Tuesday, May 5, 2015
GAMBIA: Foreign exchange controls are the wrong way to go
In an official release from the Office of the President, and not the Central Bank of the Gambia (CBG) that is legally responsible for monetary policy, the government appears to be blaming hoarders of foreign exchange and not on imprudent monetary as well as fiscal policies, for the current problems facing an economy that has been struggling since 2011. The language of the release is convoluting and imprecise thus proving difficult to gauge its impact.
State House's injecting itself in what is purely the responsibility of the Monetary Authorities brings back to the fore, a dispute between the International Monetary Fund and the regime of Yaya Jammeh about the exclusive role of the CBG in monetary affairs.
In June of 2013, the IMF warned the regime (specifically, the Office of the President) not to interfere in the forex market after meddling in it by setting rates that caused panic and uncertainty in the markets by politicizing the process. We expect the IMF to weigh in again, hopefully, this time, with severe sanctions against a recalcitrant regime that flouts international rules with impunity.
The external factors adversely affecting the value of the dalasi include but not limited to the increasing strength of the U.S. dollar. The Gambian dalasi is not the only currency experiencing the pressure that the dollar is exerting. Other currencies are experiencing similar pressures but that did not result in panic-driven reaction, and as extreme as literally taking matters into the hands of politicians; in this case the Gambian dictator and away from the Central Bank authorities.
The free market-based inter-bank mechanism which has been in existence essentially since 1986 and overseen by the CBG has been undermined by Jammeh, thus threatening the purpose for which is was establish to conduct a fair and open auction of foreign exchange by the Central Bank. Exchange controls have not worked in the past. There is no reason to believe that they will work now.
Therefore, the regime will do itself a favor by adopting prudent fiscal and monetary measures that they have agreed to with the IMF, and not by interfering with the market mechanisms that have served the economy very well when they are left alone. Jammeh is evidently unable to keep his hands off the market, partly because he is the single largest individual businessman in the country; so he has a vested personal interest in the market.
It is too early to gauge the full impact of the measures taken by the Gambian leader. What is certain is that less foreigner exchange will enter the market in the short run because those holding US dollars or Euros will continue to hold on to them to see how these new measures will hold public and IMF scrutiny. The CBG will be less active because it has little or no foreign exchange to speak of, resulting from the poor performance of two of the economy's biggest foreign exchange earners - Agriculture and tourism - in the previous two years.
In future blogs, we will be looking at these and other issues in detail. What we have here is an outline of the debate that we expect will follow.