FISCAL DEVELOPMENTS AND THE AGRICULTURE SECTOR Public Expenditure Review Update

Transcription

1 Public Disclosure Authorized THE GAMBIA Report No. XXX-GM GM Public Disclosure Authorized FISCAL DEVELOPMENTS AND THE AGRICULTURE SECTOR Public Expenditure Review Update June 2006 Public Disclosure Authorized PREM 4 Africa Region Public Disclosure Authorized Document of the World Bank

2 TABLE OF CONTENTS 1. THE MACROECONOMY AND FISCAL POLICY... 1 Introduction... 1 Macroeconomic Performance Fiscal Performance Budget PRSP Expenditures Domestic Debt THE AGRICULTURAL SECTOR Tables Introduction Sectoral Comparison Economic Classification Administrative Classification Groundnut Sector Development Expenditures Research Extension Services Input Supplies (Fertilizers) Decentralization Conclusion Table 1.1: Key Macroeconomic Indicators, Table 1.2: Central Government Operations by Economic Classification... 7 Table 1.3: Domestically Financed Expenditures by Administrative Classification... 8 Table 1.4: Domestically Finance PRSP Expenditures Table 2.1: Recurrent Budget Allocations of PRSP Priority Sectors Table 2.2: Cross-Country Comparaison of Public Expenditures on Agriculture Table 2.3: DOSA Recurrent Expenditures by Economic Classifications Table 2.4: ANR Recurrent Expenditures by Department Table 2.5: Government Support to the Groundnut Sector Table 2.6: 2006 Agriculture Development Budget by Projects Table 2.7: 2006 Agriculture Development Budget by Programs Table 2.8: 2005 NARI Research Programs Table 2.9: Funding Shares for Public Agricultural Research in SSA Countries Table 2.10: Government Supplied Fertilizers Table 2.11: DOSA Staff Allocations i

3 Figures Figure 1.1: Sectoral Growth... 2 Figure 1.2: Monetary Developments... 3 Figure 1.3: Current Account Balance... 4 Figure 1.4: Domestic Revenues, Figure 1.5: Domestic Revenues, Figure 1.6: Recurrent Expenditures, Figure 1.7: Domestic Debt Figure 1.8: Fiscal and Monetary Causes of Domestic Debt Increases Figure 1.9: Domestic Debt Projections Figure 2.1: DOSA Actual Expenditures Figure 2.2: DOSA Budget Execution Rates Figure 2.3: Agriculture Development Budget by Programs Boxes Box 1.1: Comparaison of Budget Outturn Between Education and Health... 9 Annexes Annex 1: Estimate of Operating Costs for DAS Extension Services Annex 2: Estimate of Operating Costs for DLS Extension Services ii

4 Currency Equivalents Currency Unit = Dalasi (GMD) US$1 = GMD (as of June 27, 2005) Fiscal Year January 1 December 31 ACRONYMS AND ABBREVIATIONS ACS ACU AGD CBG CED CRD DAS DLDM DLS DOS DOSA DOSFEA DOSLG&L DT EC FAO GIPFZA GLF HIPC ICRG IFMIS PAC PER PRER PRGF PRSP RA SSA SD SDR Administrative and Client Support Aid Coordination Unit Accountant General s Department Central Bank of The Gambia Customs and Excise Department Central Revenue Authority Department of Agricultural Services Directorate of Loans and Debt Management Department of Livestock Services Department of State Department of State for Agriculture Department of State for Finance and Economic Affairs Department of State for Local Government and Lands Directorate of Treasury European Commission Food and Agriculture Organization The Gambia Investment Promotion and Free Zones Agency Gambia Local Fund Heavily Indebted Poor Countries International Country Risk Guide Integrated Financial Management Information System Public Accounts Committee Public Expenditure Review Poverty Reduction Expenditure Reports Poverty Reduction and Growth Facility Poverty Reduction Strategy Paper Revenue Authority Sub-Saharan Africa Spending Department Special Drawing Rights Vice President: Gobin T. Nankani Country Director: Madani M. Tall Sector Manager: Robert Blake Task Team Leader: Hoon S. Soh iii

5 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 This PER Update is the third in an annual series of joint PERs which started in 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. iv

6 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 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 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. v

7 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 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 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 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 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. vi

8 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 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. vii

9 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. Research (National Agricultural Research Institute (NARI)). The major findings are: (i) research on livestock, fisheries, marketing and land tenure are relatively neglected with respect to NARI s long term strategy; (ii) overall funding is low compared to other SSA countries; and (iii) personnel costs are excessive compared to other SSA countries. Further analysis would be required to determine the impact of NARI s research, the effectiveness of linkages with extension services, and the potential for public and private enterprises to contribute to agricultural research. Extension Services. The analysis indicates that the level of staffing is adequate according to the ratio of farming households to extension workers targeted by the authorities. By contrast, it appears that budget allocations are less than the minimum operating expenses required for the extension workers. Based on unit cost calculations, the 2006 budget allocations cover only 17.9 percent of crop extension s minimum requirement, and 20.0 percent for livestock extension. The authorities had long proposed consolidating the crop and livestock extension service departments, but progress has been slow. Such a consolidation has the potential for cost savings. It would have to overcome institutional rigidities in which extension services for crops and livestock remain largely separated into the two line departments headed by two national directors. Inputs (Fertilizers). The government directly supplies most fertilizers in the country. The prices on these fertilizers are subsidized by between 30 and 35 percent, according to industry estimates. The authorities directly source and distribute the fertilizers. Such heavy government interventions have undermined the ability of the private sector to develop private distribution networks and sell inputs on flexible terms, for example on the basis of informal credit arrangements or in exchange for crop. A gradual and transparent process of withdrawal would allow the private sector to develop its capacity to supply the market. The first step that can be taken immediately is for the government to subcontract private firms to import and distribute fertilizers. Decentralization. The Local Government Act (2002) and the Local Government Finance and Audit Act (2004) provide the legislative framework for extensive decentralization of the central government. DOSA has already initiated significant deconcentration of its services. As a result, approximately a third of its staffs are deconcentrated. DOSA s eventual goal is to have 60 to 70 percent of the staffs in the field. A concrete implementation plan with specific milestones would facilitate this process. One viii

10 bottleneck is the lack of capacity of local governments. Local councils generally lack the capacity to manage increased resources. ANALYTICAL NEXT STEPS Agriculture Sector Analysis. The authorities are currently developing the agriculture sector strategy. This should be based on a comprehensive analysis of the latest sector developments, including identification of key sector constraints. Budget Outturn Data. The lack of recent and reliable data on budget outturn continues to hamper the PER analysis. The priority is to clear the large backlog of public accounts. An Integrated Financial Management Information System (IFMIS) is currently being implemented which should provide timely public accounts. Civil Service Capacity. The recent continued decline in the shares of wages and salaries raises the prospects that public sector capacity could be under-resourced. This concern was corroborated in a preliminary study which indicated that wages and salaries of civil servants compare poorly with the private sector and civil society organizations. 1 The next step is to conduct a comprehensive assessment of civil service capacity which could be the basis for a civil service reform program. Poverty Analysis. The field work for the latest household expenditure survey was conducted in However, the data preparation and basic analysis are still ongoing. Once the data files are completed, they can be used to conduct poverty impact analyses of public expenditures. 1 Glocoms, Inc., The Strategy for Improving Recruitment and Reducing Attrition in the Civil Service in The Gambia, Capacity Building for Economic Management Project, The Gambia, report no. CBEMP-04-C- 003, April ix

11 1. THE MACROECONOMY AND FISCAL POLICY INTRODUCTION 1.1 The macroeconomic environment continued on its stable path in recent years. The authorities have gradually tightened 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. Nevertheless, such prudent policies will have to be maintained for an extended period in order to decisively break the pattern of stop and go policy regimes of the past. This would create and sustain expectations for a stable macroeconomic environment which promotes a private sector led growth. 1.2 The key challenge in 2006 will be to contain public expenditures in the face of major expenditure items such as the African Union summit meeting and the presidential election. The authorities have also targeted in 2006 the establishment of the Gambia Revenue Authority and the implementation of the Integrated Financial Management Information System (IFMIS). Both are major structural reforms which should contribute towards the strengthening of public financial management. In the medium term, a key objective will be to reduce domestic borrowing and the domestic debt by continuing with fiscal consolidation. 1.3 The key findings of this chapter are: Recent fiscal and monetary policies have generally been prudent, but 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. The current account deficit has widened considerably, largely due to an increase of imports. Debt service reached a peak of 46.9 percent of recurrent expenditures in 2005, crowding out other expenditures. The shares of domestic expenditures on social services and economic services declined in 2005 as a result of the high debt service, and in the 2006 budget as a result of expenditures for the African Union (AU) Summit and the presidential election. PRSP related domestic expenditures declined in recent years, particularly expenditures for basic health services. Recent increases of the domestic debt to 35.5 percent of GDP at end-2005 were in large part due to monetary operations. 1

12 Without additional principal repayments, sustained domestics saving of 1.4 percent is needed to reduce domestic debt to 15 percent of GDP by 2015, the average of non-cfa SSA countries. 2 MACROECONOMIC PERFORMANCE 1.4 A large and unbudgeted fiscal expansion in 2001, low rainfalls in 2002 and a large expansion of the money supply in 2002 and 2003 were some of the major factors which destabilized the economy in the early years of the 2000s. In particular, the economy shrank in Table 1.1: Key Macroeconomic Indicators, Real GDP growth (market prices) Inflation (period average) Real effective exchange rate (period avg) Avg real interest rates (90 day T-bills) Overall fiscal balance (% of GDP) Basic primary balance (% of GDP) Government NDF (% of GDP) Domestic debt (% of GDP) Broad Money Growth Sources: IMF, DOSFEA 1.5 In more recent years, the authorities have maintained significantly tighter fiscal and monetary policies, as evidenced by the large primary balances, substantially reduced money supply growth, and significantly increased interest rates before they were lowered towards the second half of As a result, the inflation rate fell to single digits, the exchange rate stabilized, and economic growth has resumed in the five to six percent range. Figure 1.1: Sectoral Growth (Annual Percentage Change) Agriculture Industry Services Source: IMF 2 Domestic saving refers to net principal repayment of the domestic debt. Debt projections are based on assumptions on GDP growth, interest rates and monetary operations. The details of the estimation are outlined in the subsection, Domestic Debt, pages 22 to 25. 2

13 1.6 Annual broad money growth averaged 13.4 percent from 1996 to 1999 then rose to 33.2 percent from 2000 to 2003, causing inflationary pressure. Central Bank lending to the government and monetization of Central Bank losses were the principal causes of the broad money growth. In recent years, annual broad money growth slowed to 18.3 percent in 2004 and 9.4 percent in The deceleration in broad money growth was driven by a sharp reduction in the annual growth of reserve money from 62.7 percent in 2003 to 11.0 percent in In order to control reserve money growth in the face of an upsurge of foreign capital inflows, the Central Bank issued 1,070.3 million dalasis of treasury bills on a net basis in 2004, equivalent to 8.9 percent of GDP. 1.7 The large issuance of treasury bills limited monetary growth, but as a consequence interest rates remained high, credit to the private sector was crowded out, and the domestic debt burden of the government significantly increased. The discount rate on the 91 days treasury bill fell from 31 percent at the end of 2003 to 27.4 percent at the end of 2004, but in real terms the rate increased because inflation decreased by almost 10 percentage points during In 2005, a relatively reduced issuance of treasury bills and further reduction of the inflation rate allowed the discount rate to fall to 8.5 by the end of the year. Figure 1.2: Monetary Developments (Annual Percentage Change) Source: IMF broad money reserve money private credit 1.8 The current account deficit has widened substantially in recent years. As a percentage of GDP, the current account deficit including official transfers averaged 3.0 percent up to 2003, but then sharply increased to 11.7 percent in 2004 and 14.5 percent in This sharp increase was largely the result of a significant increase of imports for the domestic market, causing a substantial widening of the trade deficit to 29.3 percent in The large current account deficit was financed by increased foreign direct investments and official loans. In particular, foreign direct investment averaged 2.9 percent of GDP up to 2003, then increased to 12.4 percent in 2004 and 10.1 percent in Most of the country s exports are reexports of goods that had previously been imported from abroad. Exports of domestically produced goods averaged only 17.6 percent of total exports, 16.7 percent of domestic imports and 5.1 percent of GDP. These low ratios indicate the country s lack of export competitiveness. The export of 3

14 groundnuts, the country s main export product, experienced a near collapse in 2005 mainly due to a poorly implemented reform of the groundnut sector marketing arrangement. A newly implemented market licensing system resulted in the award of only one license to a new operator, the Gambian Agricultural Marketing Cooperation (GAMCO), which experienced operational difficulties. Figure 1.3: Current Account Balance (Percentage of GDP) Source: IMF Trade balance CA excl off transfers CA incl off transfers 1.10 Although export diversification is a key objective in the PRSP, there has been little indication of progress. Non-traditional exports, defined as exports of domestically produced goods other than groundnuts, has stagnated in the past decade at 2.0 percent of GDP. The planned Diagnostic Trade Integration Study (DTIS) is an opportunity to analyze and identify constraints to economic diversification. Horticulture and agro-processing would be some of the options to consider in a diversification strategy which takes advantage of the country s existing agricultural base. Opportunities to further develop tourism, reexport and transit trade, and light manufacturing could also be explored, including through greater regional integration FISCAL PERFORMANCE 1.11 The estimated overall fiscal deficit including grants for 2005 was 8.6 percent of GDP, substantially greater than the budget target of 4.7 percent and the actual deficit of 5.7 percent in The fiscal deficit in 2005 exceeded the budget target by 3.9 percent of GDP mainly due to: (i) shortfall in tax on international trade by 1.2 percent; (ii) overshooting of domestic interest payments by 1.3 percent; (iii) overshooting of externally funded development expenditures by 2.1 percent; and (iv) extrabudgetary expenditures of 1.0 percent The authorities compensated for the revenue shortfalls and overspending mainly by reducing other charges by 1.4 percent and domestically funded development expenditures by 0.7 percent of GDP. Nevertheless, the authorities still had to increase domestic financing to 3.6 percent of GDP, overshooting the budget target by 1.5 percent. Government domestic borrowing had fallen to 0.5 percent of GDP in the previous year, the lowest since the mid-1990s. 4

15 1.13 The basic primary balance in 2005 was 8.5 percent of GDP, similar to the 8.7 percent targeted in the budget. The primary balance was 9.6 percent of GDP in The substantial primary surpluses indicate the government s commitment to fiscal discipline. The large primary surplus in 2004 was mainly the result of a large increase of taxes on international trade. However, taxes on international trade decreased by 2.0 percent of GDP in 2005, at least partially due to the border troubles with Senegal experienced in the second half of With this decrease, taxes on international trade continued their long term decline from the 1990s Figure 1.4: Domestic Revenues, (Percentage of GDP) Income tax Goods and services International trade Source: IMF, DOSFEA 1.14 Taxes on international trade as a percentage of GDP have steadily declined since 1998 before increasing in In the same period, taxes on income and on goods and services gradually increased since 2001 by approximately 2.0 percent of GDP. Taxes on international trade ranged between 22 to 24 percent of imports of good up to 2001 before steadily declining to 16.7 percent in By contrast, imports of goods as a percentage of GDP increased sharply since Hence, the increase of taxes on international trade in 2004 was mainly the result of larger imports as opposed to improved tax collection efforts. Similarly, taxes on international trade declined in 2005 mainly as a result of reduced imports as a percentage of GDP. Figure 1.5: Domestic Revenues, Tax on int trade (% of imports) Imports goods (% of GDP) Source: IMF, DOSFEA 5

16 1.15 Interest payments continued their upward trend in 2005, recording its highest level in recent years. Interest payments in 2005 approximately doubled interest payments in 2001, both in terms of percentage of GDP which increased from 4.5 percent to 8.6 percent, and in terms of percentage of total recurrent expenditures which increased from 23.7 percent to 46.9 percent. Domestic interest payments, at almost four-fifths of total interest payments, dominate external interest payments. Figure 1.6: Recurrent Expenditures, (Percentage of total recurrent expenditures) Wages and salaries Other charges Interest payment Source: IMF, DOSFEA 1.16 The authorities have responded to the increasing share of interest payments by reducing the shares of wages and salaries and operations and maintenance. The share of wages and salaries decreased from 34.6 percent of total recurrent expenditures in 2000 to 22.8 percent in 2005, while the share for other charges decreased from 40.3 percent to 30.3 percent in the same period. Other charges include goods and services, and current transfers to domestic public agencies and international organizations Extrabudgetary expenditures amounted to 1.0 percent of GDP in 2005 and 5.4 percent of total recurrent expenditures. They consisted of purchases of two airplanes to be used against locusts, ECOWAS arrears and an emergency loan to the Gambia International Airline. The extrabudgetary expenditures approximately equal half of the reduction in domestic spending on other charges and on development expenditures. Essentially, the extrabudgetary expenditures resulted in a larger than necessary reduction in these other expenditures 1.18 In terms of administrative classification, in 2005 most of the Departments of State and major public agencies had their share of domestically financed expenditures reduced compared to their budget allocations. The main cause was the higher than expected debt service. 3 The estimate for debt service in the 2005 budget was Note that the analysis of budget outturn in 2005 is based on preliminary figures constructed directly from the cash books. More reliable figures are not available given the large delays in producing the public accounts. Total expenditures based on the preliminary figures are less than the IMF figures by approximately 90 million dalasis. It appears that the difference is mainly due to embassy expenditures. The PER analysis is limited to domestically funded expenditures given the unreliability of available data on externally financed expenditures, such as those from donor funded projects. In The Gambia, domestic funds account for all recurrent expenditures and a minor portion of development expenditures. 6

17 percent of total domestically financed expenditures, whereas actual debt service was 47.3 percent. Table 1.2: Central Government Operations by Economic Classification (Percent of GDP) 2003 Actual 2004 Actual 2005 Budget 2005 Actual 2006 Budget Revenue and grants Domestic revenue Tax revenue Direct tax Domestic tax on goods and services Tax on international trade Nontax revenue Grants Expenditures and net lending Current expenditures Wages and salaries Other charges Interest External Domestic HIPC expenditures Development expenditures and net lending Development expenditures External Loans Grants Domestic (GLF) HIPC expenditures Net lending Extrabudgetary expenditures Contingency Overall balance Basic primary balance Errors and omissions Financing External (net) Domestic (net) GDP (million of dalasis) Source: IMF, DOSFEA 1.19 After debt service, general administrative Departments of State had the largest share at 27.9 percent of total expenditures. This share excludes the head item miscellaneous. 4 Social services had a share of 17.5 percent, and economic services had 6.6 percent. 4 Miscellaneous items in 2005 budget mainly consisted of contingency funds, subvention to the Revenue Authority, settlement of confirmed outstanding debt, and loss in exchange. Spending on most of these items did not become necessary in For example, the establishment of the Revenue Authority was delayed to

18 1.20 Although all three major administrative categories experienced shortfalls in actual spending compared to their budget allocations, the shortfall for general administration was marginal when miscellaneous items are excluded. In fact, its share increased when debt services are excluded from the total. Hence, it appears that mainly spending on social services and economic services was reduced in response to larger than expected debt services, while spending on general administration as a whole was largely protected. Table 1.3: Domestically Financed Expenditures by Administrative Classification (Percentage of Total) 2004 Budget 2005 Budget 2005 Actual 2006 Budget General Administration Office of President Finance (DOSFEA) Interior Local government Foreign Affairs Defense Governance agencies Pensions and Gratuities Miscellaneous Economics Services Agriculture Water resources Fisheries Works, Const & Infra Trade, Industry Tourism Communication, IT Social Services Education Health Youth and Sports Debt service Total (millions dalasis) 2, , , ,666.9 Source: GOTG budget reports and cash books The Department of State (DOS) which spent the most resources was Education. Finance, Interior, Foreign Affairs and Health were also among the largest spenders. By contrast, Departments of State in economic services were among the smallest spenders. The authorities might want to reexamine the adequacy of the resources allocated to economic services given their importance in promoting private sector development. Governance related agencies such as the National Audit Office were also among the smaller spenders, although to some extent this reflects the inherent small size of the agencies In terms of budget execution, the Departments of State which experienced the largest shortfall of actual expenditures with respect to budget allocations were Agriculture and Health. The DOS for Agriculture spent only 57.8 percent of its budget allocation, and the Department of State for Health only 59.8 percent. By contrast, the 8

19 DOS of Education spent 90.0 percent of its allocation. The shortfalls are particularly disconcerting given that health and agriculture are PRSP priority areas. 5 Box 1.1: Comparaison of Budget Outturn Between Education and Health The large shortfall in spending by Health contrasts sharply with the nearly full spending by Education of its budget allocation. The difference mainly arises from spending on salaries and wages and on development expenditures. Education spent more on salaries and wages than it was allocated. By contrast, Health spent 69.2 percent of its allocation for salaries and wages. Given that budgets for salaries and wages are estimated on the basis of the full complement of positions, the shortfall could indicate difficulties experienced by Health in personnel recruitment Domestically Financed Expenditures for Education and Health (Millions of dalasis) Education Health Allocation Outturn Allocation Outturn Recurrent Salaries and wages Other charges Capital expenditures Development Salaries and wages Other charges Capital expenditures The share of salaries and wages in recurrent expenditures also differed significantly between the two Departments of State. Whereas Education spent 70.2 percent of its recurrent expenditures on salaries and wages, Health spent only 19.4 percent. The difference seemed to have been mainly due to the following reasons: (i) subventions to hospitals, which account for 43.3 percent of other charges, include salaries and wages; (ii) medical inputs are inherently costly, such as pharmaceuticals and vaccines which account for 36.3 percent of other charges; and (iii) most of the medical doctors in the country working in the public sector are provided by foreign development partners and therefore do not create a burden on the government budget. With respect to domestically financed development expenditures, Education spent 74.6 percent of its allocation whereas Health spent only 7.0 percent of its allocation. All of the spending on development expenditures was for counterpart funding for donor projects Although most Departments of State had their spending reduced from their allocations, there were some exceptions. The DOS for Foreign Affairs spent 6.0 percent of total domestically financed expenditures, whereas it was only allocated 4.6 percent. In addition, DOS for Defense spent slightly higher than its allocation. Note that both are in general administration In complete contrast to the distribution of recurrent expenditures, Departments of State in economic services received the largest share at 59.7 percent of total domestically financed development expenditures, followed by social services at 22.4 percent and general administration at 18.8 percent. The rate of spending with respect to allocations was also highest for economic services, then social services and finally general administration. 5 Finance also experienced a large shortfall in actual expenditures with respect to its allocation, but it appears that this was mainly due to the fact that its allocation in 2005 was increased from the previous year. Finance s share of actual expenditures in 2005 was approximately the same as its share of budget allocations in

20 1.25 In terms of the Departments of State, there were two striking features about domestically financed development expenditures: (i) the DOS of Works, Construction and Infrastructure (WC&I) spent 45.4 percent, or nearly half, of the total; and (ii) the DOS of Health and the governance agencies spent only 7.0 percent of its allocation, by far lowest spending rate. All of the development expenditures for WC&I were for road construction and maintenance. The next two largest shares were for Education and Trade and Industry, whose shares combined with WC&I represented 82.1 percent of total development expenditures. Hence, domestically financed development expenditures are highly concentrated. With the recent agreement on a large EU project on roads, the authorities would be able to consider reallocating their own funds away from road construction into other areas. However, at the same time it is critical that road maintenance is adequately funded BUDGET 1.26 The 2006 budget sets several ambitious objectives for the authorities. The targeted overall deficit is 3.0 percent of GDP lower than the average budget outturn of the three previous years, and 5.3 percent of GDP lower than budget outturn of the previous year. In addition, the targeted basic primary surplus is 10.0 percent of GDP, 1.5 percent of GDP higher than the previous year The 2006 budget indicates that the lowering of the overall deficit will be achieved mainly through higher domestic revenue, lower domestic interest payments, and lower externally funded development expenditures compared to the budget outturn of the previous year. 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. The increase in domestic revenue is expected to come entirely from higher domestic tax on goods and services and on international trade. In fact, it is expected that taxes on domestic goods and services will increase by more than 50 percent Total expenditures and net lending are expected to decrease from 30.1 percent of GDP in the budget outturn of 2005 to 26.1 percent of GDP in the 2006 budget. This large decrease is expected to come almost entirely from the decrease in the domestic debt service from 6.8 percent to 5.0 percent of GDP, and from the decrease in externally funded development expenditures from 10.2 to 7.6 percent of GDP The expected large reduction in domestic debt service will mainly depend on interest rates on the domestic debt remaining at the lower levels recently achieved. 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 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, and assuming that nominal GDP grows at approximately 10.0 percent, the authorities limit net domestic financing to 1.4 percent of GDP as targeted in the budget, and monetary operations does not contribute more than 1.5 percent of GDP to the domestic debt It is difficult to assess the likelihood of achieving the lower level of externally funded development expenditures in 2006 without analyzing disbursement projections of donor projects. However, it should be noted that the authorities have traditionally 10

21 experienced difficulties in projecting external development inflows, and that they had underestimated the inflows by 2.1 percent of GDP in Regardless of the reliability of the projections, by definition the external inflows are fully funded and therefore do not create any financing needs The 2006 budget also indicates that the expected large reduction in debt services will allow the authorities to increase expenditures on salaries and wages, goods and services and current transfers by 1.0 percent of GDP, and still lower recurrent expenditures to 17.4 percent from 18.3 percent of GDP in the previous year. However, the costs of financing the planned African Union (AU) summit and the presidential election are estimated to be 1.7 percent of GDP. This is more than the expected increase in non-debt service expenditures, and therefore implies that in fact recurrent expenditures are reduced in the 2006 budget if costs related to the AU summit and the election are excluded As a result of the need to finance the AU summit and the presidential election, the share of general administration Departments of State in total domestically financed expenditures increases from 33.3 percent in the 2005 budget to 37.0 percent in the 2006 budget. By contrast, the share of economic services decreases from 10.1 percent to 8.2 percent, and the share of social services from 20.7 percent to 18.9 percent. However, these shares increase by 1.6 and 1.4 percents respectively compared to the shares in the 2005 budget outturn due to the expected large reduction of debt service Also as a result of the AU summit and presidential election, the share of PRSP expenditures in domestically financed expenditures is expected to decrease from 29.9 percent in the 2005 budget to 26.3 percent in the 2006 budget while the share of non- PRSP expenditures is expected to increase from 34.2 percent to 37.9 percent. The majority of the decrease comes from PRSP programs in basic social services and infrastructure, particularly health related expenditures. With respect to the 2005 budget outturn, the shares of both PRSP and non-prsp expenditures are expected to increase as a result of the expected decrease in debt service. PRSP EXPENDITURES 1.34 In contrast to progress achieved in the 2006 budget with respect to debt service, albeit mainly due to reduced domestic interest rates, preliminary evidence indicates that efforts to align public expenditures with PRSP objectives have been less successful. The share of PRSP related poverty expenditures in total domestically financed expenditures decreased from 29.9 percent in the 2005 budget to 26.3 percent in the 2006 budget. 6 By contrast, non-prsp related expenditures increased from 34.2 percent to 37.9 percent while the share of debt services remained approximately unchanged Among the five broad policy areas identified in the PRSP, basic social services and infrastructure received the largest share of PRSP expenditures, mainly due to education and health related expenditures. By contrast, funding local government and 6 The analysis of the poverty expenditures is based on the budget codes which identify PRSP related expenditures. This PER Update exercise organized PRSP expenditures according to the broad policy areas identified in the PRSP document. The previous PER Update exercise substantially revise the PRSP budget codes. These codes should now be further refined and aligned with the PRSP II. 11

22 community development, and cross-cutting programs has been neglected. Crosscutting programs cover gender, environment, nutrition and HIV/AIDS initiatives. Table 1.4: Domestically Finance PRSP Expenditures (Percentage of Total Domestically Financed Expenditures) 2004 Budget 2005 Budget 2005 Actual 2006 Budget Total PRSP Expenditures I. Macro stability/governance Public sector capacity building Governance and civil service reform II. Private sector led growth Agriculture and natural resources Regulatory and control services Extension services Research Water management Natural resources management III. Basic social services and infrastructure Education Improving access to basic education Improving quality of teaching & learning Upgrading teaching & learning materials Increasing duration of instruction time Increasing access to non-formal education Health Planning. monitoring and evaluation Support services to health delivery Increasing access & quality of basic health Social welfare programs Infrastructure (rural roads) ICT research and development IV. Local govt/community development Social funds for poverty reduction Decentralization/local govt capacity building V. Cross-cutting programs Gender Environment Nutrition, population, HIV/AIDS Monitoring and Evaluation Non-PRSP spending Debt service TOTAL 2, , , ,666.9 Source: DOSFEA 1.36 Expenditures in the health sector experienced the largest decrease in PRSP expenditures, representing nearly a third of the overall decrease in the share of total PRSP expenditures. Among the PRSP sub-programs in health, expenditures related to increasing quality and access to basic health accounted for all of the decrease in health PRSP expenditures. Three other sub-programs which experienced large decreases in their shares were agriculture extension services, governance and civil service reform, and rural roads In comparing budget outturn to allocations in 2005, larger than estimated debt services crowded out both PRSP and non-prsp expenditures to similar degrees. Among the major PRSP policy areas, approximately half of the reduction came from basic social services and infrastructure, particularly health and rural roads. Agriculture and natural resources experienced the next largest reduction. 12