Unlocking the Potential of The Gambia's Capital Market: Where do we start?

Introduction:

With a projected infrastructural financing gap of about $1 billion by 2030, the launching of The Gambia's first capital market in 2023 marks a significant step toward enhancing the country's abilty to meeting its development targets. The establishing of the vibrant capital market is crucial in fostering the country’s long-term sustainable growth. Furthermore, with remittance accounting for over 30 percent of GDP, leveraging on the Gambians in the diaspora could spur the development of the capital market. Despite this significant milestone, the capital market is yet to be functional. In this blog, I explore the preconditions for the capital market, why capital market matters, and role of the government.

Preconditions for Capital Market Development in The Gambia:

The development of a domestic institutional investor base, like Social Security and Housing Finance, is crucial to anchoring the market, due to its long-term investment horizons and steady demand for securities, which ensure liquidity and market depth. Given the small size of the economy, onboarding Social Security and Housing Finance into the capital market is essential for the functionality of the market.

Furthermore, a stable macro environment-low inflation, sustainable fiscal policy and a stable Gambian Dalasi is vital for the capital market development, because persist high inflation and currency depreciation can discourage investors in participating in long term investments.

Moreover, the development of the financial sector is an important element in ensuring the functionality of the capital market. The country’s financial sector is predominantly commercial banks, with limited financial intermediation, credit to private sector by banks standing at only 8.7% of GDP in 2023.  Therefore, to support the development of the capital market, there is a need to initiate the development of a wide range of institutions, such as brokerage firms, development bank and access to credit rating services.

Another important precondition is to establish a robust legal and regulatory framework and a court that protects investors and market players, this is crucial in attracting investors.

Why Capital Markets Matter for The Gambia?

Based on the International monetary fund projections, under the current policies, the country’s infrastructure financing gap will reach 15 percent of GDP in 2030-that is the financing needed for the country to achieve its 2030 Sustainable Development Goal targets on electricity, roads, and water and sanitation. However, considering The Gambia’s limited investment on adaptation infrastructure and depreciation of the current infrastructure, the financing gap could increase to a 5.3 percent of GDP every year (https://www.elibrary.imf.org/view/journals/002/2021/266/article-A002-en.xml) or about 50 percent of GDP by 2030, that’s $1 billion. Thus, the operationalization of the capital market will provide long term financing needs to bridge this infrastructural financing gap.

Furthermore, the capital market will help provide alternative financing sources for small and medium enterprises and startups on clean energies, Research and Development and agriculture among others, this could help diversify the economy.

Similarly, the capital market can serve as a channel for the government to leverage on remittance by introducing diaspora bonds for infrastructural development and renewable energy by providing incentives.

The Role of the Government:

The government must prioritize long term macroeconomic stability by controlling inflation and maintaining currency stability. Furthermore, it should establish a robust legal and regulatory framework to ensure market confidents and transparency. This should also be accompanied by effective supervision and enforcement to maintain market integrity. Similarly, the government should initiate tax incentives competitive returns and security to encourage the participation of Gambians and those in the diaspora.

Moreover, the government should promote market participation by providing incentives such as credit guarantees for local businesses, and co-investment opportunities in strategic sectors and also create awareness to increase the financial literacy of potential investors.

Conclusion

Although the capital market is in the infancy stage, it has remarkable potential to be a driver of economic growth. To unravel this potential, a pension reform and onboarding of a domestic institutional investor, like Social Security and Housing Finance) is crucial.