Dr. Ousman Gajigo, Economist formerly with ADB and Leader PPA
Dr. Ousman Gajigo
Last week, the Monetary Policy Committee (MPC) of the Central Bank issued a press release. The headline item was the ballooning domestic debt, which currently stands at about D55 billion. I have written extensively about the dangers of this rapidly increasing domestic debt. Indeed, the comments from the Governor of the Central Bank, Mr. Bush Saidy, mirror much of what I wrote in an article earlier this year.
I want to focus on a specific consequence of high domestic debt that isn’t discussed enough: what it does to private sector credit. When the government borrows heavily on the domestic market, it crowds out credit available to the private sector. This means businesses and individuals have less access to financing. Without credit, businesses lack the means to expand, create jobs, and efficiently provide goods and services.
The IMF’s latest report on The Gambia confirms that, over the past ten years, about 60% of Gambian commercial banks’ assets have gone into government treasuries and bonds. In other words, only a small fraction of total commercial bank lending actually benefits the private sector, because excessive government borrowing is crowding out private sector lending.
Excessive domestic borrowing by the government is also linked to the relatively high number of commercial banks in The Gambia. The country has about 12 commercial banks – roughly 4 per million people. Relative to population size, this is among the highest in the sub-region. Yet the Gambian economy isn’t really benefiting from this high number of banks, because they survive mostly by lending to the government rather than the private sector.
So, if you ever had trouble borrowing from a Gambian commercial bank, please be aware that the fault is not really with the commercial banks in terms of having unreasonably requirements such as high collateral requirements or high interest rate or no grace period. It is the effect of government borrowing that is reducing their appetite for lending to you and private sector in general.
This brings me to a dubious claim in the Central Bank’s MPC press release. In paragraph 18, the press release states that credit to the private sector in The Gambia increased by 41.3% from last year. This is highly unlikely. Here’s why.
The information in paragraph 19 of the same press release seems to contradict this: commercial banks’ total assets increased by only 19%. Furthermore, most of those assets (about 60%) consist of lending to the government through treasury bills and bonds. So it is implausible for credit to the private sector to have increased by the amount the Central Bank claims.
The Central Bank appears to be trying to pull a fast one on the public by inserting the following phrase in paragraph 18: “However, part of this growth reflects improvements in balance-sheet classification and reporting.” In fact, to reach 41.3% growth in a single year, almost the entire purported increase would have to be explained by this reclassification rather than by any real increase in the underlying figure.
All other relevant banking sector indicators show only modest increases, including deposits and capital adequacy. This 41.3% figure is inconsistent with those indicators. Indeed, an increase of that size would reflect such an unprecedented injection of capital that it should be visible in broader economic indicators — including a noticeable bump in GDP growth itself. That has not happened.
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