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Why accelerating structural economic transformation is keyto sustainable price and exchange rate stability in The Gambia

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By Lamin Momodou Manneh
Senior Special Adviser,
Central Bank of the Gambia

The other day as I was doing my daily browsing of various sites on internet, I came across a social media video that captured my interest for a few minutes. As with many of such videos, the animator was speaking with a lot of passion about the ongoing inflationary pressures, balance of payments (especially the gaping deficits in the merchandise goods account) and exchange rate problems the Gambia is currently experiencing. I must say that in the video the animator was quite eloquent about spelling out these issues, displaying an impressive knowledge about how much the prices of the various basic commodities consumed in the country (ranging from rice, sugar, bread, vegetables, fish, meat, poultry and eggs etc as well as fuel) have changed in the northward direction over the past two to three years. He also demonstrated similar mastery of the data on the changes of the value of the Dalasi vis-à-vis the major international currencies, notably the US Dollar, Pound Sterling, the EURO and the CFA. While the tone of his discourse betrayed a certain degree of populist bias, he was spot on regarding the accuracy of the statistics he spewed out, because I guess he must be well read with respect to the Gambia Bureau of Statistics (GBOS) and Central Bank publications.

As I am also quite familiar with these statistics (from my vantage point in the Central Bank) but still wary of such social media posts, I was doing a quick mental check of the accuracy of the figures he was citing as I attentively listened to the video and my overall conclusion was that he got them right. Rather, what hit me as disingenuity on his part is his strong assertion that absolutely nothing is being done on the part of the authorities to address the country’s current inflationary pressures and exchange rate challenges!

As I am currently privileged to be providing a lending hand to the vigorous efforts of the Monetary Authority under the leadership of the Central Bank of the Gambia Governor at addressing the country’s macroeconomic challenges, notably the persisting inflationary pressures, significant trade deficits and the precarious perch of the Dalasi vis-à-vis other currencies, I know for sure that somethings are being done to address these problems, and I must say that they are being done rigorously and systematically as well as with a lot of commitment. It is also important at this stage to point out that some notable positive results are already being realized from these efforts aimed at containing inflation and the sliding of the Dalasi vis – a -vis the major currencies, as it will be demonstrated below.

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But, as emphasized by the Governor of the Central Bank of the Gambia on various occasions, particularly when monetary and exchange rate policies and the outcomes realized therefrom are being discussed, if so far the results have fallen below the desired levels, this is mainly because with a shrinking productive and export base, the country is highly vulnerable to imported and “structural inflation”. It normally takes time to tackle these types of inflation, as it is being experienced in most parts of the world. The Gambia’s situation is compounded by the small size of its economy which is also highly import dependent with a miniscule export base. To put it more precisely and explicitly, currently the country’s merchandise (goods) exports are of the order of US$60 million whilst its total goods imports stand at around US$600 million, clearly indicating an enormous deficit on the goods account. Without adequate compensating inflows of development finance assistance and other external resource inflows, all this increases considerably the demand for foreign exchange, thereby putting enormous pressures on the exchange rate of the Dalasi and by extension domestic prices in the process. In this process, both demand pull and cost push variants of inflation come into play.

Thus, tackling effectively the persisting inflationary upsurges and pressures on the domestic currency in the Gambia has to go beyond short term aggregate demand management and be strongly grounded on structural transformation of the Gambian economy, that could lead to measurable increases in both domestic production of staple commodities and rise in non-traditional exports. That is also the main proposition of this article. In the rest of the article, we will first reiterate and demonstrate the important point we have made in a previous article in the Standard Newspaper that although the Gambia has had a good track record of macroeconomic management and relatively strong economic growth performance over the past decades (about which all Gambians should be proud), these have yet to produce the desired structural transformation of the economy nor a robust and diversified export base, especially for non-traditional exports, notably manufactured goods. We will then show how this reality about the country’s economic structure impinges on the fight against inflationary pressures, before putting forward recommendations for accelerating the structural transformation of the economy and broadening of the export base.

A brief recapitulation of the Gambia’s growth and structural economic transformation performance since independence

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To ensure that the assessment of the Gambia’s growth and structural economic transformation performance is backed by long term empirical evidence, historical data stretching back to 1968 i.e. three years after Independence, through to 2023 is reviewed. A wide range of policy statements and accompanying programmes of both the Gambia Government and key development partners were also reviewed. We found a convergence among all of them about the country’s consistent relatively good economic growth track record.

The Gambia’s growth performance during the period from 1968 to 2023 (55 years) averaged about 5 percent compared to 3.5 to 4 percent in Sub-Saharan Africa as in figure 1.  It is notable that the country’s real GDP growth has surpassed 8 percent in 1968, 1973, 1975, and 1983 respectively and surpassed 6.0 percent during many of the subsequent years. However, it should be acknowledged that growth has been volatile and has not necessarily generated prosperity for most of the population. For instance, the current rate of poverty in the country is quite high. The OECD, UN and the World Bank made a proposition in the 1990s based on the realization that with the annual population growth in most developing countries hovering around 3%, meaningful improvements in real per capita GDP requires at least 5 percent annual real economic growth (5%-3% =2%). In the early 2000s, the African Union and the UN made the proposition that for there to be sustained poverty reduction as well as economic transformation, countries had to attain annual real GDP growth of at least 7 to 10 percent over several years.

From the foregoing analysis, overall assessment of the economic growth performance of the Gambia compares favorably with the African continent’s average growth performance during the period under review which was between 3.5 and 4.00 per cent, but fell short of the desired levels for meaningful structural changes in its economy that could guarantee its resilience and broad based prosperity. In this connection, any cursory examination of the sources of the country’s economic growth since the late 1960s will clearly show that its narrow base has not changed significantly. The country has remained heavily dependent on the agricultural sector (crops, livestock, forestry and logging) as well as fisheries. On the other hand, the industrial sector accounts for only 7.5 per cent of the GDP, which falls significantly below the stipulated threshold of between 25 – 30 per cent of GDP for a structurally transformed economy. The rest is accounted for by the tourism and service sectors, mostly of the low value types.

The upshot of all this is that the external position has remained weak and highly vulnerable due to ongoing multiple global crises. High imports of food items and capital goods have progressively outweighed total exports of goods and services in large magnitudes, highlighting vulnerabilities to external shocks. For instance, from 2004, there has been increasing divergence between imports and exports characterised by significant contraction in exports and sharp rise in imports.

As supply chain challenges persist, the Gambia grapples with a substantial shortfall in its domestic food supply due to declining productivity and decreasing yields and output in the agricultural sector. These huge deficits have to be compensated for by imports, which make up approximately 50 percent of the country’s consumer basket. To more clearly illustrate the central thesis of this article, which is that the current fight against inflation in the Gambia is complicated by the enormous gaps between the country’s exports of goods, which is only US$ 60 million on one hand and imports in the order of US$600 million, out of the country’s total consumption of 275,000 tons of rice, only 29 per cent is produced locally. For poultry meat and eggs, which are progressively becoming an important source of protein for the population, only 10% of total consumption is produced locally. This heavy dependence on imports renders the Gambia highly susceptible to external pressures, resulting in heightened price and exchange rate volatility. For instance, challenges related to supply chain disruptions first triggered by the COVID-19 and ongoing geopolitical conflicts, mainly in Ukraine and the Middle East, have notably elevated import costs, including of oil products, triggering domestic inflationary pressures and a weaker local currency.

Conclusions and the way forward

In this article, we have strived to elaborate a little bit more on an important proposition we had put forward in earlier articles on inflation in the Gambia published by the Standard Newspaper in January 2024, that successful tacking of inflation on a sustainable basis in the Gambia requires accelerating structural transformation of the economy. This, inter alia, will help the country reduce measurably the current enormous imbalances between demand for, and supply of, foreign exchange resources, that exert serious pressures on the exchange rate and domestic prices.

We had highlighted the ongoing herculean measures being pursued by the Monetary Authority towards curbing domestic demand pressures, especially through adjustments of the Central Bank policy and other allied interest rates. These measures have been pursued in the context of the Monetary Policy Committee Meetings. It is notable that, in addition to the deployment of monetary policy tools to help check inflationary pressures, the Central Bank of the Gambia has also vigorously championed measures aimed at bringing down the prices of basic commodities through facilitating their supplies at affordable prices. The monetary policy measures have been complemented by recent curbing of expenditures and fiscal consolidation measures by the Government. These measures have contributed to the slowing down of the rate of inflation.

Since end October 2023, there has been signs of moderation of inflationary pressures in the country. As of the last meeting of the Central Bank’s Monetary Policy  Committee in late February 2024, the rate of inflation had moderated to 18.0%, after reaching a peak of 18.5 per cent September 2023. It is expected that with continuation of this policy stance, the rate of inflation in the country will be brought down to single digits towards the end of 2024.

Despite these encouraging developments on the inflation front, due in large measure to the determination of the monetary authorities to contain the inflationary pressures, these measures have to  be reinforced with deeper structural policies aimed at changing the structure of the economy to make it more diversified and broaden its export base. In this regard, it is notable that in addition to maintaining an active policy stance to check the inflationary pressures, in coordination with the fiscal authority, the Central Bank management is also proactively working on initiatives that are aimed at increasing domestic production of a wide range of basic commodities, that could contribute to dampening their prices, while helping the country to conserve foreign exchange. The latter will also help in reducing the widening trade balance and contribute to exchange rate stability as well. We are aware that the Government of the Gambia has embarked on a number of initiatives aimed at broadening the productive base of the economy and its export readiness in the context of Yeriwa NDP. It is imperative that their implementation is accelerated and coordination of the processes with the private sector and external partners be deepened and strengthened.

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