Macroeconomic indicators and the implications for a scaling up of external resources to attain the MDGs in The Gambia-

A briefing note

Neil Boyer, UNDP/The Gambia

Macroeconomic indicators and the implications of scaling up external resources to attain the MDGs in The Gambia-A briefing note

Background

The Gambia is a small sovereign state in West Africa with a land area of 10,689 square kilometres, varying in width between 42 km near the mouth of the river to 24 km further upstream and stretching about 480 km in length. The country is divided in half by the River Gambia, which runs the entire length of the country from the Futa Jallon highlands in the Republic of Guinea to the Atlantic Ocean. The climate is typically Sahelian, with a short rainy season lasting from June to October followed by a long dry season.

The country, which gained independence from Great Britain in 1965, is bordered on the east, north and south by Senegal and on the west by the Atlantic Ocean. In 2003, the population was estimated at approximately 1.4 million people, with approximately 53.6% under 20 years of age (2003 NHPS). In 1998, the national literacy rate for females aged 15-24 years was 26.9% while that for their male counterparts was 44.5% (2005 CCA). The President of the Republic and the National Assembly Members are elected every five years by universal suffrage, with the next Presidential election scheduled for September 22, 2006.

The country has produced two MDG progress reports, in October 2003 and September 2005 respectively. The first assessed progress at the national level, while the second examined progress at the sub-national levels. The reports noted that although progress was on track in some areas (most notably reduction of maternal mortality and provision of potable water, with considerable efforts also occurring in education), at current trends the country will have difficulty in meeting MDGs 1 (poverty), 3 (gender), 4 (infant mortality) and 6 (HIV/AIDS, Malaria and TB) by 2015. There are considerable regional disparities, with the MDG indicators being more favourable in the western part of the country. In addition, there is pervasive gender inequality, with indicators for women and girls below that of men and boys.

National Development Policies in The Gambia

The current national development strategy of The Gambia is based on the second Strategy for Poverty Alleviation or SPA II. This was the country’s first PRSP and ran for a three-year cycle (2003-2005). SPA II consisted of five ‘pillars’ (i.e. development objectives), which were:

Improving the enabling policy environment to promote economic growth and poverty reduction

Enhancing the productive capacity and social protection of the poor and vulnerable Improving the coverage of the unmet basic needs of the poor Building capacity for local, people-centred development through decentralisation Mainstreaming gender equity, environmental issues, nutrition, governance, and

HIV/AIDS awareness into all development programs

To attain the first pillar, government received substantial assistance from the World Bank, UNDP and DfID towards strengthening financial management systems and mobilization of domestic resources. Interventions aimed at enhancing the macroeconomic environment included implementation of: (1) a private sector development policy; (2) rationalization of the government’s asset portfolio; (3) improve the comprehensiveness and timely reporting and auditing of government accounts; (4) update and conduct Public Expenditure Reviews (PERs) to improve the comprehensiveness, accountability and transparency of the budget; (5) devise Sector Wide Approaches (SWAp) and a public expenditure management system for the critical social sectors to rationalize and enhance the impact on the poor and (6) improve and strengthen Civil Service Reform (Taylor, 2004). Measures completed or underway at the

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conclusion of PRSP I include the establishment of the Gambia Revenue Authority, reform of the customs department, adoption of a Medium-Term Expenditure Framework (MTEF), strengthened capacity of the National Audit Office and initiation of an Integrated Financial Management Information System (IFMIS). Government is currently in the process of finalizing a follow-up to the PRSP I, which ended in December 2005. The proposed strategy is an MDG-based Poverty Reduction and Growth Strategy (PRGS), which will be implemented through a five-year period spanning 2007-2011. Although approximately USD $118 million was pledged for the implementation of the PRSP, and despite considerable efforts by government and development partners, poverty levels remain extremely high.

Although government has made a commitment to attain the MDGs as part of its long term development strategy, progress remains mixed, with the country off-track on four (MDGs 1, 3, 4 & 6) of the 7 endogenous MDGs. Given the current rates of implementation, the ability of the country to attain the MDGs is open to question, as insufficient domestic resources, inadequate absorptive capacity, continuing challenges in economic governance and a lukewarm response from development partners reduce the ability of national authorities to sustain poverty reduction interventions. The purpose of this briefing note is to provide an overview of the current and proposed macroeconomic frameworks in The Gambia in the context of the country’s stated commitment to reduce poverty and attain the MDGs, and to assess the conditions for a scaling up of external resource flows to meet the MDGs.

Macroeconomic indicators in The Gambia 2000-2005

The Gambia’s recent economic performance has been below expectations and, consequently, efforts to attain PRSP targets have been impaired. Government has had difficulty in sustaining economic targets during the programme supported by the Poverty Reduction and Growth Facility (PRGF) and building institutional capacity of the key PRSP sectors (Agricultural, Education and Health). In the case of the former, although the country had reached the decision point during the HIPC process of debt relief, the failure to reach a number of IMF ‘triggers’ coupled with the provision of inadequate information led to the suspension of the PRGF in 2003. In addition to the loss of income associated with HIPC resources (funds released by partial debt relief had been used to construct housing for teachers in rural areas, environmental campaigns by youth, etc.), the lack of an agreement with the IMF also had an adverse effect on the country’s international credit rating. This deterioration in the country’s credit rating (which declined from B- in 2002 to CCC+ in 2005) has had an adverse effect on the country’s ability to mobilise external resources, attract foreign direct investment, and its eligibility for debt forgiveness (2005 CCA). Consequently, the economy will be negatively impacted, impeding the development of the private sector and thus hampering efforts to generate employment and reduce poverty

Growth in GDP masks growing concerns over government macroeconomic policies. There was a large increase in government borrowing during 2003. The increase in government borrowing and the resulting high interest rates is the result of a sharp rise in the fiscal deficit. The fiscal deficit (including official transfers) increased from 4.8% of GDP in 2002 to 6.4% of GDP in 2003. In order to finance the deficit, government increased the interest on treasury bills from 20% in 2002 to 31% in 2003. A consequence of this policy was that interest rates on commercial loans climbed to 35%, effectively curtailing access to financial resources by many in the productive sectors. One of the most worrisome macroeconomic trends since 2001 has been the large increase in debt service, particularly interest payments on domestic debt, which has effectively been at the expense of other recurrent expenditures. Interest payments (domestic and foreign), as a percentage of total recurrent government expenditures, increased from 23.8% in 2001 to 35.7% and 46.3 in 2003 and 2004 respectively.

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Table 1: Recurrent Expenditures by Economic Classifications, 2001-2005

(Percent of total recurrent expenditures)2000B 2001B 2002B 2003A 2003B 2004A 2004B 2005A

Wages and salaries 34.6 27.5 30.2 23.6 26.3 20.9 24.0 20.3Other charges 40.3 42.9 39.1 43.5 34.5 34.9 26.3 40.6Interest 25.1 23.8 27.9 32.9 35.7 44.3 46.3 39.1

External 6.1 5.3 6.1 11.3 9.4 10.8 17.1 9.3Domestic 19.0 18.0 21.8 21.7 25.7 33.5 29.1 29.7

HIPC expenditures 0.0 5.3 2.8 0.0 2.9 0.0 2.9 0.0Source: 2005 Public Expenditure Review: Gambian authorities (budget reports) and IMF (mission documents): A =Budget Allocations; B=Budget Expenditures

The high rate of government borrowing also had a negative effect on inflation and the national currency, the Dalasi. The value of the Dalasi declined against its major trading partners, falling by 43% against the US Dollar, 50% against the UK pound and 58% against the Euro (2005 CCA). In 2003, the rate of inflation increased by 74% over the preceding year, with the annual rate for 2003 estimated at 15%, compared with a year end rate of 8.6% in 2002. Consumers of food products were particularly hard hit, with the prices of meat and processed foods rising by 29% and 27% respectively. The sharp increase in inflation was spurred in large part by the sharp rise in the price of imported goods, linked to the depreciation of the Dalasi. In addition to the effects that the high level of debt service had on impeding the ability of government to allocate resources to reduce poverty, there was also a marked decline in the overall public sector wage bill.

Following the crisis in 2003, there was an improvement in the level of macroeconomic indicators in 2004. This was due in large part to tight macroeconomic policies that prevailed throughout the year, in addition to an effective domestic revenue mobilization effort. The fiscal deficit as a percent of gross domestic product (GDP), including grants (commitment basis) fell to 5.1% in 2004; down from 5.6% in 2003. In the same vein, the annual inflation rate in December 2004 fell sharply to 8%, down from 17.6% a year earlier. The drop in inflation was a consequence of tight monetary policies, which resulted in a substantial increase in interest rates. As a result of the higher rates, there were declines in investments in productive activities in addition to a fall in output from most of the non-traded goods sector of the economy. However, the falling inflation rates assisted manufacturing, and services and agricultural sectors, leading to an overall real GDP growth rate of 5.1% in 2004.

Table 2: Key Macroeconomic Indicators 2000-2005

2000 2001 2002 2003 2004 2005*Real GDP growth (market prices)

5.5% 5.8% -3.2% 6.7% 5.1% 5.0%

Inflation (period average) 0.2% 8.1% 13% 17.6% 14.2% 8.0%Overall Fiscal Deficit (% of GDP)

1.4% 14.4% 4.8% 3.5% 4.1% 5.7%

Government NDF (% of GDP) 2.7% 15.3% 2.5% 3.1% 0.4% 3.1Broad Money Growth 34.8% 19.5% 35.2% 43.4% 18.3% 9.4Gross Official Reserves (months of import cover)

5.8 2.9 3.1 4.0 5.0 4.5

Debt Stock (% of GDP) 31.5 38.6 37.1 27.3 32.0 34.0

Source: 2007-2011 PRGS

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Poverty in The Gambia

After steadily growing at an average rate of 5.7% between 1998 and 2001, the Gambian economy shrank by 3.2% in 2002, in large part because of a decline in agricultural output due to low rainfall. The economy partially recovered in 2003 with a growth rate estimated at 6.7%, but this growth should be seen in light of the relatively low base of 2002 (2005 CCA). The partial recovery of the economy in 2003 was attributed to an increased agricultural production due in large part to a favourable rainfall pattern. In the agricultural sector, source of employment for most of the Country’s population, the onset of normal rains contributed to a substantial rise in GDP. More than half the total labour force is employed in the agriculture sector, which is also dominated by the poor. The lack of employment opportunities in non-agricultural sector is further exacerbated by gender inequality and concentration of women in certain sectors of the economy. Available data reveal that women represent over 60% of the agricultural labour force, 70% of the unskilled labour force in agriculture, and that they are responsible for about 40% of total agricultural production. Furthermore, some 80% of the fish-traders and 99% of the traditional fish processors are women (2005 CCA).

Table 3: Percentage of population below poverty lines 1989, 1992, 1998 and 2003

Year Food poverty line Overall poverty lineBanjul Urban Rural Banjul Urban Rural

1989 33 44 64 761992 5 9 23 17 40 411998* 7 22 45 21 48 612003 n.a n.a n.a 10.6 57 63Source: 2007-2011 PRGS- Reports on the 1989 and 1993-94, 1998 & 2003/04 Household Surveys.

*Estimated for comparative purposes using a CPI based inflation of the 1992 poverty lines. Using the overall poverty line, based on per capita consumption, the head count index (i.e. the percentage of poor people) in 2003 is calculated at 61.2%. The Gini coefficient; a measure of inequality is 0.48347 at household level and 0.46143 at individual level compared to 0.466 in 1998.

Inadequate investment in the productive sector, which contributes to low levels of productivity and rural incomes, has exacerbated rural outmigration from the rural sector. As a consequence, internal migration has left the urban areas heavily concentrated causing too much stress on social services provided in these areas and emerging urban poverty. The Greater Banjul Area has the worst-case scenario, as evident in the results of the 2003 Population and Housing Census. The urban and peri-urban areas witnessed the biggest increases in population. In fact, although Banjul, the capital and its surroundings, the Kombos, comprise approximately 17% of the national territory, the area holds about 51% of the total population of the country.

For government poverty reduction policies to be effective, significant financial reforms and/or fiscal discipline are required to ensure greater funding of poverty-focused programmes. In the same vein, it is worth noting that the high debt servicing has serious implications for poverty alleviation because it reduces the sustainability of current poverty alleviation programmes. The agriculture sector is of particular concern because it receives relatively low allocations in both the recurrent and development budgets. For example, agriculture accounted for 7.4% and 7.8% of the development budget in 2003 and 2004, respectively, compared to education, which received 7.3% and 17.9% of the development budget in 2003 and 2004. In 2005, the figures for the agricultural sector registered a slight increase (to 8.1%) while there was a slight decline (16.8%) for education.

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Table 4: Sectoral Budget Allocation-2003

  Allocation % shares  Recurrent Development Total Budget Recurrent Development Total Budget

Education 208,254,770

111,962,163

320,216,933 12.2% 7.3% 9.9%

Health And Social Welfare

180,906,980

146,661,715

327,568,695 10.6% 9.5% 10.1%

Agriculture 53,006,270

114,345,413

167,351,683 3.1% 7.4% 5.2%

Debt Services 539,401,280

-

539,401,280 31.6% 0.0% 16.6%

Others 724,165,630

1,165,117,443

1,889,283,073 42.5% 75.8% 58.2%

Total 1,705,734,930

1,538,086,734

3,243,821,664 100.0% 100.0% 100.0%

Source: Civil Service Reform in The Gambia, 2005

The vast majority (96%) of the recurrent budget (which is used for wages, operating costs, debt servicing, etc.) is financed by resources provided by government. In contrast, the development budget receives most of its funding from external grants and loans. Of the funding allocated to the development budget, domestic resources (government and HIPC) accounted for 5.5% and 5.9% respectively, while the remaining 88.7% was financed from external grants (25.9%) and loans (62.8%). In 2003, 36.9% of the combined recurrent and development budget estimates was financed from external grants and loans, 4.8% from HIPC resources and the remainder (58.3%) from government. The extent of external financing entails that consistency and reliability of resource flows are crucial to the attainment of national development objectives, including the MDGs.

The sharp increase in the education budget between 2003 and 2004 reflects the commencement of disbursement of resources of the Education for All (EFA) project financed by the World Bank. At the present time most development interventions in The Gambia operate under a project driven strategy. Not only are such strategies problematic from the point of ensuring the sustainability of interventions following the completion of the project, there is a tendency for segmentation and duplication of activities. Increasingly, there are calls for a more systematic and comprehensive approach to providing development assistance, one that more fully integrates domestic and external resources in order to provide more effective and efficient outputs and outcomes. However for the Sector Wide Approach (SWAp) to realistically contribute towards the attainment of the MDGs and national development objectives, external revenue streams need to be consistent and predictable.

Table 5: Sectoral Budget Allocation-2004

  Allocation   % Shares  

  Recurrent Development Total Budget Recurrent DevelopmentTotal Budget

Education 224,276,000 293,529,000 517,805,000 10.0% 17.9% 13.3%Health & Soc. Welfare 221,880,000 164,471,000 386,351,000 9.9% 10.0% 9.9%Agriculture 47,240,000 127,985,000 175,225,000 2.1% 7.8% 4.5%Debt Interest 994,741,000 - 994,741,000 44.3% - 25.6%Others 759,687,000 1,052,207,000 1,811,894,000 33.8% 64.2% 46.6%Total 2,247,824,000 1,638,192,000 3,886,016,000 100.0% 100.0% 100.0%

Source: 2005 PER

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Poverty and Macroeconomic indicators

Examination of the macroeconomic indicators and poverty indicators during the period 2000-2005 has indicated an increase in poverty despite the rate of real GDP growth averaging over 5% during the period. Although substantial resources were pledged at the 2002 Roundtable conference, the amounts actually committed were much less and implementation of the country’s first PRSP was estimated at 25%. The suspension of the PRGF prevented the country from progressing towards HIPC completion point and debt relief. Ongoing challenges in the areas of economic governance, stemming in large part from unbudgeted expenditures by central government contributed to a burgeoning domestic debt and a depreciation in the national currency. In order to finance government debt, rates of return on government instruments such as Tbills were very high (approximately 29%), and contributed to interest rates for commercial loans exceeding 30%. Inflation has declined from peak levels of 2003. However the importance of external trade to The Gambian economy (re-exportation to neighboring countries and as inputs for consumption and production) entails that the country remains vulnerable to external shocks such as rising energy prices, border closures and weather patterns. In addition to the lower than expected resource envelope, the capacity of government institutions to effectively manage the poverty reduction programme was constrained by low salaries (see table 1) and inadequate conditions faced by public sector employees. The conditions resulted in high rates of attrition for government staff, particularly those at senior positions or with highly marketable technical skills. As the poor receive most of their services from public institutions, the inability to engage in civil service reform as indicated was a major factor in the ineffective implementation of the national poverty reduction strategy and the current slow rates of progress in attaining several of the MDGs.

Macroeconomic objectives and the 2007-2011 Poverty Reduction and Growth Strategy: Domestic resource mobilization and the case for scaling up

The low implementation rate of PRSP I coupled with the deteriorating poverty situation has led government to expand and extend the objectives of its poverty reduction strategy, while retaining its essential elements. The new poverty reduction strategy is anchored on the MDGs, and has been expanded to include greater support for the productive sectors. In addition, the time frame for implementation has been extended from three years to five, thus taking into account the absorptive capacity challenges that the country faces. However, a look at the proposed objectives for macroeconomic indicators in the new PRGS raises considerable questions as to whether the proposed rates of economic growth will be sufficient to reduce poverty levels in line with the MDGs.

Table 6: Key Macroeconomic Objectives for 2006-2011Indicator 2006 2007 2008 2009 2010 2011 Aver.

Real GDP growth (%) 4.5 4.5 4.5 4.5 4.5 4.5 4.5Fiscal deficit (including grants) as % GDP 3.2 2.5 3.1 3.1 3.1 3.1 3.0

Export growth (%) 6.3 5.3 4.8 4.5 4.5 4.5 4.9Current Account deficit (excluding grants) as % GDP 17.9 18.4 17.5 15.0 15.0 15.0 16.5

Current Account deficit (including grants) as % GDP 11.8 6.8 6.7 5.0 5.0 5.0 6.7

Gross official reserves as months of imports (including transit trade) c.i.f.

4.5 4.6 4.7 4.8 4.9 5.0 4.8

Broad money growth 10.0 12.0 10.6 10.0 10.0 10.0 12.5

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Inflation (period average) 4.0 5.0 5.0 5.0 5.0 5.0 4.8Domestic Debt Stock (% of GDP) 30.5 28.5 26.5 24.5 22.5 20.5 22.2

Source: 2007-2011 PRGS

An analysis of the proposed targets for macroeconomic indicators during the 2007-2011 period suggests that they will be largely insufficient to address the main problems confronting the country, namely rising poverty levels and growing income inequality. It is increasingly clear that if poverty is to be effectively addressed, then comprehensive programs to improve the productivity and competitiveness of the agricultural sector will be essential. Yet, if future growth rates of real GDP are envisioned to be slightly below current levels, it is unclear how government will mobilize sufficient domestic resources necessary for sustaining interventions aimed at attaining the MDGs. Stability in the growth of the money supply and reductions in the stock of domestic debt are crucial to maintaining financial stability and low levels of inflation. However, both should be seen as a means to promoting sustainable development and reducing inequality, and in the context of the tremendous challenges that are faced by an increasingly poor population. The argument as to whether a government should undertake commitment to attain single digit inflation levels at the expense of rising poverty is gaining increased momentum among development practitioners and government policymakers (Roy and Weeks, 2004).

In regards to the estimated fiscal targets for the period 2006-2010 (see below), current projections are that there will be a slight decline in both revenue and expenditures. In the latter case, this entails reductions in recurrent and capital expenditures, while external and domestic financing also register sharp decreases. This is linked to ongoing concerns by government to reduce the levels of domestic debt, primarily through reducing expenditures so that a budget surplus can be generated to reduce the stock of domestic debt, thereby reducing debt service payments. However the projections indicated in table 7 do not appear consistent with resource flows necessary to reduce poverty, promote employment-generating investments or attain the MDGs.

Table 7: Fiscal Projections for The Gambia, 2006-2010

(Percent of GDP)2006 2007 2008 2009 2010

Revenue and grants 22.1 21.8 21.4 21.1 20.5Domestic revenue 19.5 19.2 19.1 19.0 18.9

Expenditure and net lending 25.1 23.8 23.1 22.7 21.6Recurrent expenditures 18.0 17.4 17.4 17.6 17.8Capital expenditures 7.5 6.7 6.1 5.4 4.2

Overall balance (incl. grants) -3.0 -2.0 -1.7 -1.6 -1.1External financing 3.0 2.0 1.9 1.7 0.8Domestic financing 0.0 0.0 -0.3 -0.2 0.3Primary balance 6.3 5.5 4.7 4.2 4.0

Source: 2005 Public Expenditure Review

Although it is widely accepted that government should not have high levels of deficit spending, fiscal deficits in the range of 3% and with poverty rates exceeding 60% (reaching as high as 90% in some areas) clearly mandates a less doctrinaire approach to this issue. As mentioned previously, domestic grain production is characterized by low productivity and meets only about 50 percent of national requirements. Based on current trends, demand for food will double by 2015 from a 2000 base line, and cereal imports could triple by 2020. Increasing transport costs (reflecting the rising cost of fuel) can be expected to place even

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more stress on food insecure households. The 2003/04 national household poverty survey estimated that the top 20% of Gambian households have annual consumption levels over 11 times that of the poorest quintile (2003 NHPS). In the latter years of PRSP I, the share of the health sector in the recurrent budget of government fell from 9.8 per cent in 2004 to 8.9 per cent in 2005. Although this can be attributed to the high cost of servicing the domestic debt, to be on track to attain the health MDGs will require a substantial allocation of resources to the health sector in excess of what may be available as envisaged under the macroeconomic objectives for the 2007-2011 PRGS.

Table 8:Gambia Government Budget 2006-2009 (Recurrent and Development)Per Capita allocations (US Dollars)

Category/Year 2006 2007 2008 2009Education(MDG 2)

$11.68 $12.04 $12.40 $12.80

Health (MDGs 4,5, 6)

$11.56 $11.91 $12.27 $12.62

Agriculture(MDG 1)

$6.25 $6.43 $6.63 $6.84

Total $29.49 $30.38 $31.30 $32.26Source: Calculated from the 2007-2011 PRGS. Based on applying a 3 percent budget growth for projections and 1 US Dollar = 28 Gambian Dalasis.

Although there is a growing consensus from development partners that the support for the MDGs should be a central component of development assistance provided to The Gambia, there has been a noticeable reluctance to provide resources on the scale required to meet the MDGs. Government, aware of the inconsistencies of aid inflows, has accordingly not factored in a substantial inflow of external resources towards the MDGs and has aimed at reducing the domestic debt so that once debt service payments are at sustainable levels, additional funds may be allocated for poverty reduction. However this strategy risks that domestic financing for poverty reduction interventions will continue to decline. Although there are reasonable indications that the country will attain HIPC completion point in 2007, these resources alone may be insufficient to shoulder the costs associated with attainment of the MDGs.

Capacity Development and scaling up to attain the MDGs

The preceding sections have indicated that under the current scenario, government is unlikely to attain the MDGs. This can be largely attributed to the absence of sufficient domestic resources. If we accept that the international community honours the commitments made at the New York and Monterrey summits to significantly increase resources available for the MDGs, what would be the likely outcome for The Gambia? As stated previously, a precondition for sustainable human development in the country (encompassing the attainment of the MDGs and the realization of Vision 2020) is an effective and efficient public sector. However previous studies of the public sector (Jabang, 2005, Taylor, 2005) indicate that difficulties in attracting qualified staff and high rates of attrition have resulted in a civil service ill equipped to provide the services required if the country is to attain the MDGs by 2015.

To improve public sector service delivery will take considerably more that just increasing financial incentives. A change in the prevailing institutional and organizational structures will also be required. This paradigm shift would take into account the importance of performance and accountability (Jabang, 2005). A rights-based approach to programming could be used to empower clients of the responsibilities of service providers, while results-based management processes and tools would be utilized to revitalize the public sector. A first step would be a

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comprehensive assessment of the type of institutions needed to deliver basic services in pursuit of the MDGs and to strengthen the dynamic comparative advantage of the Gambia with a view towards promoting pro-poor economic growth. This assessment would identify what type of institutions would be most suited for service delivery (public, civil society/NGO or private) and also provide insights into the type of organizational structures most suited for attainment of national development objectives.

The envisioned assessment would examine capacity development from a multi-sectoral and programmatic approach. The inter-relationship between sectors (for example, reduction of income poverty requires a healthy and literate population, itself dependent on a number or sectoral interventions in the areas of economic management, education, health, water/sanitation, gender equity, infrastructure, etc.)

Outstanding concerns raised on scaling up for the MDGs: Relevance to The Gambia

The reluctance of development partners to substantially increase resource flows in support of the MDGs is often articulated with reference to a number of standard arguments (Oxfam, 2003). These are: (1) the classic ‘Dutch Disease’ syndrome of currency appreciation and rising inflation; (2) concern over the capacity of government to effectively and efficiently manage the increased resource flows; (3) the reliability of externally provided inflows over a time frame long enough to meet the MDGs (9 years); and (4) economic and political governance. There is undoubtedly a certain validity to all of these arguments, and it would be incorrect to dismiss them out of hand. However as will be demonstrated below, the challenges are not so huge that they should present a major obstacle to a substantial scaling up of external resources to meet the MDGs in The Gambia.

1. Dutch disease and appreciation of the Dalasi from increased resource inflows

Over the past couple of years, the Dalasi has stabilized against the currencies of its main trading partners, and in some cases (the US dollar) has slightly appreciated. The case against scaling up of resource flows for the MDGs is often based on the argument that an inflow of foreign exchange will lead to a rise in the price of non-traded goods (via excess demand) and consequently an appreciation of the real exchange rate. This presupposes that there are no supply constraints and the economy is at the limit of its productive capacities (Nebie, 2006). However in The Gambia, structural factors (high levels of adult illiteracy, insufficient application of available technologies, externalities such as gender inequity and archaic land tenure systems) have resulted in low rates of productivity in the agricultural sector. The absence of reliable energy and transport infrastructure act to further disengage the agricultural sector from the rest of the monetized economy. However the potential of the sector to provide inputs to the rapidly expanding tourism industry should not be understated.

Tourism is the main foreign exchange earner for The Gambia, contributing over 12 per cent to the GDP of the country. It also creates significant local employment, with approximately 16,000 people employed by the sector. In revenue terms it was projected that it will earn approximately USD $40 million for the economy in 2004. Based on a projected doubling in tourist arrivals, tourism’s contribution to monetary GDP is projected to increase from an estimated 13% in 2004 to 18% in 2020 (CCA 2005). At the present time, much of the inputs used by the industry are imported, as private sector operators are unwilling to rely on local consumption due to concerns over quality and quantity. The results are considerable annual losses in foreign exchange.

An inflow in resources that contributes to increased efficiency of human capital and transport infrastructure also stands to increase the competitiveness of The Gambia relative

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to its CFA zone neighbors. Although the adoption of the Common External Tariff (CET) for ECOWAS member states will reduce the country’s traditional comparative advantage in the re-export trade, the link of the CFA franc to the Euro zone (and the resulting appreciation of that currency) bodes well for the positioning of The Gambia as a major transit hub for the countries of the Gambia River Basin. Assuming that relations with Senegal can be kept on an even keel, scaling up resources to improve human capital (through support to education, gender equity, access to health care, etc.) and creating an enabling environment for private sector development through increased investment in transport, telecommunications and energy infrastructure should place the economy on a growth path to not only attain the MDGs but to generate sizeable employment opportunities as well.

2. Absorptive capacity of public sector to effectively utilize increase in resources

In recent years there have been a no shortage of studies to examine the challenges of the public sector to provide effective and efficient delivery of services. The 2005 National Human Development Report, entitled ‘Building Capacity for the Attainment of the MDGs in The Gambia’; The 2005 retention and attrition study commissioned by the Capacity Building and Economic Management Project (CBEMP) of the World Bank; the 2004 studies commissioned by UNDP on: (1) ‘Absorptive Capacity in the Public Sector’ and (2) ‘Study on Civil Service Reforms in The Gambia’ all provide similar findings: namely that the civil service is demoralized, understaffed and has difficulty in recruiting and retaining technically competent staff. The presence of a dynamic public sector is a prerequisite for national development. This point is clearly stated in the upcoming PRGS.

If there is widespread acceptance that an effective and efficient public sector is essential for poverty reduction and the attainment of the MDGs, the outstanding issue is what steps are being made to ensure that civil service reforms are at the heart of the development agenda. Unfortunately, there appears to be a ‘Catch-22’ situation, where development partners are awaiting strong indications from government that the political will exists to implement CSR prior to committing themselves to the intervention, while government feels unable to proceed with CSR in the absence of substantial and consistent support from the development community. In order to move forward on this issue, a solution may be to assess what are the institutional and human resource requirements to effectively implement the 2007-2011 PRGS (different scenarios at various rates of implementation, say 65%, 75%, 90% etc.). As the PRGS is the national vehicle to attain the MDGs, substantive support for the PRGS is a prerequisite for realization of the Millennium Development Goals in The Gambia.

3. Stability of resource inflows and implementation of sector wide approaches

As indicated previously, the development budget in The Gambia is almost exclusively financed from external sources. The majority of the funding comes from concessional loans and is used to support individual projects. The track record of these stand-alone projects has led government and a growing number of development partners to reflect favorably on the suitability of Sector Wide Approaches (SWAps). The time is probably right for an assessment of the conditions, and building the capacity, for budget support, and moving away from the project approach. However the use of SWAps cannot be disassociated from the issues of scaling up of resources and strengthening absorptive capacity of government at central and local levels. For the SWAps to work as intended, the technical ability of the sectors must be strengthened and the staff motivated to achieve their annual and multi-year workplans using a performance-based management approach. The proposed debut of a National Planning Commission (NPC) to ensure multi-sectoral coordination of development interventions is a step forward that if effectively implemented, should result in increased efficiency and substantial savings.

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To achieve the objectives of the SWAps, the development partners will have to make (and more importantly, honor) multi-year funding commitments to The Gambia. The various interventions aimed at strengthening financial management and planning systems at central and local government levels provide a much need platform to introduce systems that can ensure transparent and accountable use of local and external resources. Recent actions undertaken by government in this matter include measures to ensure the independence of the Central Bank of The Gambia, pass the Organic Budget Act, establish the Gambia Revenue Authority, strengthen the National Audit Office, improve the collection, management and dissemination of data through the transformation of the Central Statistics Department and develop a national coordination and monitoring framework that will be implemented through the National Planning Commission (NPC).

In light of the above measures, and for these measures to work as intended, support from the development community is critical. The size of The Gambia entails that the resource envelope to reduce poverty and attain the MDGs should be well below that which would be required to achieve similar results in most of Sub-Saharan Africa, it is merely a question of political will on the part of the relevant decision-makers.

4. Economic and Political governance

It would be incorrect to suggest that the reluctance by some development partners to scale up resources for attaining the MDGs in The Gambia is wholly a technical issue limited to manipulation of macroeconomic indicators. Increasingly, the issue of governance has also come to the fore. A number of the issues discussed above, ranging from absorptive capacity in the public sector to the choice of SWAps over project approaches have governance components. The attainment of the MDGs, and by extension, the notion of sustainable human development have at their core, a motivated and empowered population that is equipped to fulfill their potential. The government of The Gambia has recognized the importance of economic and political governance to poverty reduction and sustainable development. These issues are addressed in the first (Create an enabling policy environment to promote economic growth and poverty reduction) and fourth (Enhance governance systems and build the capacity for local communities and Civil Society Organizations (CSOs) to play and active role in economic growth and poverty reduction) pillars of the PRGS

The inability of government to provide essential economic and social infrastructure, hire and maintain a competent and motivated civil service and effectively implement poverty reduction programmes can be linked to the paucity of government revenue (2005 CCA). The absence of a results based management framework has entailed that there has been little incentive for effective service delivery or to reward performing staff members. A generalized absence of transparency and accountability creates conditions for mismanagement and corruption. In order to strengthen government’s capacity to effectively manage the economy, assistance is being provided by UNDP and a variety of development partners (DfID, ADB, World Bank, etc.). The 2007-2011 United Nations Development Assistance framework (UNDAF) will work with local government authorities to strengthen their financial management and planning systems, while building the capacity of media institutions and civil society organizations to provide monitoring and oversight. However for economic governance programmes to be successful in the long term, there is a pressing need for improved political governance as well.

The governance issues faced by The Gambia must be seen in the context of a variety of capacity and resource constraints, and the need for the political will to address the concerns of the country’s development partners. An immediate cause for the ongoing problems in the areas of economic and political governance is the lack of a competent and

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motivated civil service that is committed to effectively implementing poverty reduction programs based on the principles of performance based management. The underlying causes can be traced to insufficient incentives to recruit and retain competent technical staff in the civil service, job insecurity and the absence of an independent civil service authority that is free from outside political influence. The root cause of the governance issues confronted by The Gambia can be traced to the absence of meaningful debate on the development issues facing the country, a lack of transparency and accountability among leading decision makers and the widespread perception that all decisions are made by State House (i.e. The President) and opinions that are contrary are done so at one’s peril. This has the effect of limiting discussion of policy options and promotes a tendency towards ‘short term, quick fix’ solutions when a more comprehensive analysis of Gambia’s development challenges is required (2005 CCA).

Conclusions

This note has attempted to provide an assessment of the macroeconomic conditions present in The Gambia, and the implications for a scaling up of domestic and external resources to reduce poverty and attain the MDGs. In recent years government has struggled with high levels of debt servicing that have reduced resources available to those sectors most used by the poor. Government has recognized the urgency of reducing these levels of debt, and in the 2006 budget has increased the levels of fees and other revenue generating measures, while substantially reducing expenditures. The 2007-2011 Poverty Reduction and Growth Strategy (PRGS) continues these policies, with the objectives of stabilizing macroeconomic indicators such that there is a significant reduction in debt service (as a percentage of the recurrent budget) and that the annual inflation rate is maintained at a level of 5.0% or lower. Although these policies may generate plaudits from certain circles, they are unlikely to resolve the pressing issue of deepening poverty and rising inequality. It is clear that with the current levels of debt service, there is not much space for deficit financing, and in this regard the importance that government attached to reducing the stock of domestic debt is appropriate.

The upcoming PRGS is viewed by government as the principle mechanism to attain the MDGs, but with projected annual GDP growth rates of 5% over the 2007-2011 period of implementation, it is unlikely that domestic revenues will be sufficient to make the necessary investment in public goods required to reduce poverty and reverse the trend towards growing inequity. Thus if the country is to have a realistic prospect of attaining the MDGs, there will need to be a substantial increase in external resources. Although there are justified concerns over absorptive capacity and the management of such resources, the recent efforts by government to establish transparent and accountable systems financial management systems at the central government level is a step in the right direction. However the systems are only as good as the personnel who operate them. In this regard, it is essential that development partners work with government to assess the type and timing of institutional reforms aimed at introducing results based management systems in the public sector. These reforms will undoubtedly address the issue of conditions and incentives for public sector employees, for an effective and efficient public sector is a necessary precondition if the implementation rate of the 2007-2011 PRGS is to be better that the 25% implementation rate noted for the 2003-2005 PRSP I.

Recommendations

The lack of information and data precludes calling for recommendations that are not evidence-based. However there are a number of issues that warrant immediate study. These include:

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Organize a comprehensive discussion between government, development partners and other relevant stakeholders on the conditions for attaining the MDGs in The Gambia, with a view to developing a consensus on mobilizing sufficient domestic and external resources.

Re-examine the current PRGS objective of maintaining low levels of inflation for the period of 2007-2011. Given the high and rising levels of poverty, what should be the level of inflation that can be maintained while mobilizing domestic resources to reduce poverty and meet the MDGs. In addition, if the envisaged 4.5% annual growth rate of GDP is not sufficient to substantially reduce poverty, what are realistic alternative scenarios.

Design a macroeconomic model that takes into account not only the specificities of the Gambia, but also integrates the country into a wider regional context. If the country is to attain the MDGs, then there will be a clear need to generate investment and create viable employment opportunities. In developing growth sectors to generate revenues for public investment and poverty reduction, it is essential that sufficient attention be given to the regional setting. Through its focus on the re-export trade and tourism, The Gambia has traditionally been outwards oriented and this fact should be acknowledged in the model.

In the context of the aforementioned model, conduct a number of complementary studies that examine issues such as (1) Poverty reducing growth elasticities; (2) Agricultural supply response and relative price ratios; Assess areas/sectors where The Gambia has dynamic comparative advantage, especially given the trend of the currencies of neighbouring countries to appreciate against the Dalasi.

If these recommendations are acted upon, government will have the required technical data on which to make informed decisions on the design and implementation of pro-poor macroeconomic policies. In collaboration with development partners, the decisions made should allow The Gambia to embark upon a growth path that gives it a realistic chance of attaining many, if not all of the MDGs by 2015.

References

Government of The Gambia: ‘2007-2011 Poverty Reduction and Growth Strategy (PRGS)-Draft document’, May 2006

Government of The Gambia: ‘2003 Preliminary National Household Poverty Survey (NHPS), Draft tables’, February, 2006

Jabang, Juka: ‘Report on the Study of Civil Service Reforms in The Gambia’, August, 2005

Nebie, Gustave: ‘The Macroeconomics of Aid’, January, 2006

Oxfam Briefing Paper: ‘The IMF and the Millennium Goals-Failing to deliver for low-income countries’, September, 2003

Roy, Rathin and Weeks, John: Making Fiscal Policy Work for the Poor, January, 2004

Taylor, Anthony: ‘Study on the Absorptive Capacity of Government and Partner Agencies to improve the implementation of PRSP I/SPA II’, November, 2004

United Nations: ‘2005 Common Country Assessment for The Gambia’, November, 2005

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United Nations Development Programme: 2005 National Human Development Report ‘Building Capacity for the Attainment of the MDGs in The Gambia’

World Bank: ‘The Gambia: PRSP Prioritization and the Budget, Public Expenditure Review Update’, June 2005

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