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"The Gambia’s program with the IMF includes limits on the amount and terms of new borrowing to prevent a build-up of debt to levels that may be unsustainable over the medium- and long-term." IMF and IDA Debt sustainability

INTERNATIONAL MONETARY FUND

The results of this debt sustainability analysis (DSA) indicate that The Gambia remains at high risk of debt distress, reflecting weak export performance, significant new borrowing, and depreciation of the exchange rate. Projections indicate that the present value (PV) of external debt to export ratio exceeds its threshold for a protracted period while the standard stress tests show that The Gambia is vulnerable to adverse developments with the PV of debt to exports and debt to GDP breaching their thresholds under some stress tests. Staffs recommend that the authorities limit new borrowing, rely mainly on grants, seek highly concessional loans with a grant element of at least 45 percent, reduce their stock of domestic debt, and complete reforms that would improve the country’s competitiveness.

1. This debt sustainability analysis (DSA) was prepared by the staffs of the Fund and the World Bank, in collaboration with the Gambian authorities. This DSA is based on debt and debt service data obtained from the authorities as of November 30, 2009, and reflects a revised macroeconomic framework following discussions of the sixth review of the Extended Credit Facility (ECF) arrangement with the Fund. The last joint DSA1 prepared by staffs of the IMF and the World Bank for the fourth review of the country’s ECF arrangement concluded that The Gambia was at high risk of debt distress.

2. The Gambia’s stock of external debt declined substantially after full delivery of debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI). HIPC and MDRI debt relief reduced The Gambia’s stock of nominal external public debt from US$676.7 million (133.1 percent of

GDP) to US$299.4 million (41.7 percent of GDP). In PV terms, the stock of debt decreased from US$439 million at end-2007 to US$347 million following HIPC debt relief and to US$165 million after MDRI debt relief. Jointly, these reduced the debt to exports ratio to about 113 percent at completion point. In January 2008, Paris Club creditors agreed to cancel outstanding claims totaling US$13 million in PV terms at end-2006. Although the country received bilateral debt relief from Kuwait, further agreements with other non-Paris club creditors on the delivery of debt are still pending with the Economic Community of West African States (ECOWAS), Saudi Arabia, Taiwan Province of China, Libya, and China.

3. Despite receiving HIPC and MDRI debt relief, The Gambia’s debt indicators remain elevated, reflecting a number of factors. These factors include weaker-than-expected export performance, unanticipated depreciation of the real exchange rate during 2008, and reliance on expensive domestic borrowing. In particular, the high debt stock is attributable to significantly larger-than-previously projected new borrowing,2 which at completion point in 2007 was about US$84 million above projections made at decision point in 1999, and an additional US$46.3 million in PV terms since completion point. The weak performance of exports is mainly due to the persisting difficulties with the country’s re-export trade. A significant depreciation of the dalasi against the US dollar in 2008 also put significant pressure on the PV of debt to GDP. Given that the Gambia receives fewer grants (as a percentage of GDP) than comparable HIPC countries, the government has had to rely on expensive domestic borrowing. Although the debt risk classification in the DSA only considers external debt, the large domestic debt stock (27 percent of GDP) and high debt service payments on domestic debt (15¾ percent of government revenues) provide further evidence of the need for the authorities to develop and implement a prudent borrowing plan in line with the country’s medium-term debt strategy (MTDS).

4. The Gambia’s program with the IMF includes limits on the amount and terms of new borrowing to prevent a build-up of debt to levels that may be unsustainable over the medium- and long-term. Under the ECF program, the authorities have committed to a minimum grant element of 45 percent in new external loans contracted or guaranteed by the government. The program also has indicative quarterly limits on the total amount of new borrowings. 3

2 New borrowing was contracted on less concessional terms than anticipated at decision point. Since completion point, however, all external borrowing has been contracted in line with the 45 percent grant element agreed under the ECF arrangement.

3 Although not binding in The Gambia’s case, IDA also has a minimum grant element under the NCBP of 35 percent or higher. The policy is complementary to other policies and tools that the Bank and Fund have in place to help countries maintain debt sustainability, such as the LIC Debt Sustainability Framework, the Debt Management Performance Assessment (DeMPA) tool, and the toolkit for developing Medium-Term Debt Management Strategies (MTDS). See ―IDA’s Non-Concessional Borrowing Policy: Review and Update‖, Resource Mobilization Department, (FRM), The World Bank, June 2008.