The Jammeh Peg

Jammeh has big problems but he’s not as dumb as we think he is.   The diagnosis of this Foreign Exchange wahala is simple.  Under Jammeh, the Gambian economy has seen a large increase in imports while domestic exports have stagnated.  Moving away from agriculture due to its low productivity, droughts, and misplaced agricultural policies, Jammeh and his gang of “advisers” decided to place their eggs in one basket by aggressively promoting tourism.  So far, tourism has also failed because with the global financial meltdown, vacation packages to places such as Greece and Vegas that were not affordable to those tourist we saw in Gambia have suddenly become affordable. Gambia is now in competition with these mainstream destinations. I will let you decide which of these places you would visit on vacation if given the option.  And to be honest, I can understand why tourists would want to opt out of visiting places where people go missing every now and then.  The safe, and “Gambia no problem” African beach ideal that made them want to visit Gambia under Jawara is no more.

The PEG: Jammeh, faced with economic difficulties, tried his hands at price controls a couple of times by threatening butchers, fishermen, and even the women that sell tomatoes at the market. Price controls in Gambia have failed because with shortages of basic commodities, domestic prices continue to increase on a daily basis while real wages have remained stagnant for almost 2 decades.

Business confidence is also low as Jammeh continues to hold monopoly of all business enterprises in the nation. Gambian businessmen and foreign investors are being prosecuted and jailed every month for the most frivolous of reasons one can imagine.

Jammeh's poor track record of rule of law, and neither here nor there economic policies (RE: harassment of investors and petty traders) date back to 1994. Ever since coming to power, the only businessman who continues to remain in Jammeh's good books is Mr. Amadou Samba.  Both local and foreign investors have ran afoul of the dictator in one way or the other.  Today, business' and investor will rather go to Senegal than take a risk and invest in Jammeh's Gambia. The result of this history is chronic failure to yield the required net flow of income for the nation, and a consequent failure to increase its international reserves and reduce its balance of payments.

In a attempt to remedy these disgraces, Jammeh has this week decided to peg our weak Dalasis to a single currency – the mighty USD.  What this means is that Jammeh is now telling Gambians that America’s performance, and not that of the Gambia, will be the only determinant of the value of the Dalasis.

The problem:  The problem of Jammeh’s pegged exchange rate regime is that, given Gambia’s dwindling foreign reserves coupled with its sluggish growth, the Gambia is not in a position to defend the Jammeh peg in case of any international crisis.  Pegging the USD to the Gambia Dalasis is dangerous in the sense that the US is not Gambia’s largest trading partner.  In simple terms, the cost of imports will increase if the dollar continues to depreciate against the currencies of Gambia’s major trading partners (Yen, Euro etc).  The cost to the Gambian economy is more inflation in an already overheated economy.

The Peg & Remittances: This Jammeh peg would depreciate the value of the money Gambians abroad send home to their families and friends; remittances that constituted 11% of GDP last year.   Gambians in the diaspora are already annoyed with Jammeh's constant manipulation of the country’s fiscal policies to their disadvantage. If this new policy is not dropped, Gambians at home can expect to be frequenting western union less often than in previous years - an effect that will affect the national economy, as remittances remain a vital component of the nation’s development and stability.

Solution: Jammeh and his advisers must go back to the drawing board.  Gambia, under the PPP with serious economic issues in 1986/1987 was able to control inflation and foreign exchange problems by floating the Dalasi.  Different times may call for different measures and if a peg is necessary to help with imports, it would be wise for the “advisers” to pursue a policy that ties the Dalasi to a basket of currencies but not just a single currency. Especially when the United States is not Gambia’s major trading partner.

Alternatively, Jammeh can stop harassing money traders in the parallel FX market and just ask his wife to stop spending the country’s meager foreign reserves on mansions, jets and shopping malls across the U.S.