Impact Of The Financial Crisis On The Gambia

Impact of the Financial Crisis on the Gambian Economy Tarun Das Macroeconomic Adviser

08 June 2009

Institutional Support Project for Economic and Financial Governance (ISPEFG) Department of State for Finance and Economic Affairs (DOSFEA) The Republic of Gambia The Quadrangle, Banjul, The Gambia

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Impact of the Financial Crisis on the Gambian Economy Tarun Das Macroeconomic Adviser

1. Global financial Crisis and Economic Slowdown The global economy is presently passing through a critical conjecture affected adversely by a massive financial crisis and severe recession. As per the projections made by the IMF in their latest World Economic Outlook: Crisis and Recovery April 20091, world output is projected to decline by 1.3 percent in 2009 as a whole and to recover only gradually in 2010, growing by only 1.9 percent. Achieving this turnaround will depend on stepping up efforts by the governments of both developed and developing countries to heal the financial sector, while continuing to support demand with monetary and fiscal easing. This is the first global contraction in the last 60 years since the great depression in 1930s. Global real sectors and financial markets continue to weaken both in advanced and emerging economies. Trade volumes continue to shrink rapidly, while production and employment data suggest that the global activity continues to contract in the current quarter. Recent data point to sustained weakness in the period ahead. Unemployment rates are rising across the major economies, especially in the United States and Europe. Major advanced and developing economies had announced a coherent set of fiscal and monetary measures to deal with the financial crisis and depression. In addition to continuing the provision of liquidity, governments initiated programs to buy bad assets, recapitalize financial institutions, and provide comprehensive bailouts and guarantees to mortgage, commercial and investment banks and key sectors such as housing and automobiles. Based on the expectation that housing prices will turn around sometime in 2009 and banks’ deleveraging will slow down, it is expected that the real output growth in advanced economies would become positive in 2010. Growth in emerging economies will also moderate albeit because of weakening global growth prospects, plunging commodity prices, and tight financial conditions. However, it will remain well above the level in the mature markets. Indeed, the five percentage point differential that persisted between emerging and mature market growth rates in recent years is most likely to continue throughout 2009 and 2010. Africa and the Middle East: In recent years African countries in general experienced an economic boom contributed by three favorable factors namely increased donors funding, rising exports driven by high commodity prices, and inflows of remittances and foreign investment. The ongoing financial crisis and economic slowdown in the developed countries has led to reversal of these positive factors and imposed serious adverse impact on the African economies. In African developing economies, growth is projected to slow significantly from 5.2 percent in 2008 to 2 percent, while growth in the Middle East is projected to decline from 5.9 percent in 1

World Economic Outlook: Crisis and Recovery, April 2009, IMF Washington D.C.

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2008 to 2.5 percent in 2009. Growth is expected to moderate particularly in commodity exporting countries, and several countries are experiencing declining exports and lower inflows of tourism income, remittances, and foreign direct investment (FDI), while aid flows are under threat. In the Middle East, the effects of the financial crisis have been more limited so far. Despite the sharp drop in oil prices, government spending is largely being sustained to cushion the toll on economic activity. 1. Impact on the Gambian economy A crisis of this magnitude in the industrialized countries is bound to have an adverse impact around the world. It has already affected growth prospects of major developing countries in Asia and Africa. Although the Gambia is a small economy, it has strong inter-linkages with the outside world as its total trade (exports plus imports) of goods and services amounts to around 80% of GDP and net capital inflows amount to 15% of GDP. This report summarizes the impact of the global financial crisis on various sectors of the Gambian economy. 2.1 Impact on real sector and growth (1) The sharp decline in global economic activity had adverse impact on the Gambian economy in 2008 leading to decline of Gambian exports and remittances inflows and decline of manufacturing production and wholesale and retail trade. (2)

However, thanks to bumper crops, high food grains prices and very good performance by electricity, telecom and financial sectors, the real GDP growth at constant 2004 factor cost improved from 6.1% in 2007 to 7.2% in 2008, supported by a spectacular growth of 28.4% in agriculture value added and a marginal growth of 0.7% by industry while services value added declined by (-) 0.6%.

(3) Real GDP GR in 2009 is projected to be around 4.5% aided by a growth of 6% in agriculture value added, 2% in industry and 4.4% in services. However, the generall increase in civil servant salaries and donors’ commitment to provide financial support to Gambia under PRGF and to help Gambia to mitigate adverse impact would boost both consumer spending and investment and enhance economic growth in the range of 5%. (4) Agricultural sector was not affected by the global economic situation and performed very well during 2008. Helped by high food prices in international markets and favorable rainfall at home, crop value added achieved a fantastic growth rate of 45.7 percent in 2008. (5) There was mixed performance within the industrial sector. As in other countries, manufacturing was affected adversely by the global economic slowdown and its value added declined by (-) 2.5 percent due to decline of exports and textile production. Mining and quarrying achieved a growth rate of 6 percent in 2008 compared to 6.9 percent in 2007, while electricity, gas and water supply achieved an excellent growth rate of 15 percent in 2008 on top of 17 percent registered in 2007. (6) Many of the services sectors were adversely affected by the global financial crisis. Wholesale and retail trade was the worst affected sector and its value added declined by (-) 12.9 percent in 2008, due to decline of exports and re-exports and negative growth of manufacturing sector. The growth rate of health and social sectors decelerated significantly from 10.9 percent in 2008 to only 1.2 percent in 2008 due to government revenue constraints and decline of funding by donors.

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(7) However, within service sectors, financial services and telecommunications performed very well and real estate, other business services, transport and storage and tourism related services performed reasonably well. (8) As the exposure of the Gambian banks to the foreign financial markets and their holdings of foreign assets are limited, there was practically no adverse impact on the Gambian financial services, which recorded an excellent growth rate of 14.5 percent in 2008 compared to an average growth rate of 14.6 percent during previous three years 2005-2007. Telecommunications also performed well and achieved a growth rate of 10 percent in 2008 on top of 20 percent recorded in 2007. 2.2 Impact on CPI Inflation

(a) CPI Inflation in 2008 •

Rise of international prices of food products and petroleum oil and disruptions in the supply of foodstuffs from the neighboring countries put pressures on consumer prices in the Gambia since 2007.

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However, due to the combined result of various fiscal and monetary measures undertaken by the government and the Central Bank of Gambia, the 12-month average CPI inflation moderated to 4.5% in 2008, compared to 5.4% in 2007, despite a significant increase of salaries of government officials in 2008.

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Government responded to rising food prices by reducing the sales tax on rice imports from 15% to 5% in July 2007 and eliminating it altogether in May 2008.

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In March 2008, in response to tight monetary conditions and against a backdrop of falling inflation, the CBG reduced the statutory minimum reserve requirement of banks from 16% to 14%. To check effective demand and inflationary pressures on the economy the CBG raised its rediscount rate from 15% to 16% in October 2008.

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Appreciation of the dalasi also helped cushion the impact on inflation but affected exports adversely and lowered exports growth in 2008.

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To compensate for revenue loss, the authorities increased other taxes (on car parts and used vehicles). Pump prices of petroleum products were increased in May 2008 by 10–24% to remove an implicit budget subsidy that had emerged in the preceding months and to bring them in line with import costs. (b) CPI Inflation in 2009

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Inflation ran high at 7% in January and February 2009. As measured by the Gambia Consumer Price Index (CPI), the annual point-to-point inflation accelerated from 5% in February 2008 to 7.0% in February 2009. However, the 12-month average inflation rate decelerated to 4.5% from 5.7% a year ago.

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Food items (with weights of 55.2% in overall CPI) recorded average inflation of 8.8% in Feb 2009 compared to 8.1% a year ago and contributed 58% to inflation in Feb 2009. Non-food items (with weights of 44.8% in overall CPI) recorded annual inflation

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of 4.8% in February 2009 compared to 1.2% a year ago and contributed 42% to inflation. •

Among other groups, in February 2009, clothing and textiles recorded annual inflation of 5.4%, housing and utilities 5.9%, restaurants 7.7% and transport 4.4%. 2.3 Government Financial Performance in 2008 and 2009

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Financial crisis had adverse impact on the government’s fiscal and financial performance in 2008. Government revenue and grants amounted to D3.6 billion in 2008 compared to D3.7 billion in 2007.

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The decline in revenue and grants was on account of the decrease in indirect tax and non-tax revenue, and the less-than expected grant receipts. Total expenditure and net lending amounted to D4.1 billion, an increase of 13.8%.

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The overall budget balance (including grants) on commitment basis deteriorated to a deficit of D490.2 million (2.7% of GDP) in 2008 from a surplus of D27.7 million (0.2% of GDP) in 2007.

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It is a matter of some satisfaction that the year 2009 has started with good performance of the government financial operations. As percentage of GDP at current market prices, revenues and expenditures in Jan-Feb 2009 are observed to be on track.

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In Jan-Feb 2009 revenue and grants increased by 18% aided by 17.4% increase by taxes, 31.5% increase by non-taxes and 13.2% increase by grants over Jan-Feb 2008. Total expenditures and net lending increased by only 4.1% in Jan-Feb 2009 over Jan-Feb 2008 due to decline of current expenditure and interest payments over Jan-Feb 2008.

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As percentages of the budget figures, government revenue collections and expenditures also performed better in Jan-Feb 2009 than those in Jan-Feb 2008. 2.4 Commercial Banks’ Performance (a)Foreign Assets and Liabilities

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Gambian banks were not adversely affected by the global financial crisis as the Gambian banks do not have large exposure to foreign assets or foreign liabilities. The banking industry remains sound. Total industry assets increased by 19.5% to D12.5 billion year-on-year at end-Dec 2008, and stood at D12.3 billion at end-Jan 2009, up by 14% over those at the end-Jan 2008.

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At end-Jan 2009, banks’ foreign assets constituted only 9.2% of total assets (foreign exchange 1.9%, balances abroad 6.4% and foreign investment 0.9%), down from 14.4% a year ago (foreign exchange 1.9%, balances abroad 11.7% and foreign investment 0.8%).

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Similarly, at end-Jan 2009, external sector related liabilities of the banks constituted only 3.1% of total liabilities (non-residents deposits 0.9%, balances with banks abroad 1.6% and external debt 0.6%), down from 4.1% a year ago (non-residents deposits 2%, balances with banks abroad 1.5% and external debt 0.6%).

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The risk-weighted capital adequacy ratio stood at 35.9% in Dec 2008, well above the statutory requirement of 8%.

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Non-performing loans rose from 7.3% in Sep 2008 to 9.5% in Dec 2008, but were adequately provisioned in compliance with the statutory requirements (b)Bank Credits in 2007-2008

(a) Credits by commercial banks to private sectors increased from D2.6 billion at the end of December 2007 to D3.5 billion at the end of December 2008. Miscellaneous sectors recorded highest growth (99.3%) followed by construction (44.2%), personal loans (35.5%) and trade (33.5%). Agricultural credits increased by only 3.2% while credits to fishing, transportation and tourism declined by 2.3%, 17.7% and 0.6% respectively in 2008. (b) As regards composition, trade had the largest share (27.2%), followed by miscellaneous sectors (24.1%), personal loans (17.2%), construction (12.3%), and transportation (7.6%) in 2008. (c) Bank Credits in January 2009 •

Total domestic credit increased to D6.7 billion in January 2009, or 51.9% over a year ago. Private sector credit rose by 41.3% to D3.8 billion. Credit to distributive trade, building and construction and manufacturing increased by 34.1%, 46.2% and 80.9% respectively in January 2009 over January 2008. In contrast, loans and advances to agriculture, tourism and fishing contracted by 25.8%, 1.4% and 2.4% respectively. 2.5 Impact on Balance of Payments

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Global financial crisis had adverse impact on the Gambian Balance of Payments. The provisional BOP estimates indicate an overall deficit of D1.30 billion ($54.6 million) in 2008 compared to an estimated surplus of D796.80 million ($32.0 million) in 2007, reflecting the deterioration in both the current and the capital and financial accounts.

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The goods account balance deteriorated to a deficit of D5.27 billion in 2008, or by 23.4%. Exports are estimated at D2.16 billion in 2008, or a decrease of 5.1 per cent from 2007. The import bill rose to D7.41 billion, or 13.3 per cent from 2007.

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Projections for 2009 indicate deterioration in the overall balance emanating from the on-going slowdown in global economic activity which is expected to adversely impact remittances, foreign direct investment and tourism. Foreign Exchange Reserves

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Reflecting the widening of the current account deficit, gross external reserves stood at US$116.8 million at end-January 2009 compared to US$140.4 million in Jan 2008.

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Volume of transactions in the inter-bank foreign exchange market in the year to endJanuary 2009 amounted to D35.1 billion (US$1.3 billion) compared to D37.8 billion (US$1.7 billion) a year ago.

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Exchange Rate •

After remaining relatively stable from 2004 to 2006, the dalasi appreciated significantly in 2007 and by 8% against the U.S. dollar in the first half of 2008, reflecting strong inflow of remittances and reduced debt service payments.

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However, very soon Gambian economy was affected to some extent by the financial crisis in USA and Europe. The Dalasi depreciated against the US dollar, CHF, CFA and Euro by 17.8 %, 17.1%, 17% and 8.7%, respectively reflecting the impact of the global financial crisis on remittances and tourism as well as increased demand for foreign exchange to meet the high cost of imports.

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However, Dalasi strengthened against the Pound Sterling by 9.7% between December 2007 and December 2008. 2.6 External Debt

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The stock of external debt declined substantially at end-2007 following HIPC and MDRI debt relief. At the end of 2006, prior to completion point, the stock of nominal external public debt was US$676.7 million (133.1 percent of GDP).

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Multilateral creditors accounted for 84 percent of this debt, with IDA as the largest creditor (39 percent of total outstanding debt). At end-2007, post-completion point, the stock of external public debt fell to US$299.4 million (46.0 percent of GDP).

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The latest IMF DSA concludes that The Gambia remains at a high risk of debt distress after HIPC and MDRI debt relief due to the high level of debt as well as the country’s vulnerability to shocks.

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The World Bank’s Country Policy and Institutional Assessment (CPIA), classifies The Gambia as a “poor performer” based on an average of the ratings for the preceding three years and the table below presents the policy-dependent debt burden thresholds. The PV of debt-to-GDP and the PV of debt-to-revenue ratios remain comfortable. Debt service payments remain manageable throughout the projection period, rising no higher than 10 percent of exports and revenue. But, the PV of debtto-exports ratio breaches the debt-burden threshold for a protracted period. Table: Poliicy Dependent Debt Burden Thresholds under Debt Sustainability Framework Indicators

Strong Performer

Moderate Performer

Weak Performer

NPV of External Debt to GDP Ratio (%)

50

40

30

The Gambia 2008 22

NPV of External Debt to Exports Ratio (%) NPV of External Debt to Revenue Ratio (%) Debt service to Exports Ratio (%)

200

150

100

117

300

250

200

117

25

20

15

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Debt Service to Revenue Ratio (%)

35

30

25

9

7

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2.7 Domestic Debt and Treasury Bills Outstanding •

As on 28 February 2009, outstanding domestic debt stood at D5.9 billion (amounting to 24.8% of GDP), marginally higher than D5.5 billion (amounting to 24.3% of GDP) a year ago.

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Treasury bills, accounting for 79.5% of total domestic debt, declined by 1.1% to D4.7 billion at the end of February 2009.

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Non-interest bearing Treasury Notes more than doubled over the period and reached 14.8% of outstanding debt at the end of Feb 2009.

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Yields on treasury bills fluctuated widely in recent months. Due to higher inflation, average yield on the 91-day and 182-day bills increased to 11.1% and 12.8% in Feb 2009 from 10.5% and 12.1% in Jan 2009 respectively, whereas yield of 364-day bills remains unchanged at 14.4%. 2.8 Money Supply Money Supply in 2008 and 2009

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Growth rate of broad money supply (M3) accelerated from 6.7% in 2007 18.4% in 2008. However, it was not due to foreign assets, rather due to significant increase in domestic assets.

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During 2008 there was substantial increase of both time and demand deposits by 33.4% and 30.5% respectively due to significant growth of official deposits, while there was modest growth of savings deposits by 4.8% mainly due to growth in private savings.

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Money supply grew by 19.3% in January 2009 compared to 3.9% a year ago. Reserve money increased by 12.7% compared to 0.1% during the same period. 2.9 Recent Economic Performance

The following paragraphs and the table on page-10 summarize the recent economic developments on the basis of up-to-date information in 2009. On the whole, the Gambian economy is performing better in 2009 than in 2008, although annual inflation is running around 6.3 percent. Inflation and Oil Prices •

Annual point-to-point CPI inflation accelerated from 1.4% (Food 1.7% and non-food 1%) in April 2008 to 6.3% (Food 7.7% and non-food 4.5%) in April 2009. The 12month average inflation rate accelerated marginally to 5.5% in April 2009 from 5.4% a year ago.

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Given global economic slowdown, international crude oil prices were projected to remain soft and rule around $51 per barrel in 2009. However, since April 2009 petroleum prices started rising and increased to US$60 per barrel in May 2009.

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Government Financial Performance •

Government Financial Performance was significantly better in Jan-April 2009 than in Jan-April 2008. In Jan-April 2009 revenue and grants increased by 15.5% aided by 16.7% increase in taxes, 4.7% increase in non-taxes and 16.9% increase in grants over Jan-April 2008.

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Overall, there is a fiscal surplus of D35 million in Jan-April 2009, lower than the fiscal surplus of D75 million in Jan-April 2008, due to significant increase of capital expenditure by 88% in Jan-April 2009 over Jan-April 2008.

Domestic Debt and Treasury Bills Yields •

At the end of April 2009, outstanding domestic debt stood at D5.7 billion (28.4% of GDP), down by 5.9% from D6 billion (33.5% of GDP) a year ago. Treasury bills accounted for 84.4% of total domestic debt at the end of April 2009, compared to 80.3% a year ago.

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Despite significant decline of CPI inflation in the recent months, average yield on the 91-day TBs increased from 10.5% in Jan 2009 to 12% in April 2009, yield of 182-day TBs increased from 12.1% to 13% and that of 364-day bills increased from 14.4% to 14.6% over the period.

Money Supply and Bank Credits •

Annual growth rate of broad money supply (M3) accelerated significantly from 3.7% in April 2008 to 18.8% in April 2009, supported by 17.8% growth in currency, 19.6% growth in demand deposits, 11.6% growth in savings deposits and 29.1% growth in time deposits. On the demand side, growth was mainly due to 31.9% growth in domestic credits.

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Domestic credit increased from D5.1 billion in April 2008 to D6.7 billion in April 2009, supported by 46% growth in government borrowing, 103.3% growth in credits to public entities and 24.1% growth in credits to the private sector.

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Gambian banks were least affected by global financial crisis as the Gambian banks do not have large exposure to foreign assets or liabilities. At end-April 2009, foreign assets constituted only 8.9% of total assets and external liabilities constituted only 1.8% of total liabilities.

Exchange Rate •

In 2008, the Dalasi depreciated against major international currencies except the British Pound. Since Jan 2009, Dalasi has appreciated against major international currencies.

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At a Glance- May 2009 Economic Indicators

Latest Reference Period

CPI inflation rate (%)

April 2009

Brent crude oil price (US$/ brl)

May 2009

Status in the latest reference period in 2009 Overall 6.7 Food 8.2 Non-food 4.8 Average US$60

Status in the Corresponding period in 2008

Outlook for 2009

Overall 3.1 Food 4.5 Non-food 1.2 Average US$123

Expected to decline during the year May stabilize around $55 by the end of 2009 Fiscal performance in 2009 will be better than last year.

Growth rate (%) of Revenue & grants Growth rate (%) of Exp & Net Lending Rev. and grants as % of nominal GDP Exp & Net Lending as % of GDP Overall fiscal bal. as % of GDP Basic Balance as % of nominal GDP Primary Bas. Bal, as % of GDP

Jan-Apr 2009

16.2

-2.2

Jan-Apr 2009

19.6

0.7

Jan-Apr 2009

7.7

7.4

Jan-Apr 2009

7.5

7.0

Jan-Apr 2009

0.2

0.4

Jan-Apr 2009

1.2

0.9

Jan-Apr 2009

2.6

2.5

Outstanding Domestic Debt (Million Dalasi) Domestic debt as % of GDP Yield of 91-day TBs (%) Yield of 182-day TBs (%) Yield of 364-day TBs (%) CBG Rediscount rate (%) GR of Money supply (M3) (%) Growth rate of Reserve Money (%) Banks’ foreign assets as % of total assets Banks’ foreign liability as % of total liabilities Dalasi/ UK £ Dalasi/ US$ Dalasi/ CHF Dalasi/ Euro Dalasi/ CFA (5000)

April 2009

5659

6013

April 2009

28.4%

33.5%

April 2009

12.0

10.9

April 2009

13.0

11.9

April 2009

14.6

13.3

May 2009

16

15

April 2009

18.8

3.7

April 2009

11.1

-6.0

Broad money growth rate is likely to decelerate.

April 2009

8.9

10.9

Likely to remain stable

April 2009

1.8

3.6

40.20 26.78 22.75 36.09 256.38

40.25 20.64 19.46 32.10 245.84

May 2009 May 2009 May 2009 May 2009 May 2009

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As % of GDP at current market prices, revenues, expenditures and basic balance are on-track.

Likely to decline in 2009.

Yields may come down as CPI inflation has started decelerating.

Dalasi is likely to depreciate against major currencies during the year 2009.