1. Introduction
Inflation is a persistent concern for a lot of economies, and The Gambia isn’t any exception. The Central Financial institution of The Gambia (CBG) has employed numerous measures, together with rate of interest changes, to curb inflationary pressures. Nonetheless,
regardless of these efforts, inflation stays stubbornly excessive. The crucial query is: why? If we don’t get this elementary difficulty proper, we threat searching for solutions within the flawed place.
The reply lies within the nature of inflation in The Gambia, which is extra structural than financial. Not like superior economies the place inflation is commonly pushed by extreme cash provide, The Gambia’s inflation is rooted in deeper structural
deficiencies. Consequently, financial coverage instruments like rate of interest hikes are largely ineffective in addressing the issue.
Milton Friedman famously acknowledged that “inflation is all the time and in all places a financial phenomenon.” His argument means that inflation is primarily pushed by extreme cash provide progress. Whereas this holds in lots of superior economies
with sturdy financial transmission mechanisms, The Gambia’s inflation dynamics problem this assertion. In The Gambia, inflation is extra structural than financial, which means that financial coverage instruments like rate of interest hikes are largely ineffective in addressing
the basis causes.
2. Proof from Financial Coverage Developments
The accompanying determine 1 and a pair of, which signify cash provide (M2), Inflation, the Financial Coverage Price (MPR), and 3-month Treasury Payments Price, additional helps the argument that inflation in The Gambia is structural relatively than
financial.
Supply:CBG, Macroeconomic Information Warehouse
Determine 1: Cash Provide and Inflation Price
Determine 2: Financial Coverage Price, 3 Months Treasury Payments Price and Inflation
2.1 Key observations from the graph embrace:
Inflation and cash provide exhibited divergent tends, with inflation persevering with to extend even throughout episodes of low cash progress. This counsel inflation in The Gambia is pushed by elements apart from cash provide.
Inflation traits are inclined to rise even when MPR stays comparatively excessive, suggesting that exterior and supply-side elements, relatively than home liquidity circumstances, are driving worth will increase.
The decoupling of inflation from financial coverage alerts reinforces the argument that structural reforms are crucial to handle persistent inflationary pressures.
Regardless of important fluctuations in MPR and T-bills charges, inflation doesn’t reply proportionally, indicating that rate of interest changes have a restricted impression on worth stability.
T-bill charges aren’t responding successfully to adjustments in MPR in Determine 2, which suggests weak financial transmission mechanisms. The shortage of synchronization between MPR and Treasury yields highlights inefficiencies within the monetary system, limiting the
effectiveness of rate of interest coverage in controlling inflation.
3. Proof Primarily based on Construction of the Economic system
The Import-Dependent Nature of the Economic system
The Gambia is closely reliant on imports for important items, together with meals, gasoline, and uncooked supplies. This dependence implies that world provide chain disruptions, trade price fluctuations, and exterior worth shocks have a direct
impression on home costs. When world gasoline costs rise or when the dalasi depreciates towards main currencies, the price of imports surges, resulting in increased inflation. No quantity of rate of interest adjustment can resolve this elementary difficulty.
Agriculture, which is a big a part of the Gambian economic system, suffers from low productiveness on account of insufficient infrastructure, farming strategies, and vulnerability to local weather shocks. The restricted home manufacturing capability
forces the nation to depend on imports, making costs prone to exterior influences. With out addressing these structural constraints, inflation will proceed to persist, no matter financial coverage interventions.
The Gambia operates below a versatile trade price regime, making the dalasi extremely prone to exterior shocks. On condition that a good portion of the nation’s shopper items are imported, any depreciation of the dalasi instantly
interprets into increased costs (inflation pass-through). Whereas elevating rates of interest would possibly assist stabilize the forex to some extent, it does little to handle the basis causes of trade price fluctuations, similar to commerce imbalances and low international trade
reserves.
Structural Rigidities within the Labor Market
The Gambian labor market is characterised by a big casual sector and low productiveness, which contribute to stagnant wages and lowered buying energy. This creates a wage-price lag relatively than a wage-price spiral, which means
inflation is just not primarily pushed by rising wages however relatively by exterior worth shocks (e.g., rising import prices). Addressing labor market inefficiencies requires long-term coverage options relatively than short-term financial interventions.
Provide Chain and Logistical Challenges
Poor infrastructure and inefficient logistics contribute considerably to excessive inflation. The price of transporting items throughout the nation stays elevated on account of poor street networks and excessive gasoline prices. Moreover, the loss
of competitiveness of the Banjul Port to Senegal has exacerbated provide chain disruptions. With most items now being imported by way of Senegal after which transported to The Gambia, companies face increased logistical prices, customs inefficiencies, and delays, all
of which additional inflate shopper costs. These structural inefficiencies create bottlenecks that drive up prices throughout the economic system. Addressing these challenges requires strategic funding in infrastructure and commerce facilitation measures relatively than relying
solely on rate of interest hikes.
3. A Extra Efficient Method: Structural Reforms
Given the structural nature of inflation in The Gambia, coverage options should transcend financial measures. The next structural reforms may present a extra sustainable path to cost stability:
Diversification of the Economic system: Investing in agriculture and manufacturing can cut back reliance on imports and mitigate exterior worth shocks.
Enhancing Home Manufacturing: Bettering productiveness in key sectors will assist stabilize costs by lowering the necessity for imports.
Strengthening Alternate Price Stability: Insurance policies geared toward boosting exports and attracting international funding might help construct international trade reserves and stabilize the dalasi.
Bettering Infrastructure: Higher transportation networks, vitality provide, and logistics will decrease manufacturing and distribution prices, thereby lowering inflationary pressures.
Local weather Adaptation Methods: Since The Gambia is susceptible to local weather shocks, investing in climate-resilient agriculture and water administration might help stabilize meals provide and costs.
4. Conclusion
Inflation in The Gambia is deeply rooted in structural deficiencies, making financial coverage instruments like rate of interest hikes inadequate for long-term worth stability. The proof from historic financial coverage traits reveals that
inflation stays excessive regardless of important adjustments in rates of interest. Moreover, the weak response of T-bills charges to MPR changes suggests inefficiencies within the monetary system, additional lowering the effectiveness of financial coverage. Addressing the
actual causes of inflation requires complete structural reforms geared toward enhancing manufacturing, bettering infrastructure, and lowering import dependency. With out these adjustments, inflationary pressures will persist, no matter changes in rates of interest.
Given the structural nature of inflation, utilizing the coverage price as a symbolic gesture (we’re doing one thing) makes extra sense than counting on it as a blunt instrument. Thus, CBG ought to use financial coverage primarily as a signaling
device relatively than a direct inflation-fighting mechanism.
