CONTENTS (Continued)

Page No.

VI. DEVELOPMENT POTENTIAL AND SECTORAL ISSUES ................. 51

A. Agriculture ............................................ 511. Past Performance .................................... 512. Growth Potential .................................... 543. Institutions ........................................ 59

B. Fisheries .............................................. 601. Resources and Production ............................ 602. Development Strategy and Required Actions ........... 62

C. Manufacturing Industry .. 631. Composition and Growth of Output .................... 632. Structure of Ownership .............................. 653. Potential and Issues ...................... 66

D. Tourism .. .................... 671. Trends ...................... 672. Institutions and Infrastructure . 693. Economic Impact and Prospects . 70

VII. PROSPECTS AND IMPLICATIONS .. 72

A. Background . 72

B. Recovery Scenario .. 731. Main Assumptions . 732. Results . 77

C. Conclusions . 81

D. Recommended Actions .. 821. Improving the Productivity of Public Investment . 822. Public Sector Reform . 833. Stimulating Growth and Employment in

Productive Sectors . 84

E. The Government Economic Recovery Program (ERP) . 87

F. The Role of Donors . 88

ANNEX I Comments on the Priorities of the 1984/85-1987/88 PIP . 89

ANNEX II List of Public Enterprises . 92

ANNEX III The Projections: A Methodological Note . 93

STATISTICAL APPENDIX . 102

map

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LIST OF TEXT TABLES

Page No.

Table 1: Composition of Exports .. 7

Table 2: Domestic and Reexport Trade . .10

Table 3: Selected Economic Indicators, 1982/83-1984185. 16

Table 4: Structure of External Debt . .18

Table 5: Projected Debt Service and Possible Relief fromRescheduling .19

Table 6: Snumary of Central GovLrnment Finances .22

Table 7: Projected and Actual Public Investment, by Sector .... 38

Table 8: Proposed PIP, and PIP with Modifications,1984/85-1987188 .43

Table 9: Financial Returns to Labor for Upland Crops,by Zone, in 1985 .54

Table 10: Value Added in Manufacturing, by Branch .. 64

Table 11: Tourist Arrivals, Bed Capacity, and HotelOccupancy Rates .68

Table 12: Recovery Scenario: Selected Indicators .78

Table 13: Projected External Financing Requirements .79

Table 14: Financing Gap under Alternative Scenario . .80

LIST OF CHARTS

Chart 1: GDP, Agriculture and Groundnuts . . 6

Chart 2: Consumer Price Index, 1975-85. 13

Chart 3: Composition of Recurrent Expenditure ................ . 28

Chart 4: Government Wages and Salaries .. 30

Chart 5: Groundaut Prices and Area under Cultivation1979-84 ........................................... 53

Chart 6: Projected World Prices for Groundauts andThe Gambia's Main Imports ....... ................... 75

ADDITIONAL SOURCES

WORLD BANK SECTOR REPORTS ON THE GAHBIA

- Agricultural Sector Issues Report (forthcoming)

- Financial Sector Review, Report No. 4766-GX, May 1985

- The Gambia: Issues and Options in the Energy Sector,Report No. 4743-QGK, November 1983

- Transport Sector Memorandum, Report No. 3973-GM,May 1983

- Education Sector Memorandum. Report No. 3734-GM,December 1981

- Basic Needs in The Gambia, Report No. 2656-GM,January 1980

CEM BACKGROUND PAPERS (white cover drafts)

- "The Tourism Sector," D. Davis, February 1985

_ "The Fisheries Sector," H. Mathiesen, February 1985

- 'A Review of Economic Statistics in The Gambia,"A. Harrison, February 1985

- "The Gambia: Health Sector Report," Dr. S. Goings,December 1984

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ACRONYMS AND ABBREVIATIONS

AfDB - African Development BankADB - Agricultural Development BankADP II - Second Agricultural Development ProjectBADEA - Arab Bank for Economic Development of AfricaCBG - Central Bank of The GambiaCCCE - Caisse Centrale de Cooperation Economique (France)CECAF - Committee for Eastern Central Atlantic FisheriesCFAF - Communaute Financiere Africaine FrancECOWAS - Economic Community of West African StatesEEC - European Economic CommunityEEZ - Exclusive Economic ZoneFAO - Food and Agricultural OrganizationFMC - Fish Marketing CorporationFFMC - Fish Processing and Marketing CorporationGCU - Gambia Cooperative UnionGCDB - Gambia Commercial and Development BankGNIC - Gambia National Insurance CorporationGPA - Gambia Port AuthorityGPMB - Gambia Produce Marketing BoardGUC - Gambia Utilities CorporationGRT - Gambia River Transport CompanyIBRD - International Bank for Reconstruction and DevelopmentIDA - International Development AssociationIMF - International Monetary FundKfW - Kreditanstalt fur WiederaufbauLIBOR - London Interbank Offer RateLIB - Livestock Marketing BoardMEPID - Ministry of Economic Planning and Industrial DevelopmentNIB - National Investment BoardNTC - National Trading CorporationNPE - National Partnership EnterpriseOECD - Organization for Economic Cooperation and DevelopmentODA - Official Development AssistanceOMVG x Organisation pour la mise en valeur du Fleuve GambiaOMVS - Organisation pour la mise en valeur du Fleuve SenegalOPEC - Organization of Oil Producing and Exporting CountriesRDP - Rural Development ProjectSSHFC - Social Security Housing and Finance CorporationSTABEX - Stabilization Fund for Exports (EEC)USAID - U.S. Agency for International DevelopmentWAMU - West Africa Monetary UnionWHO - World Health Organization

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C Y DATA - PE Gage I of 2

A_EA POPULATIO nEum (1985)

Total 113 Sq. K. 0.7 d1lliOc Caid-1984) 62 per sq. kmAgricultural 43 Sq. Km. Rate of C arwth 3.25 159 per sq. km agriacltural land

POPULATION HAAiC EALT.HCiude BIrth Rate (per 1,000) 49 per Physicia (1978) 12,310Crude Death Rate (per 1,000) 23 P tin per Hospital Bed S6Age 14 and Unde () 42 Infnt ortality Rote (per 1,000) 200Urban Populati () 30

INCOME DISTRIBInOK DISTRIBUIN OF LAD PSof National ITnco Not available

Hiujest QuttileLowest Quintile .

AC TO SAFE WATER (1980) ACCSS TO EETRICITYUrba(S) 86 S of PopulaCion - otal.

-aral (negigible)

N1T 1ON EDMCAETO (1980-82)~S~I: 7tnake as S of Requirents 86 Adult L a ReS 20Per Capita Protein Intake (grms/day) 51 Primary School EnrollmtS 56 *

GNP PER CAPITA in 1984 : SS260

CROSSNATIONAL PlODUCR IN 1984 c/ AIIAL RAZE OF GURTO M¶%. Contant Prices)

8sC min. S 1975-79 CAy.) 19798'. 1984

GLP at Narket Prices 188 100 3.8 1.9 -7.6Gross Dcamestic Inveset 31 16 21.8 -7.6 -32.6Gross National Savings -1 -1CUrrent Account Balance -32 -17Exports of Goods, NFS 111 59 31.5 -1.7 3.LZTmports of Goods, NFS -138 -73 .4 .2 -1.0

OUMTT EMMET AND PRODUGIIVI IN 1984 S/

Value Added dJ Labor Force V.A. Per WorkerUSS Mln. _ hous iad S 13SS

Agriclture 54 28 232 70 233 39Industry 25 13 30 9 833 141Services and Unallocated _l7 59 69 21 L.696 286

Total I Average 196 100 331 100 592 100

CENBtAL CDVERNM FINANCE D. Min. Percent of GOP_____c 1984 c/ 1979 C/

Current Receipts 128 21 23Current Expenditure 141 23 2LCurrenc Balance -13 -2 2Capital Expenditure 70 12 12Overall Balance -83 -14 -10

a/ Unless otberwise noted, social indicators refer to any year between1981 and 1983.

bI Per capita GNP estimate calculated by the same converslon technique asthe World Bank Atlas, 1985 edition.

c/ Fiscal year ending June 30th.11 At factor costs.

Not available

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Page 2 of 2CWU r DATA - MDE GANBIA

1980 1981 1982 1983 1981(millions of Dalasis, Outstanding End-June)

NKIEY. CREDl= AND PRICES

Money Supply 76 90 104 135 140Bank Credit to Government (net) 27 55 37 75 81Bnek Credit to Private Sector 91 98 105 131 143Bank Credit to Public entities 56 69 98 142 161

(Percentage or index Numbers)

Money as % of GDP 17.9 21.9 23.0 Z5.6 23.2General Price Index (1980-1984) 100.0 108.0 116.9 127.7 147.6

Annual Percentage Change in:

General Price Index 5.0 8.0 8.2 9.3 15.6Bnmk Credit to Goveriment (net) - 103.7 -32.7 102.7 -8.0Bank Credit to Private Sector 7.7 7.1 24.8 9.2Bank Credit to Public entities - 23.2 42.0 44.9 13.4

BALANCE OF PAYHENS MERHANDISE EXPORTS (1981-84 AVERAGE)

1982 1983 1984 (USS Min.) %'USS millions)

Exports of Goods, NF5 100.3 105.6 111.2 Groundnuts 22.5 85.9Imports of Goods, NES 142.3 131.7 138.0 Fish and Fish Products 2.1 8.0Resource Gap -42.0 -26.1 -26.8 All Other Goods 1.6 6.1

Domestic Exports l792 TOTnterest Payments andOther Factor Payments (net) -5.4 -9.1 -8.0 Reexports a/ 58.0Private Transfers (net) 3.0 2.6 2.4 Total rIercEandise exports 84.2

Balance on Current Account -44.3 -32.5 -32.4 EXIRA DEBT AS OF DECEMBER 31. 1984USS Mln.

Direct Investment .5 -. 1 .1Official Transfers and Grants 43.8 35.3 30.4 Public Debt, Incl. Guaranteed 263.3Public K & LI Borrowing (net) 30.1 13.5 18.5 Non-Guaranteed Private Debt

Disbursements 34.7 20.3 25.1 Total Outstanding and Disbursed 263.3Amortization 4.6 6.8 6.6

Other Capital (net) -46.9 -48.0 -28.3 DEBT SERVICE RATIO FOR 198. SChange in Official Reserves -16.8 -31.8 -18.2 Public Debt, Incl. Guaranteed 22.3

(net) (+ - increase) Non-Guaranteed Private DebtTotal Outstanding and Disbursed 22.3

Net Foreign Assets -65.9 -92.0 -106.5(end June)

Petroleum Imports 14.0 13.0 14.5 IBRDIIDA LENDN AS OF JUNE 30 H 1985USS KiLn.

Oustanding and Disbursed M-2Undisbursed 21.1Outstanding Incl. Undisbursed 321

RATE OF EXCHANGEAnnual Averages End Period

1981 1982 1983 1984 April19

U55 1.00 - Dalasis 1.97 2.29 2.64 3.58 4.02

a/ Includes staff estimates of unrecorded reexports.

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SUMMARY AND CONCLUSIONS

1. On February 18, 1985, the Republic of The Gambia observed itstwentieth anniversary. In two decades since Independence the country hasmade significant strides in building up an economic and socialinfrastructure - schools, roads, clinics, public administration - leftseriously und'rdeveloped during the colonial period. Today 50Z of Gambianchildren have access to primary schooling; the well-designed health caresystem is a model for other developing countries; and the country possessestransport and other basic infrastructure capab'e of supporting thedevelopment of The Gambia's productive potential for decades to come.

2. At the outset of its third decade, bowever, The Gambia'sachievements are both outweighed and threatened by the cumulative failureof the economy to achieve its growth potential and a worsening financialcrisis that is forcing both the Government and the donor community to focuson emergency stabilization rather than long-term development. Rapidpopulation growth - The Gambia's population more than doubled between 1965and 1985 - combined with the poor performance of the economy has meant anunremitting erosion of per capita income, which declined by 16% in realterms between 1975 and 1985. The estimated per capita income in 1984 ofUS$260 places The Gambia amo-_g the lowest income countries in the world.

3. In light of The Gambia's present crisis, this report has twoobjectives: (i) to identify the areas of economic potential that couldreverse The Gambia's decline over the medium term, and (ii) to examine themacroeconomic and sectoral policies required to achieve that potential. Itis intended to serve as a framework for discussions between the Governmentof The Gambia and the international aid community on a joint strategy forsustainable economic recovery. The report assumes that the donor communityw-ill maintain a relatively high level of financial support to The Gambiafor the forseeable future but, given the overall trend of declining netresource transfers to sub-Saharan Africa 1/, this continued support willdepend upon the Governmeat' s adoption of a comprehensive and seriousprogram of structural reform.

4. Chapters I and II of the report provide a summary review ofdevelopments in the economy since 1979 and the near-term outlook, andexamine the impact of the Government's recent adjustment efforts. TheGambian economy has deteriorated sharply over the past six years due to acombination of structural changes and cyclical factors. Underlying the-.Teak overall growth performance (1.8% per year in real terms) has been asignificant downward trend in groundnut production, which remains the majorsource of cash income for the almost two-thirds of the Gambian populationengaged in agriculture and continues to account for 85-90% of totaldomestic exports. Whereas the declines in groundnut production in 1980 and1981 had their origin in severe droughts and adverse terms of trade, those

1/ See Toward Sustained Development: A Joint Program of Action forSub-Saharan Africa, IBRD, August 1984.

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experienced since 1984 are largely attributable to internal factors, suchas the cumulative public sector deficits which have eroded the government'sability to set adequate producer prices or to ensure the efficient supplyof seeds and fertilizers.

5. Poor domestic export performance and persistent current accountdeficits in excess of foreign aid flows have placed growing pressure onthe overall balance of payments. The inability of the Central Bank since1981 to guarantee conversion of dalasis deposits iuto foreign exchange hasled to a rapid loss of confidence in the banking system by the tradingcommunity and substantial outflows of private capital. As a result, thecountry has accumulated growing arrears on external payments, which by thisyear equalled 35% of GDP. Despite mLcroeconomic adjustments attempted in1984 - including a 25% devaluation - the foreign exchange crisis hasbecome increasingly acute: supplies of fuel and other essential importsare severely disrupted; the country is unable to make debt servicepayments; and desperately scarce foreign exchange commands an increasingpremium on the parallel (black) market.

6. Three critical structural changes underlie the rapid economicdeterioration since 1979. Foremost among these is the dramatic expansionof the public sector over the past decade - a major cause of chronicfiscal imbalances, examined in Chapter III. Between 1976 and 1980, thecivil service doubled in size and total government expenditure increased bymore than 25% per year. The level of public sector employment is nowseriously out of line with the long-term potential of the productive base;today, the economy is spending almost twice as much on civil service wagesand salaries as on income to groundnut producers. This imbalance betweenthe overextended public sector and the productive, export-generatingactivities required to sustain it is the most profound source ofdisequilibrium in the Gambian economy at present and hence must be seen asthe starting point for structural adjustment.

7. The Gambia faces serious constraints to further revenue growthdue to the Government's heavy reliance on income from import duties. Atthe sam time, as explained in Chapter III, changes in the structure ofrecurrent expenditures since 1979/80 have substantially accentuated tLedownward inelasticity of expenditures. One such change is the rapidescalation of debt service obligations: from 5% of budget outlays in1980/81 to 28X in the current fiscal year. Therefore, to restore fiscalequilibrium, the emphasis over the next several years needs to be on theexpenditure side, although there is some scope for additional revenuemobilization through direct cost recovery (particularly from fees andcharges in the health sector) and economic pricing to eliminate consumersubsidies and to reduce operating losses of parastatals. The prime targetfor expenditure control should be the government wage bill. It isimportant, however, that this be achieved insofar as possible throughreductions in the number employed rather than continued compression of realwages, in order to safeguard the efficiency of public administration.

8. The second critical long-term problem is the failure ofsuccessive public investment programs to diversify the productive base andplace the economy on a higher growth path. The reasons for this. examined

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in Chapter IV, include: (i) overinvestment in transport relative to other,directly productive sectors; (ii) too rapid expansion of infrastructurein all sectors, exceeding the country's absorptive capacity; and (iii)inadeqxate attention to the recurrent cost, import cost and debt serviceimplications of investments and The Gambia's long-term capacity to sustainthese. The Government has prepared a public investment program for theperiod 1984/85-1987/88 which, although based on a sound overall strategy -a shift from new infrastructure investments to rehabilitation andmaintenance of existing capital assets - exceeds what is feasible in thecurrent economic climate. Modifications are needed, as itemized in thereport, to strengthen the program's focus on (i) quick gestation projectsproducing traded goods and (ii) sectoral rehabilitation projectsincorporating increased donor support for recurrent costs.

9. The accumulated external debt of The Gambia - the thirdconstraint to development - is now equivalent to about 200Z of GDP. Morethan 50% of this amount is owed to multilateral organizations and, thus, isnot eligible for rescheduling. Most of the associated debt servicerepresents a direct burden on public finances; although a significant sbareof the debt is government-guaranteed borrowing by parastatals, very few ofthese are in a position to service their debts. In addition, The Gambiahas accumulated significant arrears to both commercial and officialcreditors, including the INF. The estimated debt service ratio for 1985/86is on the order of 50% of domestic exports of goods and services, notcounting outstanding arrears.

10. Chapter V analyzes the failure of parastatal enterprises tocontribute to public savings, to provide efficient and expanding levels ofbasic services, and to contribute to the diversification and growth ofproductive sectors. The major problems are the Government's imposition ofnon-commercial objectives and inadequate tariff policies, both of whichcould be addressed by the use of 'performance contracts" to clarifygovernment-enterprise relations and establish an environment of managerialand financial accountability. The fundamental challenge, however, is toreconsider the role of these entities in the Gambian economy and to developan appropriate "privatization" strategy.

11. Chapters VI and VII focus on prospects for the future. The areasoffering the greatest potential are agriculture, fishing, manufacturing.and tourism. Agriculture, of course, is the key. Despite good qualitysoils and unexploited arable land, Gambian agricultural production hasstagnated over the past decade (0.8Z real growth p.a.). Although poorrainfall has played a role in this, it is clear that other factors havepredominated, specifically: (i) the inability of the deficit-riddenparastatal marketing board to offer farmers a groundnut price competitivewith the essentially free-market prilces paid by private traders forfoodcrops; and (ii) the poor organization and inefficiency of institutionswhich serve the sector, resulting in late delivery of seeds and otheressential inputs, high post-harvest losses due to inadequate storage andinefficient marketing, and excessive losses in processing. In addition,periodic government forgiveness of farmer loans has seriously underminedthe development of a financially sustainable system of agricultural credit.The Gambia's comparative advantage is highest in groundnuts and rainfed

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cereals; cotton and irrigated rice production are not economically viableat present. The imperative for the coming years is to restore groundnutproduction to 150,000/tons per year (the average a decade ago) from thecurrent depressed level of 75,000 tons. This will require, above all,improved price incentives.

12. Unquestionably, the problems outlined above are severe.Nevertheless, macroeconomic projections presented in Chapter VII indicatethat a program of adjustment could lead to higher output growth, a reversalof declining per capita incomes, and a restoration of balance of paymentsequilibrium. The elements of such a program (presented in detail in thechapter) would be: price incentives and institutional reforms to stimulateagricultural production and foster growth in other productive sectors,public finance reforms, improvements in the productivity of publicinvestment, and measures to increase the efficiency of parastatals. An"economic recovery scenario" based, inter alia, upon adoption of suchreforms was modelled. The results showed that a recovery of real GDP tothe 1983 level by 1990 and sustainable growth of about 3.22 per yearthereafter could be achieved with a modest increase in external assistance.External financing requirements were calculated after allowing fordisbursements from the existing project pipeline and assuming acontinuation of the current level of technical assistance and relatedgrants, but witbout assumptions regarding new aid or debt rescheduling. Inthis way, the need for fresh medium and long-term loans emerged clearlyfrom the projections as a residual. The gap so calculated (excluding anyamounts needed to liquidate current arrears) worked out to about US$20million in 1985/86. rising to US$37 million in 1989/90 and US$62 million in1994/95, in current dollars. 2/

13. The gap obtained from the projections can be financed in severalways - througb disbursements from fresh MLT commitments; through debtrescheduling; or tbrougb exceptional balance of payments financing, eitherdonor grant aid above and beyond the levels assumed or credit from the IMF.It should be underlined that the form and terms of the financing obtainedaffect dramatically the capital requirements for subsequent years. Iffinanced on non-concessional terms, accumulated interest on the gapfinancing from previous years leads to a total a-nual borrowing requirementof about US$170 million by 1995, i.e., more than US$100 million infinancing charges from previous years on top of the projected 1994/95 gapof US$62 million. If, however, it is financed through a combination ofdebt rescheduling and new commitments on highly concessional terms, the

2/ A sensitivity analysis found that less pessimistic assumptions aboutworld groundnut prices (the recovery scenario assumed a significantdeclining world price trend) substantially improved the results,implying 25% lower annual capital requirements. Under an alternativehypothesis in which the continued rapid growth of food crops hadsubstitution effects on groundnut production, the results worsenec 1slightly, and capital requirements were about 10% higher.

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overall financing requirement in 1995 is only US$70 million. If someportion of the gap is covered by exceptional grant aid - over and abovethe basic level of grants assumed in the projections - the cumulativeexternal capital requirements and The Gambia's long-term debt burden arereduced still further. Obviously, this last scenario strengthens thecountry's prospects for long-term, sustainable economic growth.

14. The results of the projections and the accompanying sensitivityanalysis suggest that the recovery scenario depicted is not unrealisticfrom the standpoint of either groundnut production and prices or externalassistance. Basically, over the next ten years, The Gambia's externalcapital requirements - other than technical assistance and associatedgrants - would average roughly US$45 million a year in current dollars,under the assumption of concessional aid flows. In constant 1985 dollars,the annual capital requirement would be on the order of US$30 million,which is not significantly different from the average annual ODA inflowover the 1980-83 period of US$26 million.

15. Over the past few months, the Gambian Government has demonstratedan increased awareness of the need for comprehensive econom-c policyadjustments and a determination to take firm measures to rehabilitate theeconomy. In June, the authorities established a special task force on theeconomy, charged with preparing a draft Economic Recovery Program (ERP).The draft ERP corresponds to a significant degree to the adjustment programrecommended in this report and covers measures to stimulate key productivesectors, especially agriculture (increased producer prices, liberalizationof input distribution, measures to streamline key institutions);comprehensive reforms of the public sector (restructuring of the civilservice, expenditure control, parapublic enterprise rehabilitation); reformof the exchange system; improved monetary and credit policies and financialsector rehabilitation; and revision of the public investment program toincrease its focus on production of tradeables and the rebabilitation ofexisting infrastructure. Staff of the Ministries of Finance and Planningand the Central Bank are continuing to elaborate the ERP and are developinga detailed matrix indicating the timing of proposed actions and thespecific agencies responsible for implementation. While the ERP requiresfurther refinement, it appears to provide a sound framework formacroeconomic and sectoral policies over the next 3-5 years.

16. Equally important as the definition of adjustment measures,however, is their implementation. The Government's promptness inannouncing several important measures outlined in the ERP during July is,therefore, encouraging. These included, inter alia: substantial increasesin producer prices, decontrol of rice imports and of the consumer riceprice, initiation of a comprehensive audit of government employment.financial restructuring of the government development bank, and eliminatonof fertilizer subsidies by the end of 1985.

17. Yet, as the medium-term projections developed for this reportclearly showed, even a comprehensive and sustained adjustment effort on thepart of the Government cannot alone restore positive per capita incomegrowth. A commitment on the part of The Gambia's donors is also required.It should be underlined that the effectiveness, and therefore size, of the

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assistance required is crucially dependent upon its timeliness. While TheGambia's development problems are fundamentally of a long-tern nature, theprospects for addressing them effectively wi}l depend to a significantextent upon the promptness and judiciousness of actions to deal with thepressing short-term problems.

I. ECONOMIC STRUCTURE AND DEVELOPMENT CHALLENGES

1.1 The Republic of The Gambia, with a population of roughly 700,000in 1983, is the smallest country on the African continent, occupying anarrow, 350 km long strip on botb banks of the Gambia River. The country,whose width does not exceed 50 km, is completely surrounded by the Republicof Senegal. The Gambia's unusual geograpby is an accident of politicalhistory: control of the river, the most navigable waterway in West Africa,was retained by the British for strategic reasons, while surroundingterritories were colonized by the French. As a consequence, The Gambiacuts across the settlements of about half a dozen different tribes, most ofwhich are also present in Senegal.

1.2 The Gambia has no important mineral or other natural resources,and the production base is, therefore, extremely narrow. About two-thirdsof the population is engaged in agriculture (subsistence farming, livestockraising and cultivatioa of groundnuts for export). Manufacturing activityis limited, with the principal activities being groundnut crushing, a fewsmall bakeries. a brewery, a tannery, two brick plants, a lime juice plant,and soap and plastics production. Fisbing resources exist but appear to besubstantially underexploited at present. The country is beavily dependenton trade, importing about half of its food supplies, all of its fuel andcapital gtoods and most other manufactured goods. Exports are highlyconcentrated, with a single commodity, groundnut products, accounting for85-90% of the value of domestic exports (as distinct from reexports).Other domestic exports include small amounts of fish, bides and skins,cotton, and palm kernels.

1.3 Outside of agriculture, the most important features of theeconomy are its tourism industry (tourist arrivals have doubled since 1982with the availability of new hotel capacity), and a well-developedcommercial sector, which for most of The Gambia's bistory has been involvedin entrepot trade, or the transshipment of imported food and consumer goodsto other countries in the region. This reexport trade expanded rapidly inthe 1970s, as The Gambia maintained its traditional open-trade policy,while neighboring countries increasingly resorted to higb tariffs andquotas to protect inefficient, import-substituting domestic industries.Although the vast majority of reexports are not officially recorded, it isestimated that some 40% of The Gambia's total goods imports are reexported,and that reexports are substantially higher than the value of The Gambia'sdomestic exports. As virtually all of the goods are sold forfully-convertible CFA francs, the reexport activity is undeniably animportant source of foreign exchange; however, in many respects the tradeis an "enclave" activity, with limited links to the domestic financialsystem. Yet the duties paid on imports that are subsequently reexportedconstitute a very important share of total government revenue.

1.4 The Gambia's small size, substantial trade openness and heavydependence upon a single export crop make it an inherently vulnerableeconomy, highly sensitive to shortfalls in agricultural production causedby drought and to changes in the terms of trade. Since 1975, the countryhas experienced one of the lowest GDP growth rates (1.8% per annum) of any

country in Africa not affected by war or civil strife. The estimated percapita income in 1984 of US$260 places The Gambia among the mostimpoverished countries in the world. The apparent acceleration ofpopulation growth over the past decade (to as much as 3.4% per year) 1/,means that per capita income in The Gambia bas declined by roughly 1.6% peryear, bringing about a 16Z erosion of average real welfare over the pastdecade. Life expectancy, at 42 years, is among the lowest in the world.Infant and child mortality rates remain tragically high: it is estimatedthat only one out of every three infants born in The Gambia survives to agefive. Maternal mortality rates are also among the highest recordedanywhere. Close to 80% of the population is illiterate; the shortage oftechnically and managerially skilled labor is severe; and the overallproductivity of the work force is seriously undermined by the highincidence of chronic infectious diseases and seasonal malnutrition.

1.5 A major issue for the coming decade is posed by The Gambia'spolitical relations with Senegal. An attempted coup in 1981 made itnecessary to invoke a mutual defense pact with Senegal for militaryassistance. In the aftermath, the two countries signed a far-reaching setof protocols establishing the Senegambia Confederation and committing themto expanded mutual defense and national security arrangements,establishment of joint foreign policy organs, and eventual integration ofthe two economies, including adoption of a coomon currency andbarmonization of tariffs and import duties. Because of the importance ofentrepot activity in the Gambian economy, the commitment to customsintegration, in particular, raises complex issues. Two bilateralnegotiating committees (one on customs, the other on monetary issues) havebeen established to work out specific proposals. While monetary issues arestill being discussed, progre-- has recently been made in the customsnegotiating committee, which 1. agreed on a proposal for establishment ofa Senegal/Gambia free trade area 2/ as a first step towards customsintegration; the proposal is now being considered by the two Governments.Background studies indicate that a free trade area could be modestlybeneficial for both countries but is nct expected to have a major impact onthe pattern of trade between the two. As it is expected to take some timeto implement a free trade area, it is assumed - for the purposes of mostof this report -- that full customs and monetary integration will not beachieved before the end of this decade.

1.6 The Gambia confronts obvious development challenges and, since1975, has attracted high levels of foreign assistance for successive public

1/ Until data from the 1983 census are more fully analyzed, it is notpossible to isolate the relative importance of in-migration and highfertility rates in The Gambia's rapid population growth; both areimportant.

2/ Under the proposal, all goods produced (defined as having a certainpercentage domestic value added) in either The Gambia or Senegal couldbe traded duty-free.

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investment programs aimed essentially at diversification of the economy andimprovement of average welfare. Total "official development assistance"(ODA) to The Gambia has averaged close to US$70 per capita for almost adecade - one of the highest levels in Africa and close to twice the levelof per capita aid to neighboring Senegal. During periods of severedrought, The Gambia has received even higher levels of emergency aid. Withthis foreign support to supplement low domestic savings, The Gambia hasbeen able to sustain a relatively high level of investment (more than 20%of GDP per annum) for almost a decade.

1.7 The failure of past investment to place the economy on a highergrowth path, the reasons for which are examined in Chapter IV, is one ofthe most serious aspects of the country's present situation. Moreover, theacceleration of The Gambia's investment effort in the mid-1970s inducedmajor changes in the structure of the economy. Foremost among these wasthe rapid growth of the public sector, largely because, given the country'slow level of development, investment was initially channeled into basiceconomic and social infrastructure (roads, schools, agricultural extensionstations, health clinics, etc.) and civil servants were rapidly recruitedto furnish new services. Between 1976 and 1980, established posts in thegovernment doubled and by 1981J82, the share of GDP absorbed by governmentexpenditures increased to 41Z. By 1983. the public sector (governmentadministration and public enterprises) accounted for two-thirds of totalmodern wage employment. In the absence of adjustment, the largerinfrastructure base and civil service will automatically dictate very highand growing levels of public expenditures in the future.

1.8 Heavy borrowing in recent years for investments and to sustaincurrent consumption has saddled The Gambia with an extraordinarily highlevel of debt relative to GDP (200%) and to its current capacity togenerate foreign exchange. This problem, which did not exist when thecountry launched its first major investment program a decade ago, placesthe country's current development efforts in a context of increasingbalance of payments pressure, with foreign obligations increasing farfaster than the likely near-term growth of Gambian exports orimport/substituting activities. For the immediate future, the country'sdebt service obligations will most likely have to be met by furtherexternal assistance -- in the form of rescheduling or exceptional balanceof payments support. For the medium term, the establishment and expansionof efficient foreign exchange earning (or saving) activities is imperative.

1.9 The rapid growth of the public sector has also attracted highurban migration, and population growth in the capital area (Banjul/KomboSt. Mary) between 1973 and 1983 swelled to 10% per annum. Banjul/Kombo St.Mary and periurban Brikama today hold 30% of the total population, asopposed to 15% a decade ago. These trends have created a highly dualisticeconomy over the past decade: average incomes in the urban modern sector,dominated by government wage earners, are approximately four times higherthan average rural incomes, and there are major disparities in consumptionpatterns, especially in the marginal propensity to consume imported goodsand in the demand for public services. The political strength of the urbanpopulation, moreover, is likely to make adoption of structural adjustmentmeasures difficult, particularly those which involve short-term consumption

cnts and sbifts in income distribution. Yet adjustment has becomeinevitable; the Gambian economy has become severely destabilized over thepast six years. and the continued growth of government consumption at ratessix to eigbt times higher than the growth of productiLve sectors cannot besustained.

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II. RECENT DEVELOPMENTS IN PERSPECTIVE

A. Production and Exports: An Overview

2.1 The Gambian economy remains beavily dependent upon agriculturewhicb, in 1984/85, accounted for 29Z of GDP, compared to 32Z in 1974/75.Year-to-year variations in agricultural production over this period,however, were substantial, especially for groundnuts, and explain most ofthe sizeable annual variations in overall GDP (Chart 1). Underlying thefluctuations there has been a significant downward trend in groundnutproduction over the past decade, which has been the major factor in thevery poor performance of the agricultural sector (0.8% per year real growthover the decade) despite encouraging increases in food crop production.The real growth of the overall economy averaged 1.8Z per year over thedecade. However, this is well below the growth of population and to asignificant extent reflects the rapid expansion of governmentadministration over the period. The only productive sectors to growconsistently were livestock, manufacturing. and tourism. According toavailable data, the livestock sector appears to have registered a veryimpressive growth of roughly 7% per year between 1974/75 and 1984/85.Manufacturing has also shown modest growth, particularly over the last fiveyears, despite the declines registered by other segments of industry, suchas public utilities and construction. However, by 1984/85, manufacturingstill accounted for only 9% of GDP.

2.2 After 1981/82, tourism grew rapidly, as new hotel capacity becamavailable and the sector rebounded from the depressed level experiencedafter contractual difficulties with major charter operators and thepolitical instability of 1981. By 1984/85, major botels were operating atcapacity during the high season. Even with the very impressive expans:Lmof tourist arrivals over the past three years, tourism still generates arelatively small share of GDP directly (value added from hotels andrestaurants was approximately 2% of GDP in 1984/85), but the totalcontribution of the sector (including indirect effects on artisasalproduction, transportation and commerce) is estimated to be 3-4 timeshigher.

2.3 The Gambia's net foreign exchange earnings derive from threebroad sources: "domestic" goods exports, wbich are at present exclusivelyagricultural products and largely groundnuts; profits on 'reexports" ofimported food items and consumer goods; and net receipts from tourism. Allthree categories are subject to substantial fluctuations from year to year.Out of a total of US$ 82 million in gross receipts from exports of goodsand nonfactor services in 1984/85, net receipts were estimated US$44million; of this, domestic exports accounted for roughly 50%, earnings onreexports represented 30% and tourism net receipts about 20% (Table 1). Itshould be recall,d, however, that a substantial element of estimation ispresent in all export and balance of payments statistics for The Gambia.

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CHART 1

GDP, Agriculture and Grounduuts(Value added at factor cost, 1976/77 prices)

/J/ GDP'W

M4 F- Agr Itu

50~~~~~~~~~Ao zoG

0- i ~~Groundnuts .0_ I I B I I i | f 1975 19 V 97 1978 1T 1801911 198Z 19M 194 15

I [.1Slb YSZ

So-arce: Appendix Table 2.2

due to the fact that reexports are on the order of US$40-60 million a yearbut at least two-thirds of them are unrecorded. 1/

2.4 The composition of merchandise exports remains highlyconcentrated, as can be seen from Table 1, with groundnut productscontinuing to represent 85-90Z of domestic exports. The dollar value of

Table 1: COMPOSIIION OF EXPORTS(% distribution)

Average1974/75-1979/80 1980181 1981/82 1982/83 1983184 1984/85

Groundnut Products 91 76 S1 90 92 85

shelled and unshelled 52 31 53 68 51 49

oil, unrefined 29 36 18 19 34 32meal and cake 0 8 10 3 7 4

Palm kernels and nuts 1 2 0 1 1 0

Fish and fisb preparation 6 15 11 5 4 7

Other Products 2 7 8 4 3 8

Total Domestic Exports 100 100 100 100 100 100

Memorandum Items (millions of USS)

Total exports of goods n.a. 81 82 85 88 61

Domestic Exports 44 22 20 29 34 19

Reexports a/ n.a. 59 62 56 54 42

Exports of Non-factor services n.a. 22 18 21 23 21

Total Exports (G&NFS) n.a. 103 100 106 1i 82

Total Imports (G&NFS) n.a. 175 142 132 138 115

a/ Includes mission estimates of unrecorded reexports.

Source: Central Statistics Department, MEPID, except for unrecorded reexports.

I/ The balance of payments statistics presented in this report weredeveloped by the mission after careful examination of trade data anddetailed estimates of domestic consumption; they are different fromprevious official government statistics, however, in that reexports,and therefore total goods exports, are substantially higher thanpreviously estimated.

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groundnut exports in recent years. however, has been well below the averagelevel of the mid-1970s, and reacbed a record low in 1984/85. Fish exportswere also disappointingly stagnant and well below The Gambia's fisheriespotential; to some extent, though, this is believed to reflectunderreporting. Livestock exports to Nigeria and Gabon grew over theper_od and may expand still further in coming years; however, sucb exportsstill represent less than 5Z of the total value of domestic experts.

2.5 Reexports fluctuated over the period, growing rapidly in 1979/80,dec ining dramatically in 1980/31, recovering in 1981/82 and increasingsubstantially again in 1983/84 (21%). The reasons for these sharpfluctuations are not clear. A number of different factors affect thereexport trade, including overall purchasing power in neighboring countries,changes in Gambian and neighboring countries' tariffs and/or importlicensing policies, and the degree of border patrolling by neighboringSenegal, through which all reexport goods must pass. Ten to twelvestaples 2/ dominate the trade, although the relative quantities of thesechange considerably from year to year. The most striking shift over the pastfew years has been the decline in textile reexports and the fast growth ofthe trade in sugar, which has tripled in volume since 1980/81. Althoughtrade in the above items is the most highly organized, other food items andbasic consumer goods imported into The Gambia also are believed to bereexported to a significant extent.

2.6 Gross foreign exchange receipts from tourism have expandedsteadily, by almost 50Z a year, with the rebound in tourist arrivals since1981/82. However, an estimated 50% of gross tourism receipts are used tofinance imported goods (including the import component of electricity usedby Oe hotels). Until the sector increases its linkages with localsuppliers of foods and other goods, net foreign exchange earnings fromtourism in The Gambia will remain lower than in other countries, where 60%or higher retention of gross foreign exchange receipts is the norm. Theseissues are discussed further in Chapter VI.

2.7 It sbould be underlined that the gains from tourism have beenoutweighed by the growing deficit on other services and income payments. Alarge part of this net deficit stems from interest payments on medium andlong-term debt, which have tripled over the last two years and areprojected to rise still faster in the future. The Gambia's seriousexternal debt problem is discussed later in this chapter.

B. Origins and Nature of the Crisis

2.8 The Gambia"s current financial crisis is the result ofdevelopments concerning the balance of payments, on the one hand, and themanagement of the public sector, on the other. Until the late 1970s, TheGambia was able to maintain broad balance of payments equilibrium in largepart thanks to the stabilizing role played by the public sector,

2/ Sugar, textiles, tomato paste, cigarettes and unmanufactured tobacco,used clothing, batteries, tea, flour, and corrugated iron sheets arethe most important items.

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specifically the central government and The Gambia Produce Marketing Board(GPKB), a parastatal organization. The Marketing Board, which hadgradually built up financial reserves from 1960 on, 3/ was able to maintainstable or moderately increasing prices to farmers over the period, therebyencouraging production for export. Althoughb producer prices were keptfairly stable, farm incomes were not, and income declines in years of badharvests tended to depress the demand for imports along with the fall inexports. The Government maintained a surplus on its current budget, which,along with foreign grants and highly concessional aid, was used to financea modest level of public investment. Even when a more ambitious level ofinvestment was initiated under the first development plan (1975/76-80/81),public sector surpluses initially financed an important share ofexpenditures (see Chapter V).

2.9 However, after 1979, the public sector shifted from a positionof overall surplus to significant and grow-ing deficits (discussed inChapter III) and this substantially exacerbated the inherent instability ofthe Gambian economy. The public sector no longer acted as a buffer againstclimatic factors or exogenous shocks but, instead, became an additionalsource of disequilibrium. Public sector employment and developmentexpenditures grew rapidly and contributed to large increases in imports(more than 30% a year between 1977 and 1980), due to the high importconsumption of the fast-growing urban population, especially public sectorwage earners, and the high (over 60%) import component of generalgovernment expenditures and development projects. These factors created a"structural deficit" in The Gambia's trade, as can be seen from Table 2;domestic exports, even in a good year, were increasingly unable to generateforeign exchange sufficient to cover the cost of domestic imports(principally fuel, foodstuffs, and capital goods). Moreover, as urbanpurchasing power was largely independent of agricultural production, thedemand for imports was no longer significantly curtailed in years ofreduced export earnings from groundnuts. At the same time, softening worldprices for groundnuts and the hike in world oil prices combined to cause aserious deterioration in The Gambia's terms of trade; by 1982183, the termsof trade index stood at one-third the level of 1976/77.

2.10 These factors were instrumental in producing substantial tradedeficits after 1979, which were the dominant factor in the severedeterioration of the overall current account from 1979 to 1982. After1981/82, a steady compression of imports is apparent wbich caused themerchandise trade balance to improve somewhat. However, the growingdeficit on the services account associated with escalating debt serviceobligations kept the current account substantially in deficit. After TheGambia's net foreign assets became negative in 1979 for the first time inthe country's history, recourse to foreign borrowing was heavy, with

3/ Total GPMB reserves grew from D3.4 million in 1962/63 to a peak ofD101.8 million 1977/78.

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Table 2: DOMESTIC AND REEXPORI TRADE(In millions of USS)

1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85

TOTAL IMPORTS (CIF) 112 162 149 I13 107 112 86of which:

Domestic imports 81 112 109 69 71 75 57of which:- fuel 11 14 21 14 13 15 13- capital goods 25 34 27 15 15 19 12

Goods for reexport a/ 31 50 40 44 36 37 29

TOTAL EXPORT5 (FOB) 82 112 81 82 85 89 61of which:

Domestic exports 35 36 22 20 29 34 19

Reexports a/ 47 76 59 62 56 54 42

DOMESTIC TRADE BALANCE -46 -7 -87 -49 -42 -41 -38

REEXPORT TRADE BALANCE +16 +26 +19 +18 +20 +17 +13

Memo Item

CURHRET ACCOUNT BALANCE -31 -49 -71 -44 -32 -32 -39

a/ Goods for reexport were estimated on the basis of information obtainedfrom private traders and from the Ministry of Finance and Trade whichsuggests that 80-85% of all imports of sugar, tobacco, tomato paste,textiles, used clothing, tea, batteries, corrugated iron sheets and flour,and 50% of all imports of soap, cement, manufactured garments, footwear,matches, milk products and washing blue are reexported. Some reexports ofrice were also estimated. The estimated value of reexports includes anallowance for duties paid on the imported items and a markup of about 20%.

Sources: Trade data from Central Statistics Department; mission estimatesof reexports.

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external public debt 4/ increasing from US$ 158 million in 1979 to US$ 312million by June 1985 (equal to 200Z of 1984/85 GDP).

2-11 Severe adjustments that might otherwise have been necessary wereto some extent averted by the volume of exceptional foreign aid madeavailable to The Gambia in response to the 1980-1981 droughts and the 1981political disturbance. Total net resource flows peaked at US$91 million in1980/81, almost double the average level of previous years; the inflow offoreign resources in botb 1979/80 and 1980/81 was close to 40% of TheGambia's GDP. As a result of this assistance (about half of which wasgrant aid), the country was able not only to maintain annual investment atmore than 25% of GDP but also to avoid a decline in consumption. Thelatter continued to grow in real terrs, increasing to over 1.00% of GDP in1980/81.

2.12 Although GDP growth recovered in 1981/82 and 1982/83 withimproved groundnut production, this concided with a sharp decline in worldprices and The Gambia was unable to recover balance of paymentsequilibrium. The improvement in the current account registered in 1981/82and 1982/83, moreover, was not as great as the decline in official aidflows, which quickly dropped back to more normal levels (roughly US$55-60million per year). As a result, the overall balance of payments came underincreasing pressure and, after 1980/81, the growing inability of theCentral Bank of The Gambia to guarantee conversion of dalasis deposits intoforeign exchange led to a rapid loss of confidence in the banking system bythe trading community. Since tnen, very little of the foreign exchange(maLJiy CFAF) earnings from the reexport trade have been made available tothe domestic banking system. Most of the estimated US$10-15 million peryear surplus on reexports has been transferred directly to foreign banks 5/or :hanneled into the active parallel foreign exchange market whichdeveloped abcut this time. By 1982/83, the private short-term capitalaccount (including errors and omissions) became highly negative, thusexacerbating the overall balance of payments deficits that have beenregistered in each of the last six years.

2.13 This evolution has had a number of effects. The holding ofreexport earnings outside the domestic banking system has cost the latter asubstantial foreign exchange float, which previously helped cushion some ofthe seasonality of foreign exchange earnings (deriving primarily from the

4/ Government and government-guaranteed medium and long-term debtoutstanding, including undisbursed portions, plus outstanding use ofIMF credit.

5/ The Central Bank of The Gambia permits the free transfer of foreignexchange by authorized foreign currency dealers, of which there areabout 10-15, both private individuals and commercial banks.Substantial currency transfers appear to be handled in this way, viatwice-weekly air shipments to London and Switzerland. There is amonthly reporting requirement to inform the Central Bank of all suchtransactions, but compliance, even by commercial banks, is weak. TheGovernment-owned GDCB is particularly behind in its reporting.

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January-June marketing of the groundnut crop). As a consequence, arrearson external payments bave accumulated rapidly since 1980, increasing frompractically nil to over US$54 million (equal to 35% of GDP) by June1985 6/. In a vicious cycle, the prevalence of arrears bas caused suppliersto increase their prices to cover expected delays in payment, furtherexacerbating the trade deficit.

2.14 By 1984, the situation had deteriorated to the point that theofficial exchange rate for the dalasis, which had been pegged at D 4.00 to1 pound sterling since 1974, could not be maintained. In February 1984,the Government implemented a 25% devaluation, to D 5.00 per 1 poundsterling. The principal initial effects of the action have been: (a) asignificant real compression of domestic imports, wbich declined by anestimated 27% from 1983/84 to 1984/85; (b) a substantial improvement in the1983/84 financial position of the GPMB and its ability to offerremunerative prices to groundnut producers; and (c) probable prevention ofa widening parallel market discount on the dalasis. Imports of :apital andmanufactured goods for domestic consumption appear to have beenparticularly squeezed - to a level wbich, in 1984/85, was 20% lower inreal terms than in 1979/80. Similarly, despite a significant expansion ofGUC power generation capacity over the past several years, 1984/85 fuelimports in real terms are almost 10% below the level of 1981/82.

2.15 Major benefits from devaluation can only be achieved ifaccompanied by policies of fiscal and monetary restraint and if gains fromdevaluation are passed on to exporters, or in The Gambia's case,agricultural producers. Crop prices were increased in June 1984, but the112 increase for groundnuts was considerably less than the amount of thedevaluation and not competitive with prices offered in neighboring Senegal,particularly in light of the black market premium on the CFAF. The GPMBattempted to remedy the situation with a further 24% increase in the

roundnut price in late January 1985, but by that time a substantial partof the crop had already been sold. The mission estimates that 10-15,000tons of groundnuts may have been sold in Senegal in 1984/85.

2.16 Restraint of total domestic liquidity is also essential in orderto reap benefits from devaluation and to coatrol inflation. In thisrespect, the January 1985 public sector wage ircrease, the 1984/85 budgetdeficit (excluding grants) of D 110 million, cc 17% of GDP, and the rapid(34%) growth of the money supply in 1984/85 all significantly underminedthe exchange adjustment. By June 1985, domestic inflation had acceleratedto 22% for the fiscal year, with a 16% increase in consumer prices of localitems and a 33Z increase in prices of imported items (Cbart 2). As aresult, by August 1985 the real effective excbange rate bad appreciatedsignificantly.

6/ The arrears accumulated prior to 1982/83 were associated with privatecommercial transactions, and there has been some reduction in thisstock over the past few years. Since 1983, however, the Governmenthas accumulated growing arrears on official debt service, which nowaccount for about 35Z of the total arrears outstanding.

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CHART 2

CONSUMER PRICE INDEX, 1975-85(PY 1.977=109)

Z30 -Increase in Conumer Prices,

zz YCalendar Tear 1984 (percent)

290 N

16,0 -

150 - /~

LocaI Imported Other130 Items Food Imports

120

110

90

I0

1975 1976 197? 1978 1979 191 1951 1. 193 1954 1955

FISCAL IY4aS

Change in Consumer Price Index (Z)

1976 1977 1978 1979 1980 1981 1982 1983 1984 1985

20.3 16.4 10.2 7.2 5.0 9.0 8.2 9.3 15.6 21.7

Source: Central Statistics Department

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C. Government Adjustment Efforts, 1980-84

2.17 Since the initial balance of payments crises of 1980 and 1981,the Government has made several attempts to adjust the economy, includingnegotiation of two Stand-by Arrangements with the IMF. In 1981, theGovernment received SDR 9 million in "compensatory financing" from the IIFand two Trust Fund loan disbursements. These were followed by a one-yearStand-by Arrangement of SDR 16.9 million adopted in February 1982. TheStand-by Program aimed at lowering the public sector deficit throughreductions in consumer subsidies and selective tax increases, andstimulating production through higher purchase prices for groundnuts andrice. Specific measures included a rise in petroleum prices to coverimport costs, increases in electricity tariffs, and the introduction ofpetroleum-related taxes both to discourage consumption and to increasefiscal revenues. To stimulate increased domestic savings, the program al1 oincluded a significant rise in interest rates on commercial bank depositsand the removal of interest rate ceilings on loans and overdrafts.

2.18 The 1982/83 Program achieved many of its desired effects. Thefiscal deficit was reduced from 21% to 14% of GDP although, significantly,this was entirely accomplished through increased taxes and a drastic (50Zin real terms) compression of expenditures on material and currentsupplies; Government wages and salaries actually increased by almost 10%under the program. There was a decline in petroleum imports, attributableto the price cnanges, and an increase in savings deposits, as desired.There also appears to have been a significant supply response to theproducer price increases; groundnut area planted rose to the highest levelever (120,000 ha) and production reached a record 150,000 tons.

2.19 Unfortunately, however, these results coincided with thedisastrous effects of a 43% decline in world groundnut prices in 1982. Thehigher price offered to farmers absorbed two-thirds of the realized exportprice, plunging the GPMB deeply into deficit and forcing it to borrowbeavily (D 67 million between June 1982 and June 1983) to cover itsoperating and marketing costs. As this level of borrowing could not beaccomodated by the commercial banks, the Government was forced to grant theGPMB direct access to Central Bank financing at the Government lending rateof 82. This greatly diminished the impact of the monetary measuresintroduced to curb commercial bank credit expansion, as the GPMB and thecentral government are the heaviest borrowers in the country, accountingfor more than half of total credit outstanding. Total liquidity increasedrapidly between June 1982 and 1983 as a result of a doubling in credit tothe Government needed to compensate for declining external aid flows, and adramatic (180%) increase in credit to the GPMB. Squeezed by this demand,credit to the private sector suffered.

2.20 Despite the recovery of world prices and groundnut exports in1983/84, the economic situation continued to deteriorate as a result ofpoor foodcrop production which necessitated heavy rice imports. Capitalflight and the continued decline of net aid in-lows put pressure on theoverall balance of payments and led the authorities to negotiate a furtherStand-by Arrangement in early 1984. Policy adjustments under the 15-month,SDR 12.8 million Stand-by Program (covering the period April 1984-July1985) included the 25% devaluation and producer price increases mentionedearlier (para. 2.15), plus stiff price increases to reduce subsidies on

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rice, fertilizers and public transport. Fiscal measures included increasesin import duties on petroleum products, tobacco products, alcoholicbeverages and automobiles, plus an increase in the basic import tax andexcise taxes. On the expenditure side, the Government adopted a hiringfreeze except for pressing emergencies. and limits on supplementaryappropriations. Monetary adjustments included further increases ininterest rates on deposits and guidelines to limit commercial bank creditto the private sector.

2.21 Although the Government implemented all of the agreed measures,it was not able to meet the June 1984 targets for reductions in externalarrears and net credit to the Government, the GPMB, and the private sector.As a result, after one disbursement of SDR 2.63 million, the program waseffectively suspended. (The Government has recently taken steps to settleits accumulated arrears to the IMF and to initiate discussion of a possiblenew Stand-by program.)

D. Current Situation and Response

2.22 The macroeconomic adjustments undertaken in early 1984constituted a notable effort by the Government to redress The Gambia'sexternal and fiscal deficits. However, the exceptionally low (45,000 tonsmarketed) 1984/85 groundnut crop caused real GDP to decline by 9% andseriously exacerbated the acute shortage of foreign exchange.Significantly, although rainfall was uneven in some parts of the country,the low groundnut crop appears to have been less the result of drougbt thanof inadequate price incentives and institutional weaknesses, wbich continueto have a crippling effect on the economy. According to the Ministry ofAgriculture, several thousand hectares were prepared for groundnutcultivation but could not be planted due to the late distribution of seeds.Pest infestation was also unusually severe, in part associated with thelack of fuel and pesticides for the Ministry's crop protection services. Asa result, many of the potential benefits of the 1984 devaluation as well asof the high world groundnut prices were not realized, demonstrating thecritical importance of effective institutions as well as price incentivesfor economic recovery.

2.23 In recent months, The Gambia's situation has become increasinglyserious, as can be seen from the macroeconomic indicators in Table 3.Record low groundnut export revenues (US$16 million) and increasingexternal debt service due (US$18 million, including IMF charges andrepurchases) in 1984/85 have produced a further deterioration of thecurrent account deficit: from 17% of GDP in 1983/84 to 25% in 1984/85. Asnet capital inflows were not sufficient to finance this deficit, additionalexternal arrears accumulated. The acuteness of The Gambia's presentsituation can scarcely be exaggerated: supplies of fuel and otheressential imports are severely disrupted; the country is unable to make

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Table 3: SELECTED ECONOMIC IINDICATORS, 1982183-1984/85

1982/83 1983/84 1984/85GDP at market prices

(D million at current prices) 527.6 603.7 646.5(real Z increase over previousyear) 14.7 -7.5 -8.7

Groundnut production (tons) 151,000 113,000 75,000 a/Marketed output (tons) 127,000 93,000 45,000

Domestic Exports (USS million) 28.4 34.5 18.6

Current Account Deficit(USS millions) -32.5 -32.4 -39.0(% of GDP) 15% 17% 25%

Debt Service Ratio b/ 25% 32Z 49%

Stock of External Arrears,end of period c/

CUS$ million) 32.1 46.1 54.1(% of GDP) 15% 24% 35%

Overall Budgetary Deficit (excl. grants)(D million) -73.5 -83.3 -109.9(Z of GDP) 14% 14% 17%

Growth of Domestic Credit 45% IJ% 3%- to Government (net) 102% 7% 18%- to GPMB 182Z 8% -17%- to other parastatals and

private sector 2% 13% 9%

Growth of Money Supply 30% 4% 342

Inflation Rate 9.3% 15.6% 21.7%

Average Exchange Rate(D per US$) 2.46 3.08 4.15

a/ Mission estimate of 1984/85 production. Government estimates rangefrom 65,000 tons to 92,000 tons.

b/ Ratio of total debt service (on medium and long term debt, short termdebt, and IMF repurchases and charges) to domestic exports of goodsand non-factor services.

c/ Excluding recurring arrears to the IMF, which, as of September 7,1985, totalled SDR 4.4 million.

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debt service payments; and desperately scarce foreign exchange commands anincreasing premium on the parallel (black) market. 7/

2.24 Against this backdrop, the Government in recent months appears tohave become convinced of the need for a comprehensive set of macroeconomicpolicy adjustments. In June 1985, it moved quiecly to begin designing, inconsultation witb the World Bank, an Economic Recovery Program (ERP),intended to establisb the broad outlines of macroeconomic and sectoralpolicies for the next several years. In July, an IMF mission visited TheGambia and agreed with the Government on many of the specific policyadjustments needed, including a fundamental reform of the exchange system.All of these measures are discussed in Chapter VII.

E. The External Debt Problem

2.25 The Gambia's current foreign exchange crisis is linked in severalimportant ways to the size and structure of the country' s external debt.Obviously, the sheer size of the current stock of medium and long-termpublic debt (US$312 million, or 200Z of GDP) bas serious implications forthe future balance of payments. In addition, there are several I mediateissues:

2.26 Structure. As can be seen from Table 4, more than 50% of theGambia's debt outstanding is owed to multilateral organizations and, thus,is not eligible for rescheduling. However, most of this debt is on bighlyconcessional terms and, except for IMF credit (discussed below), does notat present constitute a large debt service burden - only 14Z of scheduleddebt service in 1985/86. The amounts due to multilateral creditors willincrease steadily in coming years.

2.27 Only a small share (11%) of the Gambia's debt was torrowed fromprivate creditors (mostly for hotel construction over the period 1979-82),but the much harder terms of this debt has made it (along with payments tothe IMF) the principal factor in the rapid increase of debt serviceobligations. This debt and debt to bilateral donors are eligible forrescheduling and, as can be seen from Table 5, some short-term debt reliefcould be obtained from this source over the next several years. Under theassumptions described in Table 5, total debt service payments could bereduced by US$ 5-8 million a year for the next five years, roughly 30X ofthe amounts due. Although far from a panacea, a rescheduling of 1985/86debt service and arrears on 1983/84 and 1984/85 payments clearly needs tobe pursued.

7/ In December 1984, the parallel excbange rate for CFAF was reported asapproximately 15% above the official rate; parallel rates for poundsterling and U.S. dollars appeared to be slightly higher, 20% overofficial rates. By June 1985, the premium on foreign currency of alltypes had increased to 30-35%; by August 1985, the spread was close to50%.

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Table 4: STRUCTURE OF EXTERNAL DEBT a/(as of end June 1985)

Percent ofUS$ million Total

A. Suppliers credit b/ 12.2 4

B. Financial institutions 22.2 7

C. Multilateral loans c/ 171.7 55

D. Bilateral loans 80.8 26of which - Paris Club countries 18.5

- OPEC countries 47.2- oth::i 15.2

E. TOTAL, MLT DEBT 286.9 92

F. DMF, use of credit outstanding 24.8 8

TOTAL, including DMF 311.7 100

a/ Medium and long-term (MLT) debt, including undisbursed, and outstandinguse of Fund Credit (line F). Table does not include short-term debt (lessthan one year maturity).

bI Norway only.

cI Includes IMF Trust Fund.

Sources: World Bank DRS, IMF. and mission estimates.

2.28 Arrears to the IMF. The Gambia accumulated subtantial arrears tothe Fund during 1985 and will have great difficulty in meeting the sizeablepayments (roughly SDR 1 million per month) due in 1985186 and most of1986/87. The existence of arrears at present is the major issue precludingapproval of a new Standby arrangement. The problem is double-edged becausein order to obtain any debt relief from official rescbeduling as discussedabove, the country must have an ongoing Standby Program. It is difficultto see bow this conundrum can be resolved without exceptional externalassistance.

2.29 Short-term debt. In addition to arrears on public debt serviceand to the IMF, The Gambia has a stock.of approximately US$12 million incommercial arrears, and about US$23 million in Central Bank arrears to theWest Africa Clearing House and several other lenders. Neither of these iscoanted in the debt service projections above; however, a schedule fortheir progressive liquidation obviously will have to be developed.

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Table 5: PROJECTED DEBT SERVICE AND POSSIBLERELIEF FROM RESCHEDULING a/

A. Debt Service Due 1985186 1986/87 1987188 1988/89 1989190

Maltilateral, non reschedulable 4.0 5.4 6.2 7.0 7.3

IMF (Charges and Repurchases) 13.7 8.5 6.3 4.6 1.7

Other, reschedulable 9.8 12.1 l1.4 I1.2 12.4Principal 5.2 8.0 7.8 7.9 9.6Interest 4.5 4.1 3.7 3.2 2.8

Total 27.5 26.0 23.9 22.8 21.4

B. Debt Service after Rescheduling

Multilateral, non rescheduLable 4.0 5.4 6.2 7.0 7.3

IMP (Charges and Repurchases) 13.7 8.5 6.3 4.6 1.7

Other, Reschedulable 3.7 4.4 4.8 5.3 5.8

TOTAL TO BE PAID 21.4 18.3 17.3 16.9 14.8

C. DEBT RELIEF (A-B) 6.1 7.7 6.6 5.9 6.6

a/ Estimates are based on assumed annual rescheduling, beginning in1985/86, of OOZ of the maturing principal and 33.3% of the interestpayments due to three classes of creditors: (a) all financialinstitutions (London Club), (b) Paris Club countries, and (c) otherbilateral creditors (China, Kuwait, Saudi Arabia, U.A.E.). Therescheduling terms assumed are ten years maturity with five years ofgrace for the rescbeduled amounts, and moratorium interest of 82. Acash down payment of 2.5% of the consolidation amount in each of thefirst two years is also assumed. Although these rescheduling terms aresimilar to recent Paris Club agreements with otber countries, itcannot be assumed that actual agreements with creditors would offerthis degree of relief.

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2.30 Public finance impact. Altbough a significant share of theGambia's external public debt is government-guaranteed borrowing byparastatals and, in some cases, private parties, very few of these atpresent are in a position to service their debts directly. As a result,more than 85Z of scheduled external debt service payments are made directlyfrom the government budget. The rapid escalation of debt serviceobligations (from 5X of total recurrent outlays in 1981/82 to 28% thisyear) bas put severe pressure on other recurrent expenditure items. Theimplications of this are discussed in Chapter III.

2.31 The brief exposition in this section leads to two finalobservations. First, given the proportion of The Gambia's debt that is notreschedulable, it is clear that gross disbursements from multilateraldonore will have to expand significantly in coming years in order tomaintain the - - flow of resources to The Gambia. Indeed, it is theincrease in amortization which has accounted for most of the decline in netaid flows since 1982; gross MLT commitments have rew'iined relativelyconstant. Second, at the ssme time that higher MLT disbursements arecalled for, in the current situation, it is obvious that new borrowingsmust be on highly concessional terms. The grant element in new MLTcommitments to The Gambia has been on the order of 50% for the last twoyears; donors shouald, to the extent possible, seek to soften the terms ofassistance even further.

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III. PUBLIC FINANCES

3.1 As noted earlier, the critical structural change in the Gambianeconomy over the past decade has been the dramatic expansion of the publicsector. The next three chapters examine the evolution of public finances,the issues wbich have emerged, and their implications for The Gambia. Thecurrent chapter focuses on the growth, management and financing of thecentral government administration. The next chapter examines the impact ofpast and current public investment programs. The performance of publicenterprises is discussed in Chapter V.

A. Evolution of Central Government Finances

3.2 Over the past decade, three phases in the evolution of centralgovernment finances may be distinguished: (i) 1974/75 to 1979/80; (ii)1980/81 to 1981/82; and (iii) 1982/83 to the present.

1. The Period 1974175 - 1979/80

3.3 This was a period of rapid and uninterrupted expansion, as TheGambia's relatively low levels of taxation (wbich averaged 10 of GDP priorto 1974/75) gave way to steady increases in tax rates as well as theintroduction of new taxes. Rapidly expanding revenues supported anextraordinary growth of central government expenditure; between 1974/75 and1979/80, current outlays increased by 22Z a year and public investmentexpanded even more rapidly, by 37% a year (Table 6). Expenditure growth wasalmost exclusively related to the expansion of technical ministries directlyinvolved in development, particularly Agriculture, Education, Health andPublic Works; general adc'inistration (Presidency, Finance. Foreign Affairs,etc.) declined as a sbare of total recurrent expenditures over this period.The overall growth in outlays was spearheaded by the rapid expansion of thecivil service. For much of the period, public sector surpluses (on therecurrent budget and savings mobilized from the public enterprises,particularly the GPMB) were used to help finance public investment, coveringroughly 20% of annual capital expenditures.

2. The Period 1980/81-1981/82

3.4 The above pattern changed abruptly with the severe droughts of1980 and 1981. Government revenues plunged for the first time in a decade,because of the fall in groundnut exports and a slowdown of the reexporttrade associated with depressed purchasing power in drought-affectedneighboring countries. The Government sharply curtailed the growth ofrecurrent expenditures in 1980/81, but investment was maintained and theoverall fiscal deficit swelled to 19% of GDP. To cover the deficit, theGovernment increased foreign borrowing; net foreign loan disbursements, manyfrom short-term commercial credits at "LIBOR plus" rates of interest,doubled in 1980/81 and financed about two-thirds of the overall fiscaldeficit.

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Table 6: SULMR OF CENTRAL GOVERNET FINANCES(in millions of current dalasis)

Est.

1974175 1979/80 1980,81 1981/82 1982/83 1983184 1984185

Current revenues 32.4 9b.2 80.2 91.4 105.6 127.6 147.8

Current expenditures a/ 33.1 87.7 89.3 116.1 112.6 140.6 147.0 b/

Current surplus/deficit -0.7 +10.5 -9.1 -24.7 -7.0 -13.0 +0.8

Development expenditures 11.1 53.1 69.8 68.8 66.5 cJ 70.3 110.7

Net lending -0.7 +2.0 -0.5 - - - -

Total expenditures 43.5 142.8 158.6 184.9 179.1 210.9 257.7

Overall surplus/deficit -31.1 -44.6 -78.4 -93.5 -73.5 -83.3 -109.9

FinancingForeign 7.4 40.6 74.4 91.5 48.1 47.2 71.6

Loans (net) 5.3 29.8 50.1 34.7 31.2 21.2 40.3Grants 2.1 10.8 24.3 56.8 16.9 26.0 31.3

Domestic 3.7 4.0 4.1 2.1 25.4 15.6 12.6BankinRg system 1.6 -0.3 7.3 -1.7 23.7 5.4 5.7Non-bank dJ 2.1 14.3 3.2 3.8 1.7 10.2 6.9

Increase in Arrears - - - - - 20.5 25.7

Memo ItemsTotal Public Debt Service e/ 0.6 4.7 4.3 8.5 22.8 26.4 43.5Total expenditure/GDP (%) 20 35 38 41 34 35 40Overall deficit/GDP (%) 5 11 19 21 14 14 17

GDP, currentmarket prices 221.1 425.0 411.6 451.4 527.6 603.7 646.5

a/ Includes interest payments on a comuitment basis. Payments not actually made appear in item marked,Increase in Arrears.

b/ Includes D 3.9 million in expenditure which could not be allocated between current and developmentbudgets.

c| 1982/83 development expenditure reported by Accountant General is D 43.8 million. The estimate ofD 66.5 million is taken from the IDF.

d/ Mainly from parastatals, such as GPMI, SSHFC, etc.e/ As presented in the Gambian budget format, including interest and amortization. In table above,

only interest is included in current expenditures; amortization is presented under net loan financing.

Sources: Appendix Table 5.1, Government of The Gambia budgets and IMF.

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3.5 Public finance performance was mixed in 1981/82. Despite a secondpoor grounduut harvest, the Government made some progress in restoringrevenues. However, in the aftermath of the July 1981 political disturbance,the government wage bIll shot up more than 202 showing the effects ofincreased security expenditures plus a 13% across-the-board raise in civilservice wages and salaries; this pushed expenditures far above budgetaryrevenues. The Government held investment spending constant (in nominalterms), but the overall fiscal deficit was still massive, rising to 21Z ofGDP. Commercial credit dried up quickly after the political instability,but the country was able to attract an exceptional inflow of foreign grantaid which financed 60% of the 1981/82 overall fiscal deficit.

3. The Period since 1982/83

3.6 The years 1980/81 and 1981/82 were clearly exceptional in twomajor respects: (i) the magnitude of the fiscal disequilibria, whichresulted from successive droughts and civil unrest; and (ii) the high levelsof foreign financing available to the country during the crisis. In theperiod since 1982/83, however, certain longer-term trends are discernible.These and some of the issues they raise for future government policy are:

- a return to the pattern of steady tax increases and rapid revenuegrowth, but with increasing indications that this growth cannot besustained;

- strong and growing pressures for recurrent expenditure in excessof budgetary revenues;

- constraints on the growth of public investment due to theGovernment's inability to generate budgetary savings; and

- the inflationary consequences of excessive recourse to domesticcredit for the financing of fiscal deficits.

3.7 Current revenues recovered substantially in 1982/83, principallybecause of the rebound in the reexport trade and improved tax yieldsassociated with the realignment of import duty rates. (Despite recordgroundnut production, tax receipts from groundnut exports were severelydepressed by the decline in world prices.) The overall increase inrecurrent revenues (16%), however, was more than offset by the sharp fall inforeign grant financing, as aid flows returned to normal levels. TheGovernment was, therefore, forced to implement abrupt expenditure cuts,compressing both current and investment outlays in nominal terms(approxi-mately 13% each in real terms). Significantly, the compression ofrecurrent expenditures in 1982/83 was accomplished almost entirely througb areduction in outlays for materials and supplies in order to accommodateanother increase in civil service wages and salaries as well as a sharpincrease in debt service. Despite expenditure cuts, the overall fiscaldeficit remained relatively high at 14% of GDP and, with the GPMB's reservesdepleted, the Government was forced to borrow heavily from the domesticbanking system. Net credit to the Government doubled between June 1982 andJune 1983, and credit to the GPMB grew by an explosive 180%, producing

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highly inflationary overall credit growth of 45Z in a twelve month period(Appendix Table 9.2).

3.8 New tax measures introduced in 1983/84 pushed revenues up 20Z butwere more than offset by rapid expenditure growth, due to increases ingovernment wages and salaries, and public debt service. The severe pressureon government operations resulting from the compression of materials andsupplies in the preceding fiscal year also forced an upward adjustment ofthese outlays in 1983/84. Net foreign disbursements remained at the levelof 1982/83 and were not sufficient to cover the overall fiscal deficit,which remained unchanged at 14% of GDP. The Government attempted to avoidrecourse to Central Bank financing by floating a three-year, D 16.5 millionissue of government "development stock" in March 1984 which raised fundsfrom parastatals, commercial banks and a few private investors. However,even this was not enough to finance the deficit and the Government for thefirst time began to accumulate arrears. The recovery of world groundnutprices in 1984, on the other hand, significantly eased the GPMB's financialsituation and the overall growth of domestic credit slowed to 10% over thefiscal year 1983/84.

3.9 The budget for 1984/85, developed in the context of negotiationswith the IMF on the short-lived Stand-by program, constituted the firstcomprehensive attempt at expenditure restraint. Goverment wages andsalaries were held to 2% nominal growth, or a decline of over 15% in realterms. Current purchases of goods and other services were similarlycompressed in real terms. The only elements of recurrent expenditureincrease were debt service, which rose by a staggering 65%, and currenttransfers, because of a large mandated contribution to the SenegambiaConfederal administration.

3.10 Despite the lapse of the Stand-by program, the Government appearsto have made strong efforts to limit domestic credit expansion and attemptedto cover 1984/85 expenditures with another round of sigp'ficant taxincreases (expected to boost revenues by 27% over 1983/84) and non-bankborrowing. Due to the extremely poor 1984/85 groundnut harvest and sharplylower export duties and difficulties in collecting some of the new taxesintroduced, however, estimated revenue growth (16%) was substantially lo--'than envisaged. While recurrent expenditure remained on target, ievelow voutlays were about 25% higher than estimated, mainly for projects in thetransport sector. As a result, the overall fiscal deficit cor 1984/85increased to 17% of GDP. The increase in the deficit, however, beingassociated vith development expenditures, was largely financed by increasedforeign inflows. In September 1984 a further (D 10 millio-n) GambianGovernment issue was floated and was oversubscribed. As with the March 1984bond, the terms of this issue (15Z interest and a very sbort maturity) 1/make it a costly source of financing. Moreover, the extent to which this"non-bank" borrowing represents a net mobilization of domestic saviags in

1/ The first government development stock issue in November 1979 had paid8.5% interest and had a ten year maturity.

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support of government operations is far from clear, as one of the largestsubscribers has been the GPMB which, itself, remains heavily indebted to theCentral Bank. 2/ In essence, the GI(B (which, like the Government, hasdirect access to Central Bank financing at 8% interest) is borrowing fromthe Central Bank at 8% to lend to the Government at 15Z.

B. Major Problems and Implications

1. Emerging Revenue Constraints

3.11 The Gambia's rapid growth of tax revenues in excess of GDP growtb(or very higb tax buoyancy) has been possible because of the importance ofthe reexport trade and the fact that taxes derived from reexports are to alarge extent borne by foreign rather than Gambian consumers. Import dutiesgenerate a very high (70Z) share of total tax revenues in The Gambia, and itis estimated that re-export items account for 50-60% of dutiable imports. 3/Thus, although total government revenues in 1984/85 equalled 23% of GDP, TheGambia's actual domestic "tax effort" is closer to 15% of GDP, which isstill high for a non-mineral-exporting developing country. Heavy relianceon revenues from import duties Implies clear limits to long-term revenuegrowth. As the impetus for the reexport trade comes from the differentialbetween the after-duty price of consumer goods in The Gambia and prices inneighboring countries, it is obvious that yields from tariff increases maybe quite elastic and, in fact, this already appears to be a problem. 4/

3.12 The Government bas been careful in its tariff policy, but pressureto generate revenue bas pushed the average duty rate on non-government'..mports up steadily in recent years, to close to 36% by 1983/84 and evenhigher as a result of duty increases adopted in 1984185 =d 1985/86.Althougb high taxes on petroleum imports weigh heavily in this average, theaverage tariff burden in The Gambia is not as low as is commonly believed.Given the level of import taxation already achieved on re-