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Guinea-Bissau: First and Second Reviews Under the Extended Credit Facility Arrangement, Request for Rephasing of Disbursements, Modification of Performance Criteria and Financing Assurances Review

Author(s):
International Monetary Fund. African Dept.
Published Date:
December 2016
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Background and Recent Economic Developments

1. Political uncertainties between late 2015 and early 2016 eased with the recent Economic Community of West African States (ECOWAS) brokered adoption of a six-point roadmap for an inclusive government and constitutional reform. After a difficult resolution of a two-month political impasse triggered by the dismissal by President Vaz of Prime Minister Pereira and his government in mid-August 2015, the country was rocked by yet another impasse in early 2016. The latter was initiated by the expulsion in mid-January this year of fifteen ruling PAIGC party members of parliament (MPs) for voting against PM Correia’s government program, and thus inhibiting its parliamentary approval. The expulsion of the parliamentarians was declared unconstitutional by the Supreme Court and the MPs were reinstated, but PM Correia and his government fell over lack of transparency in the management of public finances. In June 2016, President Vaz appointed a new PM, Mr. Baciro Djá, who subsequently formed a government. Key political stakeholders of Guinea-Bissau signed in September 2016 an ECOWAS brokered six-point roadmap for an inclusive government and constitutional reform as a way to end the political crisis. Furthermore, although the security sector reform has stalled mainly due to lack of funding, the security situation remains calm and the government is operational. Nonetheless, in the context of administrative constraints, the political crises complicated program implementation and delayed key structural measures.

2. Economic activity strengthened further in 2015, reflecting benign domestic and external factors (Text Figure, Text Table, and Tables 18). Buoyed by a positive trend in the international cashew price, the authorities increased the reference price for cashew nuts at the beginning of the harvest season1, which moderated the smuggling and boosted formal exports. Overall agricultural production increased by 4½ percent. At the same time, the secondary and tertiary sectors grew by an estimated 5.5 and 4.8 percent, respectively, helped by enhanced supply of electricity and water. Reflecting these developments, real GDP grew by an estimated 4.8 percent in 2015, compared with a 2.3 percent in 2014. These economic developments helped strengthen external balances, increasing their contribution to growth, while the drag of public consumption on growth declined relative to 2014. Consumer price inflation remains low, averaging 1½ percent in 2015.

Table 1.Guinea-Bissau: Selected Economic Indicators, 2014–181
20142015201620172018
EBS/15/72Prel.EBS/15/72Proj.Projections
(Annual percent change, unless otherwise indicated)
National accounts and prices
Real GDP at market prices2.34.74.84.84.85.05.0
Real GDP per capita0.12.42.52.52.52.72.7
GDP deflator−2.05.210.11.86.00.92.0
Consumer price index (annual average)−1.01.31.52.32.42.62.8
External sector
Exports, f.o.b. (based on US$ values)11.013.155.57.215.20.40.0
Imports, f.o.b. (based on US$ values)19.57.92.510.414.85.42.9
Export volume−1.48.727.15.012.92.02.3
Import volume20.926.125.09.819.3−1.11.6
Terms of trade (deterioration = -)33.024.544.5−0.320.3−5.7−1.3
Real effective exchange rate (depreciation = -)0.1−16.5
Nominal exchange rate (CFAF per US$; average)493.6591.2
Government finances
Domestic revenue (excluding grants)59.417.129.417.94.32.49.3
Domestic revenue (excluding grants and one-offs)47.720.930.49.510.43.69.3
Total expenditure86.4−0.612.911.94.2−6.012.1
Current expenditure75.8−5.27.23.48.7−12.23.5
Current expenditure (excluding elections-related spending)57.26.119.93.48.7−12.23.5
Capital expenditure115.49.425.528.2−4.27.227.2
Money and credit
Net domestic assets 2−10.6−6.815.4−7.62.32.04.5
Credit to government (net)1.71.81.2−0.6−4.7−1.00.0
Credit to the economy−2.72.714.62.714.12.42.8
Velocity (GDP/broad money)2.12.21.92.21.91.91.9
(Percent of GDP, unless otherwise indicated)
Investments and savings
Gross investment11.412.412.513.612.813.213.4
Of which: government investment4.07.18.28.57.17.28.5
Gross domestic savings−1.32.16.62.47.05.75.4
Of which: government savings−7.8−1.2−1.00.5−1.70.30.8
Gross national savings7.98.811.98.99.99.18.6
Government finances
Total revenue 312.612.614.114.013.212.813.1
Total domestic primary expenditure16.313.715.614.314.912.513.0
Domestic primary balance−3.7−1.1−1.5−0.4−1.70.30.1
Overall balance (commitment basis)
Including grants−2.3−2.3−2.6−2.1−4.2−1.7−2.1
Excluding grants−11.8−8.3−9.3−8.0−8.8−6.9−7.7
External current account (including official current transfers)−3.5−3.6−1.1−4.7−2.2−3.1−3.8
Excluding official transfers−10.1−5.3−4.0−6.3−2.5−4.4−4.6
Nominal stock of public debt48.050.946.749.547.545.843.1
Of which: external debt14.218.014.916.613.714.015.0
Memorandum item:
Nominal GDP at market prices (CFAF billions)521.2608.0601.4648.5667.8707.8757.9
Sources: Guinea-Bissau authorities; and IMF staff estimates and projections.

Values in 2015 and 2016 exclude the bank bailout of CFA 34.2 billion. The Government determined the bailout contracts to be null and void. A final determination by the courts on the legality of the bailout contracts is still pending.

Contribution to the growth of broad money in percent.

One-off revenues amounted to 0.9 percent of GDP in 2014 (due to FUNPI’s proceeds being transferred to the Treasury) and are expected to account for 0.9 percent of GDP in 2015 (due mostly to the selling of 3G licenses) and 1.3 percent of GDP in 2016 (mostly due to revenue from the sell of seized illegal wood and the collection of associated taxes.

Sources: Guinea-Bissau authorities; and IMF staff estimates and projections.

Values in 2015 and 2016 exclude the bank bailout of CFA 34.2 billion. The Government determined the bailout contracts to be null and void. A final determination by the courts on the legality of the bailout contracts is still pending.

Contribution to the growth of broad money in percent.

One-off revenues amounted to 0.9 percent of GDP in 2014 (due to FUNPI’s proceeds being transferred to the Treasury) and are expected to account for 0.9 percent of GDP in 2015 (due mostly to the selling of 3G licenses) and 1.3 percent of GDP in 2016 (mostly due to revenue from the sell of seized illegal wood and the collection of associated taxes.

Table 2a.Guinea-Bissau: Central Government Operations, 2014–171(billions of CFAF)
2014201520162017 proj.
JuneEBS/15/72Prel.EBS/15/72Proj.JuneDec.
Revenue and grants115.064.3113.5125.0129.1119.354.1127.0
Revenue65.542.976.884.890.588.441.190.6
Tax revenue44.231.756.261.966.262.433.268.6
Nontax revenue21.411.220.622.924.226.17.922.0
(o/w) one-off revenues24.82.03.35.610.04.00.00.0
Grants49.521.436.840.138.630.913.036.4
Budget support23.34.110.75.610.71.00.03.3
Project grants26.217.326.134.527.929.913.033.2
Total expenditure126.971.0127.3140.5142.5147.371.8139.3
Current expenditure87.444.284.191.087.299.946.688.5
Wages and salaries32.316.132.531.834.632.017.133.1
Goods and services12.27.914.616.219.017.67.916.5
Transfers 313.38.420.218.917.131.413.621.6
Other current expenditures26.99.211.319.413.914.15.313.5
Scheduled interest2.72.65.54.62.54.82.73.9
Capital expenditure and net lending39.526.843.249.555.447.425.150.8
Public investment program39.426.843.249.555.247.425.150.8
Domestically financed0.12.54.64.98.32.52.02.7
Foreign financed39.224.238.644.646.944.923.148.1
Other capital expenditure0.10.00.00.00.20.00.00.0
Domestically financed0.10.00.00.00.20.00.00.0
Overall balance, including grants (commitment)−11.8−6.7−13.8−15.6−13.5−28.0−17.7−12.3
Overall balance, excluding grants (commitment)−61.3−28.1−50.6−55.7−52.1−58.9−30.7−48.7
Net domestic arrears4−1.8−2.9−8.1−5.2−3.0−0.4−0.4−2.6
Accumulation current year2.23.20.02.20.06.60.00.0
Payment previous years−4.0−6.1−8.1−7.4−3.0−7.0−0.4−2.6
External interest arrears current year0.0−0.4−0.9−0.40.00.00.00.0
Non Regularized Spending5−1.8−4.80.0−2.70.0−2.0−1.0−1.0
Float and statistical discrepancies−0.7−0.30.01.60.00.00.02.0
Overall balance, including grants (cash)−16.1−15.1−22.8−22.2−16.5−30.3−19.1−13.9
Financing16.115.122.822.216.530.319.113.9
Domestic financing3.49.24.213.8−4.019.29.70.1
Bank financing3.49.24.413.8−2.219.29.70.1
BCEAO credit2.90.00.02.3−0.63.82.53.8
(o/w) IMF2.90.00.02.3−0.63.82.53.8
Deposits at the BCEAO (- = build up)−7.92.34.42.7−1.65.70.0−3.7
Domestic banks8.56.90.08.80.09.77.20.0
(o/w) Regional (including T-bills)15.05.00.01.00.013.00.00.0
Foreign financing (net)12.75.913.88.416.711.29.413.8
Disbursements13.16.915.710.018.915.010.215.0
Projects13.16.912.510.018.915.010.215.0
Programs0.00.03.20.00.00.00.00.0
Amortization (scheduled and arrears)−3.3−0.6−1.9−1.1−2.2−3.8−0.8−1.2
External arrears0.0−0.50.0−0.50.00.00.00.0
Debt relief3.00.00.00.00.00.00.00.0
Gross financing gap (+ = financing need)0.00.04.70.03.70.00.00.0
Additional financing0.00.00.00.00.00.00.00.0
Residual financing gap0.00.04.70.03.70.00.00.0
Domestic primary balance6−19.4−6.0−6.5−9.3−2.7−11.2−5.82.3
Revenue65.542.976.884.890.588.441.190.6
Primary expenditure84.948.983.294.193.199.646.988.3
Sources: Guinea-Bissau authorities; and IMF staff estimates and projections.

Values in 2015 and 2016 exclude the bank bailout of CFA 34.2 billion. The Government determined the bailout contracts to be null and void. A final determination by the courts on the legality of the bailout contracts is still pending.

For 2014 it refers to FUNPI’s proceeds; for 2015 it reflects the sale of 3G licenses, sale of seized illegal wood, and Euroatlantico receipts; for 2016 it reflects sale of seized illegal wood.

Transfers in 2016 include a CFA 10.0 billion debt repayment on behalf of Guinea-Telecom.

Recorded as arrears when payments were not made more than 30 days for wages and more than 90 days for other expenditure.

In early 2015 CFA 3.7 billion were used to pay 2014 expenses.

Domestic primary balance is adjusted to reflect Non Regularized Spending.

Sources: Guinea-Bissau authorities; and IMF staff estimates and projections.

Values in 2015 and 2016 exclude the bank bailout of CFA 34.2 billion. The Government determined the bailout contracts to be null and void. A final determination by the courts on the legality of the bailout contracts is still pending.

For 2014 it refers to FUNPI’s proceeds; for 2015 it reflects the sale of 3G licenses, sale of seized illegal wood, and Euroatlantico receipts; for 2016 it reflects sale of seized illegal wood.

Transfers in 2016 include a CFA 10.0 billion debt repayment on behalf of Guinea-Telecom.

Recorded as arrears when payments were not made more than 30 days for wages and more than 90 days for other expenditure.

In early 2015 CFA 3.7 billion were used to pay 2014 expenses.

Domestic primary balance is adjusted to reflect Non Regularized Spending.

Table 2b.Guinea-Bissau: Central Government Operations, 2014–171(percent of GDP)
2014201520162017 proj.
JuneEBS/15/72Prel.EBS/15/72Proj.JuneDec.
Revenue and grants22.110.718.720.819.917.97.617.9
Revenue12.67.112.614.114.013.25.812.8
Tax revenue8.55.39.210.310.29.34.79.7
Nontax revenue4.11.93.43.83.73.91.13.1
(o/w) one-off revenues20.90.30.50.91.50.60.00.0
Grants9.53.66.06.76.04.61.85.1
Budget support4.50.71.80.91.60.20.00.5
(o/w) Election Support1.80.00.00.00.00.00.00.0
Project grants5.02.94.35.74.34.51.84.7
Total expenditure24.311.820.923.422.022.110.119.7
Current expenditure16.87.413.815.113.415.06.612.5
Wages and salaries6.22.75.35.35.34.82.44.7
Goods and services2.31.32.42.72.92.61.12.3
Transfers 32.61.43.33.22.64.71.93.1
Other current expenditures5.21.51.93.22.12.10.81.9
Scheduled interest0.50.40.90.80.40.70.40.5
Capital expenditure and net lending7.64.47.18.28.57.13.67.2
Public investment program7.64.47.18.28.57.13.67.2
Domestically financed0.00.40.80.81.30.40.30.4
Foreign financed7.54.06.37.47.26.73.36.8
Other capital expenditure0.00.00.00.00.00.00.0
Domestically financed0.00.00.00.00.00.00.0
Overall balance, including grants (commitment)−2.3−1.1−2.3−2.6−2.1−4.2−2.5−1.7
Overall balance, excluding grants (commitment)−11.8−4.7−8.3−9.3−8.0−8.8−4.3−6.9
Net domestic arrears4−0.3−0.5−1.3−0.9−0.5−0.1−0.1−0.4
Accumulation current year0.40.50.00.40.01.00.00.0
Payment previous years−0.8−1.0−1.3−1.2−0.5−1.0−0.1−0.4
External interest arrears current year0.0−0.1−0.2−0.10.00.00.00.0
Non Regularized Spending5−0.3−0.80.0−0.50.0−0.3−0.1−0.1
Float and statistical discrepancies−0.10.00.00.30.00.00.00.3
Overall balance, including grants (cash)−3.1−2.5−3.7−3.7−2.5−4.5−2.7−2.0
Financing3.12.53.73.72.54.52.72.0
Domestic financing0.71.50.72.3−0.62.91.40.0
Bank financing0.71.50.72.3−0.32.91.40.0
BCEAO credit0.60.00.00.4−0.10.60.40.5
(o/w) IMF0.60.00.00.4−0.10.60.40.5
Deposits at the BCEAO (- = build up)−1.50.40.70.4−0.30.90.0−0.5
Domestic banks1.61.20.01.50.01.41.00.0
(o/w) Regional (including T-bills)2.90.80.00.20.01.90.00.0
Foreign financing (net)2.41.12.61.42.61.71.31.9
Disbursements2.51.12.11.72.92.21.42.1
Projects2.51.12.11.72.92.21.42.1
Programs0.00.00.50.00.00.00.00.0
Amortization (scheduled and arrears)−0.6−0.1−0.3−0.2−0.3−0.6−0.1−0.2
External arrears0.0−0.10.0−0.10.00.00.00.0
Debt relief0.60.00.00.00.00.00.00.0
Gross financing gap (+ = financing need)0.00.00.80.00.60.00.00.0
Additional financing0.00.00.00.00.00.00.00.0
Residual financing gap0.00.00.80.00.60.00.00.0
Domestic primary balance6−3.7−1.0−1.1−1.5−0.4−1.7−0.80.3
Revenue12.67.112.614.114.013.25.812.8
Primary expenditure16.38.113.715.614.414.96.612.5
Sources: Guinea-Bissau authorities; and IMF staff estimates and projections.

Values in 2015 and 2016 exclude the bank bailout of CFA 34.2 billion. The Government determined the bailout contracts to be null and void. A final determination by the courts on the legality of the bailout contracts is still pending.

For 2014 it refers to FUNPI’s proceeds; for 2015 it reflects the sale of 3G licenses, sale of seized illegal wood, and Euroatlantico receipts; for 2016 it reflects sale of seized illegal wood.

Transfers in 2016 include a CFA 10.0 billion debt repayment on behalf of Guinea-Telecom.

Recorded as arrears when payments were not made more than 30 days for wages and more than 90 days for other expenditure.

In early 2015 CFA 3.7 billion were used to pay 2014 expenses.

Domestic primary balance is adjusted to reflect Non Regularized Spending.

Sources: Guinea-Bissau authorities; and IMF staff estimates and projections.

Values in 2015 and 2016 exclude the bank bailout of CFA 34.2 billion. The Government determined the bailout contracts to be null and void. A final determination by the courts on the legality of the bailout contracts is still pending.

For 2014 it refers to FUNPI’s proceeds; for 2015 it reflects the sale of 3G licenses, sale of seized illegal wood, and Euroatlantico receipts; for 2016 it reflects sale of seized illegal wood.

Transfers in 2016 include a CFA 10.0 billion debt repayment on behalf of Guinea-Telecom.

Recorded as arrears when payments were not made more than 30 days for wages and more than 90 days for other expenditure.

In early 2015 CFA 3.7 billion were used to pay 2014 expenses.

Domestic primary balance is adjusted to reflect Non Regularized Spending.

Table 3.Guinea-Bissau: Monetary Survey, 2014–181(percent of GDP)
20142015201620172018
EBS/15/72Prel.EBS/15/72Proj.Proj.
(CFAC billions)
Net foreign assets160.7204.1196.4250.2224.1238.2248.0
Central Bank of West African States (BCEAO)135.5172.9176.6226.6211.9227.6237.4
Commercial banks25.231.219.823.612.210.610.6
Net domestic assets82.667.4120.746.8128.3135.2151.9
Credit to the government (net)225.226.928.225.313.29.59.5
Credit to the economy61.167.796.875.1115.1125.7142.4
Other items (net)−3.7−27.2−4.3−53.60.00.00.0
Money supply (M2)244.1271.4317.3297.0352.4373.5399.9
Currency outside banks151.8168.3199.4184.1221.5234.7251.3
Bank deposits92.3103.1117.9112.8130.9138.7148.6
Base money (M0)176.4175.5176.1192.1195.5207.2221.9
(Change in percent of beginning-of-period broad money)
Contribution to the growth of broad money
Money supply (M2)22.410.930.09.411.06.07.1
Net foreign assets33.017.714.617.08.74.02.6
BCEAO31.815.316.819.811.14.52.6
Commercial banks1.22.5−2.2−2.8−2.4−0.50.0
Net domestic assets−11.4−6.915.6−7.62.42.04.5
Credit to the central government21.71.81.2−0.6−4.7−1.00.0
Credit to the private sector−2.72.714.62.75.83.04.5
Other items net−10.4−11.4−0.3−9.71.40.00.0
Memorandum items:
Money supply (M2, annual percentage change)22.410.930.09.411.06.07.1
Base money (M0, annual percentage change)36.810.9−0.29.411.06.07.1
Credit to the private sector (annual percentage change)−8.210.958.410.919.09.213.3
Velocity (GDP/M2)2.12.21.92.11.91.91.9
Money Multiplier (M2/M0)1.41.51.81.51.81.81.8
Sources: BCEAO; and IMF staff estimates and projections.

End of period.

Values for 2015 were adjusted by Staff to exclude the bank bailout of CFA 34.2 billion. The Government determined the bailout contracts to be null and void. A final determination by the courts on the legality of the bailout contracts is still pending.

Sources: BCEAO; and IMF staff estimates and projections.

End of period.

Values for 2015 were adjusted by Staff to exclude the bank bailout of CFA 34.2 billion. The Government determined the bailout contracts to be null and void. A final determination by the courts on the legality of the bailout contracts is still pending.

Table 4.Guinea-Bissau: Balance of Payments, 2014–18(billions of CFAF)
20142015201620172018
EBS/15/72Prel.EBS/15/72Proj.Projections
Current Account Balance
Including all official transfers−18.1−21.7−6.6−30.4−14.7−22.0−28.8
Excluding official transfers−41.4−32.3−12.2−41.0−15.8−25.3−32.3
Goods and services−67.9−62.8−39.8−72.5−44.9−56.1−62.8
Goods−42.5−30.20.9−36.71.7−7.1−12.5
Exports, f.o.b83.8114.5156.0122.2179.2179.9179.4
Of which: cashew nuts69.297.0134.4101.6152.9155.9153.9
Imports, f.o.b.−126.3−144.7−155.1−158.8−177.5−186.9−191.8
Of which: food products−40.7−43.1−41.5−45.9−50.2−53.2−57.0
petroleum products−27.4−29.5−37.0−31.5−34.2−42.4−48.0
Services (net)−25.4−32.7−40.7−35.9−46.6−49.1−50.4
Credit19.421.318.623.421.322.423.0
Debit−44.8−54.0−59.3−59.3−67.9−76.9−78.1
Incomes (net)11.211.311.711.311.813.012.4
Credit12.012.412.812.413.414.714.7
EU fishing compensation5.76.04.16.04.15.95.9
Other license fees6.36.48.76.49.38.88.8
Debit−0.8−1.2−1.1−1.2−1.5−1.7−2.3
Of which: external interest−0.8−1.2−1.1−1.2−1.5−1.7−2.3
Current transfers (net)38.629.921.430.918.321.221.6
Official 123.310.75.610.71.03.33.5
Of which: balance of payments support grants23.310.75.610.71.03.33.5
Private15.319.215.820.217.317.918.1
Of which: remittances15.319.215.820.217.317.918.1
Capital and financial balance78.554.348.680.450.037.838.6
Capital account26.526.334.728.130.133.439.0
Financial account52.028.013.852.219.94.4−0.5
Official medium- and long-term disbursements13.112.510.018.915.015.016.0
Project loans13.112.510.018.915.015.016.0
Amortization−0.9−2.7−2.2−3.0−4.4−2.2−2.9
Treasury bills and regional financing15.00.01.00.013.00.00.0
Commercial bank net foreign assets−2.2−6.05.37.67.61.60.0
Private net foreign assets27.024.2−0.328.7−11.3−10.0−13.6
Errors and Omissions0.00.00.00.00.00.00.0
Overall balance60.432.642.050.035.315.89.8
Financing−60.4−32.6−42.0−50.0−35.3−15.8−9.8
Net foreign assets (increase = -)−63.4−37.4−41.1−53.7−35.3−15.8−9.8
Of which: net IMF credits3.60.02.8−1.04.64.61.6
purchases and loans2.70.02.30.04.25.02.5
Debt relief3.00.00.00.00.00.00.0
Change in debt-service arrears (decrease = -)0.0−0.9−0.90.00.00.00.0
Gross financing gap0.04.70.03.70.00.00.0
Proposed ECF financing0.04.70.03.70.00.00.0
Residual financing gap0.00.00.0−0.10.00.00.0
Memorandum items:
Export volume of goods (annual percentage change)−1.48.727.15.012.92.02.3
Cashew export prices (US$ per ton)1,0001,1001,2101,1031,4001,4001,400
Import volume of goods (annual percentage change)25.626.122.59.819.4−0.71.5
Imputed international reserves
US$ millions199.211.5
As percent of broad money37.138.3
WAEMU gross official reserves (billions US$)13.211.5
Percent of broad money
Scheduled debt service
Percent of exports and service credits−1.91.30.91.71.41.31.7
Percent of total government revenue−3.02.31.92.83.32.93.5
Current account balance (percent of GDP)
Including official transfers−3.5−3.6−1.1−4.7−2.2−3.1−3.8
Excluding official transfers−10.1−5.3−4.0−6.3−4.1−5.4−5.9
Sources: BCEAO; and IMF staff estimates and projections.

Includes food aid and technical assistance to projects.

Sources: BCEAO; and IMF staff estimates and projections.

Includes food aid and technical assistance to projects.

Table 5.Guinea-Bissau: Financial Soundness Indicators of the Banking System, 2014–161(percent)
2010201120122013201420152016

June
Capital Adequacy
Capital to risk-weighted assets28.522.323.722.720.119.319.0
Tier 1 capital to risk weighted assets28.522.322.323.121.413.915.3
Capital to total assets15.311.813.213.511.016.816.8
Sectoral distribution of credit
Agriculture and fishing3.14.13.42.62.62.62.3
Manufacturing11.59.417.716.314.712.210.5
Electricity, gas, and water2.811.59.611.110.410.29.4
Building and construction3.44.03.34.13.92.52.8
Commerce54.052.945.642.544.047.448.1
Transport and Communication0.00.10.10.20.10.20.3
Services1.30.60.30.40.40.40.5
Collectives and Social Services0.00.00.00.00.00.00.0
Other activities23.917.520.123.124.024.526.2
Asset quality
Non-performing loans to total credit9.86.56.411.625.76.25.6
Non-performing loans to capital42.651.859.255.291.065.241.2
Provisions to gross non-performing loans5.93.32.73.12.82.32.1
Provisions to gross loans16.313.010.711.619.08.94.2
Earnings and profitability
Net Income to average assets (ROA)1.12.52.62.92.92.92.8
Net Income to average equity (ROE)6.217.718.017.917.517.516.5
Liquidity
Liquid assets to total assets22.230.034.325.234.026.817.0
Liquid assets to short term assets33.042.249.049.560.135.035.0
Ratio of deposits to assets33.135.645.956.259.245.743.3
Ratio of loans to deposits56.758.678.972.582.076.572.4
Excess reserves / broad money
Memorandum items:
Deposit rate3.63.84.74.74.74.74.7
Lending rate10.610.610.29.29.29.29.2
Source: BCEAO.

FSI indicators for 2015 and 2016 have not been updated by the BCEAO since the null-and-void declaration of the bailout.

Source: BCEAO.

FSI indicators for 2015 and 2016 have not been updated by the BCEAO since the null-and-void declaration of the bailout.

Table 6.Guinea-Bissau: Indicators of Capacity to Repay the Fund, 2016–25
2016201720182019202020212022202320242025
Projections
(SDR millions, unless otherwise indicated)
Fund obligations based on existing credit
Principal0.481.451.451.451.451.290.570.570.570.57
Charges and interest0.000.000.000.020.010.010.010.010.000.00
Fund obligations based on existing and prospective credit
Principal0.51.51.51.52.22.02.63.84.13.4
Charges and interest0.00.00.00.10.10.00.00.00.00.0
Total obligations based on existing and prospective credit
SDR millions0.51.51.51.52.22.02.63.84.13.4
CFAF billions0.41.21.21.21.81.62.13.13.42.8
Percent government revenue0.41.31.21.11.51.21.52.01.91.4
Percent exports of goods and services0.20.70.70.60.90.80.91.31.20.9
Percent debt service15.549.337.831.048.051.665.789.4127.1107.6
Percent GDP0.10.20.20.10.20.20.20.30.30.2
Percent quota1.75.15.15.17.67.09.213.514.512.0
Percent reserves0.20.50.50.50.70.6
Outstanding Fund credit
SDR millions18.022.624.222.820.618.616.012.28.14.7
CFAF billions14.818.619.918.616.815.213.09.96.63.8
Percent government revenue16.820.520.117.114.011.69.06.23.71.9
Percent exports of goods and services8.310.311.19.68.47.85.84.12.41.3
Percent debt service581.9769.5631.9486.7457.8480.6404.1285.2249.0147.0
Percent GDP2.22.62.62.31.91.61.30.90.60.3
Percent quota63.579.785.380.272.665.556.342.928.416.4
Percent reserves7.08.28.47.46.45.5
Net use of Fund credit4.64.61.6−1.5−2.2−2.0−2.6−3.8−4.10.0
Disbursements5.16.13.00.00.00.00.00.00.00.0
Repayments and repurchases0.51.51.51.52.22.02.63.84.13.4
(CFAF billions)
Memorandum items:
Nominal GDP667.8707.8757.9813.4872.8937.21,013.61,096.21,185.51,282.2
Exports of goods and services179.2179.9179.4194.6199.6193.4223.1244.5268.8296.6
Government revenue88.490.699.0108.8119.7131.3144.5159.6175.9195.1
Debt service2.62.43.13.83.73.23.23.52.62.6
Net Foreign Assets Central Bank211.9227.6237.4250.2263.6277.3
CFAF/SDR (period average)823.0821.7821.0818.7815.1815.1815.1815.1815.1815.1
Quota (SDR)28.428.428.428.428.428.428.428.428.428.4
Source: IMF staff estimates and projections.
Source: IMF staff estimates and projections.
Table 7.Guinea-Bissau: Quantitative Performance Criteria and Indicative Targets for 2015(cumulative from beginning of calendar year to end of month indicated; billions of CFAF, unless otherwise indicated)
Dec. 20142015
JuneSept1Dec.
StockProg.Adj. Prog.Act.StatusProg.Adj. Prog.Act.StatusProg.Adj. Prog.Act.Status
Performance criteria1
Total domestic tax revenue (floor)44.226.231.7Met40.749.7Met53.361.9Met
Net domestic bank credit to the central government (ceiling)2.78.210.29.2Met7.99.112.1Not Met4.411.511.5Met
Ceiling on new nonconcessional external debt (in $ million)20.00.00.0Met0.00.0Met0.00.0Met
Outstanding stock of external debt owed or guaranteed by the central government0.00.00.0Met0.00.0Met0.00.0Met
with maturities of less than one year (ceiling)2
External payment arrears (ceiling)20.90.00.0Met0.00.0Met0.00.0Met
Indicative targets
New domestic arrears (ceiling)0.00.2Not Met0.03.0 NotMet0.01.3Not Met
Social and priority spending (floor)21.312.920.0Met19.427.4Met25.836.5Met
Domestic primary balance (commitment basis, floor)−19.4−2.6−2.9Not Met−6.0−6.6Not Met−6.5−9.3Not Met
Non regularized expenditures (DNTs, ceiling)0.44.8Not Met0.60.4Met0.82.7Not Met
Memorandum items:
Clearance of domestic payment arrears4.36.66.07.48.107.4
External budgetary assistance (US$ million)324.07.67.015.87.023.619.5
ECF disbursements (SDR millions, flow)410.80.00.02.842.842.840.0

The performance criteria and indicative targets are defined in the Technical Memorandum of Understanding (TMU); end-September 2015 and end-March 2016 are indicative targets.

These apply on a continuous basis.

Comprises grants and loans.

A disbursement of 20 percent of quota (SDR 2.84 million) is proposed on Board approval of the ECF arrangement in July.

The performance criteria and indicative targets are defined in the Technical Memorandum of Understanding (TMU); end-September 2015 and end-March 2016 are indicative targets.

These apply on a continuous basis.

Comprises grants and loans.

A disbursement of 20 percent of quota (SDR 2.84 million) is proposed on Board approval of the ECF arrangement in July.

Table 8a.Guinea-Bissau: Proposed Quantitative Performance Criteria and Indicative Targets for 2016(cumulative from beginning of calendar year to end of month indicated; billions of CFAF, unless otherwise indicated)
Dec. 20152016
Mar. 1/Jun.Sept 1Dec.
StockITPrel.ITPrel.Proj.Proposed PC
Performance criteria1
Total domestic tax revenue (floor)61.915.710.431.531.249.661.4
Net domestic bank credit to the central government (ceiling)11.50.06.40.019.319.815.4
Ceiling on new nonconcessional external debt (in $ million)20.00.00.00.00.00.00.0
Outstanding stock of external debt owed or guaranteed by the central government with maturities of less than one year (ceiling)20.00.00.00.00.00.00.0
External payment arrears (ceiling)20.00.00.00.00.00.00.0
Indicative targets
New domestic arrears (ceiling)1.30.00.00.04.66.66.6
Social and priority spending (floor)36.57.76.021.712.923.231.0
Domestic primary balance (commitmenmt basis, floor)−9.3−0.7−7.1−1.3−15.8−9.4−11.2
Non regularized expenditures (DNTs, ceiling)2.70.22.10.47.81.02.0
Memorandum items:
Clearance of domestic payment arrears7.40.83.31.86.45.77.0
External budgetary assistance (US$ million)319.55.90.09.20.01.71.7
ECF disbursements (SDR millions, flow)40.00.00.02.30.00.05.1
Concessional loans (US$ million)521.16.11.812.35.45.412.5

The performance criteria and indicative targets are defined in the Technical Memorandum of Understanding (TMU). Targets for end-March, end-June, and end-September are indicative, while those for end-December are proposed performance criteria.

These apply on a continuous basis.

Comprises grants and loans.

Reflects proposed new disbursement schedule.

These comprise project loans with grant elements exceeding or equal to 35 percent.

The performance criteria and indicative targets are defined in the Technical Memorandum of Understanding (TMU). Targets for end-March, end-June, and end-September are indicative, while those for end-December are proposed performance criteria.

These apply on a continuous basis.

Comprises grants and loans.

Reflects proposed new disbursement schedule.

These comprise project loans with grant elements exceeding or equal to 35 percent.

Table 8b.Guinea-Bissau: Proposed Quantitative Performance Criteria and Indicative Targets for 2017(cumulative from beginning of calendar year to end of month indicated; billions of CFAF, unless otherwise indicated)
2017
Dec. 2016Mar. 1/Jun.Sept 1Dec. 1/
Proj.Proposed
Proj.PCProj.
Performance criteria1
Total domestic tax revenue (floor)61.416.332.648.965.2
Net domestic bank credit to the central government (ceiling)15.48.07.2’0.0−3.7
Ceiling on new nonconcessional external debt (in $ million)20.00.00.00.00.0
Outstanding stock of external debt owed or guaranteed by the central government with maturities of less than one year (ceiling)20.00.00.00.00.0
External payment arrears (ceiling)20.00.00.00.00.0
Indicative targets
New domestic arrears (ceiling)6.60.00.00.00.0
Social and priority spending (floor)31.07.721.723.231.0
Domestic primary balance (commitment basis, floor)−11.2−6.4−5.8−1.02.3
Non regularized expenditures (DNTs, ceiling)2.00.20.40.70.9
Memorandum items:
Clearance of domestic payment arrears7.00.40.40.82.6
External budgetary assistance (US$ million)31.70.00.05.55.5
ECF disbursements (SDR millions, flow)45.10.03.00.03.0
Concessional loans (US$ million)512.54.69.313.918.6

The performance criteria and indicative targets are defined in the Technical Memorandum of Understanding (TMU). Targets for end-March, end-September, and end-December 2017 are indicative, while those for end-June are proposed performance criteria.

These apply on a continuous basis.

Comprises grants and loans.

Reflects proposed new disbursement schedule.

These comprise project loans with grant elements exceeding or equal to 35 percent.

The performance criteria and indicative targets are defined in the Technical Memorandum of Understanding (TMU). Targets for end-March, end-September, and end-December 2017 are indicative, while those for end-June are proposed performance criteria.

These apply on a continuous basis.

Comprises grants and loans.

Reflects proposed new disbursement schedule.

These comprise project loans with grant elements exceeding or equal to 35 percent.

Real GDP Growth by Sector

(annual percent change)

Sources: INE; MEF; and IMF staff calculations.

Guinea-Bissau: Key Economic Indicators
2012201320142015201620172018
EBS/15/72Prel.EBS/15/72Proj.Projections
(precent of GDP, unless otherwise indicated)
Real GDP growth (percent)−1.73.32.34.74.84.84.85.05.0
Consumer price index (annual average)2.10.8−1.01.31.52.32.42.62.8
Revenue 19.17.912.612.614.114.013.212.813.1
of which: Tax revenue7.76.88.59.210.310.29.39.710.1
Grants2.43.49.56.06.76.04.65.15.6
Total expenditure and net lending 213.813.124.320.923.822.022.419.820.8
Domestic primary balance−3.3−1.6−3.7−1.1−1.5−0.4−1.70.30.1
Overall balance (commitment basis)−2.3−1.8−2.3−2.3−2.6−2.1−4.2−1.7−2.1
External current account (including official current transfers)−11.9−7.2−3.5−3.6−1.1−4.7−2.2−3.1−3.8
Total public debt56.050.148.050.946.749.547.545.843.1
Sources: Guinea-Bissau authorities; and IMF staff estimates and projections.

One-off revenues amounted to 0.9 percent of GDP in 2014 (due to FUNPI’s proceeds being transferred to the Treasury) and are expected to account for 0.9 percent of GDP in 2015 (due mostly to the selling of 3G licenses) and 1.3 percent of GDP in 2016 (mostly due to revenue from the selling of seized illegal wood and the collection of associated taxes).

Total expenditure and net lending adjusted to reflect non-regularized spending.

Sources: Guinea-Bissau authorities; and IMF staff estimates and projections.

One-off revenues amounted to 0.9 percent of GDP in 2014 (due to FUNPI’s proceeds being transferred to the Treasury) and are expected to account for 0.9 percent of GDP in 2015 (due mostly to the selling of 3G licenses) and 1.3 percent of GDP in 2016 (mostly due to revenue from the selling of seized illegal wood and the collection of associated taxes).

Total expenditure and net lending adjusted to reflect non-regularized spending.

3. Tax revenues substantially exceeded expectations under the program, reflecting several measures initiated during 2015. The government improved tax compliance by large taxpayers and stepped up custom controls to contain fraud and under-invoicing by importers. Combined with stepped-up vigilance of tax administration and burgeoning economic activity, these measures boosted tax collection to CFAF 31.7 billion at end-June (some 21 percent above the program target) and CFAF 61.9 billion at end-December (10 percent of GDP, and 10 percent above the end-year PC floor).

4. At the same time, expenditures substantially exceeded the budget and weakened the fiscal stance in 2015. Non-wage expenditures increased during the year, driven mostly by increases in other current expenditures, pushing current expenditure some 0.9 percent of GDP above the program expectation, despite a reduction in fuel subsidies to the military. On the other hand, capital spending exceeded expectation by 0.8 percent of GDP on account of higher-than-programmed project grants for public investment. As a result of these developments, the domestic primary deficit exceeded both its mid-year and year-end targets (the latter target was set at 1.1 percent of GDP). However, the increase in expenditure was offset by the strong revenue performance, yielding a mildly higher-than-anticipated domestic primary deficit of 1½ percent of GDP.

5. The authorities decided to take over non-performing loans (NPLs) from two commercial banks in July and November 2015. In an attempt to clean banks’ balance sheets and to kick-start private sector credit, the authorities took over CFAF 34.2 billion (5½ percent of GDP) of NPLs at face value from two commercial banks. The operation was financed through credit lines at the respective banks (Box 1). The scheme lacked transparency and raised serious governance concerns.

6. The political crisis and loss of budget support from development partners over the bank bailout (see Box 1) heightened fiscal challenges in 2016 that forced revenue measures and expenditure adjustment to bring the fiscal deficit to a sustainable level. The draft 2016 budget incorporates costs related to realizations of contingent liabilities with respect to loan guarantees for the publicly-owned Guinea Telecom (about 1½ percent of GDP) and to the state electricity and water company (EAGB) (0.8 percent of GDP), a significant loss of budget support (2.6 percent of GDP) from development partners over the bank bailout (MEFP ¶18 and Text Table) and a significant slowdown in revenue growth compared to 2015. End-June tax revenue in 2016 is estimated at 4.7 percent of GDP, a fall of 0.6 percent relative to the same period in 2015, hindered by the political crisis and resulting slowdown in tax administration advances despite economic growth. Similarly, non-tax revenue (excluding one-offs) in the first half of 2016 is estimated at 1.3 percent of GDP compared with 1.5 percent of GDP over the same period last year. The budget thus features expenditure reductions in wages, goods and services, and domestically financed investment which also negatively impacted social and priority sectors. A number of revenue boosting measures thus became necessary, including the accelerated sale of seized illegally cut timber. These adjustments were also necessary, in view of lapses in expenditure management resulting in high levels of non-regularized spending (1.1 percent of GDP by end-August) and a recurrence of domestic arrears (1.0 percent of GDP). As a result, 3 out of 4 indicative 2016 quarterly targets were missed (Table 8a).

Box 1.Guinea-Bissau: Unwinding The Bank Bailout Scheme

The authorities decided to bail out two problem banks by taking over NPLs from their books at face value. The stated objective at the time was to clean the balance sheets of the banks and thereby enable fresh lending, in part, however, to the same delinquent clients. The scheme was financed through credit lines with a ten-year tenor opened at the beneficiary banks—CFAF 26.3 billion and CFAF 7.9 billion for a total of CFAF 34.2 billion (5½ percent of GDP)—with interest (6 percent and 1.5 percent, respectively) and management fees. The loans could be converted into treasury bills upon five years.

The bailouts raised serious governance concerns. They were carried out in secret, without any cabinet or Parliamentary scrutiny and the cost and risks of the bailout were shifted entirely to the government. The scheme did not address the root problems of the high level of NPLs: it did not include measures to address management weaknesses in the banks or causes behind the deficient contract enforcement, nor did it require the shareholders to recapitalize the banks (despite an earlier agreed recapitalization plan of the larger of the two banks). As the NPLs were acquired at face value rather than market, the transaction implied a sizable windfall to the shareholders of the two banks (about CFAF 15 billion according to the banks’ auditors). Also, the first contract carried an interest rate above the yield of Bissau-Guinean government bonds. In addition, there were concerns about the selection of NPLs to be included in the bailouts.

Staff estimated that the economic costs of the bailouts would be large. The direct cost of the debt associated with the bailout is in sharp contrast to actual priority spending. In 2015, domestically financed social and priority spending is estimated at CFAF 14.8 billion (2.5 percent of GDP) and domestically financed investment estimated at CFAF 4.9 billion (0.8 percent of GDP). This compares to the bailout amount of CFAF 34 billion (5.5 percent of 2015 GDP).

7. The external current account deficit narrowed considerably in 2015, helped by a positive terms-of-trade shock. As global oil prices declined along with non-fuel prices, while the price of the country’s main export product, cashew nuts, increased by a fifth, the terms of trade increased by 44 percent (Table 1 and Figure 1). As a result, export values increased and import values declined, reducing the current account deficit by a third to 1.1 percent of GDP. Consequently, and supported by a pickup in commercial banks’ net foreign assets and other private net assets, the overall balance of payments strengthened.

Figure 1.Guinea-Bissau: Recent Economic Developments

Sources: Guinea-Bissau authorities; and IMF staff estimates.

Program Performance

8. The decision to bail out two banks led to protracted discussions on the first program review. The significant fiscal costs implied a large deviation fiscal targets under the ECF program. Moreover, the structure of the bailouts raised governance concerns that would jeopardize the objective under the program to foster the development of a sound banking system.

9. In an effort to bring the ECF program back on track, the government took decisive actions. In June 2016, the government declared the bailout contracts null and void, citing a lack of legally required signatures by the Attorney General and the internal auditor. After the banks refused the voiding of the bailout, the government, in September, effectuated a court injunction staying the effects of the bailout contracts (i.e. payment of interest) until the final court ruling on the legality of the contracts. It also filed a criminal lawsuit against the signatories of the bailout contracts.

10. In light of the voiding of the bank bailouts, program performance in 2015 was satisfactory. All quantitative performance criteria (PC) for both the first review (end-June 2015) and, after correcting for the bank bailout, the second review (end-December 2015) have been met. The floor on domestic revenue mobilization was exceeded at both test dates with sizeable margins due to stronger-than-expected expansion in economic activity and a vigilant tax administration. The ceiling on net domestic bank credit to the central government (NCG) was met comfortably at end-June after adjusting for excess domestic arrears clearance, while the adjusted ceiling for end-December was narrowly met after adjusting for shortfalls in budget support and after correcting for the bank bailout. Consistent with the respective zero-ceilings under the program, there was no new external borrowing on non-concessional terms and short-term external borrowing or guaranteeing. In addition, all external debt service obligations were honored and the government continues to seek restructuring and/or outright cancellation of debts currently under discussion with its bilateral creditors. With the exception of social expenditures, the end-December 2015 indicative targets were missed for the build-up of new arrears, the domestic primary balance and the level of non-regularized spending (DNTs).

11. Implementation of structural measures was mixed (Tables 9a and 9b). Four of the nine benchmarks set for implementation by end-2015 were met, while five were unmet. Of these five unmet structural benchmarks, two were implemented with delay and one only partially. The measures related to the intra-trade post in SAFIM to reconcile invoices with actual cargo, the treasury’s monthly cash-flow projection, and the quarterly reports on execution of the public investment plan (PIP) and external debt commitments, agreements and disbursements were implemented as envisaged. The unmet measures (both earmarked for end-December) relate to the implementation of a small taxpayer regime and the drawing up of a strategic plan for improving the working conditions of officials of the domestic tax and customs administration. Delays occurred with (i) the audit of the Fund for Industrialization of Agricultural Products (FUNPI), publication of which is expected after parliamentary approval; (ii) salary payments through the banking system for all public servants; and (iii) the re-installation of the debt management IT system. The latter now needs to be upgraded as the software provider has issued a new version and ceased to support the old one. The structural benchmarks on the preparation of an audit plan for all SOEs and autonomous funds and designing a strategy to promote cashew production and transformation based on results of the FUNPI audit set for March 2016 and June 2016 respectively have not been met and are being rescheduled.

Table 9a.Guinea-Bissau: Structural Benchmarks under the ECF Program, 2015–16
MeasuresTimingMacro RationaleStatus
Revenue Mobilization
Implement an intra-trade post in SAFIM to

reconcile invoice merchandise data with

actual contents of the cargo.
Sept. 2015Strengthen revenue collection.Met.
Draw up a strategic plan for improving

infrastructure and working conditions of

officials of the domestic tax and customs administration.
Dec. 2015Strengthen revenue collection.Not met. An existing plan isbeing re-drafted.
Implement a new small taxpayer regime by

the introduction of universal NIF (tax payer

identification number)
Dec. 2015To improve voluntary compliance and raise tax revenue.Not met.
Expenditure management
Prepare a monthly rolling Treasury cash flow

projection table consistent with the 2015

budget.
July 2015 for August2015 and monthly there afterEnhance expenditure management.Met.
Transition to the payment of the salaries,

wages, and allowances of all public servants

(including the security service) through the

banking system.
Sept. 2015Reduce handling of cash by the Treasury and strengthen public financial management.Not met. Implemented in October 2015.
Prepare a quarterly report on PIP execution.Dec. 2015 for Sept.2015 Report, quarterly thereafterEnhance PIP execution and monitoring.Met.
Debt management
Reinstall and operationalize debt management IT system.July 2015Enhance debt management capacity and borrowing policies.Not met. Implemented with delay.
Prepare a quarterly report on external debt

commitments, agreements and disbursements.
Dec. 2015 for Jun.2015 Report, quarterly thereafterEnhance debt management capacity

and transparency in external debt commitments.
Met.
Business Environment
Complete an international and

comprehensive audit of the fund for

industrialization of agricultural products (FUNPI)
Sept. 2015To improve cashew nuts

production and trade.
Not met. Audit

report presented to

Finance minister in April 2016.
Prepare an audit plan for all State-owned Enterprises and autonomous funds.Mar. 2016To improve service delivery by, and financial sustainability of, public enterprises.Not met and rescheduled.
Design a strategy to promote cashew production and transformation based on results of the FUNPI audit.June 2016Reduce transaction costs.Not met and rescheduled.
Table 9b.Guinea-Bissau: Proposed Structural Benchmarks under the ECF Program, 2016–17
MeasuresTimingMacro RationaleStatus
Submission of 2016 budget to ParliamentPrior action for combined first and second program reviewsProper fiscal managementUnder preparation
Revenue Mobilization
Prepare a draft law, with technical assistance from the IMF, for a new small taxpayer regime that is simple and transparent, protects the revenue base, lowers compliance costs, and ensures global participation.Dec. 2017To improve tax administration and compliance.New benchmark
Expenditure management
Prepare a monthly rolling Treasury cash flow projection table consistent with the 2017 budget.December 2016 for January 2017, and monthly thereafterEnhance expenditure management.Continuation of earlier measure.
Prepare timely quarterly reports on ministry-level budget execution with details along economic classification of expenses.Dec. 2016, and quarterly thereafterEnhance budget execution and monitoring.New benchmark.
As a precursor to the planned Treasury Single Account, draw up a list (including 2015 amounts) of own-source revenues collected by ministries, departments and government agencies.Dec. 2016Strengthen public financial managementNew benchmark
Debt management
Prepare a quarterly report on external debt commitments, agreements and disbursements.Dec. 2016 for Sept.2016 Report, and quarterly thereafter.Enhance debt management capacity and transparency in external debt commitments.Continuation of earlier measure.
Council of Ministers to issue a decree to clarify the debt issuance authority and the procedure for the issuance of government guarantees, on-lending operations, and large liabilities.Dec. 2016Bring Guinea-Bissau’s debt management policy in line with the WAEMU Regulation.New benchmark
Business Environment
Prepare an audit plan for all State-owned Enterprises and autonomous funds.Nov. 2016To improve service delivery by, and financial sustainability of, public enterprises.Not met and rescheduled.
EAGB will submit reports detailing its financial flows for the 2015 financial year, the first three quarters of 2016 and on a monthly basis starting from October 2016.December 2016To instill transparency in EAGB operations and financial position.New Benchmark
Complete, with assistance of the WAEMU Banking Commission, an assessment of the two banks affected by the bailout, and articulate an action plan to bring these banks into compliance with prudential norms.April 15, 2017To strengthen the health of the banking system.New benchmark
Design a strategy to promote cashew production and transformation based on results of the FUNPI audit.June 2017Reduce transaction costs.Not met and rescheduled.

12. The political stalemate, the associated intermittent absence of a government between late 2015 and early 2016 and the time needed to unwind the bank bailouts delayed the first and second reviews of the ECF arrangement and prompted the authorities to request a rephasing of disbursements under the ECF arrangement. As a result, one review would be dropped access redistributed over the three remaining reviews; and end-December 2016 test dates will be the basis for the third review.

Economic Outlook, Policy Measures, and Risks

13. Guinea-Bissau’s development strategy focuses on an efficient public sector, growth-conducive business environment, and poverty reduction (MEFP ¶¶14–15). The government’s development strategy (2014–18), supported by the ECF arrangement, focuses at strengthening fiscal consolidation through effective public financial management (PFM), tax reforms and vigilant tax administration; stepping up implementation of structural reforms to improve the business environment; enhancing human capital development by improving the quality of public service and access to education and health, while mindful of debt sustainability. Although budget support is expected to resume only gradually, the country’s main development partners pledge to continue to support this strategy (Text Table).

Text Table 1.Guinea-Bissau: Quantitative Performance Criteria and Indicative Targets(billions CFAF, unless otherwise indicated)
2015
JuneDec.
Prog.Act.Prog.Act.
Performance criteria
Total domestic tax revenue (floor)26.231.753.361.9
Net domestic bank credit to the central government (ceiling)110.29.211.511.5
Indicative targets
New domestic arrears (ceiling)0.00.20.01.3
Social and priority spending (floor)12.920.025.836.5
Domestic primary balance (commitment basis, floor)−2.6−2.9−6.5−9.3
Non regularized expenditures (DNTs, ceiling)0.44.80.82.7
Memorandum items:
Clearance of domestic payment arrears4.36.68.107.4
Sources: Guinea-Bissau authorities; and IMF staff estimates.

Programmed values include adjustors for excess clearance of domestic arrears (June) and shortfalls in budget support (December).

Sources: Guinea-Bissau authorities; and IMF staff estimates.

Programmed values include adjustors for excess clearance of domestic arrears (June) and shortfalls in budget support (December).

14. The economic recovery since the downturn in 2012–13 is expected to continue in 2016–17 (Text Table and Tables 14). Real GDP is projected to expand by 4.8 percent per year in 2016–17. The government has realigned incentives for a good agricultural harvest, including the supply of tractors and other inputs to farmers at subsidized rates, which should translate into a good agricultural performance. Growth in the secondary and tertiary sectors should accelerate on the back of an improved water and electricity supply, business confidence following donor reengagement (particularly in 2017) and resolution of the political impasse. Further, the start in 2017 of the construction phase of a foreign financed phosphate project is expected to help the recovery of the tertiary sector. Inflation should increase to about 2.3 percent in 2016 reflecting increasing private demand, and remain below 3 percent—the WAEMU ceiling—in the medium term. Buoyed by benign increases in the terms of trade and a favorable domestic reference price, cashew nut exports are expected to increase, helping keep the external current account deficit under 3 percent of GDP and bolstering international reserves. These projections factor in the expected start of phosphate project in 2017, which would increase FDI related import of machinery and related construction equipment.

15. Fiscal prudence and accelerating structural reforms to create fiscal space for priority infrastructure and social spending remain the centerpiece of the ECF-supported program (MEFP ¶14). To this end, the authorities aim to strengthen PFM and tax administration, which should help improve the quality of spending and increase fiscal space. A number of corrective measures were required to boost revenue performance for 2016 in order to align with program objectives. These include collection on tax arrears (0.2 percent of GDP) owed by public companies like airport, the port authority, and the introduction of a communication gateway to improve tax compliance in the Telecom industry (0.2 percent of GDP) which in total should increase tax revenues in 2017 by 1.8 percent of GDP. As a result, the domestic primary deficit is expected to decline from 1.7 percent of GDP in 2016 to an average of 0.2 percent per year in 2017–18, implying overall fiscal balances consistent with debt sustainability (Tables 1, 2a, b, and Annex II). This tightening of the fiscal stance is expected to yield a net accumulation of deposits in 2017 with an NCG of 0.5 percent of GDP, partially compensating for the debt accumulation in 2015 and 2016 that resulted from budget support shortfalls. Beyond this, higher than programmed domestic and external revenues would be used primarily for the clearance of domestic arrears accumulated in 2016. The current plan envisages a clearance of CFA 2.6 billion (0.4 percent of GDP) in 2017 with the balance of the newly accumulated arrears fully repaid in 2018. These government fiscal operations consistent with the ECF-supported program will be accounted for in the 2017 budget which the authorities plan to submit by mid-December 2016.

16. Adverse weather conditions, legal uncertainties related to the unwinding of the bailout, and political uncertainty pose the main risks to the outlook. Agricultural output remains vulnerable to adverse weather conditions. Also, the fiscal outlook could deteriorate if the courts were to rule the bank bailout contracts legal.2 Additional downside risks include heightened political tensions with disruptive government changes impacting fiscal discipline and weakening development partners’ external support.

Guinea-Bissau: Official Financial Assistance1(billions of CFAF, unless otherwise indicated)
2015201620172018Cumul.

Total
Prog.Est.Projections
Total53.952.450.153.958.9215.3
Grants36.840.130.936.442.3149.7
Budget10.75.61.03.33.513.4
Project26.134.529.933.138.8136.3
Loans17.112.319.217.516.765.6
Budget 24.62.34.22.50.79.7
Project12.510.014.914.916.055.9
(Millions of US dollars)
Total91.188.684.991.5100.3
Grants62.267.852.461.871.9
Loans28.920.832.529.728.4
(Percent of GDP)
Total8.98.47.37.47.5
Grants6.06.44.55.05.4
Loans2.82.02.82.42.1
Miscellaneous items:
Nominal GDP (US $ million)1,0291,0561,1681,2391,332
Source: Bissau-Guinean authorities.

Includes only aid to the government sector (about 85-90 percent of total); the remainder goes to ultimate beneficiaries and non-governmental organizations.

ECF financing.

Source: Bissau-Guinean authorities.

Includes only aid to the government sector (about 85-90 percent of total); the remainder goes to ultimate beneficiaries and non-governmental organizations.

ECF financing.

A. Improving Fiscal Management

Increasing Tax Revenue

17. Measures to expand the tax base and strengthen tax administration aim at boosting domestic revenue mobilization (MEFP 22). The implementation of the new uniform sales invoice with the taxpayer’s identification number will begin with large companies in December 2016, and be gradually extended to other enterprises by June 2017. In parallel, the new gateway system for communication networks will facilitate control and monitoring of corporate and sales taxes in the communication industry. Furthermore, to ensure compliance with tax obligations, the authorities plan to implement the tax certification clearance requirement (as established by law) in all contracts and payments made by the government.

18. The authorities are reducing the administrative burden on taxpayers, while boosting the tax base and yield (MEFP ¶¶ 21–22). Under the leadership of a specially created committee measures include: establishing—with the assistance of Fund TA—a new tax regime for small taxpayers (structural benchmark; Table 9b); encouraging voluntary tax compliance by large taxpayers, and improving infrastructure and working conditions of the tax authority, including for the 94 tax recruits recently hired through a competitive process; strengthening the one-stop-shop for cashew nut exports and associated tax payments; and identifying and quantifying all non-tax and tax levies and charges—own-source revenues—not collected by the tax authorities (proposed structural benchmark for December 2016). Furthermore, the authorities will—with Fund technical assistance—draw up an operational plan for tax administration in 2016–18 aimed at providing a strategic framework and outlook for core tax administration functions and procedures.

Strengthening Fiscal Transparency, Expenditure and Treasury Management

19. The authorities are accelerating implementation of PFM reforms to strengthen fiscal institutions and expenditure management and transparency (MEFP ¶¶18–20, Table 9). The authorities are standardizing the weekly Treasury committee assessments, aligning expenditures with available resources (re-prioritizing spending, if needed), and monitoring compliance with PFM rules. Several additional measures aim at limiting the use of DNTs and the accumulation of arrears to domestic suppliers and contractors, including the use of SIGFIP (an integrated system of public finances) to automatically register DNT payments with the Budget department. Finally, the authorities will prepare quarterly reports on budget execution with ministry level detail to ensure that it is guided by expenditure plans and that social and priority spending is protected (structural benchmark). The submission of the 2016 draft budget for parliamentary scrutiny (a prior action for the first and second reviews, MEFP Table 4 and Table 9) is a first step in these directions.

20. Treasury management is expected to improve mainly through a better adherence to existing accounting procedures and application of software. The authorities identified weaknesses in the application of accounting rules which they plan to overcome by rigorously following existing accounting procedures, their double-entry accounting system, and use of the accounting module of the SIGFIP. They are also strengthening their budgetary control system using the expenditure and procurement plans drawn up ex ante based on the annual budget. As a precursor to the planned Treasury single account (TSA), the authorities are in the process of identifying all government accounts with commercial banks and are taking inventory of own-source revenues collected by ministries, departments and agencies (structural benchmark, MEFP ¶29 and Table 9b).

21. The government will aim to reduce fiscal costs for the public electricity company through financial transparency in the short run, while designing more fundamental reforms for the longer run (MEFP ¶30). In the short run, EAGB is required to report monthly on its income and expenses (structural benchmark). A comprehensive electricity sector strategy that will include the expansion of electricity supply, distribution, and a restructuring of EAGB will be designed with the assistance of development partners that have substantial electricity sector projects, including the World Bank and the African Development Bank. Instead of increasing the already high electricity tariffs the immediate focus has shifted to minimizing electricity losses by increasingly relying on prepaid meters.

Adhering to Prudent Debt Strategy

22. The risks of debt distress remain moderate, and the authorities plan to continue to meet external financing needs by contracting mostly concessional loans (MEFP ¶¶23-25). The updated debt sustainability analysis (DSA) indicates that the risk of debt distress remains moderate—unchanged from the previous full DSA (Annex II). Nonetheless, the Bissau-Guinean economy remains vulnerable to adverse shocks to exports, which could be amplified by worsening terms of trade, a decline in (or non-realization of projected) foreign direct investment, or renewed disruptive government changes. Considering these risks and cognizant of their absorption capacity constraints, the authorities will limit their external financing to grants and concessional loans and avoid the contracting and guaranteeing of short-term external debt (performance criterion; MEFP Tables 1-3, and Text Table). They also intend to contract only highly subsidized local currency loans from the West African Development Bank (BOAD), and will ensure that such loans are reflected transparently in the annual borrowing plans and budgets.

Guinea-Bissau: External Borrowing Plan, 2016–18
PPG debt contracted or guaranteed1Volume of new debtPresent value of

new debt (US$

million)
(CFAF billion)(US$ million)
Sources of debt financing32.254.644.8
External
Concessional debt7.412.66.1
of which
Multilateral7.412.66.1
AfDB0.81.40.7
IDA1.42.41.1
IMF4.27.13.2
Other Multilaterals1.01.61.1
Non-concessional debt
Domestic
Non-concessional debt24.842.038.7
of which
BOAD11.820.016.0
Other Regional Institutions (Tbills)13.022.122.7
Uses of debt financing32.254.6
Infrastructure11.219.0
Budget financing 217.229.2
Other3.76.3
Memorandum item: Indicative projections
201719.933.8
201818.531.4

Includes only aid to the government sector (about 85-90 percent of total); the remainder went to ultimate beneficiaries and non-governmental organizations.

ECF and regional T-Bill financing.

Includes only aid to the government sector (about 85-90 percent of total); the remainder went to ultimate beneficiaries and non-governmental organizations.

ECF and regional T-Bill financing.

23. To limit contingent liabilities, the authorities are strengthening checks and balances for contracting domestic Government debt (MEFP ¶¶24 and 26). The authorities compiled an inventory of all government guarantees to the banking system. Furthermore, in line with the WAEMU debt management regulation (Regulation 09/2007/CM/UEMOA), the authorities drafted a decree for cabinet approval that regulates debt issuance authority and transparency, the procedure for issuance of government guarantees, and the assumption of large liabilities outside the budgetary system.

B. Promoting Sound Financial Intermediation

24. Financial intermediation remains low, and the banking system will continue to be plagued by high NPLs after reversal of the bailout. Banking system credit to the private sector has picked up recently post-bailout (18 percent at an annualized rate) but the level remains low (at 11 percent of GDP, compared with 25 percent in the WAEMU and 28 percent in sub-Saharan Africa). The bank bailout resulted in NPLs declining to 7.5 percent by end-June 2016 (compared to 25.7 percent at end-2014, Table 5), but will revert to the previous high level upon full unwinding of the bailout. Most banks are barely profitable or even loss-making when excluding the bailout benefits, which suggests the presence of underlying structural issues that need to be addressed.

25. To avoid a recurrence of problematic bank bailout schemes the regional banking supervision, the authorities, and the commercial banks are striving to bring banks into regulatory compliance and improving contract enforcement (MEFP ¶¶26-28).

  • The WAEMU Banking Commission will strictly enforce prudential norms, particularly in the context of the fallout from the recent unwinding of the 2015 bank bailout operation.3 The WAEMU Banking Commission has conducted an on-site inspection of the affected banks to assess scenarios of the required provisions, capital increases and other possible corrective actions required to bring banks into full compliance with regulatory norms in light of the ongoing unwinding of the bailout. This will inform an action plan for the two banks (SB, April 15, 2017) that will be communicated to the banks and Guinea Bissau government. Furthermore, plans for a regional deposit guarantee scheme are being drawn up, and a comprehensive credit registry has reached an advanced stage of implementation.

  • The government is committed to assisting in the implementation of any necessary remedial actions that the Banking Commission will impose. Furthermore, the authorities are strengthening contract enforcement and plan to implement OHADA’s new uniform act on collective proceedings to expedite collateral collection.

  • Banks will be required to implement the action plan set up by the WAEMU Banking Commission.

C. Improving the Business Environment for Private Sector Development and Other Issues

26. Fiscal reforms and the unwinding of the bailout will substantially improve the business environment, which can be complemented by strategies to promote the cashew sector and diversification. Reforms in tax administration will create a level playing field for private sector activity and generate additional resources for improved public services and infrastructure. PFM reforms will make the Government a more reliable partner both through a transparent procurement system and timely payments of bills. Finally, the unwinding of the bank bailout and measures to address non-compliance of prudential norms will reduce moral hazard and send a strong signal for the need of contract enforcement. To improve public service delivery and financial sustainability of public enterprises, the authorities are preparing an audit plan encompassing all state-owned enterprises and autonomous funds (structural benchmark now re-instated for November 2016). Finally, the completed FUNPI audit should provide valuable inputs for the design of a cashew sector strategy aimed at reducing transaction costs, increasing resilience, and promoting diversification.

27. Recent improvements in data provision, timeliness and coverage need to be sustained with adequate resources, passage of the statistics law and intra-institutional cooperation. With help from development partners, the statistics institute improved coverage of national statistics data with several surveys (enterprise survey, agricultural survey) ongoing or in the development phase, and first survey results are expected for early 2017. These encouraging results need to be followed by (i) Parliamentary approval of the Statistics Law to address institutional issues; (ii) adequate resourcing for the production of statistics, including staffing, equipment, and training, (iii) improvements in coordination and data sharing among institutions; and (iv) extension of the range and depth of surveys and inventories to better estimate growth and exports.

28. Structural reforms to address corruption and rent-seeking behaviors should be pursued concurrently with fiscal reforms. The submission for parliamentary approval of the national Anti-Money Laundering/Combatting of the Financing of Terrorism (AML/CFT) framework (MEFP ¶32) is welcomed. The implementation of this framework could assist in detecting, prosecuting and deterring corruption-related offenses and smuggling. However, further efforts to strengthen the Financial Intelligence Unit (CENTIF) and the implementation of the asset disclosure regime in line with international best practices remain crucial. Notably, asset disclosures should be verified for accuracy and be published. With Fund TA support, the authorities are assessing the nature of ML/FT risks, the weaknesses in the legal framework, the level of capacity with respect to the AML/CFT supervision of financial institutions and the operations of the CENTIF, and explore options for strengthening the AML/CFT legal framework.

Program Modalities and Financing Assurances

29. Program performance will continue to be monitored semi-annually (MEFP ¶33, Tables 1-4). For 2016 and 2017, program performance will be assessed relative to the proposed PCs for end-December 2016 and end-June 2017, including three continuous PCs, indicative targets for end-March, and SBs (MEFP ¶33 and Tables 23, and Tables 89). The PCs and indicative targets are defined in the original Technical Memorandum of Understanding (TMU) and its supplement that proposes minor technical modifications to: (i) include domestic loan guarantees issued by the central government to state-owned enterprises and suppliers in the calculation of NCG; (ii) switch to the use of the monetary survey table (Position Nette du Gouvernement (PNG)) in assessing performance of NCG; (iii) include bank bailout related tax receipts in the negative adjuster of -NCG,4 and (iv) define more tightly the deadline after which external debt service obligations become payment arrears. New structural benchmarks are proposed to support the program’s ultimate objectives, while most of the unmet benchmarks are being rescheduled (Table 9b).

30. Financing assurances are in place for the combined first and second reviews. The program is fully financed through end-2017, and there are good prospects of adequate financing for the remainder of the program period. The bulk of the financing is expected to be met through external support, with the residual domestic financing covered by BOAD. [Guinea-Bissau owes arrears to Angola, Brazil, Russia, the UAE, Libya, Pakistan, and Taiwan Province of China which have consented to Fund financing notwithstanding these arrears.] Adequate safeguards remain in place for the further use of the Fund’s resources in Guinea-Bissau’s circumstances and Guinea-Bissau’s adjustment efforts have not been undermined by developments in debtor-creditor relations. The government has a credible plan and projected financing in place to eliminate the arrears with the European Investment Bank (EIB) (MEFP ¶23). Guinea-Bissau remains current on its remaining external debt service obligations.

31. Guinea-Bissau’s capacity to repay the Fund is adequate. The use of Fund resources under the ECF arrangement will have a negligible impact on debt and debt service ratios (Table 6), and Guinea-Bissau’s risk of debt distress remains moderate (¶22 and Annex II).

32. Safeguards. The 2013 assessment of the WAEMU regional central bank, BCEAO, found a continuing strong control environment. All recommendations from the assessment have been implemented. These include strengthening the external audit arrangements by appointment of an international firm with ISA experience for the audits of FY 2015–17, reinforcing the capacity of the audit committee with external expertise to oversee the audit and financial reporting processes, and adoption of IFRS starting with the financial year 2015.

Staff Appraisal

33. The recent ECOWAS-brokered six-point roadmap for an inclusive government and constitutional reform to solve the political crisis is a first promising step. Staff welcomes Guinea-Bissau’s adherence to the rule of law and constitutional means in settling the political crisis. For more than a year, economic reforms were hampered by disruptive political events and the new roadmap represents a window of opportunity for political stability and accelerated implementation of economic reforms. Staff encourages stakeholders to build a sustainable political consensus which will need to be followed by a rapid resumption of Parliamentary operations to pass key pending legislations, including the Government’s program, the state budget, statistics and the AML/CFT laws.

34. Notwithstanding the political tensions, economic activity strengthened further in 2015 and 2016. Agricultural production and related services increased buoyed by strong international cashew prices and an improved supply of electricity. Economic growth rose from 2.3 percent in 2014 to an estimated 4.8 percent in 2015, and is expected to reach the same level in 2016. Meanwhile, inflation remained low, averaging 1½ percent in 2015 and increasing only slightly in 2016.

35. The recent corrective actions taken by the authorities are commendable and show their determination to implement sound economic policies, but substantial risks remain which will require continued decisive measures to secure success. The protracted political crisis led to slippages in public finance management and a slowdown in economic reforms. The recent corrective actions together with a vigorous implementation of the economic policies and the structural reform agenda under the ECF program will help regain confidence of private investors and development partners.

36. The authorities’ resolute stance in unwinding the bank bailouts is welcome. Based on the assessment by the WAEMU Banking Commission of the health of the banking system, the authorities should take steps to enforce any identified measures to bring the affected banks into compliance with prudential norms. More broadly, the authorities should actively pursue reforms aimed at deepening financial intermediation and strengthening the health of the banking system. Furthermore, to safeguard public finance, the authorities should vigorously follow through all necessary steps until the bailout is irreversibly unwound.

37. Fiscal discipline will enhance fiscal policy credibility and support macroeconomic stability. Further advances in revenue mobilization are particularly important in light of the tight fiscal situation and still-limited external budget support. Implementation of recommendations from the Treasury committee meetings and adherence to established treasury procedures are key for avoiding arrears and non-regularized spending (DNTs). The tax and PFM reforms planned for the medium term are appropriately ambitious, given existing administrative capacity constraints, and are necessary for fiscal sustainability and an improved business environment. To reduce its heavy cost to the budget, the Water and Electricity Company, EAGB, needs to become financially transparent in the short-term and prepare a more far-reaching reform in the medium-term. Fiscal reforms will be supported by the strengthening of anti-corruption and AML/CFT efforts.

38. The recent improvements in the production of statistics are welcome. The authorities should continue to improve coordination among various institutions and ensure adequate allocation of resources for the production of statistical data, including for an inventory of cashew nut trees to provide essential data for the national accounts and related projections.

39. Staff recommends completion of the first and second program reviews and a financing assurances review. This recommendation is based on recognition of the challenges posed by political uncertainties to program implementation in 2015, the corrective revenue and expenditure measures implemented by the authorities following PFM slippages in the first half of 2016, and the ambitious reform agenda articulated by the authorities in their MEFP. Staff also supports the authorities request for a rephasing of the remaining program reviews and disbursements, and modification of the performance criteria on net domestic bank credit to the central government and external payment arrears to the central government.

Figure 2.Guinea-Bissau: Fiscal and Credit Developments

Sources: Guinea-Bissau’s authorities; and IMF staff estimates.

Figure 3.Guinea-Bissau: Medium-Term Outlook

Sources: Guinea-Bissau’s authorities; and IMF staff estimates and projections

Table 10.Guinea-Bissau: Proposed Schedule of Disbursements under the ECF Arrangement, 2015–181
AvailabilityDisbursementsCondition for DisbursementStatus
In millions of In percent of
SDRQuota2
July 10, 20152.84010.000Approval of the three-year ECF arrangement.Disbursed
October 15, 20152.84010.000Board completion of the first review based on observance of performance criteria for June 30, 2015.
April 15, 20162.2728.000Board completion of the second review based on observance of performance criteria for December 31, 2015.
April 15, 20173.03010.669Board completion of the third review based on observance of performance criteria for December 31, 2016.
October 15, 20173.03010.669Board completion of the fourth review based on observance of performance criteria for June 30, 2017.
April 15, 20183.02810.662Board completion of the fifth review based on observance of performance criteria for December 31, 2017.
Total Disbursements17.04060.000
Source: IMF staff estimates.

The First and Second reviews are combined.

Based on the new quota for Guinea-Bissau under the 14th General Quota Review.

Source: IMF staff estimates.

The First and Second reviews are combined.

Based on the new quota for Guinea-Bissau under the 14th General Quota Review.

Table 11.Guinea-Bissau: External Financing Requirements and Sources, 2015–18(millions of US dollars; unless otherwise indicated)
2015201620172018
1.Gross financing requirements89.989.576.277.3
External current account deficit 120.326.742.955.1
Capital account balance 10.30.30.30.3
Debt amortization2.12.14.13.1
Change in arrears, net−0.80.00.00.0
Gross reserve accumulation68.159.826.816.7
IMF repayments0.00.72.02.0
2.Available financing89.989.576.277.3
Foreign direct investment, net17.922.834.436.8
Identified disbursements57.653.659.270.8
Grants55.948.253.863.5
Project 355.948.253.863.5
Program0.00.00.00.0
Loans1.75.45.47.3
Project1.75.45.47.3
Program0.00.00.00.0
ECF disbursements3.97.18.44.2
Other flows, net 210.56.0−25.8−34.5
3.Financing gap0.00.00.00.0
Memorandum items:
Fiscal deficit (commitment basis, in percent of GDP)−2.6−4.2−1.7−2.1
Current account deficit (in percent of GDP)−1.1−2.2−3.1−3.8
Sources: Bissau-Guinean authorities; and Fund staff estimates and projections.

Excludes official transfers.

Comprises estimates and projections of private short-term financial flows.

Excludes project grants from ECOWAS, WAEMU, and BOAD.

Sources: Bissau-Guinean authorities; and Fund staff estimates and projections.

Excludes official transfers.

Comprises estimates and projections of private short-term financial flows.

Excludes project grants from ECOWAS, WAEMU, and BOAD.

Annex I. Guinea-Bissau: Debt Sustainability Analysis Update1

This update of the joint IMF-World Bank Debt Sustainability Analysis (DSA) indicates that Guinea-Bissau faces a moderate risk of debt distress based on an assessment of public external debt, but a heightened overall risk of debt distress reflecting significant vulnerabilities related to domestic debt. 2,3 Under the baseline scenario, all external debt present value (PV) ratios show improvements relative to the last DSA, due largely to good revenue performance in 2015 and expected benign developments in the terms of trade and nominal GDP. Under the most extreme shock scenario, the PV of debt-to-exports ratio breaches its threshold for only a short period, unlike under the last DSA where the breach extended over a long period. In contrast, the overall public debt indicator has worsened relative to the last DSA, mainly due to the domestic debt increase on account of a realized contingent liability, new Treasury bill issuance and other new domestic loans—elevating the overall risk of debt distress. The economy remains vulnerable to adverse shocks to exports, which could be amplified by worsening terms of trade or a decline in (or non-realization of projected) foreign direct investment.

1. Compared to the last DSA, expected improvements in tax administration, public financial management, and the terms of trade are the main differences in the domestic assumptions. Real GDP growth is expected to follow almost exactly the same trajectory as under the last DSA, averaging 5 percent over the projection period (Text Table 1 and Table 1). Tax revenue, which shows a sluggish short-term trajectory, is projected to pick up in the longer term in response to growth in incomes and continuing improvements in tax administration. These expected advances, coupled with parallel improvements in public financial management, are expected to yield gains in the overall fiscal balance, with the primary deficit falling gradually and converting to surpluses by the end of the projection period, 2036.

Text Table 1.Guinea-Bissau: Evolution of Selected Macroeconomic Indicators
2012201320142015Long Term1
Real GDP growth (percent)
Previous DSA−1.80.82.54.75.0
Current DSA−1.73.32.34.85.0
Revenue and Grants (percent of GDP)
Previous DSA11.411.621.018.723.0
Current DSA11.511.322.120.822.6
Primary (non-interest) expenditure (percent of GDP)
Previous DSA13.513.222.017.924.3
Current DSA13.612.923.221.622.1
Primary balance (percent of GDP)
Previous DSA−2.0−1.6−1.0−0.8−1.3
Current DSA−2.0−1.6−1.1−0.8−0.5
Non-interest current account deficit (percent of GDP)
Previous DSA8.84.30.93.54.6
Current DSA8.87.13.20.42.1
Growth of exports (percent)
Previous DSA−44.816.312.713.17.5
Current DSA−44.824.79.441.310.2
Growth of imports (percent)
Previous DSA−24.40.624.77.96.2
Current DSA−24.46.115.02.59.2
Source: Guinea-Bissau authorities and staff estimates.

Long term value of the indicator is defined as an average over the last 15 years of the projections.

Source: Guinea-Bissau authorities and staff estimates.

Long term value of the indicator is defined as an average over the last 15 years of the projections.

Table 1.Guinea-Bissau: External Debt Sustainability Framework, Baseline Scenario, 2013–361(percent of GDP unless otherwise indicated)
ActualHistorical6/

Average
Standard6/

Deviation
Projections

2013201420152016201720182019202020212016-2021

Average
202620362022-2036

Average
External debt (nominal) 1/16.214.915.014.114.515.415.916.316.918.113.9
of which: public and publicly guaranteed (PPG)16.114.914.914.114.515.415.916.316.918.113.9
Change in external debt−10.6−1.20.0−0.90.40.90.50.50.60.1−0.7
Identified net debt-creating flows3.71.4−0.50.30.51.30.90.90.90.4−0.4
Non-interest current account deficit7.13.20.44.53.62.64.04.53.83.73.72.71.02.1
Deficit in balance of goods and services10.513.05.95.87.57.97.16.56.35.92.9
Exports18.119.829.030.029.427.828.129.829.333.844.8
Imports28.632.834.935.936.835.735.336.335.639.747.7
Net current transfers (negative = inflow)−3.6−7.4−3.6−6.42.5−1.1−1.6−1.5−1.5−1.2−1.3−1.9−0.9−1.5
of which: official−0.8−4.5−0.9−0.2−0.5−0.5−0.5−0.5−0.5−0.5−0.5
Other current account flows (negative = net inflow)0.3−2.5−1.9−2.1−1.9−2.0−1.9−1.6−1.4−1.3−1.0
Net FDI (negative = inflow)−1.9−2.0−1.8−2.00.8−2.0−2.9−2.9−2.5−2.4−2.3−1.7−0.9−1.5
Endogenous debt dynamics 2/−1.50.30.8−0.3−0.6−0.3−0.4−0.5−0.5−0.6−0.5
Contribution from nominal interest rate0.10.30.30.30.10.30.40.30.20.30.2
Contribution from real GDP growth−0.8−0.4−0.7−0.6−0.7−0.7−0.7−0.7−0.8−0.8−0.7
Contribution from price and exchange rate changes−0.80.31.3
Residual (3-4) 3/−14.3−2.60.6−1.1−0.2−0.3−0.5−0.4−0.3−04−0.3
of which: exceptional financing0.0−0.60.20.00.00.00.00.00.00.00.0
PV of external debt 4/12.311.912.713.213.113.213.413.19.5
In percent of exports42.339.643.247.346.644.245.638.821.3
PV of PPG external debt12.311.912.713.213.113.213.413.19.5
In percent of exports42.239.643.147.346.644.245.638.821.3
In percent of government revenues87.089.798.9103.9101.9101.6101.594.7560
Debt service-to-exports ratio (in percent)1.82.31.51.71.42.12.42.11.92.31.6
PPG debt service to-exports ratio (in percent)1.82.31.51.71.42.12.42.11.92.31.6
PPG debt service to-revenue ratio (in percent)4.13.63.13.83.14.55.24.94.35.643
Total gross financing need (Millions of U.S. dollars)58.816.8−9.312.318.628.327.429.631.839.638.4
Non-interest current account deficit that stabilizes debt ratio17.74.40.43.53.63.53.33.23.12.61.6
Key macroeconomic assumptions
Real GDP growth (in percent)3.32.34.83.42.44.85.05.05.05.05.05.05.05.05.0
GDP deflator in US dollar terms (change in percent)3.0−1.9−8.12.811.36.31.02.22.93.02.02.92.02.02.0
Effective interest rate (percent) 5/0.31.91.70.80.72.50.42.42.51.81.51.91.71.41.6
Growth of exports of G&S (US dollar terms, in percent)24.79.441.316.031.215.23.61.79.214.55.48.310.65.910.2
Growth of imports of G&S (US dollar terms, in percent)6.115.02.59.814.814.48.94.16.611.35.18.49.56.19.2
Grant element of new public sector borrowing (in percent)39.541.546.749.148.948.845.748.348.348.4
Government revenues (excluding grants, in percent of GDP)7.912.614.113.212.812.712.912.913.213.917.015.0
Aid flows (in Millions of US dollars) 7/45.2126.784.957.971.996.1107.8119.6130.9201.9419.0
of which: Grants35.9100.367.952.461.872.080.490.099.1162.4380.6
of which: Concessional loans9.226.417.05.410.124.127.429.631.839.638.4
Grant-equivalent financing (in percent of GDP) 8/5.15.86.66.76.97.18.08.88.3
Grant-equivalent financing (in percent of external financing) 8/88.386.585.087.187.487.689.995.391.8
Memorandum items:
Nominal GDP (Millions of US dollars)1052.51055.91017.31133.11201.41289.51392.71506.11613.82274.04515.3
Nominal dollar GDP growth6.30.3−3.711.46.07.38.08.17.28.07.17.17.1
PV of PPG external debt (in Millions of US dollars)122.3134.4152.3170.2183.3198.0215.1297.8429.3
(PVt-PVt-1)/GDPt-1 (in percent)1.21.61.51.01.11.11.20.80.20.6
Gross workers’ remittances (Millions of US dollars)29.931.026.727.628.529.630.731.833.039.757.3
PV of PPG external debt (in percent of GDP + remittances)12.011.612.412.912.812.913.112.99.4
PV of PPG external debt (in percent of exports + remittances)38.736.639.943.743.241.242.736.920.7
Debt service of PPG external debt (in percent of exports + remittances)1.41.61.31.92.22.01.82.21.6
Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r- g - p(l+g)]/(l+g+p+gp) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and p = growth rate of GDP deflator in U.S. dollar terms

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets,. and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants presided directly to the government and through new bar owing (difference between the face value and the PV of new debt).

Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r- g - p(l+g)]/(l+g+p+gp) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and p = growth rate of GDP deflator in U.S. dollar terms

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets,. and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants presided directly to the government and through new bar owing (difference between the face value and the PV of new debt).

2. For international prices, the DSA update is based on the IMF WEO medium-term projections of fuel and non-fuel prices, which prop up Guinea-Bissau’s terms of trade, export values, and nominal GDP, and help moderate debt vulnerabilities. In particular, as the price of cashew (the main export produce of Guinea-Bissau) is expected to increase into the medium term, the country’s terms of trade are projected to strengthen along with its export values. Reflecting the expected benign developments in Guinea-Bissau’s terms of trade, export growth is now expected at a higher rate (averaging 10.2 percent of GDP in the long term, compared with 7.5 percent in the last DSA); and import growth is expected to be higher as well, in view of higher expected income and FDI flows. As a result, the external non-interest current account balance is expected to show a lower long-term average deficit than under the last DSA. In parallel, the expected expansion of export values and nominal GDP should help domestic revenue intake, which is now expected to grow at a somewhat faster pace than under the last DSA. As a result of these expectations, and coupled with the Bissau-Guinean authorities’ pursuit of grants and highly concessional borrowing, the baseline PV of debt-to-GDP, debt-to-exports and debt-to-revenue ratios are projected to remain below their respective thresholds into the long term, with a similar profile for debt service ratios.

3. The baseline macroeconomic assumptions underlying this DSA update are as follows:

  • Real GDP growth: Economic growth is expected to remain robust, averaging around 5 percent into the medium term. Over the long term, growth could strengthen with the realization of expected FDI inflows and improvements in growth-enhancing infrastructure, and is projected to be above its historical average rate during the forecast period (Text Table 1).4

  • Consumer price inflation is projected to rise in the medium term, with increasing disposable incomes as the economy sustains its recovery. Following the decline to -1 percent at end 2014, average inflation picked up to 1½ percent at end-2015, and it is now expected to increase to the WAEMU threshold (3 percent) by end-2018 and hover around that figure into the long term.

  • Central government balances: The primary fiscal deficit is projected to gradually decline in the medium and long term. Specifically, the primary deficit, which increased in 2015 on account of weak public financial management (PFM) in the context of a lingering political crisis, is expected to improve as the authorities strengthen PFM and enhance their tax effort. Thereafter, continued improvements in tax administration and revenue measures should drive a gradual decline in the primary deficit to insignificant levels by 2021, to surpluses by 2026, and yield an average surplus during 2022–36 (Table 3). Non-interest primary expenditure is expected to be contained to average around 19 percent of GDP per year in 2016-21 (this was 20.8 percent in 2015).

  • External current account balance: Reflecting benign expected terms of trade and increasing export volumes, the current account deficit is projected to remain low, at around 2 percent of GDP in 2016 and to average around 3 percent in 2017–22; it is then expected to remain around this average in the longer term (2023-36), mainly on account of expected overall income growth and increases in imports associated with increasing FDI inflows.

  • Financing flows: FDI is projected to increase to an average 2.6 percent of GDP per year in 2017–21 (mainly on account of the phosphate project), after hovering below 2.0 percent of GDP in 2015–16. Over the longer term (2022-36), FDI is expected to decline to average 1½ percent of GDP per year (Table 1). This expectation is predicated on improvements in the political situation and the business environment. Official transfers are expected to increase during the projection period, and grant-equivalent financing would form the bulk (some 85–90 percent) of projected external financing.

Table 2.Guinea-Bissau: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2016–36(percent)
Projections
20162017201820192020202120262036
PV of debt-to GDP ratio
Baseline1213131313131310
A. Alternative Scenarios
A1. Key variables at their historical averages in 2016-2036 1/1213141516172023
A2. New public sector loans on less favorable terms in 2016-2036 21213141415151714
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2017-20181213141414141410
B2. Export value growth at historical average minus one standard deviation in 2017-2018 3/1216212020201811
B3. US dollar GDP deflator at historical average minus one standard deviation in 2017-20181214161616161612
B4. Net non-debt creating flows at historical average minus one standard deviation in 2017-2018 4/121212121213139
B5. Combination of B1-B4 using one-half standard deviation shocks1213151515151511
B6. One-time 30 percent nominal depreciation relative to the baseline in 2017 5/1218191919191914
PV of debt-to-exports ratio
Baseline4043474744463921
A. Alternative Scenarios
A1. Key variables at their historical averages in 2016-2036 1/4045525454585952
A2. New public sector loans on less favorable terms in 2016-2036 24044505149525032
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2017-20184043474744463921
B2. Export value growth at historical average minus one standard deviation in 2017-2018 3/4065109106991017736
B3. US dollar GDP deflator at historical average minus one standard deviation in 2017-20184043474744463921
B4. Net non-debt creating flows at historical average minus one standard deviation in 2017-2018 4/4042454442433721
B5. Combination of B1-B4 using one-half standard deviation shocks4043474744463922
B6. One-time 30 percent nominal depreciation relative to the baseline in 2017 5/4043474744463921
PV of debt-to-revenue ratio
Baseline90991041021021019556
A. Alternative Scenarios
A1. Key variables at their historical averages in 2016-2036 1/90104114118124128144137
A2. New public sector loans on less favorable terms in 2016-2036 29010111011111411612284
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2017-20189010311311111011010260
B2. Export value growth at historical average minus one standard deviation in 2017-2018 3/9012116315815515312965
B3. US dollar GDP deflator at historical average minus one standard deviation in 2017-20189010912812612512511669
B4. Net non-debt creating flows at historical average minus one standard deviation in 2017-2018 4/9096989796969155
B5. Combination of B1-B4 using one-half standard deviation shocks9010211511311211210664
B6. One-time 30 percent nominal depreciation relative to the baseline in 2017 5/9014114814614514413479
Debt service-to-exports ratio
Baseline21222222
A. Alternative Scenarios
A1. Key variables at their historical averages in 2016-2036 1/21222233
A2. New public sector loans on less favorable terms in 2016-2036 221232232
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2017-201821222222
B2. Export value growth at historical average minus one standard deviation in 2017-2018 3/22344353
B3. US dollar GDP deflator at historical average minus one standard deviation in 2017-201821222222
B4. Net non-debt creating flows at historical average minus one standard deviation in 2017-2018 4/21222222
B5. Combination of B1-B4 using one-half standard deviation shocks21222222
B6. One-time 30 percent nominal depreciation relative to the baseline in 2017 5/ 5/21222222
Debt service-to-revenue ratio
Baseline43555464
A. Alternative Scenarios
A1. Key variables at their historical averages in 2016-2036 1/43555578
A2. New public sector loans on less favorable terms in 2016-2036 243566577
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2017-201843565565
B2. Export value growth at historical average minus one standard deviation in 2017-2018 3/43566586
B3. US dollar GDP deflator at historical average minus one standard deviation in 2017-201843666575
B4. Net non-debt creating flows at historical average minus one standard deviation in 2017-2018 4/43455454
B5. Combination of B1-B4 using one-half standard deviation shocks43566565
B6. One-time 30 percent nominal depreciation relative to the baseline in 2017 5/44677686
Memorandum item: Grant element assumed on residual financing (i.e., financing required above baseline) 6/4747474747474747
Sources: Country authorities; and staff estimates and projections

variable include real GDP growth of GDP deflator(in U.S. dollar terms), non-interest current account in percent of GDP, and non-dept creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline. While grace and maturity periods are the same as in baseline.

Export values are assumed to remains permanently at the lower level, but the current account as a share GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfer and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing areas specified in footnote 2.

Sources: Country authorities; and staff estimates and projections

variable include real GDP growth of GDP deflator(in U.S. dollar terms), non-interest current account in percent of GDP, and non-dept creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline. While grace and maturity periods are the same as in baseline.

Export values are assumed to remains permanently at the lower level, but the current account as a share GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfer and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing areas specified in footnote 2.

Table 3.Guinea-Bissau: Public Sector Debt Sustainability Framework, Baseline Scenario, 2013–36(In percent of GDP, unless otherwise indicated)
ActualEstimateProjections
201320142015Average 5/Standard Deviation 5/2016201720182019202020212016-21 Average202620362022-36 Average
Public sector debt 1/48.950.548.549.047.244.542.640.639.232.018.8
of which: foreign-currency denominated16.114.914.914.114.515.415.916.316.918.113.9
Change in public sector debt−7.51.7−2.00.5−1.8−2.7−1.9−2.0−1.5−1.5−1.2
Identified debt-creating flows−1.42.7−4.1−2.4−1.8−1.4−1.9−1.6−2.4−2.3−2.4
Primary deficit1.61.10.80.53.02.50.81.30.91.10.11.1−0.4−1.3−0.5
Revenue and grants11.322.120.817.917.918.318.618.919.321.025.5
of which: grants3.49.56.74.65.15.65.86.06.17.18.4
Primary (noninterest) expenditure12.923.221.620.318.819.619.620.019.420.724.2
Automatic debt dynamics−2.52.1−4.5−4.4−2.3−2.4−2.4−2.4−2.2−1.8−1.1
Contribution from interest rate/growth differential−1.9−0.3−5.1−3.6−2.4−2.4−2.3−2.3−2.2−1.8−1.1
of which: contribution from average real interest rate−0.10.8−2.7−1.3−0.1−0.1−0.2−0.3−0.3−0.2−0.2
of which: contribution from real GDP growth−1.8−1.1−2.3−2.2−2.3−2.2−2.1−2.0−1.9−1.6−0.9
Contribution from real exchange rate depreciation−0.62.40.6
Other identified debt-creating flows−0.4−0.4−0.5−0.4−0.4−0.4−0.3−0.3−0.3−0.2−0.1
Privatization receipts (negative)0.00.00.00.00.00.00.00.00.00.00.0
Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.0
Debt relief (HIPC and other)−0.5−0.5−0.5−0.5−0.4−0.4−0.4−0.3−0.3−0.2−0.1
Other (specify, e.g. bank recapitalization)0.00.10.10.00.00.00.00.00.00.00.0
Residual, including asset changes−6.1−1.12.12.80.1−1.30.0−0.40.90.91.3
Other Sustainability Indicators
PV of public sector debt45.846.845.442.239.837.535.627.014.4
of which: foreign-currency denominated12.311.912.713.213.113.213.413.19.5
of which: external12.311.912.713.213.113.213.413.19.5
PV of contingent liabilities (not included in public sector debt)
Gross financing need 2/8.17.67.08.46.87.15.85.64.32.3−0.2
PV of public sector debt-to-revenue and grants ratio (in percent)220.6261.7253.0231.4213.7198.0184.4128.556.7
PV of public sector debt-to-revenue ratio (in percent)325.0353.1354.8333.4309.7289.3270.4194.784.7
of which: external 3/87.089.798.9103.9101.9101.6101.594.756.0
Debt service-to-revenue and grants ratio (in percent) 4/6.12.65.17.311.711.98.27.27.56.94.1
Debt service-to-revenue ratio (in percent) 4/8.84.67.69.816.417.211.810.511.010.46.1
Primary deficit that stabilizes the debt-to-GDP ratio9.1−0.52.82.02.64.02.83.01.61.1−0.1
Key macroeconomic and fiscal assumptions
Real GDP growth (in percent)3.32.34.83.42.44.85.05.05.05.05.05.05.05.05.0
Average nominal interest rate on forex debt (in percent)0.31.91.70.80.72.50.42.42.51.81.51.91.71.41.6
Average real interest rate on domestic debt (in percent)0.82.2−8.3−2.85.7−4.60.5−0.5−0.8−0.9−0.8−1.2−1.0−1.2−1.1
Real exchange rate depreciation (in percent, + indicates depreciation)−2.515.04.2−0.58.2−6.2
Inflation rate (GDP deflator, in percent)−0.3−2.010.13.66.46.00.92.02.22.22.02.62.02.02.0
Growth of real primary spending (deflated by GDP deflator, in percent)−1.984.3−2.48.026.8−1.3−3.19.44.97.41.93.25.53.86.6
Grant element of new external borrowing (in percent)39.541.546.749.148.948.845.748.348.3
Sources: Country authorities and staff estimates and projections

Indicates coverage of public sector, e.g, general government or nonfinancial public sector. Also whether net or gross debit is used.

Gross financing need is defined as the primary deficit plus debit service plus the stock of short-term debit at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Sources: Country authorities and staff estimates and projections

Indicates coverage of public sector, e.g, general government or nonfinancial public sector. Also whether net or gross debit is used.

Gross financing need is defined as the primary deficit plus debit service plus the stock of short-term debit at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

4. The DSA indicates an improvement in Guinea-Bissau’s external debt sustainability. The downside risks to the macroeconomic outlook under the last DSA, in the form of weakening terms of trade and exports, have not materialized; on the contrary, the country realized an increase in terms of trade and in export volumes, enhancing export values. As a result, all baseline external debt indicators have remained comfortably below their respective policy-dependent indicative thresholds throughout the projection period (2016–36) (Figure 1). Nonetheless, all five external debt indicators are highly sensitive to exports shocks. Under the most extreme shock scenario, one indicator—the PV of debt-to-exports ratio—breached its threshold, albeit by a lower margin and for a shorter period than under the previous DSA. Guinea-Bissau, therefore, remains at moderate risk of debt distress.

Figure 1.Guinea-Bissau: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2016-2036 1/

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2026. In figure b. it corresponds to a Exports shock; in c. to a Exports shock; in d. to a Exports shock; in e. to a Exports shock and in figure f. to a Exports shock

5. Due to an increase in domestic debt, however, the overall public debt and debt service indicators have worsened. The government’s contracting of additional domestic loans (issuance of Treasury bills totaling CFAF 13 billion) and the realization of a contingent liability (CFAF 9.8 billion) have shifted the baseline PV of public debt-to-GDP ratio upward and its breach of the threshold in the most extreme shock scenario now extends over a longer period than under the last DSA.5 The new domestic loans have increased public debt by some 3.4 percent of GDP, causing the baseline PV ratio in 2016 to stay above the benchmark for longer than in the previous DSA. The decline in this ratio now occurs at a slower pace than under the last DSA and the fixed primary balance PV ratio also remains above its threshold. In the same vein, the debt service ratios do not decline as fast as under the last DSA, highlighting likely risk of high debt-service burden, particularly in the event of adverse revenue shocks (Figure 2).

Figure 2.Guinea-Bissau: Indicators of Public Debt Under Alternative Scenarios, 2016-2036 1/

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2026.

2/ Revenues are defined inclusive of grants.

6. Results from the updated DSA show that the Bissau-Guinean economy remains vulnerable to adverse shocks. These shocks, including to exports and foreign direct investment (FDI) inflows, and nominal currency depreciation through a strengthening of the US dollar relative to the euro (to which the CFAF is fixed), could result in significant breaches of several thresholds in the short to medium run on a protracted basis. Despite the current benign situation with the external PV of debt-to-exports ratio falling below its threshold after a brief breach and the other ratios being comfortably below their respective ratios, adverse shocks could cause problems of debt distress. Staff therefore reiterates the need for continued prudent borrowing policies, revenue enhancement, sustained improvements in public financial management, and implementation of further growth-enhancing structural reforms.

7. The Bissau-Guinean authorities broadly concur with staff’s assessment and policy recommendations. They agree that debt sustainability depends crucially on sound macroeconomic policies that would in turn help their chances of accessing concessional financing. They recognize the contributory role of prudent debt management along with other supportive structural reforms to improve the business environment and to enhance overall growth and export prospects.

Table 4.Guinea-Bissau: Sensitivity Analysis for Key Indicators of Public Debt, 2016–36
Projection
20162017201820192020202120262036
PV of Debt-to-GDP Ratio
Baseline4745424037362714
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages4746434038373329
A2. Primary balance is unchanged from 20164747444341414040
A3. Permanently lower GDP growth 1/4746434139373125
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2017-20184748474543423527
B2. Primary balance is at historical average minus one standard deviations in 2017-20184747464340382916
B3. Combination of B1-B2 using one half standard deviation shocks4748464442403323
B4. One-time 30 percent real depreciation in 20174750474441392815
B5. 10 percent of GDP increase in other debt-creating flows in 20174753504643413117
PV of Debt-to-Revenue Ratio 2/
Baseline26225323121419818412857
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages262254231214198188148101
A2. Primary balance is unchanged from 2016262260243230219212189156
A3. Permanently lower GDP growth 1/26225423421820319114496
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2017-2018262262251236222211163102
B2. Primary balance is at historical average minus one standard deviations in 2017-201826226425123121319813862
B3. Combination of B1-B2 using one half standard deviation shocks26226324723121720415489
B4. One-time 30 percent real depreciation in 201726228025623421620013457
B5. 10 percent of GDP increase in other debt-creating flows in 201726229527224723021214967
Debt Service-to-Revenue Ratio 2/
Baseline7121287774
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages71212756910
A2. Primary balance is unchanged from 2016712121311141821
A3. Permanently lower GDP growth 1/71212888911
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2017-2018712131010111311
B2. Primary balance is at historical average minus one standard deviations in 2017-20187121215131185
B3. Combination of B1-B2 using one half standard deviation shocks7121311911119
B4. One-time 30 percent real depreciation in 20177121310910107
B5. 10 percent of GDP increase in other debt-creating flows in 2017712143491996
Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants

Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants

Appendix I. Letter of Intent

Bissau, Guinea-Bissau November 8, 2016

Madame Christine Lagarde

Managing Director

International Monetary Fund

Washington, D.C., USA

Dear Managing Director,

1. The three-year Extended Credit Facility (ECF) Arrangement, which was approved for Guinea-Bissau by the Executive Board of the International Monetary Fund (IMF) in the amount of SDR 17.04 million on July 10, 2015, is a welcomed support to our medium-term economic program focused at rekindling economic activity and poverty reduction. The recent political crises stoked uncertainty, dulled effective functioning of the government, and threatened to unwind the gains we had made since taking office; the situation has eased and we have put in place a functioning government.

2. The attached Memorandum of Economic and Financial Policies (MEFP) updates the MEFP of June 20, 2015. It summarizes recent economic developments and the implementation of our policies in 2015-16, discusses performance under the ECF-supported program, and outlines our macroeconomic policies and structural measures for 2016–17.

3. As explained in the attached MEFP, all performance criteria (PCs) for end-June 2015 and, after correcting for a bank bailout, also end-December 2015 were met, with a significant revenue over-performance (of 1½percent of GDP) relative to the end-December target. Nonetheless, the political impasse that witnessed a sequence of changes in governments between August 2015 and June this year, delayed the scheduled program reviews. It also delayed the structural reform agenda, as we were able to implement only four of the nine structural benchmarks as envisaged by end-2015. The government has re-committed to a timely implementation of the delayed measures in accordance with the proposed revised schedule. Therefore, the government requests completion of the first and second reviews of the ECF-supported program, and the disbursement of the associated loans in the amount of SDR 5.11 million and completion of related financing assurances review, a re-phrasing of disbursements and associated reviews, and the modifications to the performance criteria on net domestic bank credit to the central government and external payments arrears to the central government.

4. Economic and financial management in 2015 was challenging, partly due to the political stalemate, although significant gains were made in revenue mobilization. Albeit nascent, the pickup in economic activity following the resumption of constitutional rule in 2014 continued in 2015 and 2016, shoring up cashew nut exports and a strengthening agricultural activity, construction and services. Private sector credit grew marginally in 2015, after a decline in 2014. Our efforts in tax administration yielded significant gains in 2015, but progress in clearing domestic arrears in the context of challenging institutional shortfalls resulted in a higher-than-envisaged spending and primary deficit.

5. Our budget execution upon taking office this year has been tight, in view of the loss in budget support and revenue shortfalls on account of the political impasse. The 2016 budget, which [was submitted to Parliament], therefore appropriately features revenue measures (sale of seized wood and an increase in the sales tax rate on fuel imports) and expenditure adjustment (particularly in the wage bill and goods and services) combined with domestic borrowing. Our projections for 2017 envisage a tightening of the fiscal stance, which will be supported by vigorous revenue mobilization and cautious spending. To attain this, we continue to strengthen tax administration and public financial management procedures at our weekly Treasury committee meetings.

6. The government has declared null and void the 2015 bank bailout that resulted in a loss of development partner budget support and complicated economic management in 2016. With the intention to clean the loan portfolios of two commercial banks saddled with non-performing loans and thereby help revitalize financial intermediation, the government took over these loans from the banks in mid-2015 at their original value, implying a premium and thus a windfall to the banks. In view of the associated fiscal costs, the loss of development partner budget support, and the evident lack of a sufficient legal basis for the operation, we have declared the bailout contracts null and void—a decision for which we are seeking court confirmation after the affected commercial banks’ refusal to undo the bailout. In this connection, we have requested the WAEMU Banking Commission to carry out a thorough on-site inspection of the banking system and to require remedial prudential actions necessary to bring the banks in full compliance with regulations. We will closely follow up on this inspection and implement actions at our disposal to strengthen the banking sector.

7. The government believes that commitments outlined in the attached MEFP are adequate to achieve program objectives. However, it stands ready to take any additional measures that may become necessary for this purpose. To ensure a successful implementation of our economic program, we will keep a close policy dialogue with the IMF and seek technical assistance, as needed. We will consult with the IMF on the adoption of any additional measures and in advance of revisions to policies contained in the attached MEFP, in accordance with IMF policies on such matters. Furthermore, we will continue to provide the IMF with information on progress in implementing policies and reforms under the program.

8. The government authorizes publication of this letter, its attachments, and the related staff report, including placement of these documents on the IMF website in accordance with IMF procedures.

Yours sincerely, /s/

Henrique Horta dos Santos

Minister of Economy and Finance

Guinea-Bissau

Attachment:

  • I. Memorandum of Economic and Financial Policies

  • II. Technical Memorandum of Understanding

Attachment I. Memorandum of Economic and Financial Policies

Bissau, November 8, 2016

I. Background

1. The political stalemate in the last quarter of 2015 and early 2016 and its attendant uncertainties threatened to erode the gains that Guinea-Bissau had made in the short period of its return to constitutional rule. The country has since turned the page following the political stalemate that started with the dismissal of the government in mid-August 2015 and of fifteen PAIGC parliamentarians earlier this year. The security situation has remained calm, and a functional government is now in place under new Prime Minister Baciro Djá. However, intra-PAIGC political tension remains the key risk to stability, but could culminate into an inclusive government of the main political parties, the PAIGC and the PRS. In this context, the current government has reiterated its commitment to the economic and financial program for 2015–18 supported by the International Monetary Fund (IMF) under the Extended Credit Facility (ECF).1 The program aims to entrench macroeconomic stability and advance structural reforms to support inclusive growth and poverty reduction, and address governance issues.

2. This Memorandum of Economic and Financial Policies (MEFP) supplements the MEFP of June 20, 2015. It presents performance relative to the performance criteria and other targets under the three-year ECF-arrangement, and describes economic and financial policies as well as structural reforms for 2016 and 2017.

II. Economic Developments until End-2015

3. The economic recovery witnessed in 2014 and 2015 continued into 2016, despite uncertainties stemming from the political impasse. The pace of the recovery was supported by measures initiated by the government to enhance electricity supply, remove bottlenecks to the pricing and export of cashew nuts (including the suspension of the FUNPI levy), and to shore up mechanization of rice production. Alongside, and prior to the political stalemate, construction activities and services expanded. During the last cashew season, the government increased the domestic reference price of cashew nuts to $950 per ton, and stepped up border-control to minimize smuggling of the produce. As a result, cashew nut export increased to 198,000 tons in 2016, from 175,000 tons in the previous year, and contributed significantly to domestic revenue mobilization. Reflecting these developments, the economy is estimated to have grown by 4.8 percent in 2015. Average inflation increased to 1½ percent on account of strong aggregate demand, and despite the decline in global oil prices.

4. The external current account balance narrowed significantly because of a sharp improvement in the terms of trade in 2015. Guinea-Bissau’s terms of trade improved by 45 percent, as global fuel and non-fuel prices declined while the price of the country’s main export produce, cashew nuts, increased by 16 percent. The benign terms-of-trade development helped a decline in the current account deficit by 2-percentage points of GDP to 1¼ percent of GDP at end-2015. Accordingly, the overall balance of payments posted a significant surplus that helped reserve accumulation.

5. The banking system has been weighed down by non-performing loans and low financial intermediation. The government bailout of two banks in 2015 was aimed at removing bad loans from the banks’ portfolio and thereby kick-starting lending to the private sector. The government has declared this bailout null and void. Post-bailout, total bank credit grew by 8½ percent between end-December 2015 and end-June 2016 (an annualized rate of 18 percent). At end-June 2016, the ratio of gross non-performing loans (NPLs) to total gross credit stood at 7.5 percent according to banks’ balance sheets. This ratio would return to a high level of around 25 percent, if the bailout is not taken into account.

6. Although development partner support in 2015 helped enhance the fiscal space and capacity building, budget support fell short of expectations. While the ECF-supported program approved by the Executive Board of the IMF for Guinea-Bissau helped the pace of structural reforms, it also catalyzed assistance from other development partners. For example, the EU restored the financial compensation agreement for fisheries, while the African Development Bank and the World Bank disbursed budget and project supports to the country. Indeed, concerns about political stability and lack of progress in structural reforms—mainly failure to achieve indicative targets necessary for disbursements—reduced the amount of budget support received. Nevertheless, capacity development activities financed by development partners have helped shore up tax administration (EU, IMF and the World Bank), public financial management (IMF) and the business environment (IMF and World Bank).

III. Program Performance in 2015

7. All quantitative performance criteria for both end-June 2015 and, after correcting for the bank bailout, end-December 2015 were met (Table 1). The floor on total domestic tax revenue was exceeded both at end-June and end-December with sizeable margins on account of stronger-than-expected expansion in economic activity and a vigilant tax administration. While the end-June ceiling on net domestic bank credit to the central government was met comfortably after adjusting for excess domestic arrears clearance, the adjusted ceiling for end-December was met after adjusting for shortfalls in budget support (implying a substitution of domestic financing for foreign financing) and after correcting for the bank bailout. New external borrowing on non-concessional terms and short-term external borrowing or guaranteeing were consistent with the respective zero-ceilings under the program. The government honored all external debt service obligations, and continues to seek restructuring and/or outright cancellation of debts currently under discussion with our bilateral creditors.

Table 1.Guinea-Bissau: Quantitative Performance Criteria and Indicative Targets for 2015(cumulative from beginning of calendar year to end of month indicated; billions of CFAF, unless otherwise indicated)
Dec. 20142015
JuneSept1Dec.
StockProg.Adj. Prog.Act.StatusProg.Adj. Prog.Act.StatusProg.Adj. Prog.Act.Status
Performance criteria1
Total domestic tax revenue (floor)44.226.231.7Met40.749.7Met53.361.9Met
Net domestic bank credit to the central government (ceiling)2.78.210.29.2Met7.99.112.1Not Met4.411.511.5Met
Ceiling on new nonconcessional external debt (in $ million)20.00.00.0Met0.00.0Met0.00.0Met
Outstanding stock of external debt owed or guaranteed by the central government0.00.00.0Met0.00.0Met0.00.0Met
with maturities of less than one year (ceiling)2
External payment arrears (ceiling)20.90.00.0Met0.00.0Met0.00.0Met
Indicative targets
New domestic arrears (ceiling)0.00.2Not Met0.03.0 NotMet0.01.3Not Met
Social and priority spending (floor)21.312.920.0Met19.427.4Met25.836.5Met
Domestic primary balance (commitment basis, floor)−19.4−2.6−2.9Not Met−6.0−6.6Not Met−6.5−9.3Not Met
Non regularized expenditures (DNTs, ceiling)0.44.8Not Met0.60.4Met0.82.7Not Met
Memorandum items:
Clearance of domestic payment arrears4.36.66.07.48.107.4
External budgetary assistance (US$ million)324.07.67.015.87.023.619.5
ECF disbursements (SDR millions, flow)410.80.00.02.842.842.840.0

The performance criteria and indicative targets are defined in the Technical Memorandum of Understanding (TMU); end-September 2015 and end-March 2016 are indicative targets.

These apply on a continuous basis.

Comprises grants and loans.

A disbursement of 20 percent of quota (SDR 2.84 million) is proposed on Board approval of the ECF arrangement in July.

The performance criteria and indicative targets are defined in the Technical Memorandum of Understanding (TMU); end-September 2015 and end-March 2016 are indicative targets.

These apply on a continuous basis.

Comprises grants and loans.

A disbursement of 20 percent of quota (SDR 2.84 million) is proposed on Board approval of the ECF arrangement in July.

8. Tax revenues substantially exceeded expectations, reflecting the several measures initiated during 2015. The government limited the fuel subsidies to the military, improved tax compliance by large taxpayers, and stepped up custom controls to contain fraud and under-invoicing by importers. Combined with stepped-up vigilance of tax administration and burgeoning economic activity, these measures boosted tax collection to CFAF 31.7 billion at end-June (some 21 percent above the program target) and CFAF 61.9 billion at end-December (10 percent of GDP, and 10 percent above the end-year PC floor).

9. At the same time, budget execution fell short of expectations and weakened the fiscal stance in 2015. Non-wage expenditures increased during the year, driven mostly by increases in other current expenditures, pushing current expenditure some 0.9 percent of GDP above the program expectation. On the other hand, capital spending exceeded expectation by 0.8 percent of GDP on account of higher than programmed project grants for public investment. As a result of these developments, the domestic primary deficit exceeded both its mid-year and year-end targets (1.1 percent of GDP at end-2015). However, the increase in expenditure was offset by the outstanding revenue performance, yielding a mildly higher-than-anticipated domestic primary deficit of 1.5 percent of GDP.

10. Only one of the four indicative quantitative targets earmarked for both end-June and end-December was met at the target dates. In the government’s efforts to clear historical domestic payment arrears and avoid new ones (a program indicative target), and coupled with the lingering problem of non-regularized expenditures (an indicative target), the end-June indicative quantitative target on the domestic primary balance was exceeded (Table 1). At the same time, the indicative floor on poverty-related (social and priority) expenditure totaled CFAF 20.0 billion, some CFAF 7.1 billion above the end-June target reflecting higher-than-program investment in social areas. Performance remained steady through end-December, as only the target on social and priority spending was observed; the ceilings on both non-regularized expenditures and new domestic arrears were exceeded along with the floor on the domestic primary balance.

11. Of the nine structural benchmarks set for implementation by end-2015, four structural benchmarks under the program were implemented as envisaged, while two were not implemented and three others were either delayed or partially implemented, also owing to the political impasse (Table 4a). The unmet measures, both of which were earmarked for completion by end-December 2015, relate to the (i) drawing up of a strategic plan for improving infrastructure and working conditions of officials of the domestic tax and customs administration, and (ii) implementation of a small taxpayer regime. The rest of the measures were implemented as follows:

  • Implement an intra-trade post in SAFIM to reconcile invoice merchandise data with actual contents of the cargo (observed as envisaged);

  • The government prepared a rolling monthly cash-flow projection consistent with the 2015 budget (observed as envisaged);

  • The government prepared quarterly reports on execution of the public investment plan (PIP) and external debt commitments, agreements and disbursements as envisaged—both at end-December as envisaged for operations during the first half of 2015 (observed as envisaged); and

  • Structural benchmarks that were not met but implemented with delay as of end-December 2015 comprise: (i)—re-installation of the debt management IT system—was completed with a delay at end-October 2015. However, although the system assisted in the analysis of the debt stock and the debt service schedule, the software provider has issued a new version and ceased to support the old; we are seeking to upgrade the software to the new version. (ii) transition to salary payments through the banking system for all public servants. The authorities have extended salary payments through the banking system for all public workers only as of end-October 2015; and (iii) the government implemented, albeit with a delay, an international and comprehensive audit of the Fund for Industrialization of Agricultural Products (FUNPI) in [March] 2016 (SB for September 2015). The result of the audit is expected to be published after parliamentary approval.

Table 2.Guinea-Bissau: Proposed Quantitative Performance Criteria and Indicative Targets for 2016(cumulative from beginning of calendar year to end of month indicated; billions of CFAF, unless otherwise indicated)
Dec. 20152016
Mar. 1/Jun.Sept. 1/Dec.
Proposed
StockITPrel.ITPrel.Proj.PC
Performance criteria1
Total domestic tax revenue (floor)61.915.710.431.531.249.661.4
Net domestic bank credit to the central government (ceiling)11.50.06.40.019.319.815.4
Ceiling on new nonconcessional external debt (in $ million)20.00.00.00.00.00.00.0
Outstanding stock of external debt owed or guaranteed by the central government with maturities of less than one year (ceiling)20.00.00.00.00.00.00.0
External payment arrears (ceiling)20.00.00.00.00.00.00.0
Indicative targets
New domestic arrears (ceiling)1.30.00.00.04.66.66.6
Social and priority spending (floor)36.57.76.021.712.923.231.0
Domestic primary balance (commitmenmt basis, floor)−9.3−0.7−7.1−1.3−15.8−9.4−11.2
Non regularized expenditures (DNTs, ceiling)2.70.22.10.47.81.02.0
Memorandum items:
Clearance of domestic payment arrears7.40.83.31.86.45.77.0
External budgetary assistance (US$ million)319.55.90.09.20.01.71.7
ECF disbursements (SDR millions, flow)40.00.00.02.30.00.05.1
Concessional loans (US$ million)521.16.11.812.35.45.412.5

The performance criteria and indicative targets are defined in the Technical Memorandum of Understanding (TMU). Targets for end-March, end-June, and end-September are indicative, while those for end-December are proposed performance criteria.

These apply on a continuous basis.

Comprises grants and loans.

Reflects proposed new disbursement schedule.

These comprise project loans with grant elements exceeding or equal to 35 percent.

The performance criteria and indicative targets are defined in the Technical Memorandum of Understanding (TMU). Targets for end-March, end-June, and end-September are indicative, while those for end-December are proposed performance criteria.

These apply on a continuous basis.

Comprises grants and loans.

Reflects proposed new disbursement schedule.

These comprise project loans with grant elements exceeding or equal to 35 percent.

Table 3.Guinea-Bissau: Proposed Quantitative Performance Criteria and Indicative Targets for 2017(cumulative from beginning of calendar year to end of month indicated; billions of CFAF, unless otherwise indicated)
2017
Dec. 2016Mar. 1/Jun.Sept 1Dec. 1/
Proj.Proposed
Proj.PCProj.
Performance criteria1
Total domestic tax revenue (floor)61.416.332.648.965.2
Net domestic bank credit to the central government (ceiling)15.48.07.2’0.0−3.7
Ceiling on new nonconcessional external debt (in $ million)20.00.00.00.00.0
Outstanding stock of external debt owed or guaranteed by the central government with maturities of less than one year (ceiling)20.00.00.00.00.0
External payment arrears (ceiling)20.00.00.00.00.0
Indicative targets
New domestic arrears (ceiling)6.60.00.00.00.0
Social and priority spending (floor)31.07.721.723.231.0
Domestic primary balance (commitment basis, floor)−11.2−6.4−5.8−1.02.3
Non regularized expenditures (DNTs, ceiling)2.00.20.40.70.9
Memorandum items:
Clearance of domestic payment arrears7.00.40.40.82.6
External budgetary assistance (US$ million)31.70.00.05.55.5
ECF disbursements (SDR millions, flow)45.10.03.00.03.0
Concessional loans (US$ million)512.54.69.313.918.6

The performance criteria and indicative targets are defined in the Technical Memorandum of Understanding (TMU). Targets for end-March, end-September, and end-December 2017 are indicative, while those for end-June are proposed performance criteria.

These apply on a continuous basis.

Comprises grants and loans.

Reflects proposed new disbursement schedule.

These comprise project loans with grant elements exceeding or equal to 35 percent.

The performance criteria and indicative targets are defined in the Technical Memorandum of Understanding (TMU). Targets for end-March, end-September, and end-December 2017 are indicative, while those for end-June are proposed performance criteria.

These apply on a continuous basis.

Comprises grants and loans.

Reflects proposed new disbursement schedule.

These comprise project loans with grant elements exceeding or equal to 35 percent.

Table 4a.Guinea-Bissau: Structural Benchmarks under the ECF Program, 2015–16
MeasuresTimingMacro RationaleStatus
Revenue Mobilization
Implement an intra-trade post in SAFIM to

reconcile invoice merchandise data with

actual contents of the cargo.
Sept. 2015Strengthen revenue collection.Met.
Draw up a strategic plan for improving

infrastructure and working conditions of

officials of the domestic tax and customs administration.
Dec. 2015Strengthen revenue collection.Not met. An existing plan is being re-drafted.
Implement a new small taxpayer regime by

the introduction of universal NIF (tax payer

identification number)
Dec. 2015To improve voluntary compliance and raise tax revenue.Not met.
Expenditure management
Prepare a monthly rolling Treasury cash flow

projection table consistent with the 2015

budget.
July 2015 for August2015 and monthly there afterEnhance expenditure management.Met.
Transition to the payment of the salaries,

wages, and allowances of all public servants

(including the security service) through the

banking system.
Sept. 2015Reduce handling of cash by the Treasury and strengthen public financial management.Not met. Implemented in October 2015.
Prepare a quarterly report on PIP execution.Dec. 2015 for Sept.2015 Report, quarterly thereafterEnhance PIP execution and monitoring.Met.
Debt management
Reinstall and operationalize debt management IT system.July 2015Enhance debt management capacity and borrowing policies.Not met. Implemented with delay.
Prepare a quarterly report on external debt

commitments, agreements and disbursements.
Dec. 2015 for Jun.2015 Report, quarterly thereafterEnhance debt management capacity

and transparency in external debt commitments.
Met.
Business Environment
Complete an international and

comprehensive audit of the fund for

industrialization of agricultural products (FUNPI)
Sept. 2015To improve cashew nuts

production and trade.
Not met. Audit

report presented to

Finance minister in April 2016.
Prepare an audit plan for all State-owned Enterprises and autonomous funds.Mar. 2016To improve service delivery by, and financial sustainability of, public enterprises.Not met and rescheduled.
Design a strategy to promote cashew production and transformation based on results of the FUNPI audit.June 2016Reduce transaction costs.Not met and rescheduled.

IV. Economic Outlook and Policies for 2016–17

A. Economic Outlook

12. The macroeconomic outlook remains favorable, though with downside risks. The updated macroeconomic framework anticipates real GDP growth to nudge 4½ percent per year in 2016–17, in line with the expected continued strong activity expansion in agriculture, construction, and services, supported by improvements in energy and water supply. Buoyed by favorable terms of trade and a benign cashew reference price increase from $900 to $950 per kilogram, cashew nut export has reached 198,000 tons in the 2016 season, and 2017 is expected to be an equally strong year, which should help moderate the current account deficit to 0.3 percent of GDP in 2016 and 1 percent in 2017. The expected expansion in output would benefit from an increase in gross investment to an average around 13 percent of GDP per year during 2016–17, sustained for the most part by the public component. The government plans to continue infrastructure projects, including building high-tension power distribution lines to access power supply from neighboring countries to curtail the chronic shortage of energy, and to expand the country’s road network. Consumer price inflation is expected to average 2.3 percent (below the WAEMU convergence criteria of 3 percent) during the period, as domestic demand improves with increasing incomes. The expansion in economic activity continues to be due mainly to catch-up after the 2012 decline, and hence should not create excessive demand pressure during 2016-17.

13. The recent nascent recovery of financial intermediation is expected to continue into 2016 on account of a positive outlook for the 2016–17 cashew campaign. The BCEAO will continue to strengthen banking supervision by strictly enforcing prudential norms and seeking to strengthen these further in collaboration with the WAEMU Banking Commission, particularly in the context of the fallout from the recent voiding of the 2015 bank bailout operation. Required minimum capital of banks is scheduled to be doubled by mid-2017 to CFAF 10 billion for all banks in the region.

B. Economic policies

14. After challenging first nine months of 2016, the program through end-2017 aims to resume sound financial management fostering macroeconomic stability and to enhance medium-term economic growth supporting job creation and poverty reduction. To attain these objectives, the government will need to reinvigorate sound public financial management and accelerate structural reforms in tax administration and debt management in particular. This should help free up and expand the budgetary resources needed to improve social services and develop basic infrastructure. The government will continue to focus on improving the business environment and promoting policy transparency, good governance and respect for the rule of law, with a view to restoring the confidence of households, private investors, and development partners.

15. Approval of the government’s economic program for 2016, which is consistent with its medium-term development program (2014–18), stalled upon a Supreme Court ruling. The Supreme Court ruled unconstitutional the parliamentarian body that had approved an earlier version in January 2016. The program is the main reference for the country’s economic and financial policies in 2016–17, and comprises three levels of intervention:

  • (i) a Program of Action for Immediate Impact; (ii) a Contingency Program, and (iii) a Development and Strategic Operational Plan.

  • The economic program seeks to: (i) address the most pressing problems affecting various public entities using quick fixes (the program of action for immediate impact); (ii) review a number of contracts, obligations and acts signed by the state or where the state has a stake and which require clarification, including areas such as natural resource extractions (phosphates, bauxite and heavy sands and oil), the energy and water utility (EAGB), telecommunications, FUNPI and autonomous funds (the contingency program); and (iii) changing the country’s macroeconomic, social and political framework that adversely affects its human development. The main elements of the country’s development and strategic operational plan include development of infrastructure, industrialization, and urbanization.

  • The government envisages that the program will (i) support growth through the pursuit of prudent economic policies, while favoring priority social and infrastructure spending to reduce poverty; (ii) improve public financial management and expand the fiscal space through effective tax administration and better expenditure management; and (iii) contribute to modernizing the business environment to encourage private sector development and improve competitiveness.

Fiscal policies

16. The political crisis led to significant fiscal challenges in 2016, as the loss of 2.6 percent of GDP of budget support forced substantial expenditure adjustments. The 2016 budget [which was submitted to Parliament] (a prior action) incorporates costs related to contingent liability realizations of 1.5 percent of GDP with respect to Guinea Telecom guarantees and 0.8 percent of GDP with respect to EAGB, and resource shrinkage due to the loss of budget support (2.6 percent of GDP) from development partners. Furthermore, in view of lapses in expenditure management and slightly weaker revenue performance in nominal terms, the budget features expenditure reductions in wages, goods and services, and domestically financed investment which helps reduce the impact of the negative fiscal shocks on the overall balance. Notwithstanding these measures the budget implies a higher primary deficit (1.5 percent of GDP) relative to earlier expectations under the program.

17. Extra revenue is needed in 2016 in view of lapses in expenditure management and loss of budget support. Domestic revenue excluding one-offs is projected at 12.4 percent of GDP in 2016, slightly lower than the original program (12.5 percent of GDP) and representing a decline relative to 2015 (13.2 percent of GDP). This decline largely reflects difficulties in revenue mobilization that resulted from the ongoing political crisis. Nevertheless, the revenue measures referred to above (including the expedited sales of seized illegal wood (0.9 percent of GDP) and key tax administration measures to encourage tax compliance have helped relieve fiscal space somewhat.

18. The 2016 budget is fully financed mainly from domestic sources, as external financing pales in comparison to earlier expectations. In view of this, we envisage a net borrowing from the domestic banks and the regional securities market—a total of 2.3 percent of GDP, to cover the shortfall in budget support. Public financial management continues to be challenging despite progress in the functioning of the Treasury committee which has led to a rise in domestic arrears. To minimize/avoid the accumulation of domestic arrears, and to contain the domestic debt burden, the government stands ready to scale back spending on non-priority items and domestically financed investment in the event of a shortfall in budgeted resources. Furthermore, the government commits to applying extra revenues above the budget in both years to reduce the stock of domestic arrears.

19. Fiscal policy will be tightened in 2017 to partially adjust for debt accumulation in 2015 and 2016 due to external shocks. Projections for 2017 envisage tightening of the fiscal stance relative to the program, with a domestic primary surplus projected at 0.1 percent of GDP. This will result from a combination of higher revenues excluding one-offs and a decrease in expenditure relative to the program and to 2016 thus leading to a net accumulation of deposits in 2017 and an NCG of 0.5 percent of GDP (proposed PC) to partially offset the increased borrowing in 2015 and 2016 that resulted from shortfalls in budget support.

Measures to Bolster Public Financial Management

20. The government will continue to improve public financial management, in particular, by strengthening the functioning of the Treasury committee and incorporating a treasury plan to shore up fiscal discipline. The weekly Treasury committee meetings will help align expenditures with available resources (re-prioritizing spending, if needed) and monitor compliance with PFM rules along the expenditure chain. In this context, the government will increasingly shun the use of non-regularized spending (DNTs) and accumulation of arrears to domestic suppliers and contractors (Tables 2 and 3). To this end, it will:

  • Create and enforce via ministerial decree a “negative list” detailing expenses and payments which cannot be processed as DNTs;

  • Introduce a continuous limit of CFAF 1 billion on the outstanding stock and a quarterly limit of 1 percent of current expenditure, as envisaged by the Treasury Plan, on the flow of DNTs (to safeguard the budget execution chain and ensure the availability of funding for issued mandates in order to avoid the accumulation of arrears);

  • Prepare titles and issue mandates at the beginning of each month for anticipated DNTs paid through the banking system and adjust resto por pagar, deducting payments accordingly until the expense is fully paid;

  • Task and equip the Treasury committee with the mandate to follow up on DNTs and ensure timely regularization of DNT expenses. Provide information on the use of DNTs to the weekly Treasury committee for expense rationalization and to confirm the regularization status;

  • Mandate the use by the Treasury department of the software application in SIGFIP that automatically registers DNT payments with the Budget department thereby facilitating the regularization of DNTs;

  • Include a section in the Treasury committee reports where data supply to the Treasury committee is assessed and noncompliance reported, citing nonperformance;

  • Continue to prepare and review rolling monthly Treasury cash-flow projection tables consistent with the 2016 budget (SB for July 2015 and monthly thereafter; Table 4a). The government will further ensure that the cash-flow projections and budget execution are informed by the weekly Treasury committee meetings;

  • Draw up a list of types of own-source revenues (including 2015 amounts) collected by ministries, departments and government agencies (a proposed SB for December 2016; Table 4b) in preparation for the planned Treasury Single Account. (To this end, the government has requested and received from domestic banks a list of all government related accounts and is cross-referencing this list against account information provided by ministries, departments, and government agencies in order to evaluate voluntary compliance);

  • Continue to strengthen Treasury management by improving our accounting procedures through the double-entry system and use of the accounting module of SIGFIP (an integrated system of public finances); and

  • Prepare timely quarterly reports on budget execution (a proposed SB for December 2016, and quarterly thereafter; Table 4b). Budget execution will be guided by our expenditure plans, supported by an open and transparent procurement process.

  • Prepare quarterly reports on PIP executions.

Table 4b.Guinea-Bissau: Proposed Structural Benchmarks under the ECF Program, 2016–17
MeasuresTimingMacro RationaleStatus
Submission of 2016 budget to ParliamentPrior action for combined first and second program reviewsProper fiscal managementUnder preparation
Revenue Mobilization
Prepare a draft law, with technical assistance from the IMF, for a new small taxpayer regime that is simple and transparent, protects the revenue base, lowers compliance costs, and ensures global participation.Dec. 2017To improve tax administration and compliance.New benchmark
Expenditure management
Prepare a monthly rolling Treasury cash flow projection table consistent with the 2017 budget.December 2016 for January 2017, and monthly thereafterEnhance expenditure management.Continuation of earlier measure.
Prepare timely quarterly reports on ministry-level budget execution with details along economic classification of expenses.Dec. 2016, and quarterly thereafterEnhance budget execution and monitoring.New benchmark.
As a precursor to the planned Treasury Single Account, draw up a list (including 2015 amounts) of own-source revenues collected by ministries, departments and government agencies.Dec. 2016Strengthen public financial managementNew benchmark
Debt management
Prepare a quarterly report on external debt commitments, agreements and disbursements.Dec. 2016 for Sept.2016 Report, and quarterly thereafter.Enhance debt management capacity and transparency in external debt commitments.Continuation of earlier measure.
Council of Ministers to issue a decree to clarify the debt issuance authority and the procedure for the issuance of government guarantees, on-lending operations, and large liabilities.Dec. 2016Bring Guinea-Bissau’s debt management policy in line with the WAEMU Regulation.New benchmark
Business Environment
Prepare an audit plan for all State-owned Enterprises and autonomous funds.Nov. 2016To improve service delivery by, and financial sustainability of, public enterprises.Not met and rescheduled.
EAGB will submit reports detailing its financial flows for the 2015 financial year, the first three quarters of 2016 and on a monthly basis starting from October 2016.December 2016To instill transparency in EAGB operations and financial position.New Benchmark
Complete, with assistance of the WAEMU Banking Commission, an assessment of the two banks affected by the bailout, and articulate an action plan to bring these banks into compliance with prudential norms.April 15, 2017To strengthen the health of the banking system.New benchmark
Design a strategy to promote cashew production and transformation based on results of the FUNPI audit.June 2017Reduce transaction costs.Not met and rescheduled.

21. The government will prioritize measures to strengthen capacity enhancement and to draw up and monitor time-bound actions plans to timely implement TA recommendations. In this regard, the government will set up a unit, or assign this task to an existing unit, charged with the responsibility of identifying technical assistance needs and helping implement the recommendations from TA missions. The unit will comprise long-term foreign consultants and local experts to work in tandem with public employees in recipient government agencies. It will also help provide training to transfer the knowledge and expertise necessary for effective use of TA recommendations.

Revenue Measures

22. Domestic revenue mobilization will continue to gain from measures to expand the tax base and strengthen tax administration. For 2016 and beyond, the government will ensure the attainment of the revenue target by implementing the following measures:

  • Upon completion of outreach, implement new uniform sales invoice beginning with large companies by December 2016, medium taxpayers by March 2017, and finally for the rest of taxpayers by June 2017;

  • Introduce a gateway system for communication networks which will facilitate tax control and compliance monitoring in the communication strategy;

  • Prepare a draft law for a new small taxpayer regime with technical assistance from the IMF in order to facilitate small taxpayer compliance (December 2017);

  • Having compiled a list of 5412 taxpayers and assigned taxpayer identification numbers to 28 percent of these taxpayers, complete 75 percent assignment by December 2016, and completing 100 percent assignment by March 2017;

  • Having undertaken a significant change in personnel, replacing ill-equipped and idle workers with new employees hired via a competitive hiring process supported by TA from the IMF, urgently provide appropriate working space for the new tax officers and to accommodate equipment and furniture to be provided through a World Bank project;

  • Implement the tax certification clearance as established by law, in all contracts and payments made by the government (December 2016). Implement tax withholding as established by Law 9/2013 for all pensions and additional remuneration including subsidies (December 2016); and; implement as established by Law 3/2015 the offset of credits owed to the state, especially tax arrears, from payments to be made by the state (December 2016);

  • Eliminate special clearance procedures without proper entry lodged in ASYCUDA before release, and guarantee to fully automate the reporting operation procedures within the system; and

  • Continue to minimize tax exemptions and fine-tune subsidies. In this respect, the government will continue using the exemptions committee to identify and quantify the value of subsidies and tax exemptions, and re-commits to assessing their impacts on the poor, and transparently accounting for them in the budget.

Borrowing Policies and Debt Management

23. The government will continue to prioritize grants and concessional financing to safeguard long-term debt sustainability. We have re-installed debt management IT system that was used to track debt accumulation and debt service obligations to ensure their prompt payment (SB for July 2015; Table 4a) until the recent update by the vendor of the software and our consequent loss of vendor support. We will upgrade the software to the latest version (DEMFAS 6.0) and restore the vendor’s support. At the same time, we continue to strengthen communication between the debt management unit and the Treasury, and we are continuously training staff of the debt unit to eliminate capacity shortcomings. Further, the government is in negotiations with its bilateral (Paris Club and non-Paris Club) creditors on debt under discussion for re-structuring or outright cancellation. This includes efforts to formalize agreements with Brazil, Russia, and Angola and to initiate negotiations with UAE, Libya, Pakistan, and Taiwan Province of China. The government remains current on its remaining external debt obligations.

24. Management of domestic debt will be strengthened along three key fronts to ensure accurate debt accounting and timely servicing. First, we will re-initiate the inventory all agreements with respect to domestic debt and the commitment to guarantee domestic debt signed by the government in order to include the debts and their repayment schedules in the public debt database. In this connection, the Terms of Reference to audit and validate the 2008–12 domestic arrears are ready; the results of the audit are expected by year-end, after which we will draft a repayment strategy to clear these arrears after netting out any tax liabilities of the beneficiaries. Second, the government will continue to negotiate higher grant element in the contracting of loans from the West African Bank for Development (BOAD). We will also ensure that any such loans are transparently reflected in the annual borrowing plans and budgets. Third, to reduce the financial burden of temporary borrowings, we will finance short-term liquidity needs through the issuance of treasury bills. Should there be a need of financing from commercial banks, all such loans will, as much as possible, be carried out through transparent auctions.

25. We will continue to strengthen public investment management through frequent reviews and reports on project execution (see ¶[20] above). To ensure continued prudent borrowing to finance social and infrastructure needs, we will prioritize investment projects carefully to ensure debt sustainability and consistency with our long-term national objectives before their inclusion in the annual borrowing plans. Furthermore, to assess the strength of our fiscal institutions related to public investment management with a view to enhancing the efficiency of public investment, we will request a Public Investment Management Assessment (PIMA) mission from the IMF and take actions in line with its recommendations.

26. To improve transparency and accountability, the government has already drafted a decree to clarify the debt issuance authority and the procedure for the issuance of government guarantees, on-lending operations, and the assumption of large liabilities outside of the budgetary process. The final draft of this decree will be submitted for cabinet approval by end-December 2016. The decree will make Guinea-Bissau’s debt management practices consistent with the WAEMU debt management regulation (Regulation 09/2007/CM/UEMOA).

Financial Sector Policies

27. Recognizing that a healthy and compliant banking system is essential for financial deepening and economic growth, the government urges adoption and implementation of remedial action plans. To this end, and having declared the bailout contracts with the banks null and void, the government expects the Banking Commission to promptly conduct on-site inspections of the banks to assess the health of the banking system and require those banks currently non-compliant with regulatory norms to prepare time-bound action plans to remedy these violations. We are fully committed to take any necessary steps to ensure that such action plans are implemented.

28. The government remains committed to strengthening the bankruptcy regulation and improving the business climate. The government will, with the assistance of development partners, continue efforts aimed at developing the financial markets (including for SMEs), strengthening contract enforcement and improving the business environment for banks. In addition, it will (i) implement OHADA’s new uniform action on collective proceedings to expedite the collection of collateral, (ii) strengthen the bankruptcy legislation and (iii) implement measures aimed at ensuring registration of actual prices paid in real estate transactions and avoidance of cash settlements.

C. Other Structural Reforms

29. The government remains committed to the security sector reform, but has not been able to move ahead with the demobilization and reintegration of soldiers. The first group of 500 soldiers was not dealt with as intended within the framework of the program due to continued political instability and lack of financing for the public awareness campaign. The government has created a special pension fund with an estimated cost of US$82 million to cater to 2500 security personnel expected to be gradually demobilized and reintegrated within a five-year period. To facilitate a broader security sector reform and support the pension fund, the ECOWAS commission has allocated $63 million and is expected to finalize a revised modality with the government for the reform. The UN peace building fund has also deposited US$1.1 million into the Pension Fund, while the government has made an initial deposit of $90,000 into the fund. We will ensure the financing of the awareness campaign, and continue to engage partners to secure additional funding to facilitate the process.

30. The government will prepare audit plans for all state-owned enterprises (SOEs) and autonomous funds to strengthen oversight and service delivery. Regarding monitoring of EAGB, we will require a submission of reports detailing its financial flows for the 2015 financial year, the first three quarters of 2016 and subsequently on a monthly basis starting October 2016 (SB for end-December 2016). To shore up EAGB’s financial position, the government has authorized a restructuring of the EAGB to become an autonomous entity. Related to this, EAGB accounts and accounting processes have been separated into water and electricity, a regulatory body has been set up with full oversight over the electricity sector, the recently adopted EAGB statutes have been operationalized, a new EAGB Board has been appointed and is meeting monthly, and the relevant legislation to enable the private sector participation in the market has been revised. The latter will enable private firms to operate and maintain generation assets to ensure reliable power supply, and a management contractor to take responsibility of EAGB operations.

Improve Economic Statistics

31. The government continues to improve the compilation of statistics with TA from the IMF and other development partners. To strengthen the use of TA recommendations, the government will set up a unit charged with the responsibility of identifying technical assistance needs and helping implement data-related recommendations (see ¶19). We have instituted regular meetings between the BCEAO, the national cashew authority (ANCA), the Ministry of Agriculture, Ministry of Commerce, and the Bureau of National Statistics (INE) to reconcile official statistics, particularly for cashew nuts production and export statistics for national income accounting purposes and for balance of payments statistics. Furthermore, the government has secured funding to conduct a survey of the agricultural sector, including cashew nuts and other cereal crops, and we are mulling a strategy to enhance cashew productivity and transformation using the results of the FUNPI audit (SB for June 2017). The government, with assistance of its development partners, is conducting an enterprises survey that will help improve the quality of data on economic aggregates. In this regard, the government has designated the Ministry of Agriculture as the legal entity responsible for the dissemination of agricultural data, including data on cashew production. The government will continue to provide Fund staff with the relevant information (as outlined in the attached Technical Memorandum of Understanding (TMU)) for assessing performance under the ECF-supported program.

Combat Corruption and Rent Seeking

32. The government will build on its current efforts to address corruption and rent seeking. We will give sufficient autonomy and adequate resources to the Financial Intelligent Unit (CENTIF) to conduct its mandate as well as ensure adequate verification of asset declarations of high-ranking public officials. We will also strengthen and effectively mobilize the Anti-Money Laundering/Combating of the Financing of Terrorism (AML/CFT) framework to assist in detecting, prosecuting, and deterring corruption-related offences and smuggling within the framework of the WAEMU AML/CFT law. To this end, our AML/CFT national strategy plan was approved by the Council of Ministers and submitted to parliament for approval. This strategy plan will bring our framework in line with the 2012 FATF standard. Further, we will enforce the public procurement laws and procedures strictly, and prosecute violators swiftly to deter and root out rent seeking in the public and private sectors. Following an IMF diagnostic TA mission, the government will take appropriate actions to mitigate risk of money laundering in areas identified by the mission.

V. Program Monitoring

33. The program will remain subject to semi-annual monitoring by the IMF Executive Board based on quantitative performance criteria, indicative targets, and structural benchmarks (Tables 2-4). Performance criteria for end-December 2016 and end-June 2017 are being proposed and the modification of the performance criteria on net domestic bank credit to the central government and external payment arrears of the central government, and rephasing of disbursements and associated reviews is requested. The performance criteria and indicators are defined in the attached Technical Memorandum of Understanding (TMU) along with the relevant adjustors. The third program review will be based on the end-December 2016 performance criteria and is scheduled to be completed on or after April 15, 2017. The fourth program review will be based on end-June 2017 performance criteria and is scheduled to be completed on or after October 15, 2017. The fifth review (the last after a rephasing of disbursements and reduction in the number of reviews in view of delays in program implementation) will be based on end-December 2017 performance criteria and is scheduled to be completed on or after April 15, 2018. Accordingly, the government undertakes:

  • To refrain from accumulating any new domestic arrears (IT) other than those specified in the TMU, and from contracting non-concessional external loans;

  • Not to introduce or increase restrictions on payments and transfers related to current international transactions, to enter into any bilateral payment agreements not in conformity with Article VIII of the IMF Articles of Agreement, or to impose or intensify any import restrictions for balance of payments purposes; and

  • To adopt any additional financial and structural measures that may become necessary, to ensure the success of its policies, only in consultation with the IMF.

Attachment II. Technical Memorandum of Understanding1

Bissau, Guinea-Bissau, November 8, 2016

Introduction

1. This memorandum sets out the understandings between the Bissau-Guinean authorities and the International Monetary Fund (IMF) regarding the definitions of the quantitative performance criteria (PCs) and structural benchmarks (SBs) for the program supported by the Extended Credit Facility (ECF) arrangement, as well as the related reporting requirements. Unless otherwise specified, all quantitative PCs and indicative targets will be evaluated in terms of cumulative flows from the beginning of the period, as specified in Table 1 of the Memorandum of Economic and Financial Policies (MEFP).

Table 1.Guinea-Bissau: Summary of Reporting Requirements
InformationFrequencyReporting DeadlineResponsible
Fiscal Sector
Central Government budget and outrunMonthly30 days after the end of the monthBudget Directorate
GrantsMonthly30 days after the end of the monthBudget Directorate
Budgetary grantsMonthly30 days after the end of the monthBudget Directorate
Project grantsMonthly30 days after the end of the monthBudget Directorate
Chenge in the stock of domestic arrearsMonthly30 days after the end of the monthBudget Directorate
Unpaid claimsMonthly30 days after the end of the monthBudget Directorate
Interest arrearsMonthly30 days after the end of the monthBudget Directorate
Proceeds from bonds issued in the regional WAEMU marketMonthly30 days after the end of the monthBudget Directorate
Real and External Sector
Updates on annual National Accounts by sectorAnnuallyWithin 6 weeks of availabilityCSO/MOEF 1
Balance of Payments dataAnnuallyWithin 6 weeks of availabilityCSO/MOEF
Details of exports breakdownQuarterly30 days after the end of the quarterCSO/MOEF
Details of imports breakdownQuarterly30 days after the end of the quarterCSO/MOEF
CPIMonthly30 days after the end of the monthCSO/MOEF
Debt
External and domestic debt and guaranteed debt by creditorMonthly30 days after the end of the monthDMU 2
DisbursementsMonthly30 days after the end of the monthDMU
AmortizationMonthly30 days after the end of the monthDMU
Interest paymentsMonthly30 days after the end of the monthDMU
Stock of external debtMonthly30 days after the end of the monthDMU
Stock of domestic debtMonthly30 days after the end of the monthDMU
Arrears on interest and principalMonthly30 days after the end of the monthDMU
Exceptional domestic financingMonthly30 days after the end of the monthDMU
Copies of any new loan agreementsAs occuringDMU

Central Statistics Office / Ministry of Economy and Finance.

Debt Management Unit of the Ministry of Economy and Finance.

Central Statistics Office / Ministry of Economy and Finance.

Debt Management Unit of the Ministry of Economy and Finance.

2. Program exchange rates.2 For the purpose of the program, foreign currency denominated values for 2015 will be converted into local currency (CFA francs) using a program exchange rate of CFA 532.3/US$ and cross rates as of end December 2014.

Quantitative Performance Criteria

A. Floor on Total Domestic Tax Revenue

3. Definition. Tax revenue is defined to include direct and indirect taxes as presented in the central government financial operations table, as well as programmed recovery of tax arrears.

4. Adjustment clauses. The floor on the total domestic tax revenue will be adjusted downwards (upwards) by the amount of any shortfall (excess) in programmed recovery of tax arrears.

B. Net Domestic Bank Credit to the Central Government (NCG)

5. Definition. NCG refers to the net banking system’s claims on the central Government as calculated by the Treasury Department. It is defined as follows:

  • the net position of the Government with the national BCEAO, including: treasury bills and bonds; less (a) central Government deposits (excluding project-related deposits) at the BCEAO;

  • the net position of the Government with commercial banks, including: (a) treasury bills; (b) treasury bearer bonds; and (c) loan and advances of commercial banks to the central Government; less central Government deposits (excluding project-related deposits) in commercial banks; and

  • Any domestic loan guarantees issued by the government will be included in the net position of the government as defined in a. and b. above.

6. Adjustment clauses. The ceiling on changes in NCG will be adjusted (a) upwards (downwards) by up to the CFA value of the shortfall (excess) in external program grants and loans, including IMF drawings—the upward adjustment will be capped at the equivalent of CFA 10 billion; and (b) downwards (upwards) by the excess (shortfall) in the CFA value of any programmed privatization receipts. In addition, central government deposits at the BCEAO and the commercial banks will be adjusted downwards by any clearance of domestic arrears (excluding any arrears accumulated during the program period, 2015-18) in excess of program; (c) downwards by the excess in CFAF value of corporate tax revenue that results from the bank bailout, in light of the court injunction freezing transactions associated with the bank bailout; and (d) upwards by the amount of the bank bailout (CFAF 34.2 billion), if NCG includes the bailout and the pending court case is not completed by the time of the third review.

7. Data source. The data source for the above will be the monetary survey (Position Nette du Gouvernement (PNG)) table, submitted monthly to the IMF staff by the BCEAO.

8. Definition of Central Government. Central government is defined for the purposes of this memorandum to comprise the central administration of the Republic of Guinea-Bissau and does not include any local administration, the central bank nor any other public or government-owned entity with autonomous legal personality not included in the government flow-of-funds table (TOFE).

C. New Non-Concessional External Debt Contracted or Guaranteed by the Central Government with an Original Maturity of One Year or More

9. Definition. Those are defined as all forms of new debt with original maturity of one year or more contracted or guaranteed by the central government. For this purpose, new non-concessional external debt will exclude normal trade credit for imports and debt denominated in CFA franc, but will include domestically held foreign exchange (non-CFA franc) debts. This PC applies not only to debt as defined in the Guidelines on Public Debt Conditionality in Fund Arrangements attached to Decision No. 15688-(14/107), adopted December 5, 2014, point 8, but also to commitments contracted or guaranteed for which value has not been received. Excluded from this PC are disbursements from the IMF and those debts subject to rescheduling or for which verbal agreement has been reached. This PC will apply on a continuous basis.

10. Reporting requirement. The government will report any new external borrowing and its terms to Fund staff as soon as external debt is contracted or guaranteed by the government, but no later than within two weeks of such external debt being contracted or guaranteed.

D. External Short-Term Debt Contracted or Guaranteed by Central Government

11. Definition. External short-term debt is defined as external debt stock with a maturity of less than one year contracted or guaranteed by central government. Debt is defined in Annex I of this TMU. For this purpose, short-term debt will exclude normal trade credit for imports and debt denominated in CFA franc, but will include domestically held foreign exchange (non-CFA franc) debts. For the purposes of this PC, central government is as defined in paragraph 8 above. This PC will apply on a continuous basis.

E. External Payment Arrears of the Central Government

12. Definition. For the purposes of this performance criterion, external payment arrears, based on the currency test, are debt service payments that have not been paid on due dates (taking into account the contractual grace periods, if any) and that have remained unpaid 30 days after the due dates. Arrears not to be considered arrears for the performance criteria, or “non-program” arrears, are defined as: (i) arrears accumulated on the service of an external debt for which there is a request for rescheduling or restructuring; and/or (ii) the amounts subject to litigation which are not considered as arrears for the performance criteria. They are defined as “non-program” arrears.

Quantitative Indicative Targets

A. New Domestic Arrears of Central Government

13. Definition. The ceiling on domestic arrears are defined as accounts payable (rest-a-payer) accumulated during the year, and still unpaid by one month after the quarter for wages and salaries (including pensions), and three months for goods, services and transfers.

B. Social and Priority Poverty-Related Expenditures

14. Definition. Social and Priority Poverty-related expenditures are defined to include spending on health, education, and the gender ministry (Table 3).

C. Domestic Primary Balance (Commitment Basis)

15. The domestic primary fiscal deficit on a commitment basis is calculated as the difference between government revenue and domestic primary expenditure on commitment basis. Government revenue includes all tax and nontax receipts and excludes external grants. Domestic primary expenditure consists of current expenditure plus domestically financed capital expenditure, excluding all interest payments. Government commitments include all expenditure for which commitment vouchers have been approved by the Ministry of Finance; automatic expenditure (such as wages and salaries, pensions, utilities, and other expenditure for which payment is centralized); and expenditure by means of offsetting operations.

D. Non-Regularized Expenditure (DNTs)

16. Definition. Any treasury outlay not properly accounted for by the National Budget Directorate and/or not included in the budget.

Program Monitoring

17. The third program review will be based on end-December 2016 performance criteria and is scheduled to be completed on or after April 15, 2017. The fourth program review will be based on end-June 2017 performance criteria and is scheduled to be completed on or after October 15, 2017. The fifth review (the last after a rephasing of disbursements and reduction in the number of reviews in view of delays in program implementation) will be based on end-December 2017 performance criteria and is scheduled to be completed on or after April 15, 2018. The Bissau-Guinean authorities shall recommend policy responses, inform the IMF monthly about the progress of the program, and transmit supporting information necessary for the evaluation of QPCs and benchmarks in electronic format as indicated in the attached summary table to IMF staff (Table 1).

18. To properly monitor key macroeconomic variables, including performance indicators under the ECF, coordinate technical assistance and monitor progress in implementation of reforms, the government will staff its reform unit and provide it with the necessary means. This reform unit periodically reports to the Minister of Finance progress in achieving agreed performance indicators and development objectives. It will also keep updated lists of all its partners, prioritize technical assistance and agree with partners on the division of labor in technical assistance. Finally, it will ensure the information sharing, including TA reports, with partners involved in the same area in order to avoid conflicting and overlapping advice.

At the beginning of the cashew nut season, the government consults with stakeholders and agrees a reference domestic sales price (for taxation purposes and to protect farmers) taking into account international prices and the need to reduce smuggling of the produce and to maximize revenue intake. For 2015 and 2016 seasons, the prices were set at US$ 900/ton and US$ 950/ton, respectively

In this case, the authorities would invoke the cancellation clause, implying cancellation fees and penalties amounting to about 0.7 percent of GDP. Banks then could appeal the cancellation in the OHADA courts.

This comes in addition to the doubling of the required minimum capital of banks by mid-2017 to CFAF 10 billion for all banks in the region.

Following the bailout banks freed up provisions constituted against non-performing loans. As a result, these banks were able to generate profits, which the Government taxed.

This DSA updates the analysis presented to the IMF Executive Board in July 2015. The DSA Update was approved by Messrs. Roger Nord and Peter Allum (IMF) and Ms. Paloma Anos-Casero (IDA).

The staffs of the IMF and IDA, in consultation with the Debt Management Unit of the Bissau-Guinean Ministry of Economy and Finance, prepared this DSA update jointly. The fiscal year of Guinea-Bissau spans January 1–December 31. The previous full DSA was prepared on June 24, 2015 (see IMF Country Report Number 15/194).

Debt sustainability thresholds are determined by the three-year (2013-2015) averages of the Country Policy and Institutional Assessment (CPIA) rating (2.50) that classifies Guinea-Bissau as having weak policy performance and institutional framework.

The authorities have revised real GDP growth rates for 2012–14, based on TA from AFRITAC to finalize the national accounts for these years.

In 2015, domestic debt (which was all CFAF denominated) was 58 percent of total public debt excluding contingent liabilities related to the voiding of the bank bailout. It was owed to the BCEAO (46 percent), regional financial institutions (of which banks 42 percent and BOAD the remainder), and the remainder to non-financial institutions (mainly in the form of arrears to suppliers). This configuration is not expected to change significantly over the medium to long term, except for a gradual budgeted clearance of the arrears to domestic suppliers.

This proposed TMU supersedes the June 2015 version, and introduces modifications (indicated in italics) to better clarify and tighten the monitoring and assessment of program performance.

The source of the cross exchange rates is International Financial Statistics.

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