Our Bissau-Guinean authorities have expressed their appreciation of the Fund’s continued support as well as the constructive policy dialogue maintained with the Fund staff. They found this dialogue to be rightly focused, notably on the need to maintain fiscal sustainability, strengthen the resilience of the financial system, and accelerate structural reforms. The authorities remain committed to consolidating the recent progress made in fostering economic growth and macroeconomic stability, and they broadly concur with staff’s main policy recommendations.
Recent Economic Developments and Performance under the ECF Arrangement
Despite a difficult political situation, economic activity has been strong in 2015. Real GDP is estimated to have grown by 4.8 percent against 2.3 percent in 2014, mainly driven by the increase in agricultural output and improvement in the supply of electricity and water. Partly because of stronger cashew exports, the current account deficit narrowed significantly more than was initially expected under the ECF arrangement. At the same time, inflation stood well below the WAEMU regional convergence criterion of 3 percent.
In the fiscal sector, the authorities took several steps to enhance revenue mobilization and improve public finance management. These include measures aimed at improving tax compliance by large taxpayers and strengthening the customs administration’s capacity to reduce fraud and under-invoicing by importers. Thus, revenue performance exceeded program targets for both June 2015 and December 2015.
However, on the expenditure side, current spending was higher than expected and capital expenditure overshot targeted levels due to higher than budgeted foreign-financed public investment. Consequently, the domestic primary deficit has been slightly higher than initially programmed for 2015. In light of the above, the Government has suspended all new expenditures, excepting salary and funds needed for normal functioning.
In the financial sector, the authorities are taking steps to address the issue related to the 2015 government bailout of two commercial banks. This consisted in an attempt to take over high NPLs from the banks’ books at face value with a view to increasing private sector access to credit. Recognizing that this bailout raised governance issues, the authorities have subsequently declared it null and void pursuant to existing laws and regulations. Moreover, they initiated legal actions against the banks and the signatories of the bailout contracts. It is the firm intention of the authorities to follow forcefully through all the necessary steps to ensure that the bailout is completely reversed and at no costs to the budget.
Progress under the ECF-supported program has broadly been satisfactory despite a challenging domestic environment. All end-June 2015 and end-December 2015 quantitative performance criteria (PCs) were met. Domestic revenue exceeded the target by large margins, reflecting the government’s continuous efforts to improve tax collection and administration. The ceilings on net domestic bank credit to the central government (NCG) and on non-concessional debt were also met. In addition, all external debt service obligations were honored. As regards the indicative quantitative targets, the floor on social expenditures was easily exceeded, but ceilings on non-regularized expenditures (DNTs), new domestic arrears, and the domestic primary balance were missed.
Of the nine structural benchmarks, through end-December 2015, four were met on time and three were met with some delays. Due to the political impasse, measures related 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 could not be met. The authorities are currently working to implement them and in this endeavor technical assistance from development partners and the Fund in particular will continue to be valuable.
Economic Outlook and Policies for 2016–17
The authorities are committed to pursuing their fiscal consolidation efforts. In this connection, reform measures will aim to strengthen further public financial management (PFM) and tax administration, with the view to ensuring fiscal and debt sustainability, as indicated in their medium-term development program (2014–18). Likewise, they will step up the implementation of structural reforms to improve the business environment.
Real GDP is projected to grow by 4½ percent per year in 2016–17, as agriculture is expected to continue performing well together with a strong contribution from construction, and services as well as improvements in energy and water supply. Cashew nut exports have reached record high of 198,000 tons in the 2016 season, and are expected to continue to perform strongly in 2017, which should help keep the current account deficit under 3 percent of GDP in 2016 and 2017. Gross investment is expected to pick up to around an average of 13 percent of GDP per year during 2016–17. Inflation is projected to remain low at 2.3 percent, aided by improvements in domestic demand and incomes.
Fiscal Policy and Debt Sustainability
The authorities are committed to maintaining fiscal discipline. They have targeted an ambitious but realistic domestic primary deficit in the near term, taking into consideration available domestic revenue and financing. The authorities stand ready to scale back non-priority spending and domestically financed investment in the event of a shortfall in budgeted resources. Furthermore, they remain committed to using revenue above the budgeted amount in 2016-17 to reduce the stock of domestic arrears.
On the revenue side, among the measures envisaged, the authorities will 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. They will also introduce a mechanism for facilitating tax control. In addition, steps will be taken to further reduce the administrative burden on taxpayers and expand the tax base and yield by establishing a new tax regime for small taxpayers with technical assistance from the IMF, strengthen the one-stop-shop for cashew nut exports and associated tax payments, and identify all non-tax and tax levies and charges not collected by the tax administration. Moreover, continued efforts will be made to promote tax compliance by large taxpayers and to improve the functions and procedures of the tax administration. To achieve these objectives and improve the performance of tax administration, technical assistance will play a key role and we call for Fund continued support to Guinea-Bissau in this area.
On the expenditure front, steps will be taken to improve fiscal transparency and expenditure treasury management. The authorities plan to align expenditures with available revenue, and ensure compliance with PFM rules. They are also committed to limiting the use of DNTs and the accumulation of arrears to domestic suppliers and contractors, including through the use of an integrated system of public finances (SIGFIP). Additionally, the authorities will prepare quarterly reports on budget execution to ensure that it is guided by expenditure plans and that social and priority spending is protected. Steps will also be taken to improve treasury management by rigorously following existing accounting procedures and the use of the accounting module of the SIGFIP, and the expenditure and procurement plans drawn up ex-ante based on the annual budget.
On debt issue, as the updated debt sustainability analysis indicates, Guinea Bissau remains in moderate risk of debt distress. Given the country’s vulnerability to external shock and narrow export base, the authorities will continue to rely on grants and concessional loans for their external financing, and avoid the contracting and guaranteeing of short-term external debt. Cognizant of the need to limit contingent liabilities, the authorities have compiled an inventory of all government guarantees to the banking system. They have also—in line with the WAEMU debt management regulation—drafted a decree for cabinet approval, which will help better regulate debt issuance authority and transparency, the procedure for issuance of government guarantees, and the assumption of large liabilities outside the budgetary system.
Financial Sector Reforms
The authorities are committed to ensure that Guinea Bissau’s financial system is in compliance with regulatory norms and international standards. In this context, the authorities will require the banks identified in recent on-site inspection conducted by the WAEMU banking commission to comply with regulatory norms related to provision of non-performing loans, capital increases and other corrective measures identified as part of the ongoing unwinding of the bailout. The government stands ready to take any remedial action deemed necessary by the Banking Commission to address both post-bailout and NPLs issues.
With the technical assistance of development partners, the authorities are also taking steps to develop the financial markets (including for SMEs), strengthen contract enforcement, implement OHADA’s new uniform action on collective proceedings to expedite the collection of collateral, and strengthen the bankruptcy legislation.
Other Structural Reforms
The authorities recognize the need to continue to improve the business environment with the view to achieving high, sustained and inclusive growth and diversify the economy. Steps will be taken to improve public service delivery and financial sustainability of public enterprises, including the electricity and water company (EAGB). In this regard, the government will prepare audit plans for state-owned enterprises (SOEs) and autonomous funds and design a new strategy to promote cashew nut production and transformation.
The authorities have made substantial progress in data provision and compilation with the assistance of development partners. Additional efforts will be pursued to address remaining issues on the National Statistics Institute, including the approval of the new Statistics Law, adequate resourcing to produce statistics, and improvements in coordination and data sharing among institutions.
Our Bissau Guinean authorities are committed to continue improving their AML/CFT framework. In this regard, a national strategy on AML/CFT consistent with the Financial Action Taskforce on Money Laundering (FATF) standards was submitted to Parliament for approval. The authorities are also committed to giving sufficient autonomy and adequate resources to the Financial Intelligent Unit (CENTIF) to perform its mandate and help fight corruption and rent seeking.
Our Bissau-Guinean authorities remain committed to exercising fiscal prudence and accelerating reforms to overcome challenges facing the economy. They will continue to build on recent achievements notably on the revenue and expenditure fronts to preserve fiscal sustainability. Their efforts will also focus on implementing corrective financial measures with the assistance of the WAEMU banking commission to maintain stability in the financial sector. As well, the authorities will step up structural reforms towards diversifying the economy.
Considering the above, we would appreciate Directors’ support for the completion of the first and second reviews under the ECF arrangement and the requests for modification of PCs and rephasing of disbursements.