An Update on The Gambia’s Exchange Rate Market Pressure Index

Introduction

The exchange rate market pressure (EMPI) was introduced by Joof (2024)[1] to serve as an early warning signal to detect potential currency crises in The Gambia. This blog intends to provide an updated analysis on the country’s currency volatility, focusing on the developments up to the first half of March 2025; and assessing whether the current Dalasi depreciation signals a cause for concern.

Analysis

The analysis is conducted using the EMPI developed by (Joof, 2024). According to Joof (2024) a positive EMPI value indicates increased pressure in the exchange rate market, which can result from any combination of a currency depreciation, an expansion of the interest rate spread, or a loss of international reserves. A currency crisis is observed when the EMPI exceeds the 2.5 threshold. 

Our analysis in Figure 1 revealed that the dalasi remained stable from February 2024 onward, with an especially strong performance between December 2024 to January 2025, when the index turned negative, signaling a resilient dalasi or even an appreciation. This resilient can be explained by the increase in the foreign exchange supply driven by the peak tourism season.

However, the exchange rate pressures began to build in February 2025, as evidenced by the EMPI increasing from -2.8 to 0.9, and further rising to 1.2 in the first half of March 2025, triggering a considerable depreciation of the dalasi. This pressure could be attributed to the following: (i) Slowdown in the Tourism Sector – The peak tourist season (November–February) begins to decline in March, leading to a reduction in foreign exchange inflows. (ii) Repatriation of Profits – Foreign companies operating in The Gambia remit their earnings or dividends abroad, exerting downward pressure on the dalasi. (iii) Speculative Hoarding of Foreign Currency – Forex dealers anticipate a surge in remittances due to Ramadan, which should typically strengthen the dalasi. However, instead of allowing the exchange rate to adjust naturally, they may hoard foreign currency, creating an artificial shortage, thereby pushing up the exchange rate and accelerating depreciation.

Despite these pressures, our analysis suggests that the dalasi is not yet in a crisis stage, as the EMPI remains below the 2.5 threshold. However, continued monitoring is crucial to assess whether these pressures will intensify in the coming months. Based on Joof (2024)’s study on exchange rate market pressure, shocks to the dalasi tend to be short-lived, with the market typically absorbing them within 1 to 2 months on average.

Recommendations: 

Based on the findings of our exchange rate market analysis, we propose the following policy recommendations to the Central Bank of The Gambia (CBG) to manage exchange rate pressures and enhance market stability:

• Continue allowing market-driven exchange rate adjustments while ensuring that short-term shocks do not lead to excessive volatility. but may consider targeted forex interventions during periods of heightened market pressure to smooth volatility without depleting reserves excessively.

• Increase oversight of forex dealers to prevent speculative hoarding and artificial shortages that accelerate depreciation.
• Improve transparency in foreign exchange transactions by enhancing reporting requirements for banks and licensed forex bureaus.

• Strengthen the resilience of international reserves to cushion against sudden external shocks.
•  Enhance real-time monitoring of exchange rate dynamics using indicators like the EMPI to detect and respond to market pressures proactively.

• Conduct regular assessments of exchange rate fundamentals to inform evidence-based policy decisions.