The Potential Impacts of the COVID-19 Food Relief Package

Since the outbreak of the COVID-19 pandemic, the government of The Gambia has adopted series of measures both to prevent and contain the spread of the virus, but also to dampens its effects on the Gambia’s economy, which went through series of lockdowns between March and September 2020 that affected economic activity; between mid-March and late July, the provision of nonessential services was halted that affected many people in The Gambia and their livelihoods.

The measures undertaken by the government called for changed in budgetary commitments that affected the fiscal landscape. At the start of the pandemic, the government reallocated GMD 500 Million of the 2020 budget to the Ministry of Health and other relevant Ministries Departments Agencies (MDAs) for implementing the government prevention and containment measures against the pandemic. A significant portion of these funds went into payment for quarantine facilities and procurement of vehicles among other things. Since the lockdown measures restricted economic activity, they were expected to affect food security situation of households, especially the vulnerable ones. As a result, the government deemed it necessary to rolled out a nationwide food distribution package that targeted 84 percent of households. To fund this package, the government had to do further virements or budgetary reallocations. In particular, GMD 800 Million were reallocated from the budget on debt repayment to fund the food relief package; which was possible because of the debt moratorium granted by the multilateral lenders such as the IMF, World Bank, among others . In July 2020, the National Assembly approved a Supplementary Appropriation Bill to the tune of 2.3 billion as additional measures to curb the socioeconomic impact of the pandemic (IMF, 2021). In this section, we review the macroeconomic impacts of the food relief package.

At the macrolevel, the food relief package may impact the country’s balance of payment (BoP), government spending, debt structure, credit rating among others. Majority of the of the food products consumed in The Gambia are imported as the local production is unable to meet the domestic demand. Given that the food relief package is an unanticipated shock in the demand for the three food items (rice, sugar, and oil) that were distributed, it could increase import of the food products as well as the country’s BoP. A worsening of the country’s BoP problems will lead to further needs for budgetary supports or borrowings to address the shortfalls. In 2018, Gambia’s BoP was about USD 78 Million (about 4.7% of GDP). As a result, the food aid program may increase government borrowing in the future, thus, affecting the future debt situation of the country. In 2019, the debt service of external debt (based on World Bank estimates) was about USD 47.6 Million (about GMD 2.3 Billion), which shows that debt financing takes a significant portion of the government budget.

Therefore, the food support could also increase public debt via increase in government expenditures. Estimates from the Ministry of Finance indicates that fiscal deficit (excluding grants) increased by 9% between 2019 and 2020 and the increase is attributable to increase in government expenditure due to government’s COVID-19 emergency response including the food relief package. An increase in government spending without a commensurate increase in revenue (including grants) will require more borrowing by the government to address the deficit, which consequently will increase the public debt stock. Increase in government borrowing, particularly from the private sector, may crowd out private sector investment.

As the food relief program and other government COVID-19 interventions can affect the public debt stock, it will affect public debt sustainability. Some creditors like IMF have exempted some of their vulnerable member like Gambia from amortization and interest payment outstanding debts until April 2022. But other creditors such as the G-20 lenders, Paris Club, and China introduced just one year debt service suspensions, meaning that all debts owed to these creditors will accumulate after the elimination of the one-year suspension. Private creditors, however, did not agree to any form of short-term debt relief. Hence, all debts owed to such creditors will continue to accumulate interest (Ocampo, 2021). Although not clear how much credit does the government of The Gambia take from these different sources, it is apparent that any expansion in public spending beyond the level that can be covered by debt relief provided by IMF may expand the public debt stock.

However, reports from the Ministry of Finance indicates that the increase in government spending didn’t lead to an increased in public debt. In September 2020, the debt to GDP ratio was 71.8% relative to 81% in 2019 (2020 budget speech). The government attributes the lack of increase of the public debt stock to the various financial supports received from the IMF, World Bank, ECOWAS Bank for International Development (EBID), among others. But such arguments ignore the fact that some of the supports (example debt suspension or deferred debt payments) may not increase public debt in the short term, but will increase it in the medium to long term. For instance, the government received about USD 23 Million credit from the IMF through the IMF Rapid Credit Facility (RCF), which provides low-access, rapid, and concessional financial assistance to low-income countries (LICs) facing an urgent balance of payments need, with low conditionalities. The RCF has a zero interest rate and a grace period of 5.5 years with a maturity of 10 years (IMF, 2021b). Therefore, this credit may not increase the debt stock now, but will increase it in the future. Debt suspensions will have a similar effect on public debt stock. Increase a public debt to unstainable levels, as it was the case before the government came up with a debt strategy (see MoFEA, 2017) that reduced the debt to GDP ratio substantially, will affect the creditworthiness of the government and some restructuring will be required to make the debt level sustainable.

In light of the foregoing, the food relief program that contributed to the increase in public spending in 2020 may not affect public debt in 2021, but it can affect public debt in the long run. Hence, debt sustainability strategies must be adopted post 2021 to ensure public debt does not rise beyond sustainable levels.