On behalf of our Bissau-Guinean authorities, we would like to thank Staff, Management and the Executive Board for their continued support to Guinea-Bissau. Following the successful completion of the legislative and presidential elections in April and May 2014, the new Government set itself the task to address the country’s development challenges. The authorities are appreciative of the Fund technical assistance, policy dialogue and the disbursement received in November 2014 under the Rapid Credit Facility to address the country’s balance of payments and financing needs for 2014. This financial support has catalyzed the resumption of donors’ assistance and paved the way for the implementation of the much-needed reforms. In this regard, a ten-year development plan has been prepared and it aims at consolidating past progress and to transform the economy going forward. The constructive engagement of the Fund has been instrumental in helping our authorities organized in March 2015, in Brussels, a Donors’ Roundtable which was successful. In this meeting, donors pledged about 1.5 billion USD to support the authorities’ development projects, over the next ten years, including the reform of the security sector.
Cognizant of the daunting socio-economic challenges facing Guinea-Bissau, our authorities are strongly committed to strengthen the newly recovered political stability and lay out the solid foundations for a higher, sustained and inclusive economic growth and to fight poverty. In this regard, they have adopted a strategic plan for 2014–18 to further enhance the fiscal position, deepen structural reforms, mitigate vulnerabilities and develop a vibrant private sector supportive of growth and employment. In support of their strategic plan, the authorities are requesting a three-year arrangement under the IMF Extended Credit Facility (ECF). Based on a broad consensus and the positive results of policy measures implemented under the RCF, our Bissau Guinean authorities are strongly determined to implement the ECF-supported arrangement to maintain macroeconomic stability, improve public finance management, implement needed reforms to promote better governance and enhance private sector development.
II. Recent Economic Developments
In 2012–13, the economy experienced a deep deterioration due notably to the suspension of donors’ assistance, sharp decline in the international price of cashew and a lax fiscal policy. In this context, growth contracted by 1.8 percent in 2012 and increased by only 0.8 percent in 2013. The overall fiscal balance deteriorated by 4.6 percent of GDP in 2012 and by 5.3 percent of GDP in 2013. Over the period, the current account deficit also increased to 4.4 percent of GDP. With a decline in farm-gate cashew nut prices (the country’s main source of export proceeds) by over 60 percent, poverty soared and food insecurity doubled. Moreover, the budgetary pressures translated into tight compression in social spending and large accumulation of domestic and external arrears.
Our authorities are strongly determined to reverse this situation initiated in the second half of 2014 a set of reforms that have begun to yield positive results in restoring macroeconomic stability and fostering economic growth by implementing a strict budgetary management in the face of tight financing constraints. In 2014, real GDP growth is estimated at 2.5 percent driven by an increased cashew nuts harvest, construction and telecommunications services. Average inflation declined to -1 percent in a context of decreasing global food and fuel prices. Thanks to measures tightening controls over fuel imports, streamlining tax exemptions and intensified auditing of large tax payers, total revenue amounted to 12 percent of GDP in 2014 from 8.1 percent of GDP in 2013. The increases in revenues coupled with the donors’ assistance and the issuance of one-year Treasury –bills on the regional capital market enabled the authorities to clear a large amount of arrears accrued in recent years. The overall fiscal balance is estimated at 2.2 percent of GDP and the current account deficit declined to 1.2 percent of GDP in 2014. As regards the FUNPI (the Fund to promote the Industrialization of Agricultural Products) issue, the authorities have suspended the cashew nuts collections this year due to the lack of positive impact of the Fund on the sector. This measure will lead to an increase in the income of cashew producers; reduce the amount of smuggling and poverty as well.
The Bissau Guinean authorities are grateful to the Fund for its contribution to the successful Donors’ Round Table held on March 25, 2015 in Brussels. The authorities presented their medium-term development strategy for 2015–25 and sought the assistance and contribution of international partners for its financing. The plan’s objectives are to increase investment in infrastructure, diversify the economy through the development of agriculture and agro-industry, fishery, tourism and mining sectors, and reform the security sector.
As regard the reform in the security sector, significant progress has been made since last September. The authorities have announced a number of initiatives aimed at reforming and professionalizing the armed forces. This includes the first retirement of 500 soldiers by the end of 2015. With the external assistance, they will develop a sustainable pension scheme for affected security personals. Already a decree creating a special pension fund over the next five years has been issued.
III. Medium-Term Program and Policies for 2015
The steadfast implementation of the ECF-supported program will enable our authorities to solve the country’s financing difficulties while addressing the challenges related to growth and poverty reduction. In this regard, they are committed, to take steps to increase revenues, finance key public services, and foster sustained and inclusive growth to reduce poverty in the country.
1. Fiscal Policy and Debt Sustainability
The fiscal policy will aim at increasing fiscal revenues through the implementation of needed reforms to finance key public services. In executing the 2015 budget, if revenues exceed budgeted resources, the additional resources will be allocated to non-salary priority sending. Moreover, to improve treasury management, transparency and budgetary controls, steps will be taken towards the creation of a Treasury Single Account (TSA), and the Treasury Committee and communication will be strengthened. The authorities are also committed to minimize the use of improperly documented expenditure (DNTs) to emergency cases. To better manage the wage bill, the financial module of the payroll will be consolidated with the administrative module. This will address the deficient link between the payment of salaries and the human resource management while reducing the number of ghost workers. With regard to revenue measures, the authorities will continue to implement, enlarge and deepen reforms initiated to improve tax collection. In particular, controls and inspections of large and medium-size companies will be increased as well as tax audits and payments of taxes by non-compliant taxpayers. In addition, actions streamlining the tax system will be enforced to reduce distortions and improve tax collection. In the same vein, efforts to further restrict tax exemptions and fine-tune subsidies will be pursued.
The authorities welcome the debt sustainability analysis update highlighting that Guinea Bissau faces a moderate risk of debt distress. However, the high level of total public debt has led to a heightened overall risk of debt distress. Given the need to further improve fiscal and debt sustainability, the authorities are committed to pursue prudent fiscal and debt management policies while strengthening debt management capacity. With technical assistance from the Fund and other development partners, a legal and institutional framework for public debt management and debt contracting procedures will be introduced. The authorities will continue to rely on concessional borrowing and grants to finance investments.
2. Financial Policy
Cognizant of the challenges and vulnerabilities facing the financial sector, the authorities are determined to safeguard the sector’s stability by following international best practices. In close collaboration with the WAEMU regional banking commission, they will enforce compliance with prudential ratios including provisions to non-performing loans and capital injections. Efforts to deepen the financial intermediation and encourage access to credit and banking services will be strengthened. The national strategy document for the micro finance sector will be revised to consolidate existing initiatives.
Our Bissau Guinean authorities are committed to continue improving their AML/CFT framework. In this regard, a national strategy on AML/CFT consistent with the Financial Action Taskforce on Money Laundering (FATF) standards will be submitted to parliament by the end of the year. High ranking officials will disclose their assets to the Council of Ministers by September 2015 and the Financial Intelligence Unit will continue its awareness raising activities to commercial banks and the general public.
3. Structural Reforms and Fostering Growth
In order to achieve a higher, sustained and inclusive growth, the authorities are determined to improve the business environment and foster productive investment. Efforts to reduce the cost of doing business will be pursued through needed investments to close the infrastructure gap, develop human capital and further promote the rule of law which are critical to increasing the economy’s overall competitiveness. With international support, the quality of institutions and public delivery of health and education services will be improved. In addition, the authorities plan to restructure the electricity and water company (EAGB) into a profitable, financially healthy enterprise and privatize Guiné Telecom. The audit of FUNPI will be completed by end September 2015 whose results will serve as the basis for a new strategy to promote cashew nut production and transformation.
Over the past years, Guinea-Bissau’s economic activities have been severely affected by the political instability and significant drop of cashew prices with a heavy toll on the public finances. Under the RCF disbursement, the macroeconomic situation has been stabilized and far reaching reforms have been initiated which are yielding positive results. The Bissau-Guinean authorities would like to deepen the reforms already started and to embark on a medium term economic and financial reform to address the challenges facing the economy. They have prepared with staff’s assistance a program of adjustment for which they are requesting Fund support under the ECF. They have full ownership of the program and are strongly committed to implement the policy measures set out therein. The program will constitute a solid foundation to help solve the country’s balance of payments and fiscal difficulties and lay the foundation for growth and poverty reduction. We would, therefore, greatly appreciate Directors’ support for this request. Our authorities will also continue to need the strong support of development partners to further enhance the macroeconomic stability and reform process to achieve sustained and inclusive growth.