Wednesday, September 17, 2014

IMF: NAWEC leads spending pressures in Gambia



“Public debt, which stood at more than 80 percent of Gross Domestic Product (GDP) at the end of 2013, is projected to exceed 90 percent of GDP by the end of this year. The burden of government borrowing will exert further pressure on inflation, international reserves, and the exchange rate," IMF says.

Spending pressures have reemerged, led by financial difficulties of the public utility provider (NAWEC), as well as some spending in excess of budgeted levels, an IMF mission said of the Gambian economy on September 17.

The resulting borrowing needs have kept interest rates high while putting pressure on the Dalasi, according to head of mission Bhaswar Mukhopadhyay, whose team assessed progress in implementing policies as part of the second review of the government’s reform programme supported by an Extended Credit Facility arrangement with the IMF.

At the end of the September 4 – 17 visit, Bhaswar said: “The macroeconomic environment stabilized in early 2014, with a successful tourism season leading to improved revenues, a stable exchange rate, and moderate inflation. Government spending was contained and interest rates appeared to be edging downward slowly.

“Since that time spending pressures have reemerged, led by financial difficulties of the public utility provider (NAWEC), as well as some spending in excess of budgeted levels. The resulting borrowing needs have kept interest rates high while putting pressure on the Dalasi.

“Public debt, which stood at more than 80 percent of Gross Domestic Product (GDP) at the end of 2013, is projected to exceed 90 percent of GDP by the end of this year. The burden of government borrowing will exert further pressure on inflation, international reserves, and the exchange rate.

“The Gambia remains Ebola-free, but news from the subregion appears to be deterring tourists and this will pose an additional challenge. At the same time the delayed start of the rainy season will have a substantial impact on the harvest. Agriculture is The Gambia’s largest economic sector and its second largest exporter, after tourism. Together the impact of
                                                          
“The Extended Credit Facility (ECF) is the Fund’s main tool for providing medium-term support to low-income countries, with higher levels of access to financial resources, more concessional financing terms, more flexible program design features, as well as streamlined and more focused conditionality. 

“These two external shocks will be felt on economic growth, the government budget, trade, and the banking system, though more information is needed to quantify these risks.  

“In light of substantially higher borrowing by the government and looming risks, it is imperative to reinforce corrective measures and to make bold choices about spending priorities. The target of limiting net domestic borrowing to 2.5 percent in 2014 is no longer realistic but efforts will be required to limit borrowing and steer the budget toward zero net domestic borrowing in the medium-term.  Moving forward, a deeper restructuring of the government budget would be required to limit the sources of spending pressures and make space for priority spending. 

 “Implementation of reforms is also urgently needed to put NAWEC on a sound financial footing and limit its strain on the state budget. The mission welcomes the authorities’ commitment to implement recommendations of a comprehensive energy sector study being conducted with the help of consultants and the World Bank to restructure the energy sector.
It will equally be important to ensure that other public enterprises are operated on a sound financial basis, to minimize contingent fiscal risks and provide effective support to private sector activities.

“Commendable progress has been made in liberalizing fuel imports, reducing the size of fuel subsidies, and improving revenue collection. The authorities are encouraged to sustain such progress, ensuring that competition drives lower prices for businesses and consumers, and strengthen the social safety nets that better target vulnerable populations. These reforms promote competitiveness and investment, and allow the government to focus resources on those who need it most.

“The Mission thanks the authorities for the candid and constructive discussions during the mission, and looks forward to an active and continued dialogue with the aim of restoring macroeconomic stability as a foundation for economic development in The Gambia.”

The first review was completed in May 2013, but policy slippages in the second half of that year have delayed the completion of the current review, the IMF said. 

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