On behalf of my Guinea-Bissau’s authorities, I would like to thank staff for the candid and helpful discussions held during the recent Article IV consultations and Fund management for its continuous support. The comprehensive staff report and the Selected Issues paper offer a useful guidance to my authorities for advancing economic and structural reforms. My authorities are also grateful for the support received from development partners, including the Fund to help stabilize the political and macroeconomic environment. They also appreciate that agreement was reached with staff to monitor their program for another year.

Since our last Board discussion on Guinea-Bissau in November 2004, significant political and social progress has taken place, including the improvement of the country’s political stability and security, following the parliamentary and presidential elections held in 2004 and 2005; the finalization of the demobilization, reinsertion and reintegration operations in 2005, which led to the reintegration of approximately 3,000 ex-combatants; and the appointment of a new government in December 2005. My authorities are appreciative of the international mediation from the regional institutions (ECOWAS, WAEMU, and WADB) in February 2006, which led to the agreement among all political parties.

With the improvement in security, my authorities were able to organize the sixth Summit of the Community of Portuguese-Speaking Countries (CPLP) in Bissau in mid-July 2006 aimed at consolidating the ties that link these countries in the areas of cooperation, coordination, the international arena and raising the community’s profile. The meeting welcomed the stabilization of political situation in Guinea-Bissau. Heads of State agreed on the need for a regular follow-up of the member states’ internal situation, aimed at identifying constraints and reinforcing CPLP capacity to settle conflicts, marshal humanitarian aid and consolidate institutions. To consolidate the peace process, which is an essential pillar for the new government to implement its comprehensive economic program and to reduce poverty in Guinea-Bissau, my authorities are fully committed to maintain a constructive dialogue with all the national actors, including business and trade unions, as well as civil society partners.

The implementation of the 2005 SMP, covering the period of April-December 2005, focused on stabilizing the fiscal situation, including avoiding new domestic arrears, promoting economic growth and improving governance. Despite difficulties with regard to structural reforms, due to technical and institutional capacity constraints, delays in obtaining external financial assistance and change in government, the implementation of this program helped the authorities to make progress in stabilizing the macroeconomic environment. In order to consolidate the progress achieved in the 2005 SMP and stabilize the macroeconomic environment, my authorities are implementing a new SMP, covering the period of April-December 2006. They are committed to pursue further the adjustment process and the building of institutional capacity, in order to establish a strong track record of program implementation, which they expect will pave the way for Fund support under the Emergency Post-Conflict Assistance (EPCA). The SMP should also enable Guinea-Bissau to build a track record for consideration of a new PRGF-supported program and eventual debt relief. However, the tasks ahead represent a daunting challenge that Guinea-Bissau cannot meet without a timely and adequate support from the international community in terms of technical and financial assistance.

Recent Economic and Financial Developments

Guinea-Bissau’s macroeconomic performance in 2005 was strong, driven by favorable developments in agriculture. Real GDP is estimated to have grown by 3.5 percent in 2005, due to a good performance of cashew nut and grains harvest. However, activity in other sectors, such as industry and tourism, remained weak, owing to lack of basic facilities. Moreover, for the first time since 2001, GDP per capita recorded a slight increase. As a result of good cereal production, the 12-month inflation declined to 1 percent by December 2005.

In the fiscal area, the performance was robust in 2005, as a result of stronger-than-programmed tax revenues and lower non-wage expenditures. Moreover, the domestic primary fiscal balance on a commitment basis also improved. However, cash flows problems persisted, due in part to shortfalls in external assistance. On the revenue side, tax revenue increased significantly, as customs revenue collections benefited from the large increase of imports and the improvement in customs administration through the verification of imports shipped by land at the destination instead of border and the required prepayment of export taxes before shipment. Furthermore, tax administration was reinforced with the creation of a Large-Taxpayers Unit and the simplification of tax regime.

On the expenditure side, efforts were made to improve budget preparation through centralizing the authorization for expenditure commitments in the Ministry of Finance and closing all government bank accounts outside the central bank (BCEAO). A Treasury Committee was appointed to reconcile accounts between the Budget Department, the Treasury, and the BCEAO, in order to maintain a better fiscal control.

Although the country’s financial system is thin, the recent opening of two regional banks in December 2005 and early 2006 augurs well for ensuring a return of confidence in Guinea-Bissau. As elsewhere in the region, the banking system is very liquid. Efforts are underway to encourage financial intermediation.

As regards the external sector, Guinea-Bissau achieved important earnings from cashew, the main export crop, stemming from a substantial rise in world prices and further expansion in production. However, export revenue did not compensate for the large increase in import and a drop in private remittances, such that the external current account deficit widened. With regard to the debt issue, Guinea-Bissau’s external debt remains a heavy burden on the country’s limited finances. Despite their scarce resources, my authorities are committed to normalize relations with all external creditors. It is in this perspective that they will continue to make efforts to remain current on the payment of external debt service to multilateral creditors, so as to preserve the eligibility to debt relief.

Performance under the 2005 SMP

Under the last SMP, the authorities took encouraging steps to stabilize the macroeconomic situation, and progress was made in implementing structural measures. In particular, on the fiscal front, the targets for revenue, domestic financing and the domestic primary budget deficit were observed. However, the indicative targets for the wage bill for the year as a whole were not met and domestic arrears level was surpassed, due to some adverse factors beyond the authorities’ control. Also, faced with delays in budget support from the World Bank and the EU, the government contracted commercial debt, which allowed to clear part of domestic arrears in 2005.

On the structural front, 6 out of the 10 structural benchmarks were met. Among these are: the establishment of a Large-Taxpayers Unit within the Ministry of Finance; the transfer of the collection of customs duties and taxes to the office of Customs in the port of Bissau; the completion of discussions with all ministries and other budgetary units on the budget for 2006; the rehabilitation of the taxpayer master file; the reconciliation of changes in the treasury accounts at the BCEAO with expenditure authorized by the Treasury Committee; and the collection of full amount due on imports of petroleum products and rice and cashew nut exports. The indicative targets missed or partially met were related to the implementation of banderole system for alcoholic beverage and cigarettes; the approval by the Council of Ministers of the Organic law of the Ministry of Economy and finance; the implementation of the new organizational chart of the Customs Department and the implementation of censuses of the military and paramilitary. In their reform efforts, my authorities will take the necessary steps to meet these targets.

On governance and transparency, the Ministry of Finance has started in July 2005 to publish on a monthly basis, a summary table on fiscal developments. Promoting good governance will remain a cornerstone of government policies.

Macroeconomic and Structural Policies for 2006

The authorities are aware of the need to consolidate the peace process and political stability, which are necessary to maintain macroeconomic stability and implement deeper structural reforms. The program for 2006 is part of a broader medium-term’s government program for 2006-09, in line with the draft Poverty Reduction Strategy. Policies for 2006 aim at improving the country’s fiscal position, through better tax and public expenditure management. The program also puts forward macroeconomic policies and structural reforms that will be key for improving the investment climate, reducing poverty in Guinea-Bissau and making progress towards the MDGs. The macroeconomic framework underlying the 2006 SMP lies on the achievement of real GDP growth of 4.2 percent, higher than the population growth rate; and an average annual inflation rate close to 2 percent, in line with the WAEMU convergence criterion.

Fiscal Policy and Reforms in 2006

Prudent fiscal policies will be pursued. On the revenue side, the authorities are committed to boost revenues through better enforcement of fishing rights fees, payments of licenses by cell phone operations and continued improvement of customs administration controls. Measures will also be considered to move faster with the planned reforms to simplify the tax system, widen the tax base, and combat tax evasion. The process of simplifying the tax system started with the elimination of several low-yielding taxes in the budget for 2005. Corporate income tax rates were already unified and a minimum tax was introduced for companies that are unable to provide a balance sheet. The authorities intend also to strengthen corporate taxes by asking cashew nut exporters to pay their taxes in advance. Moreover, custom exemptions, which represent nearly 40 percent of total custom revenue, will be reduced by putting an end to discretionary exemptions.

On the expenditure side, given the importance that the authorities attach to poverty reduction in their policy agenda, they are determined to reining in discretionary spending to free resources needed to meet the social needs in the areas of health and education and to improve basic infrastructure. My authorities hope that the implementation of the first phase of the civil service reform and the reform of the security sector will help to contain the wage bill. The authorities intend to further strengthen the public expenditure management and prevent the accumulation of domestic payments arrears. In this regard, they will make use of the framework of a day-to-day fiscal management on the basis of a strict cash management system. The Treasury Committee, in which the UNDP and the EU were allowed to participate as observers, will be in charge of implementing the cash flow plan. To ensure a strict control of the budget, the Ministry of Finance will prepare on a regular basis a report comparing the budget and actual expenditure by main budget category. The authorities are also determined to further strengthen budgetary control procedures and increase transparency and donor confidence.

Monetary Policy and Financial Sector Reform

Monetary policy will continue to be conducted at the regional level by the BCEAO, which aims to maintain price stability and strengthen the external position. Although Guinea-Bissau is estimated to have missed convergence indicators established under the WAEMU’s Pact of Convergence, Stability, Growth and Solidarity, the authorities remain committed to this pact.

On the financial sector, efforts will be pursued to strengthen the system. Guinea-Bissau had recourse to the regional market for short-term government paper for the first time in October 2005, as the Treasury issued a six-month treasury bill that was mostly subscribed by banks outside Guinea-Bissau. Over the medium-term, my authorities are planning to issue treasury bills for liquidity purposes and thus, help to support financial market development in the region.

Structural Reforms

My authorities are aware of the key problems facing the country. They are committed to address structural weaknesses in key sectors of the economy, with the view of improving efficiency, revitalizing the private sector and limiting potential cost on future budgets. They are also committed to reforming the public administration, undertaking actions concerning privatization and energy reform, and promoting good governance. My authorities share the view that the successful implementation of the reform agenda over the medium-term would require considerable technical assistance. In their efforts to improve the investment climate, Guinea-Bissau has recently joined the MIGA.

Debt Issue

Guinea-Bissau has an unsustainable external debt position. It is the intention of the authorities to maintain a close dialogue with the Fund to implement the needed policies, and work closely with creditors, so that the country can receive support under the PRGF, and also move to the completion point under the HIPC Initiative. In the meantime, the authorities will make every effort to remain current on debt service to multilateral creditors.

Poverty Reduction Strategy

The authorities are cognizant of the need to improve social indicators and make progress towards the Millennium Development Goals (MDGs). Work on the preparation of a final PRSP is underway, with the participation of all stakeholders, including the civil society. The assistance from donors will remain crucial to help the country implement policies envisaged in the document.

Conclusion

My authorities have made significant efforts to restore peace and political stability since the country emerged from a prolonged conflict situation. Support from their development partners, including the Fund, has been critical in this process. Under the 2005 SMP, as a result of improved political situation, the country was able to stabilize its macroeconomic environment and to make some headway on the structural front. Under the 2006 SMP, it is my authorities’ intention to pursue their adjustment efforts to consolidate the progress achieved so far. They remain firmly committed to the adjustment process, which they view as critical to achieving the medium-term fiscal and debt sustainability and addressing the poverty situation facing Guinea-Bissau. The progress achieved up to date is encouraging and reflects the authorities’ firm commitment to restore financial discipline. However, the authorites’ efforts need to be complemented by a strong support from the international community. I, therefore, call on donors to provide Guinea-Bissau with timely and adequate technical and financial assistance, so that the country can make steady progress towards more robust and sustained growth, poverty alleviation, and the achievement of the MDGs.