Guinea-Bissau: Joint World Bank/IMF Debt Sustainability Analysis
Author: International Monetary Fund
Publication Date:
28 Nov 2007
eISBN:
9781451815849
Language:
English
Keywords:
ISCR; CR; government; authority; government intervention; Bissau-Guinean authorities; debt burden indicator; creating flow; sustainability framework; service-to-revenue ratio; debt stock; Public and publicly-guaranteed external debt; Debt service; West Africa
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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. Background

1. At end-2006, Guinea-Bissau’s total public debt amounted to $1,242 million or 403 percent of GDP in nominal terms1 (306 percent of GDP in NPV terms). External debt is the largest component, with the stock of external public and publicly guaranteed (PPG) debt at $993 million, of which $350 million is in arrears (Tables 1 and 2). Multilateral debt amounts to 48 percent of total PPG debt (14 percent is owed to AfDB/AfDF, 29 percent is owed to IDA, 0.8 percent is owed to IMF) and bilateral and commercial debt amounts to 52 percent. The NPV of external debt amounts to $766 million or 249 percent of GDP and 1087 percent of exports. Despite the concessional nature of most of the external debt, the debt burden indicators far exceed the relevant policy dependent debt thresholds (Text Table 1).2

Table 1.

Guinea-Bissau: External Debt Outstanding, 2000–06 1

(In millions of U.S. dollars)

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

Estimates are based on incomplete and unreconciled data provided by the Guinea-Bissau authorities and on IMF and World Bank staff estimates and projections

Table 2.

Guinea-Bissau: External Arrears Outstanding, 2000–06 1

(Millions of U.S. dollars)

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

Estimates based on incomplete and unreconciled data provided by the Guinea-Bissau authorities and on IMF and World Bank staff estimates and projections.

Figure 1.
Figure 1.

Stock of External Debt, 2000-06

Citation: IMF Staff Country Reports 2007, 370; 10.5089/9781451815849.002.A002

Source: IMF staff estimates and projections.

2. Domestic debt has become an increasingly larger share of total public debt, reaching 20 percent of total debt in 2006 from 15 percent in 2000. The main component of this debt corresponds to a required capital contribution to join WAEMU. Under the terms of its accession to the WAEMU in 1998, Guinea-Bissau agreed to contribute an equal share as the other members in the capital contribution of the central bank (BCEAO) and the regional development bank (BOAD). The contribution amounting to CFAF 70 billion (44 percent of 2006 GDP) is to be paid over 25 years starting in 2005, but only a small fraction of it has been paid using distributed dividends. There is also a sizable amount in domestic arrears, most of which accumulated during the period 2000-06. These arrears will be subject to an external audit to be completed in 2007 which will provide a more accurate determination of the actual amount3. Finally, the government has a debt with the BCEAO and took additional debt from commercial banks during the last two years.

Figure 2.
Figure 2.

Composition of Public Debt (Debt Stock at end 2006; millions of CFCA)

Citation: IMF Staff Country Reports 2007, 370; 10.5089/9781451815849.002.A002

Source: IMF staff estimates and projections.

3. Guinea-Bissau reached the HIPC decision point in 2000 but failed to maintain macroeconomic stability causing its PRGF-supported program to go off track at a very early stage. Two Fund Staff-Monitored Programs followed, in 2005 and 2006. Progress under both SMPs was mixed.4 A full PRSP was finalized in 2006 after many delays owing to political instability and capacity constraints.5

4. In 2007, the government agreed to a new timeline to re-engage in programs supported by the IMF and the World Bank, aiming to reach the completion point under the HIPC Initiative by end-2010. Discussions are ongoing for possible EPCA disbursements over a period up to three years, so as to build the necessary track record to move to a formal PRGF-supported program, followed soon thereafter by possible HIPC completion point.6

5. Since the 2000 PRGF went off track, Guinea-Bissau has not benefited from most of the debt relief committed at decision point. At the decision point in 2000, creditors representing 80 percent of Guinea-Bissau’s external debt pledged to provide HIPC relief amounting to $416 million in NPV terms (estimated at about $790 million in nominal terms). Since 2001, Guinea-Bissau has had to service a large share of external debt in full. he IMF suspended the provision of interim relief and the Paris Club declared null and void any debt rescheduling agreements beyond end-2001. Many agreements signed with other multilateral and bilateral creditors have not been implemented because the country failed to remain current on debt service obligations.7 The African Development Bank (AfDB) provided interim relief up until 2006 and IDA continued to provide it in 2007.8 However, the statutory ceiling for the delivery of interim relief, which was reached by AfDB in January 2007,9 is expected to be reached by IDA at the end of this same year.10 Only China and Cuba canceled all outstanding claims.

6. After the decision point, Guinea-Bissau could not service its external debt and accumulated arrears to most of its external creditors. Since 2001, the country has not repaid any creditor that did not provide interim relief, with the exception of the IMF. The stock of arrears has increased from $139 million before decision point to $350 million at end-2006.

II. Underlying DSA Assumptions

7. The medium-term macroeconomic assumptions underlying the baseline projection scenario are described in detail in Box11 GDP growth projections have been revised downward compared to the 2006 DSA, with medium-term growth now projected at 3.6 percent on average during 2007–12, compared to 4.8 percent in the 2006 DSA, while long run projections are also revised downwards to 4.5 percent average annual growth (2013–27) instead of 5 percent previously assumed. Underlying this downward revision are greater uncertainties about the recovery of the cashew sector and more conservative assumptions about the implementation of needed structural reforms, including civil service reforms.

Macroeconomic Assumptions Under the Baseline Scenario

  • GDP growth rate increases from 1.8 percent in 2006 to 4 percent by 2012, and reaches 4.5 percent by 2017 and over the long term.

  • GDP deflator is assumed to grow at a rate slightly below CPI inflation, due to expected worsening in the terms of trade. After 2012, both GDP deflator and CPI are assumed to increase at a rate of 2 percent.

  • The noninterest current account deficit is assumed to decrease over the medium term, converging to 2.3 percent of GDP by 2010, one percentage point below past average levels, reflecting significant export growth and fiscal consolidation. Exports are assumed to grow at around 7.5 percent per annum over the medium and long run.

  • The domestic primary fiscal deficit1 is assumed to decrease from 7.5 percent of GDP in 2006 to 1 percent by 2010, maintaining this level from then on. The wage bill is projected to remain constant in nominal terms over the next two years, while off budget expenses are expected to decrease significantly. Revenue collection efforts are expected to be maintained as a ratio to GDP.

  • External assistance. Budget support grants are projected at 2.6 percent of GDP per annum (similar to average level observed over the last six years excluding World Bank IDA grants). Project grants and loans are projected at nearly 8 percent and 6.3 percent of GDP, respectively, reflecting implementation of public investment programs at similar rates as in the past. Financial gaps remaining are assumed to be financed through highly concessional loans, with the grant element in new disbursements assumed to remain slightly above 50 percent.

  • Domestic borrowing. The DSA assumes that current domestic debts to the banking sector are repaid before end-2008. For domestic arrears, it is assumed that they will be audited and fully repaid by 2010. It is assumed that the audit will reduce the stock of domestic arrears, accumulated in 2000-06, by 50 percent. The baseline scenario also assumes that the audited domestic arrears are repaid using external concessional loans. The framework also assumes that capital contributions to WAEMU will be paid over 25 years starting in 2010.

  • Foreign direct investment as a ratio of GDP ratio is assumed to remain constant in the medium and long term at its average level during the last six years (2 percent of GDP).

  • Fiscal financing gaps are assumed to be filled through concessional loans, on the grounds that the country will not have continued access to commercial debt. The alternative to concessional loans would be to finance the fiscal gaps by accumulation of domestic arrears, an unsustainable strategy over the medium to long term.

1 The domestic primary balance is the revenue, excluding grants, minus non-interest expenditure, excluding foreign-financed investment projects.

III. External Debt Sustainability Analysis

A. Baseline: No Debt Relief

8. The baseline scenario (Table 1a and Figure 1a) assumes that the HIPC completion point is never attained, but real GDP growth is assumed to converge to the long-run average of about 4.5 percent per annum. The assumed growth rates are significantly higher than the historical average (less than one percent) which reflected a period of great political instability and inappropriate macroeconomic policies which are assumed to improve in the period ahead. External debt, both in nominal and NPV terms remains at very high levels, and all debt indicators based on NPV of debt remain far above the indicative thresholds for poor performers (Text Table 1). The assumption that loans to finance the fiscal gap are highly concessional explains the downward trend in the NPV of debt ratio to GDP, exports and public revenues, despite continuous recourse to additional borrowing.

Table 1a.

Guinea-Bissau: External Debt Sustainability Framework, Baseline Scenario, 2004-2027 1/

(In percent of GDP, unless otherwise indicated)

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Source: Staff simulations.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that NPV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as official grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the NPV of new debt).

Figure 1a.
Figure 1a.

Guinea-Bissau: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2007-2027

Citation: IMF Staff Country Reports 2007, 370; 10.5089/9781451815849.002.A002

Source: Staff projections and simulations.
Table 1.

Summary of Baseline External Debt Sustainability Indicators 1/

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Source: IMF staff estimates.

Debt indicators refer to Guinea Bissau’s public and publicly guaranteed external debt.

Threshold over which countries considered as poor performers according to their CPIA would have at least a 25 percent chance of having a prolonged debt distress episode in the coming year. Guinea-Bissau lies within the bottom quintile of countries ranked by the CPIA.

B. Alternative Scenarios and Stress Tests

10. An alternative scenario assumes that the HIPC completion point is reached in 2010 (Table 1b, Scenario A3), and total debt relief—including HIPC, MDRI and additional rescheduling of arrears, amounts to $591 million in end-2010 NPV terms.12 The provision of this debt relief would reduce debt service payments by about 5 percent of GDP per year. This scenario is comparable to the baseline presented in the 2006 DSA, except for the fact that Completion Point is now assumed to be reached one year later. In this scenario, the NPV of external debt to GDP falls significantly at completion point reflecting both the assumed clearance of external arrears, and the lower debt service after HIPC and MDRI debt relief. However, even in the long run, the NPV of debt remains above the relevant indicative thresholds, independently of whether the debt is measured in proportion to GDP, exports, or government revenues. Despite the relatively high long run debt level, debt service is expected to decline to below-threshold levels, as a reflection of the highly concessional terms of existing debt and the terms assumed for the treatment of arrears and new borrowing.

Table 1b.

Guinea-Bissau: Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed External Debt, 2007-27

(In percent)

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Source: Staff projections and simulations.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

11. Assuming that Guinea-Bissau is able to obtain grants to pay off its stock of domestic arrears, the debt burden indicators would be reduced even further (Table 1b, Scenario A 4). If grants are used to pay all domestic arrears during 2008-10, the NPV of debt/GDP would be 12 percentage points lower by 2010 than in Scenario A3. However, even under this scenario the ratio would remain above the indicative threshold.

12. The standard stress tests have been applied to the baseline. The first one shows the effect of a one-time 30 percent devaluation in the exchange rate (Table 1b, Scenario B6). The stress test scenario shows the enormous vulnerability that the country faces to a shock in the nominal exchange rate, given current debt levels. Given a one-time 30 percent devaluation, the NPV of debt increases by almost 100 percentage points of GDP in that year. It is the most extreme shock in terms of NPV/GDP, debt/revenue, and debt service/revenue (Figure 1a).

13. A further stress test showing the impact of a one-standard deviation negative export shock (Table 1b, B2) also illustrates the vulnerable external position of the country. Given the high volatility of exports during the recent period, and the high NPV of debt, shocks on exports can have a large impact on both the NPV debt/exports and debt service/export ratios.

IV. Public Debt Sustainability Analysis

A. Baseline: No Debt Relief

14. The assumptions under the baseline scenario for total public debt (Table 2a and Figure 2a) are the same as those described under the External DSA baseline. In these circumstances, total public debt (domestic and external) as a percent of GDP decreases over the long run, similar to the behavior of external debt described in the previous section.

Table 2a.

GNB: Total Public Sector Debt Sustainability Framework, Baseline Scenario, 2004-2027

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and Fund staff estimates and projections.

Covers debt at the general government level. Liabilities to WAEMU associated with entry rights are expressed in NPV terms.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Large residuals during 2004-08 are mostly explained by large differences between average and end-of-period exchange rates. While average exchange rate is used to express external debt in local currency, the end-of-period exchange rate is used to obtain the contribution of real exchange rate depreciation to the variation in total debt-to-GDP ratio.