1. Guinea-Bissau is trying to recover from a long period of political instability that had taken a heavy toll on the economy. The country’s physical infrastructure was destroyed, the economy stagnated, government administrative capacity virtually collapsed, social conditions worsened and poverty increased. By the end of the political transition period in mid-2004, real per capita GDP had declined by an annual average of 2 percent since 2000 and the public finance was in disarray, as the government was unable to finance basic current expenditure from its own resources. Progress has been made in recent years to address the political and economic problems, but Guinea-Bissau remains a fragile post-conflict country.

Abstract

1. Guinea-Bissau is trying to recover from a long period of political instability that had taken a heavy toll on the economy. The country’s physical infrastructure was destroyed, the economy stagnated, government administrative capacity virtually collapsed, social conditions worsened and poverty increased. By the end of the political transition period in mid-2004, real per capita GDP had declined by an annual average of 2 percent since 2000 and the public finance was in disarray, as the government was unable to finance basic current expenditure from its own resources. Progress has been made in recent years to address the political and economic problems, but Guinea-Bissau remains a fragile post-conflict country.

Introduction

1. Guinea-Bissau is trying to recover from a long period of political instability that had taken a heavy toll on the economy. The country’s physical infrastructure was destroyed, the economy stagnated, government administrative capacity virtually collapsed, social conditions worsened and poverty increased. By the end of the political transition period in mid-2004, real per capita GDP had declined by an annual average of 2 percent since 2000 and the public finance was in disarray, as the government was unable to finance basic current expenditure from its own resources. Progress has been made in recent years to address the political and economic problems, but Guinea-Bissau remains a fragile post-conflict country.

2. The improvement of the fiscal situation is crucial to addressing Guinea-Bissau’s deap-seated economic problems. Guinea-Bissau has been in fiscal difficulty for most of its history since 1973 when it became independent. By 2000 huge fiscal deficits led to the accumulation of external public debt in excess of 300 percent of GDP in NPV terms, and since then the government has been running external and sometimes domestic arrears to finance part of the deficit. The fiscal imbalances reflects both an oversized public sector, and a relatively low revenue to GDP ratio compared with other sub-Saharan African (SSA) countries, which has also been heavily dependent on the cashew sector.

3. This report discusses the main factors that have driven the evolution of public finances in Guinea-Bissau in recent years. Chapter I highlights the heavy burden to public finances posed by the excessive wage bill and reviews the salient features of recent public sector reforms in Guinea-Bissau aimed at reducing it to a sustainable level. Chapter II investigates the cause of low revenues and the main determinants of tax revenues, and suggests that the relatively low level of tax revenues can be traced to a complex tax system that has low yields in an economy with a large informal sector and to minimal tax administration capacity. Finally, Chapter III of the report highlights the importance of cashews as the main source of fiscal revenues and discusses the strategic options to boost the potential contribution of the cashew sector to value added, export and income.

I. The Wage Bill and Salary Reforms of the Public Sector1

A. Introduction

4. As far back as the early 1990s, the government of Guinea-Bissau recognized that its civil service suffered from major structural problems and presented a heavy burden to public finances. In response, the country pursued numerous reforms, with the aim of containing the wage bill, including a civil service reform in 1991, censuses of the public administration in 1997 and 2005, improvement of the payroll system in 1997, salary reviews in 2000 and 2004, and a demobilization program in 2000. Although in some cases these reforms helped stem wage bill growth, they did not succeed in bringing that growth to a sustainable level. Indeed, at end-2005, overall public sector payroll represented about 80 percent of government revenue. Under the staff-monitored program for 2006, the authorities have initiated a new public sector reform that focuses on reducing staffing levels mainly at the lowest ranks both in the civil and military administrations. This new reform offers an opportunity to introduce already recommended changes that could result in a more modern and efficient civil service.

5. This chapter reviews the salient features of recent public sector reforms in Guinea-Bissau and it concludes that reducing wage bill growth to a sustainable level can only be achieved in the context of a comprehensive medium-term plan, and financed with the help of other donors. It is organized as follows: Section B uses cross-country data to provide a regional context for Guinea-Bissau’s public sector employment and wage bill and flags potential areas of concern. Section C assesses public sector wages in Guinea-Bissau, describes the evolution of wages, and reviews the main drivers for changing the salary structure. Section D presents an overview of reforms to the salary structure since the beginning of the 1990s. Finally, Section E provides a summary of the findings and recommends future actions.

B. Guinea-Bissau’s Public Employment and Wage Bill: A Regional Comparison

6. Guinea-Bissau’s public sector employment—as measured by the proportion of civil servants in the population—is relatively modest compared with the average in sub-Saharan Africa and that of other post-conflict countries. However, compared with the West African Economic and Monetary Union (WAEMU) region, Guinea-Bissau has the highest share of civil service workers, followed closely by Senegal (Figure 1). The ratio of armed forces to its population of 0.39 percent is close to the average for sub-Saharan countries of 0.3 percent and lower than post-conflict countries like the Democratic Republic of the Congo (0.6 percent in 2004) or Angola (1.3 percent in the 90’s) which can be attributed to the demobilization program implemented in early 2000 (see section C).2

Figure 1
Figure 1

Selected WAEMU Countries: Central Government Employment, 2004

(In percent of total population)

Citation: IMF Staff Country Reports 2006, 313; 10.5089/9781451815818.002.A001

Sources: IMF, African Department.

7. At the end of the 1990s, Guinea-Bissau had one of the lowest average salaries in the WAEMU area and outlays for public sector salaries were only 3 percent of GDP. Since then, however, the wage bill has increased fivefold from its pre-conflict level reaching a level of 13 percent in 2005 (Figure 2). Wages as a share of fiscal revenues also jumped over that period, from 20 percent to almost 80 percent (Figure 3). These high ratios, which double the regional average, not only reflect the country’s low level of revenues but also a series of salary increases implemented since 2000, as explained in the following section.

Figure 2
Figure 2

Selected WAEMU Countries: Wages and Salaries, 1997-2005

(As a percentage of GDP)

Citation: IMF Staff Country Reports 2006, 313; 10.5089/9781451815818.002.A001

Sources: IMF, African Department.
Figure 3
Figure 3

Selected WAEMU Countries: Wages and Salaries, 1997-2005

(As a percentage of fiscal revenue)

Citation: IMF Staff Country Reports 2006, 313; 10.5089/9781451815818.002.A001

Sources: IMF, African Department.

C. Public Employment and Wage Trends in Guinea-Bissau

8. Excluding the jump in military personnel owing to the 1998–99 civil conflict, Guinea-Bissau’s share of public employment has declined steadly since the early 1990s (Figure 4).3 At the same time, however, wage increases designed to decompress the salary structure and to integrate especial allowances in wages have resulted in a rapidly rising wage bill (Figure 5).

Figure 4
Figure 4

Guinea-Bissau: Total Public Employment

(in number of effectives) 1991 - 2005

Citation: IMF Staff Country Reports 2006, 313; 10.5089/9781451815818.002.A001

Figure 5
Figure 5

Guinea-Bissau: Wage Bill, 1997–2005

Citation: IMF Staff Country Reports 2006, 313; 10.5089/9781451815818.002.A001

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

Compression ratio and the 2004 salary harmonization

9. In the late 1990s, Guinea-Bissau’s salary structure was extremely compressed, with virtually no salary differences evident between pay rankings.4 This flat structure reflected a policy that focused on minimizing inequality.5 Since 2000, the government has sought to correct this distortion and thus minimize adverse incentives. In addition, the government has tried to make the system more transparent by including subsidies and bonuses in reported wages. In 2000, wages of top rank officials (corresponding to levels A to B) increased significantly.6 Meanwhile, wages of middle to lower ranks were virtually unchanged. As a result, the ratio of average salary to GDP per capita almost doubled and the salary gap between top and bottom ranks widened considerably (Figure 6).

Figure 6
Figure 6

Guinea-Bissau: Civil Service Compression Ratio, 1997–2005

(In percent)

Citation: IMF Staff Country Reports 2006, 313; 10.5089/9781451815818.002.A001

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

10. The salary harmonization of 2004 (see section D, para. 18) led to a large increase of average salaries of civil servants, military personnel, and paramilitary workers (Text Table 1). For civil servants, middle officials (service directors and chiefs and technical levels) saw the highest increases. Because these two groups constitute the bulk of the civil servant workforce, the average cost of civil servant salaries to GDP per capita increased from 4.0 in 2003 to 6.3 in 2005 (see Figure 5).

Text Table 1

Guinea-Bissau: Average Monthly Individual Salary by Sectors and Categories in CFA francs

article image
Sources: Data provided by authorities and staff estimates.

11. While harmonization at the top of the scale eliminated glaring disparities between civil servants and military personnel, harmonization of the entire military salary grid was more questionable, as the salaries of medium- to low-rank officials were fairly similar to those of their civil service equivalents.7 As a result, the average salary cost for militaries to GDP per capita increased from 4.9 in 2003 to 7.4 in 2005 (figure 5), while its compression ratio rose sharply to 26:1, almost twofold the salary gap among civil servants (Figures 67).

Figure 7
Figure 7

Guinea-Bissau Military Personnel Compression Rates, 2003–05

(In percent)

Citation: IMF Staff Country Reports 2006, 313; 10.5089/9781451815818.002.A001

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

12. Overall, these harmonization measures effectively raised the average salary to GDP per capita from 1.5 percent in 1997 to 7 percent in 2005, close to the regional standards. And the wage bill increased over the same period from 3 to 13 percent og GDP per capita, far above the regional standards.

13. In sum, from an excessively flat wage system at the end of the 1990s, Guinea-Bissau’s salary structure has evolved to include wide differentials that hamper regular payment of salaries (see Figure 8). The relationship between revenues in terms of GDP and the average salary cost in GDP per capita which measures the financial capacity of servicing salaries on a regular basis has, on average, exceeded 1, resulting in irregularly paid salaries and mounting wage arrears. Moreover, the excessive wage bill has left almost no resources for the provision of basic public services.

Figure 8
Figure 8

Ratio of Fiscal Pressure to Average Salary Cost in Terms of GDP Per Capita

Citation: IMF Staff Country Reports 2006, 313; 10.5089/9781451815818.002.A001

Benefits and other gratifications

14. Before the salary harmonization of 2003–04, low salary levels were offset by high levels of nonsalary allowances. Such allowances hovered around 50 percent of the total wage bill, much higher than the technically recommended threshold of one-third. On the positive side, the salary harmonization reduced nonwage allowances to 25 percent of the total wage bill, making wages the bulk of total remuneration (Figure 9). In that sense, the harmonization has made the wage system more transparent and less prone to abuse.

Figure 9
Figure 9

Guinea-Bissau: Composition of Wages, 1998–2005

(In percent)

Citation: IMF Staff Country Reports 2006, 313; 10.5089/9781451815818.002.A001

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

D. Public Sector Reforms: Past and Present

15. This section reviews key reforms undertaken since the beginning of the 1990s to modify the salary structure and public administration, so as to draw lessons for future actions. It focuses on (i) the findings of the report De Weerd of the end of the 1990s that reviews Guinea-Bissau’s salary structure and whose recommendations still apply;8 (ii) the demobilization program following the civil conflict; and (iii) the public sector reform recently proposed by the new government. The initiatives related to wage increases and the 2004 salary harmonization will be mentioned in the context of previous recommendations, as their impact on the salary structure and on the wage bill are covered in section C (above).

16. In 1991, the government launched a broad civil service reform program aimed at (i) significantly reducing the size of the civil service; (ii) increasing the efficiency of public administration by upgrading the qualifications and working conditions for civil servants, and (iii) enhancing transparency in the salary structure by accounting for nonwage benefits. The strategy was to encourage voluntary departures by offering separation incentives to lower-ranked civil servants, who accounted for much of the overstaffing. By the end of 1996, about 3,000 out of the estimated 23,000 public workers (including military and paramilitary personnel) at end-1991 left the public service under the voluntary departure program.9

17. In 1993, with the support of the World Bank, the Cabinet for Budget and the Conjuncture of the Ministry of Finance established a more comprehensive payroll data base by computerizing and centralizing the payroll processing system for all ministries at the Ministry of Finance, with the exception of the Ministries of Agriculture, Education, and Health. By 1997, the personnel data system was linked to the payroll to allow regular updating and verification of civil service employment. A census of employment at the Ministries of Defense and Interior and a review of the beneficiaries of pensions for veterans of the war of independence were finalized at end-1997.

18. In 1997, under the Project of the Reform of the Public Administration supported by the World Bank, a report (updated in 2001) to evaluate the salary system in Guinea-Bissau was elaborated.10 Its main findings were as follows: (i) the legal base was weak, obsolete, and dichotomous, and it differentiated the management level from all other civil servant levels; (ii) there were large numbers of equiparados (workers without positions whose salaries were similar to those with positions); (iii) the performance evaluation system was subjective and nonsystematic; (iv) salaries were too low, and the extremely compressed salary structure made it prone to adverse incentives (mainly applicable to salary levels before the 2000 salary reform); and (v) benefits and other nonwage compensations were very high.

19. To overcome the identified shortcomings of the salary structure, the report made the following recommendations: (i) modify the legal system; (ii) dissociate remunerations from positions; (iii) dismiss low-skilled effectives from grades O to Z; (iv) implement a progressive salary grid (with less pronounced progression rates at a higher level), so as to increase the transparency of career prospects and incentives; (v) increase the compression ratio of the indexed grid to a level not higher than 4.5:1.0;11 (vi) maintain the same level of compression rate throughout the public sector (i.e., between civil servants and militaries);12 and (vii) change the salary structure on the basis of level of education and experience. The new proposed salary grid and widening of the compression ratio were supposed to have a neutral impact on the wage bill.13

20. In 2000—after the 1998–99 civil conflict—a demobilization, reinsertion, and reintegration program (DRRP) was launched in the context of the post-conflict strategy and based on an economic program supported under the PRGF.14 The DRRP—financed by the World Bank, the European Union (EU), and bilateral donors—was instrumental in tackling sources of continuous social and political tensions and the serious burden on the budget of a large military and paramilitary force. This (initially) three-year program encompassed three phases: (i) demobilization, during which participants were formally discharged from the armed forces; (ii) reinsertion, during which a transitional safety net helped the eligible, demobilized personnel to return to civilian life; and (iii) reintegration, to help demobilized personnel to attain a sustainable way of life. To facilitate the mobilization of donor financing, a multidonor trust fund administrated by IDA was set up in November 2000.15 An audit to assess the eligibility of combatants for the program was completed in 2001. By September 2002, 3,929 of the 4,392 ex-combatants identified by the census to be mobilized were discharged and reintegrated into civilian life.16 The last phase of the program, which was finalized in 2005 after several political and administrative disruptions, has resulted in the reintegration of approximately 3,000 additional ex-combatants.

21. Salary reforms were implemented in 2000 and in 2004. The so-called “salary harmonization” of 2004, implemented by the transition government had three major objectives. First, it increased wages to try to narrow existing salary gaps between higher and lower ranked workers. Overall those corresponding to medium ranks who represented 80 percent of staffing and who were left behind with the 2000 salary increases. Second, it brought the wage scales for military and paramilitary personnel broadly in line with the new wage grids for civil servants to reduce tensions with civil employees and to put military wages, including wages for paramilitaries, under the management of the Ministry of Internal Affairs. Third, it included nonwage benefits within wages to increase transparency. In this context, between August and September 2004, the new government reached agreements with both unions and the military to harmonize wage scales among sectors. The authorities have partially followed previous recommendations in reforming the country’s salary structure (see paras. 15–16). However, recommendations to widen the compression ratio to introduce proper salary incentives ultimately took the form of large salary increases. In this context, many other relevant recommendations went unheeded (e.g., to change the legal system, dismiss nonskilled workers, introduce a career stream based on formation and experience, reduce large inequalities in the salary structure, and keep the same level of compression ratio throughout the public sector).

The current civil service reform

22. Recognizing that controlling the wage bill is key to achieving fiscal sustainability, the government launched a public sector reform in March 2006 by removing from the payroll employees who had exceeded the mandatory retirement age. The reform’s main objective is to reduce the burden of the wage bill on public finances by cutting the number of staff mainly at the lowest ranks of the salary scale. In this context, a plan has been elaborated to streamline and rationalize organizations by (i) obtaining parliamentary approval for new laws that will allow an audit of all ministries and an assessment of their staffing needs so as to minimize overlaps and duplication of functions; (ii) updating the census of the civil service and starting one for the military, which will be facilitated by the new identification cards that will be introduced this year; (iii) dismissing redundant workers, paying them seven months severance (first phase) and by implementing—with donor support—a safety-net protection program through microenterprises and capacity building (second phase); and (iv) by retiring workers who have reached the mandatory age of 60 and are still on the payroll.17

23. If implemented on time, the reform is expected to remove from the payroll about 5,400 public workers by (i) releasing 2,800 civil servants and 1,629 military, and (ii) retiring 970 persons (604 civil servants and 366 paramilitaries). The cut in the number of civil servants will primarily affect less educated and low-salary scale workers (letters O to Z, which represent a quarter of civil servants whose average monthly salary is CFAF 20,400 (US$37). The reduction in the military will also be mostly concentrated in the lower ranks, mainly among soldiers who receive a salary equivalent to that of the civil servants. In 2006, the fiscal impact would be neutral, as the wage bill reduction would be offset by one-off compensation payments to laid-off workers and new pensioners. In the medium term, however, payroll reductions through dismissals and retirements are expected to generate an estimated savings of about CFAF 2.1 billion (about 1.2 percent of GDP) for the full year, and its counterpart related to reinsertion programs is expected to be fully financed by donors assistance.

Text Table 2

Wage Bill Reduction - in quantity and in millions of CFA francs

article image
Sources: data provided by authorities and staff estimates

E. Conclusion

24. In the early 1990s, Guinea-Bissau began implementing initiatives aimed at reforming its public sector and modifying its salary structure. Unfortunately, protracted civil conflict and political instability during the 1998–2003 period disrupted these reform efforts. Moreover, initiatives to bring very low wage levels to more competitive levels—through salary increases and a widening of compression ratios—went far beyond recommended best practices. Indeed, the resulting wage growth has proved unsustainable, as demonstrated by the government’s current, persistent lapse into wage arrears.

25. The new government’s public sector reform focuses on cutting the number of staff, mostly at the lowest ranking levels, to stem wage bill growth. It also envisages a new legal framework that would enable the government to establish and staff organizational structures that align with its priorities. In addition to helping curtail wage bill growth, this initiative would present an opportunity for the government to adopt changes already recommended by international experts in public administration. Ultimately, these reforms could result in a more modern, efficient civil service.

26. Nonetheless, a determined medium- to long-term strategy is needed to address the key problems underlying Guinea-Bissau’s excessive wage bill. First, with donor support, it is necessary to draw up a realistic action plan backed by adequate and timely financing. This plan should focus on several areas. First, it should develop a road map for (i) reincorporating laid-off workers into civilian life and (ii) introducing effective management and control of public personnel expenditures, including medium-to long-term measures for rightsizing existing government structures and establishing new government bodies. Second, it should focus on increasing productivity by providing performance incentives, restructuring the job grading system, and enhancing training and management. Third, the government should strengthen civil service management and implement stricter payroll controls to ensure that the wage bill remains at a level consistent with macroeconomic stability.

1

Prepared by Lorraine Ocampos

2

Even at the end of the 1988–99 civil conflict, the census of security forces carried out in the context of the demobilization, reinsertion, and reintegration program (DRRP) (see section D, para. 19) amounted to 12,595 (military, paramilitary, and militia), which represented about 1 percent of the population (see World Bank: “Implementation Completion Report of the Economic Rehabilitation and Recovery Credit,” December 2004).

3

Data for the 1991–2005 series were drawn from various publications and were adjusted for reporting inconsistencies. Inaccuracies are therefore unavoidable.

4

The compression ratio is the difference between the highest and the lowest salary (discarding the highest level if this concerns less than 1 percent of total effectives). For the assessment of compression rates this papers has only taken into account the wage part, leaving aside nonwage allowances since a breakdown between civil servants and military forces has not been available..

5

Guido De Weerd—expert in public administration hired in the context of the public administration reform project financed by the World Bank and other donors—reviewed the salary structure in Guinea-Bissau at the end of the 1990s (see section C, paras. 15–16). According to his findings a wage system with adequate incentives will have compression rates above 4 but lower than 10. The structural adjustment programs of the 1990s aimed at reaching a maximum compression ratio of 13.4:1.0 (see IMF: Public Expenditure Handbook, 1991; page 51).

6

The personnel structure, which is based on decree N° 2 of 1980, has 25 salary levels (in addition to 6 other higher political levels). The levels correspond to the letters A to Z and refer to positions (cargos).

7

This could also be explained by the fact that before the harmonization nonwage allowances were not accounted for in the salaries of civil servants while representing a large part of their salaries (60 percent in 2003) (Figure 9).

8

See footnote 4.

9

See IMF, Guinea-Bissau’s Selected Issues Paper and Statistical Appendix, November 2004.

10

Guido De Weerd, Commission de Réflexion Chargée de la Reforme du Système Salarial. République de Guinée-Bissau, Ministère de l’Économie et des Finances—Project Banque Mondiale de Gestion Économique, Décembre 1997, and Guido De Weerd, Éléments de Reforme du Système Salarial et du Régime du Personnel. Primature, Ministère de l’Administration Publique et du Travail, Ministère de l’Économie et des Finances. Project de Reforme de l’Administation Publique, Mars 2001.

11

According to De Weerd, this decompression level was considered appropriate to ensure normal payment of salaries and to avoid the creation of privileged islands.

12

According to De Weerd, countries that have preserved salary harmonization throughout the public sector have kept similar salary compression ratios between civil servants and militaries (De Weerd 2001, p. 81).

13

De Weerd 1997, page 80.

14

The Poverty Reduction and Growth Facility-supported program immediately got off track because of expenditure overruns. Consequently, part of the interim debt relief and assistance to the DRRP was suspended.

15

The program’s original budget amounted to US$19.6 million. As of end-2005 the disbursed amount was of US$9.5 million.

16

The size of the security forces was much smaller than initially reported (12,595 versus an initial estimation of 23,000). The program’s original objective was to reduce the size of the armed forces by some 12,000 soldiers, by demobilizing 5,000 ex-combatants by end-December 2001 and 7,000 more combatants either before reaching the HIPC completion point or not later than the end of 2003. (See World Bank,”Implementation Completion Report of the Economic Rehabilitation and Recovery Credit,” December 2004).

17

In countries were salaries are irregularly paid and pension systems are financially weak, government employees who reach retirement age are unwilling to leave the workforce, because they fear they will not receive their retirement gratuities and pensions. As a result, a large number of government employees who have reached retirement age remain on the payroll.

Guinea-Bissau: Selected Issues and Statistical Appendix
Author: International Monetary Fund
  • View in gallery

    Selected WAEMU Countries: Central Government Employment, 2004

    (In percent of total population)

  • View in gallery

    Selected WAEMU Countries: Wages and Salaries, 1997-2005

    (As a percentage of GDP)

  • View in gallery

    Selected WAEMU Countries: Wages and Salaries, 1997-2005

    (As a percentage of fiscal revenue)

  • View in gallery

    Guinea-Bissau: Total Public Employment

    (in number of effectives) 1991 - 2005

  • View in gallery

    Guinea-Bissau: Wage Bill, 1997–2005

  • View in gallery

    Guinea-Bissau: Civil Service Compression Ratio, 1997–2005

    (In percent)

  • View in gallery

    Guinea-Bissau Military Personnel Compression Rates, 2003–05

    (In percent)

  • View in gallery

    Ratio of Fiscal Pressure to Average Salary Cost in Terms of GDP Per Capita

  • View in gallery

    Guinea-Bissau: Composition of Wages, 1998–2005

    (In percent)