IMF Economic Reviews 98/01

IMF Concludes Article IV Consultation with Guinea-Bissau

International Monetary Fund
Published Date:
January 1998
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Press Information Notice (PIN) No. 98/20


March 26, 1998

International Monetary Fund

Washington, D. C. 20431 USA

The IMF Executive Board on March 6, 1998 concluded the 1997 Article IV consultation1 with Guinea-Bissau.


Guinea-Bissau’s adjustment effort was initiated with two programs supported by the annual arrangements under the Structural Adjustment Facility (SAF) in 1987-89. Following a period of mixed economic performance, a period of financial stabilization in 1993-94 led to an economic and financial program supported by a three-year arrangement under the Enhanced Structural Adjustment Facility (ESAF), which was approved by the Executive Board in January 1995. The macroeconomic and structural policies pursued by Guinea-Bissau in the period 1995-97 led to substantial improvement in a number of areas: growth was strong, inflation fell, and internal and external imbalances were reduced.

GDP growth reached 4.5 percent on average in 1995-96, and is estimated to have risen to 5 percent in 1997, spurred by a strong increase in the production of cashew nuts, the principal export crop, and a pickup in investment. However, uncertainties regarding the possible entrance of the country in the Western African Monetary Union (WAMU) and adoption of its currency, the CFA franc, unleashed in midyear market pressures on the national currency, the Guinea-Bissau peso. The resulting sharp depreciation of the peso fed through the domestic prices, increasing inflation. The exchange rate stabilized in the last quarter of 1996, following a tightening of monetary policy and clarifications about the modalities of entrance into the WAMU; as a result, the rate of inflation declined to about 1 percent per month in the last quarter of the year. Over the whole year, the rate of inflation was 66 percent. Inflation fell sharply in 1997 to 16 percent on an end-year basis, with the price level declining in the last four months of the year.

Guinea-Bissau joined the WAEMU, effective May 2, 1997, with its currency exchanged at PG 65 per CFA franc, close to the one prevailing in the month of December 1996. The currency conversion was carried out in the three-month period May-July 1997. The Central Bank of Guinea-Bissau was incorporated in the Central Bank of Western African States (BCEAO) after a recapitalization operation carried out by the government with the financial assistance of foreign donors and creditors. To support the entrance into the monetary union, policies were rigorously pursued to strengthen public finances, involving a tightening of expenditure and improved revenue collection. As a result of these efforts, the revenue/GDP ratio reached 15.4 percent of GDP in 1997, up from 12.5 percent in 1996, and the current primary surplus reached 5.5 percent, compared with 3.3 percent in 1997. A comprehensive tax reform was adopted in October 1997, involving the introduction of a generalized sales tax, the streamlining of the customs tariff, and the reform of excise taxes, including on petroleum prices. These reforms entered into effect in early 1998. The government has also embarked on a major reform of the civil service to improve pay incentives, while increasing efficiency. The expansion of credit was moderate, and the increase of money supply, in the context of a return of confidence, was mainly accounted for by the rise in net foreign assets of the banking system.

The balance of payments improved in 1997, with the external current account deficit declining to 14.2 percent of GDP, from 20.6 percent, as exports of cashew nuts reached a record level, being boosted also by the sale of the large unsold stock accumulated in 1996.

Prospects for 1998

Real GDP is projected at 5.5 percent in 1998, as the output of cashew nuts is expected to increase further, and public investment to strengthen. Inflation is expected to remain subdued, with end-year inflation declining to about 7 percent.

The external current account deficit (excluding official transfers) is expected to deteriorate somewhat, to 18 percent of GDP, as exports would decline relative to 1997, when they were boosted by the sale of stocks.

The current primary fiscal surplus is projected to attain 5 percent of GDP; tax revenue is to be boosted by the newly adopted tax reforms. On the expenditure side, the domestic contribution to investment will increase somewhat, to strengthen the education and health sectors, while current expenditure will be contained.

Executive Board Assessment

The budgetary revenue and primary surplus targets for 1997 had been exceeded owing to stronger-than-expected performance of non-tax revenue, a vigorous tax collection effort toward the end of the year, and expenditure containment. Economic growth continued to be robust, and inflation had fallen sharply throughout the year, reflecting the regained confidence resulting from the entry of Guinea-Bissau into the West African Monetary Union (WAMU) and the West African Economic and Monetary Union (WAEMU). Directors noted that the return to monetary stability had also led to an improvement in the investment climate, which had facilitated the privatization process. Progress had also been made in other areas of structural reform.

Nevertheless, Directors noted that Guinea-Bissau still faces a number of challenges, with the economy remaining vulnerable to external shocks, a high external debt burden, and widespread poverty. Therefore, to consolidate the recent progress and put the economy on a path of strong and sustainable growth, Directors urged the authorities to strengthen the public finances and deepen structural reforms.

Directors welcomed the comprehensive tax reform that is being implemented, including the introduction of a generalized sales tax due to come into effect on April 1, 1998, and of a new streamlined customs tariff, which would contribute greatly to modernizing the tax system and further improving the fiscal position. They stressed the importance of thorough and timely implementation of these reforms, and of the continued efforts to improve tax and customs administration. They also noted that expenditure management should be further strengthened, including through the elimination of domestic arrears.

Directors welcomed the steps taken by the authorities to start reforming the civil service in depth, and reducing its size while revamping the salary and incentive structure. These reforms should be carried out with determination and without delays, so as to contribute to the improvement of public services, and in particular to allow a strengthening of resources for the social sectors and infrastructure.

Directors noted that significant progress had been achieved in the privatization process. They called on the authorities to continue and broaden the privatization process, and considered that it was important that the private management of other public services—such as the post and telecommunications—be subject to competitive conditions in order to increase efficiency.

Directors welcomed the strengthening of the banking system that was under way, and especially the recapitalization of the largest commercial bank, and noted the importance of intensifying the efforts in this area. They expressed the view that, with the restoration of price stability, a favorable environment had now been established to broaden the financial system, and in particular to develop savings and loan institutions geared to the financing of small-scale enterprises.

Directors noted that debt management remains weak, and welcomed the steps taken recently to establish a national debt monitoring committee and install a computerized debt management system. They urged the authorities to regularize speedily their relations with all creditors, including Paris Club, non-Paris Club, and a number of regional multilateral creditors.

Directors noted Guinea-Bissau’s very heavy external debt burden, and emphasized that a strong and sustained track record in policy implementation was needed before reaching a decision point under the HIPC debt initiative.

Press Information Notices (PINs) are issued, at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF’s assessment of these policies.

Guinea-Bissau: Selected Economic Indicators 1/

(Annual percentage change)
Change in real GDP3.
GDP deflator23.344.749.839.510.2
Change in consumer prices (end of period)19.349.765.616.87.0
(In percent of GDP)
Gross domestic investment21.822.323.019.122.3
Gross domestic savings3.9−
Gross national savings11.56.28.314.011.5
(In millions of U.S. dollars) 2/
Export, f.o.b.20.523.921.653.942.4
Imports, f.o.b.−53.8−59.3−56.8−67.9−73.7
Current account balance, excluding official transfers−48.6−59.9−55.8−37.7−57.2
Capital account balance−
Gross official reserves18.420.311.831.2
Current account balance, excluding official transfers
(in percent of GDP)−16.2−23.6−20.6−14.2−18.5
Change in real effective exchange rate (in percent) 3/−11.0−7.64.812.4
External public debt (in percent of GDP)376.5367.1339.1356.4
Financial variables(In percent of GDP) 2/
Government revenue12.412.712.515.4147
Government expenditure and net lending 4/35.530.433.637.529.3
Current primary fiscal balance3.
Overall government balance 5/−4.6−17.7−18.0−12.6−14.6
Change in broad money (in percent)33.925.933.253.515.0
Interest rate (in percent) 6/

IMF staff estimates.

Unless otherwise noted.


Includes in 1997 the cost of the recapitalization of the Central Bank.

Excluding grants and restructuring operations.

Central Bank rediscount rate.

IMF staff estimates.

Unless otherwise noted.


Includes in 1997 the cost of the recapitalization of the Central Bank.

Excluding grants and restructuring operations.

Central Bank rediscount rate.

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. In this PIN, the main features of the Board’s discussion are described.

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