Third Gambia Economic Update Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential © 2023 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. 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Third Gambia Economic Update Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential Acknowledgements This update was prepared by the Macroeconomics, Trade and Investment Global Practice under the guidance of Keiko Miwa (Country Director, AWCF1), Theo David Thomas (Practice Manager, EAWM1), Daniela Marotta (Lead Economist, EAWM1, AFCE1), and Feyi Boroffice (Resident Representative, ACWF1). The report was prepared by a core team led by Ephrem Niyongabo (Economist, TTL, EAWM1) and comprised of Wilfried Anicet Kouame (Economist, EAWM1), Rafael Pardo (Financial Sector Specialist, EAWF1), Holti Banka (Senior Financial Sector Specialist, EFNFI), and Sering Touray (Economist, EAWPV). The report benefited from comments provided by Edouard Al-Dahdah (Program Leader, EAWDR), Daniela Marotta (Lead Economist, EAWM1, AFCE1), Theo David Thomas (Practice Manager, EAWF1), and Consolate Rusagara (Practice Manager, EAWF1). We also wish to thank the peer reviewers Katie Kibuuka (Financial Sector Specialist, ELCFN) and Mehwish Ashraf (Senior Economist, EEAM2) for their comments and suggestions. Sincere appreciation goes to Oscar Parlback (Consultant) for editing the report. Maude Jean Baptiste and Theresa Adobea Bampoe (Program Assistants, EAWM1) as well as Aji Oumie Jallow (Administrative Assistant, AWCF1) provided outstanding operational support and formatted the report. 2 Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential Preface This Third Edition of The Gambia Economic Update continues the practice of providing an annual assessment of recent economic developments in The Gambia, with a focus on a special topic. The objective is to inform the Government of The Gambia, the academic community, the public, the World Bank’s senior management, and development partners of the state of the country’s economy and the structural reforms required to address development challenges facing The Gambia. It contributes to the dialogue on policy options to enhance macroeconomic management and accelerate progress on the twin goals of eliminating extreme poverty and promoting shared prosperity in a context of state fragility. The first edition focused on ‘preserving gains’ in the context of the COVID-19 pandemic, while the second focused on ‘data for better human capital.’ The third Economic Update provided an assessment of recent economic developments, with a special focus on ‘driving financial inclusion’ in The Gambia. The focus on financial inclusion is justified by the low level of access to financial products and services in the country, and access to finance has been recognized as a key enabler for growth, employment, and poverty reduction. The report focused particularly on the constraints and opportunities of digitalization because digital financial services (DFS) have proven to be catalysts for financial inclusion, as recently highlighted in several countries. The report begins with a chapter on economic developments, with sections on growth, fiscal policy, public debt, the external sector, monetary developments and inflation, and poverty. Chapter 1 also provides a medium-term macroeconomic outlook and describes the risks facing the country that could adversely affect the growth outlook. Moreover, the chapter reviews the structural constrains that impede the productive capacity and diversification of the Gambian economy. Chapter 2 analyzes the status of financial inclusion, with a focus on DFS as an essential component to boost financial inclusion. Finally, Chapter 3 proposes policy actions that can help attenuate the structural weaknesses faced by the Gambian economy to accelerate growth as well as policy measures to spur the growth and development of DFS. Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential 3 Abbreviations and Acronyms AML/CFT Anti-money laundering and combating terrorism financing MPR Monetary policy rate CAD Current account deficit MSME Micro, small, and medium enterprise CBG Central Bank of The Gambia NBFI Non-bank financial institution DFS Digital financial services NFIS National financial inclusion strategy FDI Foreign direct investment PPT Percentage point FinTech Financial technology PSP Payment service provider GBoS Gambia Bureau of Statistics R&D Research and development ICT Information and communication technologies SME Small and medium-sized enterprise ID Identification SOE State-owned enterprise IMF International Monetary Fund SSA Sub-Saharan Africa LGA Local government area WDI World Development Indicators ML Money laundering 4 Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential Table of Contents List of Figures......................................................................................................................................6 List of Boxes........................................................................................................................................6 List of Tables.......................................................................................................................................7 Executive Summary............................................................................................................................8 I.  State of the Economy and Context................................................................................................... 12 1.  Recent Economic Developments..................................................................................................... 13 Global and Regional Growth Weakened in 2022 Amid Global Commodity Markets Shocks, 1.1.  Trade Disruptions, Tightening Financial Conditions and Covid Restrictions in China.............. 13 The Gambia’s Economic Recovery Continued in 2022 Despite an Unfavorable Context 1.2.  Related to the Lingering Impacts of the COVID-19 Pandemic and Uncertainties in the Global Economy....................................................................................................................... 13 External Sector Vulnerability and Current Account Deficit Increased due to Global 1.3.  Commodity Market Shocks...................................................................................................... 15 Monetary Policy has been Tightened to Tackle Mounting Inflationary Pressures.................... 18 1.4.  The Fiscal Deficit Increased, Maintaining High Levels of Public Debt..................................... 21 1.5.  Low Economic Growth Led to Stagnating GDP per Capita and High Poverty Trends............. 24 1.6.  2.  Outlook and Risks............................................................................................................................ 26 2.1. Outlook.................................................................................................................................... 26 2.2.  Risks to the Outlook................................................................................................................. 26 II.  Driving Financial Inclusion in The Gambia: Constraints and Opportunities of Digitalization........ 30 1.  Role of Financial Development, Financial Inclusion, and Digital Financial Services......................... 31 2.  The Gambia’s Financial Sector: Structure and Performance............................................................. 32 Financial Inclusion in The Gambia.................................................................................................... 34 3.  Key Constraints for Digital Payments and Financial Inclusion in The Gambia.................................. 35 4.  Gaps in the Legal/Regulatory Framework for Digital Financial Services.................................. 35 4.1.  Inadequate Underlying ICT Infrastructure................................................................................ 37 4.2.  Constraints Related to Access, Eligibility, Affordability, and Market Development................. 38 4.3.  Payment Infrastructure Upgrades to Strengthen Financial Inclusion in The Gambia....................... 39 5.  a) Automated Clearing House (ACH).............................................................................................. 39 b) GamSwitch.................................................................................................................................. 39 c) Regional Payment Systems/Infrastructure Aspects..................................................................... 40 6.  Digital Financial Services: Products, Participants, and Opportunities.............................................. 41 Policy Options to Accelerate Digital Payments Access and Usage for 7.  Increased Financial Inclusion............................................................................................................ 44 References.....................................................................................................................................47 Annex.............................................................................................................................................48 Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential 5 Table of Contents Table of Figures Figure 1. Public Investment and Private Consumption Continue to be the Main Growth Drivers on the Demand Side.................................................................................................................................. 13 Figure 2. The Service Sector Continues to be the Main Growth Driver on the Supply Side...................... 13 Figure 3. The Gambia’s Growth Rate was one of the Lowest in SSA between 1991 and 2020................. 17 Figure 4. The Number of Tourist Arrivals has been Increasing but Remains Below Pre-Pandemic Levels........18 Figure 5. The Dalasi has Depreciated Against the US Dollar..................................................................... 18 Figure 6. Food Inflation has been Main Driver of Inflation........................................................................ 20 Figure 7. The Policy Rate has been Gradually Raised Since May 2022..................................................... 20 Figure 8. Net Foreign Assets have Contracted.......................................................................................... 20 Figure 9. The Money Supply has Fallen Sharply........................................................................................ 20 Figure 10. Banks’ Assets are Dominated by Government Debt................................................................ 21 Figure 11. The Interest Rate Spread Remains High, Although it has been Declining................................ 21 Figure 12. The Fiscal Deficit Widened in 2022.......................................................................................... 22 Figure 13. Public Debt Remains High........................................................................................................ 22 Figure 14. The Gambia’s Real GDP per Capita has Stagnated. . . ............................................................ 24 Figure 15. . . . Lagging Behind the Average Real GDP per Capita in SSA................................................ 24 Figure 16. Evolution of the National Poverty Rate.................................................................................... 25 Figure 17. Gambia’s Financial Inclusion is Low Compared to the SSA Average and . . ............................ 49 Figure 18. . . . and Its Mobile Money Usage is Very Low Compared to the SSA Average......................... 49 Figure 19. Productivity Growth has been Negative with Limited Accumulation in Capital Stock per Worker.................................................................................................................................................. 49 Figure 20. Agricultural Productivity Continuously Declined in The Gambia.............................................. 49 Table of Boxes Box 1. Key Structural Issues Facing the Current Growth Model................................................................ 15 Box 2. Ghana’s Policy on Digital Financial Services................................................................................... 32 Box 3. Example from Côte d’Ivoire on E-money Regulation and Application........................................... 36 Box 4. Examples of Consumer Protection Mechanisms in African Countries............................................ 37 Box 5. Pix: The Instant Payment System in Brazil....................................................................................... 41 Box 6. Digitizing Government Payments in Indonesia............................................................................... 43 Box 7. Financial Literacy in Zambia............................................................................................................ 44 6 Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential Table of Contents Table of Tables Table 1. Main Policy Options to Accelerate Digital Payments for Increased Financial Inclusion............... 10 Table 2. Balance of Payments.................................................................................................................... 19 Table 3. Summary of Fiscal Operations...................................................................................................... 23 Table 4. Medium-Term Outlook................................................................................................................. 27 Table 5. Structure of the Financial Sector.................................................................................................. 33 Table 6. Volume and Value Processed through ACH................................................................................. 40 Table 7. Development Stages for Financial Inclusion and Digital Financial Services................................. 45 Table 8. Complementary Enablers to Accelerate the Development of Digital Payments for Increased Financial Inclusion...................................................................................................................................... 45 Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential 7 Executive Summary State of the economy and context Central Bank of The Gambia (CBG) raised its policy rate by 1 percent in May, September, and December to 13 percent. The Gambia’s economy continued to recover in 2022, However, the effect of monetary tightening seems limited, albeit at a subdued pace in a sluggish global economic as inflation is essentially imported. environment. Real GDP increased by 4.3 percent (1.8 percent in per capita terms) in 2022, unchanged from 2021, when The fiscal deficit deteriorated in 2022 due to lower economic growth was recovering from the COVID-19 domestic revenue collection and increased spending. Amid pandemic following a sharp deceleration to 0.6 percent in the unfavorable context related to the war in Ukraine, total 2020. On the supply side, growth was supported by improved revenue only moderately increased from 16.8 percent of agricultural production, which benefited from a relatively GDP in 2021 to 17.8 percent in 2022, driven by an increase rainy season. A deceleration of growth in industry and in grants, which overcompensated for the decline in subdued growth in the services sector explain The Gambia’s domestic revenue. To mitigate the effects of the war in weak growth performance. Rising world commodity prices Ukraine, the Government of The Gambia has provided and trade disruptions weighed on the economy, as the fuel, fertilizer, and food subsidies worth 2.2 percent of country is a net importer of oil and food commodities GDP in lost tax revenue. The increase in subsidies weighed and has experienced negative terms of trade. Growth in on tax mobilization, as The Gambia already has limited industry was affected by rising prices and limited availability tax revenue, averaging a mere 10.4 percent of GDP in of manufacturing and construction inputs. Weak growth in 2017–2022. Total public expenditure increased by 1.2 ppts to services was linked to a weaker-than-expected recovery in 22.6 percent of GDP in 2022, driven primarily by spending tourism, which, although the number of arrivals increased, on infrastructure projects. As a result, the fiscal deficit was not sufficient to offset weak growth in other subsectors. increased from 4.6 percent in 2021 to 4.8 percent of GDP in On the demand side, growth was driven by increased public 2022. The total debt stock remained relatively unchanged consumption and infrastructure investment, while private at 83.9 percent of GDP in 2022 (83.8 percent in 2021), and consumption slowed, and exports contracted. Economic The Gambia remains at high risk of debt distress. growth was 1.3  percentage points (ppts) below initial projections, owing to the spillover effects of Russia’s invasion The modest growth in per capita income has been of Ukraine. insufficient to reduce the high poverty rate. Using the international poverty line of US$2.15 (in 2017 purchasing The external sector accounts deteriorated in 2022 due to power parity), the poverty rate increased from an estimated global commodity price shocks. The current account deficit 18.4  percent in 2021 to 20.3  percent in 2020, reflecting (CAD) widened from an estimated 8  percent of GDP in weak per capita GDP growth and higher food prices that 2021 to 14.6 percent of GDP in 2022, driven by a widening eroded the purchasing power of households. trade deficit due to higher global commodity market prices and lower remittances. The CAD was financed through The economic outlook remains favorable, although growth foreign direct investment (FDI), donor support, and external is projected to remain below the pre-pandemic level in government borrowing, as well as by international reserves, the medium term. GDP is projected to grow by 5.5 percent which declined from 7.0 to 4.8 months of imports. There was in 2023–25, supported by increased economic activity also a nominal exchange rate depreciation of 15.6 percent, across sectors, with relatively higher performance in industry year-on-year, in 2022. and services. Services and agriculture are expected to continue to grow, assuming respectively higher tourist Monetary policy tightened in 2022, with the policy rate inflows as advanced economies recover and favorable increasing substantially to curb mounting inflation due rainfall. Growth in the industry sector will be supported by to shocks in global commodity markets. Headline inflation public infrastructure programs and stronger remittances reached decade highs, averaging 11.6 percent (year-on-year) to support private investment. The subsectors that are in 2022, with food and non-food inflation at 14.5 percent expected to drive growth in industry are mainly construction and 8.6  percent, respectively. The pass-through effects and electricity, gas, steam, and air conditioning. Still, growth of the currency depreciation, together with structural projections are below the pre-pandemic level of 6.2 percent challenges at the Port of Banjul and wage increases in in 2019, reflecting the lingering effects of overlapping the public sector, also fed inflation. To curb inflation, the crises related to COVID-19 and the war in Ukraine. 8 Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential Executive Summary The outlook is subject to uncertainty and downside risks. to enable financially excluded and underserved populations Risks include a prolonged war in Ukraine, fiscal slippage, access formal financial services suited to their needs. These climate change, continued financial conditions tightening, services need to be responsibly delivered at a cost both and political uncertainty. A prolonged war in Ukraine and affordable to customers and sustainable for providers. continued high global commodity prices would continue to undermine The Gambia’s growth as well as its fiscal and Access to transactional services and credit remains a external balances, with a persistently high import bill fueling challenge in The Gambia, both for households and micro, inflation and a further decline in international reserves small, and medium enterprises (MSMEs). Various supply potentially leading to severe shortages of essential imports and demand-side constraints hamper financial inclusion. and increased pressure on the domestic currency. Weaker- On the supply side, key constraints are uneven legal and than-expected growth in Europe could undermine the regulatory frameworks, limited infrastructure, and challenges recovery in the tourism sector and maintain low levels of related to access, eligibility, and affordability of financial capital and remittance inflows. Both domestic and external services. On the demand side, people’s low income (which fiscal risks could materialize in the short to medium term, makes it difficult to see the purpose of having an account), worsening the fiscal deficit and public debt. These risks inadequate financial literacy, and lack of information on include weaker-than-expected growth, pressures to clear different digital financial services (DFS) constitute some of state-owned enterprises’ (SOEs) contingent liabilities, the main constraints. continued rise in the cost of credit to the government, weaker-than-expected grants, end-of-debt service deferrals Low access and use of digital payments hinders the growth in 2024, and other external price shocks. The Gambia of DFS, which are at the heart of financial inclusion and the is also highly vulnerable to climate shocks that impact digital economy. In The Gambia, about 69 percent of adults agricultural output and household income. Political instability, (15 years and older) do not have access to a transaction such as the attempted coup in December 2022, would account. Among the youth (aged 15–35), 77  percent do negatively affect ongoing efforts to boost domestic revenue not have a transaction accounts, while same is true for mobilization and streamline current expenditures. 75 percent of people living in rural areas. Low access to transaction accounts has contributed to Driving financial inclusion in the low use of digital payments. The use of digital payment instruments, such as debit cards, credit cards, credit transfers, The Gambia: Constraints and direct debit, and mobile money, is limited in The Gambia, opportunities of digitalization with only 5 percent of adults using banking-related products (including digital payment instruments) and only 2 percent Financial inclusion is an important driver of the digital of adults using mobile money. The low use of digital economy. Increased financial inclusion translates into transactions is driven primarily by the lack of innovative individuals and businesses having more access to useful and market players, which in turn stems from legal/regulatory affordable financial products and services that meet their gaps and uncertainty, high fees due to lack of competition needs (e.g., transactions, payments, savings, credit, and and innovation by new types of payment service providers insurance) and are delivered in a responsible and sustainable (PSPs), lack of modernization in underlying information way (World Bank 2016). Being able to have access to a and communication technologies (ICT) and payments transaction account is a first step toward broader financial infrastructure, lack of interoperability in digital payment inclusion, as it allows people to store their money and send instruments and access channels, government reliance on and receive payments. A transaction account also serves as paper-based payment instruments for collections, and low a gateway to other financial services. levels of financial literacy. Financial access facilitates day-to-day living and helps Limitations in the legal and regulatory framework hamper families and businesses make long-term plans and the growth of DFS. The regulations that cover the payments manage unexpected emergencies. As account holders, market include CBG statutes, mobile money regulations, the people are likely to use financial services such as credit and anti-money laundering and combating terrorism financing insurance to start and expand businesses, invest in education (AML/CFT) act, the consumer protection, payment systems, or health, manage risk, and weather financial shocks, which can and non-bank financial institution laws. However, the legal improve the overall quality of their lives. The COVID-19 crisis and regulatory framework suffers from several limitations, reinforced the need for increased digital financial inclusion, hindering the payment system and DFS. Among others, which involves the deployment of cost-saving digital means the payment systems law lacks significant clarity and misses Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential 9 Executive Summary key nuance in concepts such as interoperability, disputes, of financial products and services, and asset-based lending and privacy, and important concepts are missing such and other financial technology (finTech), such as factoring, as agent banking, payment instruments, and account leasing, and microinsurance, are non-existent. interoperability. Mobile money regulations focus on mobile money, leaving out other forms of e-money. Moreover, the AML/CFT act is limited by regulation and capacity Policy options to accelerate digital constraints in addressing money laundering (ML). payments for financial inclusion Weak underlying energy and ICT infrastructure hinders the development and use of DFS. A significant proportion Policies aimed at accelerating the use of digital payments of Gambians (about 38  percent) are not yet covered by are essential to increase financial inclusion, which in turn is the country’s electricity grid. Internet access is still low key to reduce poverty and boost shared prosperity. Financial in the country, and mobile money usage remains very development plays a key role in stimulating economic low at 2 percent. In addition, not everyone has a national growth. The development of DFS can stimulate financial identification (ID), and establishing a unified digital ID inclusion, which is critical to economic growth, employment system would be costly. Lack of energy and ICT infrastructure creation, and poverty reduction. To stimulate DFS, the disproportionately impacts poor households and those authorities need to implement policies that aim to develop: living in rural areas. The lack of registration of SIM cards is (i) a conducive legal framework; (ii) enabling financial and another obstacle to increase financial inclusion. digital infrastructure; and (iii) ancillary government support systems. Table  1 includes a list of key reforms that can Efforts to improve financial inclusion are hampered by be implemented in the near term, while Table 8 presents constraints related to access, eligibility, and affordability. complementary enablers. On the legal side, the authorities Inability to meet hard immovable collateral requirements should consider creating a facilitative regulatory environment is part of the country’s eligibility constraints. In addition, for non-bank financial institutions (NBFIs) and updating the the high cost of financial services is a barrier to financial Payment Systems Act to include the full scope of electronic inclusion for small and medium-sized enterprises (SMEs) payments and payment services. On the infrastructure side, and low-income households. Low income, the high cost of it will be important to incorporate NBFIs into existing credit financial services, the long distance to a financial access reporting and payment infrastructure and upgrade the point, and information asymmetry are important barriers to automated clearing house1 (or GamSwitch) and convert it access financial services. Moreover, there is limited offering into a fast payment system. TABLE 1 Main Policy Options to Accelerate Digital Payments for Increased Financial Inclusion Objective Policy Option Time Frame Responsibility Conducive legal Revise the NBFI act to create a facilitative and risk-based regulatory ST CBG framework for DFS environment for NBFIs, including non-deposit taking institutions like factoring and peer-to-peer lending platforms. Update the Payment Systems Act to incorporate emerging business ST CBG models and new types of payment service and infrastructure providers (FinTech). Enabling financial and Incorporate the NBFIs sector into credit reporting and payments ST CBG digital infrastructures infrastructure. Upgrade GamSwitch to convert it into an instant payment system. ST CBG Note: Short term: < 1 year; medium term: 2–3 years. 1  The automated clearing house is the primary system for electronic funds transfers between financial institutions participating in the system. Funds are deposited electronically, and payments are made online. 10 Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential © Cristelle Kouame CHAPTER I State of the Economy and Context 12 Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential CHAPTER I – State of the Economy and Context 1.  Recent Economic Developments 1.1.  Weakening of Global and United States weakened their demand for SSA’s exports. Central banks tightened monetary policy to curve inflationary Regional Growth amid Global pressures and prevent massive capital outflows associated Commodity Price Shocks, with widening spreads. Efforts to mitigate the effects of high inflation with fiscal policy (e.g., regulating fuel price Trade Disruptions, Tightening movements, waiving import duties on cereals, and subsidizing Financing Conditions, and fertilizers) weighed on public finances, with increased fiscal deficits and the resulting rise in public debt. Against this Pandemic-Restrictions in China backdrop, economic growth in SSA slowed from 4.3 percent in 2021 to 3.5 percent in 2022. Global economic growth decelerated in 2022 due to the spillover effects of the war in Ukraine. Russia’s war in Ukraine has led to high food and commodity prices and supply disruptions, increasing inflation to levels not seen in several 1.2.  Continuing Economic decades. In response, centrals banks have tightened their monetary policy to curb inflationary pressures. These adverse Recovery despite an macroeconomic developments were combined with the Unfavorable Context Related lingering impacts of the COVID-19 pandemic and pandemic- related lockdowns in China. As a result, global economic to the Lingering Impacts of growth slowed from a 5.8 percent in 2021 to an estimated the Pandemic and Global 2.8 percent in 2022. Moreover, growth in advanced economies was downgraded from 5.2 percent to 2.5 percent in 2021, Economic Uncertainties and in emerging and developing markets from 6.6 percent The Gambia’s recovery continued in 2022, although weaker to 3.4 percent in the same year (World Bank 2023a). than initially projected. Economic growth was steady at 4.3  percent in 2022 (1.8  percent in per capita terms), Sub-Saharan African (SSA) economies experienced shocks supported by improved agricultural production (Figure  1 from slowing global growth, tightening global financial and Figure 2). Growth was 1.3 ppts lower than expected conditions, rising global inflation, and rising risk of debt before the war in Ukraine. A deceleration of growth in distress. Weak growth in the euro area, China, and the industry and subdued growth in the service sector explain FIGURE 1 FIGURE 2 Public Investment and Private Consumption Continue The Service Sector Continues to be the Main to be the Main Growth Drivers on the Demand Side Growth Driver on the Supply Side Demand side contribution to real GDP growth, percent Supply side contributions to real GDP growth, percent 10.0 10.0 5.0 5.0 0.0 0.0 –5.0 –5.0 –10.0 –10.0 2019 2020 2021 2022e 2023f 2024f 2025f 2019 2020 2021 2022e 2023f 2024f 2025f Net exports Government consumption Agriculture Industry Private investment Private consumption Services Net taxes Government investment Real GDP growth Source: Gambia Bureau of Statistics (GBoS), International Monetary Fund (IMF), and Source: GBoS, IMF, and World Bank staff estimates. World Bank staff estimates. Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential 13 CHAPTER I – State of the Economy and Context the country’s weak growth performance. Higher global and development (R&D). Yet, R&D is critical to support the commodity prices and trade disruptions weighed on the agricultural innovation needed to address the growing Gambian economy, which is a net oil and commodity challenges facing the sector (climate change, air pollution, (food) importer and recorded negative terms of trade etc.) (Beegle and Christiansen 2019). in 2022. Industry sector growth declined from 10.4 percent in 2021 Growth was supported by high public investment and to 6.1 percent in 2022, but its share in GDP has gradually consumption in a context of declining private demand. increased. The growth deceleration was due to the Economic growth in The Gambia was stimulated by increased contraction in the water supply and manufacturing public spending on investment and consumption due to: industries and a subdued recovery in construction, as supply (i) the implementation of infrastructure projects related to chain disruptions affected the price and availability of the preparation of the Organization of Islamic Cooperation manufacturing and construction inputs. While the industry conference; and (ii) increased salary expenditure as part of sector represents the smallest share of GDP, its share a civil service reform agenda. Demand for private sector increased from 12  percent in 2012 to 19  percent in 2022, investment and consumption was dragged down by higher mainly driven by the construction industry. The small share inflation and lower remittances, as the economic slowdown of industry as a share of GDP is due to lack of investment in and high inflation in major economies eroded migrants’ the sector, which is faced with limited access to finance, poor incomes. Government investment spending and private access to and unreliable electricity, and several supply-side consumption are expected to be the main growth drivers constraints. on the demand side in the medium term. Growth in the services sector increased slightly from The contribution of net exports to growth remained negative 2.1 percent in 2021 to 2.7 percent in 2022, remaining the in 2022. With an already narrow base of goods exports, principal sector in the economy. Sluggish growth in the the level of goods exports contracted by an estimated sector reflects the slow recovery in tourism, with international 0.4 percent in 2022, a reversal from 5.7 percent growth in tourist arrivals remaining below their 2021 level, due to 2021, owing to the ban on timber and cashew exports by the rising cost of living in partner countries following the the Senegalese government following security concerns at economic fallout of the war in Ukraine (Figure 4). The better- the borders. Due to trade disruptions and declining foreign than-expected number of tourist arrivals was not strong exchange reserves, growth in goods imports decelerated enough to make up for the relatively poor performance from 13.3 percent in 2021 to 10.9 percent in 2022, although in wholesale and retail trade and finance and insurance, the value of imports continued to increase due to higher as well as for the modest performance in transport and global prices. However, imports grew at a higher rate storage and communication. Growth was mainly driven than exports, resulting in net exports having a negative by the accommodation industry. Nevertheless, the tourism contribution to growth. sector is a key growth driver, contributing 8.5  percent of GDP (15.5 percent of GDP if induced and indirect effects are The agriculture sector grew by 6.9 percent in 2022, factored in) (World Bank 2022a). Despite weak growth, the up from 4.7 percent in 2021, but its share in GDP has services sector remains the principal sector in the economy, been continuously declining due to low productivity. The accounting for an estimated 52  percent of GDP in 2022. increase in agricultural growth was primarily attributed Over the long term, the sector has been mainly driven by to a relatively good rainy season and fertilizer subsidies. wholesale and retail trade, followed by information and However, the sector is subject to several constraints that communication, public administration and defense, transport hamper agricultural productivity, resulting in its share of and storage, real estate, and financial and insurance activities. GDP declining from 35 percent in 2010 to 21 percent in However, the share of services in GDP has declined since 2022, even though the agriculture sector continues to its peak of 60 percent of GDP in the early 2000s, reflecting employ 70  percent of the country’s labor force (MOFEA constraints such as deficiencies in infrastructure, lack of a 2022). Major constraints affecting agricultural productivity sufficiently large pool of skilled and well-trained workers include lack of adequate irrigation facilities and production to meet labor market demand, and high dependence on machinery, limited access to institutional credit, difficulties a low value-added tourism. The Gambia’s tourism industry in procuring inputs and storing products, the negative relies heavily on a few tour operators and is focused on the impact of climate change and variability and increasing soil winter season and accommodation near the sea and Banjul salinity, and low public funding. As a share of GDP, budget airport. Moreover, visitors are mostly focused on relaxation allocations to the agriculture sector constituted a mere tourism, their length of stay is short, and there is relatively 0.3 percent in 2022, with almost no spending on research limited travel within the country (Ceesay 2020). 14 Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential CHAPTER I – State of the Economy and Context Economic growth in The Gambia continues to be hampered of the lowest rates in SSA and below the SSA average of by several structural constraints. As highlighted in the 3.4 percent (Figure 3). Systematic Country Diagnostic 2020 and the Country Partnership Framework 2022–2026, low revenue collection hinders the provision of public goods and fiscal and debt sustainability (World Bank 2022b). In addition, the country’s 1.3.  Global Commodity weak business environment and governance challenges hamper private sector-led growth, and an overreliance on Market Shocks and Worsening low-productivity agriculture, which accounts for 75 percent External Sector Vulnerability of household earnings and employs 70  percent of the labor force, contributes to food insecurity and high poverty and Current Account Deficit rates (MOFEA 2022). These challenges are compounded The current account deficit (CAD) worsened in 2022, by low quality infrastructure and limited human capital driven by global commodity prices and lower remittances. development, all of which impede productivity growth, The CAD widened from 8 percent in 2021 to 14.6 percent limit structural transformation of the economy, and hinder of GDP in 2022, reflecting a deteriorating trade balance poverty reduction (Box 1). As a result, between 1991 and due to lower exports, relatively higher imports, and lower 2020, real GDP growth averaged a mere 3 percent, one remittances. BOX 1 Key Structural Issues Facing the Current Growth Model Low revenue collection hampers fiscal and debt Gambian adults having access to a transaction sustainability. Despite efforts made in recent account and only 2  percent using mobile money years to strengthen tax policy reforms and the tax (Figure 17 & Figure 18). The transport sector is also administration, tax revenue remains low, averaging underperforming, especially in terms of infrastructure 10.4  percent of GDP in 2017–2022, which is road quality (World Bank 2023b). The Port of Banjul, inadequate to meet the country’s development which accounts for over 90 percent of The Gambia’s needs. The tax gap is estimated at 4–6  percent international trade, faces inefficiency and capacity of GDP, driven by generous tax incentives and limitations, resulting in a large volume of goods being exemptions (World Bank 2020b). transited through Dakar. Poor and inadequate infrastructure is as a major The poor business environment and slow progress barrier to private sector-led growth. Only 62 percent in consolidating governance hamper private of Gambians had an electricity connection in 2020 investment. While The Gambia has made progress (World Bank 2022a). Digital infrastructure remains in improving the business environment, a major underdeveloped due to several constraints, including persistent issue is the lack of implementation of a low internet usage and the weak regulatory robust competition policy framework, as highlighted environment (World Bank 2020c). Moreover, in the latest Bertelsmann Stiftung’s Transformation financial inclusion is low, with only 29  percent of Index (BTI). Strengthening the framework would (continued on next page) Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential 15 CHAPTER I – State of the Economy and Context BOX 1 Key Structural Issues Facing the Current Growth Model (Continued) include the development of antitrust laws, an R&D is key to support agricultural innovation, which independent and well-functioning enforcement in turn is needed to address the growing challenges agency, and independent regulatory bodies as well facing the sector such as climate change and air as judicial support (Cherif et al. 2020). The country pollution (Beegle and Christiansen 2019). faces persistent challenges to adopt governance reforms, including limited administrative capacity, The Gambia is lagging behind in human capital low digitization, and weaknesses in the legal development. The Gambia’s Human Capital Index framework (IMF 2023). Challenges in advancing (HCI) score was 0.42 in 2020, indicating that, on policy and institutional reforms are reflected in The average, children born the country will only be Gambia’s low score on the Country Policy and 42  percent as productive as adults as they could Institutional Assessment (CPIA), especially related have been had they enjoyed complete education to macroeconomic and public sector management. and full health. In 2022, budget allocation to education and health amounted to 2.9 percent and Growth in output per worker and economic growth 2.1 percent of GDP, respectively, with most spending are dampened by limited capital accumulation and being recurrent. The country’s public spending on lack of gains in productivity. Productivity growth education and health is low compared to peers and has been consistently negative for the past decade is highly inefficient. The wage bill makes up three- and half, along with limited capital accumulation per fourths of school-related education expenditure, worker (Figure  19). Despite the recent increase in despite very low teacher salaries. The execution of investment, as reflected in its increased contribution the non-salary education budget is mainly focused to real GDP growth, capital accumulation per worker on expenses not related to learning outcomes. The remains limited and has hardly increased. Gambia’s health expenditure is largely recurrent (97  percent) and concentrated on goods and Agricultural productivity declined during the last services. Budget allocations are skewed toward decades (Figure  20). Major constraints facing the tertiary and secondary education at the expense of agriculture sector include lack of irrigation facilities primary care, contributing to inefficiency in health and production machinery, limited access to credit, service delivery. The country’s efficiency score is difficulties in procuring inputs and storing products, an estimated 82  percent at the primary level and negative impact of climate change and variability, 72 percent for 11 health facilities, which means that, and increasing soil salinity. As a ratio of GDP, budget on average, the same services can be provided with allocation to the sector was limited at 0.3 percent in 18 and 28  percent fewer resources at the primary 2022, with almost zero spending on research and level and in health facilities, respectively (World development (R&D). Increased public investment in Bank 2020b). 16 Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential CHAPTER I – State of the Economy and Context FIGURE 3 The Gambia’s Growth Rate was One of the Lowest in SSA between 1991 and 2020 Average real GDP growth in The Gambia and SSA: 1991–2020 7.0 6.0 SSA average 5.0 Percent (%) 4.0 3.0 2.0 1.0 0.0 e R o ria y i ) n ia s a ria a n n ad so e e r in he e iu kr ny bi bw oo ni da rd qu CA ng ib ig Fa at be e Ch rit na Be (T m Ve Ke am ig Su er bi N Co w ba au Za Li Co a a N m Es m bo in N bi m M of a Ca rk am Zi a oz Ca ne Bu ic M bl G ui pu G Re Average real GDP growth SSA Source: World Development Indicators (WDI). A rising imports bill and decreasing exports further decreased from US$103.6 (5.1 percent of GDP) in 2021 to widened the trade deficit in 2022. Rising global commodity US$82.7 million (3.9 percent of GDP) in 2022. The financial prices pushed import payments to US$761.1 million in account deteriorated in the same period, declining from 2022, an increase of 15.4 percent compared to 2021, despite US$224 million (11  percent of GDP) to US$97 million a relative decline in import volumes. The trade deficit (4.5  percent of GDP), mainly channeled through foreign deteriorated from 29.9  percent in 2021 to 34.5  percent direct investment (FDI). of GDP in 2022. With an already narrow goods export base, goods exports decreased from US$70.1 million in Along with a depreciation of the nominal exchange rate, 2021 to US$48 million in 2022, owing to a suspension of foreign exchange reserves have declined. The CAD has timber and cashew exports following security concerns at been financed through FDI, donor support, external the borders (GBoS 2022). While the number of international government borrowing, and partially international reserves, tourist arrivals increased by 78  percent to 182,795 in which declined from US$ 530.4 million (7.0  months of 2022, it remains 45  percent below the pre-pandemic imports) in 2021 to US$454.7 million in 2022 (5.1 months of level, as the repercussions of the war in Ukraine continue imports). Moreover, the nominal exchange rate depreciated to cloud the tourism outlook due to the high cost of living by 15.6 percent in 2022 (Figure 5). Ad hoc information on in partner countries (Figure 4). With only marginal growth foreign exchange rates reveals a gap of 11 percent from the in services exports compared to imports (reflecting a official exchange rate in October 2022. In response to the slow recovery in tourism), the services trade deficit significant fall in international reserves, the Central Bank widened from 0.5 percent of GDP in 2021 to 1.5 percent of The Gambia (CBG) intervened in the foreign exchange in 2022. market on the sale side to facilitate imports. Moreover, it adopted measures in May 2022 to mitigate the decline in The decline in current transfers contributed to the widening foreign exchange reserves, including adopting a directive of the CAD. Budget support (official transfers) increased requiring holders of foreign currency deposits to make from 0.7 percent of GDP in 2021 to 1.9 percent in 2022. By withdrawals in local currency and a requirement for money contrast, official remittances recorded by the central bank transfer agencies to send their proceeds to banks and (comprising both current transfers and investments) declined control shipments. These measures were, however, lifted by 4.5 percentage points (ppts) to 34.2 percent of GDP in later in August 2022, and the CBG took steps in early 2022, as the economic slowdown and high inflation in major October 2022 to address the wedge between its published economies eroded migrants’ incomes. exchange rate and the parallel market rate, clarifying to banks and foreign exchange bureaus that they can officially Financial inflows have declined, reflecting tightened global transact at a market-based exchange rate to dissipate any financing conditions. Net inflows in the capital account potential concern about CBG policies. Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential 17 CHAPTER I – State of the Economy and Context FIGURE 4 FIGURE 5 The Number of Tourist Arrivals has been Increasing The Dalasi has Depreciated Against the US Dollar but Remains Below Pre-Pandemic Levels 63 Tourists' arrival 61 235,789 59 250,000 209,135 57 200,000 182,975 55 53 150,000 51 102,460 49 100,000 89,232 47 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 50,000 GMD per USD 0 2018 2019 2020 2021 2022 Source: Central Bank of The Gambia. Source: Gambia Tourism Board. 1.4.  Tightening Monetary 2022, following a 1 ppt increase in May, September, and December 2022. The CBG continued monetary tightening Policy to Address Mounting in the early months of 2023 by raising the MPR to Inflationary Pressures 14 percent in February 2023 (Figure 7). It kept other policy instruments unchanged, maintaining the required reserve Inflation has reached decades-high levels, driven by of commercial banks at 13  percent, the interest rate on global commodity price shocks. Yearly inflation averaged standing deposit facility at 3  percent, and the standing 11.6 percent in 2022, up from 7.4 percent in 2021, reaching lending facility at 15 percent (MPR plus 1 ppt). However, double digits for the first time in almost three decades and the effect of monetary tightening seems limited, as inflation far above the CBG’s medium-term target of 5  percent. is essentially imported. Both food and nonfood inflation were high, averaging 14.5  percent and 8.6  percent, respectively (Figure  6). Growth in monetary aggregates has decelerated, reflecting Inflation was mainly driven by global commodity price the impact of the crisis on the balance of payments and shocks and domestic factors, including local currency the resulting effects on the banking system’s net foreign depreciation, salary increases in the civil service, and assets. Money supply growth slowed from 19.5  percent structural issues at the Port of Banjul. Headline inflation (year-on-year) at end-December 2021 to 7.1 percent in the continued its upward trend in the first four months of 2023, same period in 2022, owing to a contraction in net foreign peaking at 17.4 percent (year-on-year) in April 2023, while assets of both the CBG and commercial banks. The banking food and non-food inflation reached 21.5  percent and system’s net domestic assets remained the main source 12.3 percent, respectively, in the same period. of liquidity that continued to drive growth in the money supply. Growth in net domestic assets remained robust, The CBG has tightened its monetary policy in response to increasing by 21.6 percent (year-on-year) in end-December high inflation. The country’s central bank manages reserve 2022, up from 20 percent a year earlier (Figure 8), driven money as an operational target and broad money as by increased government and private sector borrowing an intermediate target, with the goal of ensuring price (13 and 25  percent, respectively), despite the CBG’s stability. The level of reserve money is controlled through monetary tightening. On the liability side of the open market operations as the major tool for liquidity CBG’s balance sheet, the slowing growth in the money management, supplemented by foreign exchange market supply reflected a contraction of reserve money due to interventions, the statutory reserves requirement ratio, commercial banks’ reserves falling by 27.3  percent in and an interest rate corridor to manage liquidity. To curb December 2022 (Figure 9). inflation, the monetary authority continued the issuance of CBG bonds to reduce excess liquidity and raised the Borrowing increased despite monetary tightening. Two monetary policy rate (MPR) to 13  percent in December factors can help explain the increase in private sector 18 Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential CHAPTER I – State of the Economy and Context TABLE 2 Balance of Payments US$ million Percent of GDP 2019 2020 2021 2022 2019 2020 2021 2022 1. Current account (96.4) (68.2) (159.3) (316.2) 25.3 23.7 28.0 214.6 A. Goods (net) (453.6) (503.3) (589.2) (713.3) 225.1 227.5 229.4 232.9 Exports, f.o.b. 142.7 71.2 70.1 47.8 7.9 3.9 3.5 2.2 Imports, f.o.b. (596.2) (574.5) (659.3) (761.1) −33.0 −31.4 −32.9 −35.1 B. Services (net) 116.4 (29.0) (22.7) (33.3) 6.4 21.6 21.1 21.5 Services exports 226.6 81.7 102.8 118.9 12.5 4.5 5.1 5.5 of which: Travel income 181.3 46.6 58.0 71.5 10.0 2.5 2.9 3.3 Services imports (110.2) (110.6) (125.5) (152.2) −6.1 −6.0 −6.3 −7.0 C. Income (net) (30.0) (31.1) (32.1) (32.4) 21.7 21.7 21.6 21.5 Income credits 2.3 2.4 2.4 2.5 0.1 0.1 0.1 0.1 Income debits (32.4) (33.5) (34.5) (34.9) −1.8 −1.8 −1.7 −1.6 D. Current transfers 270.8 495.2 484.7 462.8 15.0 27.0 24.2 21.3 Official transfers 55.8 82.7 16.2 43.8 3.1 4.5 0.8 2.0 Remittances 202.7 400.2 456.0 406.1 11.2 21.8 22.8 18.7 Other transfers 12.3 12.3 12.5 12.9 0.7 0.7 0.6 0.6 2. Capital and financial account 184.3 132.0 328.0 180.3 10.2 7.2 16.4 8.3 E. Capital account 73.5 66.9 103.6 82.9 4.1 3.7 5.2 3.8 F. Financial accounts 110.8 65.1 224.4 97.4 6.1 3.6 11.2 4.5 Foreign direct investment 93.9 66.8 99.3 99.7 5.2 3.6 5.0 4.6 Portfolio investment 4.1 3.8 3.9 4.1 0.2 0.2 0.2 0.2 Other investment 12.8 (5.5) 121.2 (6.4) 0.7 -0.3 6.1 -0.3 3. Errors and omissions (13.6) 30.9 (128.8) — 20.8 1.7 26.4 0.0 Overall balance (1+2+3) 74.3 94.7 39.9 (135.9) 4.1 5.2 2.0 26.3 Memorandum items Gross international reserves in US$ million 225.0 352.1 530.4 424.6 Gross international reserves in months of imports 3.9 5.8 7.0 4.8 Nominal GDP (million US$) 1,806 1,833 2,003 2,168 Source: CBG, IMF and World Bank staff calculations. Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential 19 CHAPTER I – State of the Economy and Context FIGURE 6 FIGURE 7 Food Inflation has been Main Driver of Inflation The Policy Rate has been Gradually Raised Since 16 May 2022. 14 15 12 13 10 11 8 6 9 4 7 2 5 0 Aug-20 Nov-20 Feb-21 May-21 Aug-21 Nov-21 Feb-22 May-22 Aug-22 Nov-22 Feb-23 2020 2021 2022 Headline in ation Food in ation Non food in ation Monetary Policy Rate Source: GBoS. Source: CBG. borrowing: (i) credit sectoral distribution, and (ii) banks’ interest rates, interest rates on government securities, reluctance to fully pass on monetary tightening because of which were initially low, increased significantly following the already high cost of private sector credit. On the one hand, the monetary tightening, from an average of 2.2 percent in consumer credit is not affected by monetary tightening, unlike May 2022 to 11.7 percent in February 2023. Furthermore, other sectors such as agriculture, construction, distributive credit to the private sector contracted by 4.5  percent in trade, and tourism, for which credit drops significantly after January 2023 and 4 percent in February 2023 on monthly tightening (Momodou 2021). The Gambia’s banks focus basis, likely reflecting a lagged transmission of monetary on financing consumer goods and tend not to engage in tightening to private sector credit. investment financing (Bukhari 2005), which could explain the rise in private borrowing despite monetary tightening. The banking system continues to be stable, with robust On the other hand, banks may have been reluctant to fully financial soundness indicators, but it is highly exposed to pass on the higher policy rate to lending rates, which were government borrowing. As of December 2022, the capital already high, with a maximum of 19 percent and a minimum adequacy ratio stood at 24.8  percent, well above the of 10 percent. The minimum rate was increased by 1 ppt regulatory requirement of 10 percent. The liquidity ratio in August 2022 for some sectors such as retail trade, of 63.7 percent was also above the prudential requirement manufacturing, and construction. Unlike private lending of 30  percent. Asset quality continued to improve, with FIGURE 8 FIGURE 9 Net Foreign Assets have Contracted The Money Supply has Fallen Sharply NDA and NFA, percentage change M2 and Reserve Money, percentage change 70.0 40 60.0 50.0 30 40.0 30.0 20 20.0 10 10.0 0.0 2018 2019 2020 2021 2022 0 –10.0 2018 2019 2020 2021 2022 –20.0 –10 NFA NDA M2 Reserve Money Source: CBG Source: CBG 20 Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential CHAPTER I – State of the Economy and Context non-performing loans (NPLs) falling from 5.2  percent of (iii) longstanding structural issues that hinder bank financial gross loans in December 2021 to 4.6 percent in December intermediation, including information asymmetries, weak 2022, and banks continued to maintain an adequate level contract enforcement, and foreclosure issues. of provisioning. However, the banking sector is significantly exposed to government indebtedness. As in previous years, nearly two-thirds of commercial banks’ domestic credit was provided to the government. As a result, banks’ assets are 1.5.  Maintaining High Levels increasingly held in government debt, with claims on the government reaching 60.7 percent of banks’ domestic assets of Public Debt amid a in 2022, higher than 27.8 percent for claims on the private Worsening Fiscal Deficit sector (Figure 10). Although private sector credit increased by 25 percent in 2022, it was crowded out by increased The fiscal deficit deteriorated due to lower domestic government borrowing, partly because of an unfavorable revenue collection and increased spending. Amid an business environment that increased banks’ risk aversion. unfavorable context due to the war in Ukraine, total The cost of private sector credit is high, and the interest rate revenue only moderately increased from 16.8  percent spread is wide, above 10 percent, with low-interest rates of GDP in 2021 to 17.8  percent of GDP in 2022, falling on savings, which likely disincentivized savings mobilization short of the budgeted target by 8.1 ppts of GDP. Domestic (Figure 11). A study on banking in The Gambia reveals that revenue declined by 2.4 ppts to 11.9 percent of GDP in the financial sector is not fulfilling its role of financing the 2022, driven by a decrease in both tax and non-tax revenue economy adequately (Bukhari 2005). The large exposure (Table  1). Nevertheless, grants increased by 3.4 ppts to of banks to the government and the heavy dependence of 5.9 percent of GDP, overcompensating for the decline in their income on government securities could have an impact domestic revenue. However, grant revenue was weaker on the stability of the banking system, as highlighted in than expected, as some development partners deferred The Gambia Financial Sector Assessment Program of June their budget support to 2023. Total expenditure increased by 2022. Bank profitability could decline in case of a rapid fall 1.2 ppts to 22.6 percent of GDP in 2022, driven primarily in rates on government securities, as they did in 2020 when by infrastructure projects related to the preparation of the negative real interest rates on government securities reduced Organization of Islamic Cooperation conference. Actual earnings from the bulk of banks’ assets. This adds to other total spending was 4.5 ppts below the budgeted target, vulnerabilities in the banking sector such as: (i) the systemic reflecting an adjustment to account for the shortfall in risk posed by the high concentration of deposits in funding revenue. With revenues growing less than expenditures, portfolios; (ii) liquidity risks, as government securities are not the fiscal deficit widened from 4.6 percent of GDP in 2021 particularly liquid due to the lack of a secondary market; and to 4.8 percent in 2022 (Figure 12). FIGURE 11 FIGURE 10 The Interest Rate Spread Remains High, Although it Banks’ Assets are Dominated by Government Debt has been Declining Claims on government and the private sector as 25.0 share of banks’ domestic assetshart 80 20.0 60 15.0 40 10.0 20 5.0 0 0.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2017 2018 2019 2020 2021 2022-June Claims on the private sector Claims on government, net Lending interest rate Saving interest rate Source: CBG. Source: CBG. Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential 21 CHAPTER I – State of the Economy and Context Most tax collection declined. Tax revenue declined from Despite an increase in wage expenditure by 0.3 ppts of 10.3 percent of GDP in 2021 to 9.7 percent in 2022, driven GDP, as part of a long-term civil service reform agenda, by lower tax collection on international trade as well as on current spending decreased by 1.4 ppts to 13.8 percent goods and services due to disruptions in international trade of GDP in 2022, as the government reallocated or cut and weak growth in the service sector, the main sector current expenditures. Indeed, there has been a fall in of the economy. Only direct taxes recorded a marginal expenditure on goods and services, current transfers, and increase, supported by taxes on income due to the increase interest expenses. By contrast, externally financed capital in civil service salaries. expenditure increased by 3.2 ppts to 6.4 percent of GDP in 2022, reflecting increased project support, complemented Tax revenue collection was hampered by duty waivers by external borrowing. and increased subsidies adopted to mitigate the pass- through of higher import prices. The government provided The fiscal deficit has been primarily financed through fuel, fertilizer, and food price subsidies to reduce the pass domestic borrowing. In 2022, net domestic borrowing through of rising international commodity prices on the accounted for 64 percent of total deficit net financing and domestic market. In 2022, the fiscal cost of subsidies 3.5  percent of GDP, well above the limit set under the averaged 2.2  percent of GDP in lost tax revenue, with International Monetary Fund (IMF) program, which was fuel, fertilizer, and food subsidies representing 1.4, 0.5, revised upward by 0.4 percent of GDP in September 2022 and 0.3  percent of GDP, respectively. Duty waivers also to 2.9  percent of GDP at end-December 2022 to adjust undermined tax collection on materials imported for road for the shortfall in revenue related to the delay in the construction, amounting to 1.7 percent of GDP. The cost privatization of Megabank. To reduce the rollover risk of of The Gambia’s fiscal response to the impact of the war domestic debt financing, the government has emphasized in Ukraine underscores its fiscal vulnerability to external issuing longer-dated securities, with T-bonds representing shocks. 53 percent of domestic debt by December 2022, up from 47  percent a year before. External financing included Non-tax revenue fell in 2022 after performing relatively 4 concessional loans and IMF Extend Credit Facility resources. well a year before. Non-tax revenue fell below expectations A higher reliance on domestic borrowing is likely to crowd to 2.3  percent of GDP in 2022, down from 4  percent in out private sector credit, as most bank credit is made up of 2021. This was due to the non-realization of one-off claims on the government. revenue worth 1.5 percent of GDP expected from a dispute settlement in the petroleum sector and delays in proceeds The stock of public debt remains high. The total debt stock from the privatization of Megabank. remains relatively unchanged at 83.9  percent of GDP in 2022, up slightly from 83.8  percent in 2021 (Figure  13). Current spending declined to adjust to the revenue shortfall, External debt increased from 48.4 percent of GDP in 2021 while externally financed capital spending accelerated. to an estimated 52.1 percent of GDP in 2022, and domestic FIGURE 12 FIGURE 13 The Fiscal Deficit Widened in 2022 Public Debt Remains High Fiscal stance (percent of GDP) Public debt (percent of GDP) 30.0 10.0 100 80 20.0 60 5.0 10.0 40 20 0.0 0.0 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Total revenue and grants Total expenditures Fiscal de cit (rhs) Domestic debt External debt Total debt Source: MOFEA; IMF; World Bank staff. Source: MOFEA; IMF; World Bank staff. 22 Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential CHAPTER I – State of the Economy and Context TABLE 3 Summary of Fiscal Operations Dalasi (million) Percent of GDP 2019 2020 2021 2022 2019 2020 2021 2022 Total revenue and grants 19,222 21,584 17,649 21,421 21.2 22.9 16.8 17.8 Domestic revenue 12,737 13,677 15,001 14,338 14.0 14.5 14.3 11.9 Tax revenue 9,962 10,326 10,833 11,616 11.0 11.0 10.3 9.7 Tax on goods and services 4,840 4,934 4,837 4,854 5.3 5.2 4.6 4.0 Direct revenue 2,625 2,803 3,224 3,953 2.9 3.0 3.1 3.3 Taxes on international trade 2,499 2,588 2,788 2,729 2.8 2.7 2.7 2.3 Non-tax revenue 2,775 3,351 4,168 2,722 3.1 3.6 4.0 2.3 Grants 6,485 7,907 2,648 7,037 7.1 8.4 2.5 5.9 Budget support 2,790 4,604 722 2,471 3.1 4.9 0.7 2.1 Project 3,695 3,303 1,926 4,566 4.1 3.5 1.8 3.8 Total expenditures 21,552 23,636 22,496 27,182 23.7 25.1 21.4 22.6 Current 13,287 17,036 15,959 16,569 14.6 18.1 15.2 13.8 Wages and compensation 3,955 4,049 4,593 5,621 4.4 4.3 4.4 4.7 Goods and services 3,179 3,850 3,985 3,894 3.5 4.1 3.8 3.2 Subsidies and transfers 3,310 6,170 4,291 4,323 3.6 6.5 4.1 3.6 Interest 2,843 2,967 3,180 2,761 3.1 3.1 3.0 2.3 External 371 548 709 605 0.4 0.6 0.7 0.5 Domestic 2,472 2,419 2,470 2,156 2.7 2.6 2.4 1.8 Capital 8,265 6,600 6,537 10,613 9.1 7.0 6.2 8.8 Externally financed 7,584 4,837 3,363 7,707 8.4 5.2 3.2 6.4 Gambia local fund 681 1,763 3,174 2,906 0.8 1.9 3.0 2.4 Fiscal balance 22,330 22,051 24,847 25,761 (2.6) (2.2) (4.6) (4.8) Deficit financing Net acquisition of financial assets −329 −180 −180 1,000 (0.4) (0.2) (0.2) 0.8 Net incurrence of liabilities 2,866 1,595 5,092 4,797 3.2 1.7 4.9 4.0 Domestic 452 741 4,553 3,506 0.5 0.8 4.3 2.9 External 2,414 854 539 1,291 2.7 0.9 0.5 1.1 Statistical discrepancy −207 409 −65 −36 (0.2) 0.4 (0.1) (0.0) Nominal GDP (Dalasi) 90,794 94,269 104,903 120,090 Source: MOFEA; IMF; World Bank staff calculations. Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential 23 CHAPTER I – State of the Economy and Context debt increased from 35.3  percent of GDP in 2021 to an estimated 31.8  percent of GDP at end-2022. In 2022, 1.6.  Stagnating GDP per Capita total external outstanding debt reached US$1,029 million, and High Poverty Trends of which 68  percent was owed to multilateral creditors, The Gambia’s real GDP per capita has been stagnant for 29  percent to bilateral creditors, and 3  percent to private more than three decades. In the early 1990s, 14 countries in creditors. Outstanding public domestic debt reached SSA had a per capita income lower than that of The Gambia, US$640 million in the same year, held in T-bonds (53 percent), with 6 of them having a per capita income between one- T-bills (44 percent), and SAS bills or Islamic bills (3 percent). half and one-third that of the country. The Gambia’s per capita real GDP has stagnated and been overtaken by The country remains at high risk of debt distress. The May several other countries on the continent that started from Debt Sustainability Assessment shows that The Gambia much lower levels, even when excluding some fast-growing remains at high risk of both external and overall public countries with large natural resources (Figure 14). In 2021, debt distress. Three out of four external debt indicators while 10 SSA countries had a per capita income below that (present value of external debt-to-exports, debt-service- of The Gambia, only 2 had a per capita income between to-exports ratio, and external debt service-to-revenue one-half and one-third that of the country, illustrating that ratio) temporarily breach the threshold for varying periods many African countries are growing at a faster rate than that within the forecast horizon under the baseline. The reason of The Gambia. As a result, the gap in real GDP per capita for the breaches can be attributed to lower export growth between the SSA average and The Gambia widened from in the near term and higher debt service commitments in US$642 in 1988 to US$931 in 2021 (Figure 15). the medium term, with the end of debt-service deferrals negotiated with some creditors expected in 2024. The Low real GDP per capita growth results in high poverty present value of the overall public debt-to-GDP ratio rates. There were an estimated 1.1 million poor Gambians remains on a downward sloping path and drops below its in 2020, representing 53.4 percent of the population and a benchmark by 2025, indicating that the public debt outlook 4.8 ppts increase compared to 2015, driven largely by the remains sustainable. The sustainability of the country’s COVID-19 pandemic2 (Panel A in Figure 16). The Gambia’s public debt is due to factors such as fiscal consolidation poverty reduction trends before the pandemic can be efforts, a reliance on grants and concessional loans, and divided into two distinct periods. The first period, prior to support from development partners. 2015, was characterized by slow economic growth, resulting FIGURE 14 FIGURE 15 The Gambia’s Real GDP per Capita has . . . Lagging Behind the Average Real GDP Stagnated. . . . per Capita in SSA. Gambia's real GDP per capita Vs SSA countries Gambia's real GDP per capita Vs SSA average 1100 1900 1700 900 1500 700 1300 1100 500 900 300 700 500 100 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 300 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 Burkina Faso Gambia, The Rwanda Tanzania Uganda Gambia, The Sub-Saharan Africa Source: WDI. Source: WDI.  A counterfactual analysis conducted as part of a recent poverty assessment shows that in the absence of the COVID-19 pandemic, the national poverty rate in The Gambia 2 would have declined by about 3 percentage points from its 2015 level. 24 Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential CHAPTER I – State of the Economy and Context FIGURE 16 Evolution of the National Poverty Rate Panel a) Poverty Estimates, including Counterfactual Panel b) Poverty by LGA, 2015 and 2020 Scenario, 2015–2021 55 53.4 52.9 100% Poverty headcount rate (percent) Headcount poverty rate 80% 48.6 50 47.8 47.8 47.0 60% 45.8 45.4 40% 45 20% 40 0% 2015 2016 2017 2018 2019 2020 2021 ul ng a o an h e r au m re ss nk nj w a Ba nt bu Ba Ko ni re ik Ku Ka Br an Ke sa nj an Poverty Projections using 2020 IHS Ja M Poverty Projections using 2015 IHS with COVID 2015 2020 Source: Staff estimates based on data from the 2015 and 2020 Integrated Household Surveys and WDI. in stagnant poverty reduction. The second period, between predominantly urban, to 86  percent in Kuntaur, which is 2015 and 2019, was marked by modest economic growth predominantly rural. Poverty declined in only 4 out of that led to a gradual decline in poverty. During this period, 8 LGAs between 2015 and 2020. Some of the poorest access to basic services such as education and health care LGAs, such as Kerewan, Kuntaur, and Basse, experienced improved markedly, which was reflected in significant the largest increase in poverty (more than 10 ppts) (Panel B in improvements in non-monetary indicators of well-being. Figure 16). Further disaggregation shows wide disparities However, the COVID-19 pandemic reversed these gains by in the incidence of poverty within LGAs. Out of the increasing poverty, disrupting learning and access to health 10 poorest wards, all of which have estimated poverty rates care, and constraining the fiscal space needed to make of 88 percent or higher, 7 are in Kuntaur: Njaw, Nyanga, further progress. Despite a rapid government response Panchang, Ballangharr, Kaur, Pachonki, and Kuntaur. The through the implementation of social assistance programs other 3 wards in the top 10 are Misera, Foday Kunda in that reached a large share of the population, households the Basse LGA, and Sanjal in the Kerewan LGA, although were adversely affected by the pandemic through reduced these sparsely populated wards are not home to the employment, near-universal loss of income, and increased largest number of poor people. The largest share of poor cost of living due to disruptions in global supply chains. Due people continues to live in urban areas such as Kanifing to the spillovers of the war in Ukraine, poverty, measured and Brikama, the latter of which is home to 307,501 poor using the international poverty line of US$2.15 (in 2017 people—the largest poor population in the country. purchasing power parity), increased from 18.4 percent in 2021 to an estimated 20.3 percent in 2022. The increase The spillovers from the war on Ukraine weighed on the in poverty was largely due to weaker growth in per capita most vulnerable. Data from the 2020 household survey GDP and higher prices, eroding the purchasing power of show that poor households spend 65  percent of their households income on food—over 10 ppts higher than the non-poor. The spike in food prices has worsened food insecurity and Poverty remains mainly a rural phenomenon, with 7 out of exposed the poor to the risk of falling deeper into poverty, 10 people being poor in rural areas compared to 3 out compounding an already aggravated situation due to the of 10 people in urban areas. Across local government COVID-19 pandemic. Rising food prices limit the ability areas (LGAs), the poverty incidence varies from about of vulnerable households to increase their already low 8 percent in Banjul and 12 percent in Kanifing, which are incomes. Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential 25 CHAPTER I – State of the Economy and Context 2.  Outlook and Risks 2.1.  Country Outlook system; cleansing and maintaining accurate tax ledgers for large taxpayers; consolidating toll bridge collection; and The Gambia’s economic outlook remains favorable, although developing a national mandate and a policy document GDP growth is expected below the pre-pandemic level for customs border and inland controls. Some revenue in the medium term. Real GDP growth is projected to measures underpinning fiscal consolidation are underway, average 5.5 percent in 2023–25 (2.6 in percent per capita such as the launch of ASYCUDA World in June 2022. terms), driven by increased activity across sectors. Services Spending measures include the completion of major and agriculture are expected to continue to grow, assuming infrastructure projects related to the Organization of Islamic respectively higher tourist inflows as advanced economies Cooperation conference and the phasing out of war- and recover and favorable rainfall. A recovery in private pandemic-related spending. The authorities also plan to consumption and investment, supported by more robust expand the social registry and use it to design and roll out remittances and resilient public consumption and investment, targeted support to the vulnerable population. Public debt is projected to support growth in the industry sector. The is projected to average 75  percent of GDP in 2023–25, subsectors that are expected to drive growth in industry are supported by economic growth and fiscal consolidation. mainly: (i) construction, and (ii) electricity, gas, steam, and air conditioning. Growth projections are, however, below The CAD is projected to remain high in 2023, before the pre-pandemic level of 6.2 percent in 2019, reflecting the declining in the medium term. Pressures on the balance of lingering effects of overlapping crises (i.e., the COVID-19 payments are expected to ease only moderately in 2023 pandemic and the war in Ukraine). Although stronger due to the spillovers from the protracted war in Ukraine. The projected growth in agriculture and an expansion of cash CAD is projected to remain high at 12.2 percent of GDP in transfers are expected to have a positive effect on poverty 2023, before narrowing to 8.1 percent in 2024–25, reflecting reduction, these gains will be tempered by continued high falling investment-related imports and robust export growth, food prices. The international poverty rate is expected especially in tourism. The growth in remittances is likely to to increase by 1.5 ppts in 2023 and remain high at nearly remain moderate due to weak economic growth expected 22 percent through 2025. in advanced economies in 2023, before accelerating modestly in 2024, which will continue to affect migrants’ Inflation is expected to be high in 2023, before easing in incomes. The deficit will be financed through capital transfers the medium term. Inflation is projected to remain in double (development aid), foreign investment, and public-sector digits in 2023 (largely unchanged from 2022), reflecting debt financing. persistently high global food and energy prices. In response, the CBG stated on February 6, 2023, its intention to tighten its monetary policy, with further increases in the policy rate to rapidly bring it into positive territory in real terms. In 2.2.  Risks to the Outlook the context of tight monetary policy and easing of global Significant downside risks cloud the outlook. While the supply conditions, price pressures are expected to ease baseline projects a continued economic recovery, persistent in the medium term, and inflation is projected to average external shocks related to the prolonged war in Ukraine, 7.3 percent in 2024–25. fiscal slippage, climate change, continued financial tightening, and political uncertainty are serious risks to the The fiscal deficit is expected to narrow thanks to fiscal outlook. consolidation efforts. The fiscal deficit is projected to average 2  percent of GDP in 2023–25, supported by The protracted war in Ukraine could affect medium–term higher revenue mobilization and moderation in spending. growth prospects. The Gambia depends heavily on imports Revenue measures will concentrate on strengthening the of oil, fertilizer, and Ukrainian wheat,3 and persistent high tax administration; maximizing efficiency in revenue global commodity prices continue to undermine the collection through the implementation of ASYCUDA World country’s growth as well as fiscal and external balances, with and the preparation of an integrated tax administration a persistent high import bill fueling inflation. The Gambia 3  Wheat imports from Ukraine represented 84 percent of The Gambia’s total wheat imports between 2018 and 2020 (FAO). 26 Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential CHAPTER I – State of the Economy and Context TABLE 4 Medium-Term Outlook 2020 2021 2022 e 2023 f 2024 f 2025 f Real GDP growth, at constant market prices 0.6 4.3 4.3 5.0 5.5 5.8 Private Consumption −1.2 3.5 3.3 4.0 4.1 4.1 Government Consumption 20.1 −7.9 2.6 3.5 3.6 3.6 Gross Fixed Capital Investment 26.7 22.2 18.0 15.5 10.8 12.2 Exports, Goods and Services −20.0 5.5 −0.4 14.7 16.0 16.0 Imports, Goods and Services 6.0 13.3 10.9 15.0 11.0 11.8 Real GDP growth, at constant factor prices 0.6 4.3 4.3 5.0 5.6 5.8 Agriculture 11.0 4.7 6.9 7.0 5.3 5.1 Industry 8.2 10.4 6.1 6.6 6.4 6.1 Services −5.1 2.1 2.7 3.6 5.2 6.1 Inflation (Consumer Price Index) 5.9 7.4 11.5 11.1 8.4 6.1 Current Account Balance (% of GDP) −3.8 −8.0 −14.6 −12.2 −10.0 −8.7 Fiscal Balance (% of GDP) −2.2 −4.6 −4.8 −3.2 −2.0 −1.0 Revenues (% of GDP) 22.7 16.8 17.8 19.2 19.5 20.6 Debt (% of GDP) 85.1 83.8 83.9 77.7 73.6 66.8 Primary Balance (% of GDP) 1.0 −1.6 −2.5 −1.0 0.7 1.0 International poverty rate ($2.15 in 2017 PPP)a,b 17.3 18.4 20.3 21.9 22.0 21.9 Lower middle-income poverty rate ($3.65 in 2017 PPP)a,b 47.0 48.6 51.2 52.7 52.7 52.6 Upper middle-income poverty rate ($6.85 in 2017 PPP)a,b 80.6 81.9 84.1 84.9 85.0 84.6 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. Note: e = estimate, f = forecast. Poverty data are expressed in 2017 PPP, versus 2011 PPP in previous editions - resulting in major changes. See pip.worldbank.org (a) Calculations based on 2015-IHS. Actual data: 2015. Nowcast: 2016–2021. Forecasts are from 2022 to 2024. (b) Projection using neutral distribution (2015) with pass-through = 0.87 (Med (0.87)) based on GDP per capita in constant LCU. is also dependent on remittances and tourist arrivals from contingent liabilities with public utilities, and a continued advanced economies, especially Europe. Weaker-than- rise in the cost of credit to the government following an expected growth in Europe due to the prolonged war in increase in the MPR (and thus domestic debt service). Ukraine, persistent inflationary pressures, and tighter financial Further increases in inflation and negative real interest rate conditions in international markets could undermine the yields would compromise the profitability of the banking recovery in the tourism sector and keep the level of capital sector and overall financial stability. External fiscal risks and remittances inflows low. include weaker-than-expected grants; higher interest rates relative to previous external borrowing options that would Fiscal risks could materialize in the short to medium increase external debt servicing costs; the end of debt term, weakening fiscal management and macroeconomic service deferrals negotiated with some creditors in 2024; stability. These risks could come from both internal and and other external price shocks. Rising fiscal pressures external sources, worsening the fiscal deficit and public could increase domestic government borrowing, which in debt. Internal fiscal risks include weaker-than-expected turn would further raise banks’ exposure to government growth, pressures to clear state-owned-enterprises’ (SOEs) debt, heighten the risk of public insolvency (as the country Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential 27 CHAPTER I – State of the Economy and Context is at high risk of debt distress), further crowd out private of priority goods such as fuel, fertilizer, medicines, and sector credit, and jeopardize macroeconomic stability. food, which could put further pressure on the domestic currency and inflation, significantly worsening the welfare Continued tightening of financial conditions poses an of the population. The adverse monetary and external additional threat to the country outlook. Following monetary environment remained during the first months of 2023. policy tightening, The Gambia’s Treasury bill yields have Foreign exchange reserves continued to decline and totaled rapidly and significantly risen, increasing fivefold, on average, 5 months of imports in April, the nominal exchange rate of after a long period of low interest rates. Yields on the the Gambian dalasi against the US dollar depreciated by country’s 3-month Treasury bill rose from 2.1 percent in May 18 percent in March (year-on-year), and inflation reached 2022 to 10.5 percent in January 2023, while yields increased 17.4 percent in April (year-on-year). from 1.9 percent in May 2022 to 12.6 percent in January 2023 for its 6-month Treasury bill, and from 2.5 percent in Climatic hazards are a significant threat to the country’s May 2022 to 12 percent in January 2023 for its 12-month growth prospects. As witnessed by floods in July and Treasury bill. As a result, debt service expenditure reached August 2022, The Gambia is highly vulnerable to climate GMD 416.1 million (0.3 percent of GDP) between January shocks. Agricultural production is vulnerable to abnormal and February 2023, an increase of 92 percent from GMD rainfall throughout the year, with less than normal amounts 216.9 million (0.2 percent of GDP) in the same period of of water having immediate effects on growth and poverty the previous year. Debt service costs are estimated at reduction and exacerbating food insecurity throughout 6.6 percent of GDP in 2022 and are expected to increase to the country. 8.2 percent of GDP in 2023. The transition phase to higher yields and, consequently, to higher domestic debt service Political instability could negatively affect macroeconomic could continue if inflation is not significantly reigned in, stability. Political instability, such as the attempted coup adding to already higher macro-fiscal and financial risks d’état in December 2022, could revert hard-won progress (e.g., higher fiscal and current account deficits, higher debt in macroeconomic management and negatively affect levels and the country’s rating to high risk of debt distress, ongoing efforts to boost domestic revenue mobilization higher bank exposure to government debt, and pressure and streamline current expenditures. This, in turn, could on reserves). hamper investment spending, economic growth, and poverty reduction. Persistent pressures on the balance of payments due to the war in Ukraine could widen the external deficit. Nevertheless, there are also upside risks. The main upside A further sharp rise in international commodity prices or a risks to the country outlook include: (i) above-average decline in international prices for The Gambia’s primary rain that supports a bountiful harvest; (ii) sustained donor commodity exports would widen the external deficit. support to the National Development Plan 2023–2027; Moreover, a continued decline in international reserves could (iii) higher-than-expected tourist arrivals; and (iv) a decline trigger severe shortages of essential imports, especially in global commodity prices for essential imports. 28 Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential CHAPTER II Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential 30 Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential CHAPTER II – Driving Financial Inclusion in The Gambia: Constraints and Opportunities of Digitalization This chapter provides an overview of financial inclusion and at the very early stage of developing digital financial services options to increase it in The Gambia. Financial inclusion is (DFS). The chapter also identifies opportunities to further essential for the financial sector to spur economic growth and develop digital payment systems and DFS and proposes development. A review of the performance of the banking selected enabling policy actions to support growth and the sector, which is expected to be the main driver of financial development of DFS. Moreover, it includes experiences of inclusion, and the state of financial inclusion in the country countries that have been successful in boosting financial shows that overall financial inclusion is low and the country is inclusion, as they can inform policy reforms in The Gambia. 1.  Role of Financial Development, Financial Inclusion, and Digital Financial Services Access to finance is key for economic growth, employment useful, sustainable, and affordable set of financial products creation, and poverty reduction. A functional and efficient and services for all members of an economy (Sarma 2008). financial sector intermediates resources, allows for the The level of access is determined by: (i) the availability exchange of information, facilitates the management of adequate, useful, and affordable set of products and of risk, and fuels the economy by unlocking resources services; (ii) the use of financial products and services; and for investment and business opportunities through the (iii) the quality of those products and services as well as reallocation of capital. The availability of financial products their providers, ecosystem, and infrastructure. An inclusive is therefore necessary to reduce costs, minimize risks, financial system is critical to ensure financial products and manage the impact of crises, increase capacity, and support services benefit the broadest population segments in terms the viability of projects. An efficient financial sector requires of providing access to productive resources, reducing the institutions, instruments, frameworks, infrastructure, and cost of capital, improving day-to-day management of finances, markets relative to the size and needs of the economy. and reducing people’s reliance on informal sources of The breadth and depth of the financial sector is therefore credit, which are often provided at exorbitant interest rates. relevant to achieve long-term economic growth and An inclusive financial system thus increases efficiency and development (Cihák et al. 2012). well-being by facilitating safe savings practices and a range of efficient financial services. Several African countries, The literature on financial sector development has such as Ghana (Box 2), have adopted comprehensive DFS documented the sectoral contributions to sustainable and policies and created national financial inclusion strategies, inclusive economic growth, employment generation, and typically led by the central bank and the government. While poverty reduction. Stable, sound, and efficient financial they have typically spearheaded and catalyzed the process systems channel resources by mobilizing and allocating by developing a roadmap and a national digital agenda, savings via credit to more productive uses, thereby supporting they have also incorporated inputs from the private sector economic growth. Financial systems also enable payments, and other stakeholders (end-user groups) and assigning provide collection mechanisms, and facilitate the working responsibilities across the public and private sector. capital needed by corporations, businesses, and individuals. By attaining greater levels of inclusion, the financial sector also DFS, which consist of an array of financial products and promotes poverty alleviation by: (i) providing savings and services delivered through digital technologies, can act as credit services for families and individuals, helping them catalysts for financial inclusion. The crisis triggered by the attain higher incomes; (ii) facilitating personal investments; global COVID-19 pandemic highlighted the relevance of and (iii) reducing the financial effects of shocks through the digital technologies to facilitate transactions. Technological provision of risk management tools. solutions in the financial sector can be used to reach excluded or underserved populations. International Financial inclusion is essential for financial and economic experience demonstrates the positive effects of creating development. The recent literature on financial inclusion a favorable environment for the development of DFS. DFS reveals that even well-developed financial systems have offer the opportunity to reduce transaction costs, improve not always been inclusive, with some population segments the customer experience, decrease processing times, and remaining excluded from formal financial systems. Broadly, increase the efficiency and quality of formal financial services financial inclusion refers to the level of access to a range of for communities untapped by the existing banking system. Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential 31 CHAPTER II – Driving Financial Inclusion in The Gambia: Constraints and Opportunities of Digitalization BOX 2 Ghana’s Policy on Digital Financial Services In 2020, Ghana launched a DFS policy alongside its mobile money account rising from 2 percent in 2012 national financial inclusion strategy. The policy was to 65 percent in 2018. The DFS policy—consisting born out of a need to specify how DFS could be of 43 actions to be taken by the public and private deployed to support the country’s financial inclusion sector—serves as blueprint for achieving short- and goals. DFS have had a monumental impact on medium-term progress in advancing Ghana’s cash- increasing financial inclusion in the country, with the lite vision, which lays out the country’s efforts to build share of people aged 15 and older with an active an inclusive digital payments ecosystem. Source: https://mofep.gov.gh/sites/default/files/acts/Ghana_DFS_Policy.pdf They also have the potential to address common demand- of DFS is dependent on the quality and availability of side barriers such as irregular and low-income levels, enabling factors such as infrastructure (including identity the absence of formal means of identification, the lack and connectivity), the legal and regulatory framework, of trust in the formal financial system, and geographical and financial consumer capacity (skills for using digital and literacy-related barriers. However, the expansion devices). 2.  The Gambia’s Financial Sector: Structure and Performance The country’s financial sector is very small and dominated the capital adequacy ratio was 24.8  percent, well above by 12 commercial banks, whose assets account for most of the regulatory minimum of 10 percent. However, holdings the assets in the sector. As of December 2021, commercial on the banks’ investment portfolio of zero-risk government banks represented 86.2  percent of total financial sector securities may mask solvency vulnerabilities in some banks. assets and 73.5 percent of GDP. Most of these banks are While aggregate asset quality deteriorated because of the foreign and privately owned. Banking sector concentration impact of the COVID-19 pandemic, it is showing signs of is high, with only 4 banks comprising about 65 percent of recovery. NPLs have been declining from 5.2 percent of total total assets and about 68 percent of total deposits. Lending loans in December 2021 to 4.6 percent in December 2022. is also concentrated among only a few creditworthy firms, and the large deposits made by the Social Security & Despite relatively a high banking penetration rate, financial Housing Finance Corporation pose significant systemic intermediation and depth is significantly low and limited risks to the banking sector. by structural factors. At end-2021, banking sector assets to GDP stood at 70.5 percent, higher than the SSA median Aggregate financial indicators point to a well-capitalized of 53 percent, but intermediation is significantly low due and liquid banking sector, although buffers could be limited to the high perception of credit risk, lack of investment by banks’ exposure to the public sector. In December 2022, opportunities, and heavy reliance on collateralized lending. 32 Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential CHAPTER II – Driving Financial Inclusion in The Gambia: Constraints and Opportunities of Digitalization TABLE 5 Structure of the Financial Sector As of December 2021 Percent Number of Assets (millions of Total Percent Institutions of GMD) Assets of GDP Commercial Banks 12 76,241 86.2% 73.5% Other Deposit Taking Financial Institutions 126 4,786 5.4% 4.6% Finance Companies 3 2,393 2.7% 2.3% Credit Unions 54 2,383 2.7% 2.3% Village Savings & Credit Associations1/ 69 10 0.0% 0.0% Other Finance Corporations Pension Funds 2 5,325 6.0% 5.1% Federated Pension Scheme (FPS)2/ 1 2,366 2.7% 2.3% National Provident Fund (NPF)2/ 1 2,958 3.3% 2.9% Insurance Corporations 11 1,186 1.3% 1.1% Life Insurance 2 215 0.2% 0.2% Non-life Insurance 9 651 0.7% 0.6% Industrial Injuries Compensation Fund (IICF)2/ 1 320 0.4% 0.3% Other Finance Intermediaries 1 605 0.7% 0.6% Housing Finance Fund2/ 1 605 0.7% 0.6% Financial auxiliaries 156 347 0.4% 0.3% Foreign Exchange Bureaus3/ 156 347 0.4% 0.3% Money transfer organizations Other Fiduciary Financial Institutions 1 Total 309 88,490 100% 85.3% Memorandum Item Nominal GDP 103,700 Source: CBG; IMF; World Economic Outlook; World Bank Financial Sector Assessment Program team estimates and calculations. Note: 1/ Data for Village Savings and Credit Associations are as of December 2017. 2/ Data for pension funds, the Insurance Fund, and the Housing Finance Fund are as of December 2019. 3/ Data for foreign exchange bureaus are as of December 2020. Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential 33 CHAPTER II – Driving Financial Inclusion in The Gambia: Constraints and Opportunities of Digitalization At end-2021, two-thirds of banks’ balance sheets were made Despite declining banking sector profitability, there are up of portfolio investments, primarily government securities no incentives to alter banks’ balance sheets and increase (35.5 percent), and cash holdings (33 percent), with the loan lending and financial intermediation. Yields on Treasury portfolio making up a small share (12.4 percent). Lending is bills have been falling from a high of 18  percent in 2016 concentrated among a few creditworthy firms. to below 1 percent at end-2021. Falling government rates have greatly affected profitability. Banks’ return on assets fell Credit to the private sector remains low, and bank credit from 3.16 at end-2020 to 2.49 at end-2021, while their return is skewed toward the public sector. Total domestic credit on equity fell from 22.47 to 19.87 during the same period. to the private sector reached 8.07 percent of GDP in 2020, the fifth lowest in a sample of 35 SSA countries (where the The country’s non-bank financial institutions (NBFIs) are average was 26.82 percent of GDP). Out of total domestic few and undiversified, although their share of financial credit, bank credit to the private sector reached 7.58 percent institutions is growing. NBFIs are comprised of non- of GDP in 2020, the fourth lowest in a sample of 38 SSA bank deposit-taking institutions (finance companies, countries (where the average was 23.45 percent of GDP). credit unions, and village savings & credit associations, By contrast, The Gambia’s bank credit to the government with the share of total assets equal to 4.6 percent of GDP was the fifth highest (21.81  percent of GDP in 2020) in and 5.4 percent of total financial sector assets), 2 pension a sample of 34 SSA countries (where the average was funds (with assets representing 5.1  percent of GDP and 12.59 percent of GDP).4 Instead of financing investment, 6  percent of total financial sector assets), 11 insurance banks tend to focus on financing the consumption goods. companies (with assets representing 1.1 percent of GDP Banks in The Gambia are not reaching the wider population, and 1.3 percent of total financial sector assets), and other and they have no long-run private investment relationships financial intermediaries. The Gambia’s total financial sector (Bukhari 2005). assets represent 85.3 percent of GDP. 3.  Financial Inclusion in The Gambia While progress has been recorded on certain indicators Access to transactional services and credit for MSMEs and a national financial inclusion strategy (NFIS) has remains a significant challenge in The Gambia. According been drafted, financial inclusion continues to be low in to the latest edition of the Enterprise Survey carried out The Gambia. Structural constraints pertaining to limited in 2018, 72 percent of small and 40 percent of medium- accessibility, lack of diversity of products, and low affordability sized firms identified access to credit as the main constraint have limited the expansion of financial inclusion in The to growing their business. Only 10.6 percent of surveyed Gambia. Access to formal financial services remains among firms reported having access to a bank loan and/or line of the lowest in the SSA region. The most recent FinScope credit, and only 15.6 percent of firms reported not needing survey (October 2019) shows that only 19  percent of a loan. Investment in firms is financed mostly internally, Gambians have an account with a formal financial institution, with 84.6 percent of firms using internal resources and only while another 12  percent use informal savings, leaving 3.2 percent receiving financing from banks. 69 percent completely excluded from formal and informal financial services. Of the 19 percent with accounts at formal Most companies operating in The Gambia are micro- financial institutions, a mere 5 percent have a traditional enterprises with limited capacity to demonstrate credit bank account, and 14 percent use the services of an NBFI worthiness and meet banks’ collateral requirements. such as a deposit-taking microfinance company or credit Lenders typically require high-value immovable collateral union. About 12 percent of Gambians receive remittances, (land and/or real estate), but the majority of MSMEs can making this type of financial service some of the most used only offer movable collateral. A total of 93 percent of loans in the country. Access to formal financial services is much in The Gambia require collateral, higher than an average of lower in rural (13 percent) than urban (24 percent) areas, for 85 percent in SSA, and Gambian lenders require a collateral women (15 percent) than men (23 percent), and for people value of 224 percent of the loan amount, also higher than aged between 15 and 35 (14 percent) compared to their the SSA average of 214 percent. While the CBG set up a older counterparts (27 percent). secured transactions system for movable assets in 2014, 4  https://www.theglobaleconomy.com/rankings/bankcredit_to_government/Sub-Sahara-Africa/ (consulted on February 26, 2023). 34 Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential CHAPTER II – Driving Financial Inclusion in The Gambia: Constraints and Opportunities of Digitalization it is seldom used and constrained by a lack of secondary a transaction account, while the same is true for 77 percent market for the re-sale of repossessed collateral. and 75 percent of the country’s youth and rural residents, respectively. The use of digital payments remains low, which impedes the development of DFS. Both access to and use of transaction Low access to transaction accounts has also contributed accounts and associated digital payment instruments and to the low use of digital payments. Cash and cheques are services are critical components of financial inclusion. To the predominant payment instruments in The Gambia, while expand access to transaction accounts and increase there is limited use of digital payment instruments such as the use of digital payment instruments and services, debit cards, credit cards, credit transfers, direct debit, and the authorities need to promote the digital economy. The mobile money. According to the NFIS and FinScope, only Gambian market is characterized by low levels of access to 5  percent and 2  percent of adults use banking-related transaction accounts (in both banks and NBFIs), especially products (including digital payment instruments) and mobile among the youth (aged 15–35) and people living in money, respectively. This also has implications for the informal rural areas. According to the NFIS, about 69  percent of economy and hold back the potential of DFS driving the Gambian adults (aged 15 and older) do not have access to development of the digital economy in The Gambia. 4.  Key Constraints for Digital Payments and Financial Inclusion in The Gambia Key constraints to expand digital payments and financial provides the framework for the licensing and supervision services more broadly are related to the lack of innovative regime of NBFIs such as finance/microfinance institutions, players in the market. This stems from legal/regulatory savings/credit associations and unions (also known as gaps and uncertainty, lack of modernization in the underlying savings and credit companies), leasing companies, debt payments infrastructure, high fees and issue of eligibility, financing companies, and mortgage lenders. the government’s reliance on paper-based payment instruments for collections, and demand-related challenges The Payment Systems Law lacks clarity and misses key such as low levels of financial literacy. nuance in concepts such as interoperability, anti-money laundering and combating terrorism financing (AML/CFT), disputes, and privacy. The law defines important concepts 4.1.  Gaps in the Legal/ such as clearing, netting, settlement finality, irrevocability, systemic risk, and system designation. It states that the Regulatory Framework for CBG may grant access to any financial institution it deems Digital Financial Services is in the interest of the efficient operation of the payment systems that it owns and operates. However, it is unclear The CBG is responsible for regulating and overseeing The what powers the CBG has in terms of regulating access Gambia’s digital payments market, including system to systems licensed by the CBG but operated by the operators, payment service providers (PSPs), payment private sector. Access to payment infrastructure by all types services, and payment instruments.5 While some of the of market participants without discrimination is critical country’s acts and regulations cover the oversight of the for creating a level playing field and promoting healthy payment system and PSPs, the country does not have a competition. Moreover, the law does not include other stand-alone comprehensive oversight framework for the important concepts such as banking agents, payment system, overall digital payments market. The main law that regulates instrument, access channel, and account interoperability, The Gambia’s payments market is the Payment Systems nor financing technology FinTech concepts such as open Act of 2016, while the Non-Bank Financial Institutions Act banking and application programming interfaces. 5  The CBG’s authority to regulate and oversee The Gambia’s payments market is based on different acts and guidelines: Central Bank of the Gambia Act (1992 and updated in 2005 and in 2018); Banking Act (2009); Mobile Money Regulation (2011); Anti-Money Laundering and Combating Terrorism Financing Act and Guidelines (2012); Consumer Protection Act (2014); Payment Systems Act (2016); Non-Bank Financial Institutions Act (2016); and the Non-Bank Financial Institution Rules and Guidelines on Policies and Procedures (2016). Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential 35 CHAPTER II – Driving Financial Inclusion in The Gambia: Constraints and Opportunities of Digitalization Mobile money is available in the country and is regulated by limitations and offers opportunities, particularly related to the Mobile Money Regulation, which is based on the Central operations, centralized data, risk management, and reporting, Bank Act of 2005. While the regulation defines e-money all of which can be improved to address local and regional and e-money issuer, it focuses only on mobile money and risk. Know-your-customer requirements are still stringent for mobile money service providers, leaving out other forms of opening bank accounts. e-money such as online money and prepaid cards. The case of Côte d’Ivoire illustrates the role of e-money regulation The Gambia’s consumer protection framework does in having mobile money issued by NBFIs (Box 3). Clarity not directly cover financial services. The framework is on licensing requirements for other e-money issuers would governed by the 2014 Consumer Protection Act, which aid the impact of the recent regulatory amendments of established the Competition and Consumer Protection permitting mobile money for cross-border transactions. Commission as the agency responsible for overseeing These gaps need to be addressed to drive responsible and consumer protection and empowerment issues. However, secure financial services via mobile money. The authorities the act does not address to financial services directly. should also consider aligning e-money laws with those of Four regulatory agencies have purview over the country’s regional peers. PSPs, which makes coordination challenging and creates confusion and uncertainty in the market while increasing The Gambia’s AML/CFT act suffers from several limitations. compliance costs. For example, consumer recourse measures These include a lack of regulation; capacity constraints in are a requirement for PSPs, but consumer protection addressing ML such as non-filing of suspicious transaction agencies, where consumers can escalate complaints, are reports; lack of standard operational manuals, adequate not specified in the regulation. For cross-border transactions, resources and requisite skills to investigate and prosecute ML; The Gambia’s consumer protection laws do not explicitly and failure to report suspicious physical cross–border cash cover international money transfers, as they do not mention transportations (FATF 2022). Since The Gambia relies heavily consumer recourse mechanisms for these payments. The on remittances, improving regulation and capacity constraints lack of focus and clarity, both locally and regionally, presents to address ML is paramount to maintain banking relationships an opportunity for regulation to provide guidelines and and ensure other countries of The Gambia’s ability to combat build trust in the country’s digital payments market. As ML and the financing of terrorism. The payments infrastructure the experience of several African countries show (Box 4), and legal framework, along with related processes, suffer from rigorous consumer protection mechanisms can enable BOX 3 Example from Côte d’Ivoire on E-Money Regulation and Application In 2015, the Central Bank of West African States students paid their school fees digitally—94 percent issued regulations that encouraged nonbanks to via mobile money transactions and 6  percent via issue e-money. Mobile money providers in Côte online payments. The initiative has also driven cost d’Ivoire partnered with the government to launch and operational efficiencies and benefited mobile what would become a very successful solution for money providers, all of which have improved the school registration fees. As a result of this initiative, viability of the DFS ecosystem. 99 percent of the country’s 1.5 million secondary school Source: The World Bank Research Observer 2017. 36 Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential CHAPTER II – Driving Financial Inclusion in The Gambia: Constraints and Opportunities of Digitalization BOX 4 Examples of Consumer Protection Mechanisms in African Countries The African Development Bank has supported the and artificial intelligence to interface with key financial National Bank of Rwanda, the Bank of Ghana, and the service providers. The system has incorporated key Competition and Consumer Protection Commission local languages for ease of use, to record customer of Zambia in establishing a complaint handling system complaints, including audio complaints from those for financial regulators, using multi-lingual chatbots unable to read and write, and to track their resolution. Source: https://www.proto.cx/news/african-development-bank-and-proto-to-automate-financial-consumer-protection-in-ghana-rwanda-and-zambia. countries to tackle demand-side constraints to accessing access to electricity, a significant proportion of Gambians transaction accounts and DFS, including safety measures (about 38 percent) are not covered by the electricity grid. and provisions that protect end-users. Coverage is also skewed toward urban areas, with only 30 percent of households in rural areas having access to Gaps in the legal/regulatory framework relative to that electricity. In addition, the affordability of electricity is also a of regional peers penalize regional digital payments. The constraint to improving access. For instance, 43 percent of Gambia stands to benefit from aligning its legal/regulatory households struggled to settle their electricity bill in 2020, framework with that of regional peers, but this would require as The Gambia’s electricity tariff is one of the highest in the authorities to address existing capacity constraints. SSA and more than double the global average. The country is a beneficiary of the Economic Community of West African States’ (ECOWAS) project to harmonize Internet access is still low, with limited affordability, low member countries’ legal and regulatory frameworks for quality, and lack of digital skills being the key barriers to the digital economy. This initiative will help The Gambia to access. The Gambia has a relatively competitive telecom identify gaps that hinder regional payments integration as market, although mobile internet penetration is low at well as strengthen fintech regulation as expressed by the 66.5 percent in 2021. The high cost of data remains a key CBG. However, this process will be lengthy and require constraint to increasing access to the internet. For example, several laws and regulations to be updated over the coming 1 gigabyte of mobile data in 2022 cost an average of years, and existing capacity constraints are likely to affect US$4.60, higher than US$1.85 in Niger and US$1.53 in the process. Guinea-Bissau.6 Other barriers inhibiting internet usage are low service quality, lack of content relevance, and insecurity (on the supply side) as well as weak literacy and digital skills. 4.2.  Inadequate Underlying High cell phone penetration does not yet match the limited ICT Infrastructure supply of internet access points and banks’ low branch penetration. Formal banking services are mostly located in The Gambia faces serious infrastructure deficiencies urban areas, especially in Banjul and surrounding districts. that affect the performance of the country’s economy Access to a formal bank account is hampered by a limited and inhibit the development of DFS. Despite growing supply of internet access points and lack of available bank 6  Statista – Price of mobile data in the Gambia. Available at: https://www.statista.com/statistics/1273299/price-for-mobile-data-in-gambia/. Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential 37 CHAPTER II – Driving Financial Inclusion in The Gambia: Constraints and Opportunities of Digitalization branches. Low use of digital payments partly stems from the and limited competition in the financial sector. For instance, lack of availability automated teller machines (ATMs), point- cash-out fees with Qmoney range from GMD 6 for cash-outs of-sale terminals, or branchless options. Given the high of GMD 10-25 to GMD 450 for cash-outs of GMD 22501- level of financial exclusion, The Gambia has a significant 25000. Cash-out fees can account for about 4  percent potential to leverage its high mobile phone penetration to of the monthly income of households living in extreme increase access to financial services through mobile money, poverty (about 48 percent of the population), which affects potentially increasing financial inclusion in rural areas. To the use of DFS (WB 2022c). date, there are limited merchant payment opportunities, and the use of mobile money remains shallow until better Information asymmetry is among the key inhibitors value products are developed. Additionally, mobile money to financial inclusion for SMEs and households. Credit agents are concentrated in the western part of the country, information systems and scoring models using payment and there is no full national coverage. For mobile money flow information are used to create borrower history and to reach its intended objectives, the digital payment facilitate access to financial services by reducing asymmetries ecosystem, along with the payments value chain, needs to of information. Effective collateral laws and increased be strengthened. information about potential borrowers’ creditworthiness through credit registries can therefore increase access The country’s national identification (ID) system is to credit. While the CBG set up and manages the Credit fragmented. It has undergone several developments, Reference Bureau, a credit reporting system, data coverage, with the first identity card (without a chip) being rolled reliability, outreach (the system is only available to banks, out in 2009, followed by one with a chip that was used NBFIs do not have access), and usability need significant between 2009 and 2015. The second ID card was, however, improvements. Meanwhile, a secured transactions system replaced by the initial identity card due to inefficiencies. for movable assets has been in place since 2014; however, The ID system was later enhanced to improve security its uptake is very low due to a shallow secondary market, features with the creation of a biometric card in 2018, and which hinders the resale of repossessed collateral, reducing the country’s new biometric ID scheme launched in 2020. asset liquidity and altering its valuation. The new biometric ID is costly, and the scheme was rolled out without any personal data protection regulation or Lack of diversity of financial products and demand-side dedicated data protection agency. In addition, the lack challenges drive financial exclusion. Financial service of registration for SIM cards is a hinderance for financial providers in The Gambia offer mostly traditional products inclusion. In the absence of universal coverage of digital and services. Lending products tend to offer short IDs, the authorities should consider to what extent SIM maturities, limiting the availability of long-term financing cards and mobile phone numbers could be used as identity instruments for longer-term investments. While low access proxies/aliases in financial transactions. to finance is driven by lack of diversified financial products, high risk aversion from lenders, and lack of financial sector infrastructure, there are also demand-side challenges such as high levels of informality, low levels of financial 4.3.  Constraints Related literacy, and absence of financial consumer protection. to Access, Eligibility, A wider array of financial products needs to be gradually developed by financial institutions, as the existing product Affordability, and Market offering consists of traditional lending and savings products Development that fail to meet the long-term financing needs of local businesses. The collateral requirements penalize low-income households and small and medium-sized enterprises (SMEs). The need Asset-based lending and other fintech is largely inexistent. to provide hard immovable collateral, deficient secured Financial innovation and the development of frameworks transactions and collateral registry systems (STCR), and for asset-based lending such as leasing and factoring limited availability of credit information, among others, could increase uptake. Factoring is a form of asset- represent eligibility constraints. Moreover, the high cost based short-term financing mechanism whereby firms sell of financial services is also a barrier to financial inclusion their creditworthy accounts receivable at a discount and for SMEs and low-income households. Affordability and receive immediate cash. Since financing is linked to the costs are affected by high interest rates or fees, minimum value of an underlying asset, the creditworthiness of the account balances, insufficient product availability for MSMEs, firm is irrelevant, making it particularly attractive to higher 38 Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential CHAPTER II – Driving Financial Inclusion in The Gambia: Constraints and Opportunities of Digitalization risk MSMEs.7 Leasing products enable businesses to use offering because they serve clients that typically fall outside their assets, either under the ownership of the lessor or the more-established providers’ business lines, and they allow otherwise, as security to generate capital. Microinsurance is financial service providers to further develop their commercial another small-scale risk management instrument to reduce products. These alternative products are underdeveloped vulnerability. These products are alternatives to the traditional and lack a clear regulatory framework in The Gambia. 5.  Payment Infrastructure Upgrades to Strengthen Financial Inclusion in The Gambia Retail payment system/infrastructure upgrades can be used to strengthen the use of DFS. A legacy automated b) GamSwitch clearing house (ACH) owned and operated by the central GamSwitch is a domestic card payment platform in The bank is one of the country’s main existing retail payment Gambia, structured as a public-private partnership and systems. The ACH processes credit transfers, direct debits, licensed by the CBG as a payment system. All commercial and cheques. It is especially relevant for financial inclusion, banks in the country are connected to GamSwitch, and as it processes low value payments initiated/accepted on operators are expecting that some non-banks (e.g., as a day-to-day basis by individuals and merchants. Another credit unions, microfinance institutions, and mobile money existing retail payment system is a public-private partnership providers) will join as well when they fulfill the necessary between the CBG and private investors called Gamswitch, technical requirements. which is a payment platform for commercial banks. There is a fee for participants to join as well as annual maintenance fees. The cost structure of GamSwitch does not follow the traditional four-party model, as the merchant a)  Automated Clearing House is charged a merchant discount rate, which is then split by The ACH in The Gambia (ACP-ACH) is owned and operated the acquirer, the issuer (interchange fee), and the card by the CBG, which has expressed an interest in upgrading network. The fee is borne by the payer rather than the the system that was initially launched in 2012. The ACH merchant, and it is split between the acquiring bank, the includes an upper limit of GMD 100,000, beyond which issuing bank, and GamSwitch. The aim is to incentivize individual transactions need to be processed directly through merchants to accept the card, but it is unclear to what the large value payment system. Typically, the account of the extent this model is working and the impact it is having on payee is credited in T+1 for the payment cleared via the card holders at the point of sale. ACH, which has implications for merchants, as they need to wait at least one day to receive funds in their accounts There is an opportunity to introduce instant payment for goods/services sold. The system allows for both direct services in The Gambia to increase the use of digital and indirect participants (PSPs), although banks typically payments. The process of upgrading existing infrastructure participate directly, which creates an unfair advantage over such as Gamswitch or the ACH could be utilized to introduce non-banks that need to connect via a sponsor bank. instant payments. Instant payments are characterized by instant crediting of the payee’s account as well as full The use of cheques has been gradually falling throughout availability of service. An instant payment system allows both the country. Since 2014 (with one exception in 2019), banks and non-banks to connect, creating a level playing both the volume and value of cheques processed have field. It also fosters innovation, as market participants can add decreased. In some cases, cheques have been substituted new products/services to the main underlying infrastructure with credit transfers and direct debits. It is imperative that by using application programming interfaces. To date, about this trend toward digitization of payments continues and 90 jurisdictions around the world have already implemented the authorities upgrade the ACH. instant payments. 8 The strong adoption of the recent 7  Bakker, Klapper & Udell 2004. 8  World Bank Fast Payments Toolkit. 2021. https://fastpayments.worldbank.org/resources. Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential 39 CHAPTER II – Driving Financial Inclusion in The Gambia: Constraints and Opportunities of Digitalization TABLE 6 instant payment scheme in Brazil (Pix) illustrates the positive Volume and Value Processed through ACH impact of digital means of payments on digital financial inclusion (Box 5). Credit Transfers and Direct Debits Processed Annual volume Annual value processed processed in billion Dalasi Year (percentage change) (percentage change) c)  Regional Payment System 2012  95,251 0.7 and Infrastructure 2013 484,026 (408.16%) 2.1 (211.96%) The country does not currently participate in a regional cross-border payment system that can play a role in 2014 532,032 (9.92%) 2.6 (25.10%) reducing the cost of cross-border transactions and 2015 552,470 (3.84%) 2.6 (1.19%) remittances. The Gambia (through the CBG) is a part of six countries that have piloted membership the Pan-Africa 2016 594,650 (7.63%) 2.8 (8.60%) Payment and Settlement System (PAPSS).9 While PAPSS 2017 656,953 (10.48%) 3.5 (22.21%) integration is promising for regional digital payments, slow progress and limited information about its rollout means that 2018 663,049 (0.93%) 4.3 (21.76%) there is currently no real-time cross-border functionality 2019 696,414 (5.03%) 5.3 (25.63%) available to The Gambia. Recent changes by the CBG allowing for PSPs to start offering international remittances via 2020 742,794 (6.66%) 6.1 (13.92%) mobile money bode well for regional integration, potentially 2021 865,749 (16.55%) 7.9 (30.93%) improving remittance flows. The Gambia is following in the footsteps of its fellow ECOWAS member Ghana to ensure Cheques Processed domestic cross-domain payment interoperability. Being a PAPSS pilot country, it also stands to benefit from joint Annual volume Annual value processed processed in billion Dalasi cross-border payments rails once it is live in the country. Year (percentage change) (percentage change) The ECOWAS regulatory harmonization project has been embraced and will serve as a major opportunity to align 2012 189,893 3.3 domestic regulatory frameworks. However, capacity and 2013 206,270 (8,62%) 4.4 (33.57%) capability constraints could hamper rapid reforms. 2014 185,778 (−9.93%) 3.8 (−13.91%) The high level of remittances flowing between The Gambia 2015 179,546 (−3.35%) 3.7 (−1.69%) and other ECOWAS members constitutes an incentive for regional payments, but US dollar-based remittance 2016 171,208 (−4.64%) 3.9 (4.44%) corridors will likely be prioritized. The country relies 2017 155,800 (−9.00%) 3.7 (−5.27%) extensively on cross-border remittances, which are a main source of foreign exchange. Within Africa, three ECOWAS 2018 144,518 (−7.24%) 3.6 (−1.05%) countries are top sources of remittances to The Gambia, 2019 154,262 (6.74%) 4.0 (8.81%) namely Nigeria, Sierra Leone, and Senegal, as they are home to the most Gambian migrants. Outside of Africa, 2020 130,672 (−15.29%) 3.4 (−14.48%) the United States, United Kingdom, and Italy are the top 2021 112,057 (−14.25%) 3.0 (−11.73%) three remittance corridors. Its key payment ties with the ECOWAS community provides an incentive for The Gambia Source: CBG and World Bank/IMF Financial Sector Assessment Program. to regionally integrate digital payments further and reduce costs. However, due to the heavy reliance on US-dollar denominated imports, it is likely that US-dollar based remittance corridors will be prioritized. 9  PAPSS is a cross-border, financial market infrastructure that enables payment transactions in Africa: https://papss.com/. 40 Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential CHAPTER II – Driving Financial Inclusion in The Gambia: Constraints and Opportunities of Digitalization BOX 5 Pix: The Instant Payment System in Brazil Brazil’s instant payment scheme Pix was launched The strong adoption of the platform indicates not by the Central Bank of Brazil in 2020. It allows fund only a transition to new digital means of payment transfers between all types of transaction accounts in but also an improvement in digital financial inclusion. the Brazilian market—current, savings, and prepaid Some of the main drivers behind the adoption have payment accounts—creating a payment service been single name and brand building recognition ecosystem with a low acceptance costs and high levels and trust in the system; mandatory participation of usability. Pix aliases, which initiates a transaction, of big banks, resulting in network externalities and are as simple as an e-mail address or a mobile phone scaling the payment system; low transaction costs number. The platform also actively uses QR codes compared to other retail payment instruments as an access channel. Since its launch in November (transaction is free for end-users); improved customer 2020, Pix has grown rapidly, and by December 2021, experience due to standardization of the way Pix is there were approximately 109 million consumers provided in participating institutions’ applications; and 7.6 million businesses, mostly MSMEs, actively and multiplicity of use cases, including peer-to-peer using the platform, including around 45 million transfers, tax and bill payments, and online and card citizens who previously did not have access to DFS. purchases. Source: Central Bank of Brazil. Only a small share of MSMEs are regionally integrated. Cross-border challenges including infrastructure constraints, About 20  percent of The Gambia’s MSMEs, which are high tariffs, rent seeking, and lack of awareness of the largely informal, have access to foreign markets, of which incentives offered by existing trade agreements are 67 percent have access to a foreign market in ECOWAS. impediments to regional trade integration. 6.  Digital Financial Services: Products, Participants, and Opportunities There are 12 commercial banks operating in The Gambia, identification number. Banks issue a variety of payment and these issue cards to individuals and provide instruments such as cheques, debit cards (domestic infrastructure to merchants to accept card payments and international), credit cards, direct debit (intrabank and (i.e., acquirers). Other market participants include credit interbank), and credit transfers (intrabank and interbank). and savings unions, microfinance institutions, mobile money Several banks also have agreements with international service providers, and money transfer operators. Banks card companies that allow them to issue debit/credit cards serve customers through their branches, ATMs, agents, under their brands. International brand cards can be used and digital channels (e.g., internet and mobile banking). for online payments in the country. Moreover, banks in The They charge a fee for opening and maintaining an account, Gambia collect payments on behalf of utility companies and and they require a photo ID, proof of address, and a tax government agencies at their branches as well as through Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential 41 CHAPTER II – Driving Financial Inclusion in The Gambia: Constraints and Opportunities of Digitalization internet banking. In some cases, end-users are charged of payment instruments for online payments. While an a transaction fee for such payments, while in other cases the international brand card or an ACH transfer could be used transaction fee is borne by the company on behalf of which for online payments, those are typically costly to the payee the banks collect payments. Finally, banks are engaged and the payer. Moreover, the domestic debit card is not in the disbursement of government payments such as public accepted for online payments. Furthermore, international sector salaries, pensions, and social assistance transfers. companies such as PayPal are not registered in the country. As a result, cash on delivery and cheques are still the In the context of financial inclusion, there are certain preferred payment methods, even when the actual order population segments that banks have not been able or is made online. This is detrimental to The Gambia’s willing to attract such as the elderly, people with low critically important tourism sector, as most tourists prefer income, and those living in rural areas. There is a large to use digital payment methods or making e-commerce potential for banks to collect utility and government payments. This trend is also observed in business-to- payments via the internet or mobile banking (e.g., through business payments. The market needs alternative business credit transfers or direct debit) to avoid cash payments at models that could facilitate remote payments (including branches. While some banks offer DFS, they can further for e-commerce) in a fast and cost-efficient way, using improve them by offering user friendly, full internet/mobile web-based and mobile-based payment instruments. banking packages, which consolidate all types of services. Informational campaigns should also be deployed on an The Government of the Gambia has made progress in on-going basis to ensure users understand the range of digitizing government disbursements, which to a large available benefits. extent are channeled to beneficiaries’ transaction accounts. Funds are sent to bank accounts, accounts at microfinance Credit and savings unions play an important role in institutions, and mobile money accounts (mobile money increasing financial inclusion, given that they tend to work represents only about 1 percent of digital disbursements). with clients of different sociodemographic backgrounds The integrated financial management information system, who are often excluded by banks. These institutions the ACH, and the RTGS (real-time gross settlement) are typically impose a one-time membership fee, but there are utilized to transfer and settle the funds, although there are no other fees related to opening and/or maintaining an still manual processes such as sharing excel files containing account. Moreover, account holders in credit/savings unions beneficiary information with microfinance institutions to automatically become shareholders, which makes the distribute funds to the respective beneficiary accounts. business model different than those of commercial banks. Further enhancements are needed of the interface between There is also appetite from these institutions, alongside the ACH and the large value payment system to ensure microfinance institutions, to be more involved in providing there is real-time notification of settlements and information payment services and products, thereby having a more flows. Some agencies still issue cheques, particularly proactive role in contributing to financial inclusion. Unlike for reimbursements and petty expenses. The respective banks, credit/savings unions have a physical presence in agencies need to move away from cheques and toward villages and rural areas. However, they still rely on banks credit transfers. There is a Treasury Single Account at the for issuing cards and using payment systems such as the CBG that manages all government payments. There is also ACH for clearing purposes, resulting in additional costs. transit accounts that ministries and government agencies There are two mobile money service providers operating in hold with commercial banks, but those funds are ultimately The Gambia, and mobile money allows for different types channeled to the CBG account. The reconciliation for the of payments (e.g., person-to-person, person-to-business, transit accounts is done daily. Digitalizing government person-to-government, business-to-business, business-to- payments is critical because of the large number of people government). The infrastructure needed to accept mobile they reach. By digitalizing such payments, individuals will money is typically light and mobile (quick response codes open transaction accounts and eventually start using them and mobile point of sale), adding to the convenience and for other types of payments, a pattern seen in many other cost efficiency of accepting electronic payments for countries such as Indonesia (Box 6). merchants. Such solutions could replace the need for physical cash in rural areas, and they could enable consumers to Improving financial literacy is important to increase accept their funds electronically and also use them at the financial inclusion and the use of digital payments in The point of sale without the need to withdraw physical cash. Gambia. According to FinScope, two of the main reasons people cite for not having a transaction account are lack E-commerce is underdeveloped in The Gambia. Its of trust in financial institutions and insufficient knowledge of development is hampered by the limited availability how to open/operate such an account. To obtain a better 42 Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential CHAPTER II – Driving Financial Inclusion in The Gambia: Constraints and Opportunities of Digitalization BOX 6 Digitizing Government Payments in Indonesia The Government of Indonesia and the Bank of three business models for digital social assistance Indonesia are pursuing a cashless-based social programs: (i) Quick Response Code Indonesian assistance program that is easy to access by the Standard (QRIS), (ii) unstructured supplementary public. This goal of the program is to increase financial service data, and (iii) face recognition payments. Of inclusion as well as provide economic opportunities the three business models, QRIS provides the most to vulnerable groups. The existing landscape for benefits, as it is already interconnected among digital disbursements of social assistance payments banks and non-banks, free of charge for customers, faces several challenges, including lack of supporting and accepted at 17.5 million QRIS merchants. Banks regulation; fragmented data of eligible recipients; can use QRIS for customers who have smartphones additional cost for card-based payments for noncash and add the feature of face recognition payment for transfers; limited interconnectivity, especially among recipients who do not have a mobile phone. Another payment system bank agents; lack of digital and additional feature of the application is the ‘whitelisting’ financial literacy; and underutilized digital payment of products or services that beneficiaries are allowed instruments. The Bank of Indonesia has identified to buy with their social assistance money. Source: Bank of Indonesia. and deeper understanding of financial literacy and its main from accessing and using transaction accounts and digital drivers in The Gambia, the CBG and other national agencies payments. For example, the authorities could address how could consider conducting a baseline financial literacy survey accounts can effectively help meet payment and store-of- at the national level. The findings could inform targeted value needs, and they could also target specific ‘fear’ factors interventions by the CBG and other public and private sector such as: (i) the perception of lack of soundproof of payment stakeholders in the DFS market. In the process of deploying if paper is not used; (ii) fear that new modalities may be the necessary tools to improve financial literacy, there are vulnerable to fraud; (iii) fear of dealing with unresponsive, opportunities to engage other relevant stakeholders such complicated systems prone to operational error; and (iv) the as the Ministry of Education, Chamber of Commerce, the perception of loss of privacy. This could also be done by Association of Banks, and non-bank PSPs, particularly in the targeting specific population segments, such as remittance context of the NFIS Steering Committee. The authorities recipients, that may particularly benefit from such programs should learn from the experience of other countries, such and campaigns. One example is the World Bank’s Greenback as Zambia, that have similar demand-side constraints to program, which works with remittance recipients and PSPs accessing and using DFS (Box 7). There is a need to target to increase awareness, efficiency, and transparency in the the main constraints that keep individuals and merchants remittance market.10 10  Information on the World Bank’s Greenback Program is available at https://remittanceprices.worldbank.org/en/project-greenback-20-remittances-champion-cities. Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential 43 CHAPTER II – Driving Financial Inclusion in The Gambia: Constraints and Opportunities of Digitalization BOX 7 Financial Literacy in Zambia In Zambia, the three financial regulators (the Bank of developed as a response to the increase in the number Zambia, Securities and Exchange Commission, and of people falling victims to online financial scams, Pensions and Insurance Authority) have implemented which were hampering efforts to advance digital a joint awareness campaign to educate the public on financial inclusion. digital financial security and safety. The campaign was Source: https://www.boz.zm/Governor_Speech_2023FLW_Launch.pdf Incorporating financial education in the formal school countries.11 Facilitating the development of local talent in curriculum could benefit the younger generation, who are information and communication technologies as well as the country’s future consumers and users of payment science, technology, engineering, and mathematics and services. The International Gateway for Financial Education, advancing digital skills in the economy through secondment led by the Organization for Economic Co-operation and programs, training bootcamps, or conversion courses Development, provides principles and frameworks for (developed in partnership with global universities, civil integrating financial education programs into the formal society, or development partners) may significantly help school curricula and shares best practices from other boost the development of DFS in The Gambia. 7.  Policy Options to Accelerate Digital Payments Access and Usage for Increased Financial Inclusion The Gambia is at the very early stage of digitally financial inclusion by reducing informality and the use of transforming its financial sector, as the economy remains paper-based payment instruments (i.e., cash and cheques). predominantly based on cash transactions. The CBG There are three policy actions and enablers: (i) conducive recently drafted an NFIS, which includes the promotion of legal and regulatory frameworks; (ii) enabling financial and DFS as one of its four strategic pillars to increase financial digital infrastructure; and (iii) ancillary government support inclusion in The Gambia. This section proposes policy systems (Table  7). This section outlines both the key measures to build a comprehensive vision of the digital enablers (Table 1) and complementary detailed enablers payment ecosystem that could contribute to greater (Table 8). 11  More on the OECD’s financial education frameworks is available at http://www.financial-education.org/home.html. 44 Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential CHAPTER II – Driving Financial Inclusion in The Gambia: Constraints and Opportunities of Digitalization TABLE 7 Development Stages for Financial Inclusion and Digital Financial Services Stage 3: Stage 2: Moving beyond Stage 4: Stage 1: More intensive usage of payments to other DFS Widespread adoption Policy Actions Basic access to transaction accounts for products (e.g. credit, and usage of DFS by and Enablers transaction accounts digital payments insurance) individuals and SMEs Enabling financial • Foster good • Foster functioning • Establish credit • Support universal and digital penetration of payment systems and infrastructure and broadband infrastructures mobile phones and enabling interoperability enhance coverage of connectivity connectivity credit-relevant data • Facilitate high penetration of smart phones Ancillary • Enhance financial • Establish and expand • Enable automated government management system to coverage of digital ID access to digitized support systems support intensive shift of government data G2P payments to digital platforms Conducive legal • Allow non-bank • Adopt payment systems • Establish • Adopt legal and regulatory issuance of law comprehensive measures to enable frameworks e-money regulatory framework open banking • Enable non-banks access for DFS providers • Implement to payment systems simplified customer • Adopt comprehensive • Robust consumer due diligence (CDD) legal measure for data protection framework in protection and privacy • Enable development place of widespread agent • Enable and encourage • Develop and implement network DFS providers to competition policy expose and use APIs Source: Digital Financial Services, World Bank 2020. TABLE 8 Complementary Enablers to Accelerate the Development of Digital Payments for Increased Financial Inclusion Objectives Policy recommendations Timeframe Responsibility Conducive legal Improve the collateral registry to make it more reliable and increase its uptake ST CBG framework and usage. for DFS Update the Mobile Money Regulation to cover e-money services (beyond mobile money). Clarify in the AML/CFT guidelines if remote know your customer for opening a ST CBG bank account is permitted. Continue legal/regulatory harmonization with ECOWAS peer countries and MT CBG expand the participation of PSPs in the PAPSS. Market Utilize light infrastructure such as QR codes for merchant payments at the MT Banks dynamics, point of sale. government payments, Consider the use of SIM cards as identity proxies in financial transactions. MT CBG and financial litterature Continue efforts to digitize government payments. Conduct a financial literacy survey. MT CBG Implement a national financial education strategy (beyond the NFIS), focusing MT CBG, MOBSE on digital payments and remittances. Note: Short term: < 1 year; medium term: 2–3 years. Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential 45 CHAPTER II – Driving Financial Inclusion in The Gambia: Constraints and Opportunities of Digitalization Legal and regulatory framework – Ensure that the software is scalable to handle high volumes of payments. To improve the legal and regulatory framework, the authorities should consider: – Implement basic proxy functionality based on a centralized model to support a one-to-one • Reforming the NBFI regulatory framework. This should mapping of an alias to a bank account number. In include revising the NBFI act to create a facilitating and the beginning, the proxy solution could support risk-based regulatory environment for NBFIs, including the use of mobile numbers and email addresses as non-deposit taking institutions like factoring and peer- aliases. to-peer lending platforms. – Implement an open application programming • Improving the collateral registry. This should aim to interface to connect with the current ACH. make it more reliable and increase its uptake and usage. • Updating the Payment Systems Act. An updated act Market dynamics, government payments, could incorporate emerging business models and new and financial literacy types of payment services and infrastructure providers (FinTech) to open up the market and create a level To improve the DFS market, government payments, and playing field for new entrants. financial literacy, the authorities should consider: • Updating the Mobile Money Regulation. The regulation • Utilizing light infrastructure such as QR codes for could be reframed to cover e-money more broadly, merchant payments at the point of sale. QR codes opening the way for the licensing of companies that are becoming a cost-efficient way for merchants to provide e-money services beyond mobile money. accept digital payments, including fast payments. Payers can scan the QR code with their phones, • Clarifying in the AML/CFT guidelines if remote know your making the payment experience convenient and user- customer for opening a bank account is permitted. The friendly. guideline refers to due diligence for remote transactions. However, it is not clear from the language used if • Exploring to what extent SIM cards and mobile phone opening a transaction account remotely is permitted. numbers could be used as identity proxies/aliases in financial transactions. This could be used in the • Continuing legal/regulatory harmonization with absence of a universal digital ID system. ECOWAS peer countries and expanding the participation of PSPs in the PAPSS. Pursuing both of • Continuing efforts to digitize government payments. these objectives would allow the country to facilitate The interface between the ACH and the large value cross-border digital payments with regional peers in a payment system needs to be enhanced to ensure there faster and more cost-efficient way. is real-time notification of settlement and information flows for digital government payments. Financial and digital payments infrastructure • Conducting a financial literacy survey. In the absence To improve financial and digital payments infrastructure, of data, the CBG is encouraged, along with other the authorities should consider: relevant government agencies and private sector stakeholders, to conduct a national financial literacy • Incorporating NBFIs into credit reporting and payments survey to establish a baseline of financial literacy data infrastructure. This is necessary to reduce information asymmetries. and identify the main issues that policies and interventions need to address to improve financial • Converting GamSwitch into an instant payment literacy. system. This would include efforts to: • Exploring the implementation of a national financial – Increase its business hours, which could serve as an education strategy (beyond the NFIS), focusing on initial step for continuous operation at a later stage. digital payments and remittances. This could cover – Support the processing of credit transfers in real DFS, different digital payment instruments, access time to ensure funds are instantly availability in channels and cost efficiencies, and barriers facing the account of the payee. individuals and merchants in using DFS. 46 Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential CHAPTER II – Driving Financial Inclusion in The Gambia: Constraints and Opportunities of Digitalization References Bakker, Marie H. R.; Klapper, Leora; Udell, Gregory F. 2004. Financing OECD Database: Corse Competencies Frameworks on Financial Literacy. Small and Medium-Size Enterprises with Factoring: Global Growth Available at: https://www.oecd.org/finance/core-competencies- and its Potential in Eastern Europe. Policy Research Working Paper; frameworks-for-financial-literacy.htm No.3342. Warsaw: World Bank. © World Bank. Republic of The Gambia, Ministry of Finance and Economic Affairs, 2022. 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Washington, DC: World Bank. to major economic sectors in the Gambia: evidence from an SVAR, International Journal of Economics, Commerce and Management, World Bank. 2017. The World Bank Research Observer (2017). Vol. IX, Issue 12, Dec 2021, p178–194. http://ijecm.co.uk/ Washington DC: The World Bank. Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential 47 Annex 48 Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential Annex FIGURE 17 FIGURE 18 Gambia’s Financial Inclusion is Low Compared to . . . and Its Mobile Money Usage is Very Low the SSA Average and . . . Compared to the SSA Average Financial inclusion (percent) Gambia’s mobile money usage (percent) 60% 35% 30% 50% 25% 40% 20% 30% 15% 20% 10% 10% 5% 0% 0% The Gambia SSA (excluding high income countries) The Gambia SSA (excluding high income countries) Mobile money account (% age 15+) Account (% age 15+) Financial institution account (% age 15+) Source: 2019 Finscope Consumer Survey for The Gambia and 2021 Findex data Source: Findex data 2017 (last year of available data) for The Gambia and 2021 for SSA for SSA FIGURE 19 FIGURE 20 Productivity Growth has been Negative with Agricultural Productivity Continuously Declined Limited Accumulation in Capital Stock per Worker in The Gambia Annual production, TFP and real capital stock per Agricultural TFP index 2015 =100 worker remains weak (percentage change) 160 4.5 3.0 120 2020 1.5 80 0.0 –1.5 40 –3.0 0 –4.5 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Central African Republic Somalia Annual growth of output per worker The Gambia Mauritania Growth rate of real capital stock per worker Niger Senegal Total factor productivity per worker Malawi Source: Authors based on PWT 10 (Freensta, Inkaarand Timmer (2015) Source: United States Department of Agriculture12 12  For more details about the USDA methodology, kindly refer to Fuglie (2013). The data can be accessed using the following link: https://www.ers.usda.gov/data-products/ international-agricultural-productivity/. Third Gambia Economic Update: Accelerating Financial Inclusion to Unleash The Gambia’s Growth Potential 49