Tuesday, September 26

Opinion: Our Economic Hardships

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Dr. Ousman Gajigo, Former ADB Official

By: Dr. Ousman Gajigo

It is no secret that the economic conditions in The Gambia are hard. If you talk to the average Gambian citizen today about their living standard, you are likely to hear painful stories about the rising cost of living amidst stagnating incomes. This extends to even public sector employees. If one talks to any business owner, they also likely to point to rising cost of goods, which is caused by the constant depreciating Dalasi. These two vantage points – from the two key pillars of any modern economy – are unsurprisingly very related in the Gambian context.

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Inflation rate is currently almost 18%. The same point last year, it was 12%. Three years ago this month, it was about 8%.Inflation of food items is even worse and has exceeded 20%.Over the past three years, the income per person in The Gambia grew a rate of only 2% per annum. In other words, the real income in the country has been falling. It is therefore not surprising that the average Gambian is crying about the rising cost of living because actual standard of living has been falling rapidly. 

One does not have to be a business owner to be aware of our constantly depreciating currency. Currently, the dalasi/US dollar exchange rate is about 60. Three years ago this month, it was about 50. This slide in value against the dollar mirrors the dalasi’s exchange rate with other currencies such as the CFA franc, the euro and the pound sterling. Why is our currency constantly falling in value against those of our trading partners?

Rising prices and the almost constantly depreciating currency can be linked to one major proximate cause. The Gambia’s trade with other countries is composed of almost wholly of imports. The country hardly exports any goods. In 2021, our imports of goods and services was over $700 million.  In the same year, the value of the country’s exports was about $150 million, and as a percentage of our GDP, it was only 6.5%. That was the lowest the export share of GDP has been for The Gambia since 1970. The country has consistently run a trade deficit.

When people remark that The Gambia is an imports-based economy, it is a fact based on the above reality. And it is not a compliment. This imports-based economy can explain why the dalasi is almost always depreciating. In simple terms, the value of a currency is determined by supply and demand. The higher the demand relative to supply, the higher its value against other currencies. The demand for a currency comes from a country’s exports (not exclusively), which causes other countries to demand the currency and increases its value. When a country exports very little but imports a lot, its currency will fall in value relative to the currencies of its trading partners. This is what is happening in The Gambia. 

This provides an explanation for why the country’s inflation rate is high and rising. Because we import almost everything that we consume and we have to purchase that with our dalasi, which is constantly falling in value relative to other currencies, our businesses would need more dalasi to buy the same quantity of goods. The only way for them to stay in business or just to break even is to raise the prices of imported goods.

The inflation rate in the country is computed based on a carefully selected basket of goods and services that a typical household consumes. It is the rate of changes in the composite prices of these goods and services that gives us the inflation rate. Half of the goods and services in this typical consumption basket in The Gambia is composed of food items, almost all of which are imported. So when the Gambian Bureau of Statistics (GBOS) calculates the inflation rate, a large share of those goods in that basket of goods is essentially imported items. So, in a way, our inflation rate is almost all imported.

The last point is usually highlighted by the officials as a way of excuse as if to say there is nothing the government can do aboutour current economic hardships because its source is external. This is disingenuous. What we import or export, and how much, is determined by policies and economic planning. This gets to the ultimate case of why we are afflicted with the twin problem of inflation and currency depreciation. The basic structure of our economy remains as it was since independence, which is an economy that is based on primary exports and tourism, while there is largely an absence of any manufacturing. None of the three governments we have had up to date appear competent to change the economic structure of the country. As a result, the economy has almost no industrial activity, lacks diversity and has little resilience to any outside shocks.  

It is a fact that inflation has been going up globally. However, its severity varies greatly across countries due in no small part to how various economies’ structures make them resilient. So, nocountry is completely at the mercy of international events or trends or shocks. To appreciate the feasibility of addressing the country current problems, let’s consider what kind of goods we actually import. Among our top imports are vegetable oil and rice. On average, these two items take up about $150 million per annum. These are items that can be produced locally if the right policies are in place. Now suppose that the imports of these two items are reduced by about 60%. That alone would increase our gross domestic product by at least 5%. Because of thiscorresponding decrease in our imports, it would lessen thedownward pressure on our currency. And since these two items comprise a significant proportion of goods consumed by the typical Gambian, the inflation rate growth would be significantly curtailed.

Of course, going from importing a good to producing it locally does not happen overnight. It requires an understanding of current reality, its causes, the formulation of appropriate policies, re-orienting actions towards the new goals and executing plans, among others. In effect, a government that has an understanding of the problems of an imports-based economy and is determined to changed this reality would be operating in a way that is recognizably different from what we are witnessing with the Adama Barrow government.

Our current economic malaise is in fact addressable with implementable policies. We are not a small vessel completely adrift at sea at the mercy of elements beyond our control as the current government would want you to believe. No government can control global tides – certainly, not the officials of a small, poor country like The Gambia. But with competent stewardship, the country can be put on a favorable growth trend. All the country needs is competence at the top and high-level policymakers that have the public interest at heart.