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; cash payment; GNB farmer; Guinea-Bissau authorities; GNB consumption; Currencies; Agroindustries; Agricultural sector
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69. Cashew has long been considered the “gold” of Guinea-Bissau. A low-maintenance and resilient crop, cashew has helped the country survive both development failures and political upheavals. While the tree is highly valued by the population, it is still cultivated in a fairly casual way, leaving open the potential for much greater income generation. Farmers continue bartering rice for cashews, a practice that minimizes how much cashew income boosts local purchasing power. The nut, which is exported as a raw commodity, has been the main source of cashew revenue during the past twenty years. Compared with other cashew-producing countries, Guinea-Bissau has a comparative advantage in that its cashew sector is less vulnerable to production disruptions.

Abstract

69. Cashew has long been considered the “gold” of Guinea-Bissau. A low-maintenance and resilient crop, cashew has helped the country survive both development failures and political upheavals. While the tree is highly valued by the population, it is still cultivated in a fairly casual way, leaving open the potential for much greater income generation. Farmers continue bartering rice for cashews, a practice that minimizes how much cashew income boosts local purchasing power. The nut, which is exported as a raw commodity, has been the main source of cashew revenue during the past twenty years. Compared with other cashew-producing countries, Guinea-Bissau has a comparative advantage in that its cashew sector is less vulnerable to production disruptions.

III. Cashew Nuts in Guinea−Bissau24

A. Introduction

69. Cashew has long been considered the “gold” of Guinea-Bissau. A low-maintenance and resilient crop, cashew has helped the country survive both development failures and political upheavals. While the tree is highly valued by the population, it is still cultivated in a fairly casual way, leaving open the potential for much greater income generation. Farmers continue bartering rice for cashews, a practice that minimizes how much cashew income boosts local purchasing power. The nut, which is exported as a raw commodity, has been the main source of cashew revenue during the past twenty years. Compared with other cashew-producing countries, Guinea-Bissau has a comparative advantage in that its cashew sector is less vulnerable to production disruptions.

70. This chapter concludes that a strategy to increase cashew revenues could benefit the overall economy. First, reducing rice-for-cashew barter practices would allow more cashew revenues to spill over to other areas of the Guinean economy. Second, processing cashew nuts locally, rather than at remote plants, would significantly boost the sector’s value added. In addition to helping to stabilize the nut’s export price, local production would lessen Guinea-Bissau’s dependence on major processors.

71. Further developing the cashew sector, however, does carry some risk. As the local consumption becomes more dependent on the sector, the impact of adverse sectoral shocks on the economy would become more pronounced. To counter such risk and further boost income, the authorities could incorporate other activities, such as further developing other nontraditional agricultural sectors, into their strategy.

B. Background

72. The bulk of cashews are now produced in Asia because inappropriate strategies disrupted production in Africa. In the 1970s, Africa was the main cashew producer, claiming 69 percent of the world production. Asia, mainly India, produced the remaining 30 percent. In the 1980s, production in the main African producers, Mozambique and Tanzania, sharply declined, because marketing policies inappropriately restricted the exports of raw nuts. Today, Asia accounts for 50–60 percent of global cashew production. The largest producers are India, Brazil, Nigeria, and Tanzania. In recent years, several new producers have also emerged in west Africa: Côte d’Ivoire, Benin, and Guinea-Bissau.

Figure 1:
Figure 1:

Africa and Asia in Cashew Production

Citation: IMF Staff Country Reports 2006, 313; 10.5089/9781451815818.002.A003

Source: FAO.

73. The Portuguese introduced cashews in Africa at the beginning of the 1970s to compensate for losses in other cash crops. Guinea-Bissau’s colonial administration produced other cash crops, such as sugar, cotton, and groundnuts. However, at the beginning of the 1970s, when sugar and cotton prices sharply decreased and a pest disrupted Mozambique cashew production, the Portuguese promoted cashew production in Guinea-Bissau.

74. The cashew is a casual crop—one that demands relatively few inputs. As such, it can grow even if other areas of the economy fail to develop. Because cashews require relatively few capital inputs (e.g., machinery and fertilizer) and labor, economic declines could actually support, rather than hurt, the sector. Indeed, the lack of capital may explain why the cashew sector, instead of such demanding cash crops as peanuts or cotton, developed after 1990s. During 1994-2004, cashew production grew by 15 percent, while real GDP declined, on average, by 0.6 percent.

75. The importance of the cashew sector for Guinea-Bissau is well known. First, cashew plays a more important role in GNB agriculture than it does anywhere else. Despite its small size, GNB’s climate makes it among the most important raw-nut producers in the world market. GNB also devotes one of the largest areas in the world to cashew fields. Consistently, cashew nuts are the main export, accounting for 85 percent of all GNB exports. Cashew value added amounted to 18 percent of nominal GDP in 2004 and 21 percent in 2005. In comparison, rice and other food crops accounted for 9 and 10 percent of nominal GDP during the same years. Raw nuts produced by GNB corresponded to 4.2 percent of world production, on average, during 2001–2005, even though GNB is the world’s smallest and poorest cashew operator.

Text Table 1.

Comparative Indicators of Cashew Production

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Sources: FAO; and Financial International Statistics (IMF).

76. Second, cashew nuts are the main source of private sector income in GNB, especially in rural areas. In most cashew-producing countries (e.g., Tanzania, Mozambique, India), small farmers using family labor are the main producers. In GNB, farms cultivating cashews generate income for 47 percent of households. Studies completed in rural areas (2002 ILAP survey and 2005 QS) reveal that cashew revenues and GDP per income are correlated. For instance, an increase of 15 percent in cashew prices boosts household consumer spending by an estimated 10 percent. Because most operations in the cashew sector are labor intensive, income is widely distributed among the population and may, as a result, may spill over into rural income; for instance, a 1.0 percent increase in cashew income could lead to a 0.4 percent increase in the income of other sectors (World Bank 2005).

77. Third, cashews are GNB’s main source of fiscal revenues. Cashew nuts are an important source of fiscal revenue via customs and fees because as exports, they are easy to tax25 in a context of low fiscal capacities. The tax consists of an ordinary duty (2 percent) and exceptional levy (10 percent before 2002, 6 percent thereafter). As the government taxes export value, it has to evaluate the commodity exported. For convenience, customs use a reference price, which becomes part of the tax. Duties on cashew exports represent 11 percent of tax revenues in 2005. In 2003, the government also introduced a minimum indicative price for farmers; however, this reference is not meant to be binding, and the government has no way to enforce it.

C. Comparative Advantage in Raw Nuts Production

78. During the past decade, GNB has become one of the world’s main producers of cashew nuts, as its production has increased rapidly. Table 2 shows the trends in cashew production among major producing countries. The deterministic trend estimates the yearly average of increases during 1961–2004 drawing on data from the Food and Agriculture Organization (FAO) for 33 countries. The fixed effects show a country’s increase relative to the world average during 1961–2004. A negative coefficient means that the country’s increase is below the world average. Over the sample period, the most important producers were India, Vietnam, Nigeria, Tanzania, Indonesia, and Mozambique. Despite its late entry in the market (1970), GNB ranked eighth. The steepest trends were observed in Benin, Côte d’Ivoire, Ghana, Guinea-Bissau, Mali, and Vietnam. In West Africa, cashew developed rapidly, with cashew growing at a rate of 3 to 7 percent per year over the period. Vietnam and GNB were the two countries that achieved both high production (in terms of rank) and rapidly increasing production.

Text Table 2.

Trends in Cashew Production

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Source: Author’s estimates.

79. Cashew production in GNB has been less volatile than in other countries, suggesting that it is less prone to exogenous shocks. Volatility—as defined by the standard deviation of residual,26 that is, the production of cashews, controlling for world production trends—is much lower in GNB than in other countries. GNB farmers do not use modern techniques to cultivate cashew, suggesting that they would be especially vulnerable to exogenous shocks, such as bad weather. The data show, however, that GNB does not experience more important production shocks than other important producer countries, such as Tanzania, Vietnam, and Mozambique. Indeed, the only significant producers that are less vulnerable to shocks than GNB are India and Nigeria. Interestingly, GNB seems less vulnerable to shocks than West Africa newcomers Côte d’Ivoire and Benin. As technological factors could not explain much of the differences in shocks (except for in India and Brazil), they might be related to exogenous events (e.g., climatic shifts or unexpected pests). GNB, then, seems to be relatively less prone to exogenous shocks.

Text Table 3.

Cashew Production Volatility by Country

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Source: Author’s estimates.

80. Circumstances in GNB would allow other crops to compete with cashew. While cashew plays a preeminent role in GNB’s economy, it is not the only crop cultivated in GNB. In fact, as noted in previous sections, groundnuts, cotton, and sugar were cultivated in GNB before cashew, and the crop has competed with them. GNB’s climate and soil are also conducive to growing orange, banana, and mangos, fruits that have a fairly mature market in developed economies. To assess the development of diverse crops during 1961–2004 in a panel of African countries, Table 4 compares production trends for cashews and diverse competitor crops. Controlling for overall production trends, we estimate the volatility of production in each crop. Two observations can be made.

Text Table 4.

Trend and Volatility: Cashews Versus Other Commodities

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Standard deviation production once controlled for trends. () indicate cases that yield ambiguous results.

81. First, although cashew production is more erratic and volatile than other cash crops, GNB seems to have a relative advantage. Cashews, along with banana, orange, and papaya, appear highly susceptible to volatility shocks than other cash crops, such as cotton, groundnuts, and coconuts, which have competed with cashew in GNB. GNB, however, appears to have a relative advantage in that it experiences less volatility in producing cashew (as well as coconut, and mango), as shown by the fixed effects. Compared with other cash crops, the steepest trend in production corresponds to cashew, suggesting that GNB’s share of total production increased over the period. Cashew production in GNB is also less volatile than the world median, reinforcing our earlier findings. Interestingly, GNB did not develop other cash crops over the period, even crops with similar production volatility.

82. Second, cashew competitors do not develop in GNB because the country lacks basic facilities to support an efficient marketing system. Banana, orange, and papaya, could be interesting alternatives to cashew, as GNB has the soil and climate to support these highly valuable cash crops. Unfortunately, GNB production of each of these crops is under the African average, and no development seems to have occurred. Indeed, these crops seem more vulnerable to production shocks in GNB than elsewhere, because basic facilities, the capacity to transport perishable goods, frizzing, basic processing plants, and organized farming methods are lacking. As a result, a significant marketing system has only developed around raw cashew nuts, which do not require much processing before being exported.

D. Potential and Risk of Cashew Nuts for Guinea-Bissau

83. Cashews have the potential to improve rural income, because, at a given gate price, the value added is high and numerous small farmers cultivate the tree. The value added is high because the trees can yield bountiful harvests without needing many inputs (e.g., fertilizers). Moreover, the most important operations—harvesting, brushing, and seeding—are labor intensive (i.e., machine use does not significantly improve their efficiency), and inexpensive labor is plentiful in GNB’s rural areas. Consequently, rudimentary and cheap techniques could allow the farmers to obtain good harvests, which, once sold, bring cash revenues to the village; moreover, these revenues join the income of a large number of households. Indeed, small farmers grow most of the cashew nuts produced in GNB. Cashew farms, which are on average no bigger than 1.6 hectares, generate income for 47 percent of GNB households.

84. Farmers receive a small share of cashew revenues because bartering practices contribute to worsen their situation. In spite of the competition among buyers inside Guinea-Bissau and an efficient—albeit informal—marketing system,27 the gate price (270–450 US$/ton) remains well below the international price (about 700 US$/ton in 2005). Bartering cashew for rice, a method often used by Indian buyers, also encourages farmers to fix deals well below the potential of their production, because rice sellers are better organized than cashew producers. The farmers often barter cashew for rice to satisfy subsistence needs, reducing the spillover of cashew revenue to other local activities. Even though the government set a reference for the gate price of cashew, the price paid fluctuates during the harvest season. Thus, farmer and middlemen might try to retain the nuts, waiting for an increase in the demand of the Indian processing industry. If they are right and demand increases, the farm price will rise during the season; conversely, if demand fails to increase, the farmers would sell their built-up inventory at any price, causing the gate price would collapse. Consequently, farmers have yet to fully benefit from the income potential of cashew.

85. Cashews could generate more income if GNB bases its local trade on cash payments and begins processing the nuts. Cashew nuts could constitute a resource for development. Currently, bartering rice for cashew reduces the potential use of receipts. Cash payments instead of barter transactions would allow farmers to make better deals and permit a wider range of purchases, which could, in turn, increase demand in other sectors of the economy. Increasing cash income would also encourage rural households to use financial facilities, thereby fostering bank development. The next step would be to develop processing facilities. As mentioned above, processed nuts add more value than raw nuts, and their price in the international market is more stable. Processing the nuts could also free GNB from its dependence on commodities, because plants could purchase the raw nuts abroad if climatic conditions take an unfavorable turn locally.

86. The increase in local demand cashew revenues could boost growth, especially if GNB processes the nuts.28 An increase in local demand stemming from cash payments for cashew (versus barter arrangements for rice) during 2005–07 would produce additional revenues of 2.6 percent of 2005 real GDP. However, limited local capacity to meet the extra demand (two-thirds of which is assumed to come from abroad) and the lack of developed nonagricultural sectors would limit the spillover effects. If GNB also processed the nuts, it could boost revenues by another 14 percent of 2005 real GDP, putting the total value added at 16.6 percent (assuming that all nuts produced in GNB are processed there and that farmers receive cash payments).

Figure 2:
Figure 2:

GDP Projections With and Without Cash Payments for Cashew

Citation: IMF Staff Country Reports 2006, 313; 10.5089/9781451815818.002.A003

Source: Author.

87. Depending too heavily on a commodity—cashew in the case of GNB—exposes a country’s economy to undue risk. Developing the cashew sector would further GNB’s dependence on the product, thus exposing GNB to unexpected shocks. In the past, cashew prices have dropped by 22 percent. If production dropped by the same amount in 2006, GNB would lose about 6.8 percent of GDP in a barter context and 7.5 percent of GDP in a cash-payment context. Given the size of the cashew sector, unlikely that another sector, even in agriculture, could compensate for the losses. As expected, cash payments amplify the crisis because of their effect on local demand. In that respect, barter has some advantage, in that such arrangements insulate other sectors from the effects of a cashew crisis.

Figure 3:
Figure 3:

Cashew Production Crisis

Citation: IMF Staff Country Reports 2006, 313; 10.5089/9781451815818.002.A003

Source: Author.

88. Government intervention would be needed to increase cashew revenue. The private sector has few incentives to process the nuts because infrastructure and financing are lacking. Investments in basic infrastructure, such as electricity, roads, and the port of Bissau, would considerably improve the profitability of processing industries. Similarly, rehabilitating the central administration would help banks to enforce contracts and give them incentive to finance new businesses in the processing industry. Nevertheless, the government may avoid measures aim at restraining raw nut exports because of the poor records such measures have had elsewhere.

89. Diversifying GNB’s economy should remain a priority. Improving cashew revenue may aggravate the country’s dependency on the nuts; therefore, some of the additional resources that the government may earn to enhance the cashew sector may usefully be spent in favor of other sectors. Fortunately, measures that aim at improving infrastructure and the business environment would also support the development of noncashew sectors. Moreover, the production of other crops, such as orange, mango, or banana, require specific facilities that could be targeted in a public investment program.

E. Conclusion

90. Though cashew could further support GNB consumption, efforts to develop the sector must include measures that diversify the country’s income sources. During times of development failure, cashews were GNB’s only source of income, financing local subsistence needs. The unfavorable economic and political circumstances might even have fostered cashew development, as the crop demands minimal capital inputs. While the crop has helped GNB weather difficult years, it has also exposed the country to exogenous shocks. Initiatives to increase cashew revenue could include reducing the practice of bartering rice for cashew, which would allow more cashew income to spill over to the local economy, and processing the nuts, which would increase the sector’s value added. Developing the cashew sector is still risky, as it could increase the country’s economic dependence on the crop; for example, additional cashew revenue might encourage farmers to reduce production in other areas. Using the extra revenues received from cashews to diversify the economy would help offset this risk.

Guinea-Bissau: Basic Data

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Sources: Guinea-Bissau authorities; Food and Agriculture Organization Statistics Database (FAOSTAT); World Bank (World Development Indicators); and IMF staff estimates.Note: Italics indicate periods earlier than that shown.

Dietary energy consumption (kcal/person/day).

Numbers may not total because of rounding.

Table 1.

Guinea-Bissau: Nominal Gross Domestic Product by Sector, 2000–05

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Sources: Guinea-Bissau authorities; and IMF staff estimates.
Table 2.

Guinea-Bissau: Real Gross Domestic Product by Sector, 2000–05

(Constant 1986 prices)

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Sources: Guinea-Bissau authorities; and IMF staff estimates.
Table 3.

Guinea-Bissau: Investment-Savings Balance, 2000–05

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Sources: Guinea-Bissau authorities; and IMF staff estimates.
Table 4.

Guinea-Bissau: Stocks, Production, and Uses of Cashew Nuts, 2000–05

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Source: Guinea-Bissau authorities, and IMF staff estimates.
Table 5.

Guinea-Bissau: Consumer Prices, 2000–05

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Sources: Guinea-Bissau authorities.

The percentage change in the average CPI reflects a break in the series due to a change in methodology. As a result, the figure reported for 2003 CPI inflation differs from that reported in the staff report and in the summary tables of this statistical appendix.

Table 6.

Guinea-Bissau: Central Government Operations, 2000–05

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

Defined as revenue (excluding grants) minus primary current expenditure, minus domestically financed capital expenditure.

Table 7.

Guinea-Bissau: Central Government Revenue, 2000–2005

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Sources: Guinea-Bissau authorities; and IMF staff estimates.
Table 8.

Guinea-Bissau: Central Government Expenditure, 2000–05

(Millions of CFA francs)

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