THE GAMBIA’S ECONOMIC TRANSITION IN PERSPECTIVE- PART II
BY ALASANA J.K NJIE, London, UK
The turn of the 1980s, which saw, countries like Russia and China begin to embrace free market policies albeit in varying degrees; marked a significant turning point in international economics. The result was that two main issues, related at least from the perspective of international development institutions, made it increasingly impossible for us and African countries in general, to maintain not only the status quo of pseudo-social model through ‘unofficial redistribution but also their financing. These include (1) The gradual but significant decrease in foreign aid and this became more acute post July 22nd 1994 (2) The increasing IMF and Washington led drive for free markets through trade and financial sector liberalization as well as internal reforms, which became intricately tied to economic and financial aid in the form of conditionalities. This was and remains very particular about fiscal policy, with strict conditions on austerity. These presented deep-seated challenges, which should define the future of country and therefore, became a critical phase in our development agenda. This presented us with the best opportunity to effect fundamental reforms with the view to set the path to focus on ‘GROWTH’ rather than ‘REDISTRIBUTION’. This is why Tijan Nimaga’s interpretation of ‘social democracy’ attributable to PDOIS, which was featured on The Gambia Echo online newspaper, raises the question, what planet he is dwelling on? Let’s forget about ideology and be pragmatic, developments in the global economy and even international socio-politics means the building of a totally inward looking economy, means signing a death sentence not only for your economy but your very existence as a sovereign country. Tijan’s interpretations and applications of his communist ideas, which he believes should be applied to The Gambia, is a fantasy in today’s free market led globalize world economy, which are purely grounded ideology rather than reality. Textbook ideological frameworks/models are broader guiding principles that are mainly underlined by assumptions. Hardly do these assumptions stand the test of reality and I believe Tijan should get real.
The policy responses, particularly fiscal responses to these exogenous developments, are what set the tone for the current state of affairs. Typically, as usual, we tried to ‘deal with the problems’ presented by the changing exogenous factors particularly, global economic dynamics and the dysfunctional institutions and fiscal problems that developed rather than dealing with the causes of such dysfunctions. The significance of this situation emanated from the fact that it required deep-seated reforms; to do away with the pseudo-social model of redistribution to a more market centered approach firmly focusing on growth. But even if we tried to ‘deal with the problems’ rather than take the painful and challenging approach of ‘dealing with their causes’, the implications of our choice(s) of approach should have foreseen the consequences and one such consequence is that the problem(s) do not really go away but it’s instead, a case of papering over the cracks and in most cases, as our situation proved, the problems gets worse, until an emergency solution is needed. That emergency solution in the case of The Gambia came with its brush with the IMF IN 2004/5. What we had was strict conditionalities imposed upon us which amounted to an emergency solution and this in turn forced the hand of the government to effect some of the reforms we are seeing today.
In the face of these dynamics, let us look at fiscal policy of the government from around this period. A structurally imbalanced and for that matter, a dysfunctional economy not fit for purpose couldn’t adequately mobilize the resources required for our model of redistribution let alone growth, meant that we found ourselves in persistent and worsening fiscal problems. This included both at central government and public enterprises level. Since this was a gradual process, one would have thought it was vital for a root and branch strategic review of the system both internally and in its relationship with the global economy to make sense of what was presenting us with the difficulties. This may well have been done, but policy responses indicated a decision to’ deal with the problem rather than a fundamental reform to reposition the economy into a fit with the global economy in a sustainable fashion, bearing in mind the flexibility needed for sustainable performance in this new world economy. This would have set the benchmark for dealing with the ‘causes’ of our woes rather than continuing to manage them.
While the inter-relationships between fundamental/ primary economic variables such as the levels of fiscal deficit, net public sector debt, inflation and interest rates mostly means that distresses like we are facing cannot be totally be attributable to one single factor, their significance can be isolated and an orderly analysis be effected to make sense of developments. Let us try and analyze the significance of fiscal and monetary policy decisions over the period to make sense of what we see today.
PERSISTENT AND WORSENING BUDGET DEFICITS AND THE DECISIONS TO ‘FINANCE’ THEM THROUGH AN EXPANSIONARY FISCAL AND MONETARY POLICY.
This involved decisions to ‘deal with the deficit problem’ rather than ‘deal with its causes’. The approach of the government to this important issue was to ‘finance’ the deficits rather than a root and branch reform, to address the causes of the persistent and worsening deficits. This does not. This was an expansionary fiscal and monetary policy which involved three main approaches
-Borrowing (thus significantly increasing Net Public Sector Debt).
-Printing money (the D100 denomination)
The Net Public Sector of the country has been at an all time high in our history, after all, we have been categorized as a Highly Indebted Poor Country (HIPC). This categorization may or may not be subjective, but the significant factor is how the fiscal indicators of the country have been developing over the years. Recommendations from institutions like the International Monetary Fund are an ideal figure of around 5% of GDP depending on the level of actual growth in any fiscal year. This is because fiscal indicators particularly that of the Central government and the level of Net Public Sector Debt as a percentage of Gross Domestic Product has a direct relationship with the overall level of inflations, Interest rates and the performance of the currency in the foreign exchange market. More often than not, this will also have a bearing on the levels of Foreign Currency reserves of the country, because the Central Bank of The Gambia uses such reserves to intervene in the forex market to effect a certain goal. This will also have a direct impact on the Current Account position in the Balance of Payments in a structurally imbalanced economy like that of ours.
Since around 2000 Central government Fiscal deficit averages around 10% of GDP. Consolidated revenue in for example 2003 was D1.87 Billion but projected net expenditure over the same period was D2.9 billion. The important figure here is that D1.77 Billion of such goes to recurrent administrative expenditure vis-à-vis on salaries and stationeries. It has to be said that where we choose to ‘deal with such a problem’ rather than ’address it’s causes’, this has to be financed in one way or another and this is done in part through borrowing and in part through printing the D100 denomination. As a result, Net Public Sector Debt averages almost 40% of GDP over the last 8 years and the corresponding interest payment (Debt servicing) reached close to D500 million annually. The worrying thing is that almost 90% of our NPSD are foreign currency denominated thus leaving dangerously exposed to foreign currency risk. This simply refers to the risk, in our case increasing cost of debt servicing, of unfavorable movement in the exchange rate between the Dalasi and major currencies in the currency market. The Dalasi has depreciated by almost 30% against major currencies in the last 8 years; this potentially means an increase of 30% in the cost our external debt financing. This is because we would need at least in quantitative terms, 30% more Dalasi to finance our fixed installments. But for the purpose of this discussion, the focus is on the relationship between our average annual financing requirement of 10% and corresponding GDP growth rate, which averages 4%. This means an average 6% more spending and for that matter demand for goods and services than the expansion in domestic economic activity. This created huge inflationary pressure in the economy, as there was more capacity to spend within the economy than the economy can services. Commercial banking lending activity also played an important role in this pressure
The printing of the D100 denomination to help finance these deficits, undoubtedly further increased inflationary pressure within the economy over the years. When such an expansionary monetary policy was pursued inflationary pressure was further increased and this only made the situation worse as an import dependent country will naturally increase its demand for imports because there not domestic resources to increase supply to meet the excess demand in the economy and imports are bound to increase. What we ended up with is a further worsening of the fiscal position of the government (11.6% of GDP in 2003) and a worsened current account/ trade balance. By the end of 2003 the value of imports stood at D4.0billion while exports stood at an embarrassing D93.7million. Broad money growth reached an all time high of 43.4% in 2003.The natural thing is for an import dependent country to resort to more imports, to service the excess demand created by the excess liquidity in the economy. This is evident in our current account position in the BOP account in 2003, 2004 and 2005 for example, which were -13.6, -21.6 and -25.3 respectively, indicating a sharp and progressive increase in imports. This puts further pressure on the Dalasi in the currency markets as the demand for foreign currency further contributes to the depreciation of the Dalasi thus increasing the cost of importing goods into the country. This pressure is further increased by the fact that Gross Official Reserves was progressive falling over the period. The average for this has been about 4 to 5 months worth of Import Cover but around 2003 this has fallen to an all time low of 3 months (a fall of 42.2%, from D1.53billion worth to D 883.67 million). Therefore at central bank level, we had a shortage of hard currency in the economy thus limiting the capacity of the Central banking to intervene in the currency markets through an OMO. Inflation reached a high of 17.6% in 2003 around the time when these notes were introduced.
The difficulty of this position was clearly manifested in both fiscal and monetary policy responses to demand pressures and for that matter inflation in the economy. After the expansionary fiscal policy outlined above, a policy reverse and a tightening of monetary policy by way of increasing the Treasury bills discount rate from 20 to 30 % and increased the commercial bank's reserve requirement ratio from 14 to 18% of deposit liabilities, with the view to curb the excessive expansion in commercial bank credit, to mop up the excess liquidity all failed work. In fact even such tightening of monetary policy did not dampen commercial bank domestic credit expansion as this increased by D996.32million, which was an increase of 48% over the previous fiscal year. The economy shrank by -3.2% over the period and this is evidenced by the fact that foreign asset acquisition by financial institutions in the country actually rose.
The indications were that, what we experienced was inflation induced or worsened by a combination of fiscal and monetary policy decisions thus inducing or worsening a demand pull inflation. This further worsened a cycle of import pull inflation. What we ended up are:
1. A worsened central government fiscal deficit (11.6% in 2003
2. Falling Official Reserves (a fall of 42.2% in 2003)
3. Increased Net Public Sector Debt (debt services reached almost D500million)
4. Worsened Balance of Payment account (Current Account Deficit)
5. A Depreciation of the Dalasi in the currency market (by almost 30%)
6. Annual Inflation rate in excess of 17% induced by demand and import related
Factors
In the end it is the consumers who bear the brunt of these developments. General prices went on an uncontrollable hike, further made difficult to stabilize because of the extreme volatility in the currency markets. It was therefore imperative for the government to intervene and regulate the currency market through licensing.
I believe, as a country, we should look at the bigger picture, i.e. the broader framework of the economy and its relationship with the rest of the global economy. In Part Three, I will try to discuss the details of the framework of the economy and its relationship with the global economy, to try and point out its shortcomings and why a root and branch reform is needed to create a fit with the global economic dynamics. I hope this can stimulate debate as to the best framework/ model (Am bearing in mind Tijan Nimaga’s argument for a ‘Social Democracy’ model). To be continued