Gambia-Current Account Deficit Grown by 98% as Import Grows – CBG

Gambia monetary policy committee

The Monetary Policy Committee  (MPC) of the Central Bank of The Gambia met on Wednesday, November 28, 2018 to review recent economic developments and decide on the monetary policy rate. The following summarizes the deliberations on key economic indicators that informed the Committee’s decision.

Global Economic Outlook

Global economic  growth  remains  on  track,  although  risks  to  the outlook  have  shifted  to  the  downside.  In  its  October  release  of  the World  Economic  Outlook,  the  International  Monetary  Fund  (IMF) has revised downwards  its growth  projection  for 2018 to 3.7 percent (the same level as in 2017) from 3.9 percent reported in its July update, as trade and investment moderate and financial conditions tighten.

In advanced economies, growth  is projected at 2.4 percent in 2018, compared  to  2.3  percent  in  2017.  The  rising  global  interest  rates combined with the strengthening of the U.S. dollar, have contributed to tighter   financial   conditions   and   moderated   capital   flows   to  the emerging  and developing  economies.  Growth  in  emerging  market and developing economies is projected to remain unchanged at 6.5 percent in 2018 compared to 2017 before declining to 6.3 percent in 2019. In sub-Sahara Africa, economic recovery  continues,  supported by stronger external demand, higher commodity prices and improved access to capital. Economic growth in the region is projected at 3.1 percent in 2018, higher than 2.7 percent in 2017.

Global inflation  is  projected  to  accelerate  to  an  average  of  3.5 percent in 2018, higher than 3.1 percent in 2017, driven largely by rising energy  prices. Inflation  pressures  in sub-Saharan  Africa have broadly softened, with annual inflation projected to ease to 8.6 percent in 2018, from 11 percent in 2017.

Domestic Economic Outlook

Real Sector

Economic  recovery   in  the  Gambia   continues   to  gather  strength evidenced  by the rebound in tourism, construction  activities, finance and insurance, trade, and telecommunication. The strong business confidence and prudent macroeconomic policies were also important contributors  to  growth  during  the  period.  The  Gambia  Bureau  of Statistics (GBoS) estimated real GDP to have grown by 4.6 percent in 2017, higher than 0.4 percent in 2016. Growth is expected  to remain robust in 2018 and the medium-term outlook is positive on the back of continued implementation of sound macroeconomic policies and structural reforms.

External Sector

Preliminary balance of payments estimates for the first nine months of 2018 indicate a wider current account deficit compared to the corresponding period of 2017, attributed largely to the sharp increase in imports which reflects increased economic activity.

The current account deficit is estimated to have widened to US$55.58 million in the first nine months of 2018 from a deficit of US$28.11million a year ago.  The  services  account  balance  surged  to  a surplus  of US$52.23 million or by 43.50 percent in the first nine months of 2018 from US$36.40 million  in  the  same  period  last  year.  Performance  in  the services  account  is attributed,  in  the  main,  to the increase  in travel income reflecting  robust start to the tourism season. Similarly, current transfers rose to US$136.68 million or by 20.46 percent.

The deficit in the goods account widened to US$252.64 million or 16.47 percent of GDP in the first nine months of 2018 from US$ 205.51 million in the corresponding period of 2017, due to the increase in imports.

The surplus in the capital and financial account improved to US$ 40.15 million in the first nine months of 2018 from a deficit of US$ 13.55 million in the same period a year ago. Gross international reserves is projected at 4 months of next year’s imports of goods and services.

Exchange rate developments

Activity in the foreign exchange market, measured by aggregate sales and purchases of foreign currency has picked up rapidly. In the year to end-October 2018, volume of transactions in the domestic foreign exchange market totaled US$1.9 billion, higher than US$1.2 billion in the same period  last  year.  The  strong  performance  reflects  improved supply conditions.

Purchases of foreign currency increased markedly by 50.7 percent to US$965.4 million as at end-October 2018 from US$640.4  million  in the corresponding period in 2017. Similarly, sales of foreign currency, which indicates demand, increased significantly by 68.4 percent to US$963.3 million in the review period from US$572.2 million in the same period of 2017.

The exchange rate of the dalasi remains stable. From December 2017 to October 2018, the dalasi appreciated against the pound sterling by 0.2 percent but depreciated  against  the U.S. dollar and Euro by 3.7 percent and 0.3 percent respectively. In real effective exchange rate terms, however, the dalasi has appreciated. The exchange rate is expected to remain stable in the near to medium-term, predicated on the continued implementation of sound macroeconomic policies, improved supply conditions and confidence.

Government Fiscal Operations

Preliminary government fiscal  operations  for the nine months to end- September 2018 indicate total revenue and grants of D7.8 billion compared  to  D10.9  billion  in  the  same  period  last  year.  Domestic revenue, comprising tax and non-tax revenues, rose by 16.0 percent to D6.7 billion.

Total expenditure and net lending declined to D10.7 billion or by 19.1 percent reflecting mainly the marked drop in interest payments by 20.4 percent.

The budget balance (excluding grants) narrowed to a deficit of D4.0 billion in the  nine  months  to  end-September  2018  compared  to  a deficit of D7.5 billion in the corresponding period a year ago.

Domestic Debt

The stock of  domestic  debt  increased  slightly  to  D29.66  billion  (42.7 percent  of  GDP)  as  at  end-October  2018  from  D29.14  billion  (42.0 percent  of GDP)  in  the  corresponding  period  a year  ago.  Stock  of Treasury and Sukuk-Al Salaam bills increased by 0.96 percent to D17.14 billion during the period under review.

Yields on all Treasury bills increased. The 91- day, 182-day, and 364-day Treasury bills rates increased from 3.68 percent, 4.77 percent, and 6.34 percent  in  October  2017  to  4.97  percent,  6.83  percent,  and  9.25 percent, respectively in October 2018.

As part of broader reforms of the monetary policy framework of the Bank, the Central Bank has started issuing its own bills for liquidity management beginning October 2018. In addition, the Bank has also introduced the interest rate corridor comprising overnight lending and deposit facilities.

Banking Sector

The banking sector remains fundamentally sound. The industry remains highly capitalize, liquid  and  profitable.  The  industry  registered  asset growth of 15.8 percent in the year to end-September  2018. The asset quality  has  also  improved.  Non-performing  loan  ratio  stood  at  4.7 percent, lower than 5.9 percent reported at the previous MPC and 10.2 percent in the same period last year.

The risk weighted  capital  adequacy   ratio  stood  at  33.6  percent, significantly   higher  than  the  statutory   requirement  of  10  percent. Liquidity ratio was 98.48 percent in September 2018, also remains well above the requirement of 30 percent.

Development in Monetary Aggregates

As at end-September 2018, money supply grew by 22.4 percent, higher than 20.0 percent recorded a year earlier. The net foreign assets of the banking system expanded to D9.4 billion or by 33.1 percent during the period. The net foreign  assets  of  the  Central  Bank  and  commercial banks increased to D3.8 billion and D5.6 billion or by 4.0 percent and 64.4 percent respectively.

The banking system’s net domestic assets increased to D22.7 billion or by 18.4 percent  following  a  contraction   of  6.7  percent  at  end- September  2017. Claims  on  government,  net, grew by  14.5  percent relative to a growth rate of 3.2 percent a year ago.

Private sector   credit   expanded   by   robust   28.2   percent   at   end- September  2018 compared  to a contraction  of 12.3 percent a year ago.

Reserve money growth slowed largely reflecting decline in the Bank’s net claims on government. As at end-September 2018, reserve money grew by 11.8  percent,  lower  than  29.3  percent  recorded  last  year. Central Bank financing of fiscal deficit remains zero in November 2018.

Price Movements

Inflation as measured by  the  National  Consumer  price  Index  (NCPI) remained largely  subdued.  According  to the latest release  from  the Gambia   Bureau   of  Statistics   (GBOS),  inflation   decelerated   to  6.5 percent in October, 2018 from 7.4 percent a year ago, thanks to the decline in consumer food inflation.

Food inflation,   which   is   the   main   driver   of   headline   inflation, decelerated to 6.5 percent in October 2018 from 7.9 percent last year. Price indices of all the components  of the food basket declined with the exception of fruits and nuts. Non-food inflation, on the other hand, edged up slightly to 6.8 percent from 6.7 percent  during  the review period. The marginal increase in non-food inflation is attributed largely to  the  rise  in  price  indices  of housing,  fuel  and  lighting,  hotels  and restaurants, transportation, health, furniture, and education.

Inflation Outlook

The outlook for inflation is a further  deceleration  towards  the  Bank’s medium term target of 5 percent. This is premised on the following:

  • The exchange rate of the dalasi is projected to remain broadly stable supported by improved confidence and supply conditions in the foreign exchange market.
  • The  Bank’s  Business  Sentiment  Survey  indicated  that  inflation expectations are well anchored with majority of respondents projecting subdued inflationary environment.
  • Pressures from global food prices are expected to remain mild.
  • Monetary   and  fiscal   policies   will  remain   prudent   and  well- coordinated.

However, there are risks to the outlook:

  • Global inflation is accelerating which may put upward pressure on prices of imported goods.
  • The rising interest rates in advanced economies and stronger U.S. dollar in the international market.
  • Increase    in   domestic    energy   prices   may   affect   inflation expectations.

Decision

Taking the above factors in to consideration, the Monetary Policy Committee has decided to keep the monetary policy rate unchanged at 13.5 percent.

The Committee also decided to maintain the overnight deposit rate at 2.0 percent.

Information Note

The next  Monetary  Policy  Committee   (MPC)  meeting   is  scheduled   for February 27, 2019. The meeting will be followed by the announcement of the policy decision on February 28, 2019.

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