I Introduction
T he Gambia is a very small country located on
the west coast of Africa, surrounded on three
sides by Senegal, extending inland at widths vary-
ing from 24 to 48 kilometers along the banks of the
River Gambia, with a total area of 10,700 square
kilometers. With a population of about 890,000,
which is rising at a rate of 3.4 percent a year, The
Gambia has one of the highest population densities
in the world (estimated at 207 inhabitants per
square kilometer of agricultural land in 1991). It
has also a fairly undeveloped human capital base,
with an illiteracy rate of 75 percent and a primary
school enrollment rate of 56 percent (in 1987).
The Gambia has an open economy with limited
natural resources and is one of the least developed
African countries, with a per capita income esti-
mated at present at $325. The traditional mainstay
of economic activity has been the production and
export of groundnuts, although in recent years sig-
nificant progress has been made in diversifying pro-
duction and exports toward tourism and trade
services. Most of the population work in agricul-
ture, which accounts for about 20 percent of real
GDP; industry contributes 12 percent of value
added, with the rest accounted for by services.
The Gambia became independent in 1965 and
since then has been governed by a democratic mul-
tiparty parliamentary system, with free elections
held at regular intervals.1
During the first ten years after independence,
broadly stable macroeconomic conditions were
maintained with modest rates of economic growth.
In the decade to 1985/86, however, external shocks
and inappropriate domestic policies caused eco-
nomic and financial performance to deteriorate
markedly. In particular, unfavorable weather, erra-
tic world groundnut prices, and inadequate real
producer prices led to a sharp decline in the domes-
tic output of groundnuts. During the same period,
the involvement of the public sector in the econ-
omy increased sharply, through the creation of sev-
eral public enterprises, particularly in the industrial
1
For an overview of recent political developments, see Sallah
(1990).
©International Monetary Fund. Not for Redistribution
and trading sectors, and the size of the Central
Government rose markedly, entailing, inter alia, a
doubling of the size of the civil service. The result-
ing large expansion in government current expen-
diture, coupled with a surge in government
development expenditure, contributed to a widen-
ing of fiscal imbalances. The expansionary stance of
fiscal policy and an increasingly overvalued cur-
rency boosted the demand for imports and dis-
couraged the surrender of export proceeds to the
official banking system, inducing a growing exter-
nal indebtedness and a depletion of gross official
reserves. As a consequence, the growth of output
in the directly productive sectors of the economy
(i.e., excluding government services) remained low,
inflation accelerated, and major external dis-
equilibria emerged. Although the pressures on the
external current account position were alleviated
somewhat by large inflows of external assistance
and some partial adjustment measures in the early
1980s, the imbalances reached critical proportions
by the end of 1985/86. Gross official reserves fell to
the equivalent of less than a week of imports,
external public debt climbed to 113 percent of
GDP, and external payments arrears peaked at
SDR 88.2 million (almost one and one half times
the 1985/86 export earnings, including net re-
exports and travel income), of which SDR 10.3 mil-
lion represented overdue obligations to the Fund.
In response to the rapidly deteriorating situation,
the Gambian authorities in June 1985 began to
implement a comprehensive adjustment program,
the Economic Recovery Program (ERP), aimed at
restoring financial equilibrium and laying the foun-
dation for sustainable economic growth. In 1990,
the E R P was succeeded by the Program for Sus-
tained Development (PSD), which continued the
thrust of E R P policies, while renewing efforts to
stimulate private sector development. The Gam-
bia's adjustment efforts have been supported by
successive arrangements from the Fund, compris-
ing two annual arrangements under the structural
adjustment facility (SAF) during 1986/87-1987/88
(July/June) and a three-year arrangement under
the enhanced structural adjustment facility (ESAF)
 I INTRODUCTION
during 1988/89-1990/91, as well as a stand-by
arrangement and a drawing under the compensa-
tory financing facility during 1986/87. The total
cumulative use of Fund resources by The Gambia
amounted to the equivalent of SDR 38.91 million,
or 227.5 percent of quota. Substantial financial and
technical assistance has also been provided by the
World Bank, including two structural adjustment
credits, and by other bilateral and multilateral
donors.
With successful implementation of a broad range
of financial and structural reforms, The Gambia's
economic and financial performance has improved
©International Monetary Fund. Not for Redistribution
considerably since 1985/86. The Gambia's experi-
ence is a good example of economic adjustment,
even though it is recognized that more remains to
be done, as a number of major structural and
institutional constraints continue to hamper the
economy. Following the expiration of the three-
year ESAF arrangement in November 1991, the
Gambian authorities requested a continuation of
the close policy dialogue with the Fund and
monitoring by the Fund of The Gambia's economic
and financial policies for 1992/93, as well as the
updating of the policy framework paper to cover
the period 1992/93-1994/95.