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

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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.

• 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.

• 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.

• 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.

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

• 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

• 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.

• 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

• 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.

• 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%.

• 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.

• 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.

• 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.

• 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

• 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.

• 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%).

• 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%.

• 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

• 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.

• 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.

• 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

• 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.

• Volume of transactions in the inter-bank foreign exchange market in the year to end-
January 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.

• 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.

• However, Dalasi strengthened against the Pound Sterling by 9.7% between

December 2007 and December 2008.

2.6 External Debt

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

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

• 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.

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

Table: Poliicy Dependent Debt Burden Thresholds under Debt Sustainability

Framework
Indicators Strong Moderate Weak The
Performer Performer Performer Gambia
2008
NPV of External Debt to GDP Ratio (%) 50 40 30 22

NPV of External Debt to Exports Ratio 200 150 100 117

(%)
NPV of External Debt to Revenue Ratio 300 250 200 117
(%)
Debt service to Exports Ratio (%) 25 20 15 9

Debt Service to Revenue Ratio (%) 35 30 25 9

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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.

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

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

• 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

• 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.

• 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.

• 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 12-
month average inflation rate accelerated marginally to 5.5% in April 2009 from 5.4%
a year ago.

• 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.

• 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.

• 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.

• 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.

• 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 Latest Status in the Status in the Outlook for 2009
Indicators Reference latest Corresponding
Period reference period in 2008
period in 2009
CPI inflation rate (%) April 2009 Overall 6.7 Overall 3.1 Expected to decline
Food 8.2 Food 4.5 during the year
Non-food 4.8 Non-food 1.2
Brent crude oil price May 2009 Average US$60 Average May stabilize around
(US$/ brl) US$123 $55
by the end of 2009
Growth rate (%) of Jan-Apr 2009 16.2 -2.2 Fiscal performance in
Revenue & grants 2009 will be better than
Growth rate (%) of Exp Jan-Apr 2009 19.6 0.7 last year.
& Net Lending
Rev. and grants as % Jan-Apr 2009 7.7 7.4 As % of GDP at current
of nominal GDP market prices,
Exp & Net Lending as Jan-Apr 2009 7.5 7.0 revenues, expenditures
% of GDP and basic balance are
Overall fiscal bal. as % Jan-Apr 2009 0.2 0.4 on-track.
of GDP
Basic Balance as % of Jan-Apr 2009 1.2 0.9
nominal GDP
Primary Bas. Bal, as % Jan-Apr 2009 2.6 2.5
of GDP
Outstanding April 2009 5659 6013 Likely to decline in
Domestic Debt 2009.
(Million Dalasi)
Domestic debt as % April 2009 28.4% 33.5%
of GDP
Yield of 91-day TBs April 2009 12.0 10.9 Yields may come down
(%) as CPI inflation has
Yield of 182-day TBs April 2009 13.0 11.9 started decelerating.
(%)
Yield of 364-day TBs April 2009 14.6 13.3
(%)
CBG Rediscount May 2009 16 15
rate (%)
GR of Money supply April 2009 18.8 3.7 Broad money growth
(M3) (%) rate is likely to
Growth rate of April 2009 11.1 -6.0 decelerate.
Reserve Money (%)
Banks’ foreign April 2009 8.9 10.9 Likely to remain stable
assets as % of total
assets
Banks’ foreign April 2009 1.8 3.6
liability as % of total
liabilities
Dalasi/ UK £ May 2009 40.20 40.25 Dalasi is likely to
Dalasi/ US$ May 2009 26.78 20.64 depreciate against
Dalasi/ CHF May 2009 22.75 19.46 major currencies during
Dalasi/ Euro May 2009 36.09 32.10 the year 2009.
Dalasi/ CFA (5000) May 2009 256.38 245.84

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