6 March 2014

Gambia: IMF /Gambia Government Views On Stabilizing the Dalasi

The depreciation of the Dalasi has been a major concern to the business community as well as the ordinary consumers who are every day being confronted with price increases which leads many to lack confidence in the economy, compelling this reporter to find out the views of the International Monetary Fund and Gambia Government on the stabilization of the Gambian Dalasi and rebuilding confidence in the economy.

According to the IMF Factsheet 2013, a two-pronged approach for tightening macroeconomic policies is needed to immediately stabilize the dalasi and rebuild confidence in the economy. First, tightening the monetary policy through an aggressive campaign to shift financing of government deficits back to the market, rather than central bank financing.

According to IMF, the weekly T-bills auctions should aim for issuances in excess of the government's net borrowing requirement, so that in going forward, the Central Bank Gambia reduces its current holdings and that rising yields would attract investor interest and stem-or possibly reverse-capital flight and dampen depreciation pressures.

The second objective, they said, is to achieve fiscal discipline. According to them, while monetary tightening is needed to stop the bleeding, adhering to the fiscal adjustment is needed to heal the wound and curtailing government borrowing in line with existing targets.

This is essential to restoring confidence that fiscal policy is returning to a sustainable path. Additionally, they went on to say, the government could take some highly visible actions for revenue building or cost cutting and that it is also important that the government establishes an effective communications strategy to inform investors and the general public of policy implementation.

In addition to tightening macroeconomic policies, the IMF went on to say that it is critical that recent exchange rate directives are rescinded and a flexible exchange rate policy is maintained. By imposing an over-valued exchange rate, they said, the directives create an expectation of an upcoming dalasi depreciation, which undermines the effectiveness of monetary tightening as a tool for containing or reversing capital flight.

An over-valued exchange rate would also seriously threaten The Gambia's competitiveness for the upcoming tourism season. The Gambia Authorities' view According to the Factsheet: The Gambian authorities agreed that a tightening of macroeconomic policies is needed to restore stability to the dalasi; however, steps taken thus far have differed from staff's advice.

The authorities' first step was to tighten monetary policy by increasing the policy rate twice (May and June 2013) and raising the reserve requirement on deposits (from 12 percent to 15 percent) in late June. Yields on T-bills have subsequently been driven up (by about 400 basis points). On the fiscal side, the authorities agreed to the importance of disciplined budget execution, but noted that it was difficult to fully control spending, particularly expenditures ordered by directives.

The authorities described the exchange rate directives as political decisions aimed at discouraging speculative elements in the market; they did not represent a switch to a fixed exchange rate regime.

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