Fiscal Developments and the Agriculture Sector

Report No. XXX-GM

THE GAMBIA

FISCAL DEVELOPMENTS AND THE AGRICULTURE SECTOR

Public Expenditure Review Update

June 2006

PREM 4

Africa Region

Document of the World Bank

ii

TABLE OF CONTENTS

1. The Macroeconomy and Fiscal Policy 1

Introduction 1

Macroeconomic Performance 1

2005 Fiscal Performance 1

2006 Budget 1

PRSP Expenditures 1

Domestic Debt 1

2. The Agricultural Sector 1

Introduction 1

Sectoral Comparison 1

Economic Classification 1

Administrative Classification 1

Groundnut Sector 1

Development Expenditures 1

Research 1

Extension Services 1

Input Supplies (Fertilizers) 1

Decentralization 1

Conclusion 1

Tables

Table 1.1: Key Macroeconomic Indicators, 2001-2005 1

Table 1.2: Central Government Operations by Economic Classification 1

Table 1.3: Domestically Financed Expenditures by Administrative Classification 1

Table 1.4: Domestically Finance PRSP Expenditures 1

Table 2.1: Recurrent Budget Allocations of PRSP Priority Sectors 1

Table 2.2: Cross-Country Comparaison of Public Expenditures on Agriculture 1

Table 2.3: DOSA Recurrent Expenditures by Economic Classifications 1

Table 2.4: ANR Recurrent Expenditures by Department 1

Table 2.5: Government Support to the Groundnut Sector 1

Table 2.6: 2006 Agriculture Development Budget by Projects 1

Table 2.7: 2006 Agriculture Development Budget by Programs 1

Table 2.8: 2005 NARI Research Programs 1

Table 2.9: Funding Shares for Public Agricultural Research in SSA Countries 1

Table 2.10: Government Supplied Fertilizers 1

Table 2.11: DOSA Staff Allocations 1

Figures

Figure 1.1: Sectoral Growth 1

Figure 1.2: Monetary Developments 1

Figure 1.3: Current Account Balance 1

Figure 1.4: Domestic Revenues, 1995-2005 1

Figure 1.5: Domestic Revenues, 1995-2005 1

Figure 1.6: Recurrent Expenditures, 1995-2005 1

Figure 1.7: Domestic Debt 1

Figure 1.8: Fiscal and Monetary Causes of Domestic Debt Increases 1

Figure 1.9: Domestic Debt Projections 1

Figure 2.1: DOSA Actual Expenditures 1

Figure 2.2: DOSA Budget Execution Rates 1

Figure 2.3: Agriculture Development Budget by Programs 1

Boxes

Box 1.1: Comparaison of Budget Outturn Between Education and Health 1

Annexes

Annex 1: Estimate of Operating Costs for DAS Extension Services 1

Annex 2: Estimate of Operating Costs for DLS Extension Services 1

Currency Equivalents

Currency Unit = Dalasi (GMD)

US$1 = 28.38 GMD (as of June 27, 2005)

Fiscal Year

January 1 – December 31

ACRONYMS AND ABBREVIATIONS

Acknowledgement

The PER Update exercise was jointly conducted by the authorities, the Bank and FAO. The identification mission took place in October 2005, and the main field work took place during a mission in January 2006. This PER Update is the third in an annual series of joint PERs which started in 2004.

The January 2006 mission consisted of Hoon S. Soh (Task Team Leader, AFTP4), Satish Kumar (agricultural specialist, World Bank consultant), and Buddhika Samarasinghe (groundnut sector specialist, FAO consultant). Discussions were held with senior representatives of the Department of States of Finance and Economic Affairs (DOSFEA), the Department of State of Agriculture (DOSA), the Department of State of Trade and Industry (DOSTI), and various public and private agencies related to the agriculture sector. The mission undertook upcountry trips to engage local public and private representatives. Christopher Willford (MTEF technical adviser, DOSFEA) was mainly responsible for providing the budget data.

The exercise for the agricultural sector was significantly participatory. A series of workshops were held in which key departmental representatives providing inputs and participated in the discussions. The chapter on agriculture was jointly prepared by the authorities and the donor team. A more detailed report on the groundnut sector, which includes sectoral policy analysis, was separately prepared.

The report reflects the comments from the review meeting which took place in June 2006, particularly comments by the peer reviewers Jane Hopkins (Senior Agriculture Economist, AFTS4) and William Sutton (Agriculture Economist, ECSSD). The team would also like to thank the guidance provide by Robert Blake (Sector Manager, AFTP4), Madani Tall (Country Director, AFC14), and Iradj Alikhani (Country Program Coordinator, AFCSN). Josette Percival (ACS staff, AFTP4) provided editorial assistance.

Executive Summary

The objectives of this Public Expenditure Review (PER) Update are to analyze public expenditures of the overall budget and the agriculture sector in greater detail. This PER Update is the third in a series of PERs conducted jointly by the authorities and the donors. The first PER conducted in 2004 was a full PER which focused on analyzing overall government expenditures, public financial management capacity, and the education and health sectors. The second PER conducted in 2005 was a PER Update which limited its analysis to government expenditures and public financial management. This third PER is also an update, thus limited in scope.

The authorities prepared a sectoral PER of the agriculture and natural resources sectors in 2001. The second chapter of this PER Update is a partial update of the 2001 sectoral PER. It focuses only on the agriculture sector and excludes the natural resource sectors, and it does not analyze the sector strategy or the latest sector developments.

The topics were chosen through discussions with the authorities during an identification mission. The timing of the report was mainly dictated by data availability. However, the report can be easily incorporated into the budget preparation cycle which typically takes place in the second half of the calendar year.

The Macroeconomy and Fiscal Policy

The authorities have generally adhered to prudent fiscal and monetary policies since the economic downturn in 2002, resulting in a resumption of growth, lowering of inflation, and stabilization of the exchange rate. However, sustained fiscal consolidation is required in the long term in order to reverse adverse debt dynamics such that domestic debt is put on a sustainable path. This would expand discretionary fiscal space which allows greater flexibility in reallocating resources to PRSP related activities.

From 2003 to 2005, the primary fiscal balance increased from 3.6 percent to 8.5 percent of GDP, and the annual growth of broad money decreased from 43.4 percent to 9.4 percent. Inflation fell to single digits, the exchange rate stabilized, and annual GDP growth resumed in the five to six percent range. The current account deficit widened considerably, largely due to an upsurge in imports financed by large capital inflows. In order to sterilize the capital inflows, the authorities issued treasury bill up to 8.9 percent of GDP on a net basis, further increasing the domestic debt.

2005 Fiscal Performance. Although the primary balance remained a significant surplus, the overall fiscal deficit including grants increased to 8.6 percent of GDP due to a shortfall in tax on international trade, increased domestic debt service and donor project disbursements, and extrabudgetary expenditures of 1.0 percent. In response, the authorities reduced discretionary expenditures, and increased domestic financing to 3.6 percent of GDP.

Debt service continued their upward trend in 2005, increasing to 8.6 percent of GDP. Accounting for 46.9 percent of recurrent expenditures, debt service effectively crowded out spending on wages and salaries and operations and maintenance. The increasing debt service also reduced the recurrent expenditures of most Departments of State (Ministries) and public agencies compared to their budget allocations. However, spending on general administration as a whole was largely protected, while mainly expenditures on social services and economic services were reduced. This is reflected in the decrease of the share of PRSP related expenditures.

Nearly half of the domestically funded development expenditures were for roads projects. With the imminent start of a large road construction and rehabilitation project funded by the EU, the authorities could consider reallocating some of the government’s own funds to other priority areas.

2006 Budget. The 2006 budget maintains fiscal discipline. The targeted overall deficit of 3.0 percent of GDP and a basic primary surplus of 10.0 percent of GDP are both fairly ambitious. They will be achieved through higher domestic revenue, lower domestic interest payments, and lower externally funded development expenditures. In particular, the targeted domestic revenue for 2006 is 3.0 percent of GDP higher than the average budget outturn of the three previous years, and 2.0 percent of GDP higher than the previous year.

Domestic debt service is expected to decrease from 6.8 percent to 5.0 percent of GDP mainly due to lower domestic interest rates. The discount rates on the 90 day treasury bills had steadily decreased from 30.0 percent in December 2004 to 8.5 percent in December 2005. Although the rate has subsequently increased to 13.0 percent in April 2006, the targeted domestic debt services of 5.0 percent of GDP in 2006 should be roughly achievable as long as the average interest rates for the year remain approximately at 15.0 percent.

The key fiscal challenge is to contain expenditures for the African Union (AU) Summit meeting and the presidential election. As a result of these two expenditure items, the shares of spending on social and economic services decrease in the 2006 budget. They also result in a decrease in the share of PRSP expenditures, with the majority of the decrease coming from PRSP programs in basic social services and infrastructure, particularly health related expenditures.

Domestic Debt. Domestic public debt is one of the most critical policy issues in the country. It reached 35.5 percent of GDP at the end of 2005. By contrast, the average stock of domestic debt in 27 non-CFA SSA countries is 15 percent of GDP, while the median is only 10 percent.

As a percentage of GDP, the domestic public debt tripled in a little over a decade from 12.3 percent in 1994. Its explosive growth have mainly been due to government borrowing, but monetary operations have also played a major role in recent years, particularly in 2004 when the authorities sought to sterilize large capital inflow.

Simulations of domestic debt indicate that the authorities would be able to approximately maintain the current level of debt to GDP ratio by limiting annual domestic borrowing to 1.5 percent of GDP. Without additional principal repayments, sustained domestics saving of 1.4 percent would be needed to reduce domestic debt to 15 percent of GDP by 2015, the average of non-CFA SSA countries. Hence, sustaining fiscal constraint is critical. In addition, the domestic debt can be further reduced by repaying principals using any additional sources of funding, such as from future debt relief.

Agriculture Sector

Recurrent Expenditures. The Department of State for Agriculture (DOSA) receives a share of expenditures which is reasonably close to the SSA average, but significantly less than the average of all development countries.

There appears to be key structural imbalances in DOSA’s intrasectoral resource allocations:

(i) The share of inputs reached 31.1 percent in the 2006 budget, the largest share in the budget. It indicates the government’s increasing involvement in the supply of inputs, particularly fertilizers which are typically considered private goods. Responsibilities for such inputs could be transferred to the private sector, thus reducing public expenditures and increasing the public good component of agricultural expenditures.

(ii) The share of expenditures for extension services decreased from 73.8 percent in 2001 to 30.3 percent in the 2006 budget. Traditionally, the share of expenditures for the Department of Agricultural Services, responsible for crop extensions, was by far the largest and at times more than half of DOSA’s expenditures. This decrease raises concerns that extension services are under-funded. A more detailed analysis of extension services corroborates these concerns.

(iii) Preliminary figures indicate that the government has spent up to 134 million dalasis to support the groundnut sector during the past four years, equivalent to approximately 70 percent of the recurrent expenditures of DOSA, 0.3 percent of GDP, and approximately 2,350 dalasis per groundnut farming household. The authorities support the sector through equity investments, loans, subsidized fertilizers, and producer price support. In addition, they provide indirect support to the sector through government guarantees of loans. Despite significant expenditures, it does not appear that there have been noticeable improvements in sector performance or poverty levels among groundnut farmers.

Development Expenditures. Development expenditures for agriculture have been on a downward slide in recent years, decreasing from 2.1 percent of total expenditures in 2001 to 0.7 percent in 2005. The decline has been due to both lower budget allocations as well as lower budget execution rates. Further analysis would be required to identify the exact causes. They could be due to weaknesses in budget preparation, foreign aid coordination and project management.

The composition of DOSA’s 2006 development budget is consistent with a sector strategy based on both import substitution and export promotion. The emphasis on livestock and rice cultivation reflects policies to strengthen food security through import substitution. Projects on horticulture support a sector which has long been touted for its export potential. There is a risk that a strategy based on both import substitution and export promotion would be poorly implemented given limited resources and capacity. The agriculture sector strategy should further prioritize subsectors.