From Maneged to (More) Market: Exchnage Rate Pass-Through Before and After The Gambia's 2023 Foreign Exchange Reforms

Abstract

Does exchange rate depreciation pass through to consumer price inflation in The Gambia, and has this relationship changed since the Central Bank of The Gambia (CBG) introduced a new, more market-determined foreign exchange policy in December 2023? Using quarterly data from 2006Q2 to 2026Q2, we find pass-through is weak and statistically insignificant before the reform (β ̂=0.077, t=1.52, R^2=0.011, n=71), consistent with a managed exchange rate regime in which the central bank actively limits how much currency movement occurs and therefore how much can pass through to prices. Following the reform, the relationship changes dramatically: pass-through rises to β ̂=1.302 (t=9.92, R^2=0.723, n=10), an estimate exceeding complete pass-through; a formal Chow test confirms this represents a genuine structural break (F=3.925, p<0.05) rather than a suggestive comparison, though an outlier check on the small post-reform sample produces an implausibly large t-statistic on a further reduced sample, itself a symptom of small-sample fragility disclosed here rather than treated as further validation. Testing the post-reform relationship at longer lags reveals it is specifically a contemporaneous phenomenon, weakening sharply beyond the same quarter (t=9.92 at lag zero, falling to t=1.89 at two quarters) — informative about the speed of the new mechanism rather than evidence the finding is fragile. Given the small post-reform sample, the headline magnitude is best read as an upper bound on current pass-through, or as the initial reaction velocity of a newly market-determined rate-setting mechanism, rather than a stable long-run parameter. This finding is not an isolated result: it is directly consistent with, and mutually reinforcing of, two companion findings from related work on this same economy — that uncovered interest parity fails entirely in the pre-reform sample (R^2=0.001), and that fiscal financing pressure is absorbed almost entirely through reserves rather than the exchange rate. Together, these three independently estimated results describe a coherent transition: a central bank that actively suppressed exchange rate movement, and by extension its inflationary consequences, before December 2023, and a currency that has since begun transmitting price pressure much more directly and considerably faster, consistent with a genuine shift toward a more market-determined regime. Non-Technical Summary In December 2023, CBG replaced its administratively published exchange rate with one calculated directly from real market transactions. This paper measures whether that change actually altered how exchange rate movements affect inflation. It did substantially. Before the reform, a depreciation of the dalasi showed almost no measurable effect on inflation. Since the reform, the relationship has strengthened dramatically, though this later estimate rests on a small number of quarters and should be read as an early signal rather than a settled figure. This finding is independently supported by two other pieces of research showing the exchange rate did not previously behave like a market-determined price, and that reserves, not the exchange rate, previously absorbed most fiscal financing pressure. Together, these results suggest the reform has made the dalasi genuinely more responsive to market conditions — with a direct implication for how CBG should factor exchange rate movements into inflation forecasting going forward.