98360 v2 THE GAMBIA: Policies to Foster Growth Volume II. Macroeconomy, Finance, Trade and Energy May 19, 2015 Trade and Competitiveness Practice Cape Verde, Gambia, Guinea-Bissau, Mauritania and Senegal Country Department Africa Region Document of the World Bank REPUBLIC OF GAMBIA –FISCAL YEAR January 1st - December 31st MONETARY EQUIVALENT (Exchange rate as of May 15, 2015) Currency Unit = Gambian Dalasi (GMD) 1,00 US$ = 42.6000 GMD WEIGHTS AND MEASUREMENTS Metric System ABBREVIATIONS AND ACRONYMS ABT A Association of British T ravel Agents IPC Investment Promotion Center T EU T wenty-foot equivalent Unit ADR Average Daily Rate JIC Joint Industrial Council Agreement T FP T otal Factor Productivity Agribusiness Services and Producers’ T rade Intensity Index ASPA LDCs Least Developed countries T II Association Association of Small Enterprises in T ourism Master Plan ASSET LFO Liquid Pilot Fuel T MP T ourism C.Pct Column Percentage LIC Low Income Countries ULC Unit Labor Cost CAR Capital Adequacy ratio LMIC Low Middle Income Countries UNDP United Nations Development Program CBG Central Bank of T he Gambia MFI Microfinance institution UREP Upland Rice Expansion Program Ministry of Finance and Economic United Nations World T ourism CET Common external tariff MOFEA UNWT O Affairs Organization DB 2015 Doing business 2015 Report MT C Ministry of T ourism and Culture VFR Visiting Friends and Relatives Economic Community of West Ministry of T rade, Industry and West African Agricultural Productivity ECOWAS MOT IE WAAP African States Employment Program Ministry of Works, Construction and West African Economic and Monetary EPZ Export Processing Zone MOWCI WAEMU Infrastructure Union ES Enterprise Survey MT Metric Ton WDI World Development Indicators National Association of Cooperative World Development Report FDI Foreign Direct Investment NACCUG WDR Credit Unions of Gambia World Economic Forum FEZ Free Economic Zone NAWFA National Women Farmers Association WEF Gambia T elecommunications National Agronomic Research World T rade Organization GAMT EL NARI WT O Company Institute National Water and Electricity World T ravel and T ourism Council GAP Good agricultural practice NAWEC WT T C Company GBT Gambia T ourism Board NER Nominal Exchange Rate GCAA Gambia Civil Aviation Authority NES National Export Strategy Gambia Comm. Agric. and Value Chain GCAV NPL Non Performing Loan Man. Project GCI Global Competitiveness Index NRA National Road Authority GDA Gambia Divestiture Agency ODI Overseas Development Institute GDP Gross Domestic Product Pct Percentage Gambia Growth & Competitiveness Private Participation in port GGCP PPI Project Infrastructure Gambia Investment & Export GIEPA PPPA Purchasing power parity Promotion Agency GIG Gambia is Good PRSP Poverty Reduction Strategy paper Gambia Investment Promotion & Free GIPFZA R. Pct Row Percentage Zones Agency GoG Government of T he Gambia RCA Revealed Comparative Advantage GPA Gambia Ports Authority REER Real Effective Exchange rate GT A Gambia T ourism Authority ROA Return on assets GT B Gambia T ourism Board SGA Sesame Grower Association Gambia T ourism and Hospitality GT HI SME Small and Medium Enterprise Institute HDI Human Development Indicator SS Small State HFO Heavy Fuel Oil SSA Sub Saharan Africa Social Security and Housing Finance ICJ International court of justice SSHFC Corporation IEF Index of Economic Freedom T &T T ravel and T ourism IFC International Finance Corporation T CI T rade Complementarities Index IMF International Monetary Fund T DA T ourism Development Area Vice President: Makhtar Diop Country Director: Vera Songwe Practice Director: Annabel Gonzales Practice Manager: John Speakman Task Team Leader: Jean Michel N. Marchat 47 AUTHORS Julian Casal (Economist, Financial Sector, GFMDR, World Bank) Francesca De Nicola (Economist, Trade, GTCDR, World Bank) Fatouma Toure Ibrahima (Senior Financial Sector Specialist, GEEDR, World Bank) Annette I. De Kleine Feige (Senior Economist, Macroeconomics, GMFDR, World Bank) Jean-Michel Marchat (Lead Economist, GTCDR, World Bank – Task Team Leader) AKNOWLEDGMENTS The authors would like to express their gratitude to the Gambian authorities, the various business associations of the country and several individual business owners for their contribution, their patience and kindness in responding to our queries. The authors also wish to thank Jean Francois Arvis (Senior Transport Economist, GTCDR), Philip English (Program Leader, AFCF1), Kadir Osman Gyasi (Senior Agriculture Economist, GFADR), Suhail Kassim (Senior Private Sector Development Specialist, GTCDR), Hannah R. Messerli (Senior Private Sector Development Specialist, GTCDR), Ivan Rossignol (Chief Technical Specialist, GTCDR), John Speakman (Practice Manager, GTCDR), Vera Songwe (Country Director, AFCF1), Jean Philippe Tre (Senior Agriculture Economist, GFADR) and Marie-Chantal Uwanyiligira (Country Program Coordinator, AFCF1) for their valuable assistance, comments and suggestions on preliminary versions of this document. 48 CONTENT CHAPTER 1. MACROECONOMIC PATTERNS: AN UNSTABLE AND MODERATE LONG TERM GROWTH. 54 I. GROWTH PATTERNS. ........................................................................................................................................................................... 54 1.1. An unstable growth. ..............................................................................................................................................................54 1.2. A relatively weak investment............................................................................................................................................57 1.3. Recent developments. ..........................................................................................................................................................59 II. STRUCTURE OF THE ECONOMY. ................................................................................................................................................... 61 2.1. The Agricultural Sector. .......................................................................................................................................................61 2.2. Industrial Sector. ....................................................................................................................................................................62 2.3. Services. ......................................................................................................................................................................................62 2.4. Expenditure...............................................................................................................................................................................63 III. TRADE AND CAPITAL FLOWS. ...................................................................................................................................................... 64 3.1. Merchandise and Services Trade.....................................................................................................................................64 3.2. Worker Remittances. ............................................................................................................................................................66 3.3. Current Account. .....................................................................................................................................................................66 IV. GAMBIA’S GROWTH: A SYNTHESIS. ........................................................................................................................................... 69 CHAPTER 2 – ECONOMYWIDE INFLUENCES ON GROWTH: FINANCE, TRADE AND ENERGY. ................... 70 I. THE FINANCIAL SECTOR. ................................................................................................................................................................... 70 1.1. The banking system...............................................................................................................................................................71 1.2. Insurance and Pensions. ......................................................................................................................................................73 1.3. Microfinance and Credit Unions. .....................................................................................................................................74 1.4. Access to Finance....................................................................................................................................................................75 II. THE TRADE SECTOR. .......................................................................................................................................................................... 78 2.1. Trade in goods and services. .............................................................................................................................................78 2.2. Trade policy ..............................................................................................................................................................................80 2.3. Trade logistics ..........................................................................................................................................................................83 2.4. Infrastructures for trade. ....................................................................................................................................................84 III. ELECTRICITY SUPPLY....................................................................................................................................................................... 88 IV. AN AVERAGE BUSINESS ENVIRONMENT. ............................................................................................................................... 90 V. CONCLUSION. ......................................................................................................................................................................................... 93 ANNEXES 49 LIST OF TABLES AND CHARTS Table 1. GDP per capita annual growth (%). .................................................................................................................................56 Table 2. Periods of strong growth followed by GDP contraction tied to drought and policy deterioration. ....56 Table 3. Share breakdown of GDP growth by Expenditure. ...................................................................................................63 Table 4. Trade tariffs. ...............................................................................................................................................................................81 Chart 1. Contribution to GDP Growth by Sector ..........................................................................................................................55 Chart 2. Growth in credit to the private sector and gross fixed capital formation. ......................................................57 Chart 3. Investment and REER. ............................................................................................................................................................58 Chart 4. Structure of GDP by sector. ..................................................................................................................................................61 Chart 5. Gross National Saving and Foreign Saving....................................................................................................................64 Chart 6. Trade openness. ........................................................................................................................................................................65 Chart 7. Net FDI inflows. .........................................................................................................................................................................67 Chart 8. Official Development Assistance to Gambia from all donors ................................................................................68 Chart 9. Banking sector depth (2013). .............................................................................................................................................71 Chart 10. CAR and Liquidity Ratios: 2010-2013. .........................................................................................................................71 Chart 11. Asset quality and provisions. ...........................................................................................................................................72 Chart 12. Efficiency and earnings: 2010-13. ..................................................................................................................................73 Chart 13. Importance of MFIs...............................................................................................................................................................74 Chart 14. Credit to private sector, distribution of credit in 2012 and financing by banks. ......................................76 Chart 15. T-Bill interest rates. ..............................................................................................................................................................77 Chart 16. Collateral requirements and Pct of firms with a bank loan/line of credit. ..................................................78 Chart 17. Import and Export of goods and services. ..................................................................................................................78 Chart 18. Trade partners among ECOWAS members. ...............................................................................................................80 Chart 19. Trade regulations. .................................................................................................................................................................83 Chart 20. Logistics Performance in 2014. .......................................................................................................................................84 Chart 21. Line Shipping Connectivity Index (LSCI) in 2014. ..................................................................................................85 Chart 22. Some international rankings for Gambia. ...................................................................................................................91 Chart 23. Ease of doing business index for 2008. ........................................................................................................................91 Chart 24. Paying taxes. ............................................................................................................................................................................92 Chart 25. Total tax rate as percentage of profits. ........................................................................................................................93 ANNEXES Table A. 1. Shifting geographical and organizational composition of Official Development Assistance ............99 Table A. 2. Banking System: Financial Soundness Indicators for 2010-2013. ............................................................ 100 Table A. 3. Cargo through Banjul seaport and airport............................................................................................................ 102 Table A. 4. Port services and dues in early 2014. ..................................................................................................................... 103 Table A. 5. Selected port facilities and equipment. .................................................................................................................. 103 Chart A. 1. Real GDP growth rates. .....................................................................................................................................................95 Chart A. 2. Gross fixed capital formation. ........................................................................................................................................98 Chart A. 3. Real effective exchange rate index (2010 = 100)..................................................................................................98 Chart A. 4. Overall budget balance, net domestic borrowing and total investment. ...................................................99 Chart A. 5. Imports: market indicators, top 3 partners, sectors, products. ................................................................... 101 Chart A. 6. The Gambia’s re-exports - thousands of US$ (2002-2011). .......................................................................... 101 Chart A. 7. The Gambia's direct export performance.............................................................................................................. 102 Chart A. 8. The Gambia: Changes in LPI components score over time. ........................................................................... 102 50 EXECUTIVE SUMMARY The Gambia is the smallest country in continental Africa and is surrounded by Senegal, except for a 60 km Atlantic Ocean front. The economy is largely dependent on agriculture, which accounted for around 25 percent of GDP over 1994-2013 and provides an activity for 70 percent of the labor force. The industrial sector (about 15 percent of GDP over the same period), consists mostly of construction and agro-processing activities. Services accounted for 60 percent of GDP, with trade and transport, and communications being its two largest components. Tourism is Gambia’s primary foreign-exchange earner. With a per capita income at $500 in 2013, The Gambia is among the poorest countries in Africa. Poverty remains widespread in spite of a decline in the last decade; the overall poverty headcount index still stands at 48.5 percent - with a poverty line at 1.25 a day - in 2010. This reflects gains in education and health. While mixed, there has also been progress in the areas of public sector, economic and fiscal management, civil service and justice reform, anti-corruption and public procurement reform. However, The Gambia remains vulnerable to external shocks as the main sources of domestically generated foreign exchange come from tourism and re-export trade whose fate depend largely on exogenous factors. In addition, a major part of the labor force is engaged in farming, and agriculture is vulnerable to weather conditions. Macroeconomic patterns: An unstable and moderate long term growth. Long term GDP growth in The Gambia - The Gambia: Real GDP growth. from 1994 through 2013 – has been quite 12.0 unstable. Over the last two decades, The 10.0 Gambia has enjoyed two periods of relatively strong growth - from 1997 8.0 through 2001, and from 2007 through 6.0 2010 - while growth faltered markedly in 2002 and 2011(See chart). Overall, long 4.0 term GDP growth - from 1994 through 2.0 2013 - averaged a modest 3.5 percent a year, against an average of 4.1 percent for 0.0 1993 1995 2000 2005 2010 2013 SSA. -2.0 The performance of the agriculture sector -4.0 Gambia, The Sub-Saharan Africa (dev. only) – which in itself depends on weather -6.0 conditions - and the ability of the other sectors of the economy, especially tourism, to eventually counterbalance swings in output are key elements that explain growth variability. In addition, over the past two decades, although total investment has been catching up with SSA it has remained below what was observed for low income countries and small states. Over 1993-2012, gross fixed capital formation averaged 13.9 percent of GDP in The Gambia compared with 17.1 percent for 51 SSA, 20.5 percent for LICs and 25.7 percent for small states. Finally, a challenging and unpredictable macroeconomic policy environment characterized by sudden policy shifts, extra-budgetary spending, excessive borrowing, weak institutions and a lack of transparency has affected growth. This has generated uncertainty and hampered economic activity, and over the long term undermined confidence in the economy. For example, persistent fiscal deficits have largely been financed by short-term domestic borrowing, pushing up interest rates and crowding out private sector investments. Given past growth patterns, an important challenge confronting The Gambia is to find ways to foster steadier and higher economic growth. This can be done, first, by reinforcing growth generating sectors. In this respect, tourism and agriculture and are key sectors to support, given their share in employment (agriculture), their income generation capabilities (both sectors), FOREX earnings abilities (tourism) and countercyclical potential (tourism). Related sector policies are developed in Volume 3 of this report. Secondly, specific economy wide issues also affect the country’s growth prospect and are now analyzed in detail. Economy-wide influences on growth: finance, trade and energy. Besides macroeconomic policies and purely sectoral issues, other factors are at play in The Gambia that affect firms ability of operate, invest and ultimately generate growth. The working of the financial system – and its weaknesses – influences the little funds that can be directed to investment. Issues related to trade and electricity supply also affect firm’s operations and therefore long term growth in the country. The Gambia’s financial sector consists of commercial banks, insurance companies, foreign exchange bureaus, microfinance institutions and other non-bank finance companies. It is relatively small and is dominated by a highly concentrated banking system - in terms of banks' assets, of credit and of deposits: concentration is high with the six largest banks accounting for 81 percent of assets in the system while the top four borrowers account for 54 percent of the total loan portfolio. Competition for deposits combined with high funding and operating costs limits banks' profitability. Other elements of the system are much smaller, for example microfinance only accounts for about 0.25 percent of the population in terms of borrowers and depositors. The financial sector as a whole does not fulfill one of its key role which is to promote sustained growth by channeling savings to profitable investment opportunities. Access to finance remains indeed a key issue in The Gambia and is impeded by banks' high operating costs, some crowding out by government debt, high interest rates and collateral requirements, and the mismatch between bank’s requirements and firms abilities. Trade has traditionally played an important role in the economy of The Gambia as the country used to play the role of a regional entrepôt. As of 2012, Import and Export of goods and services accounted for 79 percent of GDP. The importance of trade in the economy is predominantly driven by the role of imports; in 2012, they amounted to 47 percent of GDP. The composition of Gambian exports has been highly variable, reflecting the importance of 52 re-export trade. In the past, the Gambian development and trade strategies were largely based on reaping the long-held advantages of the country as an entrepôt. The Gambia's re- exports are currently estimated at 85-88 percent of gross exports and are mainly directed to West African countries. However, the re-export sector has become less attractive over time. Trade policy changes have eroded the country’s advantage as a trade hub (especially the ECOWAS CET implementation) and, owing to weak logistics (Gambia’s performance on most components of the Logistics Performance Index is worse in 2014 than it was in 2007,) and limitations of the port - high shipping rates and equipment deficiencies - the sector appears at risk. Finally, electricity supply remains a major impediment to growth in The Gambia. Strengths of the sector include good staff skills, a relatively new transmission and distribution network (T&D), an established prepaid metering system and the possibility to connect to the OMVG in the medium term. Weaknesses are however significant and include a lack of fuel diversity, a deficient planning capacity, technical design weaknesses (such as the lack of redundancies in T&D), a poor MIS and NAWEC’s debt. All of this contributes to increase prices and make the quality and reliability of the electricity a major issue for the private sector. 53 CHAPTER 1. MACROECONOMIC PATTERNS: AN UNSTABLE AND MODERATE LONG TERM GROWTH. 1. The situation in The Gambia is a good example of the many challenges faced by small states. The country is faced with institutional capacity constraints, and due to a narrow resource base and a small domestic market, its production base and exports show little diversification. Tourism and groundnuts remain the leading exports and are key sources of foreign exchange. Like other small states, the country tends to rely heavily on external trade and foreign investment to overcome its scale and resource limitations, increasing its vulnerability to external shocks. Growth in recent decades in the Gambia has accelerated, but not at pace with the rest of Sub-Saharan Africa and is below the regional average. As a result, with a per capita income at $500 (2013), and a ranking of 172 out of 187 countries in the Human Development Index (2014), Gambia is among the poorest countries in the world, and among the poorest in Africa. 2. Poverty remains widespread in The Gambia, although there has been a marked decline in the last decade. The overall poverty headcount index declined to 48.5 percent at the national poverty line (roughly $1.25 a day) in 2010 from 58 percent in 200324. Income inequality has also diminished over the corresponding years with the reduction in the incidence of poverty. The GINI coefficient, which measures the distribution of income and for which 100 percent represents maximum inequality, has slightly improved, diminishing 46.2 percent in 2003, and most recently to 45.8 percent in 2010 (and down further from 46.6 percent in 1998). Despite these gains, food insecurity is high and The Gambia remains heavily reliant on food imports, which account for one third of merchandise imports. I. GROWTH PATTERNS. 1.1. An unstable growth. 3. Over the past twenty years - from 1994 through 2013 - annual real GDP growth in The Gambia averaged a modest 3.5 percent a year, against an average of 4.1 percent for SSA. The GDP path was also highly variable (Chart A.1). Alternating periods of expansion and contraction were largely tied to swings in agricultural production and the ability of other sectors to compensate. Hence, the economy has periodically benefited from countervailing dynamics across the key sectors. For example, overall economic activity has been partially supported by services during periods of weak or negative agricultural sector outturns, providing for some buffer to the drag on growth. This is evident during the 2011 drought25 and in 2006, when agricultural production contracted and services sector expansions largely offset the drag on activity. Correspondingly, The Gambia’s GDP growth 24- The overall poverty rates are estimates from the 2010 and 2003 Integrated Household Budget Surveys, and while not directly comparable, indicate nonetheless a significant reduction in poverty. 25 - The severe drought in 2011 resulted in a 36 percent collapse in crop production, and led to a 4.3 percent contraction in GDP. 54 was substantially buoyed by the robust 2008 harvest, which supported above trend growth despite a contraction in services sector activity (Chart 1). Chart 11. Contribution to GDP Growth by Sector Real GDP at Factor Cost Nb. 2012 are estimates, and 2013 are preliminary Source: Gambia Bureau of Statistics. 4. However, as the population growth rate, which averaged 3.1 percent from 1994 through 2013, has nearly matched the pace of GDP growth in The Gambia, on a per capita basis GDP growth has been limited. Considering comparator data for the two decades from 1993 through 2012 (through which period data is available) with other developing countries, The Gambia achieved a cumulative increase in per capita GDP of 5.1 percent26, significantly lagging behind the cumulative average increases of 45.0 percent and 46.3 percent, respectively, for all low income countries and small states worldwide. Growth in developing Sub-Saharan African countries was weaker with a cumulative increase of 25 percent, but nevertheless fivefold stronger than in The Gambia. Considering the most recent decade of 2003 through 2012, The Gambia’s average per capita growth rate accelerated - rising to an average of 0.5 percent per annum from zero in the previous decade - but more markedly lags that of SSA developing countries, which recorded acceleration in the average per capita growth rate to 2.3 percent from 0.2 percent over the same period. (Error! Reference source not found.). 26 - The difference between the cumulative rates of GDP per capita over the two periods - 5.1 percent for 1993-2012 and 6.6 percent for 1994-2013 - reflect the lower GDP per capita growth of 0.1 percent in 1993 versus 1.6 percent in 2013, i.e., a 1.5 percentage point difference. 55 Table 1. GDP per capita annual growth (%). Source: WDI, September 2014 5. A number of factors might have contributed to this weaker growth performance, but a record of improved macroeconomic policy conditions across the subset of SSA countries supporting the stronger SSA-regional growth outturn suggests that The Gambia’s track record of inconsistent and ad hoc shifts in policies is of importance (Box A.1 and Table 1). Over the last two decades, The Gambia has enjoyed two periods of relatively strong growth - from 1997 through 2001, and from 2007 through 2010 - when GDP expanded by average rates of growth of 5.2 percent and 5.6 percent, respectively. These periods of strengthened activity were tied in part to good harvests with an agricultural expansion averaging 10.7 percent and 11.8 percent, respectively. Improved macroeconomic policy implementation was also conducive to growth; as indicated, for example, by relatively more sustainable fiscal positions, contained inflationary pressures, and stable exchange rates. Further, during both of these periods, The Gambia was pursuing IMF supported economic reform programs—guided by the Gambia’s longstanding key growth and development policy document, Vision 2020, published in 1996. Table 2. Periods of strong growth followed by GDP contraction tied to drought and policy deterioration. Macroeconomic policy reform implementation 1997-2001 Macroeconomic policy slippage 2002 Real GDP % growth, average 5.2 Real GDP % growth -3.2 Real GDP per capita % growth, average 2.2 Real GDP per capita % growth -6.2 Cummulative GDP per capita growth, % 11.0 Memo: cummulative GDP per capita growth 1997-2002, % 4.8 Budget balance as % share of GDP, average -1.8 Budget balance as % share of GDP for 2001 -8.5 Inflation rate, CPI % growth, average 2.1 Inflation rate, CPI % growth 8.6 Real effective exchange rate average % growth, minus = depreciation -1.4 Real effective exchange rate growth, minus = depreciation -17.2 Capital flight*, US$ million, average -46.2 Capital flight*, US$ million -104.0 Macroeconomic policy reform implementation 2007-2010 Macroeconomic policy slippage 2011 Real GDP % growth, average 5.6 Real GDP % growth -4.3 Real GDP per capita % growth, average 2.3 Real GDP per capita % growth -7.3 Cummulative GDP per capita growth, % 9.2 Memo: cummulative GDP per capita growth 2007-2011, % 2.0 Budget balance as % share of GDP, average -2.5 Budget balance as % share of GDP -4.7 Inflation rate, CPI % growth, average 4.9 Inflation rate, CPI % growth 4.8 Real effective exchange rate average % growth, minus = depreciation 0.8 Real effective exchange rate growth, minus = depreciation -7.6 Capital flight*, US$ million, average -9.0 Capital flight*, US$ million -28.3 Nb. * EIU estimates. Sources: WDI and Economist Intelligence Unit. 6. However, growth faltered markedly in 2002 and 2011. In both cases, The Gambia experienced extreme weather conditions that led to contractions in agricultural sector 56 production of 18 percent in 2002 and 36 percent in 2011, which contributed to the contractions in real GDP of 3.2 percent and 4.3 percent, respectively. These economic disruptions also correspond with deteriorations in the macroeconomic policy framework, evident for example in the first period with an extremely sharp rise in the fiscal deficit in 2001 and ahead of the onset of drought. For both periods, the fiscal deficit expanded to unsustainably high levels - equivalent to 8.5 percent and 4.7 percent of GDP in 2001 and 2011, respectively. Deterioration in market confidence is indicated by an estimated two- fold and three-fold rise in capital flight over the same periods, respectively. 1.2. A relatively weak investment. 7. Investment activity remains relatively weak in The Gambia. Over the past two decades through 2012, total investment as a share of GDP has been catching up with SSA, but remains below what is observed for low income countries and small states (Chart A.2). Over 1993-2012, gross fixed capital formation averaged 13.9 percent of GDP in The Gambia compared with 17.1 percent for SSA, 20.5 percent for LICs and 25.7 percent for small states. Chart 12. Growth in credit to the private sector and gross fixed capital formation. Annual percent growth rates Source: WDI, September 2014 8. During the two strong growth and reform periods (1997-01 and 2007-10), investment activity initially strengthened, but then weakened along with private sector credit growth as policy slippages became manifest. The growth rate of gross fixed capital formation was close to zero at the start of both periods, but surged as reforms advanced over the years; peaking at 30 percent in 2000 and 39 percent in 2009. In December 2008, The Gambia achieved completion of the Heavily Indebted Poor Countries (HIPC) Initiative and substantial debt forgiveness, which might have helped support the especially sharp 57 upswing in investment in 2009. With the subsequent policy deterioration following the periods of growth and reform, investment faltered, decelerating to a 1 percent growth rate in 2001, and contracting by 14 percent in 2011. Corresponding to the rise in the fiscal deficits in 2001 and 2011, the growth rates of domestic credit to the private sector also decelerated markedly. During 1997-2001, and 2007-2010, credit to the private sector expanded by average annual growth rates of 30 percent and 18 percent, respectively. With deterioration in the macroeconomic policy environment, including the expansions in the government’s domestic borrowing requirement, growth in credit to the private sector decelerated to 0.6 percent and 5.3 percent in 2002 and 2011, respectively (Chart 3. ). 9. In addition, The Gambia’s real effective exchange rate (REER)27 has generally depreciated over the past two decades, and posted strong depreciation in the early-2000s. For The Gambia, sustained periods of depreciation seem to have contributed to higher domestic investment rates in the 2000s, which strengthened from very low levels in the 1990s. Subsequently, the REER has been relatively stable, at least until 2013, and investment activity has remained relatively consistent as a share of GDP, except for 2008, when there was a dip in investment activity with the onset of the global financial crisis (Chart 3). Chart 13. Investment and REER. Source: WDI, September 2014 10. In comparison, the median REER for SSA developing countries depreciated by 22 percent over the two decades through 2012, versus 57 percent for The Gambia over the same period. And, as a share of GDP, gross domestic investment in developing SSA rose from an average of 16.3 percent during 1993-2002 to 19.1 percent during 2003-2012, 27 - The real effective exchange rate is the nominal effective exchange rate (a measure of the value of a currency against a weighted average of several foreign currencies) divided by a price deflator or index of costs. For small open economies, such as The Gambia, REER depreciation tends to promote growth, as it increases the demand for domestically produced goods by reducing their relative price compared with imported goods. It also supports tradables by improving relative prices, i.e., supports the competitiveness of Gambian exporters. Finally, sustained depreciations support growth by raising the relative profitability of investing in tradables. 58 whereas in The Gambia it rose from a very low average of 6.1 percent to 19.8 percent over the same period. In comparison, gross domestic investment averaged 20.5 percent and 22.4 percent for low-income countries (LICs) during the decades of 1993-2002 and 2003 and 2012, respectively. And, among developing small states, gross domestic investment averaged 26 percent during 1993-2002 and 25.1 percent during 2003-2012. 1.3. Recent developments. 11. Negative growth impacts of macroeconomic policy slippage are again evident more recently, as the fiscal deficit deteriorated sharply in 2013 to 8.8 percent from 4.5 percent of GDP in 201228. Preliminary estimates indicate that the fiscal deficit deteriorated further to an estimated 13.3 percent of GDP in 2014. Aside from pronounced fiscal slippage, there were sudden shifts in the exchange rate policy during the third quarter of the 2013, when the Office of the President issued a series of directives that variously set the value of the Gambian Dalasi against the US-dollar to about 20 percent to 25 percent above the previously market-determined exchange rate. The exchange rate policy shifts, which included controls on US-dollar shipments, led to heightened uncertainty and contributed to a jump in borrowing costs, as predictability and transparency of policy determination diminished greatly. Government borrowing interest rates rose as a consequence—from about 12 percent (or about 6.2 percent real) in June 2013 to about 18.5 percent (or about 12.7 percent real) in October 2013 for one-year treasury bills—before the government reintroduced a flexible, market determined exchange rate. For 2013, capital flight is estimated at US$ 88 million, or the equivalent of about 10 percent of GDP29. Again, in early May 2015, a significant exchange rate policy shift happened. GoG and the CBRG set a new nominal rate for the dalasi (to be exchanged in a 35-40 dalasi to a dollar band) coupled with restrictions on capital movements according to which no foreign exchange movement of more than ten thousand dollars, euros and pound sterling can be taken out of The Gambia without approval from the Office of the President. 12. Real GDP growth recovered in 2012 and 2013 with rates of 5.6 percent and 4.8 percent, respectively, but much of this was recovery from the 4.3 percent contraction in GDP in 2011. The economy has declined again in 2014 with an estimated GDP growth of - 1.4 percent (EIU 2015). This is due to the combined effects of Ebola on the tourism sector (despite no recorded outbreaks in The Gambia), a bad harvest and weak macroeconomic management. The regional Ebola outbreak is expected to cut by more than half tourism receipts for the 2014-2015 season in The Gambia. It has further led to the emergence of balance of payments needs for the country (IMF 2015)30. Therefore, it appears that per capita incomes have fallen in the last four-five years and poverty has probably increased. 28 - This is to be compared with a programmed budget consolidation of the deficit of 1.8 percent of GDP for 2013. 29- Economist Intelligence Unit estimates. This is equivalent to about half of the country’s international reserve holdings recorded for the year of $161 million, which was equivalent to 4 months of imports of goods and services, implying capital flight for the year equivalent to about 2 months of import-cover. 30- The impact of the various exogenous shocks on the balance of payments, although partially offset by lower fuel prices, is estimated to amount to US$ 12 million in 2014 and US$ 28 million in 2015 (IMF 2015). 59 13. Net domestic borrowing is estimated to have reached 12 percent of GDP in 2014. Government borrowing interest rates remained elevated, above 18 percent for one year treasuries in 2014, and in December 2014 rose to 19 percent (or about 13.0 to 13.5 percent in real terms). The situation remains fragile as fiscal credibility remains weak—with persistently high government borrowing interest rates—and deterioration in the public domestic debt position. A number of factors have contributed to deterioration in 2014: spending tied to Ebola spillover effects31 and drought to a lesser extent, the government taking over the financially strapped national power company's obligations and fiscal slippages to a greater extent. 14. In part, the persistent low level of market confidence may reflect the more challenging public financial circumstances, which have intensified with the policy slippage in 2013 and in 2014. Public sector domestic debt is high, rising (from 37.1 percent of GDP in 2013 to an estimated 47.1 percent in 2014), short-term, and increasingly costly. Interest payments on domestic debt absorbed an estimated 30 percent of domestic revenues in 2014, up from 24.6 percent in 2013, and as public domestic debt is held largely in short- term denominations, it is being rolled over at significantly higher rates (e.g., at 19 percent at end-2014 versus 12 percent in mid-2013). And, since auctioning government securities at a steeper discount (e.g., 19 percent instead of 12 percent) requires a larger issuance to raise the same level of funds, the government’s domestic level of debt is rising. The interest payments are squeezing out public expenditures for development objectives. 15. There are also significant indirect risks to economic growth, as the sharply elevated interest rates are discouraging private investment. In 2013, durable capital goods investment is estimated to have declined to 13.4 percent as a share of GDP from 16.2 percent in 2012. Commercial loans with 2-3 year maturities are running at about 25-28 percent, which implies that a business would need to generate a return of about 35 percent in order to service the loan, adjust for inflation and pay their operating costs, including salaries. This assumes that they can get a loan, since the heavy government borrowing has largely tapped out the thin local financial markets. Given the difficult financing conditions, NPLs deteriorated in 2014, and in mid-2014, two commercial banks (local subsidiaries of Nigerian banks) were intervened, and put under CBG supervision and received CBG cash injections (see section on the financial sector). Despite the CBG intervention, there was no indication that this led to a loss of confidence in the banking system. 31 - While there are no reported cases of Ebola yet in The Gambia, its spread to neighboring countries has led to an estimated 60 percent cancellation rate for travel packages and bookings for the 2014/2015 tourist season. While figures on the impact to goods trade are not available, goods trade activity, including re-exports are also being affected. This is due to border closures/disruptions (for example between Senegal and Guinea) and to falling demand as economic activity and external demand in the Ebola-affected countries has fallen off markedly. Health experts expect the current Ebola outbreak to persist for a year, so even if Ebola is held at bay from Gambia, and there are no outbreaks in The Gambia’s only direct neighbor, Senegal, there is a risk of persistent headwinds and weak demand across the sub-region. An outbreak in The Gambia or more widespread contagion in neighboring countries would lead to greater economic disruption. 60 II. STRUCTURE OF THE ECONOMY. 16. The structure of The Gambian economy has changed very little over the past twenty years, as indicated by the sectoral shares of GDP (Chart 4). Chart 14. Structure of GDP by sector. Percentage share of Factor Cost GDP* Nb. Excludes adjustments (e.g., taxes and subsidies) Sources: WDI and GBoS. 17. Agricultural activity has averaged about one-fourth as a share of GDP and the services sector has averaged nearly two-thirds of GDP (60 percent) from 1994 through 2013. The manufacturing and other industries sectors have accounted for about 7 percent and 8 percent, respectively, over the same time period—although the shares of both of these sectors have diminished slightly in the last decade (2004-2013) relative to the previous decade (1994-2003), largely to the benefit of agriculture and to a lesser extent services. 2.1. The Agricultural Sector. 18. Economic activity in The Gambia is largely based on subsistence and rain-fed agriculture. While the sector only represents one-fourth of GDP, about 70 percent of the labor force is employed in the sector through farming, husbandry and fisheries, so it has a strong impact on the population at large. While livestock rearing and fisheries industries are primarily carried out for local consumption, over a third of cultivated arable land is farmed for groundnuts that are mainly grown for export. 19. Historically, agricultural production has fluctuated widely in Gambia, tied to its dependence on rainfall, as adverse weather conditions of drought and heavy rains can significantly cut into crop harvests. Only 3 percent of the arable land is under irrigation. Over the past two decades through 2013, real agricultural production expanded by an average of 3.7 percent. Underscoring the variability in output, during the past 45 years for which data is available (1968-2013), the sector only once recorded more than three consecutive years of positive growth; about 40 years ago in 1972-76. 61 20. Poor harvests result in higher prices, which also cut into disposable incomes. Given high poverty rates and the prevalence of subsistence farming - with the vast majority of the labor force employed in agriculture - food security is weak. Hence, private consumption is also strongly affected by agricultural sector outturns. The Gambia is heavily reliant on food imports, which account for about one-third of merchandise imports. This has only diminished modestly over the past two decades, during which food imports have averaged 36 percent as a share of total merchandise imports, more than double the average 15.3 percent share recorded for low-income countries globally and 12 percent for developing African countries. 2.2. Industrial Sector. 21. The industrial sector represents an estimated 14.6 percent as a share of GDP over the past decade through 2013 on average, and primarily serves the domestic market. Of this, the manufacturing sector component accounts for 6.2 percent as a share of GDP, and other industries combined account for an average of 8.4 percent. For manufacturing, activities are largely small-scale light industry and include processed groundnuts, fish, hides, and beverages, along with soap-making, woodworking, and metalworking, among other activities. Other industries are comprised of construction, power generation, and mining, which account for about 5 percent, 1.5 percent, 2.5 percent, respectively, as a share of GDP over the same period. Construction firms operate both on private and public infrastructure projects and are focused on the local economy. Power generation, transmission and distribution of electricity and water are supplied by the National Water and Electricity Company (NAWEC). The mining sector is very small and is geared toward the domestic economy and lower value minerals, such as clay for bricks, silica sand, cockleshell, sand and gravel for construction, among other minerals32. 2.3. Services. 22. The tourism sector, defined as including both direct and indirectly related activities, in The Gambia accounts for an estimated 13-15 percent of GDP in recent years33. As such, it represents the largest share of services activity. While the tourism sector is widely considered as being quite dynamic, the share of GDP measured on this basis has remained fairly stable over the past decade for which data is available (2004-2013). Tourism activity is a key source of foreign exchange for The Gambia, and is the second biggest source of employment following agriculture, and provides employment for a large proportion of the coastal population. 32 - The small mining sector is largely geared to the domestic economy, although in the mid-2000’s an Australian mining firm was established to prospect zircon, rutile and silica sands, for commercial production including export. Under the Gambia Mineral Sands Project, it was envisioned to produce 20,000 tons of zircon/rutile concentrate per year for export to China. In 2008, however, the mining firm, Carnegie Corporation, was charged with illegal activities, including the failure to pay royalties, and it was shut down. In early-2014, the Special Criminal Court in Banjul in its ruling on the charges against Carnegie Minerals dating from 2008, ordered the company to pay fines, otherwise the machines and other assets would be forfeited to the State. (http://m.allafrica.com/stories/201401150770.html). 33 - The tourism sector in The Gambia is widely recognized as a key sector, however, data collection is limited and exact figures on value added as a share of GDP are not available. 62 23. After tourism, financial intermediation and communication represent the next two largest components of the services sector. The banking sector has expanded significantly over the past decade, rising from 6.4 percent as a share of GDP in 2004 to an estimated 10 percent in 2013. This reflects the expansion of participation by foreign banks, particularly from Nigeria. Despite the increase in public domestic borrowing, lending rates have come down marginally during this period (averaging 31.2 during 2003-2008, and 28.3 percent during 2009-2013 in nominal terms, and 25 percent and 23.4 percent in real terms, respectively).34 The telecommunications sector has also expanded as share of GDP, from 7.7 percent in 2004 to an estimated 12.7 percent in 2013. This largely reflects the expansion of mobile telephone and internet usage in The Gambia. 2.4. Expenditure. 24. Household final consumption expenditure accounts for the lion’s share of GDP, equivalent to an average 87.1 percent of GDP at market prices for the 2004 through 2012 period, for which data is available. Government final consumption expenditure averaged 8.7 percent of GDP over the same period. Gross capital formation represents an average of 20.9 percent, of which, private sector gross fixed capital formation represents a bit more than half - at an average of 12.7 percent for the same period. The average share of imports of goods and services 45.4 percent of GDP is much higher than that of exports of goods and services at 28.8 percent. As a consequence, the external balance on goods and services has averaged a deficit of 16.6 percent of GDP during the 2004 through 2012 period (Table 1.3). Table 3. Share breakdown of GDP growth by Expenditure. Percentage shares of GDP at market prices, period averages unless otherwise noted Sources: World Bank, WDI and IMF (2014). 25. As private and government consumption expenditures have increased as a share of GDP over the decade through 2012, gross national savings (GNS) has decreased. During 2004 through 2007, GNS averaged 14.9 percent of GDP, and declined to represent an average of 5 percent during 2008 through 2012. As a consequence, The Gambia has become significantly more dependent on foreign saving to support investment activity. Foreign savings averaged 7.5 percent of GDP during 2004 through 2008, and expanded to an average of 13.1 percent during 2008 through 2012. Estimates of 2013 gross national saving 34 - International Financial Statistics, IMF, lending rate. 63 indicate that the share has shrunk further, to a mere 1.7 percent of GDP, while foreign saving shrank as well to 9.3 percent, indicating that investment as a share of GDP has declined correspondingly. Clearly, it will be important to rebuild national savings in order to sustain growth and avoid total dependence on unpredictable foreign savings. Chart 15. Gross National Saving and Foreign Saving Percentage share of GDP Source: WEO, IMF, October 2014. III. TRADE AND CAPITAL FLOWS. 3.1. Merchandise and Services Trade. 26. Merchandise trade exports - equivalent to $102 million - account for an estimated 11 percent of GDP in 2012. The Gambia’s exports are largely comprised of re-exports, with domestic goods accounting for about 5 percent of merchandise exports. The country remains an important supplier of foreign-manufactured goods and other essential items to the sub-region countries. Locally produced goods for export are largely comprised of groundnuts, and to a lesser extent cashews and fishery exports. Over the past decade, export activity has been sluggish, as transit trade has been hampered by various developments, including political disruption in key destination countries (Guinea and Mali) and deterioration in The Gambia’s export competitiveness, as neighboring countries have developed their port facilities.35 Additionally, for domestically produced goods, poor weather conditions have recently contributed to lower groundnut exports. Due to a low level of food security, food and beverage imports account for one-third of The Gambia’s total merchandise imports. Machinery and transport equipment represents about another third of imports. Minerals and fuels and manufactures imports together comprise the remaining third of the country’s imports, led by minerals and fuels. Overall, imports amounted to about 47 percent of GDP in 2012. 35 - Similarly, the Ebola outbreak in key markets could substantially reduce The Gambia’s transit trade in 2014. 64 Chart 16. Trade openness. Goods and services trade, percentage share of GDP* 140.0 130.0 120.0 110.0 100.0 90.0 80.0 70.0 60.0 50.0 40.0 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Gambia Sub-Saharan Africa (developing only) Small States Source: WDI, September 2014 27. Trade openness36 has grown by 20 percentage points to an average of 74 percent of GDP during 2003-2012 from an average of 54 percent during 1993-2002, reflecting deepening integration with the world economy (Chart 6). However, as a small country, The Gambia’s trade openness remains relatively low. For example small countries as a group recorded trade openness at an average 109 percent as a share of GDP during the past two decades through 201237. 28. Services exports are largely comprised of tourism receipts, which reached $92 million in 2012 or the equivalent of 10 percent as a share of GDP, up from $75 million in 2006 or the equivalent of 11.5 percent of GDP. A more detailed analysis of the sector appears later in this volume. 36 - Exports plus imports of goods and services as a percent share of GDP. 37 - Gambia’s trade openness had been significantly higher historically, averaging 98 percent as a share of GDP from 1973 through 1992, which was much more closely in line with the small countries’ average of 107 percent over the same period. The economy experienced significant disruption in trade tied to the 1994 coup with the imposition of sanctions by international donors and collapse of tourism activity. Further, The Gambia has experienced persistent, if periodic, disruptions in trade with its sole neighbor Senegal—also dating to the early-1990s. Periodic border closures with neighboring Senegal, the main trade route for The Gambia’s re-exports, disrupt trade flows (and passenger traffic) and undermines export growth. This has contributed to the erosion of Gambia’s advantage as a trade hub, along with an ageing port facilities and a poor investment environment. Events of 2013 provide a good example, when the border with Senegal was shut for much of the first half of the year tied to a transport trucking and border fee dispute. A shift to informal trade and deterioration in reporting practices subsequent to the political upheaval in the mid-1990s might also explain the lower openness indicator. 65 3.2. Worker Remittances. 29. Worker remittances inflows to the Gambia provide another key source of foreign exchange, while supporting domestic consumption and investment, and have averaged 10.4 percent as a share of GDP during the decade through 2012. Based on this measure, The Gambia is among the highest recipients of worker remittances as a share of GDP in the SSA region, which averaged 2.7 percent as a share of GDP, and among low-income countries, which average 6.3 percent as a share of GDP over the same period. According to UNCTAD, The Gambia is the fifth highest recipient as a share of GDP among the 39 countries in its annual report on the least-developed countries in the world.38 Worker remittances inflows have varied significantly since 2003 in The Gambia, dipping to a low of 6.7 percent of GDP in 2008, and subsequently rising to a decadal high of an estimated 15.5 percent of GDP in 2012. 3.3. Current Account. 30. The Gambia’s current account deficit is increasing. It was around $72.1 million39 in 2012 (7.9 percent of GDP) and $96.1 million in 2013 (10.7 percent of GDP). Estimates for 2014 suggest further widening of the deficit - largely because of Ebola induced losses in the tourism sector, policy slippages and difficulties in public enterprises – up to an estimated $105.1 million or 12.7 percent of GDP (IMF 2015). This compares with a current account deficit of 6.9 percent of GDP in 2006. Besides the 2014 Ebola shock, this widening of the current account deficit largely reflects a rising merchandise trade deficit, which has nearly doubled from $138 million in 2006 to $262 million in 2012. The expansion of the trade deficit is due primarily to higher imports, but also reflects weakness in export growth. The financing of the current account deficit is largely comprised of FDI inflows, followed by development assistance. • Foreign Direct Investment. Net foreign direct investment (FDI) averaged 6.8 percent as a share of GDP during the decade of 2003-2012 in The Gambia, slightly above the 6.2 percent average recorded by small states over the same time period (Chart 7). The Gambia attracted significantly larger inflows, more than double, measured as a share of GDP, than developing SSA countries and LICs, which recorded average inflows equivalent to 3.2 percent and 3.0 percent shares of GDP, respectively. During this period, FDI had more than tripled from 3.8 percent as share of GDP in 2003 to over 12.5 percent in 2006. From 2007 forward, however, net FDI inflows have diminished as a share of GDP, falling back to 4.4 percent in 2009, from which they have gradually decreased to 3.7 percent of GDP in 2012. As a share of gross fixed capital formation, FDI inflows have declined sharply to 8.2 percent in 2012 from 14.9 percent in 2011, and from an average of 31 percent during 2005-2007.40 38 - UNCTAD (2013a). 39 - Including budget support. 40 - UNCTAD (2014) and country fact sheet, http://unctad.org/sections/dite_dir/docs/wir2014/wir14_fs_gm_en.pdf . 66 Chart 17. Net FDI inflows. Percentage of GDP Source: WDI, September 2014 A number of factors have likely contributed to the fall-off in FDI flows to The Gambia, over recent years. In particular, the negative impacts of the global economic crisis that took hold in 2008 are likely a key factor, as evident across many developing countries. However, as the fall-off in The Gambia is particularly pronounced, other factors could be at play and might be attributed to a relative drop in its attractiveness vis à vis other African countries. For instance, implementation of the Free Trade Zone (FTZ) with the Gambia Gateway Project (launched in 2002) has floundered, and no exporting firms have opened for business at the FTZ near the airport. In contrast, as of 2011, there were 27 economic free zones in other West African countries, some of which have attracted significant numbers of exporters.41 Aspects of the business environment appear to be a factor as well. The Heritage Foundation’s annual Freedom report notes that commercial law is not always applied in a transparent or consistent manner in The Gambia, and that judiciary is subject to pervasive political interference, which to the extent such dynamics are evident, would discourage foreign investment42,43. The 2009 World Bank’s Investment Climate Assessment reached similar conclusions. 41 - OECD (2011). The FTZs in Ghana and Togo have been notably successful. 42 - Heritage Foundation Index of Economic Freedom, 2014: http://www.heritage.org/index/ranking. 43 - One example is the short-lived experience of Spectrum, a foreign investor that secured 50 per cent of the state-owned telecommunications (GAMTEL) and cellular phone (GAMCEL) companies in 2007. After failing to clarify its accounts with the authorities, for which it was given a 72 hour notice, its contract was terminated in November 2008 because of "a fundamental breach of contract at the expense of the Gambian people (The Gambia: 2009 Investment Climate Statement, US Embassy). In 2008 as well, the Gambia authorities cancelled the license for the extraction and processing of heavy mineral sands to the Australian mining company, Carnegie Minerals. The case held up in the courts until early 2014, when the Gambian court ruled that if Carnegie Minerals failed to pay the determined fines, the government would seize its equipment and assets remaining in The Gambia. 67 Chart 18. Official Development Assistance to Gambia from all donors US$ million in current prices and 2012 constant prices Source: OECD, Development Assistance Committee Data (2013). • Official development assistance (ODA) represents a significant source of financing for The Gambia and has expanded significantly since 1999, especially over more recent years (Chart 8). ODA increased by an average of 10 percent per annum since 1999 through 2012, nearly tripling from $49 million to $139 million (at constant prices). Notably, ODA reached the equivalent of an average of 15 percent of GNI over the four years of 2009 through 2012, up from an average of 11 percent of GNI in the preceding four year period of 2005-2008. On a per capita basis at constant prices, this represents a 33 percent increase in ODA from an average of $US58 per annum during 2005-2008 to $US77 during 2009-2012. The general rise in ODA inflows to The Gambia over the past decade is attributable to a number of factors, including that new donors have come to the fore globally, notably from high income countries in the Middle East and from private sector donors. New important sources of ODA include the Global Fund for health, which rose from zero during the 1990s to an average of 11.9 percent of total ODA to Gambia during 2010-12. The Islamic Development Bank’s ODA to Gambia rose to an average of 8.2 percent from 2010 through 2012 from an average of 0.6 percent of total flows in the 1990s (Table A.1). 68 IV. GAMBIA’S GROWTH: A SYNTHESIS. 31. This chapter underscores that long term growth in The Gambia has been unstable, below the SSA average, and barely higher than the rate of demographic growth, thereby inducing a limited and below average growth in per capita incomes. In addition, over the past two decades, although total investment has been catching up with SSA it has remained below what was observed for low income countries and small states. Given the above, it is not surprising that The Gambia, with a per capita income at US$500 in 2013, remains among the poorest countries in the world. 32. Agriculture and tourism fundamentally affect growth in The Gambia. The performance of agriculture and the ability of the other sectors of the economy, especially tourism, to counterbalance swings in output are indeed key elements that explain the long term growth pattern in The Gambia. Furthermore, agriculture employs a majority of the population and its evolution has a major impact on poverty, while tourism is the country’s primary forex earner and has a positive effect on poverty reduction through jobs creation. 33. Another factor that has affected long term growth patterns is a challenging and unpredictable macroeconomic policy environment recently characterized by sudden policy shifts, extra-budgetary spending, large borrowing, weak institutions and a lack of transparency. This has generated uncertainty and hampered economic activity, and over the long term undermined confidence in the economy. For example, persistent fiscal deficits - which averaged 7.4 percent over the past five years through 2014 - have largely been financed by short-term domestic borrowing, pushing up interest rates and crowding out private sector investments. Although this expansionary fiscal stance has been partially balanced by generally more restrictive monetary policies, this has come at the cost of prohibitively high nominal and real lending interest rates that have further dampened incentives to invest (Chart A.4). The recent experience of 2007-10 demonstrates that significant growth and poverty reduction can be achieved—that Gambia’s growth potential is high, if sound macroeconomic management is combined with good harvests, investment in tourism, and steady reforms. 69 CHAPTER 2 – ECONOMYWIDE INFLUENCES ON GROWTH: FINANCE, TRADE AND ENERGY. 34. As shown previously, long term growth in The Gambia is primarily affected by the performance of the agriculture sector and to a lesser extend tourism44. A common feature of these two sectors and of the economy as a whole is a relatively low level of investment, especially compared to the needs. This can be explained by the overall unpredictability of the macroeconomic environment and the crowding out private sector investments by State borrowing. Besides this, other factors are at play in The Gambia that affect firms ability of operate, invest and ultimately generate growth. The working of the financial system – and its weaknesses – influences the little funds that can be directed to investment. Issues related to trade, electricity supply and the overall legal framework also affect firm’s operations and therefore long term growth in the country. I. THE FINANCIAL SECTOR. 35. A sound financial sector matters for development as: i) it promotes sustained growth by channeling savings to profitable investment opportunities and monitors firms to ensure proper use of such financial resources; and, ii) it protect consumers and investors from the risks inherent in every economic activity. Furthermore, a sound financial sector is critical to Gambia’s development as two of the sectors most likely to generate significant growth and employment – agroindustry and tourism – face significant challenges in accessing funding for working capital and investment, which undermines their competitiveness. 36. The Gambia’s financial sector consists of commercial banks, insurance companies, foreign exchange bureaus, microfinance institutions and other non-bank finance companies. The Gambian financial system is relatively small and is dominated by the banking system. Private credit to GDP is only 14.4 percent compared to a regional median of 20.0 percent and an income group median of 17.8 percent (Chart 9). This compares well with Liberia (4.2) and is on par with the rate in Guinea-Bissau (14.8) but lower than Comoros (21.0) and Lesotho (18.8). This, despite the fact that the domestic deposits are higher than comparator countries, which suggests structural credit market constraints. 44 - Issues specific to these sectors are detailed in the next volume of this report. 70 Chart 19. Banking sector depth (2013). Source: IMF. 1.1. The banking system. 37. The banking system accounts for the majority of financial sector assets and is the predominant form of financial intermediation. The Gambian banking system provides the standard range of financial services, such as current accounts, savings accounts, fixed deposits, electronic funds transfers, GoG T-Bills45 and private and business loans. 38. Concentration is high with the six largest banks accounting for 81 percent of assets in the system. The banking sector grew rapidly from 2007 to 2010 with the number of banks operating in The Gambia doubling to 14 during that period. Since 2010, two banks have voluntarily exited the market after choosing not to meet the minimum capital increase required by the central bank46. Chart 20. CAR and Liquidity Ratios: 2010-2013. Source: CBG and IMF. 45 - Treasury Bills are issued (every Wednesday or as decided by the CBG) with maturities lasting either 91, 182, or 364 days. 46- The 12 banks in The Gambia include: Standard Chartered Bank, Trust Bank, Bank PHB, Arab Islamic Bank, First International Bank, Guaranty Trust Bank, International Commercial Bank, Access Bank, Ecobank, Banque Sahelo-Saharienne pour L'investissement et le Commerce (BSIC) and Oceanic Bank. 71 39. Capital adequacy47 of the banking system as a whole remains high, with regulatory capital equivalent to 27.7 percent of risk weighted assets in 2013 but aggregate figures can mask variability at the individual bank level. At the six largest banks, the average capital adequacy ratio was 11.9 percent as of end-2013 with ranges between 6.1 to 21.1 percent. As a result, the capacity of some of the larger banks to absorb an increase in nonperforming loans (NPLs) or an external shock is potentially lower than the aggregate CAR would suggest. The system is characterized by high degree of liquidity due to significant holding of treasury bills relative to total assets (Chart 10). 40. Credit risk is high and exacerbated Chart 21. Asset quality and provisions. by the degree of loan concentration. The top four borrowers account for 54 percent of the total loan portfolio. Nonperforming loans, while declining in recent years, still comprise a significant portion of total credit at 11 percent with provisions equivalent to 9.5 percent of total capital in 2013 (Chart 11). There is significant variation between banks with asset quality issues predominating in a few banks48. Deposit concentration is also a risk. In 2009, one financial institution (the national pension fund) accounted for 45 percent of deposits in the system. At least one bank Source: CBG and IMF. reported difficulty in redeeming deposits withdrawn by a large depositor over a short period of time. 41. Competition for deposits combined with high funding and operating costs limits bank’s profitability. Net interest margin49 is high with lending rates of between 23-25 percent and time deposit rates of 8-10 percent and net interest income represents 35.3 percent of gross income. Operating expenses represent 57.7 percent of gross income. As a result, returns on assets have been relative low at 1.2 percent and return on equity also in the single digits at 8 percent, albeit a better performance that what was achieved in 2010- 11 (Chart 12, Table A.2). 47 - The capital adequacy ratio is a measure of a bank's capacity to absorb losses as is expressed as a percentage of the bank’s risk weighted credit exposures. 48- Two banks were intervened by the CBG in May 2014 following impairment of their loan portfolio, which negatively impacted their capital adequacy. Hence, the CBG injected GMB 600 million (1¾ percent of GDP) into these two commercial banks to preventively recapitalize them. Subsequently, one bank was returned to its owners after they reimbursed the CBG. The other bank is still under the control of the CBG, but an exit strategy which includes the creation of a special purpose vehicle that will collect nonperforming assets is being implemented (IMF 2015, p15). 49 - Net interest margin (NIM) is a measure of the difference between the interest income generated by banks and the amount of interest paid out to their lenders, relative to the amount of interest-earning assets. 72 Chart 22. Efficiency and earnings: 2010-13. Source: CBG and IMF. 42. The capacity of the Central Bank of the Gambia (CBG) to supervise the banking sector has improved with the introduction of a new electronic system to collect data from banks as well as with the hiring of additional staff. However it remains constrained by low capacity particularly for effective off-site analysis and assessment. Efforts to move to a more risk based supervision model are nascent. The CBG regularly engages in joint supervision of cross border banks, particularly with the Central Bank of Nigeria, which is helping with the introduction of a risk based supervision model. 1.2. Insurance and Pensions. 43. The insurance sector in The Gambia is small in terms of assets with non-life insurance premia representing only 0.69 percent of GDP – this is to be compared to 1.92 percent in Lesotho.50 The sector includes 13 insurance companies and 9 brokerage firms. Ten of the insurance companies are general insurers (operating in non-life areas), and two are life insurance provider. A small branch network of 27 offices is spread across the country. 46 percent of insurers are fully locally owned while 15 percent have full foreign ownership and the rest has mixed ownership. The industry is regulated by the Insurance Act 2003, the Insurance Regulations 2005 and the Insurance Amendment Act 2006. The Insurance Regulations 2005 set out the basic requirements such as paid up capital, deposits for every class of business, the amount of solvency margin and components of its calculation as well as investment requirements amongst others (CBG 2014). The key player is the national pension fund; the Social Security and Housing Finance Corporation (SSHFC). 44. SSHFC was created to administer a compulsory social security scheme including pensions (both public and private), injuries and compensation fund, and a housing fund. Contributions to the SSHFC pension fund are levied on all formal enterprises with a mandatory contribution rate of 5 percent. The public pension fund is the largest and is comprised of mandatory contributions of 15 percent of all public sector gross wages (two 50 - World Bank, Financial Structure Database, November 2013. 73 thirds paid for by the employer and one third by the employee). Contributions are invested and at retirement beneficiaries receive either a monthly pension or a lump sum balloon payment with all interest included. 45. SSHFC is the largest holder of government securities and is the largest single depositor in the banking system. Despite the long term nature of SSHFC’s liabilities, the majority of its portfolio is invested in bank deposits and treasury bills along with some investment in the tourism and agribusiness sectors. As pension funds are intended to transform current savings into future income, it is desirable for them to invest in long-term assets. An asset allocation skewed towards short-term deposits and T-bills may reflect the lack of alternative investment opportunities in The Gambia. As a result, this pool of capital is not channeled into long-term investment and does not contribute to overall economic growth. In 2013, return on investment was between 12-14 percent according to management, which is above the average of 7-8 percent achieved in previous years. Among its investments, SSHFC has equity stakes in two of the largest domestic bank, Trust Bank, and the largest foreign bank, Standard Chartered, where it is the largest domestic minority shareholder. SSHFC is also invested in two large hotels, Ocean Bay and Sun Bay. It also has investments in state-owned enterprises, particularly in the telecommunications sector. SSHFC only provides loans to state-owned enterprises. 1.3. Microfinance and Credit Unions. 46. The microfinance sector could play a more important role in increasing access to finance. As of now, it is of a small size and only accounts for about 0.25 percent of the population in terms of borrowers and depositors, way below what is observed in countries like Ghana or Liberia (Chart 4.5). In effect, is not currently being run as a sustainable business in most cases and is reliant on donor funding. Chart 23. Importance of MFIs. Source: World Bank 47. The only exceptions are credit unions, which have a sustainable business model premised on mobilizing the savings of their members (more than 60,000). The majority of companies operating in The Gambia are micro-enterprises with limited capacity to demonstrate credit worthiness and reliant on fixed asset collateral and guarantees to 74 access funds. Basic elements such as a culture of financial reporting and contract enforcement are lacking. MFIs, a natural source of borrowing for micro enterprises and small proprietorships, have little money to lend, weak management, and are inadequately regulated and supervised. 48. The National Association of Cooperative Credit Unions of Gambia (NACCUG), the domestic coordinating body for savings and credit cooperatives, provides liquidity and technical support to its 69 member institutions involved in microfinance activities. Although most of its members are in rural areas, the majority of the deposits are urban. It can offer its members loans equivalent to 2-3 times their subscribed capital from a common fund (the Central Finance Facility, CFF) in the form of liquidity provisions. Excess funds are invested in T-bills with short-term maturities. Given their prevalence in rural areas, most credit cooperatives are licensed by the Ministry of Agriculture and are therefore not regulated in any meaningful way. NACCUG, with a critical role in liquidity provision to its membership, is seeking formal recognition for its role as the apex institution for credit unions from the Central Bank. 1.4. Access to Finance. 49. Domestic credit to the private sector is low, on average 14.7 percent of GDP over 2007-2012, against a regional average of 58.7 percent (Chart 13). It reached 15.2 percent of GDP in 2013. The majority of credit is in the form of trade finance (29 percent). Relatively little credit flows to agriculture (3.9 percent), tourism (5 percent), or manufacturing (6 percent). Most firms use internal sources of funds and retained earnings to finance their working capital and their long term investments. At the sector level, in the late 2000s, internal funds represented about 65 to 90 percent (respectively for manufacturing enterprises and informal firms) of funds used to finance long term investments. The use of bank finance remains very limited for manufacturing or retail services enterprises (less than 13 percent of the global long term investment) and almost non-existent for other sectors and micro/informal enterprises (World Bank 2009, Chart 13). 75 Chart 24. Credit to private sector, distribution of credit in 2012 and financing by banks. Source: IMF (2013) and World Bank (2009). 50. Access to finance is impeded by banks' high operating costs, some crowding out by government debt, high collateral requirements, and the mismatch between bank’s requirements and firms abilities. • Large fiscal deficits, partly financed by the CBG, have led to high levels of domestic borrowing that have driven up interest rates and, to a certain extent, crowded out the market for private borrowing (see Chapter 1). Interest rates on T-bills have increased sharply in recent months. In countries with high T-bill rates, such as The Gambia, banks tend to hold a sizable part of their balance sheets in Government securities, which can discourage lending. In financial systems with weaker legal and regulatory structures and capacity there appears to be a strong negative relationship between banks’ willingness to lend to private companies and the availability of “safer” investments opportunities, such as T-bills. 76 Chart 25. T-Bill interest rates. Source: IMF (2013). • High operating costs and the attractiveness of the safer T-bills imply that banks are fairly risk adverse. This translates, inter alia, into high collateral requirements. The value of collateral needed for a loan is almost two times the value of the loan (193 percent) and three times the levels recorded in Liberia (69 percent) and Lesotho (87 percent). Although high relative to comparators, it is in line with regional averages. Almost all loans (86 percent) require some form of collateral, typically real estate or third party guarantee. As a result, only 16.6 percent of firms reported a bank loan or line of credit, which is below the SSA average (23.7 percent) and in the middle of rates reported by comparator countries. Microenterprises and informal firms face even more difficulties accessing banks as only about 4 percent of them report having access to finance (World Bank 2009, Chart 16). Firms often state that the high cost of financing available from banks is a deterrent to accessing loans. • Firms face challenges in meeting banks' collateral requirements. Real estate is seen as reliable collateral given the challenge and cost associated in determining the viability of firms that can lack audited accounts. The absence of viable credit information systems to assess credit applications also increased in the past banks' reliance on physical collateral. Moreover, the legal infrastructure necessary to support collateralized lending requires an effective and efficient judicial system to enforce contracts, which many countries including Gambia struggle to produce. A movable collateral registry is being implemented, which is a positive step51. 51- The CBG is developing a Collateral Registry. A Security Interest in Movable Assets Act was passed into Law in October 2014 and took effect on January 1, 2015. The infrastructure for the registry is in place and it should be operational before mid-2015 (IMF 2015). 77 Chart 26. Collateral requirements and Pct of firms with a bank loan/line of credit. Source: World Bank (2009). II. THE TRADE SECTOR. 2.1. Trade in goods and services. 51. Trade has traditionally played Chart 27. Import and Export of goods and services. an important role in the economy of The Gambia. It accounted for more than 100 percent of GDP at the beginning of the 1990s. This share has since declined, from a height of 131 percent in 1990 down to 52 percent in 1999. Trade has re-gained traction in early 2000s, it accounted for as much as 83 percent of GDP in 2004. However, it has ever since played a smaller role in Gambian economy. The drop in trade share has been significant in the aftermath of the financial crisis when, Source: WDI, September 2014 in 2008, trade amounted to only 63 percent of GDP (Chart 17). 52. Imports account for the largest component of net trade. The country has traditionally been in a trade deficit growing in magnitude since the 1990s. In 2012, imports tallied above 353 million in constant US$ or 47 percent of GDP. Imports to The Gambia are more slightly concentrated relative to its peers in ECOWAS or Sub-Saharan Africa, as measured by the Herfindahl-Hirschman index.52 The lack of diversification is reflected in the origins and types of goods imported. More than one third of imports consist of food and 52 - The index is normalized to range between 0 and 1, where higher values correspond to more concentrated markets. Formally it equals to ೐ೣ೛೚ೝ೟ೞ೔ೕ భ ඨ∑ೕ( )మ ିට೙ೠ೘್೐ೝ ೚೑ ೔೙೏೔ೡ೔೏ೠೌ೗ ೎೚ೠ೙೟ೝ೔೐ೞ ಶೣ೛೚ೝ೟ೞ೔ ‫ܪ‬௝ = భ . ଵିට೙ೠ೘್೐ೝ ೚೑ ೔೙೏೔ೡ೔೏ೠೌ೗ ೎೚ೠ೙೟ೝ೔೐ೞ 78 live animals, food staples such as rice and sugar are at the top of the list.53 A large fraction of rice arrives from Brazil, while other popular food staples such as refined linseed oil, flour and dried legumes are imported from Malaysia, Turkey and UK respectively. China is a key market for imported manufacturing goods, chiefly represented by woven fabrics. A sizeable share of manufacturing goods is also taken by cement and construction material from Senegal. Among machinery and transport equipment are German passenger cars, and power-generating machinery and equipment from Northern European countries such as Finland, UK, and Germany (Chart A.5). 53. Exports in the form of transit and (illegal) re-export trade have traditionally played a relevant role in The Gambia’s economy.54 Re-exports still amount to about 88 percent of gross exports (Comtrade, Chart A.6 and Chart A.7). Food items are mainly re-exported to neighboring countries such as Senegal and Nigeria while China used to be the largest foreign buyer of wood (wood wool and veneers)55. Direct exports account for the remaining fraction (12 percent) of gross exports and are directed to India, UK and China. The harmonization of external tariffs within the region56 and the reduction of trade distortions in neighboring countries57 have progressively eroded the profitability of re-exports which currently consist on a few items with limited value added. Cashew nuts are imported by India while Netherlands, Spain, Senegal and Singapore import fish and related products. Groundnuts and fruits are mainly exported to the UK. The Gambia appears to still maintain a comparative advantage in the export of food items with a revealed comparative advantage (RCA)58 above 1, at 4.7 in 2012. However, this has substantially fallen down from the 2007 level of 9.6. 54. Overall, three main destination countries typically make up for more than 50 percent of total exports (re-exports and direct exports). Yet, these countries have varied over the past few years. In 2006, Great Britain alone attracted 49 percent of total exports. The share has significantly dropped since then and in 2011 UK bought less than 20 percent 53 - Rice accounts for more than 13 percent of total imports, or US$30 million. Improving agricultural productivity becomes of paramount importance once the President’s announcement to ban rice imports from 2016 will be a reality. 54 - Re-export trade implies payment of Gambian tariffs upon entry and then payment of Senegalese tariffs upon exit, but few if any products can support such treatment and be competitive. In reality, goods are smuggled into a neighboring country, sometimes with the connivance of customs officials. This trade is driven by distortions in the bordering market, due to high protection. See the 2007 Diagnostic Trade Integration Study for additional details. 55 - A presidential ban on wood re-exports was imposed in 2012. 56 - The Gambia’s role as regional entrepôt has been challenged since the early 2000s. In 1998-2000, trade taxes in Senegal and Guinea fell substantially with the implementation of the West African Economic and Monetary Union (2007 DTIS). In response, The Gambia simplified its custom tariffs system in 4 brackets, with a top rate of 18 percent. These changes was reversed in 2006 when The Gambia increased the ceiling on import tariffs from 18 to 20 percent and the sales taxes on imports from 10 to 15 percent, to align with the Economic Community Of West African States (ECOWAS) customs union structure. The Gambia may further drop tariffs on imported goods from the EU as part for the negotiations to replace its non-reciprocal preferential trade agreements. 57 - For example in the case of Senegal, the partial liberalization of sugar imports, and the full liberalization of vegetable oils diminished the profitability of this trade. 58 - The index measures the ratio between the share of country's i exports of good j to the world's exports of good j and the share of country's i ೐ೣ೛೚ೝ೟ೞ೔ೕ total exports to the world’s share of total exports. Formally it corresponds to ܴ‫ܣܥ‬௜௝ = 100 ೐ೣ೛೚ೝ೟ೞೢೕ ಶೣ೛೚ೝ೟ೞ೔೟ . ಶೣ೛೚ೝ೟ೞೢ೟ 79 of total Gambian exports. France has also been consistently present among the main destination markets for Gambian exports. Due to limited data availability from Gambian sources, statistics on geographical trade are from partner countries, so the resulting picture of shifting trade patterns could be somewhat distorted to the degree that some activity is not captured. With that caveat, there have been significant shifts in Gambia’s key trade partners over the past decade. Guinea, Guinea Bissau and more recently India are the other popular exporting markets. 55. On a regional basis, The Gambia’s trading profile complements well that of Guinea Bissau and Niger based on the relatively high Trade Complementarities Index (TCI)59, above 50 (Chart 4.10). Conversely, the TCI with Liberia is less than 10 indicating that the two countries tend to export similar products and therefore would not gain from expanding trade to one another. As a result, not surprisingly, the Trade Intensity Index (TII)60 between The Gambia and Liberia is fairly low at around 53. Burkina Faso and Cote d’Ivoire have the lowest TII, well below 10, while on the other side of the spectrum are Guinea Bissau, Guinea and Mali with extremely high TII of more than 100,000. Chart 28. Trade partners among ECOWAS members. 700000 70 600000 60 500000 50 400000 40 TCI TII 300000 30 200000 20 100000 10 0 0 Senegal Mali Burkina Faso Togo Benin Guinea-Bissau Cote d'Ivoire Nigeria Liberia Sierra Leone Guinea Niger Ghana Source: World Integrated Trade Solution (WITS) 2.2. Trade policy 56. Trade policy stands out among the factors that have contributed to the decline of The Gambia’s role as a regional entrepôt since the early 2000s. In 1998-2000, trade taxes in Senegal and Guinea fell substantially with the implementation of the West African 59 - The trade complementarity index (TCI) provides information on prospects for intraregional trade in that it shows how well the structures of a country’s imports and another’s exports match. The TCI measures the correlation between exports for all k goods and ೔ ೕ services from country j to the world and imports of country i from the world, that is ܶ‫ܫܥ‬௜௝ = 100[1 − ∑௞ ௜௠௣௢௥௧ೖ ି௘௫௣௢௥௧ೖ ]. ଶ - The trade intensity index (TII) is used to determine whether the value of trade between two countries is greater or smaller than 60 would be expected on the basis of their importance in world trade. It measures the ratio of the share of exports from country i to country ೐ೣ೛೚ೝ೟ೞ೔ೕ j divided by the share world’s exports to country j, formally it corresponds to ܶ‫ܫܫ‬௜௝ = ಶೣ೛೚ೝ೟ೞ೔ ೐ೣ೛೚ೝ೟ೞೢೕ . ಶೣ೛೚ೝ೟ೞೢ 80 Economic and Monetary Union (WAEMU). In response, The Gambia simplified its custom tariffs system in 4 brackets, with a top rate of 18 percent. These changes were reversed in 2006 in order to align with the Economic Community of West African States (ECOWAS) customs union structure. Specifically, The Gambia increased the ceiling on import tariffs from 18 to 20 percent and the sales taxes on imports from 10 to 15 percent. Further changes in trade tariffs are expected as the country harmonize its regime to the ECOWAS Common External tariff (CET)61. 57. First established in 2006, the CET was originally organized in four tariff bands: 0 percent for essential social goods, 5 percent for goods of primary necessity, raw materials and specific inputs, 10 percent for intermediate goods and 20 percent for final consumption goods. However, its implementation has encountered a number of obstacles with respect to the classification of product lines and the definition of tariff bands62. Another important point of contention regards the modalities of collection of the CET. Each country insists on collecting payments at its border, instead of at the point of entry into the community. 58. As of late 2014, the comprehensive implementation of the CET is not a reality yet, as indicated by the fact that two key products for The Gambian economy face widely different tariffs within ECOWAS. The average ad valorem duty for rice and groundnut is respectively 0 percent and 20 percent in The Gambia, and 10 percent and 2.5 percent in Guinea. Disparities are not limited to selected goods or countries, as evident from Table 4.1 that reports a synthetic indicator of the trade tariffs faced at the ECOWAS and regional level. An evolution from the current system is expected to take place soon, since the CET is planned to become fully operational as of January 1, 2015. Table 4. Trade tariffs. The Gambia Senegal Guinea Liberia Nigeria ECOWAS SSA 14.6 10.5 11.6 10.7 11.0 11.2 10.3 Nb. The tariffs indicator corresponds to the average of all the applied tariff rates, weighted by the trade patterns. Source: World Integrated Trade Solution (WITS) 59. While trade tariffs may play a relevant role for regional trade, they affect trade with developed countries to a smaller extent. The Gambia, similarly to most other African LDCs, receives a preferential treatment to access to foreign markets through the Everything But 61 - The CET is part of a larger effort to establish a custom union among ECOWAS members. The ECOWAS Trade Liberalization Scheme (ETLS) aims at introducing the CET while eliminating customs duties and taxes, and non-tariff barriers among its members. These policies are intended to be applied to a selected group of goods including unprocessed goods, traditional handicraft products, and industrial products of community origin. The scheme - originally articulated in 1979 - was first launched in 1990. After some (internal and external) resistance in implementation, ETLS has gained momentum and now about sixteen Gambian companies are certified to operate under the Scheme. The remaining barriers to fully capitalize the benefits of the ETLS are supply-side related. 62 - More recently, Nigeria has asked for the introduction of a fifth band at 35 percent for “specific goods for economic development” (essentially agricultural goods), based on the observation that disparities in domestic cost of labor and tax rates undermine economic competition across ECOWAS members. For example, there is a wide variation in the range of VAT tax rates. On one side of the spectrum is Nigeria that applies a 5 percent, while The Gambia charges 10 percent, Ghana 15 percent, and the francophone countries (such as Togo, Benin, Burkina Faso) charge 20 percent. 81 Arms (EBA) program with the European Union (EU) and, until January 1st, 2015, with the African Growth and Opportunity Act (AGOA) of the United States63. Under these programs no quota or duty restrictions are levied. Trade with the EU or the US is hampered not by trade regulations per se, but rather by technical barriers as well as sanitary and phytosanitary measures. For instance, The Gambia has not yet been able to take advantage of the AGOA because of its inability to meet safety standards and procedural requirements. Analogously, phytosanitary concerns, for example those related to the presence of aflatoxin in groundnut, have hampered sales to EU markets. On the contrary, Senegal has been able to some extent to take advantage of the preferential treatment exporting to the US mostly agricultural and energy-related products.64 60. The authorities also recognize that non-tariff barriers may tremendously raise the cost of trading in The Gambia. Road transportation has been hampered by numerous checkpoints, the consequent delays in the flow of goods add to the cost of doing business and transiting goods from The Gambia. Cognizant of these inefficiencies, The Gambia in concert with other ECOWAS members has started implementing the protocol on the Inter- State Road Transit (ISRT) scheme, in order to promote a more efficient and transparent movement of transit goods within the sub region.65 61. Customs operations are another important element to consider when assessing the extent of NTBs. The “quality and comprehensiveness of services provided by customs authorities and related agencies” is slightly above the regional and sub-regional average in The Gambia (Global Express Association, 2014). However, among the factors that prevent the country from improving its performance is the fact that the ASYCUDA++ system for custom clearance is yet to be adopted at all major entry points. Moreover, notwithstanding dedicated meetings in 2013, the system interface is not yet integrated with GAINDE, the automated solution used in Senegal. The differences are not limited to the software used, but extend to custom administration practices. Senegal follows the West African Economic and Monetary Union (WAEMU) laws, regulations and documents whereas The Gambia adopts the ECOWAS parameters. As a result, the countries tend to use different administrative documents, leading to higher bureaucratic costs. The issues are to be addressed by the full implementation of the ISRT. 62. Large gains are to be obtained from improving the relationship with Senegal. Better coordination with such a strategic neighbor is needed in order to tighten border control and reduce trading costs. In the absence of an efficient and effective collaboration between the two countries, the Senegalese authorities require The Gambia Revenue Agency (GRA) to receive hard copies of landing certificate that goods have reached their final destination, and not simply left The Gambia, before clearing the shipment and releasing the custom 63 - The United States dropped The Gambia starting from January 1, 2015, according to a presidential proclamation on December 23, 2014 that said the country is not making continual progress in meeting the requirements of the 1974 Trade Act. 64 - The port of Dakar is directly connected to the American continent, as Grimaldi has two dedicated lines: Grimaldi ACL-US-West Africa Ro/Ro service and Grimaldi Africa-South America Line-West Africa ESCA string. The port of Banjul on the other hand does not have direct service to North or South America. 65 - Further details about the ISRT are discussed later. 82 bonds. Such costly and inefficient practice should be abandoned with the full implementation of the ISRT. 2.3. Trade logistics 63. The decline in the importance of trade over the past few years in the Gambian economy is reflected in the country’s average ranking (77th out of 185 countries) in the DB2015 indicator for “trading across borders”. Since 2006 the amount of time, documents and cost per container required to trade has remained stable. There has been only a mild contraction in the number of days required to imports that however has not translated into a reduction of costs. From a comparative perspective, The Gambia does better than ECOWAS members - except Senegal which is very close. Senegal outperforms The Gambia in the number of days to export or import, it takes 7 more days to export from and 5 more days to import to The Gambia than in Senegal. These delays are however counterbalanced by lower trading costs that allow the country to remain competitive (Chart 19). Chart 29. Trade regulations. Source: DB 2015 64. Taking a broader perspective encompassing all aspects of trade logistics besides the previous details of the clearance process, it appears that over the past few years The Gambia’s performance worsened significantly. Gambia’s performance on all components of the Logistics Performance Index66 (LPI) is worse in 2014 than it was in 2007, with the exception of the “international shipment” sub-index which is stable (Chart A.8). Hence, The Gambia has fallen in the LPI rankings, from the 77th position (out of 66 - The logistics performance (LPI) is a weighted average of a country scores on six key dimensions: - Efficiency of the clearance process (i.e., speed, simplicity and predictability of formalities) by border control agencies, including customs; - Quality of trade and transport related infrastructure (e.g., ports, railroads, roads, information technology); - Ease of arranging competitively priced shipments; - Competence and quality of logistics services (e.g., transport operators, customs brokers); - Ability to track and trace consignments; - Timeliness of shipments in reaching destination within the scheduled or expected delivery time. 83 150 countries) in 2007 down to 146th in 2014 (out of 160 countries) in 2014. Furthermore, in 2014, The Gambia has performed worse than any other ECOWAS members, according to the LPI, achieving a score of 2.25, while the average has been 2.66 and 2.47 among ECOWAS and Sub-Saharan countries respectively. The Gambia lags well behind Senegal in almost every subcomponent of LPI, with the exception of a similar capacity at “timely” shipments. 65. To try to reverse this evolution, The Gambia has undergone several custom reforms in recent years. In 2008, the authorities abolished the compulsory scanning of all containers, and opted instead for a system of random inspections in order to save processing time and costs. In 2012, the country pursued further improvements in customs operations by adopting the Automated System for Customs Data (ASYCUDA). However, the system is not yet fully functioning at each point of entry to the country and there are reports of still duplicate custom operations, using both electronic and paper procedures, resulting in an inefficient increase in costs. Chart 30. Logistics Performance in 2014. Customs 3.5 3.0 2.5 2.0 Timeliness Infrastructure 1.5 1.0 0.5 0.0 Tracking & tracing International shipments Logistics competence Senegal Sub-Saharan Africa Gambia, The Source: LPI 2014, The World Bank. 2.4. Infrastructures for trade. 66. The port of Banjul is at the core of The Gambia’s economy as international trade accounts for a large share of GDP and it handles almost the totality of the country’s international trade flows (Table A.3). Gambia’s economic competitive edge therefore also depends on the quality of port’s infrastructure and efficiency of operation specialists. Import traffic accounts for the majority of international trade flows, and typically comprises ro/ro67 vessels and containerized cargo with sugar, rice, flour, cement and liquid bulk products. The Gambia Ports Authority (GPA) handles over 350 vessels per year, and more than 1.7 million metric tons of “throughput” or overall imported and exported cargoes. 67 - Ro/ro stands for roll-on/roll-off vessels designed to carry wheeled cargo driven on and off the ships, as such the use of crane is not needed to load and unload the cargo, as in the lo/lo or lift-on/lift-off vessels. 84 67. The Gambia Chart 31. Line Shipping Connectivity Index (LSCI) in 2014. appears to be less 30 integrated in the global 25.2 25 liner shipping networks than the average ECOWAS 20 peers according to the line 15 shipping connectivity index (LSCI) developed by 10 5.5 5.8 5.64 the UNCTAD (Chart 21). 5 Nigeria with an LSCI of 22.9 outperforms other 0 World average SSA average ECOWAS average Gambia ECOWAS countries; Côte d’Ivoire (21.9) and Ghana Nb:The Line Shipping Connectivity Index is based on five components: (a) the number of ships; (b) (21.7) are close Nigerian the total container-carrying capacity of those ships; (c) the maximum vessel size; (d) the number competitors, while Benin of services; and (e) the number of companies that deploy container ships on services from and to a country’s ports. The index is standardized so that the value 100 corresponds to best (17.2), Senegal (12.8) lag performing country in 2004. a little further behind. Source: UNCTAD 68. The Gambia’s ability to Map 1. Selected maritime route between West Africa and position itself as a regional hub West Mediterranean. suffers in particular from the comparison with Senegal that has ranked consistently higher for the past 10 years. Higher ranking of Dakar’s port translates into more business opportunities as it is more frequently included in the maritime routes of major shipping companies. This is evident by going through the routes followed by Maersk, Delmas (CMA CGM) and MSC, i.e. the three companies serving also Banjul’s port. Source: Maersk 69. Maersk stops in Banjul along only one out the nine direct routes connecting the West Mediterranean and West Africa (Chart 4.14). Analogously, Delmas (CMA CGM) includes Banjul’s port in two out of seven routes connecting Mediterranean and West Africa, while it includes Dakar’s port not only in one Mediterranean-West Africa route, but also in two Africa-Northern Europe routes. Regarding MSC’s routes, Banjul appears directly connected only with New York, while Dakar is linked with 10 other US ports besides New York’s. 85 70. Similar findings emerge from a more in depth analysis of the quality of port infrastructure. Banjul’s port enjoys a relatively positive ranking since overall infrastructure quality is estimated to be higher than in regional or sub-regional ports. Yet Banjul’s port remains below Dakar’s. Several factors contribute to challenge Gambian entrepôt role: • First, shipping rates tend to be higher than in other West African ports. Banjul’s offers competitive terminal handling charges (THC), on par or below those charged in Dakar, Conakry or Abidjan. Yet freight rates are much higher, more than compensating the potential savings in THC (Table A.4)68. Higher shipping costs are typically blamed on the low draught that prevents from hosting ships with capacity above 2000 TEU. This constraint is expected to become a more relevant obstacle in the future as operators are investing more and more in higher capacity vessels in order to exploit economies of scale; • Second, the gap in quality infrastructure is not sufficiently high to establish a strong advantageous position. The port lacks both (i) proper equipment and (ii) adequate infrastructure in order to be fully competitive. Regarding the former, the port lacks for example dedicated cranes for over-the-quay cargo-handling operations, meaning that loading and discharging cargo is largely done through ships’ own gear. Regarding the latter, the port has limited capacity, with a 10m draft and a 300m quay. While Senegal enjoys a similar position according to international rankings on port’s overall quality, Dakar’s port has a substantially higher capacity than Banjul’s port, in terms of both storage capacity and stevedoring equipment (Table A.5). This disadvantage is likely to play an increasingly important role in the future as more and more operators are moving to higher capacity ships in order to exploit economies of scale. The lack of adequate equipment and infrastructure to handle larger volumes would negatively affect the competitiveness of The Gambia. 71. Aware of this, the GoG has developed in the early 2000s a master plan that details a series of interventions to upgrade the port. Within this framework, noteworthy is the recent adoption of a mobile scanner for container’s inspection that has contributed (i) to substantially cut the time spent for cargos’ physical inspections and (ii) to streamline the administrative procedures for goods clearance69. Besides, more recently, the construction works for the expansion of the containers yard have started. 72. Roads. Land transportation is at the core of rebuilding Gambia’s entrepôt role. Roads account for more than 90 percent of the total motorized freight and passenger movements (World Bank 2009). By 2007, The National Road Network (NRN) of The Gambia comprised 1,559 km of classified roads of which 495 km were paved and 1,064 km were unpaved. There was also approximately 1,300 km of unclassified earth roads giving access to rural settlements as well as residential areas in some urban settlements. The road network in and around the capital city, Banjul is much better developed than those in other 68 - Everything else equal, it currently costs 14 percent less to ship from Dakar, 11 percent less from Lagos, 10 percent less from Lome, 9 percent less from Cotonou or Abidjan, 4 percent less from Conakry or Freetown, 3 percent from Monrovia, and 1 percent less from Accra. Only shipping from Bissau is more expensive, costing 39 percent more. 69 - The process for cargo clearance from landside facilities receive praises from the private sector for its efficiency, especially when compared with other West African ports, thanks to the cooperation between custom and port authorities. 86 parts of the country. The road conditions in The Gambia are generally poor, resulting from under-investment in routine and periodic maintenance (PRSP 2007). 73. In this context, the ECOWAS ISRT is an essential component to reduce transit costs and facilitate the shipment of transit goods throughout the sub-region. After decades of discussions, the ISRT was launched on July 15th 2013 under the patronage of the Gambia Chamber of Commerce and Industry (GCCI), designated as the Guaranteeing Institution. The IRST is a regime that allows the transportation of goods by road from one Customs Office in a Member State to another Customs Office in another Member State through one or more Member States free of duties, taxes and restrictions while in transit. Such goods are to be accompanied with a set of customs documents and shall not be off-loaded or transferred while in transit. In particular, ISRT trucks need to (i) mount on the front and back the ECOWAS plates and (ii) lock with a seal their doors as proof that goods will not be transferred along the way; drivers need to send their vehicle for inspection and carry the ISRT logbook and return sealed with stamp. The GCCI is in charge of implementing the scheme, but despite having been appointed in 2008, it has not been actively involved in the implementation of the ISRT until 2011. Insufficient capacity (lack of adequate financial resources, tracking system) has contributed to the delays in implementation. As a consequence of the ISRT, the number of internal checkpoints has formally dropped to three70. The authorities appear determined to proceed with the full implementation of the ISRT and the MOTIE has offered support to the GCCI in order to strengthen their capacity and expedite the roll out of the scheme. To this end, coordination and cooperation with Senegal would be of strategic importance in order to maximize the benefits from the ISRT. 74. For the future, the rehabilitation of transit corridors in the Gambia is another crucial element to reduce the cost of transporting goods from the port of Banjul. The authorities have launched an ambitious program, the “National Transport Policy”, and with the support of the EU have almost completed the restoration, upgrading and maintenance of five main trunk roads (Barra-Amdallai, Soma-Basse, Basse-Velingara, Mandinaba-Seleti and the Trans-Gambia road). The EU is also funding the rehabilitation of fourteen feeder roads, the construction of infrastructure for axle load control as well as a number of capacity building activities with the National Road Authority. 75. Airport. Airport cargo is underutilized, due to the lack of dedicated infrastructure. Less than 0.1 percent of overall cargo in transit to and from The Gambia passes through the airport. The quality of the services delivered by airport authorities and the level of fees and charges levied were identified as major challenges by freight forwarders and express carriers during recent interviews. Conversely the quality of the airport infrastructure is not deemed as problematic. A possible explanation for such findings lies in the low volumes outbound traffic due to other supply-side constraints. Banjul’s airport has the potential to become a regional hub, because of its (unusually for the region) long runway and the relative higher proximity to Europe and United States. The Kuwait Fund for Arab Development has funded a US$35 million investment to rehabilitate and expand the airport 70- However discussions with local stakeholders suggest that long queues of vehicles at borders, roadblocks and demands for informal payments are still present. 87 apron, build new taxiways, rehabilitate terminal building and control tower, install navigation systems and other equipment as well as providing technical assistance. Building on this, the Swedish cooperation agency, Sida, is investing to promote more efficient institutional arrangements, building human capacity and improve access to airport services for exporters and smallholders in order to boost horticulture and fisheries exports. III. ELECTRICITY SUPPLY. 76. Access to electricity is a critical issue in The Gambia. At around 35 percent nationwide, access to power in the Gambia is modest: 60 percent of the population in the greater Banjul area is served while as low as 6 percent has access in the outlying provinces. In the late 2000s, 75 to almost 80 percent of formal firms, depending on the sector, stated that electricity was a major or very severe constraint to their operation (World Bank 2009). Due to a combination of unfilled demand and an inefficient distribution system, the highest volume of complaints from industrial and residential consumers concern either the unreliability of power or, during those periods when reliability is relatively good, the very high price of electricity. 77. In 2014, the country has one of the highest electricity tariffs in the region with approximately 0.23$ per kWh which does not even fully cover costs. These high costs further limit access to power and restrict business growth. In 2013, the country has witnessed 124 MV outages and 3,985 LV fault lead to frequent daily interruptions. The pattern of these outages was not regular enough to permit rational responses such as working shifts. As a result, most firms had to produce their own electricity. Little seem to have changed today. 78. Power supply within the Gambia is provided by the state-owned National Water and Electric Company (NAWEC). NAWEC maintains a monopoly in the production, distribution and transmission of electricity. It manages the Kotu, Farafenye and Kerewan electricity-generating plants. An attempt was made to open the generation segment by entering into a power purchase agreement with an Independent Power Producer (IPP) in 2006 and by launching the GAMWIND project71; however this attempt to involve private participation was later reversed. In 2012, The IPP transferred its operations to NAWEC and shortly after commissioning in 2013, GAMWIND also stopped its operations. 79. The main constraints in improving access include the current production capability, the inadequacy of the transmission and distribution network, a lack of fuel diversity, regional disparities and NAWEC’s poor financial performance. • Current production capability. Only 43.7 MW of the 88.8 MW installed capacity is available. This does not allow peak load to be met and current projections show the need for an additional 135 MW of capacity between 2014 and 2020. NAWEC operates a thermal power station that runs mainly on heavy fuel oil. There is no reserve margin, 71 - It sells 900kVA wind generated electricity to NAWEC. 88 machines are strained disproportionately and the risk for further damage is significant. Production cannot keep pace with increasing demand. Nevertheless, new customers are constantly connected to the grid, mostly in connection with electrification projects, leading to an increasing instability in the power. As a result, several system failures occur per day, often in combination with total breakdowns. NAWEC’s generation and transmission and distribution teams are constantly fighting emergency situations. Population suffers from blackouts several times per day and load shedding is common. Scheduled maintenances are skipped which can lead to more serious damages72; and critical spare parts, tools and equipment are lacking because of financial constraints. • Transmission and distribution network. Although the existing transmission network is in good physical condition, it has a limited reach and inadequacies that reduce its effectiveness. An assessment of the transmission and distribution shows a number of issues. The first one is that there is no continuous criteria (n-1) applied on transmission level, therefore not enough redundancies in the network – i.e. a failure of one component can lead to system collapse. Operational activities are coordinated in six operations centers via telephone due to lack of automated control mechanisms, thus bearing a high risk if communications infrastructure were to break down. The inadequacies of the system therefore contribute to large technical losses (estimated at 23 percent), which reduce the effectiveness of the already low generation capacity in the country, and further restrict access to power. Also, the current state of the transmission and distribution system restricts the ability of IPPs to enter the country and provide generation facilities without pairing their generation plans with a transmission and distribution upgrade plan (something that most IPPs do not wish to get involved in). • Fuel diversity. There are few alternatives to fossil fuels and high cost of power. Although potential interconnections with Senegal and the West Africa Power Pool offer an opportunity for The Gambia to access generation capacity from proposed hydro projects at Sambangalou (128 MW) and Kaleta (240 MW), few alternatives to fossil fuels have been developed. This contributes to the high cost of power which has been identified as an issue by the Government and the regulator. • Regional disparities. In the provinces of the Gambia NAWEC operates six remote areas with local power stations and local network grids that are not connected to each other. Existing engines are high speed LFO engines, not originally meant for base load power stations and with very high operational costs. NAWEC has never been able to deliver sufficient energy in the off-grid areas. Electricity is not available more than 12-14 hours; load shedding is practically done every day. Apart from the extraordinarily high fuel costs, logistics is also a constraint. Sufficient fuel cannot be transported to the provinces as a single tank truck has to provide all stations in one trip. • NAWEC’s financial performance. NAWEC has suffered financial distress in the past few years. A combination of earlier spike in oil prices worldwide, exchange rates shifts, an inability to raise tariffs, and high commercial losses have contributed to compromise NAWEC’s financial situation which shows significant operating and net deficits as well 72 - Due to the variety of different engine manufacturers, it is difficult to keep adequate stock of spare parts and tools; also for the maintenance staff it is more difficult as every type of engine has its own specialties 89 as high indebtedness. Fuel is the main driver of NAWEC's costs, accounting for 81 percent of its expenditures. NAWEC has had three consecutive years of losses that eroded its capital which is increasingly negative, increased liabilities that represent about four times its annual revenue and current liabilities that exceed current asset in the same proportion. NAWEC has therefore been financing its operations through liabilities and is now in a position where it can no longer honor its debt. These difficulties are now impacting State finances with significant Government support in 2013-2014 that is now close to $US 22 million (GMD 1 billion). 80. Despite major constraints, the electricity sector has some strengths and opportunities, including the relatively new transmission and distribution system, the established prepaid metering and the chance to connect to power generated with neighbors in the region through projects developed under the River Gambia Development Organization (OMVG) which include the Gambia, Guinea, Guinea Bissau and Senegal. The OMVG sub-region (particularly Guinea) has abundant hydro resources that are considered suitable for power generation, but have not been exploited yet. Studies estimate that Guinea’s hydro-generation potential (technically and economically feasible) could reach 6,000MW. Regional cooperation under the OMVG/WAPP can help Guinea to unlock this potential, with the benefits for the whole sub-region73. For The Gambia, the OMVG interconnection represents a critical infrastructure to access increased competitively priced and clean base load generation. From the first plants that will come online, the OMVG interconnection will provide an additional 38 MW of base load capacity. IV. AN AVERAGE BUSINESS ENVIRONMENT. 81. Based on the 2014 Index of Economic Freedom (Chart 22), Gambia is ranked 92nd out of 178 economies. The Gambia's 2014 economic freedom score is 59.5 (on a maximum of 100). In the terminology of the IEF, the Gambian economy is considered as “mostly unfree”. The country has been rated a “mostly unfree” economy throughout its history in the Index since 1997, but has achieved its highest score ever in the 2014 Index. In recent years, there have been gains in trade freedom, labor freedom, and fiscal freedom which were however offset partially by declines in business freedom, control of government spending, and freedom from corruption. The Gambia is ranked 11th out of out of 46 countries in the Sub-Saharan Africa region, and its overall score is just below the world average (IEF 2014). 82. The World Economic Forum, in its 2014 “Global Competitiveness Report 2014- 2015”, ranks The Gambia 125th country out of 144 countries (Chart 22). This indicates a relatively limited competitiveness of the Gambian economy as a whole. According to the 2014 WEF ranking, the most important constraints to do business in The Gambia are i) access to financing, ii) tax rates and iii) foreign currency regulations. 73 - Pipeline projects include Kaleta (240MW), Amaria (380MW), Souapiti (600MW), Boureya (160MW), Koukoutamba (281MW), Balassa (181MW) and Fomi (90MW). 90 Chart 32. Some international rankings for Gambia. Ranking according to the 2014 IEF. Ranking according to the 2014-15 GCI. Switzerland 1 Best performance United Kingdom 9 Best SSA performance Mauritius 39 Senegal 112 Cape Verde 114 Egypt 119 Gambia 125 Worst performance Guinea 144 0 20 40 60 80 100 120 140 160 Source: "Index of Economic Freedom 2014", Heritage Source: "Global Competitiveness Index 2014-15", World Economic Forum. Foundation. 83. Gambia is also ranked 138 out of 189 countries in the 2015 Doing Business Indicator report. Regulations remain fairly complex in spite of an improvement compared to 2013 (the country was ranked 144th). Key areas of concern include i) Getting Credit, ii) Protecting Minority Investors (despite recent significant improvements) and iii) Paying Taxes. Chart 33. Ease of doing business index for 2008. Source: Doing business 2014-15, The World Bank 91 84. Hence, a common complain among investors and trade operators concerns the administration and level of taxes. The number of payments required and the time spent paying taxes is not disproportionately higher in The Gambia than in neighboring countries, such as Senegal and Guinea, so that the situation doesn’t appear particularly troubling on the surface (Chart 24). Yet tax rates are higher than the average country in ECOWAS or Sub- Saharan Africa. Chart 34. Paying taxes. 120.0 100.0 80.0 60.0 40.0 20.0 0.0 Payments (Nber per year) Time (Days per year) Sub-Saharan Africa ECOWAS Average Gambia, The Guinea Guinea-Bissau Nigeria Senegal Source: Doing business 2015 85. Indeed, looking at the total tax rate (measured as percentage of profit) reveals the challenges faced by investors in the country that have to pay in taxes 63.3 percent of commercial profits, after accounting for allowable deductions and exemptions (Chart 25). Conversely, the total tax rate is only 46.1 percent for the average ECOWAS country. The profit or labor tax rates charged in The Gambia are in line with the regional rates. What triggers the difference are “other taxes”. In 2013, the sales tax has been replaced with a value added tax74 set at 15 percent. The introduction of the VAT has encountered some delays due to the confusion about the precise rules and lack of proper equipment to process transactions. Depending on the source of information, estimates about not compliance with VAT application were as high as 70 percent of the cases. Several stakeholders identified as the most recent severe obstacles to trade the combined effect of VAT introduction and simultaneous increase in custom fees. The ports in Guinea-Bissau and Guinea Conakry are deemed to have benefited from the lower competitiveness of The Gambian, due to higher transaction costs. 74 - The main differences between sales taxes and VAT concern traded goods and services. First, VAT is charged on exports while sales tax is not. Second, VAT is charged only on component accounting for the value added by the importer and reseller, while the sales tax is charged on the whole value of imports. These discrepancies in taxation may give rise to Non-Tariff Barriers (NTB), since goods may be taxed twice depending on the tax system adopted by the trading countries. To overcome possible issues, export goods should be exempt from VAT payments (claiming VAT rebates), and import goods should be charged for the full price the first time they are sold. 92 Chart 35. Total tax rate as percentage of profits. 80 68.3 70 63.3 60 50 46.2 46.1 45.5 45.1 40 32.7 30 20 10 0 Guinea Gambia, The Sub-Saharan ECOWAS Guinea-Bissau Senegal Nigeria Africa Average Nb: The indicator is based on profit tax (as a share of profits), labor tax and contributions (as a share of profits), and other mandatory contributions (as a share of profits) payable by a business in the second year of operation. Commercial profits are net of any deductions or exemptions. Source: Doing business 2015 V. CONCLUSION. 86. Besides macroeconomics and the purely sectoral issues seen previously, other factors detailed in this chapter are at play in The Gambia that affect firms' ability to operate, to invest, and therefore the country’s growth. 87. The Gambia’s financial sector consists of commercial banks, insurance companies, foreign exchange bureaus, microfinance institutions and other non-bank finance companies. It is relatively small and is dominated by a highly concentrated banking system - in terms of banks' assets, of credit and of deposits. Competition for deposits combined with high funding and operating costs limits banks' profitability. Other elements of the system are much smaller, for example microfinance only accounts for about 0.25 percent of the population in terms of borrowers and depositors. The financial sector as a whole does not fulfill one of its key role which is to promote sustained growth by channeling savings to profitable investment opportunities. Access to finance remains a key issue in The Gambia. 88. Trade has traditionally played an important role in the economy of The Gambia as the country used to play the role of a regional entrepôt. However, the re-export sector has become less attractive over time. Trade policy changes have eroded the country’s advantage as a trade hub (especially the ECOWAS CET implementation) and, owing to a weak business environment and ageing port infrastructure - Senegal outperforms The Gambia in the number of days to export or import - the sector appears at risk. 93 89. Electricity supply remains a major impediment to growth in The Gambia. Strengths of the sector include good staff skills, a relatively new transmission and distribution network (T&D), an established prepaid metering system and the possibility to connect to the OMVG in the medium term. Weaknesses are however significant and include a lack of fuel diversity, a deficient planning capacity, technical design weaknesses (such as the lack of redundancies in T&D), a poor MIS and NAWEC’s debt. All of this contributes to increase prices and make the quality and reliability of the electricity a major issue for the private sector. 94 ANNEXES. Chart A. 1. Real GDP growth rates. 12.0 10.0 8.0 6.0 4.0 2.0 0.0 1993 1995 2000 2005 2010 2013 -2.0 -4.0 Gambia, The Sub-Saharan Africa (dev. only) -6.0 Nb. The black curve is a second order polynomial trend. Source: WDI, September 2014 95 Box A. 1, Five fundamental changes in Emerging African countries. Recent research (Radelet 2010) on a turnaround in economic activity and development outcomes in seventeen ‘emerging African countries’ (excluding oil-exporting economies) provides some insights on the key drivers of growth. It underlines the importance of ‘sensible’ economic policies. Economies of Africa are classified as: emerging African countries, threshold (to becoming an emerging economy); and other non- oil exporters. The sixteen members of latter group—which includes Gambia—are characterized by “relatively little change in income levels, social indicators and governance” and a lack of “fundamental change since the mid-1990s.” Over 1996-2008, the seventeen emerging economies shared the following characteristics: • Economic growth rates in each country reached a minimum of 2 percent per capita in real terms, and as a group averaged 3.2 percent per capita, which is equivalent to an average real GDP growth rate of at least 5 percent per year over the whole period; • The proportion of people living below the poverty line of US$1.25 per day declined from 59 percent in 1993 to 48 percent in 2005; • Trade and investment more than doubled; • And, there were marked improvements in education and health indicators. This turnaround can be attributed to five fundamental changes: • The end of the debt crisis and changing relationships with the international community; • The spread of new technologies that supported higher rates of productivity; • The emergence of a new generation of public and private sector leaders; • The rise of more democratic and accountable governments; and • The introduction of more ‘sensible’ economic policies. With respect to the fifth fundamental change tied to economic policies, it must be noted that as of a generation ago, policies in most African countries were markedly different, and contributed to large budget deficits, double-digit inflation, rising debt burdens, thriving black markets, and shortages for basic commodities. These conditions discouraged investment, generated capital flight and led to economic stagnation and rising poverty. He suggests that a shift in policy frameworks started to become evident in the late-1980s for the seventeen ‘emerging’ African countries, and continued to gradually improve, such that budget and trade deficits have become more sustainable, and trade and investment barriers have been brought down. Similarly, the business environment has become friendlier, marketing boards have disappeared to a large extent, and the private sector has expanded to play a more important role in the economy and in supporting growth. He notes that while further improvements in the policy environment are needed, they have ‘vastly improved’. The table below extends the calculations on real per capita income from 1996 through to 2012 for all but the oil exporting economies (though in the interim Ghana might be more appropriately classified as an oil- exporter). The figures indicate the persistency of the improved growth dynamics in the ‘emerging’ countries as a group, as they recorded a 3.3 percent rate for 1996-2012 compared with a 3.2 percent rate recorded for 1996-2008. Notably, this positive growth outcome coincided with the global financial crisis and aftermath, when countries faced weakened external demand. The performance of the ‘threshold’ countries, which as a group are converging with the performance of the ‘emerging’ countries, is masked by Liberia’s post-war recovery and robust growth. Most of the ‘threshold’ countries have recorded weaker outturns. The performance of the ‘other’ African countries remains weak, as the cumulative GDP per capita for the group remains in negative territory, albeit it is less negative at minus 0.4 percent for the 1996-2012 period compared with the minus 4.2 percent for the 1996-2008 periods. 96 1996-2012 Cummulative increase The Gambia 0.6 9.5 1 Emerging Countries , average 3.3 54.8 3 Botswana 3.0 51.6 1 Burkina Faso 3.3 56.1 4 Cabo Verde 6.4 109.0 1 Ethiopia 4.3 73.7 Ghana 3.5 59.6 Lesotho 2.9 48.8 Mali 2.1 36.3 Mauritius 3.5 59.3 Mozambique 4.8 82.0 Namibia 2.5 42.2 Rwanda 4.3 73.2 Sao Tome and Principe 1.8 19.5 Seychelles 2.8 47.2 South Africa 1.5 25.9 Tanzania 3.3 55.6 Uganda 3.3 55.9 Zambia 2.1 36.2 1 Threshold Countries , averages 3.2 54.2 Benin 1.1 19.1 Liberia 12.7 216.7 Kenya 0.9 15.0 Malawi 0.4 7.6 Senegal 1.2 20.7 Sierra Leone 2.7 46.2 1 Other African Countries (incl. Gambia) , averages 0.0 -0.4 Burundi -0.7 -11.7 Central African Republic 1.8 30.9 Comoros -0.6 -10.4 Congo, Dem. Rep. -0.1 -1.3 Cote d'Ivoire -0.1 -2.0 Eritrea -1.0 -17.5 Guinea 0.9 15.0 Guinea-Bissau -1.1 -19.3 Madagascar 0.0 0.6 Niger 0.6 9.7 Swaziland 0.7 11.1 Togo 0.6 10.1 Zimbabwe -2.1 -35.1 Djibouti 0.3 4.0 Memo aggregates, averages Sub-Saharan Africa (developing only) 1.6 27.4 Small states 2.5 42.0 Low income 2.7 46.0 Sources: World Bank World Development Indicators Database, and Steven Radelet, Emerging Africa: How 17 Countries are Leading the Way . Center for Global Development (2010). 1 Categories are Radelet's, and he includese Gambia in Other African Countries that have posted relatively little change in GDP. 97 Chart A. 2. Gross fixed capital formation. 40 35 30 25 Gambia, The Sub-Saharan Africa 20 (developing only) Low income 15 Small states 10 5 0 1994 1996 1998 2000 2002 2004 2006 2008 2010 Source: WDI, September 2014 2012 Chart A. 3. Real effective exchange rate index (2010 = 100). Index and annual percent change Source: WDI, September 2014 98 Chart A. 4. Overall budget balance, net domestic borrowing and total investment. Percent shares of GDP Source: WDI, September 2014 Table A. 1. Shifting geographical and organizational composition of Official Development Assistance Percentage share of total by donor ranked by 2012 flows 1990-1999 2000-2009 2010 2011 2012 1 IDA 14.3 15.6 9.6 8.3 21.0 2 EU Institutions 10.4 8.1 18.2 27.3 14.7 3 United Kingdom 7.3 3.3 1.7 6.8 10.2 4 IMF (Concessional Trust Funds) -4.4 1.7 2.5 2.7 10.1 5 Global Fund .. 9.3 15.6 11.7 8.3 6 Isl.Dev Bank 0.6 3.8 8.2 8.8 7.6 7 AfDF 14.9 14.5 4.5 4.3 7.5 8 Japan 5.0 8.4 14.8 8.7 5.4 9 Private Donors, Total .. 0.2 2.6 2.4 2.4 10 IFAD 1.4 2.0 1.8 0.6 2.1 11 Spain 0.1 1.2 3.1 4.0 1.8 12 United States 10.6 5.0 5.4 2.4 1.7 13 United Arab Emirates -0.3 1.2 0.1 1.0 1.6 14 GAVI .. 1.0 1.5 1.3 1.5 15 UNDP 4.9 3.1 2.5 2.0 1.4 Total 64.8 78.4 92.0 92.5 97.1 Source: OECD, Development Assistance Committee Data (2013) 99 Table A. 2. Banking System: Financial Soundness Indicators for 2010-2013. 2010 2011 2012 2013 Capital adequacy Regulatory capital to risk-weighted assets 26.0 27.1 30.2 27.7 Tier-1 capital to risk-weighted assets 26.9 28.2 31.2 20.2 Asset quality Nonperforming loans to total loans 15.0 12.9 11.6 11.0 NPLs net of provisions to capital 7.2 7.9 11.7 9.5 Management efficiency Net interest income to gross income 29.6 37.1 35.3 35.3 Operating expenses to gross income 65.2 59.5 58.0 57.7 Earnings Return on assets -0.5 0.0 2.0 1.2 Return on equity -2.7 0.2 8.0 8.0 Liquidity Liquid assets to total assets 37.3 41.6 52.1 48.9 Liquid assets to short-term liabilities 59.7 64.2 80.9 75.6 Exposure to FX Risk Net open FX position to capital 1.3 -1.0 4.5 17.2 Source: CBG, IMF 100 Chart A. 5. Imports: market indicators, top 3 partners, sectors, products. 0.7 USA 15.2 Gambia 2006 CHN 13.8 GBR 10.1 0.6 Sub-Saharan Africa CHN 16.0 2007 USA 12.5 0.5 GBR 11.0 ECOWAS CHN 17.3 2008 GBR 12.3 0.4 USA 10.4 CHN 15.7 0.3 2009 GBR 9.4 BRA 8.1 BRA 22.8 0.2 2010 CHN 12.0 NLD 7.9 BRA 15.0 0.1 2011 CHN 12.9 SEN 6.6 0 0 5 10 15 20 25 Concentration index Diversification index Share of Total Real Imports Food 26.6 Refined linseed oil 8.3 2006 Machinery 21.9 2006 Raw solid sugar nes 7.3 Manufacturing 18.8 Bulk text wste/old cloth 3.1 Food 27.8 Refined linseed oil 8.9 2007 Machinery 21.3 2007 Raw solid sugar nes 7.9 Manufacturing 18.8 Rice milled, broken 5.5 Food 28.1 Refined linseed oil 8.1 2008 Manufacturing 22.0 2008 Rice milled, broken 7.6 Machinery 16.1 Raw solid sugar nes 6.1 Food 31.3 Rice milled, broken 14.1 2009 Manufacturing 19.3 2009 Refined linseed oil 10.0 Machinery 17.6 Portland cement 6.3 Food 40.9 Raw solid sugar nes 13.8 2010 Manufacturing 21.6 2010 Rice milled, broken 12.8 Machinery 15.1 Refined linseed oil 6.7 Food 33.0 Rice milled, broken 13.6 2011 Manufacturing 22.6 2011 Refined linseed oil 7.8 Machinery 16.5 Raw solid sugar nes 6.1 0 10 20 30 40 0 5 10 15 Share of Total Real Imports Share of Total Real Imports Source: UNSD Commodity Trade (UN Comtrade) Chart A. 6. The Gambia’s re-exports - thousands of US$ (2002-2011). 4500 4000 3500 3000 2500 2000 1500 1000 500 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Milk and milk products Plastics and articles thereof Meat, fish and seafood food preparations Natural sands Cotton Edible vegetables and certain roots and tubers Tobacco and manufactured tobacco substitutes Machinery, nuclear reactors, boilers, etc Ships, boats and other floating structures Beverages Nb. This graph shows the evolution of export items that have been among the top 5 exports for at least one year between 2002 and 2011. Source: (UN Comtrade) 101 Chart A. 7. The Gambia's direct export performance. Market indicators Top direct export items in Top direct exports (2012-2013) 8000 thousands of US$ (2002-2011) 31386 7000 25739 0,747 6000 0,708 0,622 5000 0,58 4000 0,46 3000 0,252 2000 8305 1000 5075 3776 2606 1804 0 1522 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Concentration Diversification Groundnuts Cashew nuts Fruits (guavas Fish and sea index index Groundnuts Cashew nuts and mangoes) products Gambia 2012 2013 Fruits (guavas and mangoes) Fish and sea products Sub-Saharan Africa ECOWAS Nb. Nb. Trademap - Figures reported by the Gambia Trademap - Mirror data reported by trade partners Source: UN Comtrade Chart A. 8. The Gambia: Changes in LPI components score over time. 3.30 3.10 2.90 2.70 2.50 2007 2010 2.30 2012 2.10 2014 1.90 1.70 1.50 Customs Infrastructure International Logistics Tracking & Timeliness shipments competence tracing Source: LPI 2014, The World Bank. Table A. 3. Cargo through Banjul seaport and airport. Cargo at seaport (Tons) Cargo at airport (Tons) Unloaded Loaded Unloaded Loaded 2009 1,226,147 214,399 600 221 2010 1,266,831 281,409 642 461 2011 1,405,919 450,604 700 281 2012 1,401,729 352,833 592 500 Source: Gambia Bureau of Statistics 102 Table A. 4. Port services and dues in early 2014. Country Port Tug fees Pilot fees Mooring fees Port dues Total The Gambia Banjul 1005 555 122 22218 23900 Senegal Dakar 2729 2822 341 6510 12402 Guinea Conakry 7974 2779 128 0 10881 Liberia Freetown - - - 20284 - Liberia Monrovia 17987 4996 600 4336 27919 Côte d'Ivoire Abidjan 1 2592 4237 700 4476 12005 Côte d'Ivoire Abidjan 2 2592 4237 700 2952 10481 Côte d'Ivoire San Pedro 2592 2729 910 744 6975 Ghana Takoradi 2562 889 291 2571 6313 Ghana Tema 2562 889 291 - - Togo Lome 2850 940 183 - - Benin Cotonou 3570 1683 468 2342 8063 Nigeria Tin Can - - - 27841 - Nigeria Lagos - - - 19963 - Source: Catram and authors calculation. Table A. 5. Selected port facilities and equipment. Storage capacities Banjul’s port Dakar’s port Bonded warehouses (sq.m) 10,000 60,000 Container storage area (sq.m) 28,000 150,000 General cargo storage yard (sq.m) 12,000 360,000 Stevedoring equipment Multi purpose (1, 100T); Mobile Cranes Shore (1, 45ts SWL) (1, 10T and 1, 16T) Pilot 3 13 Source: Catram and authors calculation 103 REFERENCES Economist Intelligence Unit (2015). Gambia: Country Report, London, United Kingdom. Global Express Association (2014). Gambia Custom’s Capabilities Report, Geneva, Switzerland. IFAD (2012). Partnership between an MFI and Commercial Bank in Remittances increases access to rural communities, 7th Regional Forum for IFAD-funded Projects, November 2012, Banjul, The Gambia. International Monetary Fund (2013). The Gambia: Staff Report for the 2013 Article IV Consultation; Informational Annex; Press Release on the Executive Board Discussion; and Statement by the Executive Director for The Gambia, Country Report No. 13/289, Washington DC, USA. 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