A. The Situation in the Early 1990s

5. Overall performance under the 1987-89 SAF arrangement was poor and the problems inherited from the period of central planning—large fiscal deficits, high external debt, and an inefficient public enterprise sector—remained largely unresolved. With the continuation of market-oriented reforms, initiated in 1986, the authorities removed legal impediments to private sector participation in the economy, liberalized prices and external trade, devalued the currency and introduced a more flexible exchange rate policy. However, there was little progress in stabilizing the economy as fiscal policy (reflecting both revenue shortfalls and expenditure overruns) and monetary policy (because of large increases in credit to the private sector, reflecting negative real interest rates) remained loose. Policy slippages caused a delay in the approval of the second annual arrangement under the SAF and it was not possible to reach understandings on a third annual arrangement before the end of the three-year commitment period. Thus, in the early 1990s, Guinea-Bissau’s economy remained beset by high inflation, a rapidly declining currency in the parallel market, high external debt and increasing external arrears, and low economic growth (Figure 1). The economy remained dominated by inefficient public enterprises, the government sector was highly overstaffed, and technical capacity and the macroeconomic database were weak.

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Guinea-Bissau: Selected Economic Indicators, 1987-92

Citation: IMF Staff Country Reports 2005, 094; 10.5089/9781451815788.002.A001

Sources: Guinea-Bissau authorities; and Fund staff

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B. The 1993-94 Staff-Monitored Program

6. Guinea-Bissau embarked on a second attempt to reduce macroeconomic imbalances and advance structural reforms in 1993, which was initially supported by a staff-monitored program (SMP). Under the SMP, which focused on macroeconomic stabilization, tighter fiscal policies—aiming at increasing the primary surplus by revenue enhancing and expenditure reducing measures—allowed a reduction in the banking system’s net claims on the government. In combination with an increase in interest rates to positive levels in real terms, this contributed to a sharp decline in the expansion of broad money, inflation and the rate of depreciation of the peso. However, revenue performance faltered somewhat because of lower than projected cashew nut exports and dutiable imports, delays in taking revenue enhancing measures, and lower revenue from privatization than anticipated. Moreover, the fiscal deficit, while declining because of lower expenditure on capital projects (under the program, the authorities put greater emphasis on economic criteria in the setting of investment priorities), remained considerably above target. Combined with lower than anticipated external assistance (which peaked in 1992), this resulted in a further increase in external debt arrears.

C. The 1995-98 ESAF Arrangement

7. The authorities formulated a new medium-term program in mid-1994, which was supported by the Fund through an arrangement under the ESAF for 1995-98. The program built on progress under the SMP, but, in addition to reducing macroeconomic balances, put more emphasis on economic growth. The main policies in support of these objectives were as follows:

• With regard to macroeconomic policies, the key element was further fiscal tightening by strengthening revenue through tax and tariff reform and improvements in tax administration. Domestically-financed capital expenditure was to be reduced further on the basis of better selection criteria, and reoriented toward health and education. The main fiscal policy target was to gradually increase the current primary surplus (to 6½ percent of GDP by 1997), to meet a rapid increase in external interest payments.

• On the structural side, the program aimed at improving the efficiency of the economy and the investment climate. Measures in this area included streamlining the investment code, reforming the legal and regulatory framework, public enterprise reform aiming at substantially divesting the remaining enterprises by end-1996, further reduction in government employment, and agricultural policies to increase food security and diversify exports. Moreover, the authorities intended to improve the efficiency of the economy also by removing all external current account restrictions by end-1995.

• In support of program implementation and in order to address the serious weaknesses in institutions and technical capacity, the program identified the need for extensive technical assistance in the areas of macroeconomic policy formulation, public expenditure management, tax administration, bank supervision, private sector development, export promotion, public enterprise reform and strengthening the macroeconomic database.

Developments and performance under the program

8. Notwithstanding slippages, the economic situation eventually improved and performance under the ESAF-supported program was broadly satisfactory (Figure 2).

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Guinea-Bissau: Selected Economic Indicators, 1992-97

Citation: IMF Staff Country Reports 2005, 094; 10.5089/9781451815788.002.A001

Source: Guinea-Bissau authorities; and Fund staff estimates.

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• Economic growth accelerated and exceeded the program’s medium-term target for 1997. However, the sources were mainly the cashew sector and donor-financed construction projects and the intended diversification of the economy was not achieved. The latter not only reflects the usual lags in investment to improving policies, but also delays in implementing wide-ranging reforms in the investment code and the legal and regulatory framework.

• The main slippage was at the beginning of the program in 1994-95. This was caused by a revenue shortfall because of delays in completing an agreement on fishing licenses and a sharp increase in credit to the economy because of the removal of bank-by-bank credit ceilings in the second half of the year, spilling over in much higher inflation and continued depreciation of the peso in 1995. However, the program was brought back on track under an SMP for the latter part of 1995 by measures to mobilize fiscal revenue and contain expenditure, and by tightening monetary policy.

• On the fiscal side, the authorities succeeded in raising revenue and the current primary surplus, missing the original program targets of about 15 percent of GDP for revenue and 6½ percent of GDP for the primary surplus by only ½ percent of GDP and 1 percent of GDP, respectively, at end-1997. Revenue performance was weaker than targeted in 1996 and early 1997 but, under a new government and stronger collection efforts, improved sharply in the second half of 1997. The reduction in the civil service, on the basis of a voluntary departure package, also advanced, contributing to containing expenditure. The improvement in the current primary balance allowed the budget for 1998 to provide for a considerable increase in the domestic financing of public investment, particularly in health and education.

• Monetary policy, however, was not successful. Although credit to the government declined, this fell short of what was needed to sterilize large external inflows in late 1995 and the first half of 1996. Thus, control of monetary developments and inflation proved elusive until Guinea-Bissau entered the WAEMU in mid-1997 (Box 1), after which inflation fell rapidly.

• With regard to the external sector, gross official reserves, in terms of imports, were slightly lower than targeted in 1994 and 1995, but over performed in relation to the program by end-1997, mainly because of higher exports (from cashew nuts) and lower imports than projected. Guinea-Bissau removed all restrictions on current account transactions as of January 1, 1997 (accepting Article VIII status in the Fund), and implemented wide-ranging tariff reforms, making it the first country to adopt a system broadly in line with the WAEMU’s common external tariff.

• Major reforms had been undertaken to recapitalize the banking system—consisting of two foreign-owned commercial banks, of which the largest was 26 percent government owned—and privatize public enterprises, although the original (ambitious) target of divesting all government-owned enterprises was not reached.

• With considerable technical assistance from the Fund, the World Bank and other donors, Guinea-Bissau made good progress in building institutions and capacity.⁴ Effective assistance led to, among others, stronger budget management, including with regard to the payroll, public employment, and debt management, and to improvements in the macroeconomic database. Technical assistance was also very effective in preparing the broad tax reform implemented in 1998.

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Guinea-Bissau: Budgetary revenue, 1995-2003

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 094; 10.5089/9781451815788.002.A001

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Guinea-Bissau: Exports, 1993-2003

(In US$ millions)

Citation: IMF Staff Country Reports 2005, 094; 10.5089/9781451815788.002.A001

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Box 1.

Guinea-Bissau’s Membership of the WAEMU and the BCEAO

Guinea-Bissau joined the West-African Economic and Monetary Union (WAEMU) and became a member of the Central Bank of West-African States (BCEAO) on May 2, 1997. The country’s membership application which reflected the government’s intention to improve Guinea-Bissau’s integration in the region, had been approved by 1993, and policies during the 1990s aimed at complying with the convergence criteria. The expected benefits of membership were principally lower inflation and exchange rate stability, something that had eluded Guinea-Bissau but the WAEMU members appeared to have achieved. However, monetary union membership also involved costs. Membership meant less flexibility with the surrender of independent monetary and exchange rate policy. Also, there were substantial financial costs associated with the required recapitalization of the Central Bank of Guinea-Bissau and with participation in the capital of the BCEAO.

The direct costs of BCEAO membership were considerable and have still not been fully paid. A key requirement was that the negative capital position of the Central Bank of Guinea-Bissau be eliminated before being incorporated into the BCEAO. The costs of this recapitalization were $33 million, or 12 percent of 1996 GDP, in transfers of resources or the assumption of liabilities. The government also committed to paying its capital share of the BCEAO, one seventh of the net capital of the institution, or $84 million, on a graduated schedule over 20 years; this capital contribution is yet to be paid and it imposes a significant potential burden on the budget on top of already high external debt service.

The benefits for Guinea Bissau from WAEMU membership in terms of greater price stability were immediate. Some price and exchange rate volatility preceded Guinea-Bissau’s entry into the WAEMU but the currency conversion during May-July 1997 proceeded smoothly. Traders took the opportunity during this period to increase prices, but after August the rate of inflation declined sharply, with the year-over-year increase in consumer prices falling to 17 percent in 1997. In 1998, inflation dropped into the single digit range and has since remained relatively moderate despite the political and economic turbulence that has beset the country. The conversion took place at Peso 65 per CFAF, based on prevailing market rates at end-1996.

9. Guinea-Bissau’s economic program received considerable financial assistance from donors. Grants and loans, which were broadly in line with the program projections for most years, amounted to about 25 percent of GDP on average per year during 1994–1997, of which about two-thirds was in the form of grants. Budget support averaged almost 5 percent of GDP during this period.

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Guinea-Bissau: External Budget and Project Support

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 094; 10.5089/9781451815788.002.A001

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D. The 1999–2000 EPCA

10. Discussions on a successor arrangement for the ESAF started in early-1998, but were interrupted by the conflict. In June 1998, a power struggle between the President and the Chief of Staff of the Army rapidly escalated into a broad civil conflict, reflecting deep-seated political and social tensions in the country (Box 2). The fighting, which centered on the capital Bissau, displaced most of the city’s civilian population (about a third of the total country) to the rural areas. Bissau’s industrial infrastructure, the telecommunications and utility systems, and the international airport were severely damaged, and thousands of houses destroyed. The government’s administrative capacity was paralyzed as many civil servants departed and computers and files were destroyed or looted. Economic output contracted sharply because of the interruption of trade and services.

11. Following international intermediation and the formation of a national interim government, the authorities submitted an emergency program to a special donor meeting in May 1999. Key priorities of the emergency program were the rehabilitation of housing and basic infrastructure, restoration of government administration and social services, demobilization of the armed forces—which had expanded substantially during the conflict—the return of displaced persons, support for the private sector, and the organization of elections by end-1999.

12. The EPCA-supported program focused on reintroducing regular budgetary procedures and rehabilitating the Ministry of Economy and Finance with donor-financed material support and technical assistance. Emphasis was also placed on identifying and clearing domestic arrears from the conflict period with a view to recapitalizing the private sector. In the financial sector, the main commercial bank, whose credit portfolio had seriously weakened because of the conflict, was to be recapitalized, following an audit, in the first half of 2000. The program also included structural reforms, building on the progress that had been made under the ESAF arrangement. Technical assistance in support of the program included strengthening customs administration and the budget and treasury directorates, tax policy, and rebuilding the statistical database, especially with regard to national accounts.

Developments and performance under the program

13. Progress under the EPCA-supported programs was mixed. Economic growth exceeded projections, and inflation, which had increased during the conflict, subsided to closer to the WAEMU-area average (Figure 3). Strong efforts to collect tax arrears assisted in raising government revenue to such an extent that the indicative target for the primary current budget balance was being met despite a significant overrun in domestic spending at end-1999. The authorities also made progress in strengthening fiscal management and tax administration. However, the inclusion of all fighters from the conflict in the army swelled the latter’s ranks from about 15,000 in 1997 to 26,000 by 1999. Moreover, the authorities agreed to a substantial increase in public sector wages in mid-2000 to reduce the gap with wages prevailing in the other WAEMU countries. Consequently, the wage bill more than doubled between 1997 and 2001—from 20 percent of revenue to 45 percent of revenue—as did other wage-related expenditure, greatly reducing the flexibility of the budget to absorb shocks. Also, the reconstruction of administrative infrastructure and social services was delayed, as donors were unable to launch their programs as rapidly as expected and the technical assistance effort was less than envisaged, also reflecting the difficult living conditions in Bissau.⁵ Moreover, domestic financial services remained hampered by the difficult financial situation of the main commercial bank and there was little progress with structural reforms.

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Guinea-Bissau: Selected Economic Indicators, 1997-2003

Citation: IMF Staff Country Reports 2005, 094; 10.5089/9781451815788.002.A001

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

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E. The 2000–03 PRGF Arrangement

14. The EPCA was succeeded by a three-year arrangement under the PRGF on the request of the new government that was elected in early-2000. The PRGF-supported program was based on an Interim Poverty Reduction Strategy Paper and policies aimed at reorienting public expenditure toward poverty reduction, promoting private sector-led growth through structural reform, and regularizing—under the framework of the HIPC Initiative—relations with external creditors, while maintaining fiscal sustainability.⁶ The two key post-conflict programs included in the program were the demobilization and reinsertion of soldiers—to reduce the burden on the budget—and the regularization of domestic arrears—to recapitalize and revitalize the private sector—which were financed under adjustment loans from the World Bank, the European Union (EU) and bilateral donors. Donors also supported the restoration of critical infrastructure. The program further aimed at improving transparency and governance, including by strengthening fiscal expenditure management, privatization and restructuring of the remaining public enterprises, and strengthening the banking system. It also included wide-ranging plans for institutional development; the timely delivery of significant financial and technical assistance to improve the administrative capacity of the government was deemed to be key to attainment of the program objectives.

15. Assuming rapid rehabilitation and reform, the macroeconomic framework was based on an acceleration of average annual real GDP growth to about 8-9 percent during 2000-03. Monetary and external policies were, in the context of the WAEMU, to be determined in a regional setting. The fiscal balance was projected to worsen in 2000 and 2001, mainly owing to the inclusion in the army of all factions from the conflict period (deemed essential for maintaining peace) and reconstruction outlays, but to improve thereafter on the basis of a strong revenue effort. Following interim debt relief under the HIPC Initiative, external debt service would be reduced to about 2 percent of GDP, compared to about 6 percent of GDP before the conflict.

F. Cooperation With Donors

20. Fund cooperation with the World Bank on Guinea-Bissau has been very close. Fund-supported programs moved in tandem with adjustment lending by the Bank, and Fund and Bank staff ensured a proper distribution of emphasis by each institution in line with the different areas of competency. Teams from both institutions cooperated closely on assisting the authorities in preparing the emergency budget for 2004, with Bank staff providing valuable input in the budgets for the health and education ministries.

21. Coordination among the larger donor group active in Guinea-Bissau could have been better. Coordination in implementing the two key post-conflict programs was good until different institutional speeds recently complicated cooperation between the World Bank and the EU on the arrears clearance program. The main deficiency, however, is that the development partners lack arrangements for preparing regular common assessments and joint approaches in between Round Table conferences. This has been evident in the failure to prepare a broad technical assistance needs assessment after the conflict, which was judged to be critical by Fund-staff for attaining the targets of the PRGF-supported program. The lack of donor coordination in recent years is partly caused by the relocation of several embassies to Senegal after the conflict. A positive effort toward strengthening coordination has been the nomination, by the United Nations Economic and Social Council, of an Ad Hoc Advisory Group for Guinea-Bissau in 2002, although this group will only play a temporary role.

22. Furthermore, Guinea-Bissau has gradually lost the special donor relationships that contributed much to the high level of assistance during the 1990s. In reaction to continuing weak implementation and governance concerns, Sweden withdrew after the conflict in 1998-99. The Netherlands decided to end its special relationship with Guinea-Bissau just before the coup in September 2003. While these and other bilateral donors continue smaller project assistance, the only remaining large contributors are the multilateral institutions and the EU.

A. Lessons From Experience Under Fund-Supported Programs

23. Fund-supported programs with Guinea-Bissau were effective when there was sufficient government commitment. The ESAF-supported program was successful because it was supported on both the technical and political levels. The fiscal reform, focusing on reducing dependence on trade taxes and shifting the tax burden to domestic taxes, was effective. Structural reform progressed slower than anticipated, but nevertheless constantly moved forward and by the end of the arrangement most of the main public sector enterprises had been privatized or liquidated. Technical assistance was effective in this period.

24. The considerable donor assistance during the period under the ESAF arrangement safeguarded social sector spending under the serious expenditure constraints, but contributed to increasing external debt. Guinea-Bissau is one of the most indebted HIPCs, with a net present value-of-debt to exports ratio of more than 1,000 at end-1999, despite a large share of concessional debt. The debt problem originated in large inefficient public investments in the 1970s and 1980s. However, while Guinea-Bissau made repayments during the 1990s, this was offset by considerable new debt. Consequently, the debt stock stabilized at around US$850 million during the period 1993-2003, continuing the debt overhang and unsustainable debt service obligations. Thus, while the excessive debt is since being addressed under the HIPC Initiative, the possible serious impact of large amounts of concessional debt should be taken into account when providing new assistance to Guinea-Bissau.

25. On balance, Guinea-Bissau’s membership of the WAEMU has been positive. It provided the long-elusive exchange rate stability and low inflation. Nevertheless, membership also entailed considerable costs, some of which (for example the capital subscription to the BCEAO and other financial institutions of the Union, amounting to almost 30 percent of GDP) are yet to be paid. These costs were recognized under the ESAF-supported program, but a discussion on their financing at that time might have been helpful in finding a solution at an early stage.

26. The conflict of 1998–99 shows the limits to what multilateral and bilateral development assistance can accomplish without simultaneous progress in domestic political and social conditions. Despite the introduction of a multi-party political system in the 1990s, the country failed to broaden actual involvement of the population in the decision-making process, and accountability of the government and the administration remained weak. The resulting weak political and financial governance led to the conflict in 1998-99, that set the country back many years. The failure of the post-conflict strategy was the result of the same dysfunctional political system, with continuing power struggles inside the political elite getting priority over proper economic management.

27. Since building effective political systems is outside the Fund’s terms of reference, the lesson that can be drawn is that lasting success of Fund-supported programs with Guinea-Bissau requires broader international involvement. At the time of the ESAF arrangement, serious risks were evident in areas outside the Fund’s competence, and a broader international effort than the usual economic development partners should have included organizations with competencies in building political institutions and capacity. This could have been supported by the Fund, with more emphasis on fiscal transparency and governance, the lack of which was an important element behind the social tensions that led to the 1998–99 conflict; this was recognized (but not addressed by the authorities) in the PRGF-supported program.¹¹

28. The programs under the emergency post-conflict assistance may have been too accommodating to policies that were proposed by the authorities as required for political stability. Especially allowing, under the second EPCA-supported program, the insertion of all combatants in the army in 1999 and the large wage increase in 2000 while demobilization and measures to reduce the civil service had yet to be implemented, proved premature. When sharp increases in revenue in 1999 and 2000 turned out to be temporary in later years, and demobilization and reduction in the civil service were delayed, the much higher wage bill had reduced the flexibility of the budget to absorb such shocks, contributing to the serious fiscal problems later on. Moreover, the programs supported under the EPCA could have focused less on structural reform, for which the country was not ready at that time.

29. With hindsight, the Fund took too much of a risk with the early approval of the PRGF arrangement in 2000. Preliminary indications pointed toward low ownership by the new government and continued political instability, and weak technical capacity. Under these circumstances, Guinea-Bissau met none of the preconditions for a PRGF arrangement—ownership and capacity to implement strong macroeconomic and reform policies—in 2000. The Fund took the decision to go ahead with the arrangement so that it would be able to move the country to the decision point under the HIPC Initiative, and to much needed additional debt relief, including in the context of more general efforts to provide HIPC debt relief to as many countries as possible by end-2000. The consequence of this approach was that, when the country proved unable to provide adequate performance, the entire post-conflict strategy began to unravel as interim debt relief by the Fund and Paris Club creditors, and donor assistance for the two key post-conflict programs, automatically stopped.

30. Guinea-Bissau has made much progress with structural reform since the mid-1980s but the agenda remains unfinished. Most major state-owned enterprises had been privatized or liquidated by the end of the ESAF-supported program in early 1998. Nevertheless, economic development remains constrained by many rules and regulations from the colonial and centrally-planned periods, whereas an adjustment to the regulatory environment of the WAEMU is necessary. Moreover, the judiciary system remains very weak and will have to be strengthened in the context of an overall effort to improve governance.

B. What Could Have Been Done Differently?

31. While higher-than-normal risks were present in Guinea-Bissau, Fund support for the country’s economic program was well justified in the early 1990s. In spite of weak performance under a previous SAF arrangement, Guinea-Bissau had nevertheless made considerable progress in moving from a centrally-planned to a market-oriented economy. Moreover, the country had expressed an interest in regional integration, (with the associated increase in discipline in economic policy making) and the reform of the political system toward a multiparty democracy was encouraging.

32. With hindsight, the main deficiency of the ESAF-supported program has been the lack of emphasis on good governance and transparency. While donor concerns were evident in the early 1990s, the annual programs did not include performance criteria or benchmarks in this area, and technical assistance in the fiscal sector focused on tax policy and not on expenditure management, which was the source of the underlying problems. The adoption of the guidelines on the Fund’s involvement in governance issues in 1997 might have promoted closer Fund involvement in this area in a successor arrangement, discussions on which were suspended, however, when the conflict started.

33. With this background in mind, the approval of the PRGF-arrangement at end-2000 was premature. Although this allowed Guinea-Bissau to benefit from debt relief under the HIPC Initiative, early warning signs pointed to a lack of commitment on economic policies as well as potential recurring political and governance problems. Moreover, as the staff pointed out in the relevant paper for the Board, there were significant “political, economic, and implementation risks.”¹² Under these circumstances, continuation of post-conflict assistance would have been preferable until the outlook with regard to government commitment, implementation capacity, and the results of post-conflict programs would have become clearer.

34. The design of the ESAF-supported program during the 1990s was generally adequate, but some improvements could have been made. The authorities’ abolition of the bank-by-bank credit ceilings in the 1994 program was proved premature as there were no appropriate alternative measures in place. Furthermore, conditionality under the Fund-supported programs could have been stronger with regard to the key structural reform measure in the program—the overhaul of the investment code and the general legal and regulatory environment—which was delayed beyond the period covered by the arrangement, hampering diversification of the economy.

35. With regard to the EPCA and the PRGF arrangement, more attention should have been given to technical assistance and capacity building. The staff report for the 2000 Article IV consultation and the PRGF arrangement mentioned that “the timely delivery [of technical and financial assistance from donors] will be key to ensuring progress and any delays could compromise attainment of program objectives.” However, the program should have addressed this concern with more specific actions aimed at strengthening the weak implementation capacity through technical assistance.

36. Some elements of the Fund’s involvement in Guinea-Bissau could have been improved, but the main cause of the ultimate failure of the Fund-supported programs lies with the authorities. First, the moves toward better macroeconomic management under the ESAF-arrangement and better political management through democratization in the 1990s were not complemented by progress in improving governance, thus laying the basis for the conflict in 1998-99. Second, the new government after the conflict showed little ownership for the PRGF-supported program or for macroeconomic management in general. Reflecting a long history of governance and implementation problems, the international donor community has largely turned away from Guinea-Bissau, and it will take a very strong and sustained effort for the country, especially in improving political and financial governance, to restore the special aid relationships that will be necessary to rebuild the country and to reduce the wide-spread poverty in an acceptable timeframe.

C. Challenges Ahead

37. In mid-2004, Guinea-Bissau is poorer than when it started its adjustment effort in 1993. Per capita real GDP is estimated to be about 25 percent lower in 2003 than in 1993. The economy remains vulnerable to external shocks as cashew nuts account for about 95 percent of exports and remain virtually the only source of cash income in the rural areas, and export taxes on cashew nuts and fees from fishing licenses account for about half of government revenue. Burdened by low revenue and high wage- and wage-related expenditure, the fiscal situation remains unsustainable. Moreover, in addition to already very high external debt, domestic debt—mainly in the form of arrears—has increased sharply in recent years. The structural reform agenda is unfinished, and the financial system consists of only one commercial bank operating out of one branch in the capital Bissau. At end-2000, a UN report concluded that “three years after the end of the conflict, its underlying causes remain unresolved and the country is again “in a situation of severe political, economic and social crisis” with “many risks in all sectors for greater destabilization.”¹³ Many of its conclusions remain valid today.

38. Recent political developments provide a window of opportunity for resuming stabilization and reform policies. In this regard, the relatively smooth transition from the coup in September 2003 to an elected government, that campaigned on a broad agenda for reform, in May 2004, is encouraging. Nevertheless, the main challenge for the country remains to build an accountable and representative political system, without which progress in economic development will remain at risk from political and social instability.

39. With regard to the economy, the challenge for the new government is to repair the remaining damage from the conflict, restore fiscal sustainability and basic social services, and reduce wide-spread poverty. Most urgent repairs concern water and electricity supply in Bissau, which remain haphazard. Restoring fiscal sustainability—which may take several years—will not only require a considerable improvement in the revenue effort and strong expenditure restraints, but also rebuilding fiscal management capacity. On poverty reduction policies, the main challenge for the authorities is to revitalize and develop the private sector as the main engine for renewed growth. The PRSP could play an important role in obtaining broad consensus on the directions and priorities of the policies; the challenge in this area is to ensure that the final PRSP is based on a broad-based domestic consultation process with a view to promoting a sense of participation and ownership in setting the direction of poverty reduction policies.

40. Finally, an important challenge for Guinea-Bissau is restoring good relations with donors. As mentioned above, after three decades of a largely failed development effort and persistent political and governance problems, donors have sharply reduced assistance to Guinea-Bissau. Nevertheless, the country will not be able to address its serious problems in a reasonable timeframe without a strong and well-coordinated international financial and technical assistance effort. In this regard, it will be a challenge to both the authorities and donors to find a framework within which effective assistance can resume as quickly as possible.