Gambia Covid-19 Relief Package – Unintended Consequences & Macroeconomic Upshots

Report by Frederic Tending

Following the outbreak of the COVID-19 pandemic, the government of The Gambia adopted a series of measures both to prevent and contain the spread of the virus, but also to dampen 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 non-essential services was halted and this affected people’s livelihoods.

Gambia Covid-19 Relief Package – Unintended Consequences & Macroeconomic Upshots

Following the outbreak of the COVID-19 pandemic, the government of The Gambia adopted a series of measures both to prevent and contain the spread of the virus, but also to dampen 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 non-essential services was halted and this affected people’s livelihoods.

The World Bank, the International Monetary Fund and other development partners also provided technical and financial assistance to help The Gambia mitigate the impact of the pandemic.

The World Bank approved a COVID-19 Preparedness and Response Project for US$10 million in April 2020 for the Health sector. The World Bank sponsored Social Safety Net Project US$30 million was restructured in June 2020 to widen the cash transfer program to 60,000 households in The Gambia.

The Global Partnership for Education funded Emergency Education COVID-19 Response Project amounting US$3.46 million was approved in July 2020. The International Monetary Fund further approved a disbursement under the Rapid Credit Facility for US$21.3 million. The same institution added an Extended Credit Facility of US$47.1 million, and The Gambia joined the debt service relief under the Catastrophe Containment and Relief Trust for approximately US$ 2.9 million in April 2020.

The European Union (EU) disbursed US$19.4 million and the African Development Bank (AfDB) provided an additional US$7 million respectively as budget support grants in 2020. The Gambia is also participating in the Debt Service Suspension Initiative (DSSI).

On July 22, 2020, the National Assembly of The Gambia approved a supplementary appropriation (SAP) totaling GMD 2.85 billion which is nearly 3 percent of the GDP. The supplementary budget included additional provisions (0.5 percent of the GDP) allocated to a further possible emergency spending on health and food distribution as well as an economic stimulus package. The bulk comprised financial relief for the Tourism sector and State-owned Enterprises, and targeted public investment outlays to fill critical infrastructure gaps.

On April 16th 2021, the World Bank Board approved $8 million additional financing to provide The Gambia with safe and effective vaccine purchase and deployment.

An array of support that triggers new budgetary and fiscal commitments

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 and 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 roll 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 GMD 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 macro level, the food relief package may impact the country’s balance of payment (BoP), government spending, debt structure, credit rating among others. Majority 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. By October 2021, the total outstanding domestic debt stock has risen by D2.77 billion to D37.32 billion in the year to end-October 2021, compared to D34.55 billion in the corresponding period in 2020.

Rising debts, a threat to needed social expenditures

Speaking at the National Assembly, the Minister of Finance and Economic Affairs, Mamburey Njie, [insert date] stated that the economic impact of the COVID-19 outbreak would be a loss of GMD2.5 billion and that the economy will shrink to by 3 percentage points to 3.3 percent from a projected growth rate of 6.3 percent in 2020. This will also have implications on the budget and net domestic borrowing negatively impacting the concessionary fiscal stance the Government had been undertaking in recent years.

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 support (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.

In fact, when tabling the 2022 draft Budget estimate, the Minister of Finance, Njie, conceded that with a total projected to reach D32.1 billion, the 2022 government expenditure and net Lending will exceed Revenue (D29.8 billion) in 2022. Clearly, there will be a financing Gap of over D2.28 billion in 2022 compared to a gap of about D5.99 billion in 2021.

According to the World Bank, Potential savings through the Debt Service Suspension Initiative for The Gambia as a country at high risk of debt as a percentage of GDP is only 0.6 percent of the GDP.

Overall, evidence suggests that rising debt levels remain a threat to social expenditure. In 2019, The Gambia was one of 25 countries that spent more on debt service than on social spending on education, health and social protection combined. The Gambia spent over three times more on debt service than on social services.

The Gambia is among the Countries with high debt service to social spending ratios and high levels of monetary and multidimensional poverty (UNICEF-DAPM and Save the Children, 2020). The Debt service as percentage of GDP was 21.25 percent. Meanwhile, The Gambia’s combined spending on education, health and social protection spending as percentage of GDP was only 7.19 percent. The debt service as proportion of social spending is 3.33 percent.

According to UNICEF, The Gambia is among seven of 25 countries with the highest rates of multidimensional child poverty, with over 60 per cent of children severely deprived of at least one essential social service (namely, education, health, housing, nutrition, water or sanitation) (UNICEF-DAPM 2020).

In fine, 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.

The food relief program has therefore contributed to the increase in public spending in 2020. While the government argues it may not affect public debt in 2021, it can surely 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.