Dr. Ousman Gajigo
The press recently quoted the Central Bank of The Gambia (CBG) announcing a cut to its monetary policy rate (MPR). The MPR is one of the key tools of monetary policy and it is the interest rate set by the CBG to manage guide market interest rate. Within the same press report, the CBG projected strong economic growth. It is worth asking whether the CBG’s interest rate cut can reasonably be expected to boost economic growth in the current Gambian context.
The main channel through which lower interest rate can increase growth is as follows: Bear in mind that the interest rate is the cost of borrowing. When interest rates are low, firms are more willing to borrow and are therefore able to invest more. This expansion in investment leads to higher output and increased hiring. Lower rates can also encourage greater consumer spending by making credit purchases more affordable.
However, several conditions must be in place for this channel to work. There must be no structural impediments limiting firms’ investment. Banks must be willing to lend not only for short-term working capital but also for long-term investment in equipment and capital. In other words, credit markets must be functioning well.
While the interest rate is an important factor, firm investment is determined by many other variables as well. The impediments to investment today in The Gambia are many – among them are poor business environment, lack of reforms, poor implementation, and failure to prioritize the right sectors, among others. These structural dimensions of the economy are not typically under the direct influence of monetary policy.
The link between lower interest rates and growth also depends on banks actually lending more to firms – that is, the funds firms need to invest must be available when required. The reality is that local banks do not provide sufficient private financing. There are several reasons for this and most are not the fault of banks. One of the reasons is the government’s own borrowing behavior. The country’s domestic debt stands at D52 billion – having increased by 36% from 2021. Despite the interest rate cut, its level remains high enough that a substantial share of local financial institutions’ assets is held in government securities (treasury bills and bonds). In other words, the government’s domestic borrowing is crowding out the private sector from the credit market.
On the consumer side, The Gambia does not have an economy where consumer spending responds significantly to lower interest rates. Such a mechanism operates in economies where consumers make large purchases of goods, as well as major ones such as vehicles and housing on credit. That is not the situation in The Gambia, where consumer purchases are largely made through upfront cash payments.
My main point is not to argue that the CBG’s rate cut is unwise. It is, rather, to caution against unwarranted expectations that it would lead to economic growth given The Gambia’s current economic context. Given our structural challenges, a large part of the problems (and their solutions) lies on the fiscal side, not the monetary side. Monetary policy is still important – after all, the regulation and supervision of financial institutions is needed. Furthermore, the yield on treasury bills can influence how much effort commercial banks put into lending to the private sector.
But for The Gambia, the game is almost all on the fiscal side. The government needs to allocate resources to priority sectors, avoid excessive waste, and refrain from taking on excessive debt – especially when that debt is not directed toward areas that generate high economic and social returns. Sustained economic growth also requires broad reforms in regulations and institutions, as well as appropriate personnel choices. Without these changes on the fiscal side, small monetary policy adjustments will not generate any significant economic growth.
