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The depreciation of the Gambian Dalasi: Causes and economic impact

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By Muhammed Sillah

The depreciation of the Gambian dalasi has been a major economic challenge for the country, driven by several underlying economic fundamentals. A key factor contributing to the depreciation is The Gambia’s heavy reliance on imports, as the country imports a vast majority of its goods, including food, fuel, and raw materials. This dependency on foreign goods, coupled with structural weaknesses in the economy, has led to a weakening of the dalasi against major foreign currencies. The result has been a sharp rise in inflation, particularly food inflation, which has had devastating effects on the everyday lives of Gambian citizens.

1. Economic fundamentals driving Depreciation

1.1 Heavy dependence on imports

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The Gambia is an import-dependent economy, with an estimated 80% of the country’s goods being imported. This includes essentials such as rice, wheat, fuel, construction materials, and other consumer goods. In 2022, The Gambia’s import bill stood at approximately $640 million, while exports amounted to around $130 million, resulting in a significant trade deficit. This trade imbalance puts pressure on foreign reserves and weakens the dalasi, as the country requires more foreign currency (such as the US dollar or euro) to pay for imports than it earns from exports.

1.2 Declining foreign exchange reserves

As of 2023, the Central Bank of The Gambia has reported a steady decline in foreign exchange reserves, which have dropped to around $300 million, providing just a few months of import cover. The country’s reserves are insufficient to meet its high demand for foreign currencies, leading to increased pressure on the dalasi. This shortage of foreign exchange has been exacerbated by global factors, such as rising global fuel and food prices, which have pushed up the cost of imports even further.

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1.3 Inflationary pressures

As the dalasi weakens, the cost of imported goods rises, fueling inflation. The Gambia’s inflation rate surged to 13.7% in 2023, up from 8% in 2021, with food inflation being the most significant contributor. The depreciation of the dalasi makes imports more expensive, driving up prices for everyday essentials, including food items such as rice, sugar, flour, and vegetable oil. As of mid-2023, food inflation stood at approximately 19%, meaning that the prices of staple foods have nearly doubled in some cases.

1.4 Structural economic weaknesses

The Gambia’s economy is heavily reliant on tourism, agriculture, and remittances. The agricultural sector, which contributes about 20% of GDP, is vulnerable to climatic shocks and poor infrastructure, leading to low productivity. The tourism sector, while significant, is highly seasonal and dependent on external factors like global economic conditions and health pandemics (such as COVID-19). These structural weaknesses limit the country’s ability to generate foreign exchange, further exacerbating the depreciation of the dalasi.

2. Impact of the depreciation on the Gambian economy and citizens

2.1 Food inflation and rising cost of living

One of the most direct impacts of the depreciation of the dalasi has been the rise in food prices. As The Gambia imports nearly all its food supplies, the cost of imported food has skyrocketed in dalasi terms. For example:

·           The price of a 50 kg bag of rice, a staple food, increased from GMD 1,500 in 2021 to nearly GMD 2,200 in 2023.

·           A liter of cooking oil went from GMD 60 in 2021 to over GMD 100 by mid-2023.

·           The cost of flour, which is essential for bread production, rose by over 50% in the same period.

These price increases have made it difficult for ordinary citizens, many of whom live on less than $2 per day, to afford basic necessities. According to the World Bank, nearly 48% of Gambians live below the poverty line, and the rising cost of food has only worsened poverty levels.

2.2 Increased transportation and fuel costs

The depreciation has also had a severe impact on fuel prices, as The Gambia imports all its petroleum products. As of 2023:

·           The price of petrol has risen by 40%, from GMD 62 per liter in early 2021 to GMD 87 per liter in mid-2023.

·           Diesel, used in public transportation and industrial activities, has seen a similar increase, from GMD 58 per liter to GMD 84 per liter.

The rise in fuel prices has translated into higher transportation costs for goods and people, further inflating the cost of food and other essentials. Public transport fares have increased by 25% to 30%, affecting the mobility of citizens and the costs of goods transport.

2.3 Worsening trade deficit

The trade deficit, which was already significant, has widened further due to the depreciation of the dalasi. In 2022, The Gambia’s trade deficit stood at around $510 million. The depreciation has made imports more expensive, which has pushed the cost of the country’s import bill even higher. This widening trade gap puts further strain on foreign reserves and creates a vicious cycle of currency depreciation.

2.4 Reduced purchasing power

The weakening of the dalasi has eroded the purchasing power of Gambian citizens. As the cost of living rises due to food and fuel inflation, wages have not kept pace with inflation. This has led to a decrease in real incomes, making it difficult for households to meet their basic needs. The Gambia’s minimum wage, which stands at around GMD 50 per day, is insufficient to cover the rising costs of food, transportation, and utilities, leaving many families struggling to survive.

2.5 Impact on businesses

Businesses, particularly small and medium enterprises (SMEs), have also been hit hard by the depreciation of the dalasi. The higher cost of imported raw materials and fuel has increased operational costs, leading to reduced profit margins. Many businesses are passing these costs on to consumers, further contributing to inflation. Additionally, businesses that rely on imported machinery and spare parts have found it difficult to maintain operations, as the cost of these imports has surged.

3. Policy responses and recommendations

To address the persistent depreciation of the Gambian dalasi and mitigate its devastating impact on the economy and citizens, it is critical for policymakers to adopt a combination of short-term and long-term measures aimed at strengthening the country’s economic fundamentals. The following are key policy responses and recommendations that could help stabilize the dalasi, curb inflation, and set the economy on a path to sustainable growth:

3.1 Strengthening foreign exchange reserves

One of the root causes of the dalasi’s depreciation is the shortage of foreign exchange reserves. Foreign reserves are vital for stabilizing a country’s currency, as they provide the necessary liquidity to meet external obligations, pay for imports, and manage currency fluctuations. The Gambian government, in collaboration with the Central Bank of The Gambia (CBG), must adopt strategies to rebuild and strengthen these reserves.

·           Boosting export revenues: The Gambia’s export base is narrow, with agriculture (notably groundnuts) and tourism being the primary foreign exchange earners. To diversify and increase export revenues, the government should focus on:

o          Promoting value-added agricultural products: Investments in processing facilities for groundnuts, cashews, and other crops could increase export value, reduce reliance on raw commodity exports, and create jobs.

o          Enhancing fisheries exports: Given The Gambia’s access to rich marine resources, the government could boost investment in sustainable fisheries and fish processing to generate foreign exchange.

o          Supporting small-scale manufacturing: Expanding the local manufacturing sector can help The Gambia develop an export base in low-cost manufactured goods, providing an additional stream of foreign currency.

·           Encouraging remittances: Remittances from the Gambian diaspora are a key source of foreign exchange, accounting for an estimated 20-25% of GDP. Policy measures to streamline remittance transfers, reduce transaction costs, and encourage formal remittance channels (through partnerships with financial institutions) can significantly increase the inflow of foreign currency into the economy. For example, introducing tax incentives or establishing an online platform for secure remittance transfers could attract more diaspora funds.

·           Tourism development: Tourism is one of The Gambia’s largest foreign exchange earners, but it remains vulnerable to global crises (e.g., the COVID-19 pandemic) and is highly seasonal. To bolster tourism revenues:

o          Diversification of the tourism offering: The Gambia should aim to diversify its tourism products by promoting eco-tourism, cultural tourism, and conference tourism. This would reduce reliance on traditional beach tourism and help attract a broader range of international visitors throughout the year.

o          Regional and domestic tourism: Encouraging regional (West African) and domestic tourism could provide a stable source of income when international tourism is disrupted. This could be supported through promotional campaigns and infrastructure improvements.

3.2 Addressing the trade deficit

The Gambia’s chronic trade deficit—caused by its reliance on imports—exerts sustained downward pressure on the dalasi. To mitigate the impact of the trade imbalance, the government must pursue policies that reduce import dependency and encourage local production.

·           Agricultural self-sufficiency: The Gambia imports a large portion of its staple foods, such as rice and wheat. Investing in agricultural infrastructure, providing technical support to farmers, and improving access to affordable inputs (seeds, fertilizer) can boost domestic production. For example:

o          Rice production: The government could target increased rice production by expanding irrigation schemes and introducing modern farming techniques in key rice-producing areas. This could reduce the need to import rice, a key driver of the import bill.

o          Livestock and poultry production: Enhancing local production of meat and poultry could reduce reliance on imported frozen foods, while simultaneously creating jobs and improving food security.

·           Supporting local industry: Policies aimed at promoting local manufacturing could reduce the need for imports, particularly of consumer goods and building materials. Tax incentives, low-interest loans, and the development of special economic zones (SEZs) could encourage both domestic and foreign investors to set up manufacturing plants in The Gambia. This would help diversify the economy, create jobs, and reduce reliance on imports.

·           Import substitution: Encouraging the production of goods that are currently imported—such as packaging materials, textiles, and processed foods—could help mitigate the effects of the trade deficit. The government could implement industrial policies that prioritize sectors with high potential for import substitution, providing targeted support through tax breaks, subsidies, or technical assistance.

3.3 Inflation management

The depreciation of the dalasi has led to rising inflation, particularly food inflation, which has had severe consequences for Gambians. Managing inflation effectively requires a combination of monetary, fiscal, and structural policies to stabilize prices and reduce inflationary pressures.

·           Monetary policy: The Central Bank of The Gambia must adopt a tighter monetary policy to curb inflation. This could include:

o          Raising interest rates: Increasing interest rates could help control inflation by reducing money supply and curbing excessive demand. However, this policy must be carefully calibrated to avoid stifling economic growth or increasing borrowing costs for businesses.

o          Sterilization operations: The Central Bank could intervene in the foreign exchange market to stabilize the dalasi, using reserves to buy or sell foreign currency as necessary. This would help manage the exchange rate and control inflation.

o          Open market operations: The Central Bank could engage in open market operations by selling government securities to absorb excess liquidity from the economy, thereby controlling inflation.

·           Targeted subsidies: To protect vulnerable populations from the impact of rising food and fuel prices, the government could consider introducing targeted subsidies for essential goods. These subsidies would help lower the cost of staple foods (such as rice and cooking oil) and fuel for transportation, reducing the burden on low-income households. However, subsidies should be carefully designed to avoid excessive strain on public finances.

·           Improving supply chains: Reducing inefficiencies in supply chains—such as high transportation costs, bottlenecks at ports, and inadequate storage facilities—can help lower the prices of goods. The government could invest in infrastructure improvements (roads, storage depots) and streamline customs procedures to improve the flow of goods and reduce inflationary pressures.

3.4 Fiscal discipline and public spending

The Gambia’s fiscal policy must be aligned with its goal of stabilizing the economy and reducing inflation. The government needs to practice fiscal discipline, ensuring that public spending is efficient and does not exacerbate inflationary pressures.

·           Reducing public debt: High levels of public debt put pressure on foreign exchange reserves and contribute to currency depreciation. The government should focus on reducing its debt burden by cutting non-essential expenditures and improving revenue collection. Engaging in debt restructuring or negotiating favorable terms with creditors could also help manage the country’s debt load.

·           Improving tax collection: Enhancing the efficiency of tax collection would provide the government with more resources to invest in infrastructure, social services, and other critical areas. The government could modernize tax administration, reduce tax evasion, and broaden the tax base by formalizing parts of the informal economy.

·           Efficient public spending: The government must prioritize investments in key sectors that can promote long-term economic growth, such as education, health, agriculture, and infrastructure. Public spending should be targeted toward programs that provide the greatest return on investment, while minimizing wasteful or inefficient expenditures. Improved budget management, transparency, and accountability will help ensure that public funds are used effectively.

3.5 Strengthening institutional capacity

Building institutional capacity is critical for implementing and sustaining the recommended policy measures. This includes improving the governance of key economic institutions, such as the Central Bank, Ministry of Finance, and trade-related agencies.

·           Enhancing the central bank’s role: The Central Bank should have the autonomy and technical capacity to effectively manage monetary policy, foreign exchange reserves, and the banking sector. Strengthening the Central Bank’s capacity to analyze economic data, manage inflation, and conduct policy interventions will be key to maintaining economic stability.

·           Improving governance and transparency: The government must improve governance and transparency in all sectors, particularly in public financial management. Reducing corruption, enhancing the transparency of public procurement processes, and ensuring that public funds are used for their intended purposes will help restore investor confidence and promote long-term economic growth.

Conclusion

The depreciation of the Gambian dalasi is a complex issue driven by a combination of structural weaknesses, external shocks, and poor economic fundamentals. Addressing the root causes of depreciation requires a coordinated effort by policymakers to strengthen foreign exchange reserves, reduce the trade deficit, manage inflation, and promote fiscal discipline. By implementing the recommended policies, The Gambia can stabilize its currency, reduce inflation, and set the stage for sustained economic growth, improving the livelihoods of its citizens and creating a more resilient economy.

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