Guinea-Bissau
2007 Article IV Consultation: Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Guinea-Bissau
Author: International Monetary Fund
Publication Date:
28 Nov 2007
eISBN:
9781451815849
Language:
English
Keywords:
ISCR; CR; government; authority; government intervention; Bissau-Guinean authorities; exchange rate; wage bill; State secretariat; cash flow; debt relief; Fiscal stance; Capital spending; Current spending
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The staff report for the 2007 Article IV Consultation on Guinea-Bissau highlights post-conflict challenges and recent economic developments. The conflict and ensuing political instability have taken a toll on growth and economic policies, and most macroeconomic indicators have worsened in the post-conflict period. The frequent changes in government have eroded international support. The recently appointed government has adopted an emergency program to address the main sources of fiscal slippages that have gained broad support both domestically and internationally, but significant donor support is still needed to fill the financing gap.

Abstract

The staff report for the 2007 Article IV Consultation on Guinea-Bissau highlights post-conflict challenges and recent economic developments. The conflict and ensuing political instability have taken a toll on growth and economic policies, and most macroeconomic indicators have worsened in the post-conflict period. The frequent changes in government have eroded international support. The recently appointed government has adopted an emergency program to address the main sources of fiscal slippages that have gained broad support both domestically and internationally, but significant donor support is still needed to fill the financing gap.

I. Introduction

1. Guinea-Bissau remains a fragile post-conflict country. Despite attempts to rebuild the government’s administration and address economic problems, continued tensions among the major political parties, frequent changes in government, and lack of accountability and ownership of policies have worsened economic conditions.

2. Since April 2007, in a clear break from the recent past, a newly appointed government has initiated steps to stem the economic deterioration. A new prime minister and cabinet of ministers were appointed under pressure from a new coalition of political parties within parliament. In its first months, the new government adopted an emergency program to help restore fiscal stability.

3. The new government has also taken steps to re-engage the donor community, and donors, signaling their support for the government’s recent initiatives, have begun to disburse pledges made at the November 2006 donors’ conference. Discussions with the Fund have been ongoing since the new government requested early purchases under the Fund’s EPCA. Among the key requirements for concluding these discussions, the authorities need to secure donor assurances to finance the 2007 budget. Satisfactory performance under EPCA could pave the way for a PRGF arrangement and, eventually, debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI).

II. Post-Conflict Challenges

4. Guinea-Bissau faces enormous challenges after nearly a decade of conflict, political instability, and withdrawal of donor support. Real GDP growth in recent years was less than half its pre-1998 levels, and per capita income is well below the averages for WAEMU and other countries in sub-Saharan Africa (Text Table 1 and Figure 1). The fiscal balance has widened sharply mainly because of an increase in the wage bill—while spending on health and education remained lower than the regional average. Progress toward meeting the MDGs has been slow, and some indicators have worsened (Table 1).

Text Table 1.

Guinea-Bissau and WAEMU Economic Performance Indicators, 1993-2006

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Source: World Bank Development Indicators, World Economic Outlook; IMF Staff estimates and projections.

Excluding Guinea-Bissau.

Guinea-Bissau joined the WAEMU in 1997

Figure 1.
Figure 1.

Guinea-Bissau: A Comparison with the WAEMU Area

Citation: IMF Staff Country Reports 2007, 370; 10.5089/9781451815849.002.A001

Sources: Guinea-Bissau authorities and IMF staff estimates and projections.
Table 1.

Guinea Bissau: Millenium Development Goals, 1990-2005

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Source: World Development Indicators

5. Public debt is unsustainably high, and rapid accumulation of domestic arrears has stifled economic activity. As shown in the Debt Sustainability Analysis (DSA) (Supplement 1), Guinea-Bissau would remain at high risk of external debt distress even after possible HIPC and MDRI debt relief, while additional donor support is needed to reduce the outstanding domestic debt burden.1

6. Guinea-Bissau depends heavily on external assistance (Box 1), though aid levels have been lower and more erratic in the post-conflict period. A number of earlier attempts to initiate EPCA discussions stalled. Performance under staff-monitored programs (SMP) for 2005 and 2006 was mixed, and the timing and magnitude of donor support were lower than expected.2 At a donors’ conference in November 2006, the first since 1999, a broad group of donors pledged financial assistance to support the authorities’ economic and reform agenda. Disbursements at end 2006 and early 2007, however, were delayed when governance issues in the energy sector emerged.3 These issues have since been resolved, and donors are cautiously beginning to disburse pledged assistance.

uA01fig02

External assistance as a share of GDP has been irregular and below its pre-conflict levels

Total External Assistance, 1997-06

(Percent GDP) 1/

Citation: IMF Staff Country Reports 2007, 370; 10.5089/9781451815849.002.A001

Source: IMF staff estimates and projections.Note: 1/ includes budget and project grants and concessional loans.

III. Recent Economic Developments and Near-Term Outlook

7. Economic activity in 2006 was weaker than expected, but is projected to recover in 2007 (Figure 2 and Table 2). The economy weakened as the terms of trade deteriorated because of lower world prices for cashew nuts—Guinea-Bissau’s main export—and rising international oil prices. Government intervention in price-setting in the cashew market, which disrupted the export supply chain, also hurt economic growth and cashew exports.4 Cashew marketing arrangements are expected to normalize in 2007 and should help economic activity rebound. The external current account deficit (excluding grants) widened significantly in 2006 even though private remittances surged (Table 3).

Figure 2.
Figure 2.

Guinea-Bissau: Main Economic Trends, 2001–07

Citation: IMF Staff Country Reports 2007, 370; 10.5089/9781451815849.002.A001

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

Guinea-Bissau: Selected Economic and Financial Indicators

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Sources: Guinea-Bissau authorities, and IMF staff estimates and projections.

Based on staff updated projections for 2006.

Projections based on population growth of 2.5 percent per year.

There is a break in the series in July 2002, when Guinea-Bissau adopted a new harmonized CPI index.

In 2004, domestic revenue includes CFAF 2,342 million in payments to Guinea-Bissau soldiers participating in the UN Liberia peacekeeping mission. The same amount is recorded in current expenditure under salaries.

In 2004 and 2005, includes CFAF 3.4 billion for legislative elections and CFAF 1.6 billion for presidential elections.

Change in percent of beginning-of-period stock of broad money.

In 2003, the BCEAO corrected its estimate of currency in circulation resulting in a large drop of base money.

Table 3.

Guinea-Bissau: Balance of Payments, 200308

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Sources: BCEAO; and IMF staff estimates and projections.

Based on staff updated projections for 2006

Including food aid and technical assistance to projects

In 2004, includes CFAF 2,342 million for remuneration to Guinea-Bissau soldiers for participation in the UN peace keeping mission in Liberia.

Does not exclude fishing licenses.

A drop in the level of net foreign assets in 2003 reflects a change in the methodology for the calculation of this series by BCEAO applied for 2003 and afterward. The counterpart of this break in the net foreign assets series in 2003 is included under errors and omissions.

8. Monetary conditions were stable in 2006, and inflation remained low. Broad money growth slowed to 5 percent in 2006, as the deterioration in the external current account slowed the accumulation of net foreign assets (Table 4). Financial activity expanded with the opening of three new banks since 2006,5 bringing the total to four banks. As elsewhere in the region, banks are very liquid. Despite an increase in bank deposits, financial intermediation remains low: credit to the public and private sectors is just 5 percent of GDP. A large informal sector, lack of proper financial accounting in most firms, insufficient collateral, and banks only located in the capital Bissau are key obstacles to expanding bank lending.

Table 4.

Guinea-Bissau: Monetary Survey, 2003–07

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Sources: BCEAO; and IMF staff estimates and projections.

In 2003, the BCEAO revised its estimate of currency in circulation, broad money, and net foreign assets.

uA01fig03

With the opening of new banks, total deposits and credits increased, but financial intermediation remains low.

Commercial Banks Credit and Deposits, 2000-06

(Percent of GDP)

Citation: IMF Staff Country Reports 2007, 370; 10.5089/9781451815849.002.A001

Source: Banque Centrale des Etats de l’Afrique l’onest (BCEAO).

9. The fiscal stance deteriorated sharply in 2006, reflecting a severe breakdown in fiscal controls, and the government fell short of targets agreed under the 2006 SMP (Tables 5 and 6).6 Weak management led to expenditure overruns, particularly in travel and representation costs, as well as large unbudgeted expenditures, including payment of (unaudited) domestic arrears of previous years, and excessive incentives paid to tax collectors. The wage bill shrunk by almost 1 percent of GDP, but was higher than programmed because of delays in implementing planned civil service reforms. Shortfalls in expected donor support exacerbated cash flow difficulties, and the government resorted to short-term borrowing from commercial banks and issuing treasury bills.7 These borrowings were insufficient, however, and large additional domestic arrears were accumulated by the year’s end.

Table 5.

Guinea-Bissau: Quantitative Indicators under the 2006 Staff Monitored Program 1/

(in CFAF billions)

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Cumulative from January 1 of the corresponding year. The definition of the aggregates for 2006 is provided in the technical memorandum of understanding.

Ceiling. If the actual amount of external budgetary assistance falls short of program forecasts, the ceiling will be increased for the full amount of the shortfall. The programmed amounts of external assistance in 2006 are (on a cumulative basis) CFAF 9.1 billions by end-July, CFAF 12.4 billion by end-October, and CFAF 19.9 billion by end-December. Definition applied in 2005 includes payment of previous years domestic arrears and therefore differs from definition applied in 2006 as stated in TMU.

Floor. If the actual amount of external budgetary assistance surpasses program forecasts, the floor will be decreased by the full amount of the difference between actual and programmed external budgetary assistance. The programmed amounts of external assistance in 2006 are (on a cumulative basis) CFAF 9.1 billions by end-July, CFAF 12.4 billion by end-October, and CFAF 19.9 billion by end-December.

Floor. This floor on revenue will be fully adjusted for advances or delays in the EU’s compensation for fishing rights compared with the assumptions underlying the program. The program assumes payments of CFAF 4.8 billion in December 2006

Ceiling.

Table 6.

Guinea-Bissau: Structural Benchmarks Under the Staff-Monitored Program, April 1, 2006—December 31, 2006

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10. The government’s cash flow difficulties worsened in the first half of 2007, as fiscal controls weakened further and donors continued to delay much-needed assistance. Tax revenues were lower than expected in the first four months of 2007: they dropped 15 percent from the same period a year ago, as revenue administration weakened and imports fell in the wake of political uncertainties. Nonetheless, the government continued to pay large arrears from previous years, and to make unbudgeted expenditures; meanwhile, substantial arrears, including four months of civil service salaries, accumulated for the current year.

11. For 2007 as a whole, the fiscal stance is expected to deteriorate sharply; the overall balance (including grants) is projected to widen to 17 percent of GDP (Text Table 2 and Table 7). Because of delays in concluding a new fishing agreement, the EU will not disburse annual compensation to Guinea-Bissau before early 2008 and government revenues are now projected to decline to 15 percent of GDP, some 4 percent of GDP lower than in 2006. The revenue shortfall will be partly offset by a decline in current primary expenditures (to 24 percent in 2007 from 26 percent in 2006), reflecting a slight decline in the wage bill as a share of GDP and better control of nonwage discretionary spending, including travel and representation costs and off-budget items.

Text Table 2.

Guinea–Bissau: Central Government Operations, 2005–08

(Percent of GDP)

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Sources: Guinea-Bissau authorities, and IMF staff estimates and projections.
Table 7.

Guinea-Bissau: Central Government Operations, 2003–08

(in billions of CFA francs)

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Sources: Guinea-Bissau authorities, and IMF staff estimates and projections.
Table 7.

Guinea–Bissau: Central Government Operations, 2003–08 (concluded)

(in billions of CFA francs)

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Sources: Guinea-Bissau authorities, and IMF staff estimates and projections.

Staff estimates based on draft budget version June 6, 2007.

In 2004, domestic revenue includes CFAF 2,342 million, representing payment to Guinea-Bissau soldiers for services to the peacekeeping mission in Liberia. The same is recorded in current expenditure under salaries.

In 2004, includes an amount of CFAF 3.4 billion in donor funding for legislative elections.

Demobilization, reinsertion, and reintegration program.

Capital contribution to the WAEMU not included.

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