By: Kemo Kanyi
Resource economist and Sustainable Finance Specialist, Dr. Foday Joof, has shed light on the weaknesses and inefficiencies in The Gambia’s monetary policy transmission mechanism.
In a recent interview with this reporter, he explained why the country’s monetary policy may be weak, unreliable, or even non-existent, citing structural deficiencies rather than financial factors as the main cause of inflation.
Dr. Joof outlined that in advanced economies, monetary policy influences aggregate demand through four main channels: the interest rate channel, the asset channel, the credit channel, and the exchange rate channel.
However, he argued that due to The Gambia’s financial system structure, its monetary policy transmission differs significantly. He attributed this to the lack of well-functioning markets for fixed-income securities, equities, and real estate, as well as limited integration with private international capital markets.
Additionally, substantial Central Bank intervention in the foreign exchange market further weakens monetary policy effectiveness.
“This leaves The Gambia with only one probable channel for monetary policy transmission—the bank lending channel—since the other channels are likely to be weak and unreliable due to the dominance of banks, which control about 90% of the total financial sector assets,” Dr. Joof explained.
He further emphasized that even this lending channel is rendered weak due to several factors, including a lack of competitiveness in the banking industry, the small size of the sector, and the fact that a large portion of the economy operates outside the banking system. Additionally, he noted that the high cost of lending is exacerbated by a weak institutional environment.
When asked about possible solutions to address these economic challenges, Dr. Joof recommended prioritizing the strengthening of the financial system to enhance monetary policy effectiveness.
“The Central Bank of The Gambia (CBG) should focus on developing financial markets and institutions by improving depth (size and liquidity), access (the ability of individuals and firms to utilize financial services), and efficiency,” he stated.
Meanwhile, he advised that CBG should limit the use of monetary policy activism and refrain from adopting a framework that relies on public announcements of objectives, such as an inflation-targeting regime.
Further to that, he suggested that monetary policy rates should be used as signaling tools rather than direct inflation-fighting mechanisms, and also analysis highlights the urgent need for reforms in The Gambia’s financial sector to ensure a more effective and reliable monetary policy transmission mechanism.
