How Can The Gambia Attract More Foreign Investment?

By Amadou Njie

The world presently is at a very difficult moment. The economies of countries are collapsing as a result of recession. During this period, there is generally a fall in prices of goods because people's ability to buy is very low. These problems are affecting almost all countries, and Gambia is not an exception. As a result, it is going to be extremely difficult at the moment for Gambia economy to attract foreign investors.

I believe, as an economics student, that if certain policies are adopted by the  state we shall be able to stimulate the economy so as to attract investors.These policies are expansionary fiscal policy and expansionary monetary policy.

Fiscal Policy

Firstly, what is an expansionary fiscal policy? This is a policy that is adopted when the economy is in recession  in order to stimulate it. It aims at increasing people's purchasing power. It has three dimensions that the state can adopt separately or combing them.
(1) Increase government purchase during recession.
(2) Reduce taxes.
(3) Use the combination of the two.

When government tends to increase its spending, for example building roads, schools etc, these constructions will increase country aggregate supply (output). Likewise if they decide to reduce taxes the disposable income of people will increase, hence their ability to buy goods will also increase and this encourages foreign investors as they are expected to pay less tax. This will help them to reduce their costs of production.  It is  also possible for the state to combine the two policies simultaneously, to aim at getting the economy out of recession.

Expansionary fiscal policy when adopted, will increase  the interest rate, thereby attracting foreign investors. This is because the Gambian currency (dalasi) will appreciate and this will cause a fall our net exports; imports will become cheaper and exports become expensive.

Monetary Policy

Another policy that can be adopted in order to stimulate economy is called expansionary monetary policy. This policy also aims to achieve and maintain price-level stability, full employment and economic growth. This policy also has three cases such that, if any is applied  there is the possibility that the economy will be out of recession, hence we shall be able to encourage foreign investors.These three cases are:
 (1) Conducting open market operation, otherwise called OMO.
 (2) Changing the reserve ratio.
 (3) Changing the discount rate.
 

Firstly, open market operation is the best and fastest policy that can stimulate the economy within some period of time. It refers to buying and selling of bonds or treasury bills from and to commercial banks and the general public by the central bank. When central bank realize that the economy is in recession , they buy treasury bills in the open market as a form of pumping money into circulation. This form of money supply helps people to get money in order to increase their buying ability.

Secondly, changing the reserve ratio is another form of expansionary monetary policy. It refers to the the percentage of commercial bank deposit liabilities required as reserve. This amount when reduced by the state, helps commercial banks to give loans to people in order to increase their consumption and much can be purchased by people. This reserve rate has a multiplier effect in an economy because it helps both commercial banks and general public.

Thirdly, changing the discount rate has a positive impact on the economic growth. It refers to the interest rate that central bank charge on loans to banks and public.When interest rate is reduced, people will be willing to take loans and invest on things that they expect to get profit. As loans are available at low interest rate to people, they will be able to buy goods and consume more. This will result in an increase in prices of goods, and aggregate output will also increase.  During recession central banks buy bonds, lower reserve ratio and lower discount rate. Excess reserves increase. Money supply rises. Interest rates fall. Investment spending increases. Aggregate demand rises. Real G.D.P rises by a multiple of the increase in investment.

Higher Investment

These two policies will encourage foreign investors to come and invest in the Gambia. I can conclude by saying that when these policies are adopted , it will take time before we realise their impacts.

Finally, it is believed that some mechanisms have to be put in place when these policies are adopted because they could lead to an inflation.When people's disposable income is increased, the aggregate supply should also increase in order to prevent inflation. This is because people will be buying more and this will force general prices to rise as demand will exceeds supply of goods in the country.