Guinea-Bissau: Staff Report for the 2004 Article IV Consultation
Author: International Monetary Fund
Publication Date:
11 Mar 2005
eISBN:
9781451815764
Language:
English
Keywords:
ISCR; CR; staff appraisal; intermediation effort; authority; emergency economic management program; IMF staff representative; government program; Guinea-Bissau authorities; debt relief; real GDP; transition government; Arrears; West Africa
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This 2004 Article IV Consultation highlights that Guinea-Bissau’s economic performance has weakened substantially in recent years. Real GDP declined by 7 percent in 2002 and was flat in 2003. Structural reforms stalled after the war; the private sector remained incapacitated because of the destruction of equipment and infrastructure caused by the conflict, and the loss of stocks owing to confiscating and looting. In 2003, the external current account deficit, excluding official transfers, halved relative to the previous year, to 6.7 percent of GDP, reflecting higher cashew nut exports and stagnating imports.

Abstract

This 2004 Article IV Consultation highlights that Guinea-Bissau’s economic performance has weakened substantially in recent years. Real GDP declined by 7 percent in 2002 and was flat in 2003. Structural reforms stalled after the war; the private sector remained incapacitated because of the destruction of equipment and infrastructure caused by the conflict, and the loss of stocks owing to confiscating and looting. In 2003, the external current account deficit, excluding official transfers, halved relative to the previous year, to 6.7 percent of GDP, reflecting higher cashew nut exports and stagnating imports.

I. Introduction

1. Guinea-Bissau has gone through a very difficult period in recent years. Political instability continued after the civil war in 1998-99 (Box 1). Economic activity failed to pick up because of the unstable political environment, a stalled reform effort, and large private sector wartime losses (Table 1). Fiscal problems mounted, reflecting a near doubling of wage expenditure after the war; weak expenditure management; declining revenue; and the suspension of donor assistance amid growing concerns about governance and unsatisfactory performance under the PRGF arrangement (Table 2). As a result, poverty has increased. Guinea-Bissau remains one of the poorest countries in the world with per capita income of US$185 (25 percent lower than in 1993) and a Human Development Index ranking that is among the ten lowest internationally.

Table 1.

Guinea-Bissau: Selected Economic and Financial Indicators, 2000–2005

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

The projections for 2004 take into account World Bank disbursement of US$4.3 million toward the mobilization and reintegration (PDRRI) and US$10.2 million for domestic arrears project (DASP) (5.3 percent of GDP in total), donor financial assistance for the emergency budget as of June (around 4 percent of GDP), and remuneration to Guinea-Bissau military personnel for participation in the UN peace keeping mission in Liberia (2 percent of GDP).

Projections based on population growth of 2.5 percent per year.

There is a break in the series in July 2002, when Guinea-Bissau adopted a new Harmonized CPI Index and the average CPI for 2003 is not

In 2004, domestic revenue includes CFAF 2,539 million in payment to Guinea-Bissau soldiers participating in the UN Liberia peace keeping mission. The same amount is recorded in current expenditure under salaries.

In 2004, includes an amount of CFAF 3.4 billion for legislative elections.

In 2003 and 2004, includes expenditure on foreign-financed demobilization and domestic arrears clearance programs.

In percent of beginning-of-period stock of broad money.

Table 2.

Guinea-Bissau: Central Government Operations, 2000–2009

(In billions of CFA francs)

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

In 2004, domestic revenue includes an amount of CFAF 2,539 million representing payment to Guinea-Bissau soldiers for services toward the peace keeping mission in Liberia. The same is recorded in current

In 2004, includes an amount of CFAF 3.4 billion in donor funding for legislative elections.

In 2000, the unallocated expenditures include those not authorized and paid with bons de virement (CFAF 10.8 billion) and cheques.

Interest and amortization on domestic debt does not include the servicing of debt stemming from the membership dues in the WAEMU. The authorities have agreed to begin repayment for these dues in 2005, fo billion per annum (recorded in transfers).

BCGB = Central Bank of Guinea-Bissau.

The amount in 2000 reflects payments due to bilateral, non-Paris Club creditors.

Defined as revenue (excluding grants) minus domestic interest, current and capital expenditure, excluding foreign financed expenditures and external interest payments.

After 2004, includes payment for capital contributions to WAEMU financed institutions.

The 1998-99 Civil War and Its Aftermath

In June 1998, a power struggle between the President and the military escalated quickly into a much broader conflict, the roots of which lay in failed governance and a sense of exclusion among much of the population. The fighting was concentrated in the capital Bissau. It resulted in thousands of deaths, widespread damage to housing, infrastructure and government buildings and equipment, the virtual annihilation of the small industrial sector, and the departure abroad of many of the better educated.

The post-conflict strategy was based on an economic program supported under the PRGF, interim debt relief under the Initiative for Heavily Indebted Poor Countries (HIPC Initiative), and two key programs, financed by the World Bank, the European Union (EU) and bilateral donors, for (i) demobilization and reintegration of the military and veterans of the independence war (PDRRI); and (ii) clearance of public sector supplier arrears (DASP).

However, the country failed to attain political stability. The governing coalition fell quickly apart and oppression increased, while economic management was neglected. The PRGF-supported program went off track immediately because of expenditure overruns, and part of the interim debt relief and assistance to the PDRRI and the DASP was suspended.

Following delays beyond the constitutional deadline for holding elections, the military removed President Yalà in a bloodless coup in September 2003. A civilian national transition government organized parliamentary elections on March 28, 2004, which were won by the main opposition party, but without a majority in parliament. On October 6, 2004, some military units staged a rebellion—ostensibly to protest against corruption in the senior ranks of the army and bad living conditions in the barracks—killing, among others, the Chief of Staff of the Army. While the government reached an agreement with the mutineers quickly, mounting demands by the rebels and the emergence of different factions within the army raised tensions again later.

II. Recent Developments

2. Economic activity remained sluggish in 2003. After a sharp fall in 2002, agricultural production rebounded because of favorable weather conditions. However, activity in other sectors continued to decline, reflecting the lingering damage of the war, increasing political instability, and mounting public sector wage arrears. Real GDP growth is estimated to have stagnated in 2003 (Figure 2).1 Consumer prices remained flat during December 2002-03, reflecting falling domestic demand and adequate food harvests. The economic situation remained broadly unchanged in early-2004.

Figure 1a.
Figure 1a.

Guinea-Bissau: Real GDP Growth and Inflation, 1998-2004 1/

(In percent)

Citation: IMF Staff Country Reports 2005, 069; 10.5089/9781451815764.002.A001

Source: Guinea-Bissau authorities; and Fund staff estimates.1/ 2004 ob servations are projections.
Figure 1b.
Figure 1b.

Guinea-Bissau: Savings and Investment, 1998-2004 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 069; 10.5089/9781451815764.002.A001

Source: Guinea-Bissau authorities; and Fund staff estimates.1/ 2004 observations are projections.
Figure 2.
Figure 2.

Guinea-Bissau: Money and Credit, 1998-2004 1/

(In percent of beginning-of-period money stock)

Citation: IMF Staff Country Reports 2005, 069; 10.5089/9781451815764.002.A001

Source: Guinea-Bissau authorities; and Fund staff estimates;1/ 2004 observations are projections.

3. The fiscal situation deteriorated further. With the possibility of elections, political interference in fiscal operations increased and control by the Ministry of Economy and Finance (MEF) collapsed during 2003. Provisional data indicate that the domestic primary deficit (on a commitment basis) remained around 4 percent of GDP.2 However, debt service to the IMF—which is paid automatically by the BCEAO from the government’s account—increased sharply compared to 2002 (Table 5), as did payments for domestic short-term debt and past arrears.3 The financing need was met by new domestic arrears. The salaries of most civil servants remained unpaid through the first nine months of 2003 as the authorities gave priority to paying for goods and services to promote political support (increasingly through netting out against tax liabilities). Consequently, the already severely weakened administration virtually collapsed as morale declined and strikes increased.

4. After the coup in September, the transition government formulated a donor-supported emergency plan for 2004 that had mixed results (Box 2). Expenditure control was strengthened and salaries eligible for donor financing were paid, albeit with delays. However, revenue remained considerably below expectations, reflecting a decline in imports and continuing administrative weaknesses. Moreover, the EU delayed disbursing the compensation for fishing rights—more than 20 percent of revenue—pending a review of its assistance to the sector, resulting in further arrears.

5. Guinea-Bissau’s financial system remains very small. Only one small bank operates in Bissau as two larger banks remained closed after the civil war.4 Credit to the economy, mainly for import financing, declined in 2003, reflecting (corrected for accounting changes) the economic stagnation (Figure 3, Table 3).

Figure 3.
Figure 3.

Guinea-Bissau: Effective Exchange Rates, Jan 1990 - May 2004

(1990=100)

Citation: IMF Staff Country Reports 2005, 069; 10.5089/9781451815764.002.A001

Source: IMF, Information Notice System (INS).
Table 3.

Guinea-Bissau: Monetary Survey, 2000–2005

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Sources: Central Bank of West African States (BCEAO); and staff estimates and projections.

6. Since Guinea-Bissau joined the WAEMU in 1997, its monetary and exchange rate policies are set for the Union as a whole. Inflation has been low and the real effective exchange rate depreciated through most of 2003 (Figure 4).

Figure 4.
Figure 4.

Guinea-Bissau: Exports, Imports, and Current Account Balance, 1998-2004 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 069; 10.5089/9781451815764.002.A001

Source: Guinea-Bissau authorities; and Fund staff estimates.1/ 2004 observations are projections.

The Emergency Economic Management Plan (EEMP)

The EEMP was based on an international partnership agreement proposed by the United Nations (UN) ECOSOC Ad Hoc Advisory Group for Guinea-Bissau to break the deadlock in donor assistance. The plan included political and financial governance policies and was submitted to donors by mid-December 2003. To add to donor confidence, the UN established an Emergency Economic Management Fund (EEMF), through which emergency budget support could be channeled and monitored. Assistance from the EEMF is provided for social sector and nonmilitary operating expenditure, conditional upon the implementation of the EEMP and the submission of detailed spending plans.

A key element of the EEMP was an emergency budget for 2004, that was prepared on the basis of “minimum needs” with technical assistance from the IMF, West AFRITAC, the World Bank, and the African Development Bank (AfDB). The main objective of the budget was to allow a basic functioning of the government by providing for wages and basic allocations for health and education. The EEMP included a treasury cash-flow plan for the period December 2003-June 2004 to facilitate fiscal management and allow close monitoring. External support for the emergency budget amounted to almost €7 million through June, slightly less than what had been requested.1/ The EEMP and the emergency budget were replaced by the government program for 2004-08 and a revised budget for 2004, accepted by parliament by end-July 2004.

1/ The countries of the West African Economic and Monetary Union (WAEMU) contributed about 40 percent. Other contributions came from Angola, China, France, Ghana, Italy, The Netherlands, Portugal, and Sweden.

7. The external current account balance continued to improve in 2003 (Table 4, Figure 5). The deficit on the trade balance narrowed, mostly on account of higher cashew nut exports. Imports declined as a ratio to GDP, with a large drop in rice imports—reflecting high stocks and a good domestic harvest—offsetting increases in other goods. The surplus on the capital account declined, partly reflecting lower capital transfers following the completion of an EU-financed infrastructure project.

Table 4.

Guinea-Bissau: Balance of Payments, 2000–2009

(In millions of U.S. dollars)

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Sources: BCEAO; and Fund staff estimates and projections.

In 2004, includes an amount of US$4 million for services for elections, financed by US$ 6 million in donor grants.

Including food aid and technical assistance to projects

In 2004, includes US$ 4.7 million for remuneration to Guinea-Bissau soldiers for participation in the UN peace keeping mission in Liberia.

8. Guinea-Bissau is one of the most indebted poor countries (Table 6). It reached the decision point under the HIPC Initiative in December 2000, at which time the NPV of debt-to-exports and of debt-to-government revenue ratios stood at 1,029 and 1,254, respectively. Average required debt relief was calculated at 86 percent of the NPV of debt; the Fund and the World Bank would provide interim relief of 100 percent and Paris Club creditors of 90 percent of debt service falling due. However, following nonperformance under the PRGF-arrangement, interim relief from the IMF and Paris Club creditors automatically stopped after 2001. Debt to the IMF continues to be fully serviced; World Bank interim relief declined to 90 percent in January 2004—it will reach the statutory limit by end-2007—and the AfDB extended 100 percent relief through 2006.5 However, debt service to other creditors continues to fall into arrears (Table 7).6

Table 5.

Guinea-Bissau: Obligations to the Fund, 2002-09

(In SDR Millions)

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Source: IMF Finance Department.

Post Conflict Assistance, 1999 and 2000.

Table 6.

Guinea-Bissau: Nominal and Net Present Value (NPV) of Public and Publicly Guaranteed Debt Outstanding, 2003-09 1/

(At end-period, in millions of U.S. dollars)

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Source: Guinea-Bissau authorities and staff estimates and projections.

Assuming a completion point under the Enhanced HIPC Initiative at end-October 2007. It also assumes for bilaterals (i) accumulation of arrears between January 2004 and September 2007, and (ii) forgiveness of 90 percent and rescheduling of ten percent of outstanding debt; and for multilaterals (i) reduction by 90 percent of IDA obligations and 100 percent of AfDB obligations.

Including arrears.

Table 7.

Guinea-Bissau: External Arrears Outstanding, 1999-2003 1/

(In millions of U.S. dollars)

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Sources: Based on unreconcialed data provided by Guinea-Bissau authorities; and staff estimates.

Before application of traditional debt relief

Figures revised based on decision point calculations.

Includes Nigerian Trust Fund.