42261 INTERNATIONAL DEVELOPMENT ASSOCIATION AND THE INTERNATIONAL MONETARY FUND REPUBLIC OF THE GAMBIA Enhanced Heavily Indebted Poor Countries Initiative Completion Point Document and MultilateralDebt Relief Initiative Prepared by the Staffs o f the International Development Association and the International Monetary Fund Approved by Obiageli K. Ezekwesili and Danny M. Leipziger (IDA) and Hugh Brendenkamp and Matthew Fisher (IMF) November 28. 2007 Contents Page Executive Summary ................................................................................................................... i . I Introduction....................................................................................................................... 1 I1. Assessment o f Requirements for Reaching the Completion Point ................................... 2 A . PRSP and Poverty Monitoring ................................................................................ 2 B. Macroeconomic Performance ................................................................................. 6 C . Governance............................................................................................................ 10 D. Social Sector Reforms........................................................................................... 12 E. Structural Reforms................................................................................................. 15 F. U s e o f HIPC InterimRelief ................................................................................... 16 G. Staff Assessment ................................................................................................... 18 I11. Updated Debt Relief and Sustainability Analysis ........................................................... 19 A . Updated Data Reconciliation for the Decision Point ............................................ 19 B. Status o f Creditor Participation in the Enhanced HIPC Initiative......................... 21 C . Consideration for Topping-Up o f HIPC Assistance ............................................. 22 D. Creditor Participation in the Multilateral Debt Relief Initiative ........................... 28 E. Updated Debt Sustainability Analysis ................................................................... 29 F. Sensitivity Analysis and Long-Term Debt Sustainability ..................................... 32 IV. Conclusions ..................................................................................................................... 34 V . Issues for Discussion....................................................................................................... 35 . Boxes B o x 1. Status o f Triggers for Reaching the Floating Completion Point ................................... 4 Box 2 . The Gambia: Performance Under the Fund-Supported Programs. 1998-07 ................. 7 B o x 3 . Debt Sustainability Analysis Macroeconomic Assumptions. 2006-2007 ................... 31 Fimres Figure 1. Poverty Reducing Expenditures and Interest Payments ......................................... 18 Figure 2 . The Gambia: Projected and Actual Export Performance. 2000-2006 .................... 25 Figure 3 . External Debt for Medium and Long Term Public Sector Debt. 2007-26 .............. 50 Figure 4 . Sensitivity Analysis. 2006-2025 (Stock o f Debt) .................................................... 5 1 Figure 5 . Sensitivity Analysis. 2006-2025 (Debt Service) ..................................................... 52 Figure 6 . External Debt Structure ........................................................................................... 53 Table 1. The Gambia: Selected Economic and Financial Indicators. 1999-2007 ................... 7 Table 2 . Gambia College Primary Teacher’s Certificate (PTC) Graduates ............................ 13 Table 3 Scholarship Funds for Girls ...................................................................................... 13 Table 4 . Share o f Births Attended by Skilled Health Staffs .................................................. 13 Table 5 . Share o f Primary and Secondary Health Care in Health Recurrent Budget ............14 Table 6 . Budget Outturns o f Locally Funded Poverty Reducing Expenditures (PRES)........17 Table 7 . Debt and Exports Related Variables (After HIPC Assistance) ................................ 23 Table 8 . Decomposition o f the Changes in the NPV o f Debt-to-Exports Ratio .................... 24 Table 9 . Discount Rate and Exchange Rate Assumptions ...................................................... 37 Table 10. Nominal and NPV o f External Debt Outstanding as o f End-December 1999......... 38 Table 11. Estimated Assistance at Decision Point ................................................................... 39 Table 12. External Public and Publicly Guaranteed Debt at End-December 2006 ................. 40 Table 13. Net Present Value o f External Debt......................................................................... 41 Table 14. External Debt Service after Full Implementation o f Debt-Relief Mechanisms .......42 Table 15. External Debt Indicators .......................................................................................... 43 Table 16. Sensitivity Analysis ................................................................................................. 44 Table 17. Delivery o f IDA Assistance under Enhanced HIPC Initiative and the MDRI ........ 45 Table 18. Delivery o f IMF Assistance under Enhanced HIPC Initiative and the MDRI ........ 46 Table 19. Status o f Creditor Participation under Enhanced HIPC Initiative ........................... 47 Table 20. Paris Club Creditors’ Delivery o f Debt Relief Under Bilateral Initiatives.............. 48 Table 21. Status o f Country Cases Considered Under the Initiative, October 4, 2007 ........... 49 Appendices I. Debt Sustainability Analysis Under the Debt Sustainability Framework for Low-Income Countries-An Update.....,.,..,.,..,.,,.,,................,,...................,.,.....,.....,.,,................................54 11. Debt Management ...................................................................................... ........................68 i EXECUTIVE SUMMARY The staffs o f the InternationalDevelopment Association (IDA) and the International Monetary Fund (IMF) are of the view that The Gambia has met the requirements for reaching the completion point under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative. The Gambia has made satisfactory progress in implementing its first Poverty Reduction Strategy Paper (PRSP), and has recently prepared i t s second PRSP which was discussed by the Boards o f IDA and IMF in July and August 2007, respectively. After a period o f uneven macroeconomic performance following the decision point in 2000, macroeconomic stability has been maintained since 2004. O f the eleven triggers for reaching the floating completion point, nine have been h l l y achieved while two have been partially achieved, for which the staffs recommend that waivers be granted. The Gambia i s now well placed to consolidate and deepen its poverty reduction strategy while maintaining strong real GDP growth. 0 At the decision point in December 2000, the Executive Directors agreed that The Gambia qualified for debt relief under the Enhanced HIPC Initiative. The decision point analysis indicated that HIPC assistance in the amount o f US$66.6 million in 1999 NPV terms was required to lower The Gambia’s NPV o f debt-to- exports ratio to the HIPC threshold o f 150 percent. IDA and IMF commitments to this debt r e l i e f were US$22.3 million and US$2.3 million, respectively in NPV terms. O f these total commitments, US$8.0 million and US$0.6 million respectively have already been delivered as interim assistance as o f November 2007. Total interim HIPC debt relief delivered by multilateral and bilateral creditors in 2001-2007 amounted to US$17.5 million in NPV terms. The NPV of debt-to-exports ratio has substantially increased with respect to projections at the time of the decision point. This i s primarily attributable to substantially larger than projected new borrowing, lower than projected export volumes, and changes in the discount rates and exchange rates. At the decision point, the NPV o f debt-to-exports ratio at end-2006 was projected to be 139.8 percent assuming full delivery o f the assistance committed under the HIPC Initiative at decision point, while the completion point analysis shows the actual outturn to be 242.5 percent. The staffs are of the view that The Gambia does not meet the requirements for additional debt relief, or exceptional “topping-up”, under the Enhanced HIPC Initiative. Exceptional topping-up would be justified if the deterioration o f the debt burden indicators could be primarily attributed to fundamental changes in a country’s economic circumstances due to exogenous factors. Adverse changes in the international price o f exports and in the discount and exchange rates are considered exogenous factors, but these accounted for only approximately one-third o f the unanticipated deterioration o f the NPV o f debt-to-exports ratio. Lower than projected .. 11 export volumes and higher than anticipated new borrowing had a much greater impact on the deterioration o f the debt-burden ratios, and these factors are not considered to be exogenous changes to the country’s economic circumstances, according to a detailed assessment (Section 1II.C). 0 The Gambia will qualify for additional debt relief under the Multilateral Debt Relief Initiative (MDRI) upon reaching the completion point under the Enhanced HIPC Initiative. Debt r e l i e f under the MDRIwould cover all remaining debt service obligations on eligible credit balances to IDA, the IMF and the African Development Fund (AfDF), after debt service r e l i e f available under the HIPC Initiative. MDRI debt relief, net o f HIPC assistance, would lead to nominal debt service savings on debt owed to IDA, the IMF and the AfDF o f US$373.5 million. 0 While full delivery of debt relief under the HIPC Initiative and the MDRI would significantly reduce external public debt, The Gambia will remain at high risk of debt distress. The country’s stock o f external debt will remain large post-completion point primarily due to outstanding debt owed to multilateral creditors that do not participate in MDRI and non-Paris Club bilateral creditors, much o f which was contracted since the decision point. The updated debt sustainability analysis (DSA), based on the joint debt sustainability framework for low-income countries, estimates that the NPV o f debt-to-exports ratio will fall only to 107 percent after the full delivery o f HIPC and MDRI assistance, a level which i s above the policy-dependent threshold o f 100 percent (Appendix I ) , although the NPV o f external debt-to-GDP ratio and all debt service indicators are expected to fall substantially and remain below their respective thresholds. In addition, the sensitivity analysis shows that the country’s external public debt indicators would substantially worsen in the presence o f adverse shocks. The decision not to recommend exceptional topping-up and the high risk of debt distress in the future are consistent given the policy-based causes for The Gambia’s level o f indebtedness post HIPC and additional bilateral assistance, which r u l e out topping-up, combined with the forward looking nature o f the DSA, which highlights vulnerabilities stemming from the likely future debt profile and macroeconomic volatility. The continuing risk o f debt distress underscores the importance o f continued fiscal prudence, policies to support broad-based growth and export diversification, sustained donor support, and improved debt management. In addition, the government has increased the minimum grant element in new external borrowing to 45 percent, and plans to limit the volume o f new concessional borrowing for the foreseeable future. The staffs o f IDA and the IMF recommend that the Executive Directors of IDA and the IMF approve the completion point for The Gambia under the Enhanced HIPC Initiative. I. INTRODUCTION 1. This paper discusses progress by The Gambia under the Enhanced Heavily Indebted Poor Countries Initiative, and recommends that the Executive Directors o f the International Development Association and the International Monetary Fund approve the completion point for The Gambia under the Enhanced HIPC initiative. In the opinion o f the staffs, The Gambia has made satisfactory progress in achieving the completion point triggers, notably preparing and implementing a Poverty Reduction Strategy Paper (PRSP), maintaining a stable macroeconomic environment, setting up mechanisms to ensure efficient and transparent use o f HIPC interim debt relief, implementing reforms in the education and health sectors, and promoting private sector development by strengthening regulatory capacity and restructuring the groundnut sector. 2. I n December 2000, the Board of Executive Directors of IDA and the IMP agreed that The Gambia had met the requirements for reaching the decision point under the Enhanced HIPC Initiative.' The amount o f debt relief committed at the decision point was US$66.6 million in NPV terms, calculated to reduce the NPV o f debt to 150 percent o f exports on the basis o f end-1999 data. This relief represents a reduction o f 27.2 percent o f the NPV o f debt as o f end-1999 after traditional debt relief. At the same time, the Boards o f IDA and IMF agreed to provide The Gambia with interim debt r e l i e f until the country reached the floating completion point. Interim assistance under the Enhanced HIPC Initiative was also granted by the African Development Bank Group (AfDB), the European Union, and the Paris Club group o f creditors. Executive Directors had determined that completion point would be reached when The Gambia had complied with the triggers set out in Box 7 o f the decision point document (see Box 7 in the HIPC Decision Point Document on page 20)'. 3. This paper i s organized as follows: Section I1provides an assessment o f The Gambia's performance in meeting the requirements for reaching the completion point under the Enhanced HIPC Initiative. Section I11reviews the status o f creditor participation and presents an updated debt sustainability analysis (DSA). Section I V contains a summary o f the main conclusions and Section V l i s t s a number o f issues for discussion by the Boards o f IDA and the IMF. ' and, See http://www.imf,or~/external/n~/hi~c/2000/~mb/gambiad~.~df h~://siteresources,worldbank.orn/INTDEBTDEPT/DecisionPointr)ocuments/2025O 132/The%20Gambia- E-DP.pdf The Gambia. Decision Point Document for the Enhanced Heavily Indebted Poor Countries Initiative (November 28,2000). IDA: I D M 7413, November 28,2000; IMF: EBS/00/242, November 28,2000. 2 11. ASSESSMENT OF REQUIREMENTS FOR REACHING THE COMPLETION POINT 4. The conditions f o r reaching the floating completion point, set out in B o x 7 o f the decision point document, consist of: (i) PRSP and poverty monitoring-preparation o f a full PRSP and satisfactory implementation for at least one year, and improvement o f the poverty database and monitoring capacity; (ii) macroeconomic p e r f o r m a n c w o n t i n u e d maintenance o f macroeconomic stability as evidenced by satisfactory implementation o f the PRGF supported program; ( iii) governance-progress in strengthening public expenditure management; (iv) HIPC interim relief a n d social sector reforms-use o f HIPC interim relief in accordance with annual budgets, and education and health sector reform programs; and (v) structural reforms-establishment o f a multi-sector regulatory agency and privatization o f the public groundnut processing plants. 5. I n the view o f the staffs, The Gambia has made satisfactory progress in meeting the conditions f o r reaching the floating completion point. O f the eleven triggers for reaching the floating completion point, nine have been fully met and two were partially met, for which the staffs recommend that waivers be granted for non-observance (see box 1 below). This section reviews performance o f each o f the triggers. 6. E a r l i e r slippages in macroeconomic policies a n d slow structural reforms have delayed the completion point, but adjustments were successfully implemented in recent years. After the decision point in 2000, expansionary fiscal and monetary policies and poor governance at the Central Bank o f the Gambia (CBG) caused the program supported by the Fund’s PRGF to go o f f track. Successful policy adjustments and reform o f the C B G led to a new PRGF-supported program in February 2007, and the first review was successfully concluded in August 2007. Earlier attempts to restructure the groundnut sector were unsuccessful. However, in 2007 the government prepared and started implementing a sector reform “roadmap” to fully liberalize the sector. As part o f the roadmap, the government has allowed the free entry o f operators at all levels o f the value chain and intends to privatize the management o f the public groundnut processing plants by 2008. A. PRSP AND POVERTY MONITORING 7. The Gambia has produced two full PRSPs since the decision point. The first PRSP, covering the years 2002 to 2005, was presented to the Boards o f IDA and IMF in July 2002, along with the Joint Staff Assessment (JSA). The second PRSP and the accompanying Joint Staff Advisory Note (JSAN), for the years 2007 to 201 1, were discussed by the Boards o f IDA and IMF in July and August 2007, respectively. In the interim years, the country produced two Annual Progress Reports (APRs) which were presented to the IDA and IMF Boards along with the JSANs. 8. The Boards concluded t h a t t h e PRSPs provide a credible f r a m e w o r k f o r poverty reduction. The 2002 JSA noted that the first PRSP was an important step forward in the 3 fight against poverty and provided a sound basis for concessional assistance. The 2007 JSAN provided key recommendations for improving implementation o f reform programs, and the Boards underscored their support for the second PRSP’s strategic focus. IDA i s currently preparing a new Joint Assistance Strategy (JAS) with the African Development Bank, which will be aligned with the second PRSP. 9. The second PRSP applies lessons learned from implementingthe first PRSP. As in the first PRSP, the second PRSP used a comprehensive participatory and consultative process in preparing the strategy. Stakeholder consultative workshops and focus group discussions were held with representatives o f the public and private sectors and civil society, and consultations reached down to the level o f local communities. Unlike the first strategy, the second PRSP included an implementation action plan which outlined costed priority activities, which would allow for improved monitoring and results orientation. The previous strategy’s strengths in the social sectors were retained, while civil service reform and strengthening o f public financial management (PFM) now receive greater attention. The JSAN recommended that the PRSP be further integrated into the government budgeting process, and noted that improving governance remains a priority. 10. Progress in implementingthe PRSPs provides a satisfactory basis for the completion point. Implementation o f reforms in education and health has been satisfactory, as reflected in improved outcomes. Significant progress has been made in strengthening PFM. The economy has been stable and growing at an annual average rate o f 6.5 percent in the past five years and inflation has been reduced, thanks in large part to substantially improved macroeconomic policy implementation. Structural reforms to promote private sector development have been slower than initially expected, but progress has been made recently in reforming the groundnut sector, the National Agricultural Development Agency (NADA) has been established, and assessments o f the investment climate are being conducted which will pave the way for further reforms. Implementation o f the second PRSP i s expected to benefit from the lessons learned from the first PRSP. In particular, the newly created National Planning Commission (NPC) i s expected to improve coordination among sectors. 11. The poverty data base and monitoring capacity has been improved. Official statistics have been strengthened over time through institutional restructuring, training and technical assistance. The new Statistics Act (2005) and a sector reform Master Plan outline a comprehensive strategy for strengthening official statistics. The Central Statistics Department (CSD) has been restructured into the semiautonomous Gambia Bureau o f Statistics (GBOS) and the Statistics Council established to provide oversight and strategic guidance to GBOS. The poverty database has been strengthened through the 2003 household expenditure survey, the 2003 population census and the 2005/6 economic census. GBOS has benefited significantly from training and technical assistance provided under an IDA project. IDA i s also currently working with GBOS in preparing a Poverty Assessment. 4 Box 1. Status of Triggers for Reaching the Floating Completion Point Triggers Assessment 1. Poverty reduction (i)A full PRSP has been prepared through a Implemented. The country’s first full PRSP (2003 - 2005) was participatory process and satisfactorily presented t o the Boards o f IDA and IMF in July 2002. Annual implemented for one year, as evidenced by the Progress Reports (APR) have been produced as required. The Joint Staff Assessment o f the country’s annual second PRSP and the accompanying J S A N were presented t o the progress report. Boards o f IDA and IMF o n July and August 2007, respectively. B o t h PRSPs were prepared through a participatory process. Progress in implementing the PRSP provides a satisfactory basis for the completion point. ( iiImprovement o f the poverty database and ) Implemented. Good progress has been made in restructuring the monitoring capacity, as evidenced by progress Central Statistics Department (CSD) and in developing i t s in restructuring the Central Statistics capacity. A new Statistics A c t (2005) and a sector reform Master Department or developing its capacity. Plan outline the strategy for organizational restructuring o f CSD and strengthening official statistics. The poverty database has been improved through household expenditure (2003), and population (2003) and economic (2005-06) censuses. 2. Macroeconomic stability Implemented. After some initial difficulties, the country has maintained a stable macroeconomic environment. The country’s Continued maintenance o f macroeconomic previous PRGF program, approved by the IMF Board in July stability as evidenced by satisfactory 2002, went off-track shortly thereafter. However, the authorities implementation o f the PRGF-supported successfully implemented a Staff Monitored Program (SMP) f r o m program. October 2005 to M a r c h 2006, which laid the foundation for a new PRGF program approved by the IMF Board in February 2007. The first review, completed in August 2007, concluded that overall performance under the program has been strong. Fund staffs recommend the completion o f the second review. 3. Governance Implemented. The authorities have consistently produced annual public reports o n budget execution, as well as reports o n the Progress in strengthening public expenditure utilization o f interim HIPC debt relief. Instead o f the Task Force management as evidenced by (i) the issuance and HILEC (a Cabinet subcommittee) as originally envisioned in o f annual public reports o n budget execution; the decision point, currently the entire Cabinet directly reviews and (ii)semiannual reports o n the use o f and approves the annual budgets and the annual Poverty Reducing interimH I P C Initiative debt relief, the latter to Expenditure Reports (PRERs). be reviewed by the Task Force and the High- Level Economic Committee (HILEC). 4. Social sector reforms (i) Budgetary savings from H I P C interim debt Implemented. The use o f interim H I P C relief i s explicitly service will be used in accordance with the identified in the annual budget as part o f poverty-reducing annual budgets approved by the Task Force expenditures. The Cabinet-approved budgets clearly identify and the H I L E C . poverty-reducing expenditures, a portion o f which i s funded by interim HIPC relief. [ii) Measures and targets regarding progress in implementing education and health reform programs include: (a) Increase by at least 45 percent Implemented. The number o f graduates f r o m The Gambia 5 Box 1. Status o f Triggers for Reaching the Floating Completion Point Triggers Assessment (from 192 graduates in the base academic College with a Primary Teacher’s Certificate has increased every year 2000/01) the number o f teachers for year. In 2005, the number o f graduates reached 331, representing a lower basic education graduating from The 72 percent increase over the base year. Gambia College; t h i s measure will help The Gambia raise the quality o f teaching in the most important grades. (b) Ensure appropriate funding o f a trust Implemented. The number o f girls that received a scholarship fund for girls’ scholarships in the poorest has been greater than 2,000 every year, and it has increased every regions and make progress in raising such year to 41,939 in 2005-06. The scholarship program covers rates by expanding this scholarship scheme to regions 1 to 6, which are among the poorest in the country. n o less than 2,000 girls annually in at least 3 regions. (c) Increase by at least 5 percent each Partially Implemented. The country has increased the share o f year (from 44 percent in the base year births attended by skilled personnel from 44 percent in 1998 to of 1998) the number o f births attended by a 56.3 percent in 2005, the most recent data available. This i s a person trained in antenatal care. This should significant increase f r o m the baseline, and compares favorably in reduce the relatively high maternal death rate; the region. While the increase i s less than the decision point target, monitoring mechanisms for t h i s indicator have which would imply 61.9 percent in 2005 and 68.3 percent in 2007, also been defined in the Participatory Health, staffs observe that the target percentages are unrealistically high Population, and Nutrition Project (PHPNP). due to the long delays in reaching the completion point, leading to a situation where the indicator would need to have continuously increased for an unreasonably long period, and to levels significantly greater than in comparable Sub-Saharan countries. (d) Increase the share o f primary and Implemented. The share o f primary and secondary health care secondary health care within the recurrent increased from 42 percent in the baseline year (1999) to 50 percent budget for health. The recurrent budget for in 2003, and averaged 48 percent in the four years since then. primary and secondary health care i s understood to comprise health centers; dispensaries and sub-dispensaries; health promotion and protection; family health; disease control; and nurses’ training. These are covered by budget lines 06 to 11 under heading 2 1 o f the budget; they do not include expenditures incurred directly or indirectly o n (i) foreign personnel; and ( ii ) all the referral hospitals. The base year for measurement i s 1999. 5. Structural reforms Measures to promote private sector development: (i)Establish a functional multisector Implemented. The Gambia Public Utilities Regulatory Authority regulatory agency. (PURA) A c t was enacted in 2001, endowing P U R A with the mandate to regulate the energy, communication, and telecommunication sectors. The Board has been established and staffs recruited. PURA collaborates with D O S F E A (Ministry o f Finance) and the relevant line ministries o n licensing, tariffs and 6 Box 1. Status of Triggers for Reaching the Floating Completion Point Triggers Assessment competition related policies. (ii) Bring to the point o f sale The Gambia’s Partially implemented. The government attempted to privatize two major public groundnut processing the groundnut plants between 2005 and 2006. I t advertised plants. requests for bids but there was only one bidder, which the government decided to reject o n the grounds that it was not sufficiently qualified and it would be detrimental to the sector and the economy. In 2007, the government, in consultation with IDA and the EU, prepared a comprehensive sector reform “roadmap” which liberalizes the groundnut sector and outlines plans for privatizing the public groundnut plants by 2008. As part o f the roadmap, the government has allowed free entry o f operators and transferred management o f the sector to an association o f public and private stakeholders. B. MACROECONOMIC PERFORMANCE 12. Macroeconomic policies and performance have passed through two phases since the decision point (Table 1 and B o x 2): Fiscal slippages, accommodating monetary policy, and falling international reserves during 2001-2003 fueled a sharp depreciation of the dalasi and inflation. The dalasi depreciated by 55 percent in nominal effective terms between end-2001 and end-2003, and inflation reached 17 percent in 2003 (the highest level in nearly two decades). The second PRGF arrangement went off-track soon after it was approved in 2002, and it expired in 2005 without completion o f a review. As a result, The Gambia was unable to reach completion point as originally envisaged. Policy adjustments restored macroeconomic stability during 2004-2007. Macroeconomic policy improved in 2004 but the PRGF program remained off-track due to delays in implementing structural measures for improving governance o f the CBG. Subsequently, a staff monitored program (SMP) was successfully implemented from October 2005 to March 2006, and a new PRGF-supported program was approved by the IMF’s Board in February 2007. The first review, which was completed in August 2007, concluded that overall performance under the program has been strong, with all but one o f the quantitative performance criteria and indicative targets met. Six out o f eight structural performance criteria were observed; waivers were granted for the other two. Performance under the program has remained strong, and Fund staff are recommending completion o f the second review. 13. A marked deterioration in public finances in 2001 was driven by unbudgeted expenditures and a decline in tax revenues. The overall deficit including grants increased from 1.4 percent o f GDP in 2000 to 13.9 percent in 2001. A combination o f unbudgeted 7 expenditures (amounting to 6.8 percent o f GDP) and a decline in tax revenues (by 3.2 percent o f GDP) l e d to large government borrowing from the CBG and a sharp rise in domestic debt. Table 1. The Gambia: Selected Economic and Financial Indicators, 1999-2007 Table 1. The Gambia: Selected Economic and Financial Indicators, 1999-2007 1999 2000 2001 2002 2003 2004 2005 2006 2007 Proj. (Annual percent changes, unless otherwise indicated) National income and prices GDP at constant prices 6.4 5.5 5.8 -3.2 6.9 7.0 5.1 6.5 7.0 Consumer price index (period average) 3.8 0.9 4.5 8.6 17.0 14.3 5.0 2.1 5.0 Consumer price index (end of period) 1.7 0.2 8.1 13.0 17.6 8.1 4.8 0.4 5.0 External sector Exports, f.0.b. (in US$) -7.8 5.3 -19.4 7.1 -7.1 10.5 -16.5 3.9 4.5 Imports, f.0.b. (in US$) -9.7 0.5 -19.9 12.8 -6.2 46.2 10.2 -0.6 21.5 Terms of trade I/ -18.0 -3.5 0.7 8.3 17.9 -10.2 -13.8 -3.0 -0.3 Nominal effective exchange rate (period average) -4.8 -3.7 -14.1 -22.6 -37.4 -11.3 4.2 3.0 ... Real effective exchange rate (period average) -2.2 -4.9 -12.2 -17.6 -28.5 -1.2 4.5 1.3 ... (Percent change; in beginning-of-year broad money) Money and credit Broad money 12.1 34.8 19.4 35.3 43.4 18.3 13.1 26.2 8.6 Net foreign assets 4.3 22.5 -33.8 13.0 28.2 28.8 0.3 17.8 -3.6 Net domestic assets 7.8 12.3 53.2 22.3 15.2 -10.5 12.8 8.5 12.2 Of which: Credit to the government (net) 3.4 3.1 25.5 1.0 12.5 -10.6 6.3 3.8 -3.8 Credit to the private sector and public enterprises 7.8 4.4 4.4 23.7 20.0 -6.5 5.5 8.4 2.8 Claims on foreign exchange bureaus 0.0 0.0 8.8 4.0 -1.0 -1.2 0.0 0.0 0.0 Other items net -3.8 4.9 -9.9 -6.4 -16.3 7.7 1.0 -3.7 13.2 Velocity (GDP/end-of-period broad money) 3.3 2.7 2.8 2.3 2.2 2.4 2.3 1.9 2.0 Treasury bill rate (in percent; end of period) 12.5 12.0 15.0 20.0 31.0 28.0 12.5 10.4 11.6 (Percent of GDP, unless otherwise indicated) Central government budget Domestic revenue 17.9 18.5 15.1 16.3 15.7 20.9 19.7 21.2 22.1 Total expenditure and net lending 22.7 22.1 31.1 25.4 22.9 31.1 30.0 29.2 25.4 Balance, including grants -3.5 -1.4 -13.9 -4.6 -4.7 -6.2 -9.2 -6.8 2.9 Basic primary balance 2/ 4.7 4.6 -1.3 2.7 3.6 9.6 8.5 8.4 9.0 Net foreign financing 0.8 -0.8 -0.4 1.9 0.6 5.7 5.5 5.2 0.8 Net domestic financing 2.9 2.2 14.3 2.7 4.1 0.5 3.7 1.6 -3.3 Stock of domestic debt 27.0 31.5 38.1 36.6 25.2 32.9 35.5 32.2 29.6 Gross domestic investment and savings Gross domestic investment 17.8 17.3 17.4 21.2 19.5 29.0 26.8 27.9 23.6 Gross national savings 14.9 14.1 14.8 18.4 14.4 22.8 11.7 16.4 12.8 External sector Current account balance Excluding official transfers 3/ -9.8 -10.6 -10.1 -13.4 -13.6 -14.7 -20.2 -14.7 -16.1 Including official transfers 3/ -2.8 -3.1 -2.6 -2.8 -5.1 -6.1 -15.1 -11.5 -10.8 Gross official reserves (in millions of US$) 98.0 111.4 63.3 67.2 61.5 84.0 96.6 118.6 120.0 in months of imports, c.i.f. 6.2 7.0 5.0 4.5 4.4 4.3 4.5 5.5 4.8 External debt service 4/ 11.8 15.4 16.4 16.9 8.5 17.7 17.7 16.5 18.5 Sources: Gambian authorities; and IMF staff estimates. I / Excluding reexports and imports for reexport. 2/ Basic primary balance is defined as domestic revenue minus expenditure and net lending, excluding interest payments and externally financed capital expenditures. It measures the Government's domestic fiscal adjustment effort. 3/ Official transfers also includes an assumption for technical assistance. 4/ Percent of exports of GNFS. 8 Box 2. The Gambia: Performance Under the Fund-SupportedPrograms, 1998-07 A three-year arrangement under the ESAF, approved in 1998,~wasconverted to an arrangement under the PRGF and expired at end-2001. A new PRGF arrangement was approved July 2002. After one drawing upon approval, the program soon went o f f track and expired in mid-2005 without completion o f a single review. Strengthened macroeconomic policies f r o m 2004 and successful implementation o f a staff monitored program paved the way for a new PRGF arrangement in February 2007. ESAFPRGF, June 1998 -December 2001 (EBS/98/102). All but one o f the reviews were completed, though often accompanied by requests for waivers o n nonobservance o f Performance Criteria (PCs). While quantitative PCs o n external payments arrears and external debt were generally observed, targets o n fiscal performance (e.g., revenue and limits o n public sector wages) and o n the level o f net foreign assets o f the C B G were often not met. Prior actions and about 2/3 o f total benchmarks were met o n time. Later, in 2003, unrecorded public expenditure financed by loans from the C B G in 2001 and illicit foreign exchange transactions by C B G officials were uncovered. T h i s resulted in misreporting o f end-March and end-September 2001 PCs; the associated non-complying disbursements were repaid in 2004. 2”dPRGF, July 2002 - July 2005 (EBS/O2/115). Implementation difficulties became acute under the arrangement approved in 2002. As a result o f severe policy slippages and the economic consequences o f lack o f accountability in public expenditure management, the first review under the arrangement was not completed when the program expired. A majority o f structural benchmarks under the f i r s t year o f the second PRGF arrangement were not met o n time. SMP, October 2005 -March 2006 (EBS/O5/197). Revenue shortfalls meant fiscal targets for December 2005 were missed, however implementation improved in the second h a l f o f the program and the fiscal targets met cumulatively through March 2006. Further, performance against structural benchmarks was strong through strengthened internal controls and the operational independence o f the CBG, enhanced public financial management and accountability, and progress toward fiscal sustainability. 3rdPRGF. On February 2 1,2007 the IMF Executive Board approved a new three-year PRGF arrangement for the period 2007-09 (EBS/07/13). Consistent with the PRSP and the Fund’s ex-post assessment o f i t s earlier programs, key elements o f the program are fiscal adjustment designed to support a reduction in domestic interest rates; measures to enhance C B G internal controls and operational independence to sustain macroeconomic stability; a strengthening o f public financial management to ensure that aid and domestic resources are used effectively in line with national priorities; and creation o f a credit reference bureau to deepen fmancial intermediation. Strong performance led to the completion o f the f i r s t review in August 2007. Fund staff recommend completion o f the second review. 14. A tightening of fiscal and monetary policies from late 2003 lowered inflation and contributed to sustained growth. The basic primary balance4 moved from a deficit o f over 1 percent o f GDP in 2001 to an average surplus o f 8.8 percent o f GDP during 2004-06, and i s A good review o f macroeconomic performance and a history o f engagement with the Fund through 2004 i s contained in “The Gambia-Ex Post Assessment o f Longer-Term Program Engagement” (SM/05/234). Basic primary balance i s defined as domestic revenue minus expenditure and net lending, excluding interest payments and externally financed capital expenditures. I t measures the Government’s domestic fiscal adjustment effort. 9 expected to reach 9 percent in 2007. Yields on treasury bills rose from 15 percent at end- 2001 to 31 percent at end-2003 before declining to 10-15 percent since mid-2005. Inflation f e l l from 17.6 percent at end-2003 to 1.4 percent at end-2006. A spike in the prices o f some imported food items pushed the annual rate o f inflation to over 6 percent in the second quarter o f 2007, but there has since been an easing o f inflationary pressures and the rate i s expected to fall to about 5 percent at the end o f the year. 15. Economic growth has been robust during most of the period since decision point. After growing by nearly 6 percent in 2001, real GDP f e l l by about 3 percent in 2002 reflecting macroeconomic instability and the impact o f adverse weather on agriculture. Subsequently, growth has averaged 6.5 percent a year, driven by the tourism, telecommunication, and construction sectors. Tourism has been a major beneficiary o f foreign direct investment (FDI), which has expanded the supply o f hotels and allowed the sector to grow by an annual average o f 11.6 percent. A new competitor entered the mobile telephone market in 2007, increasing the total to three. A construction boom has been financed by FDI and also remittances. Agriculture has been the laggard, particularly the groundnut sector, in which a majority o f the poor make their livelihood. However, the government recently initiated concrete measures to revitalize the sector as part o f the implementation o f the sector reform roadmap, based on full liberalization o f the sector (see Section 1I.E). Liberal trade polices and an efficient port infrastructure allow the country to act as a regional re-export hub. Continued macroeconomic stability and strengthened public financing management provide the foundations for sustained growth and poverty reduction. 16. External developments have been broadly favorable over the period. In 2001 and the first year under the second PRGF arrangement, the external current account deficits, including official transfers, remained below the program projections. During most o f this period, The Gambia accumulated gross international reserves which were equivalent to six to seven months o f import cover and above the program targets except for 2001. Over the period 2001-03, the level o f reserves fell in response to macroeconomic instability and uncertainty. With renewed macroeconomic stabilization and an associated increase in FDI inflows, the current account deficit has widened, but reserve coverage has increased to approximately five months o f import cover despite increasing imports. 17. Macroeconomic performance under the third PRGF-supportedprogram has been strong. The first review o f the program was completed August 2007, and Fund staff are recommending completion o f the second review. Under the program, robust growth and l o w inflation have been sustained through good policy implementation-in particular, strong fiscal performance. The second review included discussion o f the authorities’ proposed budget for 2008 which aims at ensuring that past fiscal success will be continued, and translate into lower domestic debt looking forward. The authorities also agreed to indicative limits on new borrowing under the program, to prevent debt ratios quickly returning to pre- decision point levels. 10 18. The staffs of IDA and the IMF conclude that The Gambia has met the trigger on the maintenance o f macroeconomic stability, as evidenced by satisfactory implementation of the PRGF-supported program. After an initial period o f uneven performance, a stable macroeconomic environment has been maintained through fiscal and monetary discipline. The Fund’s Board approved the first review o f a new PRGF program in August 2007, and Fund staff recommend completion o f the second review. C. GOVERNANCE 19. The government has successfully introduced a number of significant reforms on public financial management and Central Bank operations. These reforms have improved transparency and accountability in the use o f public resources and reduced the opportunities for corruption. They addressed critical deficiencies in governance, such as a significant backlog o f unaudited public accounts and internal control failures at the Central Bank. In particular, the government has had to rely on preliminary and sometimes incomplete expenditure data for monitoring poverty reducing expenditures, such as in 2004 (see Table 6 below). 0 Budget Management and Accountability Act (2004). Legislation on budgeting and accounting had been based on an outdated framework. The Budget Management and Accountability Act (2004) updated the legal framework to international standards. I t provides for a fuller integration o f the recurrent and development budgets, a closer linkage between budget preparation and execution, and consolidation o f public funds. I t includes good practices on limiting and publicizing government borrowings and guarantees, and timely preparation o f annual public accounts. Central Bank reforms. A new Central Bank Act (2005) provides increased operational independence o f the CBG, including setting limits o n lending to the government by the CBG. The arrangements for external audits were improved, and the capacity o f internal audits and supervision departments were strengthened through new recruits and training. Important steps have been taken to strengthen internal controls, in line with the recommendations o f the IMF’s Safeguards Assessment and external audits: (i) an action plan for improving internal controls was approved by the CBG’s Board in July 2005 and i s being implemented; (i i) formal guidelines for foreign exchange reserves management were approved by the Board in December 2005 and are being implemented; ( iii) an audit committee, comprising the independent members o f the Board, has been formed to oversee the external audit process and the internal control structure o f the CBG; and (iv) new operating manuals for the internal audit, finance, and foreign exchange departments have been prepared. Public procurement reforms. The Gambia Public Procurement Act (2001) provides the framework for an open, non-discriminatory and transparent procurement system. The new legislation supports national anti-comption initiatives and harmonizes public 11 procurement policies and tools. The Gambia Public Procurement Authority (GPPA) was created in 2002 with the responsibility for implementing the new legal framework and reviewing all large contract awards. The central tender board was replaced by decentralized procurement committees and units. Gambia Revenue Authority (GRA). The GRA Act (2004) created the semiautonomous GRA which consolidated administration o f income and sales tax with customs. The establishment o f the GRA contributes to the enhancement o f the legitimacy and professionalism o f tax administration, the improvement o f taxpayer services, and the promotion o f uniform application o f tax laws. The newly created GRA Board, comprising both public and private sector representatives, has been actively engaged in the reform process. Tax administration capacity has been strengthened through organizational restructuring, training and technical assistance and this has had a positive effect o n revenues. Integrated Financial Management Information System (IFMIS). The authorities are introducing the IFMIS, which i s a comprehensive public expenditure management I T system for all stages o f the budgeting and accounting process. IFMIS began operations in January 2007 and covers the entire central Government. I t i s being developed and implemented through two phases, with completion o f phase one expected in the first quarter o f 2008. The system i s currently processing all payments and the payroll, and producing fiscal accounts. I t incorporates commitment controls which facilitate fiscal discipline. The budgeting module and the full complement o f fiscal reports are expected to be completed by the end o f phase one. Staffs o f the Treasury and the Department o f State for Finance and Economic Affairs (DOSFEA) have received extensive training o n the system as well as on basic I T and accounting skills. A key challenge for the authorities will be to ensure the sustainability o f this system, particularly in terms o f retaining trained staffs and adequately preparing for staff turnover. Preparation of public accounts. At the decision point, the government’s public accounts had not been prepared since 1992, undermining fiscal transparency and accountability. The accounts have now been updated to 2006. The I F M I S i s expected to produce the 2007 accounts by end-March 2008. 20. The Government has issued annual public reports on the overall budget execution and semi-annual reports on the use of interim HIPC Initiative debt relief. The government’s annual budgets report o n actual public expenditures with a two year lag. In addition, a series o f annual Public Expenditures Reviews (PERs) were conducted by the authorities, IDA and other development partners. These PERs analyzed the effective use o f public expenditures, particularly with respect to PRSP priority spending, and also improvements in public financial management. The use o f interim HIPC debt relief has been analyzed through semiannual and annual Poverty Reducing Expenditure Reports (PRERs). These reports cover all poverty-reducing expenditures, not just expenditures funded by 12 interim HIPC relief. The staffs endorse this approach given that funds are fungible. The Cabinet reviews and approves the annual budgets and the PRERs. D. SOCIAL SECTOR REFORMS 21. Resources in the budget freed by interim HIPC debt relief have been used in accordance with the annual budgets approved by the Cabinet. The use o f interim HIPC relief i s explicitly specified in the annual budgets as part o f poverty-reducing expenditures. The budgets identify all poverty-reducing expenditures, parts o f which were funded by interim debt r e l i e f and the rest through the government’s own local revenue. IDA and the AfDB Group suspended their interim r e l i e f in March 2005 and end-2003, respectively. IMF r e l i e f was suspended in 2002 when the PRGF went off-track, and it resumed in 2007 with the approval o f a new PRGF. The government continued to track poverty-reducing expenditures even after the cessation o f interim HIPC relief. Instead o f the Task Force and H I L E C as originally envisioned in the decision point, currently the entire Cabinet directly reviews and approves the annual budgets and the allocations to poverty-reducing expenditures. H I L E C i s a Cabinet subcommittee. 22. There have been important gains in education. The government has a new comprehensive Education Policy (2006-20 15) which focuses on expanding and improving the quality o f education. Education benefits from: (i) the largest government budget among all ministries; (ii) support from donors, including IDA’Srecently approved second phase o f i t s education project; and (iii) funding from the EFA FTI Catalytic Grant. The education sector has benefited from an extensive government program o f expanding infrastructure, teacher training and school materials. Over 1,000 classrooms were built with the support o f the World Bank education project. Access to education has expanded, particularly in rural areas, with a gross enrollment rate o f 77 percent which increases to more than 90 percent if Madrassa enrollments are in~luded.~ The government has programs to recruit and retain qualified staff, including hardship allowances and improved working conditions for teachers assigned to rural areas. The key next challenge i s to improve the quality o f education programs. 23. The annual increase in the number of graduating lower basic education teachers has significantly exceeded the decision point target of 45 percent. Starting from 192 graduates in the base academic year 2000/01, the number o f graduates from The Gambia College with a Primary Teacher’s Certificate has increased every year, reaching 331 in 2005. This represents an increase o f 72 percent from the base year, which will help the country improve the quality o f teaching in the grades considered to have the greatest impact on poverty. Madrassas are Islamic religious schools. 13 Table 2. Gambia College Primary Teacher’s Certificate (PTC) Graduates 2001 2002 2003 2004 2005 PTC Graduates 192 22 1 227 311 33 1 24. The scholarship scheme for girls has increased far beyond the annual target o f 2,000 girls in at least three regions. The number o f girls that have benefited from a scholarship has increased every year, reaching 41,939 in 2005-06. There are two scholarship programs for girls. The Scholarship Trust Fund for Girls under the Department o f State for Education covers regions three to six out o f a total o f six regions, while the President’s Empowerment o f Girls Education Project i s a more recent program initiated in the 2005/6 school year, covering regions one and two. Together, the two girls scholarship programs cover the poorest regions o f the country. Table 3 Scholarship Funds for Girls Year STF PEGEF Total 2000101 5,979 5,979 2001102 6,042 6,042 2002103 9,800 9,800 2003104 11,390 11,390 2004105 12,711 28,337 4 1,048 2005106 13,217 28,722 41,939 2006107 14,006 NIA NIA 1. Scholarship Trust Fund 2. President’s Empowerment o f Girls Education Project 25. Health care has expanded significantly. The country has a comprehensive set o f health policies, including the National Health Policy, a National Drug Policy, and a National Nutrition Policy. Health has the third largest budget among government ministries. Primary and secondary health care have expanded significantly, particularly the construction o f health centers through donor financing. Moreover, investments in health centers have mostly been made in poorer regions. Physical access to basic health services i s generally good, with 85 percent o f the population living within one-hour travel time, or 7.5 km, o f a health facility. Hospital beds, at 1.2 1 beds per 1,000, compare favorably with other Sub-Saharan Africa (SSA) countries. The challenge now i s to ensure that the health centers are properly equipped and staffed. Table 4. Share of Births Attended by Skilled Health Staffs T h e Gambia Senegal Ghana SSA A v g 1998 2000 2005 2002 2006 2005 Percentage o f Births 44 ‘ 54.7 56.3 58.0 49 45 Source: 2000 and 2005 M I C S for The Gambia, and WHO for Senegal and Ghana. 1. Although the decision point document indicates that the baseline o f 44 percent was estimated for 1998, it was actually estimated in 1990 (World Bank, PHPNP, ICR, M a y 2006). 14 26. The country has substantially increased the share of births attended by a person trained in antenatal care, but not to the extent envisioned at decision point. At the decision point, this indicator was targeted to increase annually by at least 5 percent, from 44 percent in the base year o f 1998. The most recent estimate available i s from the 2005 Multiple Indicator Cluster Survey (MICS), which indicates that 56.3 percent o f births were attended by skilled health personnel. This i s a significant increase from the baseline, but it i s less than the decision point target o f 61.9 percent in 2005. 27. The staffs observe that the target percentages are unrealistically high, and similar or better than other Sub-Saharan African countries. The high percentages are due to the long delays in reaching the completion point, resulting in a situation where the indicator would have continuously increased for an unreasonably long period. As a result o f the substantial gains made since the decision point, the share o f assisted births in The Gambia i s now significantly greater than the SSA average (Table 4). In general, the government has increased the supply o f antenatal care services with skilled attendants.6 Table 5. Share of Primary and Secondary Health Care in Health Recurrent Budget (Percentage) 1999 2000 2001' 2002 2003 2004 2005 2006 Share o f P r i m a r y and 42 41 39 42 50 51 48 44 Secondary H e a l t h 1. The percentage for 2001 i s based o n the budget allocations, while the other years are based o n actual expenditures. 28. The share of primary and secondary health care within the recurrent budget for health has increased. The recurrent budget for primary and secondary health care i s understood to comprise health centers, dispensaries and sub-dispensaries, health promotion and protection, family health, disease control, and nurses' training. I t does not include expenditures incurred directly or indirectly on foreign personnel and referral hospitals. The share o f primary and secondary health care was 42 percent in 1999, the baseline year. In 2001, this share remained relatively stable up to 2002, but subsequently it increased to 50 percent in 2003 and has generally maintained this higher level. The share has averaged 48 percent since 2003, which i s greater than the baseline o f 42 percent as required by the decision point trigger. W o r l d Bank, Participatory Health Population and Nutrition Project, Implementation Completion Report, M a y 2006. 15 E. STRUCTURAL REFORMS 29. A functional multi-sector regulatory agency has been established. The Gambia Public Utilities Regulatory Authority (PURA) Act was enacted in 2001. The Act provides PURA the mandate to regulate the water, electricity, and telecommunication sectors. The Board has been established and staffs recruited. At present, PURA’S activities are mainly focused on the electricity and telecommunication sectors. I t collaborates with the Department o f State for Finance and Economic Affairs (DOSFEA) and the relevant line ministries on licensing, tariffs, and competition (antitrust) related policy decisions. 30. The Government unsuccessfully attempted to privatize the public groundnut processing plants. The Gambia Groundnut Corporation (GGC), which owns the groundnut plants as well as transportation and storage facilities, was formerly a foreign-owned private company which was nationalized in 1999. From 2005 to 2006, the authorities attempted to privatize GGC. A due diligence was conducted, the bidding document was prepared and requests for bids advertised. There was only one bidder, a local firm, and the authorities decided to reject the bid on the grounds that it was not sufficiently qualified and that i t would be detrimental to the sector and the economy. 3 1. Groundnut exports fell sharply in 2005 due to poor marketing. In 2005, a public- private joint enterprise, the Gambian Agricultural Marketing Corporation (GAMCO), was established. A change in licensing regulations left G A M C O as the sole operator for processing and marketing groundnuts in 2005/06. G A M C O was undercapitalized and lacked market experience. As a result, groundnut exports decreased to US$2 million in 2005 from US$16.9 million in the previous year, and G A M C O i s now bankrupt. I n2006, the Government reopened the groundnut market to multiple operators. Also, GGC was given a license to export groundnuts, whereas previously it focused exclusively on processing, transport and storage activities. 32. The government has prepared a comprehensive sector reform strategy to revitalize the groundnut sector and attract established international investors. A sector reform “roadmap” was prepared in consultation with key public and private sector stakeholders, including the World Bank, the IMF and the EU. This roadmap outlines the government’s plans to fully liberalize the sector and to privatize the management o f the publicly-owned groundnut facilities. The government has already implemented the following actions from the roadmap: (i) allowing immediate free entry o f operators at all levels o f the value chain; (ii) transferring management responsibility for the sector to an association o f the sector’s public and private stakeholders, the Agribusiness Service Plan Association (ASPA), which will inter alia determine the producer price; ( iii) putting G A M C O under a receivership as part o f the liquidation process; and (iv) dissolving the Board o f Directors o f GGC, and initiating steps to reconstitute a new Board which will no longer intervene in the daily operations o f the company. In 2008, the government plans to introduce private management to GGC under a performance-based contract, in preparation for eventual complete 16 privatization. The only direct cost to the budget from the implementation o f the roadmap relate to the government’s assumption o f nonperforming bank loans, equivalent to one percent o f GDP, that were guaranteed by the Social Security and Housing Finance Corporation, a public enterprise. The loans will be repaid over three years beginning in 2008. IDA and the EU plan to support the implementation o f the roadmap through investment projects and budget support operations. 33. The groundnut sector reform roadmap was endorsed by the Cabinet in June 2007. In July 2007, the government made a public announcement to inform all interested parties o f i t s commitment to the implementation o f the roadmap, and to full liberalization and open competition in the sector. The government also formally communicated to IDA and IMF i t s commitment to the roadmap. The staffs broadly support the roadmap’s strategic focus on liberalizing the sector. F. USE OF HIPC INTERIM RELIEF 34. The Gambia has benefited from the full amount o f the interim HIPC debt relief from IDA, AfDB and the EU. Interim assistance from IDA reached the ceiling o f one third o f expected total H P C relief in December 2004.7 IMF interim relief was suspended in 2002 when the PRGF went off-track, and i t resumed in 2007 with the approval o f a new PRGF. IDA has delivered interim assistance in the amount US$8.0 million in NPV terms and the IMF has delivered interim debt relief o f US$0.6 million (SDR 0.4 million) in NPV terms as o f end-November 2007. Interim assistance from the AfDB Group was provided during 2001- 2003. I t came to an end in end-2003 when the 40 percent ceiling o f total AfDB HIPC relief provided as interim relief was reached. Total assistance during the interim period amounted to US$17.5 million in NPV terms (US$21.2 million in nominal terms), o f which US$17.0 million in NPV terms came from multilateral creditors and US$0.5 million in NPV terms from bilateral creditors. 35. The government allocates between one quarter to one third o f total locally funded expenditures to poverty-reducing spending. Locally funded expenditures are recurrent expenditures and parts o f development expenditures that are directly funded by the government’s own resources. The share o f poverty-reducing spending comprises approximately half o f total expenditures when interest payments are excluded. The PRSP priority sectors account for approximately a fifth o f all expenditures, and approximately a third if interest payments are excluded. As an indication o f their prioritization, the Departments o f State for Education and Health have the largest and third largest budgets, respectively. The Department o f State for Finance and Economic Affairs (DOSFEA) has the 7 Interim relief for The Gambia was terminated in March 2005. All interim relief delivered counts towards the total amount o f H I P C relief in NPV terms and this i s reflected in the new IDA H I P C debt r e l i e f delivery schedule. 17 second largest budget, mainly due to transfers to economic management agencies such as the Gambia Revenue Authority (GRA) and the Gambia Bureau o f Statistics (GBOS). The PRSP defines this type o f spending as poverty reducing given that these agencies are responsible for strengthening public financial management and official statistics. Other poverty reducing expenditures cover agriculture, governance and c i v i l service reform, decentralization and local government capacity building, and cross-cutting programs o n nutrition, population, gender and HIV/AIDS. Table 6. Budget Outturns of Locally Funded Poverty Reducing Expenditures (PRES) 2001 2002 2003 2004’ 2005 2006 2007’ Total expenditures (mil. dalasis) 1,298 1,408 1,842 2,252 2,528 2,661 3,238 H I P C interim relief (mil.dalasis) 30.3 39.2 57.9 63.7 20.6 0.0 0.0 Total expenditures (US$ millions) 82.7 70.7 67.5 75.0 88.5 94.8 116.6 Percent of total expenditures PRE 35.2 37.0 30.0 24.3 26.2 33.6 Non-PRE, non-interest payment 42.2 36.7 37.0 31.0 39.2 40.3 Interest payment 22.6 26.3 33.0 38.5 44.7 34.6 26.1 Percentage increase wrt 2001 PRE 14.2 21.0 34.3 52.6 137.9 Non-PRE, non-interest payment -5.7 24.7 43.1 90.6 138.6 Interest payment 26.1 106.8 195.4 285.0 213.5 188.1 Memorandum items: PRE o f t o t a l exp WIO int. payment 45.5 50.3 44.7 43.9 40.1 45.4 PRSP priority sectors 22.9 23.9 18.3 18.7 20.2 18.9 PRSP priority sectors w l o 29.6 32.4 27.3 33.8 30.8 25.6 international. Source: Government budget reports and draft public accounts, IMF reports and staffs’ own calculations. 1. Detailed budget outturn data for 2004 are unavailable. 2. 2007 figures are budget allocations, whereas the other years are budget outturns. 3. The denominator i s total locally funded expenditures excluding interest payments. 4. PRSP priority sectors are education, health and agriculturei 36. The share of poverty-reducingexpenditures declined from 2002 to 2005 due to rising domestic interest payments and efforts to restore fiscal discipline. Poverty- reducing expenditures as a share o f total locally funded expenditures increased to 37 percent in 2002, but then declined to 24 percent in 2005.8Poverty-reducing expenditures were essentially crowded out by domestic interest payments which increased from 23 percent o f total recurrent expenditures in 2000 to 45 percent in 2005 (Figure 1). Rising interest payments were a legacy o f earlier fiscal and monetary slippages which significantly increased the domestic debt and interest rates. Subsequent efforts to restore fiscal discipline meant that the growth o f recurrent expenditures was hrther constrained. * Note that the budget outturn has been difficult to track due t o the lack o f reliable data, and therefore these findings should be considered preliminary. ,/’ 18 37. The share of poverty-related expenditures has increased since 2005. Domestic interest rates eventually declined as a result o f improved fiscal and monetary discipline, leading to a decrease in the share o f interest payments in total recurrent expenditures from 45 percent in 2005 to 35 percent in 2006. I t s share i s expected to decline further to 26 percent in 2007. Inresponse to the expanded fiscal space, PRSP priority spending increased from 24 percent in 2005 to 26 percent in 2006, and i s expected to increase to 34 percent in 2007. Compared to 2001, poverty-reducing spending was larger by 34 percent in 2005 and by 138 percent in 2007, while the corresponding percentages for interest payments decreased from 285 percent to 188 percent in the same years. Figure 1. Poverty Reducing Expenditures and Interest Payments (Percent o f total locally funded expenditures) 50.0 , I U 0.0 ~ 2001 2002 2003 2004 2005 2006 2007 +Poverty reducing expenditures --cInterest payments Source: See table 2. Note: Budget outturn o f poverty-reducing expenditures in 2004 i s unavailable. 38. Social development funds have been used to target support to local communities. Most o f these social development funds were established with support from development partners. In particular, the Board o f IDA approved in August 2007 a Community Driven Development (CDD) project which will support rural communities. The PRSP outlined plans for a Poverty Reduction Fund (PRF) as an accounting framework for monitoring pro-poor spending. I t has now evolved into an overall framework for tracking spending from social development funds. Once operationalized, i t i s expected that the PRF will facilitate the coordination and monitoring o f spending from the C D D project and other social development funds. G. STAFF ASSESSMENT 39. The staffs are of the view that the Government has fully implemented nine out of eleven completion point triggers. T w o triggers were partially completed: (i) annual increase by five percent o f the share o f births attended by a person trained in antenatal care; and (ii) bringing to the point o f sale the publicly-owned groundnut processing plants. The staffs recommend that waivers be granted for non-observance o f these two triggers. These waivers 19 are sought because, as discussed above: (i) substantial progress was made towards implementation o f each trigger; (ii)regarding the trigger on assisted births, the target percentages are unrealistically high due to the long delays in reaching the completion point, and moreover progress on this front has been such that the situation is now similar or better than in other comparable Sub-Saharan African countries; and (iii) with respect to groundnut processing plants, a previous attempt by the government to privatize them was unsuccessfid and corrective actions are now being implemented. 111. UPDATED DEBT RELIEF AND SUS,TAINABILITY ANALYSIS A. UPDATED DATA RECONCILIATION FOR THE DECISION POINT 40. The staffs o f IDA and the IMF, together with the Gambian authorities, have reviewed the stock of debt at end-December 1999 presented in the decision point document against creditor statements. As a result o f this exercise, the NPV o f the debt owed to some creditors as presentedin the decision point document was revised. The revisions arose primarily from data discrepancies discovered during consultations with creditors. The revisions are as follows: 41. Multilateral creditors: As a result o f this exercise, the nominal stock o f debt owed to multilaterals has decreased by US$0.6 million to US$355.6 million, and the NPV o f debt was reduced by US$0.5 million to US$180.3 million. The NPV o f debt to IDA was revised upwards by US$O.1 million. Moreover, European Union (EU) loans administered by IDA- amounting to US$0.3 million in NPV terms after traditional debt relief-were not included at decision point (see paragraph 42 below). The NPV o f debt owed to the African Development Bank Group was revised downwards by US$0.6 million, mainly due to corrections in the loan database, while the NPV o f debt to the Arab Bank for Economic Development in Africa (BADEA) and the EU was revised upwards, respectively, by US$0.2 million and US$O.1 million to account for higher nominal stocks o f debt than considered at decision point. The NPV o f debt owed to the Islamic Development Bank (IsDB) and the International Fund for Agricultural Development (FAD) was revised downwards by US$0.3 million and US$0.02 million, respectively, due to overstated nominal stock, while the NPV o f debt owed to the OPEC Fund for International Development (OFID) was revised upwards by US$ 0.1 million due to understated nominal stock at decision point. 42. Bilateral creditors: The NPV o f debt to Paris Club creditors after applying a traditional debt r e l i e f mechanism was revised upward from US$17.6 million to US$19.5 million (Table 10). This revision i s attributable to the reclassification o f European Union loans administered by IDA that are now treated as loans from Paris Club creditors (US$0.3 million in NPV terms after traditional debt relief) and to the changes o f the NPV o f debt 20 owed to Norway and France.' The NFV o f debt to Norway increased from US$2.8 million to US$5.6 million, while the NPV o f debt to France was revised downward from US$5.5 million to US$4.3 million." The NPV o f debt to non Paris Club creditors decreased from US$46.4 million to US$40.9 million due to the revised NPV o f debts to Kuwait, Taiwan Province o f China, and Libya.'' 43. Estimates of exports of goods and services used to evaluate HIPC assistance a t the decision point have also been revised from an average o f US$118.8 million per year over 1997-99 to US$119.4 million. 44. T h e debt reconciliation exercise, together with revised estimates of exports, implies a decrease in the required HIPC assistance. The nominal stock o f debt at end 1999 has decreased by US$7.9 million to US$444.7 million and the NPV o f debt, after the delivery o f traditional debt relief, i s reduced by US$4.2 million to US$240.7 million (Table 10). Revisions to debt and export data together would result in a downward revision o f HIPC assistance by US$5.0 million in NPV terms, from US$66.6 at the decision point to US$61.7 million. 45. Debt relief under the enhanced HIPC Initiative nevertheless remains that agreed at the decision point. For countries that reached the decision point prior to the adoption o f the decision on information reporting by the Boards o f IDA and the Fund, l2 the amount o f enhanced HIPC assistance required at the decision point cannot be adjusted downward without consent o f the country authorities. I nthis case, the Gambian authorities have not agreed to a revision on the grounds that, by reducing the resources available for their ongoing PRSP program, a downward adjustment in assistance would weaken poverty reduction efforts. As a result, committed debt r e l i e f under the enhanced HIPC Initiative remains US$66.6 million in NPV terms, as estimated at the decision point, and the common reduction factor remains at 27.2 percent. 9 European U n i o n loans administered by IDA were classified as multilateral at the decision point. In February 2005, the Commission o f the European Union, after consultation with i t s member states, notified staff that these loans should be reclassified as bilateral to reflect correct ownership status. 10 The Gambia's debt vis-$-vis Norway and France was revised due to new information provided by the creditors o n the nominal stock o f debt. The Gambia's debt vis-a-vis Taiwan was revised down due to new information provided by the creditor o n the nominal stock o f debt. With respect to Kuwait and Libya, the debt was revised after correcting the interest rate used at decision point. l2''Information Reporting in the Context o f H I P C Initiative Assistance", approved by the members o f the Executive Board o f the IMF (EBS/02/36) and IDA (IDNSecM2002-013 l), March 4,2002. 21 B. HIPC INITIATIVE STATUS OF CREDITOR PARTICIPATIONIN THE ENHANCED 46. The Gambia has received financing assurances of participation in the Enhanced HIPC Initiative from creditors accounting for 80.7 percent of the NPV of HIPC assistance estimated at the decision point. Multilateral creditors account for 73.5 percent o f total committed assistance, while bilateral creditors account for 26.5 percent. Several multilateral creditors and all Paris Club creditors have provided interim assistance (Table 19). Most multilateral and all Paris Club creditors have confirmed their participation in the HIPC Initiative. The authorities are working toward reaching agreements with all remaining creditors (Table 19). Multilateral creditors 47. HIPC assistance from multilateral creditors amounts to US$49.2 million in NPV terms, or about three-quarters o f total HIPC assistance (Table 19). IDA, the IMF, the AfDB Group, and the European Union provided interim assistance in the form o f debt service reduction. All but one creditor have committed to provide the required assistance once The Gambia reaches the completion point.I3 48. The IMF:Enhanced HIPC assistance from the IMF amounts to SDR 1.8 million (US$2.3 million) in NPV terms at decision point. O f this amount, an estimated SDR 0.4 million (US$0.6 million) has already been disbursed as o f end-November 2007 in the form o f interim assistance.l4At completion point, the IMF will provide the remaining HIPC assistance amounting to SDR 1.4 million (equivalent to US$2.0million), together with accrued interest, currently estimated at SDR 0.5 million. IMF assistance represents an average annual reduction o f 13 percent in debt service over 2001-09. 49. IDA: Debt r e l i e f from IDA amounts to US$22.3 million in NPV terms at decision point (Table 19), equivalent to debt-service savings o f US$35.9 million during 2001-2016. O f this amount, IDA has delivered US$8.0 million in NPV terms (US$9.1 million in nominal terms) as interim r e l i e f in the form o f a 50 percent reduction o f The Gambia’s debt service to IDAL5. Upon reaching the completion point, the remaining portion o f assistance from IDA amounting to US$14.3 million in NPV terms (US$26.8 million in nominal terms) will be provided in the form o f a 50 percent reduction o f The Gambia’s debt service to IDA through February 2016. 13 E C O W A S had not confirmed i t s participation at the time o f writing. 14 Interimassistance was suspended in 2002 when the original PRGF arrangement went off-track, but was resumed in 2007 with the approval o f a new three-year PRGF program. 15 Interimrelief reached the ceiling o f one-third o f total NPV o f H I P C relief from IDA in December 2004. 22 50. The African Development Bank Group: HIPC debt relief from the AfDB Group amounts to US$15.8 million in NPV terms (Table 19). O f this amount, the AfDB Group has already provided US$6.3 million in end-1999 NPV terms (US$6.8 million in nominal terms) as interim relief. At completion point, the AfDB Group i s assumed to provide the remaining amount o f relief through an 80 percent reduction o f debt service on debt outstanding at end- December 1999, applied from January 2008 through 2013, 5 1. Assistance from BADEA, EU, IFAD, IsDB and OFID amounts to US$8.6 million in end-1999 NPV terms (US$14.0 million in nominal terms). The modalities o f assistance for these multilateral creditors are summarized in Table 19. Bilateral creditors 52. Paris Club Creditors have agreed in principle to provide their share o f assistance under the enhanced HIPC Initiative, for US$4.8 million in end-1999 NPV terms (Tables 19 and 20).16 Interim assistance has been provided through a flow treatment under Cologne terms, agreed on January 9,2003 and extended on June 22,2007. Participating Paris Club creditors declared their readiness in principle to provide their fill share o f assistance at the completion point, provided The Gambia maintains satisfactory relations with participating creditor countries. Bilateral agreements have been signed with France and Norway. Official Development Assistance loans administered by IDA and h n d e d by the members o f the European Union are expected to be rescheduled in accordance with the terms o f the Paris Club Minutes. Paris Club creditors are expected to deliver their share o f HIPC Initiative assistance through a stock-of-debt reduction under Cologne terms, which should lead to the cancellation o f all outstanding obligations o f The Gambia towards Paris Club creditors. 53. Non-Paris Club creditors are expected to provide relief in terms comparable to that o f Paris Club creditors. The NPV o f debt to the non-Paris Club creditors i s US$80.6 million (18.9 percent o f the total debt stock). The largest official non-Paris Club creditor i s Taiwan Province o f China, followed by Kuwait. The Gambian authorities have sent letters to their non-Paris Club creditors seeking debt r e l i e f agreements with them on terms at least comparable to those offered by the Paris Club.17 c. CONSIDERATIONFOR EXCEPTIONAL TOPPINGUP OF HIPC ASSISTANCE 54. The enhanced HIPC Initiative allows for additional debt relief, o r exceptional “topping-up,” at the completion point if the deterioration o f the debt burden indicators 16 This i s consistent with the proportional burden sharing based o n the Paris Club relative exposure in NFV o f total external debt at decision point after the full use o f traditional debt relief mechanisms. l7The IMF i s in the process o f c o d i n g non-Paris Club creditors who intend to provide debt relief in the context o f the enhanced H I P C Initiative. 23 could be primarily attributed to fundamental changes in a country’s economic circumstances due to exogenous factors.18 Additional debt relief may in this case be provided to bring the NPV o f debt-to-exports ratio down to the 150 percent threshold at the completion point.lg Table 7. Debt and Exports Related Variables (After HIPC Assistance) Decision Point Completion Point DP Projections Actual NPV o f debt-to-exports ratio 150.0 139.8 242.5 NPV o f debt (US$millions) 178.2 254.5 333.9 New borrowing (US$ millions) 200.3 283.8 Grant element o f new borrowing ’ 60.8 45.3 Exports o f GNFS (US$ millions 118.8 182.0 137.7 SDR discount rate (percent) 5.6 5.6 5.1 SDR exchange rate (SDR per US$) 0.73 0.73 0.66 55. The Gambia’s NPV of debt-to-exports ratio at end-2006 was almost double i t s projected value at the decision point (Table 7). At decision point, the end-2006 debt-to- exports ratio was projected to be 139.8 percent o f exports o f goods and nonfactor services. By contrast, the actual ratio was 242.5 percent, which i s 102.6 percentage points above the projection and 92.5 percentage points above the HIPC threshold o f 150 percent. 56. The main factors that explain the variation o f the ratio are export performance, new borrowing, and the exchange rates and discount rates used to calculate the NPV o f debt. The contribution o f these factors i s illustrated in table 8 and discussed in what follows. “The Enhanced HIPC Initiative - Completion Point Considerations,” EBS/O1/141 (8/20/2001) and IDNSecM2001-0539/1 (8/21/2001). To l9 date, six countries have received topping-up assistance under the enhanced HIPC Initiative: Burkina Faso, Ethiopia, Rwanda, Malawi, Niger and Sao Tome and Principe. 24 Table 8. Decomposition of the Changes in the NPV of Debt-to-Exports Ratio Anticipated at the Unanticipated at the Percent contribution Percent Total change decision point decision point to unanticipated (percentage points) contribution to (percentage points) (percentage points) increase total increase Total change in the ratio -10.2 102.6 100% 92.5 100% Factors contributing to the change of the ratlo Due to changes in the parameters I. 0.0 21.9 27% 27.9 30% i) Discountrates 0.0 13.2 13% 13.2 14% ii) Exchange rates 0.0 14.6 14% 14.6 16% 2. Due to additional bilateral debt relief 0.0 0.0 0% 0.0 0% 3. Due to new borrowing 43.1 55.6 54% 98.7 107% Volume 43.1 23.8 23% 66.9 72% Concessionality 0.0 7.1 7% 7.1 8% Other factors 24.7 24% 24.7 27% 4. Due to Exports of goods and non-factor senices -51.4 38.7 38% -12.7 -14% Volumes 33.3 32% Prices 5.5 5% 5. Due to amortization&others -1.9 -19.5 -19% -21.4 -23% Export Performance 57. Growth in export earnings fell short o f the level originally projected at the decision point. Although the growth in export earnings lowered the NPV o f debt-to-exports ratio by almost 13 percentage points between the decision and the completion point, this contribution was lower than projected. Export growth between 1999 and 2006 was projected to be 63 percent; however, actual export growth during this period was only 28 percent. This shortfall i s mainly attributed to a lower than projected growth o f export volumes, which accounted for 32 percent o f the unanticipated increase o f the debt-to-exports ratio. 58. Government policies can explain a substantial amount of the poor performance of the main export sectors relative to the decision point projections. The Gambia’s largest contributors to export earnings are re-export earnings, groundnuts and travel income, which accounted for 30.0,6.6 and 58.3 percent o f total export earnings, respectively. Approximately h a l f the shortfall o f exports compared to decision point projections can be attributed to re-export earnings, while groundnuts and travel income accounted for a quarter each. 59. The shortfall in re-exports was mainly a volume and not a price effect. The quality o f the data o n re-exports is poor, resulting in considerable uncertainty about re-export earnings. Nevertheless, it can be shown that re-export prices, based on the world export price deflator, have grown modestly, close to the decision point projections. By contrast, re-export volumes f e l l short o f projections during this period. 60. There i s sufficient evidence that government policies were major determinants of the lower growth of re-export volumes. The Gambia has traditionally acted as a regional 25 re-export hub due to liberal trade policies and relatively efficient ports and customs administration. However, policy shortcomings resulted in lower re-exports: e Poor macroeconomic management, resulting in macroeconomic uncertainty and at times an unstable exchange rate, contributed to a stagnation o f re-exports. The Gambia has been slow to further improve i t s customs clearance procedures and ports facilities, while neighboring countries such as Senegal have closed the competitiveness gap. Anecdotal evidence suggests this has materially impacted The Gambia’s role as re-exporter to the region. e In early 2006, the country adopted the ECOWAS Common External Tariff (CET) and increased its import sales tax in order to harmonize i t s tariff regime with the region. Although these reforms are intended to promote regional trade integration, the near- term tax increase o n imports hrther reduced the country’s competitiveness in re-export trade. Figure 2. The Gambia: Projected and Actual Export Performance, 2000-2006 100 200 Outturn: cumulative growth I 80 150 /groundnuts 60 100 earnings 40 50 20 0 0 -50 V 0 Exports goods and services (dollars) -20 -100 Source: Gambian authorities and staff estimates. 61. Groundnut i s the country’s most significant cash crop, but poor policies have undermined performance (see also paragraphs 30-33). At the decision point, i t was projected that groundnut exports would steadily increase by 50.4 percent by 2006, actual 26 groundnut exports decreased by 25.5 percent compared to 2000. W h i l e world groundnut prices were marginally lower than the projections, the shortfall in groundnut exports can be mostly explained by lower export volumes. The authorities implemented a series o f sector reforms which had a negative impact on the domestic groundnut sector. In 2005, a change in licensing arrangements created a defacto monopoly, whose inexperience and undercapitalization resulted in the near collapse o f groundnut exports to US$2.0 million. Groundnut exports recovered partially in 2006, but only to approximately half o f the decision point projection o f US$19.4 million. Finally, note that the shortfall in groundnut exports in 2006, which i s the basis for the topping-up assessment, cannot be attributed to l o w rainfall in 2002. 62. Finally, the tourism shortfall can be traced to the significant decline in 2000, which was policy-induced. Tourism i s the country’s largest foreign exchange earner. Tourist arrivals were projected to increase to approximately 135,000 by 2006, but instead only reached 121,000. As a result, travel income f e l l short o f the projections by 10.7 percent. The shortfall in tourist arrivals was largely due to the withdrawal o f a major German tour operator. A major reason for this withdrawal was the government’s ban on all-inclusive tour packages, which detrimentally affected the German market in particular.” German tourists decreased f i o m 25,393 in 1999 to 12,156 in 2000. The number o f German tourists decreased further to 3,065 in 2001 and has never recovered to previous levels. 63. Overall, exports performance has largely been driven by lower than projected volumes, for which poor policies were major determinants. For this reason, the staffs are o f the view that the contribution o f export underperformance to the deterioration o f the NPV o f debt-to-exports ratio i s not due to exogenous factors. For the three main export sectors, price effects have been negligible while lower than projected export volumes accounted for 33 o f the 39 percentage points shortfall. New Borrowing 64. At decision point, new borrowing was projected to increase the NPV of debt-to- exports ratio by 43 percentage points. N e w borrowing was required to support the implementation o f The Gambia’s Interim PRSP through investments in health and education, agriculture, fisheries, energy, water and sanitation, public sector reforms and private sector development. 65. However, actual new borrowing exceeded the decision point projections by US$84 million, resulting in an additional unanticipated deterioration of the NPV of debt-to-exports ratio by 56 percentage points. O f the unanticipated increase in the new 2oWorld Bank, “The Gambia, F r o m Entrepot to Exporter and Eco-tourism,” Diagnostic Trade Integration Study (DTIS), July 2007. 27 borrowing, 25 percentage points reflect the assumption at decision point that all new multilateral borrowing would be available o n IDA terms; with hindsight, an average grant element o f 45 percent would have been more realistic since considerable new borrowing was from non-IDA multilateral creditors. The correction to borrowing terms assumed at decision point i s shown as “other factors” in Table 8. Such corrections are not considered an exogenous factor that fundamentally changes a country’s economic circumstances. After accounting for this correction, new borrowing was on average s t i l l contracted o n terms that were less concessional than the 45 percent that should have been anticipated, contributing a further 7 percentage points to the deterioration in debt-to-exports. Higher than projected volume o f new borrowing, which accounted for 24 percentage points o f the unanticipated deterioration, was discretionary and was not associated with natural disasters or any other types o f exogenous factors.21 Neither the lower concessionality nor the higher volume o f new borrowing i s considered exogenous. Changes in Parameters 66. Unanticipated changes in the exchange and discount rates accounted for an increase in the NPV of debt-to-exports ratio of 28 percentage points. Lower discount rates, in line with the fall in world interest rates, contributed 13 percentage points, while unanticipated depreciation o f the dollar against most major currencies, in which the country’s debt i s denominated, further deteriorated the debt-to-exports ratio by 15 percentage points. Changes in these parameters are determined by international markets, and thus they are considered exogenous changes to the country’s economic circumstances. 67. A decline in discount rates can be interpreted to reflect market expectations o f lower world economic activities and thus worsening export outlooks. The discount rates are based on interest rates on international bonds o f industrialized countries. Insofar as the decline would reflect expectations o f lower global output and demand, the corresponding reduction in The Gambia’s future export earnings implies a higher than projected debt burden. Other Factors 68. The remaining reduction o f 20 percentage points i s due to revisions of the decision point debt database and amortization of existing debt. Due to the lag between the decision point and the completion point, The Gambia has repaid much more external debt than anticipated. 21 Disbursements o f US$380,000 from an IDA Africa Regional Locust Project can be considered exogenous. 28 Conclusion 69. The staffs are of the view that The Gambia does not meet the requirements for exceptional topping-up under the enhanced HIPC Initiative. Most o f the factors explaining the deterioration in the ratio are not considered exogenous changes to the country’s economic circumstances. Two factors are considered exogenous: (i) unanticipated changes in international prices o f exports, which account for 5.5 percentage points o f the deterioration; and (ii) unanticipated changes in the discount rate and the exchange rate, which account for 27.9 percentage points o f the deterioration. These two exogenous factors explain less than a third o f the unanticipated deterioration o f the NPV o f the debt-to-exports ratio. Lower export volumes, larger new borrowing and lower concessionality had a much greater impact on the deterioration o f the debt distress ratios. By themselves, they would s t i l l have resulted in a NPV o f debt-to-exports ratio o f 204 percent, significantly higher than the HIPC debt distress threshold o f 150 percent. 70. At the same time, the results of the LIC DSA-that The Gambia remains at high risk of future debt distress (Appendix I) -are a concern. While The Gambia does not meet the criterion for exceptional topping-up, the combined impact o f HIPC and MDRI debt r e l i e f will significantly reduce external public debt. However, despite this debt relief The Gambia will remain at high risk o f debt distress going forward. For this reason, the government has increased the minimum grant element on new external borrowing, and plans to limit the volume o f new borrowing for the foreseeable fbture as part o f an improved debt management framework. D. CREDITOR PARTICIPATION IN THE MULTILATERAL DEBTRELIEF INITIATIVE 71. Contingent upon approval by Executive Directors of the completion point under the Enhanced HIPC Initiative, The Gambia will qualify for additional debt relief under the Multilateral Debt Relief Initiative (MDFU). Three creditors would provide this debt r e l i e f under the MDRI: IDA, the AfDF and the IMF.22 MDRI debt relief (net o f HIPC assistance) would lead to debt service savings o f US$373.5 million over a period o f 43 years on debt owed to IDA, the IMF and the AfDF. 72. Debt Relief from IDA: IDA will provide debt relief under the MDRIthrough a debt stock cancellation o f debt disbursed before end-2003 and still outstanding on December 3 1, 2007.23This would reduce The Gambia’s debt stock owed to IDA by US$206.4 million, o f 22 For IDA, eligible debt covers debt disbursed and outstanding as o f December 3 1, 2003. For the IMF and AfDF, credits on debt outstanding and disbursed as of December 31, 2004 may be eligible for debt r e l i e f under @e MDRI. 23 See, International Development Association, “The Multilateral Debt Relief Initiative: Implementation Modalities for IDA,” November, 18, 2005, http://siteresources.worldbank.org/IDA/Resources/MDRT.pdf. 29 which a reduction o f US$183.4 million would be due to the implementation o f MDRI and the remainder to HIPC assistance (Table 17). Debt cancellation under the MDRI from IDA would result in average annual debt service savings (net o f HIPC assistance) for The Gambia of US$4.6 million between 2008 and 2011 and US$ 6.1 million over the next 30 years. Total debt service savings from MDRI would amount to US$201.8 million (or SDR134.1 million). 73. Debt Relief from the IMF: The IMF will provide debt relief under the MDRI amounting to SDR 9.4 million (or US$14.2 million), covering the full stock o f debt owed to the IMF at end-2004 that remains outstanding at the completion point.24 O f this amount, SDR 7.4 million (or US$11.2 million) would be financed from the MDRI-ITrust and the remainder from the HIPC Umbrella sub-account (Table 18). MDRIr e l i e f from the IMF would imply average debt service savings net o f projected HIPC assistance o f SDR 1.4 million (or US$2.1 million) per year over the next 5 years. 74. Debt Relief from the AfDF: The AfDF will provide debt relief under the MDRI through a debt stock cancellation o f debt disbursed before end-2004 and s t i l l outstanding at the completion point. MDRIr e l i e f from the AfDB will yield annual debt service savings (net o f HIPC assistance) averaging US$ 1.6 million over the next 5 years and U S $ 3.9 million over the following 39 years. Total debt service savings under MDRI would amount to US$160.2 million in nominal terms to be delivered in hll at the time o f the completion point. E. UPDATED DEBTSUSTAINABILITY ANALYSIS Debt Sustainability at End-2007 75. The Debt Sustainability Analysis (DSA) included in the decision point document has been updated jointly by the authorities and the staffs of the IMF and IDA on the basis of loan-by-loan debt data, using updated exchange and interest rates (Table 9).25 The Gambia’s nominal stock o f external debt reached US$677 million at end-2006 compared with US$453 million at end-1999 (Tables 10 and 12). Multilateral creditors accounted for 84 percent o f total debt, while bilateral creditors accounted for 16 percent, o f which 14 percentage points are attributable to non-Paris Club creditors. IDA and African Development Fund are the Gambia’s largest creditors, accounting for 39 and 26 percent o f total outstanding nominal debt, respectively. 76. The NPV of the Gambia’s external debt at end-2007, after full delivery of the assistance committed under the Enhanced HIPC Initiative at the decision point, i s estimated at U S 3 4 7 million, equivalent to 236 percent of exports, as compared with a 24 As defined in the MDRI-ITrust Instrument. 25This section updates the debt sustainability analysis using the HIPC DSA methodology, while Appendix I provides a forward-looking update using the Low Income Countiies (LIC) DSA methodology. 30 decision point projection o f 137 percent (Tables 13 and 15). As the delivery o f full HIPC Initiative relief by Paris Club creditors will entail the cancellation o f all o f their claims, the Paris Club will not be in a position to provide “beyond HIPC” r e l i e f to The Gambia. As explained in the discussion on topping-up (section III.C), the significant deterioration o f the NPV o f debt-to-exports ratio was mainly due to poor export performance, higher new borrowing compared with the decision point projections, and adverse changes in the discount rates and exchange rates. Debt Sustainability Outlook, 2007-2027 77. The medium-term macroeconomic framework has been updated in conjunction with the second review of the PRGF-supported program (Box 3 and Appendix I), and assumes a continuation o f recent prudent macroeconomic management. K e y macroeconomic assumptions reflect: (i) higher annual growth o f 6.2 percent in the near term, in line with recent strong performance and reflecting the expected continued FDI inflows and an upsurge in donor-sponsored projects, then gradual reduction to 5 percent over the medium-term, based on steady growth in the tourism, telecommunications, and agriculture; (ii) real annual growth o f exports o f goods and services at 7 percent over the medium term, driven by tourism, a recovery in the groundnut sector, and an expansion in other agricultural exports; ( iii) larger imports and current account deficits through 2012 due to ongoing investment projects, before the current account declines as a share o f GDP to 5 percent in 2025; (iv) an improved fiscal balance in the medium term, reflecting sustained strong revenue performance, fiscal discipline and lower debt service; and (v) increased external donor assistance, both loans and grants, over the period 2007-2012, declining as a share o f GDP over the medium term. 78. Full delivery of debt relief under the HIPC Initiative and the MDRI would significantly reduce The Gambia’s external public debt. I nNPV terms, the stock o f debt would be reduced from US$439 million at end-2007 to US$347 million after HIPC relief and to US$165 million after MDRI (Table 13). However, the country’s stock o f external debt will remain relatively large post-completion point primarily due to outstanding debt owed to multilateral creditors that do not participate in MDRI and non-Paris Club bilateral creditors, much o f which was contracted since the decision point.26Together these creditors will account for two-thirds o f The Gambia’s external debt stock in NPV terms after completion point. Nominal debt service relief would amount to US$23 million in 2008, o f which MDRI relief would contribute US$9 million (Table 14). 26 Most o f the multilateraldebt i s owed to BADEA, IsDB, OFID and IFAD, while the EXIM Bank o f Taiwan and the Kuwait Fund for Economic Development account for the majority o f debt owed to non-Paris Club creditors. 31 Box 3. Debt Sustainability Analysis Macroeconomic Assumptions, 2006-2027 The medium term assumptions in the baseline scenario are consistent with the IMF PRGF supported program (see also Appendix 1). Key macroeconomic assumptions include a continuation o f prudent macroeconomic management, sustained investment in infrastructure and tourism, and a near-term scaling up o f donor assistance. The D S A also factors in the recent exchange rate appreciation, which is an additional source o f risk. The baseline scenario assumes sustained output growth in the near-term due to ongoing large foreign direct investments (FDI) and donor-sponsored projects. GDP growth i s expected t o average 6.2 percent in 2007-12, in l i n e w i t h recent performance, before slowing gradually to 5.0 percent over the medium-term. Significant investments are expected to continue in the tourist sector, which i s a major beneficiary o f FDI and a key driver o f growth. FDI i s projected to remain robust at 6.9 percent o f GDP over 2007-12, but declining as a share o f GDP over time. In addition to tourism, sustained growth i s expected to come from: (i) telecommunications, particularly the mobile phones market which has three competitors; (ii) construction, financed by FDI in the hotel sector and also remittances; and ( iii) groundnuts and the rest o f the agricultural sector, benefiting f r o m the implementation o f the recently adopted groundnut sector reform “Roadmap” and expansion o f horticulture and other nontraditional crops.27 In line w i t h GDP growth, growth o f exports o f goods and services i s expected to be largely driven by tourism, groundnuts and other agricultural exports. Re-exports are projected to grow more slowly as the country loses some o f i t s comparative advantage in liberal trade policies due to regional tariff harmonization and improvements o f neighboring countries’ trade regimes. Nominal export growth i s expected to increase from an average o f 5.6 percent through 2012 to 7.7 percent over the medium-term, while imports are projected to grow at 5.9 percent annually. Large externally-financed investment projects together with FDI inflows would support larger current account deficits in the near-term, but they decline f r o m 10.8 percent o f GDP in 2007 to 5 percent in 2025. The fiscal balance improves in the medium term, reflecting sustained strong revenue performance and lower debt service. Implementation o f the new PRSP i s expected to be supported by donor assistance in the near-term. External borrowing i s expected to average 5 percent o f GDP between 2007 and 2012 before declining to 1.8 percent by 2027. External grants increased in 2007 and are expected to average about 3.6 percent o f GDP through 2012 before declining to about 0.7 percent by 2027. A reversion o f external assistance to traditional levels will require fiscal adjustments. Expenditures are projected to decrease f r o m 27.3 percent o f GDP in 2007- 12 to 22 percent in the long run. In particular, interest payments are expected to continue their downward adjustment from 8.6 percent o f GDP in 2005 to 1.4 percent in 2027, thus freeing up resources for poverty- related expenditures. Domestic revenue collection i s expected to remain robust at 2 1 percent, in line with recent levels. 79. The debt sustainability analysis shows that The Gambia’s NPV of debt-to- exports ratio will fall beneath the debt-burden threshold after Enhanced HIPC assistance and MDFU debt relief (Table 15 and Figure 3). After Enhanced HIPC relief alone, the NPV o f debt-to-export ratio for The Gambia i s projected to remain above the 150 percent threshold, although it falls steadily beneath the threshold by 2026. However, following MDRIrelief at completion point, the NPV 27W o r l d Bank, “The Gambia, F r o m Entrepot to Exporter and Eco-tourism,” Diagnostic Trade Integration Study (DTIS), July 2007. 32 o f debt-to-exports ratio drops to 113 percent at end-2007. After increasing to over 150 percent through 2012 associated with planned poverty-reducing new borrowing, i t falls to 106 percent by the end o f the projection period. MDRI relief also significantly reduces the NPV o f debt-to-GDP and debt-to-revenue ratios. 0 After both Enhanced HIPC and MDRI relief, the NPV o f debt-to-GDP ratio falls from 84 percent at end-2006 to 26 percent at end-2007 and i s expected to remain beneath 30 percent over the projection period. 0 Finally, the NPV o f debt-to-revenue ratio would decline from 397 percent in 2006 to 121 percent in 2007, and after increasing to 148 percent in 2012, falls steadily to 110 percent in 2026. 80. The updated LIC DSA indicates that The Gambia’s NPV of debt-to-exports ratio will remain above the debt burden threshold for a protracted period even after receiving HIPC and MDRI relief (Appendix I). After the full delivery o f HIPC and MDRI assistance, the NFV-of-external-debt to export ratio declines significantly but remains above the L I C DSA’s policy-dependent external debt-burdenthreshold o f 100 percent. 28 Furthermore, this ratio stays above the threshold for a protracted period, indicated that the r i s k o f debt distress i s high. At 30 percent o f GDP, the large domestic debt stock fiuther supports the assessment that the risk o f debt distress remains high. 8 1. External debt service ratios will decline to comfortable levels in line with a significant reduction of the NPV of debt stock after the completion point. The debt service-to-exports ratio after the HIPC and additional bilateral assistance i s expected to average 13 percent in 2007-2016 and to decline further to approximately 11percent on average in 2017-26 (Table 15 and Figure 5). After MDFU, debt service-to-exports are projected to average 9 percent over 2007-2016 and about 7.5 percent for the rest o f the projection period. F. SENSITIVITY ANALYSISAND LONG-TERMDEBTSUSTAINABILITY 82. The Gambia’s debt sustainability outlook hinges on sustained growth in the , export sector (mainly tourism) and prudent debt management. In the event o f large 28 The debt distress thresholds for the H I P C and L I C DSAs differ as the latter are based o n policy performance. The respective DSAs are based o n consistent underlying assumptions regarding the baseline macroeconomic scenario and debt data. The baseline macroeconomic scenarios, including assumptions o n new borrowing, are generally identical. Debt ratios and debt service projections will, however, differ between the H I P C and L I C D S A given the different exchange rates and discount rates used. The L I C uses the same-year exports, while H I P C D S A uses a three-year backward average. The L I C D S A uses a fixed 5 percent discount rate, while the H I P C D S A uses currency-specific discount rates. Finally, the L I C D S A debt service projections use WE0 exchange rates, while the H I P C D S A uses fixed exchange rates (end-2006). The results o f the L I C D S A are presented in Appendix I . 33 shocks to exports and shortfall in grant financing, indicators o f the stock o f debt are expected to exceed HIPC thresholds through much o f the projection period. Sensitivity analysis thus underscores the importance o f pursuing export diversification and prudent borrowing policies, including borrowing only o n highly concessional terms, to avoid potential risks for debt sustainability. Scenario 1: Lower export growth 83. The main assumptions in scenario 1 comprise a reduction in exports of goods and service volumes relative to the baseline scenario. In this scenario, real exports are projected to grow at 4 percent instead o f 6 percent in the baseline. Underlying this assumption i s a combination of: (i)a failure o f the tourist sector to sustain investment and growth; (ii)slower expansion and diversification o f agricultural exports; and ( iii) a failure to maintain competitiveness in re-export trade, perhaps owing to the adverse impact o f the Economic Partnership Agreement (EPA) under negotiation with the EU. Associated w i t h poorer export performance i s a reduction in economic growth and government revenues. 84. The Gambia’s external debt indicators could deteriorate considerably over the medium term if such adverse external developments materialize. A reduction in export growth would increase the NPV o f debt-to-exports after MDRI to above 170 percent from 20 12, where it remains through most o f the projection period (Figure 4). The debt service ratio also increases to about 10-11 percent o f exports before falling over the medium-term (Table 16 and Figure 5). Scenario 2: Less concessionality on external financing 85. The second scenario demonstrates the importance of borrowing on highly concessional terms to ensure debt sustainability. This scenario assumes that new borrowing has a grant element o f only 25 percent rather than 45 percent in the baseline. However, such a scenario could equally reflect an increase in new borrowing, even if o n highly concessional terms, to fill the gap if disbursements o f external grants fall short o f projections. 86. A less favorable grant element of new loans has substantial negative impacts on external debt sustainability (Table 16, Figures 4 and 5). This shock would increase the debt stock by approximately U S 2 8 6 million in NPV terms by 2025 compared with the baseline, and the NPV o f debt-to-export ratio would increase by 33 percentage points by 2012 compared with the baseline, to reach 190 percent o f exports. Though i t trends downward, NPV o f debt-to-exports will remain high over the projection period at 160 percent, above the post-MDRI baseline debt-to-exports ratio in 2007. Borrowing o n highly concessional terms or grant financing close to the baseline projections are necessary to ensure the authorities achieve their poverty reduction efforts without returning to a state o f debt distress. 34 IV. CONCLUSIONS 87. The staffs of IDA and the IMF consider that The Gambia’s performance on the conditions established in 2000 for reaching the completion point under the Enhanced HIPC Initiative has been broadly satisfactory. 88. The staffs are of the view that nine out of the eleven completion point triggers have been fully implemented, while two have been partially implemented. The poverty reduction strategy presents a broad reform agenda prepared through an extensive participatory process, and i t s progress has been monitored through annual progress reports. After an initial period o f uneven performance, macroeconomic performance has been restored and maintained under a PRGF-supported program. The country has established mechanisms to ensure efficient and transparent use o f HIPC debt relief. Poverty-related expenditures are explicitly identified and monitored through the budget process, and public financial management systems have been strengthened. A range o f education and health measures specified at the decision point were successfully implemented. A multisectoral regulatory agency for the electricity, water and telecommunication sectors has been established and i s operational. 89. Implementation of two triggers i s partial and ongoing. The share o f births attended by a person trained in antenatal care has significantly increased, although not to the level envisioned in the decision point. The target percentages are unrealistic due to the long delays in reaching the completion point, resulting in a situation where the indicator would have had to increase continuously for an unreasonably long period to levels above those for comparable Sub-SaharanAfrican countries. The Government continues to implement programs to increase the supply o f antenatal care services and improve maternal health. With respect to groundnut processing plants, an earlier government effort to privatize them was unsuccessful. In response, the Government has adopted a sector reform strategy to revitalize the sector and attract international investors. This strategy will h l l y liberalize the sector and privatize the management o f the groundnut plants. Given the progress made to date, the staffs recommend that waivers be granted for non-observance o f these two triggers. 90. The Gambia’s debt situation will improve significantly after it receives Enhanced HIPC assistance and MDRI debt relief, but the country will be at a high risk of debt distress according to the LIC DSA. Assurances have been obtained regarding participation in the Enhanced H I P C Initiative from creditors representing 80.7 percent o f the r e l i e f to be provided. After full delivery o f assistance o f the Enhanced H I P C Initiative and additional debt r e l i e f from some Paris Club creditors and MDRI, the NPV o f debt-to-exports ratio would be reduced from 236 percent to 113 percent in 2007, and it i s expected to remain below the HIPC debt distress threshold o f 150 percent for most o f the projection period. The NPV o f debt-to-GDP ratio and the debt service indicators all fall below the debt distress thresholds immediately after receiving the debt relief. However, the LIC D S A indicates that the NPV o f debt-to-exports ratio will remain above the policy-based debt distress threshold 35 o f 100 percent for a protracted period. Furthermore, sensitivity analysis indicates that the country’s external debt sustainability would be jeopardized by adverse shocks to export performance and increased external financing on less concessional terms. 91. The staffs are of the view that The Gambia does not meet the requirements for exceptional topping-up, even though the country will be at a high risk of debt distress after HIPC and MDRI relief. It i s the judgment o f the staffs that the deterioration in the country’s debt burden indicators during the interim period cannot be explained primarily by exogenous factors, and therefore it does not meet the requirements for exceptional topping- up approved by the IDA and IMF Boards. Given that the country will remain at high risk o f debt distress, i t will be critical that it implements measures to continue to strengthen debt sustainability. 92. The Government has initiated plans to strengthen debt sustainability. The second PRSP outlines a national development strategy that will encourage continued economic growth, particularly exports o f goods and services, which will strengthen the country’s capacity to service i t s debt. A recently completed Diagnostic Trade Integration Study (July 2007) identifies key success factors for expanding exports. The PRSP prioritizes prudent fiscal and debt management policies. The minimum grant element on new external borrowing has been raised to 45 percent. The Government plans on limiting the volume o f new concessional borrowing for the foreseeable future. It will further prioritize PRSP initiatives in line with available funding. The Government has committed to developing a comprehensive debt management strategy (DMS). I t s debt management capacity was assessed by IDA in March 2007 through application o f the Debt Management Performance Assessment (DeMPA) tool. This assessment provides a basis for the refinement and finalization o f the debt management strategy. 93. In light of the above, the staffs of IDA and the IMF recommend that the Executive Directors determine that The Gambia has reached the completion point under the Enhanced HIPC Initiative. v. ISSUES FOR DISCUSSION 94. Executive Directors may wish to focus on the following issues and questions: Completion point: D o Directors agree that The Gambia has fully met nine out o f eleven floating triggers and partially implemented another two triggers for reaching the completion point under the Enhanced HIPC Initiative, and that the waivers recommended by the staffs are warranted? 36 Data correction: D o Directors agree with staffs’ recommendation, based on the paper on information reporting approved by the IMF and Bank Boards in March 2002;’ that the downward revision in the stock o f debt in NPV terms does not warrant a revision in the amount o f HIPC Initiative assistance? MDFU: D o IMF Directors agree that The Gambia qualifies for an amount o f debt r e l i e f by the Fund equal to SDR 9.4 million, o f which SDR 7.6 million would be financed from the MDRI-ITrust and the rest from The Gambia’s HIPC Umbrella sub-account? Creditor participation:D o Directors agree that sufficient assurances have been given by The Gambia’s creditors to commit HIPC assistance to The Gambia on an irrevocable basis? 0 Topping-Up: D o the Directors agree with the staffs’ assessment that The Gambia does not meet the requirements for exceptional topping-up at the completion point? Debt Sustainability: D o Directors agree with the staffs’ assessment that The Gambia will remain at a high risk o f debt distress after hll delivery o f HIPC and MDRI assistance? D o Directors share the staffs’ assessment regarding possible risks that may emerge if the authorities do not actively pursue policies that encourage continued growth and prudent fiscal and debt management policies? Comparable treatment: D o Directors agree that The Gambia should continue to seek debt r e l i e f from i t s non-Paris Club creditors within the framework o f the HIPC Initiative and that the staffs should continue to monitor the delivery o f debt relief from all creditors? 29 “Information Reporting in the Context o f HIPC Initiative Assistance”, approved by the Executive Boards o f the IMF (EBS/02/36) and IDA (IDNSecM2002-0131), March 4,2002 37 Table 9. The Gambia: Discount Rate and Exchange Rate AssumDtions 11 1999 2006 Discount Rates 11 21 Exchange Rates 21 Discount Rates l / 21 Exchange Rates 21 (In percent per annum) (Currency per US. dollar) (In percent per annum) (Currency per US. dollar) Currency AfDF1AfDB Unit of account 5.59 0.73 5.13 0.66 Austrian Schilling 5.47 13.70 4.80 10.45 Belgian Franc 5.47 40.16 4.80 30.63 Canadian Dollar 6.67 1.44 5.22 1.17 Chinese Yuan 5.59 8.28 5.13 7.81 Danish Kroner 5.32 7.40 4.81 5.66 Deutsche Mark 5.47 1.95 4.80 1.49 Domestic Currency: Dalasi 5.59 13.00 5.13 28.05 Euro 5.47 1 .oo 4.80 0.76 Finnish Markaa 5.47 5.92 4.80 4.51 French Franc 5.47 6.53 4.80 4.98 Great Britain Sterling 6.70 0.62 5.68 0.51 IrishPunt 5.47 0.78 4.80 0.60 Italian L i r a 5.47 1927.40 4.80 1470.21 Japanese Yen 1.98 102.20 2.57 118.95 Kuwaiti Dinar 5.59 0.30 5.13 0.29 Libyan Dinar 5.59 0.46 5.13 1.28 Luxembourg Franc 5.47 40.16 4.80 30.63 Netherland Guilders 5.47 2.19 4.80 1.67 NorwegianKroner 6.64 8.04 5.05 6.26 Portuguese Escudo 5.47 199.56 4.80 152.23 Saudi Arabia Ryal 5.59 3.75 5.13 3.75 Spanish Peseta 5.41 165.62 4.80 126.34 Special Drawing Rights 5.59 0.73 5.13 0.66 Swedish Kroner 5.80 8.53 4.73 6.86 Swiss Franc 4.27 1.60 3.51 1.22 United Arab Emirates Dirhams 5.59 3.61 5.13 3.67 United States Dollar 1.04 1.oo 5.89 1.00 MemorandumItem: Paris Club cut-off date: July 1 1986 Sources: OECD and IMF, InternationalFinancial Statistics 11The discount rates used are the average commercialinterest reference rates (CIRRs) for the respective currencies over the six-month period ending in December 2006 for the completion point and in December 1999 for the decision point. 21 For all Euro area currencies, the Euro CIRR i s used. For the Kuwaiti Dinar, the US dollar CIRR is used for completion point calculations (compared to the decision point calculations, when the SDR CIRR was used), in accordance to the explicit peg of the Dinar to the US dollar in the beginning of 2003. For all other currencies for which the CIRRs are not available, the SDR discount i s used as a proxy. 38 Table I O . The Gambia: Nominal andNet PresentValue of External Debt Outstanding as ofEnd-December 1999 I/ Nominal debt NPV of debt NPV of debt before rescheduling21 before rescheduling 21 after rescheduling 31 From decision point Revised From decision point Revised From decision point Revised ( I n millions ofU.S. dollars) Total 452.6 444.7 258.0 251.1 244.9 240.7 Multilateral institutions 356.2 355.6 180.8 180.3 180.8 180.3 African DevelopmentBank Group African Development Bank 4.5 2.1 4.3 2.1 4.3 2.1 African Development Fund 117.9 117.2 53.6 52.9 53.6 52.9 Nigerian Trust Fund 0.3 2.7 0.3 2.4 0.3 2.4 InternationalDevelopment Association (IDA) 172.7 172.7 81.9 81.9 81.9 81.9 IMF 11.3 11.3 8.3 8.3 8.3 8.3 BADEA 3.6 3.9 3.0 3.2 3.0 3.2 Economic Community of West African States 0.8 0.8 0.8 0.8 0.8 0.8 European UnioniCommision 4/ 8.7 8.7 6.7 6.8 6.7 6.8 InternationalFund for Agricultural Development 18.0 18.0 9.2 9.2 9.2 9.2 Islamic Development Bank 14.7 14.5 9.9 9.7 9.9 9.7 OPEC Fund for InternationalDevelopment 3.7 3.7 2.9 2.9 2.9 2.9 Official bilateral 51 96.4 89.2 77.2 70.8 64.0 60.4 Paris Club 27.5 29.8 23.1 25.3 17.6 19.5 Post-cutoffdate 17.8 16.6 14.2 12.9 14.2 12.9 ofwhich: ODA 4.4 3.7 3.7 Pre-cutoffdate 9.7 13.3 9.5 12.4 3.4 6.6 ofwhich: ODA 1.3 2.5 1.o 1.7 0.6 1.o Austria 10.9 10.8 7.9 7.9 7.9 7.9 France 6.9 5.7 5.9 4.7 5.5 4.3 Netherlands 1.3 1.3 1.4 1.3 1.4 1.3 Norway 8.3 10.8 8.4 10.7 2.8 5.6 EU-IDA administeredloans 41 1.2 0.6 0.3 Non-Parls Club ofllclal bilateral 68.9 59.3 53.5 45.5 46.4 40.9 Post-cutoffdate 56.1 50.7 43.1 38.2 43.1 38.2 ofwhich: ODA 52.1 50.7 40.1 38.2 40.1 38.2 Pre-cutoff date 12.8 8.6 10.4 7.3 3.4 2.7 of which: ODA 12.8 8.6 10.4 7.3 3.4 2.7 Saudi Fund for Development 4.7 4.7 3.2 3.1 2.4 2.4 Kuwait Fund for Economic Development 6.9 6.9 5.8 5.3 4.3 3.6 Taiwan Export Import Bank 35.0 30.0 28.4 24.0 28.4 24.0 Libya 4.5 4.5 3.2 2.8 3.2 2.8 China 17.7 13.1 13.0 10.3 8.3 8.2 Sources: The Gambian authorities; and Bank-Fundstaff estimates. I/ Public and publicly guaranteed debt only. 21 Before full use o f traditional debt relief mechanisms. 3/ Assumes a stock-of-debt operation on Naples t e r n (67 percent NPV reduction) and at least comparable action by other official bilateral and commercial creditors. 4/ EU loans administeredby IDA amounting to US%0.3million in NPV terms were reclassifiedas official bilateral claims. 51 Data revision are due to better data availability. 39 Table 11. The Gambia: Estimated Assistance at Decision Point 1/ (In millions ofU.S. dollars in NPV terms at end-1999, unless otherwise indicated) Total Assistance under the NPV o f debt-to-exports ______.__.__________________ criteria Common Reduction Factor at the Decision NPV o f debt-to- Bilateral and Point 31 exports-target Total commercial Multilateral ____________________________________ (in percent) (In millions of US. dollars) on percent) Assistance at decision point 150.0 66.6 17.4 49.2 27.2 Assistance at decision point (revised) 150.0 61.7 15.5 46.2 25.6 Memorandum items: N P V o f debt 21 ... 244.9 64.0 180.8 N P V of debt (revised) 21 41 ... 240.7 60.4 180.3 3-year average o f exports ... 118.8 3-year average o f exports (revised) ... 119.4 ... ... N P V o f debt-to-exports 51 ... 206.1 ... ... N P V o f debt-to-exports (revised) 5/ ... 201.7 ... ... Sources: The Gambian authorities and staff estimates and projections. 11The proportional burden sharing approach i s described in "HIPC Initiative--Estimated Costs and Burden Sharing Approaches" (EBSl971127, 7/7/97 and IDNSEC M 97-306,717197). 21 Applies a hypothetical stock-of-debt operation on Naples terms and appropriate comparable treatment b y other official bilateral creditors at end-December 1999. 31 Each multilateral's NPV reduction at the decision point in percent o f its exposure at the decision point. 41 Based on latest data available at the decision point after full application o f traditional debt relief mechanisms. 51 Uses a three-year average o f exports o f goods and nonfactor services centered on previous year. 40 Table 12. The Gambia: External Public and Publicly Guaranteed Debt at End-December 2006 1/ (In millions o f US. dollars) Legal Situation 21 NPV o f Debt 31 Nominal Debt NF'V o f Debt After Enhanced After Additional HIPC Bilateral Assistance Total 676.7 427.1 333.9 333.9 Multilateral 566.2 333.4 286.7 206.7 African Development B a n k 0.0 0.0 0.0 0.0 African Development Fund 174.5 97.0 84.0 84.0 BADEA 26.0 19.1 17.8 17.8 Economic Community o f West African State 0.0 0.0 0.0 0.0 European U n i o d C o m m i s s i o n 4.8 4.0 3.4 3.4 IDA 263.6 145.2 125.1 125.1 IMF 17.8 15.8 13.3 13.3 International Fund for Agricultural Development 29.0 16.7 12.8 12.8 Islamic Development B a n k 32.6 21.4 17.3 17.3 Nigerian Trust Fund 2.8 2.2 2.2 2.2 OPEC Fund 15.2 12.0 10.8 10.8 Bilateral and commercial 110.6 93.7 47.1 47.1 Paris Club 15.6 13.1 1.1 4/51 1.1 Austria 9.7 8.0 France 3.3 2.8 Norway 1.5 1.5 EU-IDA 1.1 0.7 Non Paris Club official creditors 95.0 80.6 46.1 46.1 Saudi Fund for Development 4.9 3.2 1.1 1.1 K u w a i t Fund for Economic Development 22.9 17.4 12.0 12.0 Taiwan Province o f China 49.4 43.6 30.3 30.3 Libya 1.9 1.6 0.4 0.4 China 13.9 13.5 1.o 1.o India 2.0 1.3 1.3 1.3 Sources: The Gambian authorities; and Bank-Fund staff estimates. 11Figures are based on data as o f end-2006. 2/ Reflects the external debt situation as o f end-2006, including Cologne flow and additional assistance beyond HIPC for some creditors where applicable. 31 Assumes full delivery o f HIPC assistance as o f end-2006. 41 Pans Club creditors deliver their share o f assistance as a group. Actual delivery modalities are defined on a case-by-case basis. 51 Shows the amount o f amortization and interest payment falling due before end-2007. Pans Club expected to deliver their share o f HIPC Initiative assistance througb a stock-of-debt reduction under Cologne terms, leading to the cancellation o f all outstanding obligations. 41 42 .i?N2 P E R ~ w ow o - mdo ob do t- io o- o o o m d d W W O b idodd N N - 0 0 N m o m c O - c o P O h O h d d N * " A w o o o m s o s O O N - . 43 44 45 - f s - N 9 e m - 4 119' V N - . B 46 0 0 2 0 0 0 0 2 0 0 x v l w N - x,: F: , z , 0 l m v N m m N - -- m N ? ? ? 0 0 0 a 4 2 P 0 0 0 - 0 * 0 - 1 0 0 0 a w 0 0 47 Table 19. The Gambia: Status o f Creditor Participation Under EnhancedHIPC Initiative HIPC assistance as at the Decision Point Document Debt relief Percentageof Satisfactory Modalities to in NPV tcrms total assismce reply deliver debt relief (US$ millions) African Development Bank Gmup 15.8 23.7 YCS interim assistance amounting to US16.3 million in NFV t m was providedthmugh the reductionofthedcbtsmiccpaymentstothcAa)BGmupovertheperiodZWI toZW3. At wmplctionpoint, the outstanding amount oftotal debt relief for the A D B Gmup (vSS9.S Million in NPV tcrms) will be pmnded thmugh an 80% reductiono f the debt smicc paymentsto the African Development Fund fmm Januaty 2008 thmugh 2013. BADEA 0.8 1.2 YCS BADEA intcnds to deliver its share o f relief through concenssional reschedulingof outstanding debt at completion point EmnOmiC CommunityOf !"Kt African 02 0.3 No Not currently participatingin debt reliefto The Gambia. Stata EumpcanUniodCoMllision I 8 2.7 Yes The EC provided debt-smicercliefon identifiedEC b ans duringthe interimperiod. Total interim assistance amounts to US12.5 million in nominalt m (USS1.9 million in NPV -). lntanationalDevelopment Association 22.3 33.4 YCS Interim assistance was provided equivalent to a 50 percent reductionon The Gambia's debt PA) smice to IDA, amunting to a total ofUSS8.0 million in NPV tcrms. After completion point the m i n i n g assistance of USS14.3 million in NPV t m will be pmndcd through dcbt smice reduction o f SO percent on IDA loans as of end-2000. IMP 2.3 3.4 YCS Assistance is beingdelivered fmm the PRGF-HIPC TNIt to cover a portion of dcbt smice falling due m the IMF. Interimassistance stancd in 2W1 but was suspendedin 2W2 whm the original PRGF arrangcmcntwent off-uack. I t mumed in 2007 with the approval of a nm thrcc-year PRGF program IMF assistance repments a n average annual reductiono f 13 p n m t in debt smice o v a 2W1-09. intcmationalFund for &cultural 2.5 3.8 YCS Assistance will be delivmd at completion point thmugh reductionofdebt s m i c e payments Devebument on eligible debt by up to 100%until the target is reached. preliminw cstimats show that FAD's relief couldbe delivered over S years 2.7 4.1 YCS Assistance will bedelivmd at completionpoint through reschedulingofdebtova2Syears OPEC Fund for InternationalDevelopment 0.8 1 .2 YCS Assistance is expected to be providedthrough a combination ofdebt reschedulingand interest raw reductionuntil the rarget in NPV t m is reached. Total multilateral 49.2 73.8 Paris Club Creditors 4.8 7.2 YCS Interimassistance is providedthmugh Colo@e teams flow relief and several ofthe creditors have cancelled 100 p a m t of flow during the interimperiod. The Paris Club creditors will deliver the rest ofthe relief at the completion point Non-Paris Club Creditors 12.6 19.0 Saudi Fund for Development 0.6 1.0 No Kuwait Fund for Economic Devebpment I.2 1.7 No Taiwan Export Impotl Bank 7.7 11.6 No Libya 0.9 1.3 No China 2.3 3.4 No 17.4 26.2 Total bilateral and commerclnl 66.6 100.0 TOTAL. Sources: The Gambian authorities; and Bank-Fund staff atimata 48 Table 20: Paris Club Creditors' Delivery of Debt Relief Under Bilateral Initiatives Beyond the HIPC Initiative I/ Countries covered ODA (In percent) Non-ODA (In percent) Provlalon of relief Precutoff date debt Post-cutoff date debt Pre-cutoff date debt Post-cutoff date debt Declslon polnt Completlon (Inpercent) point (1) (2) (3 ) (4) (5) (6) (7l , Australia HIP- 100 100 100 IOOY Y 2 1 , Austria HlPCs 100 IW . Case-by-case, flow Stock Belgium HlPCs LOO 100 1W 100 flow Stock Canada HlPCs 31 .41 ~ 41 100 100 1W flow Stock Denmark HlPCs LOO I W 51 1W 100 51 100 flow Stock France HlPCs LOO 100 100 100 flow 61 Stock Pinland HlPCs LOO - 71 1W ~ 71 HlPCs LOO 100 100 IO0 100 now Stock Ireland Italy HlPCs 100 100 81 IO0 100 81 I W flow Stock Japan HlPCs 100 IO0 100 Stock Netherlands, the HlPCs 100 91 100 IO0 90-100 now 91 Stock 91 Nomay HPCS 1o/ 101 111 II1 Russia HlPCS - 1Y - IY 100 100 Stock Spain HlPCs 100 Case-by-case I00 Case-by-case Stock Sweden HlPCs - 131 100 Stock Switzerland HlPQ - 141 - 141 90-100 I 5 1 90.100 flow Stock United Kingdom HlPCs 100 100 100 I00 161 I W f l o w 161 Stock United Sates HlPCs 100 100 I00 100 171 100 flow Stock Source: Paris Club Secretariat. I/ C o l m (I) to (7) describe the additional debt reliefprovided following a specific methodology under bilateral initiatives and need to be read as n whole for each creditor. In W I m (I),"HIPCs" stvlds for eligible countries effectively qualifying for the H P C process. A "100 percent" mntion in the table indicates that the debt reliefprovided under the enhanced H P C Initiative h w o r k will be topped up to 1W percent through a bilateral initiative. 21 Australia: post-cutoff date non-ODA relief to apply to debts incurredbefore n date to be finalized; timing details for both flow and stock relief are to be finalized 31 Canada: including Bangladesh. Canada has granted n moratoriumof debt seMce as oflanuary 2001 on all debt disbursedbefore end-March 1999 for 13 out of 17 HlPCs with debt service dus to Canada Eligible counhies are Benin, Bolivia, Cameroon, D e n Rep. O f Congo, Ethiopia, Ghana, Guyana, Honduras, Madagascar, Rwanda, Senegal, Tanzania, and Zambia 100% cancellation will be granted at completionpoint As of July 2004, Canada has provided completionpoint stock of debt cancellationfor Benin, Bolivia, Guyana, Senegal and Tanzania. 4/ 100 percent of ODA claim have already been cancelled on HIPCs, with the exception of Myanmar's debt to Canada. 51 Denmark provides 100 percsnt cancellationof ODA loans and non-ODA credits contractedand disbursed before September 27, 1999. 61 France: cancellationof 1W percent of debt service on pre-cutoff date commercial claim on the government as they fall due starting at the decision point Once countries have reached their completionpoint, debt relief on ODA claim on the g o v e m n t will go to a special account and will be used for specific developmentprojects 7/ Finland no post-COD claim 8/ Italy: cancellationof 100 percent of all debts (pre- and post-cutoff date, ODA and non-ODA) incurred before June 20, 1999 (the Cologne S d t ) . At decision point, cancellationof the related amounts falling due i n the interim period. At completionpoint, cancellationof the stock of rmining debt 91 The Netherlands: 100 percent ODA (pre- and post-cutoff date debt will be cancelled at decisionpoint); for non-ODA: in s o m particular cases (Benin, Bolivia, Burkina Faso, Ethiopia, Ghana, Mali, Mozambique, Nicaragua Rwanda, Tanzania, Ugandaand Zambia), the Netherlands will mite off 100 percent o f the consolidated amounts on the flow at decisionpoint; all other HlPCs w i l l receive interim relief up to 90 pcrcsnt reduction of the consolidatedamounts. At completionpoint, all HlPCs will receive I W per cent cancellationof the remainingstock of the pre-cutoff date debt. IO/ Norway has cancelledall ODA claim. II/Due to the current World BanldIMF methodology for recalculatingdebt reductionneeds at HIPC completion point, Norway has postponedthe decisions on whether or not to grant 100% debt reduction until after the completionpoint. 121Russia has no ODA claim 13) Sweden has no ODA claim. 141 Switzerlandhas cancelled all ODA claim. IS1 Insome particular cases (Central African Republic, Liberia, Republic ofCongo, Sierra Leone, Togo), Switzerland will mite off 100 percent of the remaining debt stock at completionpoint; all other HPCs will receive debt relief according to Paris Club t e r n . 161 United Kingdom: "beyond 100 percent" full write-off of all debts of HIPCs as of their decisionpoints, and reimbursemnt at the decision point o f any debt senice paid before the decisionpoint. 171 United States: 100 percent post-cutoff date non-ODA heated on debt assumed prior to lune 20, 1999 (the Cologne Summit). Table 21. HIPC Initiative: Status o f Couney Cases Considered Under the Initiative, October 4,2007 Target E s h t c d Total NPV ofDebt-to- AssistanceLNeh I/ Percentage Nominal Debt Decision Completion GOV. (In millions 0fU.S. dollars, present value) Rduction S m i c c Relief Countly Point Point E w m rcvenuc Bilateral and Multilateral inNPV of (In millions o f (inpercent) Total commercial Total IMF World Bank Debt 2/ U.S.dollars) Completlon point reached under enhanced framework (22) Benin Ju1.W Mar.03 IS0 265 77 189 24 84 31 460 Bolivia 1,302 425 876 84 I94 2,060 originalframework Sep. 97 Sep 98 225 448 I57 291 29 54 14 760 enhanced framework Feb. 00 Jun 01 I50 854 268 585 55 I40 30 1.300 Burkina Faso 553 83 469 57 231 930 oripinol fromework Sep 97 Jul 00 205 229 32 196 22 91 27 400 enhoncedfromework Jul 00 Apr, 02 I50 195 35 161 22 79 30 300 lopping-up ... Apr.02 I50 129 16 112 14 61 24 230 camcroon Oct W Apr.06 I50 1,267 879 322 37 176 21 4,917 Ethiopia 1,982 637 1,315 60 832 3,275 enhancedframework Nov 01 Apr. 04 I50 1.275 481 763 34 463 47 1,941 lopping-up Apr 04 I50 707 I55 552 26 369 31 1.334 Ghana Feb. 02 Jul. 04 144 250 2,186 1,084 1,102 112 781 56 3,500 Guyana 591 223 367 75 68 1,354 original framework D ~ C .97 ~ 0 ~ 9 9107 zao 256 91 165 35 27 24 634 enhancedframework Nov 00 Dec-03 I50 250 335 132 202 40 41 40 719 Honduras Jul. W Mar-05 110 250 556 215 340 30 98 18 1,040 Madagascar Dee. W Ocl-04 150 836 474 362 19 252 40 1,900 Malawi 1,051 171 886 45 622 1,628 enhancedframework Dec. 00 Aug-06 150 646 164 482 30 333 44 1,025 topping-up ... Aug-06 150 411 7 404 I5 289 35 603 Mali 539 169 370 59 I85 895 origlnal framework Sep 9a Sep 00 200 121 37 a4 14 43 9 220 enhancedframework Sep. 00 Mar 03 I50 417 132 285 45 I 43 29 6 75 Mauritania Feb.OO Jun.02 137 250 622 261 361 47 1W 50 1,100 Mozambique 2,023 1,270 753 I43 443 4,300 originalframework Apr 98 Jun. 99 200 1.717 1.076 641 125 381 63 3,700 enhancedframework Apr. 00 Sep 01 I50 306 194 112 ia 62 27 600 Nicaragua Dcc. W Jan.04 150 3,308 2,175 1,134 82 191 73 4,500 Niger 663 235 428 42 240 1,190 enhancedframewrk Dec 00 Apr. 04 I50 521 211 309 28 170 53 944 lopping-up ... Apr.04 I50 I43 23 119 14 70 25 246 Rwanda 696 65 631 63 383 1,316 enhoncedfrnmework Dec 00 Apr-05 I50 452 56 397 44 228 71 839 lopping-up ... Apr-05 I50 243 9 235 20 154 53 477 Sa0 Tomb and Prlncipe I24 31 93 - 47 128 263 enhoncedfromework Dee. 00 Mar-07 150 99 29 70 . 24 83 215 lopping-up ... Mor47 150 25 2 23 . 23 45 49 Senegal Jun.00 Apr.04 133 250 488 212 276 45 124 19 850 Sierra Lmne Mar. 02 Dec. 06 150 675 335 340 125 123 81 994 Tanzania Apt. W Nov. 01 150 2,026 1,006 1,020 I20 695 54 3,WO Uganda 1,003 183 820 160 517 1,950 original framework ~pr.97 r ~ p 9a 202 347 73 274 69 I60 20 650 enhancedframework Feb. 00 May00 I50 656 110 546 91 357 37 1,300 Zambia Dec. W Apt-05 150 2,499 1,168 1,331 602 493 63 3,900 Dedsloa polat reached under enhanced framework (10) Afghanistan Jul. 07 Floating 150 571 436 135 - 75 51 1,272 Burundi Aug. 05 Floating I50 826 124 701 28 425 92 1,465 Central African Rep. Scpt 07 Floating I50 583 217 365 27 209 68 782 chad May. 01 Floating I50 170 35 134 18 68 30 260 Congo, Democratic Rep. of Jul. 03 Floating I50 6,311 3,837 2,474 472 831 80 10,389 Congo Rep. of Mar 06 Floating 250 1,679 1,561 118 8 49 32 2,881 Gambia, The Dcc. 00 Floating 150 67 17 49 2 22 27 90 Guinea Dec. 00 Floating IS0 545 215 328 31 152 32 800 Guinea-Bissau Dcc. W Floating 150 416 212 204 I2 93 85 790 Haiti Nov.06 Floating 150 140 20 120 3 53 15 213 Total arslstaace provlded/commltted 35,996 11,618 18,219 1,635 31 8,780 62,951 Sources: IMF and World BanL Board decisions, completion point documents, decision paint documcnD, preliminary HlFC documents, and staff calculations. I1 Assistance levels are at cou n u s i 'rcspective decision or completion points, as applicable. 2! In percent of the net present value ofdebt at the decision or completion point (as applicable), a& the full use of traditional debt-reliefmechanism. 31 Equivalent to SDR 1,698 million at an SDWUSD exchange rate of 0.644524, as ofOctober 4,2007. 50 Figure 3. The Gambia: External Debt for Medium- and Long-Term Public Sector Debt, 2007-26 (In percent) External Stock o f Debt inNet Present Value TermsExports 500 - +After traditional debt relief mechanisms - 500 -4-After Enhanced HIPC assistance - -After MDRIand bilateral debt relief beyond HIPC - 400 400 300 - - 300 200 - - 200 100 - - 100 I I t ' I I 600 600 External Stock o f Debt in N e t Present Value TermsRevenue 500 - 4After traditlonal debt relief mechanisms 500 +After Enhanced HIPC assistance After MDRI and bllateral debt relief beyond HIPC 400 - 400 300 - 300 200 - 200 100 - 100 I I I I " " " I 0 1 1 1 ~ " " ' Sources: The Gambian authorities; and Bank-Fund staff estimates and projections. 51 Figure 4. The Gambia: Sensitivity Analysis, 2006-2025 (In percent) I"" 200 INPV o f Debt 180 180 160 160 140 140 120 120 100 100 80 80 60 60 40 20 t +Alternative -Base scenario II-Lower concessionality on external debt Line scenario 40 20 0 0 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 200 200 N P V o f Debt to Revenues 180 180 160 160 140 140 120 120 100 100 80 80 60 - - C - .Alternative scenario I- Lower exports and growth 60 - 40 +Alternative scenario lI-Lower concessionality o n external debt 40 Base Line scenario 20 20 0 I 1 I I I I I I I I I I I I I I I I I 0 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 Sources: The Gambian authorities; and Bank-Fund staff estimates and projections. 52 Figure 5. The Gambia: Sensitivity Analysis, 2006-2025 (In percent) 25 25 Debt Service-to-Exports 20 20 15 15 10 10 5 5 +Alternative scenario I-Lower exports and growth - - - A- - .Alternative scenario II-Lower concessionality on external debt Base Line scenario 0 0 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 Sources: The Gambian authorities; and Bank-Fund staff estimates and projections. 53 Figure 6. The Gambia: External Debt Structure (In percent) End-Dec 1999 End-Dee 2006 Other Bilateral 15% Other Bilateral Paris Club 11% Sources: The Gambian authorities; and IDA and IMF staff estimates and projections. 54 APPENDIXI THE GAMBIA - DEBTSUSTAINABILITY ANALYSISUNDER THE DEBTSUSTAINABILITY FRAMEWORK FOR L O W INCOME COUNTRIES -AN UPDATE” 1. This debt sustainability analysis (DSA) updates the last DSA presented to the Fund Board in October 2006.31 The DSA i s consistent with the HIPC completion point DSA; both DSAs were prepared jointly by staffs o f the Fund and the World Bank, and are based on reconciled external debt and debt service data. The full effect o f MDN relief, which was shown as a separate scenario in EBS/06/128, i s now included in the baseline scenario, as are new borrowing limits under the PRGF-supported program. 2. The update suggests that The Gambia i s at high risk of remaining in debt distress even after receiving HIPC and MDRI relief. With the full delivery o f HIPC and MDRI assistance, the NPV o f external debt-to-export ratio declines significantly but remains above the policy-dependent external debt-burden threshold. By contrast, the NPV o f debt-to- GDP ratio as well as all the debt service indicators fall below their respective thresholds. Standard stress tests show that The Gambia will remain vulnerable to adverse developments. Inparticular, the debt stock indicators deteriorate significantly and exceed their respective thresholds when subject to negative shocks. At approximately 30 percent o f GDP, the large domestic debt stock further supports the assessment that the risk o f debt distress remains high. I. EVOLUTIONOF PUBLIC DEBTSINCE HIPC DECISION POINT 3. The Gambia reached the Decision Point under the Enhanced HIPC Initiative in December 2000. Based on external debt data at the end o f 1999, the Boards o f the International Development Association (IDA) and the IMF approved debt relief worth US$66.6 million in NPV Interim relief in the form o f debt service reductions was provided by IDA, the IMF, the African Development Bank (AfDB) and the EU. Reaching the HIPC completion point, originally expected around the end o f 2002, was delayed by serious policy slippages which derailed the program supported by the IMF’s Poverty Reduction and Growth Facility (PRGF). 30 The DSA has been producedjointly by Bank and Fund staffs. The last DSA was presentedto the Fund Board in October 2006 (EBS/06/128, Appendix I) 31 Appendix Iin EBS/06/128. 32 Assuming the participation o f a l l creditors and full delivery o f traditional debt relief. 55 4. At the end of 2006, the latest date for which comprehensive data are available, the stock o f external public debt was US$676.7 million (133.5 percent o f GDP) (Text table 1). Multilateral creditors accounted for 84 percent o f this debt, with IDA as the largest creditor (39 percent o f total outstanding debt). The nominal debt has grown by US$232 million, or approximately 50 percent (or 30 percentage points o f GDP) since end- 1999 (point o f reference for H P C decision point in 2000). Most o f this increase can be attributed to new disbursements from IDA, the ADB, other multilateral creditors and non-Paris Club creditors. Since end-2005 (presented in the 2006 DSA), nominal debt has increased by US$49 million, or about 8 percent; most o f this increase i s the result o f new borrowing in 2006, with the remainder due to previously unrecorded debt revealed by the data reconciliation exercise carried out for this DSA. 5. The stock of gross domestic debt stood at 32.2 percent of GDP at end-2006, up 8 percentage points from its level at decision point. The increase reflected large extra- budgetary spending in 2001, and the central bank’s sale o f government debt between 2003 and 2005 to sterilize the impact o f rebuilding international reserves. Text table 1 : Evolution of Public External Debt s i n c e D ecisionP aint 1f 1999 2003 200 6 US$ millims percent US$ millions percent US$ millions percent. TOtal 444.7 100 6282 100 6 76.7 im Mulfilateral 355.6 80 5252 84 5662 84 f wH ch: c IDA 172.7 39 254.9 41 2 63.6 39 AfDB 119.3 27 168.4 27 1 74.5 26 IMF 11.3 3 14.6 2 17.8 3 Other 52.3 12 87.3 14 110.3 16 Bilateral 89 1 m 103.1 16 1106 16 CjfwHch: Parisclub 29.8 7 16.0 3 15.6 2 Non-Paris Club 59.3 13 87.1 14 95 .o 14 CO HUl l e r C h1 0Jl 0 011 0 0.0 0 Memorandumitems: GDP [rnillimsUS dollr 431.9 ... 4613 ... 506.7 ... Nomind debtto-GDP 103.0 ... 1952 ... 1335 ... Source: Staff estimates and authorities. 1IFiguresfor 1999 a r e based mrecmciled cmpletionpcint data, 2005 data frm EESlO6fl28. 11. KEYASSUMPTIONS 6. The baseline scenario, consistent with the HIPC completion point DSA, assumes a continuation of recent prudent macroeconomic management, and the country 56 reaching the HIPC-completion point at end-2007, The key macroeconomic assumptions are presented in Text table 2. These differ only marginally from those assumptions underlying the last DSA. Notably, real growth has been revised up through 2012, inflation i s also projected to be somewhat higher, while export growth over the medium term i s more conservative. The revised assumptions reflect: Robust output growth over the near-term, in line with recent experience, due to on- going large foreign direct investment and donor-sponsored projects. Growth i s sustained in the medium-ternby continued expansion in the tourism and telecommunications sectors, as well as by growth in agriculture. Increased exports o f goods and services from growth in the tourist sector, as well as groundnuts and other agricultural exports. Further growth in imports through 2012, though lower than recent experience. The associated current account deficits due to large externally-financed investment projects decline over the medium term. Improved fiscal balance in the medium term, reflecting sustained strong revenue performance, fiscal discipline and lower debt service. Increased external donor assistance (both concessional loans and grants) over the period 2007-2012, declining as a share o f GDP over the medium term. P In line with the authorities’ PRSP aspirations, external borrowing i s expected to average 5.8 percent o f GDP between 2007 and 2012 before declining to 2 percent by 2026. New borrowing i s expected to be evenly divided between multilateral and bilateral creditors, with an average grant element o f 45 percent. P External grants increased in 2007 and are expected to average about 4 percent o f GDP through 2012 before declining to about 1 percent by 2027. Text table 2: Key macroeconomic assumptions (Period averages: in percent, unless otherwise indicated) 1998-2000 2001-03 2004-06 1998-06 2007-12 2013-27 Real GDP growth 6.1 3.1 6.2 5.2 6.2 5.0 Inflation 4.75 4.0 Growth exports o f goods and services 1.1 -0.1 11.6 4.2 5.6 7.7 Non-interest current account (percent o f GDP) 11 -1.5 -2.1 -9.0 -4.2 -10.1 -6.8 Overall fiscal balance (percent o f GDP) 11 -2 -1.7 t i Including official transfers and grants. 57 111. EXTERNAL DEBTSUSTAINABILITY A. BASELINE 7. Under the staff baseline scenario, all but one of the NPV of debt indicators will remain below their corresponding thresholds once completion point i s reached and the HIPCMDRI relief i s delivered (Table 1 and Figure l).33 The NPV o f debt-to-GDP ratio falls to 26 percent at the beginning o f the projection period. N e w borrowing associated with increased investment pushes the NPV o f debt-to-GDP towards the threshold through 2012 before i t declines as investment levels o f f and growth i s sustained. The NPV o f debt-to- revenue and the debt service ratios fall considerably beneath their respective thresholds. W h i l e they too increase through 2012, they remain at comfortable levels throughout the projection period. Box Al: Policy Dependent Debt-Burden Thresholds for The Gambia The latest World Bank Country Policy and Institutional Assessment (CPIA) rates The Gambia a “poor performer.” The relevant indicative thresholds for countries assessed in this category are 30 percent for the NPV o f debt-to-GDP, 100 percent for NPV o f debt-to-exports, 200 percent for NFV o f debt-to-revenues, 15 percent for debt service-to-exports, and 25 percent for debt service-to-revenues ratio. These ratios are applicable to public and publicly guaranteed external debt. 8. The NPV of debt-to-exports ratio breaches the debt-burden threshold for a protracted period. The NPV o f debt-to-export ratio i s expected to decline significantly to 107 percent in 2007 following full impact o f HIPC and MDRI, but this i s s t i l l above the indicative policy-dependent threshold o f 100 percent. Furthermore, this ratio increases through 2012 due to new borrowing, and it stays above the threshold for a protracted period. I t gradually falls below the threshold over the medium-term, due to sustained growth in receipts from tourism, re-export services, and agricultural exports. W h i l e there are country- specific factors to consider when assessing the sustainability o f The Gambia’s external debt (Box A2), alternative measurements o f the ratio continue to indicate a protracted breach o f the debt-burden threshold. 33As outlined in the HIPC DSA, outstanding debt at end-2007 before completion point i s estimated at NPV $439 million. Following completion point, HIPC assistance reduces the NPV o f existing debt by US$92 million while MDFU results in an additional US$182.1 million reduction. 58 Box A2: Alternative measures of NPV of debt to exports The NPV o f debt-to-exports threshold i s breached over ‘most o f the projection period despite HIPC and MDRI relief. The ratio captures the NPV o f debt compared with exports o f goods and nonfactor services, as an important measure o f the country’s capacity to sustain external debt levels through i t s foreign exchange earnings. However, there are country-specific issues t o consider when applying this ratio to The Gambia: First, official statistics do not capture the full extent o f reexport trade and associated service earnings, which are major components o f exports. Due t o the lack o f reliable data, staff estimate re-exports as a fraction o f imports, adding a mark-up for earnings from re- exports. the text i s compared with two alternatives: 145 (i) the case where service exports are 135 NPV of debt-to-exports ratio with alternative scenarios revised upward by assuming re-exports o f 125 50 percent o f imports rather than 30 115 percent currently estimated; and, ( ii) remittances are added to estimated I O s baseline goods and nonfactor service 9s earnings to reflect projected total foreign 85 Including remittances exchange earnings in the future. B o t h 75 effects are seen to drive the NPV o f debt to “exports” beneath the threshold in 2007, 6s 2o07 2012 2017 2022 20: extended period due to new borrowing through 2010 before falling o f f in the medium term. These alternative measurements substantially improve the outlook for debt sustainability, although not enough to suggest that the country i s n o longer at a high risk o f remaining in debt distress. B. ALTERNATIVESCENARIOS AND STRESS TESTS 9. Alternative scenarios reveal that external debt indicators are vulnerable to substantial deterioration in the face o f adverse external developments or if new borrowing i s on less favorable terms than in the baseline (Table 2, Figure 1). T h e scenarios in F i g u r e 1 focus on an “extreme shock” case - r e f l e c t i n g a c o m b i n e d negative 59 shock to all variables based o n historical performance - and if borrowing occurs o n less favorable Emphasizing the “less favorable terms” scenario demonstrates the importance o f the authorities’ commitment to borrowing only o n highly concessional terms. With the exception o f the debt service indicators, which remain beneath their thresholds, the debt stock indicators all deteriorate significantly under these alternative scenarios. A number o f points are worth noting: e The NPV o f debt-to-GDP and the debt-to-exports ratio deteriorate significantly above their respective thresholds (Figure 1 and Table 2). A combination o f adverse shocks or lower grant element o n debt generates a significant deterioration in debt dynamics over the projection period. e The debt-to-revenue ratio shows a similar deterioration under the adverse shocks scenario. e Table 2 (line B6) demonstrates the deterioration in the debt-to-GDP ratio as a result o f an exchange rate depreciation. In particular, a one-time 30 percent depreciation results in the debt-to-GDP ratio breaching the 30 percent threshold for much o f the projection period. This scenario serves to illustrate the importance o f recent exchange rate appreciation o n the baseline debt-to-GDP ratio. If this appreciation i s not permanent, debt-to-GDP will rise above the indicative threshold in the near term despite HIPC and MDRI relief. IV. PUBLIC DEBT SUSTAINABILITY A. BASELINE 10. Domestic debt i s expected to fall from 29.6 percent of GDP at the end of 2007 to 10.4 percent of GDP in 2012 and to 9.1 percent of GDP in 2027, reflecting sustained good fiscal performance. Recently implemented reforms in tax administration are expected to help maintain revenues around 2 1 percent o f GDP, while the relatively tight fiscal policy programmed for the medium term helps bring domestic interest rates close to single digits levels. Over the longer term, lower debt service, reflecting the drop in external debt after delivery o f debt relief and lower interest rates o n domestic debt, provides space to steadily 34 Figure 1 does not report the standard historical scenario since this shows improved debt dynamics driven by lower historical current account deficits reducing external debt in this scenario. This scenario assumes that the interest rate o n new borrowing i s 2 percentage points higher than in the baseline, grace and maturity periods are unchanged, and implies a lower grant element o f 25 percent o n new borrowing, rather than 45 percent in the baseline. 60 increase basic primary expenditure^^^ and to partially offset the downward trend in externally-financed projects. 11. The NPV of public debt i s projected to decline from about 54.9 percent of GDP in 2007 to 38.9 percent in 2012 and to 30.6 percent in 2027 (Table 4 and Figure 2). The decline in the near term i s driven by a drop in the domestic debt. As a ratio o f domestic revenues, the NPV o f public debt i s projected to fall from about 247 percent in 2007 to 138 percent at the end o f the projection period. B. ALTERNATIVESCENARIOS AND STRESS TESTS 12. Stress tests indicate that public debt would not decline significantly under some adverse shocks (Table 4 and Figure 2). For example, under a permanently lower output growth rate (4.3 percent instead o f 5 percent), the NPV o f total debt-to-GDP ratio would decline from 54 percent in 2007 to 50 percent in 2027, as opposed to 3 1 percent under the baseline scenario. V. CONCLUSION 13. I t is the staffs’ view that The Gambia i s at high risk of debt distress based on external debt burden indicators. The Gambia’s debt situation has become more precarious since the last DSA due to the new borrowing. Given continuing risks, development o f a comprehensive public debt management strategy should be a priority. High levels o f concessionality in new borrowing and careful control over the volume o f such borrowing for the foreseeable future are also strongly recommended. Failure to achieve sustained export diversification and growth, meanwhile, would offset any gains in debt management, thus also requiring sustained efforts to promote exports and stimulate growth. 35 Defined as expenditures excluding interest payments and externally-financed projects. 61 62 Table 2. The Gambia: Sensitivity Analyses for Key Indicators ofpublic and Publicly Guaranteed External Debt, 2007-27 including HIPC and MDRl (Inpercent) Projections 2007 2008 2009 2010 2011 2012 2017 2027 N P V of debt-to-GDP ratio Baseline 25 25 27 29 29 29 17 22 A. Alternative Scenarlos A I . Key variables at their historical averages in 2008-27 I/ 25 25 26 26 25 24 16 6 A2. New public sector loans on less favorable t m in 2008-27 2/ 25 26 30 33 35 35 36 33 B. Bound Tests 61, Real GDP growth at historical average minus one standarddeviation in 2008-09 25 26 30 31 32 32 19 24 BZ. Export value gmwth at historical average minus one standard deviation in 2008-09 31 25 26 31 32 33 33 29 22 B3. US dollar GDP deflator at historical average minus one standarddeviationin 2008-09 25 32 39 41 42 42 38 31 84. Net non-debt creating flows at historical average minus one standard deviationin 2008-09 4/ 25 32 40 41 41 41 35 25 85. Combination of BI-B4 using one-half standard deviation shocks 25 36 49 51 51 51 45 33 B6.One-time30 percent nominal depreciationrelative to the baseline in 2008 5/ 25 34 37 39 40 39 36 29 N P V of debt-to-exports ratio Basellne 107 118 131 142 146 147 130 95 A. Alternative Scenarios A I . Key variables at their historical averages in 2007-26 11 107 121 123 126 124 120 80 25 A2. New public sector loans on less favorable t m in 2007-26 21 107 126 146 164 173 178 173 146 B. Bound Tests B I . Real GDP growth at historical average minus one standarddeviation in 2008-09 107 118 131 142 146 147 130 $5 B2. Export value growth at historical average minus one standard deviation in 2008-09 31 107 141 191 204 209 210 182 126 B3. U S dollar GDP deflator at historical average minus one standard deviation in 2008-09 107 118 131 142 146 147 130 95 B4. Net non-debt creating flows at historical a m g e minus one standarddeviation in 2008-09 4/ 107 151 191 201 204 204 170 108 B5. Combination o f BI-B4 using one-half standard deviation shocks 107 147 198 210 214 214 182 120 B6.One-tim 30 percent nominal depreciationrelative to the baseline in 2008 51 107 118 131 142 146 147 130 95 N P V of debt-to-revenue ratio Baseline 121 120 133 143 147 148 135 106 A. Alternative Scenarios AI. Key variables at their historical averages in 2007-26 I/ 121 122 126 127 126 120 83 28 A2. New public sector loans on less favorable t m in 2007-26 21 121 128 150 166 175 179 180 163 B. Bound Tests B I . Real GDP growth at historical average minus one standard deviation in 2008-09 121 125 146 156 161 161 147 116 BZ. Export value growth at historical average minus one standarddeviation in 2008-09 31 121 126 152 161 165 165 148 111 B3. US dollar GDP deflator at historical average minus one standarddeviationin 2008-09 121 152 190 204 210 211 193 152 B4. Net nondebt creating flows at historical average minus one standard deviation in 2008-09 4/ 121 153 196 203 207 205 176 121 B5. Combination o f BI-B4 using one-halfstandard deviation shocks 121 173 243 254 260 258 116 162 B6. One-time 30 percent nominal depreciationrelative to the baseline in 2008 5/ 121 162 181 193 200 200 183 144 63 Table 2. The Gambia: Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed External Debt, 2007-27 (continued) with HIPC and MDRl (Inpercent) Debt service-to-exports ratio Baseline 18 7 7 7 7 8 8 6 k Alternative Scenarios A I . Key variables at their historical averages in 2008-27 11 19 9 9 8 8 10 8 4 A2 New public sector loans on less favorable t m in 2008-27 2i 19 7 8 8 9 9 11 IO B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2008-09 19 7 7 7 7 8 8 7 B2 ExpoR value growth at historical average minus one standard deviation in 2008-09 31 19 8 9 9 9 10 12 9 B3. US dollar GDP deflator at historical average minus one standard deviationin 2008-09 19 7 7 7 7 8 8 7 B4. Net nondebt creating flows at historical average minus one standarddeviation in 2008-09 41 19 7 8 8 8 8 12 8 B5. Combination o f BbB4 using one-halfstandarddeviation shocks 19 8 9 9 9 9 12 9 B6. One-time 30 percent nominal depreciation relative to the baseline in 2008 51 19 7 7 7 7 8 8 7 Debt service-to-revenue r a t i o Basellne 21 7 7 7 7 8 9 7 k Alternatlve Scenarlos Al. Key variables at their historical averages in 2008-27 I/ 21 9 9 8 9 10 8 4 A2. New public sector loans on less favorable t m in 2008-27 W 21 7 8 8 9 9 11 11 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2008-09 21 8 8 7 8 8 9 8 82. Export value growth at historical average minus one standard deviation in 2008-09 31 21 7 7 7 7 8 10 8 83. US dollar GDP deflator at historical average minus one standard deviation in 2008-09 21 9 10 IO 10 11 12 IO B4. Net non-debt creating flows at historical average minus one standard deviation in 2008-09 41 21 7 8 8 8 8 12 9 B5. Combinationof BLB4 using one-halfstandarddeviation shocks 21 9 11 10 11 11 IS 12 B6. One-time 30 percent nominal depreciation relative to the baseline in 2008 51 21 10 10 9 9 IO 12 IO Memorandum item: Grant elemnt assumed on residual financing (i.e., financingrequiredabove baseline) 61 45 45 45 45 45 45 4s 43 Source Staff projechons and simulations 11 Variables include real GDP growth, growth ofGDP deflator (in U S dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. 21 Assumes that the interest rate on new borrowing i s by 2 percentage points higher than m the baseline., while grace and maturityperiods are the same as i n the baseline 31 Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an ofietting adjustment in import levels). 41 Includes official and private bansfers and FDI. 51 Depreciation i s defined as percentage decline in dollarhocal currency rate, such that i t never exceeds 100percent. 61 Applies to all stress scenarios except for A2 (less favorable financing) in which the term on all n w financing are as specified in footnote 2. 23 C P x 65 Table 4.The Gambia: Sensitivity Analysis for K e y Indicators o f Public D e b t 2007-2027 Projections 2007 2008 2009 2010 2011 2012 2017 2027 NPV o f Debt-to-GDP Ratio Baseline 55 49 48 45 42 39 36 31 A. Alternative scenarios Al. Real GDP growth and primary balance are at historical averages 54 49 49 48 46 44 39 37 AZ. Primary balance is unchanged from 2007 54 45 40 35 30 25 8 -16 A3. Permanentlylower GDP growth I / 54 49 48 46 44 42 43 50 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations in 2008-2009 54 51 54 52 50 48 49 50 B2. Primary balance is at historical average minus one standard deviations in 2008-2009 54 51 52 49 46 42 39 32 B3. Combination o f B1-BZ using one half standard deviation shocks 54 51 52 49 46 43 39 33 B4. One-time 30 percent real depreciation in 2008 54 59 56 52 49 45 41 34 B5. 10 percent o f GDP increase in other debt-creating flows in 2008 54 54 52 49 46 43 40 33 NPV of Debt-to-Revenue Ratio 2/ Baseline 215 197 189 180 171 162 157 134 A. Alternative scenarios Al. Real GDP growth and primary balance are at historical averages 213 199 194 190 186 180 170 163 A2. Primary balance is unchanged from 2007 213 180 160 142 124 105 33 -71 A3. Permanently lower GDP growth 1/ 213 197 191 186 179 173 186 219 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations in 2008-2009 213 205 210 206 201 196 211 217 B2. Primary balance is at historical average minus one standard deviations in 2008-2009 213 205 205 195 186 177 171 142 B3. Combination ofB1-BZ using one half standard deviation shocks 213 206 206 197 187 178 170 143 B4. One-time 30 percent real depreciation in 2008 213 239 224 211 199 188 177 148 B5. 10 percent o f GDP increase in other debt-creating flows in 2008 213 219 207 198 189 180 174 144 Debt Service-to-Revenue Ratio 2/ Baseline 31 18 16 14 13 12 12 12 A. Alternative scenarios A1 . Real GDP growth and primary balance are at historical averages 31 21 17 14 14 14 11 15 AZ. Primary balance i s unchanged from 2007 31 21 9 4 2 1 -4 -9 A3. Permanently lower GDP growth I / 31 21 17 15 13 12 15 21 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations in 2008-2009 31 22 19 18 16 16 17 20 82. Primary balance is at historical average minus one standard deviations in 2008-2009 31 21 21 20 14 12 12 12 B3. Combination o f Bl-BZ using one half standard deviation shocks 31 21 20 18 13 12 12 12 84. One-time 30 percent real depreciation in 2008 31 21 17 15 13 12 13 13 85. 10 percent o f GDP increase in other debt-creating flows in 2008 31 21 29 18 13 12 12 13 Sources: Countly authorities; and Fund staff estimates and projections. 1/ Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root o f 20 (i.e., the length o f the projection period). 2/ Revenues are defined inclusive o f grants. 66 Figure 1. The Gambia: Indicators o f Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2007-2027 Debt Accumulation 60 NPV o f debt-to-GDP ratio 9.0 46.0 I 8.0 - 45.5 Most extreme shock 7.0 - 50 \ - 45.0 6.0 - 44.5 5.0 - Grant-equivalent/GDP Less favorable terms 44.0 35 l?%bld 4.0 - 43.5 3.0 - 2.0 - 43.0 20 Base1ine 1 1.0 - 42.5 0.0 -- 42.0 l5 10 2007 2012 2017 2022 2027 2007 2012 2017 2022 2027 NPV o f debt-to-exports ratio NPV o f debt-to-revenue ratio 250 230 Most extreme shock 210 - Less favorable terms 190 - 170 - 150 - 130 - 110 - 1 1 1 1 1 1 1 1 1 1 90 - 110 - Threshold 70 - 60 2007 2012 2017 2022 2027 2007 2012 2017 2022 2027 Debt-service-to-exportsratio 20 j I Threshold Most extreme shock 2 5 - 1 = 16 \ Threshold I I I I I I 1 I I I 14 - Less favorable 2011 Less favorable terms 12 - e Most extreme shock 10 - 8 - 10 6- Baseline 5 1 Baseline 0 1 2007 2012 2017 2022 2027 2007' 2012 2017 2022 2027 Source: Staff projections and simulations. 67 Figure 2.The Gambia: Indicators o f Public Debt Under Alternative Scenarios, 2007-2027 1/ 60 NPV o f debt-to-GDP ratio 50 / 40 -- - - - _----- - - - - - - _ _ _ _ _ _ - 30 20 -Baseline 10 - - - Historical scenario Most extreme stress test 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 -_Iv I NPV o f Debt-to-Revenue Ratio 21 100 - -Baseline 50 - - - - Historical scenario Most extreme stress test 0 1 " " " " " " " " " " , 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 35 Debt Service-to-Revenue Ratio 2/ - \ -Baseline 30 - - - Historical scenario Most extreme stress test 25 20 15 ____---- ---- 10 ' 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 Source: Staff projections and simulations. 1/ Most extreme stress test i s test that yields highest ratio in 2017. 2/ Revenue including grants. 68 APPENDIX I1 DEBT MANAGEMENT I n March 2007, the government’s debt management capacity and institutions was assessed by a World Bank team using the Debt Management Performance Assessment (DeMPA) tool? The assessment revealed that, while there are a number o f strengths in the government’s debt management operations, many components o f debt management need significant improvement. The government has requested IMF and World Bank technical assistance to improve its debt management capacity and institutions. The government i s pursuing efforts to enhance accountability in the use o f public resources and, to this end the authorities have undertaken to prepare a comprehensive debt management strategy by end-July 2008. The strategy will inter alia set limits on the amount and terms o f new borrowing. Through the ongoing Country Assistance Strategy (CAS) discussions, the World Bank i s discussing with the Government possibilities for providing support for capacity building o f debt management. With support from the IMF, the government intends to strengthen the capacity o f the Central Bank o f The Gambia (CBG) in the areas o f debt management, monetary policy framework and operations, and banking supervision. A. The Institutional Framework for Debt Management The Gambia’s legal and institutional framework for debt management clearly defines roles and responsibilities. In accordance with the Government Budget Management and Accountability A c t (2004), the Secretary o f State for Finance and Economic Affairs i s the only authority entitled to borrow from legal entities, or to enter into a guarantee or indemnity with third parties. The Public Debt Unit (PDU) o f the Department o f State for Finance and Economic Affairs (DOSFEA) i s responsible for managing, recording and reporting on external debt, while the C B G borrows in the domestic market by issuing Treasury Bills. The C B G i s also responsible for making payments to external creditors upon receipt o f instructions from DOSFEA. While the Act stipulates borrowing purposes, the government could strengthen the framework by introducing debt management objectives, strict requirements for mandatory reporting to the National Assembly and regular external audits, and by strengthening co-ordination o f debt management with macroeconomic policies. 36 D e M P A i s a methodology for assessing performance through a comprehensive set o f indicators spanning the full range o f government debt management (DeM) functions. The D e M P A highlights strengths and weaknesses in government DeM practices. While assessment reports do not contain specific recommendations, performance assessment facilitates the design o f plans to build and augment capacity and institutions tailored to the specific needs o f a country, and facilitates the monitoring o f progress over time in achieving the objectives o f government DeM consistent with international sound practice. T h e Gambia was one o f five countries in which the D e M P A was field tested during 2007. 69 I t i s recommended that the government develop a debt management strategy based on long-term debt management objectives and set within the context of government’s fiscal policy and budget framework. Implicitly all external borrowing i s contracted on concessional terms with a minimum grant element o f 45 percent. While the PDU and C B G interact to provide forecasts on central government debt and debt service as part o f the annual budget process, there appears to be l i t t l e formal co- ordination between the government’s fiscal policy, debt management and the monetary policy authority (CBG). There are no documented procedures for external borrowing. Formal analysis o f the relative costs and risks associated with the alternative financing options i s not undertaken. The authorities have, however, received training in the preparation o f debt sustainability analyses (DSA) and there are plans to prepare DSAs o n a regular basis. The quality o f cash flow forecasts i s expected to improve with the implementation o f the new integrated financial management information system (IFMIS). B. Assessment of Debt Management Debt data recording capacity should be bolstered to improve the quality of debt information. The P D U records, monitors and settles external and guaranteed debt, and validates transactions o n an ad-hoc basis. Procedures for validating the completeness, consistency and accuracy o f the debt records need to be strengthened, and the recording o f debt relief and debt restructuring needs to be incorporated in the debt management system3’. Weak archiving practices make data reconciliation cumbersome. However, the quality o f loan administration and payments i s expected to improve with the introduction o f the IFMIS. The C B G records government domestic debt and reconciles Treasury bill stocks and flows with primary dealers regularly. However, no government entity i s responsible for recording total non-financial public debts3* The C B G maintains an up-to- date registry system o f all holders o f government securities and, with technical assistance from the Commonwealth Secretariat, plans to upgrade i t s debt management system with electronic registry and auction features. Reporting of central government external and domestic debt meets statutory reporting requirements. I t i s recommended, however, that a Debt Statistical Bulletin or equivalent covering domestic and external central government debt and loan guarantees be prepared and published annually. Procedures for securing and controlling access to sensitive debt information should also be strengthened. W h i l e external audits subject to third-party confirmation are conducted semi-annually o n domestic debt activities, no internal, external or independent audit related to external debt has been carried in the past five years. 37 The P D U operates the Commonwealth Secretariat’s Debt Recording and Management System (CS- DRMS). 38 This consists o f the central government (budgetary, extra-budgetary and social security funds), the state and local governments, and the public corporations. 70 Staff capacity and organizational structure need to be strengthened. O f the PDU’s limited staff, few are trained in the interpretation o f loan agreements and standard debt recording and reporting procedures. The P D U also lacks analytical capabilities, although the government has plans to establish such capacity. W h i l e practical training has been provided by the Commonwealth Secretariat, WAIFEM3’and Debt Relief International, high turnover has led to loss o f institutional memory and c ~ n t i n u i t y . ~ ~ 39 West African Institute for Financial and Economic Management (WAIFEM) 40 In addition, in early 2007 a serious auto accident took the life o f one staff and sent two others, including the PDU head, out o f commission for an extended period. There was n o contingency for t h i s tragic event as the government lacks a business continuity and disaster plan.