Guinea-Bissau: Selected Issues and Statistical Appendix

International Monetary Fund

doi:10.5089/9781451815818.002.A002

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Guinea-Bissau

Selected Issues and Statistical Appendix

Author: International Monetary Fund

Publication Date:: 21 Aug 2006

eISBN:: 9781451815818

Language:: English

Keywords:: ISCR; CR; wage; Guinea-Bissau; wage bill; Nontax revenue; salary harmonization; IMF staff estimate; U.S. dollar; scale worker; Agricultural commodities; Civil service; Wages; Income; West Africa; Africa; Asia and Pacific; Sub-Saharan Africa; tax-arrears windfall; custom tax; revenue policy; investment goods import; ratio to GDP; Tariffs; Consumption taxes; Tax administration core functions; Export earnings

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27. A major element of the persistent fiscal imbalances in Guinea-Bissau is the relatively low level of revenue compared with other sub-Saharan African (SSA) countries (see Table 1). During 2000–03 Guinea-Bissau’s average revenues (excluding grants) as a ratio to GDP were low, essentially reflecting the fact that the tax revenue-to-GDP ratio is itself very low. At 9.7 percent, the average tax revenue-to-GDP ratio for 2000–03 was well below the averages for the West African Economic and Monetary Union (WAEMU) and SSA. Nontax revenues, on the other hand, have been a significant source of funds as a ratio to GDP for Guinea-Bissau in comparison to other SSA non-oil-producing countries, although they have not been enough to compensate for low tax revenues and high government expenditures.

Abstract

II. Fiscal Revenues (1991–2005)^¹⁸

A. Introduction

27. A major element of the persistent fiscal imbalances in Guinea-Bissau is the relatively low level of revenue compared with other sub-Saharan African (SSA) countries (see Table 1). During 2000–03 Guinea-Bissau’s average revenues (excluding grants) as a ratio to GDP were low, essentially reflecting the fact that the tax revenue-to-GDP ratio is itself very low. At 9.7 percent, the average tax revenue-to-GDP ratio for 2000–03 was well below the averages for the West African Economic and Monetary Union (WAEMU) and SSA. Nontax revenues, on the other hand, have been a significant source of funds as a ratio to GDP for Guinea-Bissau in comparison to other SSA non-oil-producing countries, although they have not been enough to compensate for low tax revenues and high government expenditures.

^{Text Table 1.}

Fiscal Revenues in SSA Countries (average 2000–03)

(In percent of GDP)

Sources: IMF, Government Finance Statistics (CD-ROM) and WEO.

^{^1/}Includes data from 2000 only.

^{Text Table 1.}

Fiscal Revenues in SSA Countries (average 2000–03)

(In percent of GDP)

	Côte d’Ivoire	Kenya^{^1/}	Lesotho	Namibia	Senegal	Seychelles	Uganda	Guinea-Bissau	WAEMU	SSA
Total revenue (excl. grants)	16.7	24.4	41.3	32.5	18.0	39.1	11.0	16.6	15.76	21.89
Tax revenue	14.6	22.8	33.8	29.7	17.2	25.8	10.7	9.7	12.0	12.5
Nontax revenue (excl. grants)	2.0	1.6	7.5	2.8	0.8	13.3	0.3	7.0	3.8	9.4

Sources: IMF, Government Finance Statistics (CD-ROM) and WEO.

^{^1/}Includes data from 2000 only.

^{Text Table 1.}

Fiscal Revenues in SSA Countries (average 2000–03)

(In percent of GDP)

	Côte d’Ivoire	Kenya^{^1/}	Lesotho	Namibia	Senegal	Seychelles	Uganda	Guinea-Bissau	WAEMU	SSA
Total revenue (excl. grants)	16.7	24.4	41.3	32.5	18.0	39.1	11.0	16.6	15.76	21.89
Tax revenue	14.6	22.8	33.8	29.7	17.2	25.8	10.7	9.7	12.0	12.5
Nontax revenue (excl. grants)	2.0	1.6	7.5	2.8	0.8	13.3	0.3	7.0	3.8	9.4

Sources: IMF, Government Finance Statistics (CD-ROM) and WEO.

^{^1/}Includes data from 2000 only.

28. This chapter investigates the cause of low revenues and the main determinants of tax revenues with the objective of finding a way to improve tax collections The paper shows that relatively low tax revenues are due not to low tax rates but to a complex tax system that has low yields in an economy with a large informal sector and to minimal tax administration capacity. Because government revenues rely heavily on customs taxes, they depend strongly on the value of international trade.

29. The rest of the chapter is structured as follows. Section B describes the evolution of fiscal revenues and their components in Guinea-Bissau since the 1990s. Section C presents a simple model and econometric specifications for analyzing tax revenue determinants and estimation results. Section D presents the conclusions.

B. Evolution of Fiscal Revenue and its Components

30. Fiscal revenues, including grants, trended down significantly in Guinea-Bissau from 1991 through 2005, especially during the last five years. The slide mainly reflects a continuous reduction in grants as a share in GDP, together with only slight increases in tax and nontax revenues as a percent of GDP. Grants constituted an average of 60 percent of total revenues during the period; as a ratio to GDP, they decreased from a maximum of 30 percent in 1994 to 8.5 percent in 2005 (Table 2 and Figure 1).^¹⁹ Although tax revenues increased over 1990s levels, the increases were not nearly enough to compensate for dwindling grants and stagnant nontax revenues (Table 2, Figures 1 and 2).

^{Text Table 2.}

Guinea-Bissau: Fiscal revenues to GDP ratio

Source: Guinea-Bissau authorities, IMF and staff estimates.

^{Text Table 2.}

Guinea-Bissau: Fiscal revenues to GDP ratio

					average 1991–97	1998	1999	2000	2001	2002	2003	2004	2005
Total revenues					37.4	20.6	40.1	44.0	33.0	36.7	25.6	34.5	26.0
Budgetary revenues					12.3	5.6	17.7	19.3	16.8	15.3	15.2	17.2	17.6
	Tax revenues				6.2	3.8	9.7	11.4	10.1	8.4	8.7	8.3	11.5
		Direct taxes			1.0	0.8	1.7	2.1	1.9	1.6	2.1	2.0	2.6
		Indirect taxes			5.2	3.0	8.0	9.4	8.2	6.8	6.6	6.3	9.0
			Export duties		1.1	0.2	2.3	2.7	2.6	1.1	0.9	1.2	1.3
			Import duties		1.2	1.1	1.8	2.4	1.7	1.5	1.9	1.6	2.4
			Tax on goods and services		1.3	0.9	2.6	3.5	3.4	3.5	3.6	3.2	4.9
				On imports	1.2	0.7	1.9	3.0	2.6	2.8	3.0	2.5	4.0
				On local production	0.1	0.2	0.8	0.5	0.7	0.7	0.6	0.7	0.9
			Other indirect taxes		1.7	0.8	1.2	0.7	0.5	0.6	0.2	0.2	0.4
	Non-tax revenues				6.1	1.7	8.0	7.8	6.7	6.9	6.5	8.9	6.1
Grants					25.1	15.0	22.4	24.7	16.2	21.4	10.4	17.3	8.4
	BOP support				2.4	0.0	1.4	5.6	0.7	0.0	0.8	8.4	3.2
	Projects and others				22.8	15.0	21.0	19.1	15.5	21.4	9.6	8.9	5.2

Source: Guinea-Bissau authorities, IMF and staff estimates.

^{Text Table 2.}

Guinea-Bissau: Fiscal revenues to GDP ratio

					average 1991–97	1998	1999	2000	2001	2002	2003	2004	2005
Total revenues					37.4	20.6	40.1	44.0	33.0	36.7	25.6	34.5	26.0
Budgetary revenues					12.3	5.6	17.7	19.3	16.8	15.3	15.2	17.2	17.6
	Tax revenues				6.2	3.8	9.7	11.4	10.1	8.4	8.7	8.3	11.5
		Direct taxes			1.0	0.8	1.7	2.1	1.9	1.6	2.1	2.0	2.6
		Indirect taxes			5.2	3.0	8.0	9.4	8.2	6.8	6.6	6.3	9.0
			Export duties		1.1	0.2	2.3	2.7	2.6	1.1	0.9	1.2	1.3
			Import duties		1.2	1.1	1.8	2.4	1.7	1.5	1.9	1.6	2.4
			Tax on goods and services		1.3	0.9	2.6	3.5	3.4	3.5	3.6	3.2	4.9
				On imports	1.2	0.7	1.9	3.0	2.6	2.8	3.0	2.5	4.0
				On local production	0.1	0.2	0.8	0.5	0.7	0.7	0.6	0.7	0.9
			Other indirect taxes		1.7	0.8	1.2	0.7	0.5	0.6	0.2	0.2	0.4
	Non-tax revenues				6.1	1.7	8.0	7.8	6.7	6.9	6.5	8.9	6.1
Grants					25.1	15.0	22.4	24.7	16.2	21.4	10.4	17.3	8.4
	BOP support				2.4	0.0	1.4	5.6	0.7	0.0	0.8	8.4	3.2
	Projects and others				22.8	15.0	21.0	19.1	15.5	21.4	9.6	8.9	5.2

Source: Guinea-Bissau authorities, IMF and staff estimates.

31. Nontax revenues are stagnant as a proportion of GDP as a result of weak fisheries administration and control. Though fishing licenses are the main and most stable source of nontax revenues, poor management and lack of capacity to monitor and enforce licenses have led to large-scale piracy and fast depletion of this resource. Better control of fisheries is key for the country and its government not only to increase fee collection in the short run but also to avoid an unsustainable rate of fisheries exploitation.

32. Tax revenues as a proportion of GDP are relatively low in Guinea-Bissau even compared with other low-income countries (Table 1). On average, tax revenues were 7 percent of GDP for 1991-2005; the ratio peaked at 11.5 percent in 2005 (Table 2). Given the decreasing role of grants as a source of funds and the limited potential to increase nontax revenues in the short run, efforts to maintain or exceed tax collection levels during the last year are worth enhancing. The composition of tax revenues suggests areas where tax policy and administration could be improved.

Composition of tax revenues

33. The share of direct taxes in total tax revenues is relatively low in comparison with other SSA countries (Table 3), including those with similar per capita GDP. For 2000-03 Guinea-Bissau relied on indirect taxes, specifically international trade taxes, more heavily than most other countries in the sample (see Table 3). Table 3 also shows how in general tax revenues in countries with higher per capita GDP also have a higher share of direct taxes. Tanzi and Zee (2000) find that the correlation between GDP per capita and the share of direct taxes holds not only for SSA but also for the world as a whole. They explain that poorer countries typically have a larger informal sector, lack the necessary human capital for tax administration, and have very uneven income distribution—all of which favor reliance on indirect taxes.

^{Table 3:}

Structure of tax revenues in a selection of African Countries (average 2000-03)

(in percent)

Sources: FAD database using Government Finance Statistics (CD-ROM) and WEO as sources.

^{^1/}Includes data from 2000 only

^{Table 3:}

Structure of tax revenues in a selection of African Countries (average 2000-03)

(in percent)

			DRC	Guinea-Bissau	Uganda	Lesotho	Kenya ¹/	Senegal	Cote d’Ivoire	Namibia	South Africa	Seychelles
Taxes			100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0
	Direct taxes		23.1	20.1	18.8	26.0	30.7	25.8	29.3	41.7	60.7	26.3
	Indirect taxes		76.9	79.9	81.2	74.1	69.3	74.2	70.7	58.3	39.3	73.7
		Taxes on goods and services	26.9	37.1	46.7	17.5	48.4	36.6	23.7	23.9	34.5	16.4
		Taxes on int’l. trade and transactions	32.7	37.6	34.3	56.3	20.6	35.9	46.5	33.6	2.7	55.5
		Other taxes	17.3	5.2	0.2	0.2	0.4	1.8	0.5	0.8	2.0	1.8
Memorandum item:
	2004 GDP per capita in U.S. dollars		84.6	175.5	282.2	402.2	422.0	473.0	558.0	1975.8	3279.7	6774.8
	Tax/GDP (average 2000-03)		4.7	9.7	10.7	33.8	22.8	17.2	14.6	29.7	26.1	25.8

Sources: FAD database using Government Finance Statistics (CD-ROM) and WEO as sources.

^{^1/}Includes data from 2000 only

^{Table 3:}

Structure of tax revenues in a selection of African Countries (average 2000-03)

(in percent)

			DRC	Guinea-Bissau	Uganda	Lesotho	Kenya ¹/	Senegal	Cote d’Ivoire	Namibia	South Africa	Seychelles
Taxes			100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0
	Direct taxes		23.1	20.1	18.8	26.0	30.7	25.8	29.3	41.7	60.7	26.3
	Indirect taxes		76.9	79.9	81.2	74.1	69.3	74.2	70.7	58.3	39.3	73.7
		Taxes on goods and services	26.9	37.1	46.7	17.5	48.4	36.6	23.7	23.9	34.5	16.4
		Taxes on int’l. trade and transactions	32.7	37.6	34.3	56.3	20.6	35.9	46.5	33.6	2.7	55.5
		Other taxes	17.3	5.2	0.2	0.2	0.4	1.8	0.5	0.8	2.0	1.8
Memorandum item:
	2004 GDP per capita in U.S. dollars		84.6	175.5	282.2	402.2	422.0	473.0	558.0	1975.8	3279.7	6774.8
	Tax/GDP (average 2000-03)		4.7	9.7	10.7	33.8	22.8	17.2	14.6	29.7	26.1	25.8

Sources: FAD database using Government Finance Statistics (CD-ROM) and WEO as sources.

^{^1/}Includes data from 2000 only

34. The low share of direct taxes is not due to low tax rates. Guinea-Bissau’s 53 percent effective marginal tax rate on investors is significantly higher than that of both similar countries like Cape Verde and São Tomé and Príncipe and other countries with significantly higher per capita income (World Bank and SFI FIAS, 2004; see Table 4). The corporate tax rate was high, 39 percent, for most of the period; though it was somewhat reduced to 30 percent in 2005 and 25 percent 2006. It was higher than the corporate tax rate in most African countries (Table 5).

^{Text Table 4:}

Effective Marginal Rate of Taxation for Industrial Sector

^{Text Table 4:}

Effective Marginal Rate of Taxation for Industrial Sector

Country	Rate
Guinea-Bissau	53.3
Cape Verde	40.1
São Tomá and Príncipe	31.7
Mauritania	43.7
Mali	41.0
Senegal	45.4
Morocco	29.2
Tunisia	33.8
Hungary	28.3
Poland	20.0
Hong Kong	10.3
Singapore	20.4

^{Text Table 4:}

Effective Marginal Rate of Taxation for Industrial Sector

Country	Rate
Guinea-Bissau	53.3
Cape Verde	40.1
São Tomá and Príncipe	31.7
Mauritania	43.7
Mali	41.0
Senegal	45.4
Morocco	29.2
Tunisia	33.8
Hungary	28.3
Poland	20.0
Hong Kong	10.3
Singapore	20.4

^{Text Table 5:}

Corporate Tax Rate for a Selection of Countries

35. Indirect taxes have been the main source of tax revenue to the Guinea-Bissau government for the last fifteen years. Even though their share in total tax revenue declined over the last five years, indirect taxes have always constituted more than 75 percent of total tax revenues (Table 6).

^{Text Table 6.}

Guinea-Bissau: Tax revenues structure

(Percent)

Source: Guinea-Bissau authorities, IMF and staff estimates.

^{Text Table 6.}

Guinea-Bissau: Tax revenues structure

(Percent)

				average 1991–97	1998	1999	2000	2001	2002	2003	2004	2005
Total tax revenues				100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0
	Direct taxes			15.7	20.5	17.6	18.0	18.8	19.2	24.5	24.3	22.4
	Indirect taxes			84.3	79.5	82.4	82.0	81.2	80.8	75.5	75.7	77.6
		Export duties		16.5	4.7	24.3	23.7	25.9	13.4	9.8	14.4	11.0
		Import duties		20.1	29.6	18.3	21.1	16.4	18.4	21.6	19.8	20.5
		Tax on goods and services		20.8	24.5	27.4	30.8	33.5	42.3	41.9	39.0	42.5
			On imports	19.9	19.1	19.3	26.1	26.2	33.5	34.8	30.5	35.0
			On local productions	0.9	5.4	8.1	4.6	7.3	8.8	7.1	8.5	7.5
		Other indirect taxes		27.0	20.7	12.3	6.4	5.4	6.6	2.2	2.6	3.6

Source: Guinea-Bissau authorities, IMF and staff estimates.

^{Text Table 6.}

Guinea-Bissau: Tax revenues structure

(Percent)

				average 1991–97	1998	1999	2000	2001	2002	2003	2004	2005
Total tax revenues				100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0
	Direct taxes			15.7	20.5	17.6	18.0	18.8	19.2	24.5	24.3	22.4
	Indirect taxes			84.3	79.5	82.4	82.0	81.2	80.8	75.5	75.7	77.6
		Export duties		16.5	4.7	24.3	23.7	25.9	13.4	9.8	14.4	11.0
		Import duties		20.1	29.6	18.3	21.1	16.4	18.4	21.6	19.8	20.5
		Tax on goods and services		20.8	24.5	27.4	30.8	33.5	42.3	41.9	39.0	42.5
			On imports	19.9	19.1	19.3	26.1	26.2	33.5	34.8	30.5	35.0
			On local productions	0.9	5.4	8.1	4.6	7.3	8.8	7.1	8.5	7.5
		Other indirect taxes		27.0	20.7	12.3	6.4	5.4	6.6	2.2	2.6	3.6

Source: Guinea-Bissau authorities, IMF and staff estimates.

36. Customs is a major force in the process of tax collection. Besides export and import duties, which already account for 31 percent of tax revenue, customs collects the sales tax and selective consumption tax on all imported goods, so that in fact customs collects 66 percent of all tax revenues.^²⁰ This is consistent with the observations of Tanzi and Zee (2001) that in developing countries, administrative constraints and a large informal sector create enormous difficulties for collecting taxes other than customs.

37. The fact that collection of domestic indirect taxes is much more effective for imported goods at customs than for local production can have distortive effects. Sales and selective consumption taxes on imports accounted for 80 percent of the total collection of sales and selective consumption taxes. This implies tax protection for local production, which can evade sales and selective taxes more easily than imported goods.

38. Given the importance of international trade as a base for taxation, tax collection in Guinea-Bissau depends heavily on the administrative capacity of customs to collect taxes and on total international trade. With some technical assistance from the IMF, customs administration and technology have been improved. International trade, on the other hand, depends on structural reforms that will enhance growth in the exportables sector and reduce nontariff barriers to trade (e.g., the cost of ports). Increased foreign direct investment, access to external credit, and grants are also likely to increase imports and related tax revenues, at least in the short run.

Tax and other revenue policy

39. Tax policy in Guinea-Bissau has been characterized by periods of gradual improvement in administration and tax structure, followed by political disruptions that led to significant regression. The civil war in 1998 and the politically unstable period starting in 2001 that led to a coup in 2003 significantly disrupted tax administration and policies. Based on these episodes, tax and other revenue policy over the term of the study went through three phases: the pre-war period (1991–1997), the period of conflict and instability up to the 2003 coup d’état (1998–2002), and the post-coup period (2004–05).

40. During the pre-war period, 1991–1997, customs administration gradually improved and there were several tax reforms. Measures were implemented to tighten customs administration and prevent abuses; taxes on cashew exports (the export tax plus the 2 percent tax on property charged on these exports) were reduced from 19.5 percent in 1996 to 14 percent in 1997 and to 12 percent in 1998; and the authorities implemented a major reform in 1997 that simplified and harmonized taxes on imports.^²¹ Also, efforts supported by the European Union to modernize the fisheries sector yielded, together with privatization receipts, a sharp increase in nontax revenues in 1997 (Table 2).

41. During the civil war, the government was able to operate only on a limited scale. This together with a significant decrease in production and the withholding of most fishing licenses let to a major slump in fiscal revenues in 1998.

42. After the war, in spite of political instability efforts were made to rehabilitate the tax administration and the tax rates were again changed. In 1999, tax revenues recovered due to a tax-arrears windfall, improved fiscal management and rehabilitation of the ASYCUDA computer system, and a record cashew harvest. In 2001, the sales tax rate was increased from 10 to 15 percent and excise taxes on cigarettes and beer were adjusted upwards significantly (which would later result in smuggling problems). In 2002, effective taxes on cashew exports decreased significantly: the export tax rate was reduced from 10 to 6 percent,^²² and the reference price of exported cashews was reduced from CFAF 750 to CFAF 650. Cashew exports fell as the international market price of cashews was reduced, which brought pressure from cashew exporters to lower taxes.^²³

43. After the 2003 coup d’état there were significant improvements in tax administration. Not only was customs administration improved but also a large-taxpayers unit was created to improve collection of both corporate taxes and sales taxes on domestic producers. This increased tax revenues, as did record growth in cashew production in 2004 and a 25 percent increase in cashew prices in 2005.

44. The effective tax rate on imports clearly reflects many of the tax policy reforms that were undertaken (Figure 5). It is calculated as the total revenues from indirect taxes charged on imported goods divided by the total value of imports of that year as reported in the balance of payments. The upward trend of this rate from 1992 to 1996 probably reflects increased tax administration efforts. The decrease in 1997 probably reflects the reduction in import tariffs, while a slump in 1998 reflects the limited capacity of the government to collect taxes during the civil war. The effect of the increase in sales tax in 2001 and a later increase in excise taxes can be seen in an increase in the effective import tax rate.

45. The effective tax rate on exports reflects tax policy changes for cashew exports. This rate is calculated as the total revenue from export taxes (excluding the imposto predial) divided by the value of exports in the same year. Before Guinea-Bissau joined the WAEMU in 1997, the effective tax rate decreased significantly along with the decrease in cashew export tax rates. After a slump in 1998, the tax rate recovered its previous level through 2002, when the cashew export tax rate and the cashew references price were lowered significantly.

C. A Simple Model for Determining Tax Revenues

46. The main source of revenues in Guinea-Bissau is taxes on exported and imported goods. Tax collection will depend not only on the tax rates charged but also on government administrative and enforcement capacity, and on the value of international trade, the base to which the tax is applied. This section focuses on the main determinants of international trade in Guinea-Bissau and their effects on tax revenues.

A simplified framework

47. Assume a country with three types of goods: cashews, rice, and an investment good. Of these, only cashews and rice are produced, and the values of their production is denoted by c^p and r^p.

48. Total income in this economy is the value of its production plus the amount of grants received during the period:

\begin{matrix} Y = c^{p} + r^{p} + Grants & (1) \end{matrix}

49. The consumer is assumed to derive no utility from consumption of cashews; rice is the only good consumed. The value of this consumption is denoted by r^c.

50. The demand for investment goods is assumed to be a fixed fraction (γ) of the grants received during the same period:

\begin{matrix} I = γ \cdot Grants & (2) \end{matrix}

51. This economy is assumed to have no access to international credit markets, and therefore all income is either consumed or invested in each period:

\begin{matrix} Y = r^{c} + 1 & (3) \end{matrix}

52. Solving for r^c in (3) and substituting (1) and (2), the demand for rice in this economy is:

\begin{matrix} r^{c} = Y - I = r^{p} + c^{p} + (1 - γ) Grants & (4) \end{matrix}

International trade

53. From Equation (4) we know that the demand for rice exceeds production and therefore part of this demand will be satisfied through imports (M^r):

\begin{matrix} M^{r} = r^{c} - r^{p} = c^{p} + (1 - γ) \cdot Grants & (5) \end{matrix}

54. Since we assume that this economy does not produce investment goods, the amount of investment goods imported is given by Equation (2).

55. The value of exports is the difference between cashew production and cashew consumption. Since we assume that no cashew is consumed in this economy, the total value of exports (denoted by X) is equal to the value of cashew production:

\begin{matrix} X = c^{p} & (6) \end{matrix}

Tax revenues

56. Assume that in this economy the only taxes are taxes on international trade. Thus, total tax revenues are given by:

\begin{matrix} T = t_{x} X + t_{m}^{r} M^{r} + t_{m}^{I} I & (7) \end{matrix}

57. Investment goods imports financed by project grants are typically exempt from taxes in low-income countries. Therefore, we will assume that $t_{m}^{I} = 0$ . With this assumption, and substituting Equations (5) and (6) in (7), we obtain:

\begin{matrix} T = t_{x} c^{p} + t_{m}^{r} (c^{p} + (1 - γ) \cdot Grants) = (t_{x} + t_{m}) c^{p} + t_{m}^{r} (1 - γ) Grants & (8) \end{matrix}

58. Since gross domestic product in this economy is the value of cashew and rice production: GDP = c^p + r^p, the ratio of tax revenues to GDP can be expressed as:

\begin{matrix} \frac{Tax}{GDP} = \frac{(t_{x} + t_{m}) c^{p} + t_{m}^{r} (1 - γ) Grants}{c^{p} + r^{p}} & (9) \end{matrix}

59. The effect of an increase in cashew production, and exports on the ratio of tax revenues to GDP is:

\begin{matrix} \frac{\partial (Tax / GDP)}{\partial c^{p}} = \frac{(c^{p} + r^{p}) (t_{x} + t_{m}^{r}) - [(t_{x} + t_{m}^{r}) c^{p} + t_{m}^{r} (1 - γ) Grants]}{{(c^{p} + r^{p})}^{2}} \\ \Rightarrow \frac{\partial (Tax / GDP)}{\partial c^{p}} = \frac{(t_{x} + t_{m}^{r}) r^{p} - t_{m}^{r} (1 - γ) Grants}{{(c^{p} + r^{p})}^{2}} & (10) \end{matrix}

Equation (10) implies that the ratio of taxes to GDP increases when cashew production increases as long as the fraction of grants not spent in investment goods is small enough. On the other hand, an increase in grants, according to Equation (9) would increase the ratio of tax revenues to GDP as long as the tax rates t_x and $t_{m}^{r}$ do not decrease, due to the discouraging effect of grants on fiscal effort documented by Gupta et al. (2003).

Econometric model

60. We use the following specification to capture the relationship described by Equation (9):

\begin{matrix} {(\frac{Tax}{GDP})}_{t} = α + β_{1} {(\frac{Exports}{GDP})}_{t} + β_{2} {(\frac{Grants}{GDP})}_{t} + β_{3} D 98_{t} + ε_{t} & (11) \end{matrix}

61. D98 denotes a dummy variable used to control for the year 1998, during which the civil war took place; ε_t is a random error term.

62. Table 7 presents the results of the estimation. Specification (11) is applied to five different sorts of tax revenues as dependent variables: (a) uses total tax revenues, (b) uses import duties, (c) uses sales and excise taxes on imports, (d) uses all taxes on imports (including duties, sales taxes, and excise taxes), and (e) uses export taxes only.

^{Text Table 7.}

Determinants of Tax Revenues

^{^*}Statistically significant at 10 percent.

^{^**}Statistically significant at 5 percent.

^{^***}Statistically significant at 1 percent.

^{Text Table 7.}

Determinants of Tax Revenues

	(a	(b	(c	(d	(e
Dependent	Total taxes	Import	Sales and excise taxes on imports/GDP	All taxes imports/GDP	Export
Explanatory variables
Constan	3.370 ^{^*}	1.040 ^{^**}	1.752 ^{^*}	2.794 ^{^**}	−1.395
	1.780	0.472	0.833	1.124	1.069
Grants/GD	0.028	−0.006	−0.046	−0.052	0.072 ^{^*}
	0.058	0.016	0.027	0.037	0.035
Exports/GD	0.214 ^{^**}	0.036 ^{^***}	0.068 ^{^***}	0.104 ^{^***}	0.068 ^{^***}
	0.036	0.010	0.017	0.023	0.022
Dummy 98	−2.630 ^{^**}	−0.251	−1.156 ^{^*}	−1.407 ^{^*}	−0.334
	1.140	0.303	0.535	0.721	0.686
R-squared	0.87	0.75	0.84	0.86	0.56

^{^*}Statistically significant at 10 percent.

^{^**}Statistically significant at 5 percent.

^{^***}Statistically significant at 1 percent.

^{Text Table 7.}

Determinants of Tax Revenues

	(a	(b	(c	(d	(e
Dependent	Total taxes	Import	Sales and excise taxes on imports/GDP	All taxes imports/GDP	Export
Explanatory variables
Constan	3.370 ^{^*}	1.040 ^{^**}	1.752 ^{^*}	2.794 ^{^**}	−1.395
	1.780	0.472	0.833	1.124	1.069
Grants/GD	0.028	−0.006	−0.046	−0.052	0.072 ^{^*}
	0.058	0.016	0.027	0.037	0.035
Exports/GD	0.214 ^{^**}	0.036 ^{^***}	0.068 ^{^***}	0.104 ^{^***}	0.068 ^{^***}
	0.036	0.010	0.017	0.023	0.022
Dummy 98	−2.630 ^{^**}	−0.251	−1.156 ^{^*}	−1.407 ^{^*}	−0.334
	1.140	0.303	0.535	0.721	0.686
R-squared	0.87	0.75	0.84	0.86	0.56

^{^*}Statistically significant at 10 percent.

^{^**}Statistically significant at 5 percent.

^{^***}Statistically significant at 1 percent.

63. In all specifications, exports as a ratio to GDP have a statistically significant effect on the tax revenue-to-GDP ratio. Although this is to be expected in specifications (a) and (e) because export duties are included in the dependent variable, specifications (b) through (d) capture a significant effect of exports through their effect on demand for imports. The coefficient of the exports-to-GDP ratio in specification (a) implies that for each percentage point of increase in this ratio, the ratio of total tax revenues to GDP increases by 0.2 percentage points. As expected, this coefficient is lower for the other specifications.

64. The grants-to-GDP ratio is not statistically significant in any of the specifications. This may be because most of these funds are used to import tax-free investment goods or because the income effect of these grants on the demand for imports is compensated for by a negative effect of grants on tax collection efforts as documented by Gupta et al. (2003).

D. Conclusion

65. For the last fifteen years, Guinea-Bissau’s revenues, including grants, have been decreasing as a result of dwindling international official transfers and only slight increases in tax and nontax budgetary revenues. Political instability, a large informal sector, and lack of physical and human capital have hampered efforts to improve the tax system, adequately manage fisheries as a source of nontax revenues, and improve governance and transparency in the public sector to attract additional international aid. Given the high nondiscretionary expenditures in the public sector, the downward trend in total revenues has led to an unsustainable fiscal stance with increasing external arrears and intermittent accumulation of domestic arrears.

66. Tax revenues as a percent of GDP are low in Guinea-Bissau in comparison to other SSA countries with similar per capita incomes. The low revenues are due to limited tax administration capacity and a complex and distortive tax system that stimulates informal economic activity and hinders tax collection efforts. Tax rates have been relatively high over the last fifteen years, although custom taxes were reduced after Guinea-Bissau joined the WAEMU and the corporate tax rate was lowered in 2005 and 2006.

67. Poor tax administration together with a large informal sector has led the government to rely on indirect taxes collected at customs. As a result, revenues depend heavily on factors that affect tax collection at customs and on the value of total international trade (exports plus imports) on which taxes are levied.

68. As one of the country’s main sources of income, production of exportables not only provides the government with revenues through export duties but also fuels demand for imports and produces revenues from all taxes levied on the sale of imported goods—not only import duties but also sales and excise taxes, as evidenced by the empirical relationship observed between these types of tax revenues and the value of exports in Guinea-Bissau. Given the current limitations of tax administration and collection outside of customs, exports are expected to remain one of the main determinants of the ratio of tax revenues to GDP, at least until the government can rely less heavily on international trade as a source of financing.

References

Gupta, S., B. Clements, 2003, A. Povovarsky, and E. Tiongson. “Foreign Aid and Revenue Response: Does the Composition of Aid Matter?” IMF Working Paper WP/03/176 (Washington: International Monetary Fund).
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International Monetary Fund, 2004, Guinea-Bissau—Selected Issues and Statistical Appendix, IMF Country Report No. 05/93 (Washington: International Monetary Fund).
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Tanzi, V., and H. Zee, 2000, “Tax Policy for Emerging Markets: Developing Countries,” National Tax Journal, Vol. 53 (2), pp. 299 −332.
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World Bank and SFI FIAS, 2004, “Guinée-Bissau. Système d’imposition des enterprises et régimes d’incitations: analyse et recommandations,” Final Report (Washington: World Bank).
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Zee, Howell, 2004, “World Trends in Tax Policy: An Economic Perspective,” International Tax Review, Vol. 32, Issue 8/9.
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Prepared by Manrique Saenz.

During this period, grants for projects (as opposed to budget support) constituted the main component of total grant resources. This component has dwindled even faster than budget support grants.

This does not include the property tax charged cashew exporters at customs, which is in reality a 2 percent additional export tax also collected at customs.

The previous structure had nine rates and 20 different rates of consumption taxes; the new structure comprised five tariffs: 0, 5, 10, 20, and 30 percent. Customs service tax was reduced to 2 percent, and a major effort was made to provide customs staff with proper equipment and training.

In addition to the export tax, a 2 percent property return tax (imposto predial) is still charged on cashew exports.

In response to exporter pressures, the minimum producer price of cashews was reduced from 250-300 CFAF/Kg, to 100 CFAF/Kg.

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Guinea-Bissau: Selected Issues and Statistical Appendix

Author: International Monetary Fund

Volume/Issue:: Volume 2006: Issue 313

Publisher:: International Monetary Fund

ISBN:: 9781451815818

ISSN:: 1934-7685

Pages:: 66

DOI:: https://doi.org/10.5089/9781451815818.002

Keywords
II. Fiscal Revenues (1991–2005)18
References

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Revenues: Budgetary and Grants

(Percent of GDP)

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Budgetary Revenues: Tax and Nontax

(Percent of GDP)

^{Text Table 7.}

Determinants of Tax Revenues

	(a	(b	(c	(d	(e
Dependent	Total taxes	Import	Sales and excise taxes on imports/GDP	All taxes imports/GDP	Export
Explanatory variables
Constan	3.370 ^{^*}	1.040 ^{^**}	1.752 ^{^*}	2.794 ^{^**}	−1.395
	1.780	0.472	0.833	1.124	1.069
Grants/GD	0.028	−0.006	−0.046	−0.052	0.072 ^{^*}
	0.058	0.016	0.027	0.037	0.035
Exports/GD	0.214 ^{^**}	0.036 ^{^***}	0.068 ^{^***}	0.104 ^{^***}	0.068 ^{^***}
	0.036	0.010	0.017	0.023	0.022
Dummy 98	−2.630 ^{^**}	−0.251	−1.156 ^{^*}	−1.407 ^{^*}	−0.334
	1.140	0.303	0.535	0.721	0.686
R-squared	0.87	0.75	0.84	0.86	0.56

^{^*}Statistically significant at 10 percent.

^{^**}Statistically significant at 5 percent.

^{^***}Statistically significant at 1 percent.

where t_x	= tax rate on exports
$t_{m}^{r}$	= tax rate on rice imports
$t_{m}^{I}$	= tax rate on imports of investment goods

where t_x	= tax rate on exports
$t_{m}^{r}$	= tax rate on rice imports
$t_{m}^{I}$	= tax rate on imports of investment goods

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Abstract

II. Fiscal Revenues (1991–2005)18

A. Introduction

B. Evolution of Fiscal Revenue and its Components

Composition of tax revenues

Tax and other revenue policy

C. A Simple Model for Determining Tax Revenues

A simplified framework

International trade

Tax revenues

Econometric model

D. Conclusion

References

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II. Fiscal Revenues (1991–2005)^¹⁸