Guinea-Bissau
Use of Fund Resources -Request for Emergency Post-Conflict Assistance: Staff Report; Press Release; and Statement by the Executive Director for Guinea-Bissau
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International Monetary Fund
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Publication Date:
21 Feb 2008
eISBN:
9781451815856
Language:
English
Keywords:
ISCR; CR; government; IMF's Emergency Post-Conflict Assistance; spending; amount; Emergency Post-Conflict Assistance; government transaction; Guinea-Bissau authorities; transition government; government saving; authorities' measure; Fiscal stance; debt relief
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Guinea-Bissau remains fragile, after nearly a decade of conflict and political instability. Fiscal performance has improved markedly since the new government implemented its emergency fiscal plan. The focus of the government on stabilizing public finances and improving economic management and transparency reflects a sound view of urgent priorities. Efforts to enhance revenue collection, including improving tax administration, are necessary to boost revenues on a lasting basis and ensure that the state has the resources to meet its core expenditure needs and provide basic public services.

Abstract

Guinea-Bissau remains fragile, after nearly a decade of conflict and political instability. Fiscal performance has improved markedly since the new government implemented its emergency fiscal plan. The focus of the government on stabilizing public finances and improving economic management and transparency reflects a sound view of urgent priorities. Efforts to enhance revenue collection, including improving tax administration, are necessary to boost revenues on a lasting basis and ensure that the state has the resources to meet its core expenditure needs and provide basic public services.

I. Background

1. Nearly a decade of conflict and political instability has left Guinea-Bissau very fragile (Table 1). Though the 1998 civil war and the coup in mid-2003 have ended, they left a legacy of deteriorated physical infrastructure, weakened administrative and policy implementation capacity, unsustainable fiscal deficits, and heavy reliance on donor support. As discussed in the 2007 Article IV consultation,1 economic and social conditions have worsened since the conflict, with per capita incomes declining in most years (Text Table 1). Since parliamentary elections in 2004 and presidential elections in 2005 the government has attempted to rebuild the administration and address the country’s economic problems. However, political tensions have caused delays in policy implementation and persistent postponement of donor support. In April 2007 a new Prime Minister and cabinet of ministers were appointed under considerable pressure from a new coalition of political parties within Parliament. To stabilize a deteriorating fiscal position, the new government moved forward quickly with an emergency fiscal program that has received widespread support from Parliament, donors, development partners, and the public. However, the political situation is still marked by frequent strikes triggered by arrears on government wages. Legislative elections are scheduled for October 2008, followed by Presidential elections in 2009.

Table 1.

Political Developments, 1998-2007

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Text Table 1.

Guinea-Bissau: Macroeconomic Indicators, 2001-07

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

Based on updated staff projections for 2006.

2. Contributing to Guinea-Bissau’s economic emergency are unsustainably large fiscal imbalances. The public wage bill has increased fivefold since the civil war, reflecting the rise in military personnel and a series of politically motivated civil and military salary increases since 2004. While government revenues have been about 16 percent of GDP since 2000, current expenditures rose from about 20 percent of GDP in 2000 to 29 percent in 2006, with the share of the wage bill rising. It now accounts for almost half of current expenditures, soaking up about 80 percent of government revenues. Meanwhile, as the erosion of donor support led to large financing shortfalls, the authorities resorted to short-term commercial borrowing and accumulated large amounts of external and domestic arrears, including government wages. The situation is clearly unsustainable.

A01ufig01

Guinea Bissau: Wages, 2000-07

(In percent)

Citation: IMF Staff Country Reports 2008, 077; 10.5089/9781451815856.002.A001

3. The government appointed in April 2007 has made major progress in the essential task of restoring fiscal control. It moved quickly to adopt an Emergency Action Plan that included forceful measures to collect additional revenue, especially tax arrears; control expenditures; and address weaknesses in revenue administration, expenditure management, and fiscal transparency (MEFP ¶ 6). The improvements in fiscal performance in the second half of 2007 have been encouraging, and the international community has responded positively by disbursing earlier pledges. The challenge for the government now is to build on these gains to reduce fiscal imbalances and the burden of expensive commercial debt, put public finances on a more sustainable path, and implement much-needed structural reforms, especially in the civil and military services.

II. Recent Economic Developments

4. Economic activity in 2007 was weaker than expected; real GDP growth is only an estimated 2.7 percent (Figure 1) against a projected 3.3 percent. It appears from provisional data that production of cashews in 2007 fell slightly below projections even though cashew marketing arrangements were normalized, and rice and other cereals were severely affected by late and inadequate rains. As elsewhere in the WAEMU area, inflation in Guinea-Bissau has been subdued, although food prices could push year-end inflation above the 3 percent target (Table 2). The external current account deficit (excluding official current transfers) is expected to narrow to 11 percent of GDP in 2007, from 25 percent in 2006, reflecting higher exports of cashews, some from last year’s stock (Table 3). Monetary developments were stable in 2007; broad money grew at moderate rates. This reflects a pickup in credit to the economy as commercial banks took over a large part of cashew financing, and a rise in net credit to the government (Table 4).

Table 2.

Guinea-Bissau: Selected Economic and Financial Indicators, 2003-10

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

Based on updated staff 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.

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, 2003–10

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Sources: BCEAO and IMF staff estimates and projections

Based on updated staff projections for 2007.

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.

Offical transfers excludes Angola.

Excludes proposed 2008 EPCA drawings.

Excludes the financing gap, BCEAO includes the finacing gap in the capital account.

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.

Table 4.

Guinea-Bissau: Monetary Survey, 2004–10

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Sources: BCEAO, and IMF staff estimates and projections.
Figure 1.
Figure 1.

Guinea-Bissau: Main Economic Trends, 2000-08

Citation: IMF Staff Country Reports 2008, 077; 10.5089/9781451815856.002.A001

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

5. After a sharp deterioration in early 2007, fiscal performance has improved markedly since the new government implemented its emergency plan. Tax revenues in particular surged in the second half of 2007 (Box 1). As a share of GDP, second-half tax revenues were nearly double the intake from the first half (Text Table 2), when revenue administration withered under the former government and imports fell due to political uncertainties. The pickup in budget support in the second half allowed for increased expenditures, including full payment of government wages and more domestically financed capital expenditures. Importantly, expenditure control improved in the second half of the year, and wages and other discretionary expenditures were held within budget. The increase in budget support also allowed for some repayment of domestic arrears, including wages, that had accumulated in the first half of 2007.

Text Table 2.

Guinea-Bissau: 2007 Fiscal Performance - Selected Cash Flow Items

(In millions of CFA francs and percent of GDP)

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Guinea-Bissau: 2007 Tax Performance

Tax revenue has risen markedly since the government implemented its emergency fiscal plan. While for most of the year cumulative tax revenues were lower than in 2006, the margin has been narrowing since July. By October, cumulative tax revenues of CFAF 15.8 billion were 4 percent higher than in the same period last year. In contrast, through June, tax revenues were about 13 percent lower than in 2006.

A01bx01ufig01

Cumulative Tax Revenues

Years 2006 and 2007 In CFAF Millions

Citation: IMF Staff Country Reports 2008, 077; 10.5089/9781451815856.002.A001

The improvement is significant even excluding export taxes, which are seasonally higher in the second half of the year. Monthly tax revenues (excluding export taxes) starting in July have been averaging about 18 percent higher than in the same period last year; earlier in the year they were 17 percent lower on average than in 2006.

A01bx01ufig02

Average Monthly Tax Revenues

Comparative Performance In CFAF Billions

Citation: IMF Staff Country Reports 2008, 077; 10.5089/9781451815856.002.A001

6. However, the fiscal deficit (excluding grants) is still expected to widen from 22 percent of GDP in 2006 to about 25 percent (Text Table 3 and Table 5). Total revenues are currently projected to decline to 16 percent of GDP, down about 3.5 percent of GDP from 2006 because sizable annual fishing compensation from the E.U. was postponed until early 2007.2 On the other hand, current expenditures are expected to be lower, down to 27 percent of GDP from 29 percent in 2006, reflecting better control of nonwage discretionary spending, especially travel and representation costs.

Text Table 3.

Guinea–Bissau: Central Government Operations, 2005–08

(Percent of GDP)

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Sources: Guinea-Bissau authorities, and IMF staff estimates and projections
Text Table 4.

Guinea-Bissau: 2007 Sources of Financing

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Source: IMF staff estimates

France, Portugal, Spain, and China.

Including revenue, expenditure, and other domestic financing items.

Text Table 5.

Guinea-Bissau: Medium Term Scenario

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

7. Donor disbursements resumed in 2007. External budget support for 2007 amounted to US$34 million from the E.U.; regional partners (WAEMU and ECOWAS); bilateral partners (France, Portugal, Spain, and China); and nontraditional partners such as Angola (Text Table 4). Expected budget support of US$10 million from the World Bank was delayed until early 2008. Budget support of US$1.7 million expected from the African Development Bank in 2007 was also delayed until early 2008.3

8. Despite the recovery in external assistance, to avoid substantial accumulation of domestic arrears the government had to reschedule most of its commercial debt that was due in 2007 (about US$ 22 million or 6 percent of GDP). Nevertheless, some domestic arrears accumulation (about CFAF 6.6 billion, 3.8 percent of GDP) was unavoidable. A portion of these (about CFAF 3.6 billion related to medical and education supplies) will be paid in early 2008 with the delayed World Bank disbursement; a considerable amount will be included in an E.U.-financed audit of domestic arrears and repaid over time as financing becomes available (see below).

III. The Program for 2008

A. Overview

9. In their program for January–December 2008 (Memorandum on Economic and Financial Policies (MEFP), Appendix II) the authorities address Guinea-Bissau’s main post-conflict challenges of rebuilding physical infrastructure, reinforcing administrative and policy implementation capacity, and reducing fiscal imbalances. Their objectives are to (i) strengthen revenue collection; (ii) restore effective expenditure control; and (iii) rein in the expansion in the wage bill. With the 2008 program, the country will start gradually moving toward fiscal sustainability and more regular relations with external creditors. However, achieving fiscal sustainability will take time, given the large external debt burden, and will require continued and increased access to grants and concessional aid inflows over the medium term. 4 The authorities, who have already secured a significant amount of donor financial and technical assistance for 2008, are requesting an Emergency Post-Conflict Assistance (EPCA) purchase to support their 2008 program.

10. Guinea-Bissau meets the Fund’s conditions for EPCA support. First, its institutional and administrative capacity have been severely undermined by the protracted conflict, and the country is clearly not yet able to implement a comprehensive program that could be supported by a PRGF or other Fund arrangement. Second, despite the weaknesses, there are signs that the country has enough capacity for policy planning and implementation, as demonstrated by the new government’s commitment to restore fiscal stability. Third, there is urgent need to meet essential external payments, including payments to multilaterals. Finally, concerted international support for Guinea-Bissau has re-emerged.

11. The authorities see their program as essential for restabilizing the economy and preparing for higher and sustained economic growth. A Fund-supported program would help restore confidence in their economic management and help them implement their policy priorities. The authorities are confident that good performance on the EPCA program could catalyze additional donor support for critical structural reforms, especially security and civil service reforms, and allow them to spend more to address pressing needs for poverty reduction, infrastructure rehabilitation, and other priorities. More external assistance would also help reduce the heavy burden of domestic arrears.

12. The authorities hope that the EPCA-supported program could pave the way to a PRGF arrangement, the completion point for the Highly-Indebted Poor Countries (HIPC) initiative, and Multilateral Debt Relief Initiative (MDRI) relief. However, while the 2008 EPCA-supported program would be an important step in that direction, much more needs to be done to improve policy implementation and administrative capacity before the country can move to a PRGF arrangement. Such an arrangement is currently anticipated for 2010 after successive EPCA-supported programs establish a performance track record.

B. The Macroeconomic Framework

13. The macroeconomic framework for the program is based on the medium-term outlook presented in the 2007 Article IV consultation, which envisages a gradual recovery of annual real GDP growth to above 3 percent over the medium term (Text Table 5).5 This is based on (i) the government’s continued commitment to policy reform, which would enable it to implement more forceful Fund-supported reforms and achieve sustained levels of donor support; (ii) steady rebuilding of infrastructure and institutional capacity; and (iii) a return of investor confidence.

  • Real GDP growth is projected to increase to 3.3 percent in 2008, slightly above the average for the past four years. The projections assume (i) more normal rains and an increase in cereal production to previous levels; (ii) an increase in cashew production as the crop matures; and (iii) public investment of about 13 percent of GDP—above the average for the past five years—as the government continues to garner donor support. Real per capita income would rise slightly, reversing the trend of recent years.

  • Average inflation is projected at about 3.3 percent, in line with the WAEMU convergence criteria.

  • The external current account deficit (excluding official current transfers) is expected to widen slightly to 12 percent of GDP in 2008, as fewer cashews are exported than in 2007 and prices for rice and oil imports rise.

  • Monetary conditions are expected to hold steady in 2008. Broad money is expected to increase by 8 percent, reflecting an increase in private sector deposits in commercial banks as the banking system expands.

C. The Fiscal Framework

14. The fiscal deficit is expected to narrow in 2008, in line with the budget drafted after discussions with the staff and approved by Parliament.6 The 2008 budget targets a deficit on a commitment basis (excluding grants) of 21 percent of GDP, a decline of nearly 5 percent for the year (Figure 2). This target is based on a revenue increase of 5 percent of GDP—nontax revenues are expected to be above normal in 2008 because of two disbursements from the E.U. for fishing compensation (compensation for 2008 and delayed compensation for 2007)—and restrained spending, notably a nominal freeze of current expenditures on wages and strict control of nonwage discretionary outlays, which should enable the authorities to avoid accumulating domestic arrears. Tax revenues are projected to remain roughly constant as a share of GDP, assuming no change in tax rates (which are already in line with rates elsewhere in the WAEMU) and limited administrative capacity to improve tax collection significantly in the short term.

Figure 2.
Figure 2.

Guinea-Bissau: Main Fiscal Indicators, 2000-08

Citation: IMF Staff Country Reports 2008, 077; 10.5089/9781451815856.002.A001

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

15. The key fiscal objective for 2008 and beyond is to avoid accumulating domestic arrears by strictly controlling expenditures and boosting revenue. The authorities recognized that the spending plan is tight and reflects only minimum requirements, but they are committed to keeping expenditures within the financing identified. Should donors provide additional budgetary grants, the priority will be to use them to repay audited domestic arrears, fully repay outstanding commercial bank borrowing, and increase spending in social areas beyond what is budgeted, in consultation with the Fund. Staff agreed with the authorities that expenditures related to parliamentary elections scheduled for October 2008 should be limited primarily to those financed by external assistance specific to this purpose.7

16. The 2008 program will include a few measures the structural content of which is considered appropriate for a post-conflict country like Guinea-Bissau. They deal with building capacity in critical areas of revenue administration, public expenditure, and cash management (MEFP ¶ 16). Progress in these areas is important not only for reducing fiscal imbalances but also for improving fiscal transparency, restoring confidence, and shoring up donor support. The measures begin with strengthening intelligence and audit activities and improving information flows between government agencies and departments for better cash flow management. The reforms are supported by a new Ministry of Finance management information system.8 The revenue administration measures include updating taxpayer databases to improve compliance of large taxpayers and broaden the tax base. On the expenditure side, steps will be taken to ensure that government transactions are properly accounted for and closely monitored.

17. A major objective of the authorities is to control the wage bill. In view of the exceptionally difficult fiscal position, the authorities will maintain a nominal freeze on the wage bill for 2008. They have also set informal targets on global personnel expenditures (including benefits, pensions, and retrenchment) for purposes of cash flow management. Given the size of Guinea-Bissau’s wage bill (at some 13 percent of GDP it is more than double the regional average) and its contribution to the large fiscal imbalances post-conflict, the authorities consider the wage bill freeze and target to be critical for economic management. For 2008 the wage freeze is not expected to affect vital hiring in the social sectors; the authorities do not plan additional hiring in health and education in 2008, because they have already budgeted salary increases for 5,000 teachers and 3,000 health care workers whose positions were converted from contractual to regular staff in 2007.

18. The authorities also recognize that a nominal wage freeze can only be temporary and must ultimately be replaced by civil and military service reforms. Some efforts will be made in 2008 to clean up the public sector payroll to reduce fraud and duplication of payment of government salaries. As a first step, the authorities will finalize the merger of the separate payroll databases of the ministries of Finance and Public Administration. For 2008, it is expected that some 2,300 civil servants and 1,000 military who were already removed from the government’s payroll will continue to be paid by the Ministry of Public Administration, pending full reintegration to the private sector.9

19. Staff expressed concern about nonconcessional domestic commercial borrowing and urged the authorities to rely on grant financing as much as possible. They agreed on the importance of grant financing but stressed that their recourse to commercial loans from domestic banks reflected urgent priority expenditure needs resulting from shortfalls and delays in external assistance. They intend to repay expensive commercial bank debt as soon as possible and rely on grant assistance in 2008.

20. The government will make a major effort to resolve its domestic arrears, which are now estimated at about CFAF 48 billion—28 percent of GDP. 10 The authorities have contracted for an external audit of domestic arrears accumulated in 2000–06 (CFAF 44 billion) and a portion of 2007 arrears (about CFAF 4 billion).11 After the audit the authorities will seek external assistance beyond existing external assistance expectations (see ¶ 9) to pay off the arrears. They will also seek external assistance to pay down pre-2000 arrears that have already been audited (CFAF 20 billion). Even assuming that about half of the 2000–07 arrears will be eliminated after the audit, paying off the arrears over the medium term (2008–10) could require some 8 percent of GDP annually in additional external assistance.12 Meanwhile, the government will strive to honor current obligations and avoid accumulating new arrears in 2008.

21. Beyond 2008 the fiscal position should steadily improve as fiscal controls are restored and nonpriority expenditures are reined in. Continued commitment to reform will enable the government to implement stronger Fund-supported reform programs and achieve sustained levels of donor support. The overall fiscal balance (excluding grants) is projected to decline to below 20 percent of GDP in 2010, to levels that are more manageable given domestic resources and external budget support. This will allow the country finally to focus external assistance on meeting critical development needs.

D. Financing the Budget

22. The financing needs for 2008 are large (about US$92 million or 27 percent of GDP) (Text Table 6). Some arise from the previous rescheduling of domestic debt owed to commercial banks and the BCEAO, as well as the rescheduling of Treasury bills, which are now expected to be repaid in 2008.

Text Table 6.

Guinea-Bissau: Financing the 2008 Fiscal Program

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Source: IMF staff estimates and projections

23. The financing needs will be filled mainly by budget support from both traditional and nontraditional donors. There is limited scope for further fiscal adjustment in 2008; spending is already minimal and capacity to raise revenues in the short term is limited. Additional uncollateralized domestic financing is also limited, given the rescheduling of domestic debt to 2008 and the high cost of commercial borrowing. In these circumstances, the authorities have made securing donor support a priority. The donor community has already made firm pledges of some CFAF 25 billion (US$50 million) in budget support for 2008.13 The authorities also expect an extension of interim debt relief from the World Bank to cover about US$8.5 million (CFAF 4.2 billion) in debt service owed in 2008. They also intend to take measures to collect more back taxes in 2008 (CFAF 0.7 billion). While the authorities intend to repay most of the outstanding domestic debt rescheduled to 2008, they are planning to reschedule about CFAF 3.1 billion (roughly a quarter of all debt owed in 2008) to provide additional financing for 2008. Though they will continue to accumulate arrears on external debt in 2008 (CFAF 9.7 billion or US$20 million), they are committed to taking whatever measures are necessary to find additional financing.

E. Program Monitoring, Access, and Capacity to Repay

24. The fiscal framework underlying EPCA covers calendar 2008. This allows enough time to demonstrate a track record of credible policies to restore fiscal stability and avoid domestic arrears for the full period.

25. The authorities’ MEFP contains quantitative indicators through December 2008 and a few structural indicators that are critical for fiscal sustainability. Prior actions and structural indicators are listed in Table 3 of the MEFP. The structural indicators relate to priority expenditure management measures that can be implemented in 2008. The authorities, with the help of Fund staff, have formulated a monthly treasury cash-flow plan for 2008 on which quarterly quantitative indicators are based (MEFP Tables 2 and 4). Definitions and adjusters of financial indicators and requirements for transmitting data to staff are described in the Technical Memorandum of Understanding (Appendix II, Attachment II).

26. Guinea-Bissau has sizable payment arrears to sovereign and multilateral creditors 14and external arrears are expected to accumulate further during the EPCA-supported program. The authorities have received assurances that there are no objections to EPCA from Paris Club creditors to whom Guinea-Bissau is currently in arrears. They have also informed non-Paris Club creditors that they will continue to have difficulties servicing their external debt even during the EPCA program period. Given these actions and the financing commitments the authorities have received from other donors, staff considers that financing for the authorities’ 2008 program, which includes a continued build up of external arrears, is adequate, and the authorities can therefore request EPCA.

27. Staff considers Guinea-Bissau’s capacity to repay the Fund to be adequate. The Government is current on its Fund obligations, and the BCEAO has a good record of honoring debt service to the Fund on behalf of WAEMU members, even though arrears to other creditors are significant.

28. The proposed initial EPCA purchase is for SDR 1.775 million, equivalent to 12.5 percent of quota. A second purchase of SDR 1.775 million (12.5 percent of quota), is expected in July 2008, assuming performance is satisfactory, for a maximum purchase of 25 percent of quota in 2008. The authorities would continue to make EPCA purchases (up to an annual limit of 25 percent of quota for a cumulative maximum of 50 percent of quota over three years) until they have capacity to move to a PRGF arrangement. The purchases in 2008 are beyond repayment of PRGF resources during the year. Guinea-Bissau could receive subsidies to lower the annual basic rate of charge on the EPCA purchase to 0.5 percent, if resources are available. It is also subject to burden-sharing adjustments to the basic rate of charge, currently 21 basis points annually, which are not covered by the subsidies. With the proposed first-year purchases, Guinea-Bissau’s credit outstanding to the Fund would increase from 23.1 percent of quota in 2007 to 39.3 percent in 2008 (Table 7).

29. High among the risks to the program is the risk of shortfalls and delays in donor disbursements. Absence of donor support could lead to more wage arrears, reigniting political instability, and to delays in reforms crucial to fiscal sustainability (e.g., civil service and security reforms). Parliamentary elections, currently scheduled for October 2008, could jeopardize fiscal discipline due to pressures to exceed budgeted outlays. Donors may also take a wait-and-see approach in the period leading up to the elections, which could delay disbursements. The limit on access to EPCA incorporates the risk to Fund resources, and any further purchases would be subject to an updated risk assessment.

.30. To ensure that the fiscal reforms are effective and sustainable, the EPCA program will be supported with technical assistance (MEFP Table 1). The IMF will continue to provide support, including technical assistance from West AFRITAC and AFRISTAT, to firm up budget management and tax collection and improve economic statistics. The World Bank is also helping with these reforms through its support to lowincome countries under stress (LICUS), including financing a long-term resident fiscal advisor. Other donors, including the EU and bilaterals, are also providing technical assistance to government revenue and expenditure departments.

IV. Staff Appraisal

31. Guinea-Bissau faces enormous challenges. The erosion of its institutional and administrative capacity seriously impedes economic management and recovery. Moreover, the fragile political situation reflects the population’s impatience with the country’s difficult financial situation.

32. The new government has demonstrated determined commitment in beginning to address these challenges. Its emergency fiscal program and the improved fiscal performance in the second half of 2007 are a solid foundation for stability in the period ahead.

33. The focus of the authorities on stabilizing public finances and improving economic management and transparency reflects a sober and sound view of urgent priorities. The proposed program aims to support these efforts and catalyze much-needed financial and technical assistance from donors, which will be indispensable for rebuilding capacity and putting the country on the path to sustained economic growth.

34. Keeping current spending, particularly wages, within available resources is essential to the stability of public finances and—recognizing the past link between salary arrears and political instability—the sustainability of the reforms. The authorities will need to resist the inevitable pressures to backtrack on the nominal freeze of the wage bill. Structural measures will be crucial to improve payroll management and to ensure that the share of wages in public expenditures gradually decreases. Ensuring that the Treasury remains in sole charge of managing all government accounts and effectively applying the cash flow plan are crucial to restore confidence in management of the economy. It is also critical that the government finds a lasting resolution to its domestic arrears.

35. Efforts to enhance revenue collection, including improving tax administration, are necessary to boost revenues on a lasting basis and ensure that the state has the resources to meet its core expenditure needs and provide basic public services. The recent improvements are encouraging and should be built on.

36. The viability of the 2008 budget depends critically on significant concessional external assistance. The authorities must be steadfast in their efforts to improve governance, strengthen institutional capacity, and implement credible reforms. Slippage in any of these areas could jeopardize external assistance.

37. Staff considers that Guinea-Bissau meets the requirements for Fund EPCA. Help in meeting current external payments is urgently needed, and the country’s capacity has been so disrupted that the authorities are not yet able to carry out a comprehensive program that could be supported by a different Fund arrangement. Nonetheless, recent progress demonstrates that the authorities have the capacity to implement the proposed program, which would be part of a concerted international effort. Moreover, the authorities are determined to establish the track record necessary for a PRGF-supported program and for reaching the HIPC Initiative completion point. Policy implementation should therefore improve under the proposed program, especially in the fiscal area. Recognizing the role that the proposed program would play in stabilizing the economy and catalyzing international support, the staff recommends approval of the authorities’ request for Emergency Post-Conflict Assistance.

Table 5.

Guinea–Bissau: Central Government Operations, 2003–10

(CFAF billions)

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

In 2008 includes World Bank debt relief, EPCA, and authorities’ measures to fill the financing gap.

Table 6.

Guinea-Bissau: Indicators of Capacity to Repay the Fund, 2007–12

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Sources: Data provided by the authorities; IMF staff estimates and projections

Includes EPCA purchase of SDR 1.775 millions (12.5 percent of quota) in January 2008.

Assuming that the rate of charge on EPCA purchase is subsidized down to 0.5 percent per annum plus adjustment for deferred charges. Subsidization is subject to the availability of resources.

Exports of goods and nonfactor services.

Appendix I

Bissau, January 9, 2008

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

Washington D.C. 20431

U.S.A.

Dear Mr. Strauss-Kahn:

1. Guinea-Bissau is slowly recovering from a decade of conflict and political instability. Economic and social conditions have worsened in the post-conflict period; the country’s physical infrastructure was destroyed, and its administrative capacity was severely weakened. The fiscal situation has become unsustainable and relations with the international community have suffered. A new government appointed in April 2007 has taken early measures to adopt an emergency program to restore fiscal stability and improve economic management. This government has taken firm action to control expenditures, increase revenue collection, and improve fiscal management, transparency, and governance. There are already encouraging signs of an improvement in fiscal performance in the second half of 2007, and donor support has resumed.

2. In order to build on these recent gains, the government has agreed on a program of economic and financial policies for 2008 that addresses the immediate post-conflict challenges of stabilizing the fiscal position, building capacity for policy implementation, and regularizing relations with the donor community. The program also includes structural measures that lay the ground work for meeting the country’s medium-term objectives of reviving growth, reducing poverty, and achieving fiscal and external sustainability. The donor community has already indicated it will provide significant financial and technical support for the 2008 program. To help achieve its objectives and restore confidence in economic management, the government is requesting a first purchase of SDR 1.775 million (12.5 percent of quota) under the Fund’s Emergency Post-Conflict Assistance (EPCA) program. A second request for an EPCA purchase will be made later in 2008..

3. The details of the program for 2008 are included in the attached Memorandum on Economic and Financial Policies (MEFP). The government believes that the policies and measures set forth in the MEFP are adequate for achieving the objectives of the program, but we will take any further measures that may become appropriate for that purpose. In such cases, as well as before implementing policies that could adversely affect the program, we will consult the Fund.

4. To assist the Fund in assessing progress on the program, we will provide information on a regular basis as detailed in the attached Technical Memorandum. Moreover, we invite the staff of the Fund to review performance under the program quarterly, on the basis of quantitative and structural indicators (Tables2 and 3 of the MEFP) as well as on overall implementation of the program.

Sincerely yours,

/s/

Issufo Sanhá

Minister of Finance

Attachments:

- Memorandum on Economic and Financial Policies

- Technical Memorandum of Understanding

Attachment I: Guinea-Bissau: Memorandum on Economic and Financial Policies for Emergency Post-Conflict Assistance for 2008

Bissau, January 9, 2008

I. Introduction

1. Guinea-Bissau remains a fragile post-conflict country. The conflicts and prolonged political instability have taken a toll on the country’s physical infrastructure, weakened administrative and technical capacity, and left unsustainable fiscal balances. The country is heavily dependent on external assistance, but relations with the donor community have suffered. The government of Guinea-Bissau is determined to take the necessary actions to address the immediate post-conflict challenges of stabilizing the fiscal position, building capacity for policy implementation, improving economic confidence, and regularizing relations with donors. A new government appointed in April 2007 has already made progress on an emergency program1 to restore fiscal stability and improve economic management. The new government has taken strong measures to control expenditures, increase revenue collection, and improve fiscal management, transparency, and governance. We have also vigorously pursued efforts to secure much-needed financing, including reaching out to new donors. There have been encouraging signs of improved fiscal performance in the second half of 2007, and donors have resumed disbursements on pledges from the 2006 donors conference.

2. To build on these recent gains, the government has agreed on a program of economic and financial policies for 2008 that aims to achieve fiscal stability in the near term and lay the groundwork for meeting the country’s medium-term objectives of reviving growth, reducing poverty and achieving fiscal and external sustainability. The government is requesting a purchase from the Fund’s Emergency Post-Conflict Assistance (EPCA) to achieve its objectives and restore confidence in its economic management.

3. This memorandum describes economic developments in 2007 and outlines policies and measures planned for 2008.

II. Recent Economic Developments

4. Preliminary projections for 2007 point to real GDP growth of 2.7 percent. slightly higher than in 2006. Despite a normalization in cashew marketing arrangements in 2007, when the government avoided intervention in the cashew market—the 2007 domestic reference price of CFA 200/kilo for cashews was agreed by all major stakeholders—provisional data indicate that production and exports of cashews was slightly lower than expected. In addition, the production of rice and other cereals has been severely affected by late and inadequate rains. Inflation has remained subdued, as it has been elsewhere in the WAEMU area, although recent high food prices could push the inflation rate for the year to slightly above the 3 percent target. The current account deficit (excluding grants) is expected to narrow to 11 percent of GDP in 2007, from 25 percent in 2006, reflecting higher exports of cashews, including from last year’s harvest.

5. The fiscal stance deteriorated sharply in early 2007, reflecting a severe breakdown in controls since late 2006. Tax revenues declined 13 percent in the first half of 2007 compared to the same period in 2006, as revenue administration weakened and imports fell in the wake of political uncertainties. Although resources were scarce, the former government repaid large stocks of (unaudited) domestic arrears of previous years and there were other unprogrammed and extra-budgetary expenditures; substantial arrears, among them four months of civil service salaries, accumulated.

6. Faced with the extremely difficult fiscal situation and a large financing gap estimated for 2007, in April the new government undertook an emergency program to restore fiscal stability. The government plan received widespread support from Parliament, donors, development partners, and the public. Strong measures were taken to increase revenues, restrain expenditures, improve financial management, enhance supervision and monitoring, and address financing weaknesses.

Revenue Measures:

(i) Limited the granting of exemptions to only those situations foreseen in the law (NGOs, embassies, ex-combatants, projects).

(ii) Abolished the tax compensation system for customs (DGA) and corporate tax payers (DGCI), and allowed only the Treasury to grant tax compensations.

(iii) Returned tax rates to previous levels on 14 of 18 products on which rates were lowered in May 2006.

(iv) Enforced collection of stamp tax (cigarettes, bank checks, credit cards, airline tickets, insurance companies).

(v) Contracted with commercial banks to manage tax collection for the DGA and DGCI departments.

(vi) Pursued collection of tax arrears.

Expenditure Measures:

(i) Closed accounts of all ministries and public entities at the BCEAO and opened accounts at the Treasury. The Treasury now holds only one account, the Treasury Current Account, at the BCEAO (rather than having financial directorates of ministries and public entities managing government accounts as before).2 The Treasury is now in sole charge of managing all government revenue and expenditure accounts.

(ii) Process all payment orders through the Budget Directorate (DGO).

(iii) Restrict extrabudgetary expenditures (DNT) only to emergency situations and regularize them within 48 hours.3

(iv) Standardize budget execution procedures

(v) Require pre-approval by the Ministry of Finance’s Financial Control Department any purchase of goods and services.

(vi) Cease Treasury issuance of checks in the names of finance managers of ministries to directly pay for goods and services.

(vii) Computerize payment system at the Treasury.

(viii) Placed a ceiling of CFAF 300,000 on expenditures that can be paid by cash.

Transparency and Financial Management

(i) Improved the transparency of and public confidence in the Treasury Committee, which is in charge of implementing the Treasury’s cash flow plan, by inviting members from civil society, the armed forces, the Ministry of Interior, and ex-combatants, in addition to donor representatives, to participate as observers.

(ii) Dismantled internal nontariff barriers on transporting cashews within the country.

(iii) Introduced a requirement that all government suppliers have taxpayer identification numbers and bank accounts for payment, and that payments are to be made only after goods or services have been verified.

7. Fiscal performance has improved markedly in the period since the new government began implementing its emergency fiscal plan. In July–October, tax revenues were some 28 percent higher than during the same period last year, an important reversal of the trend observed in the first half of the year. There have also been positive developments with respect to expenditure control: The new government has ceased to pay domestic arrears from previous years, the amount of extrabudgetary expenditures (DNT) was reduced, and wages and other discretionary expenditures have been kept within budget.

8. Despite these improvements in fiscal management, the fiscal stance is expected to deteriorate in 2007; the overall balance (excluding grants) is expected to widen to about 25 percent of GDP, from 22 percent in 2006. Despite the improvement in revenue, it will not be possible to make up for the delay in disbursement of sizable annual fishing compensation from the E.U., which is now planned for early 2008.4 Total revenues are currently projected to decline to 16 percent of GDP, some 3.5 percent of GDP lower than in 2006. On the other hand, current expenditures are expected to be lower in 2007, down to 27 percent of GDP from 29 percent in 2006, reflecting improved expenditure control.

9. Donor disbursements resumed in 2007, among them outstanding pledges from the November 2006 donor meeting. External budget support for 2007 amounted to CFAF 17 billion (US$34 million) from the European Union, regional partners (WAEMU and ECOWAS), bilateral partners (Spain, Portugal, France and China), and such nontraditional partners as Angola. Expected budget support of US$10 million for 2007 from the World Bank was delayed and will be disbursed in early 2008. Budget support expected from the African Development Bank in 2007 (US$1.7 million) has also been delayed until early 2008.

10. On the financing side, the government rescheduled the domestic commercial debt it owed in 2007, in order to avoid substantial accumulation of domestic arrears:

(i) CFAF 3 billion (US$5.7 million) in debt service owed in 2007 on commercial bank loans, as well as CFAF 1.5 billion (US$3 million) in debt payments owed to the BCEAO, and

(ii) CFAF 6.7 billion (US$13.5 million) in Treasury bills that were due in February 2007

11. Despite the government’s efforts, some accumulation of domestic arrears (about CFAF 6.6 billion, 3.8 percent of GDP) was unavoidable in 2007, largely because of the delayed budget support in 2007. A portion of the domestic arrears (about CFAF 3.6 billion related to medical and education supplies) will be paid with the World Bank disbursement expected in early 2008, and the remaining 2007 arrears will be included in an E.U.-financed audit of domestic arrears and repaid over time as financing becomes available (see below).

III. Outlook, Objectives, and Policies for 2008 and the Medium Term

12. Real GDP growth is projected to increase to 3.3 percent in 2008, slightly higher than the average for the past four years. The projections assume (i) an increase in cereal production to levels observed in previous years; (ii) an increase in cashew production from crop maturing; (iii) a slight pickup in public investment as the government continues to gather external donor support. Inflation is expected to converge to moderate levels below 3 percent, in line with WAEMU convergence criteria. The current account deficit (excluding grants) is expected to widen slightly to 12 percent of GDP in 2008, reflecting a lower export volume of cashews compared to 2007 (which included stocks from the previous year) and higher expected prices for rice and oil imports.

13. The fiscal stance is expected to improve in 2008 as the government continues to implement its fiscal adjustment plan. For the year as a whole government revenues are projected to increase by some 5 percent of GDP to about 21 percent of GDP. Nontax revenues are expected to be above normal in 2008 because of two disbursements from the E.U. for fishing compensation (corresponding to the 2008 annual compensation and the delayed 2007 compensation). Tax revenues are projected to remain roughly constant as a share of GDP, but efforts will be made to bring in more revenues by year-end. Current expenditures are expected to decline by about 1 percent of GDP in 2008, reflecting a nominal freeze of current expenditures, including the wage bill, and strict control of nonwage discretionary outlays. While it is recognized that the expenditure framework is tight and encompasses only minimum spending requirements, the government is committed to maintaining domestic expenditures within available resources, both domestic and external. The overall balance (excluding grants) is expected to decline to about 21 percent of GDP, lower than in previous years.

14. Financing needs will continue to be large in 2008, amounting to CFAF 45 billion (US$92 million or 27 percent of GDP). The 2008 financing needs include the rescheduling of Treasury bills and domestic debt owed to commercial banks and the BCEAO that are now expected to be repaid in 2008, as well as repayment in 2008 of domestic arrears that arose in 2007. The authorities have already secured the following sources of financing for 2008:

(i) budget support from traditional and nontraditional donors (CFAF 24.8 billion or US$50 million)5

(ii) an extension of interim debt relief from the World Bank to cover US$8.5 million (CFAF 4.2 billion) in 2008 external debt service obligations.

(iii) additional recovery of tax arrears (CFAF 0.7 billion)

(iv) partial rescheduling (about CFAF 3.6 billion or US$6 million) of domestic commercial debt owed in 2008.

(v) further accumulation of arrears on external debt (CFAF 9.7 billion or US$20 million).

15. These measures, along with two EPCA purchases (US$5.6 million or CFAF 2.8 billion), should fully cover the financing gap and avoid accumulation of domestic arrears for 2008 as a whole, a key fiscal objective. To the extent of any shortfalls in external financing in 2008, the government is committed to making further efforts to reschedule its domestic debts, to the extent possible. In 2008 the government also intends to hold a meeting following up on the November 2006 Round Table Conference to present its 2008 program and mobilize partners to support its development program, especially security sector and civil service reforms. If donor budget grants exceed the amount needed to finance the fiscal gap, priority will be given to using the resources to fully repay outstanding commercial debts and audited domestic arrears, and increase priority spending in social sectors above budgeted levels, in consultation with the Fund.

16. The government in 2008 will also implement policy measures to address remaining structural weaknesses in revenue collection and expenditure management. These will:

(i) Improve accounting and information flows of all Treasury transactions, including nonregularized expenditures and bank financing.

(ii) Conduct a comprehensive audit of outstanding domestic arrears for 2000–06 and a portion of new 2007 arrears. 6

(iii) Avoid payment of audited arrears until the audit is completed and specific external financing for their clearance is obtained.

(iv) As a first priority, avoid the accumulation of new domestic arrears in 2008.

(v) Implement an integrated management information system, linking data flows between the customs (DGA) and tax department (DGCI), the budget office (DGO), and the Treasury.

(vi) Strengthen the inspection capabilities of the General Audit Department of the Ministry of Finance and the Financial Control Unit of the Budget Office (DGO) through human and technological capacity building.

(vii) Approve and have the Council of Ministers adopt a new state budget classification system in line with WAEMU regulations and implement it for the 2009 budget process.

(viii) Finalize the merger of the payroll databases of the Ministry of Finance and the Ministry of Public Administration.

17. Beyond 2008 the fiscal position should steadily improve as controls are restored and nonpriority expenditures are reined in. Continued commitment to policy reform will enable the government to implement stronger Fund-supported reform programs and achieve sustained donor support. The government will in particular pursue efforts to contain the wage bill through civil and security sector reform. The overall fiscal balance (excluding grants) is projected to decline to below 20 percent of GDP in 2010, to levels that are more manageable given domestic resources and sustainable levels of external budget support.

18. The authorities intend to avoid introducing or intensifying exchange and trade restrictions in 2008 and beyond.

IV. Capacity-Building and Technical Assistance

19. Capacity-building is a key complement to fiscal reform in order to ensure that reform is effective and sustainable. The recent missions from the World Bank and the IMF—including its regional technical assistance center West AFRITAC—identified technical assistance needs in all areas of public financial management as well as macroeconomic statistics (Table 1). The highest priority is assistance to the Customs, Treasury, and Tax Departments and the debt unit. The IMF West AFRITAC and AFRISTAT are providing technical support to strengthen public financial management and tax collection, as well as improve the statistics. The World Bank is also assisting with these reforms through its support to low-income countries under stress (LICUS), including financing a long-term resident fiscal advisor.

Table 1.

Technical Assistance Needs of the Ministry of Finance

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TA requested and under consideration.

TA in place.

First mission conducted in January 2005.

V. Program Monitoring

20. The monitoring of progress on the program outlined will be based on the quantitative and structural indicators provided in Tables 2 and 3. The quantitative indicators are (i) a floor on government revenue (tax and nontax); (ii) a ceiling on the domestic primary deficit; (iii) a ceiling on domestic financing of the budget; (iv) no new domestic arrears; and (v) a ceiling on payment of previous arrears; and (vi) no short- or long-term nonconcessional external borrowing. The quantitative indicators are based on the monthly treasury cash flow plan for 2008 (Table 4).7 Specific definitions and explanations are contained in the annexed Technical Memorandum of Understanding (TMU). The government will provide, on a timely basis, all necessary data to monitor the program as indicated in the technical memorandum of understanding. A second EPCA purchase will take place in July 2008.

Table 2

Guinea-Bissau: Quantitative Indicators under the Emergency Post-Conflict Assistance for 2008 Quarterly Targets1/

(Cumulative, in millions of CFAF)

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Cumulative from January 1 of the corresponding year. The definition of the aggregates is provided in the Technical Memorandum of Understanding (TMU).

Floor. Defined as direct taxes (01.00.00) plus indirect taxes (02.00.00) plus fishing licenses (03.01.01).

Ceiling. From TOFE. If the disbursed amounts of EU fishing compensation are lower (higher) than programmed, the ceiling will be increased (lowered). For the programmed quarterly amounts of EU fishing compensation for 2008 see the TMU (¶ 11).

Ceiling. From TOFE. If the actual amount of external budgetary assistance (including EU fishing compensation) falls short of program forecasts, the ceiling will be increased for the full amount of the shortfall. For the programmed quarterly amounts of external assistance (including EU fishing compensation) in 2008 see the TMU (¶ 11).

Ceiling. At end-March, end-June and end-September, stock of accounts payables (rest-a-payer); at end-December, accounts payables accumulated during the current year (2008) and still outstanding one month after the end of the year in the case of wages and other personnel expenditures (including pensions) and three months after the end of the year, in the case of non personnel expenditures. The ceiling on the accumulation of new domestic arrears will be adjusted in line with available domestic financing of the budget. In particular, if the government is not able to increase (decrease) the domestic financing of the budget by the full amount of the shortfall (excess) in external budget support, the ceiling in the accumulation of new domestic arrears will be adjusted upward (downward) by that difference.

Ceiling. Includes arrears in wages, transfers, and goods and services previous to 2008 and outstanding as of January 1, 2008. If external financing specifically targeted to clear arrears is available, the ceiling will be increased for the full amount of the funds available.

Table 3.

Guinea-Bissau: Prior Actions and Structural Indicators Under the Emergency Post-Conflict Assistant January 1, 2008—December 31, 2008

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Table 4.

Guinea-Bissau: Treasury Cash-Flow Plan 2008

(CFAF millions)

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Source: Guinea-Bissau authorities, and IMF staff estimates and projections based on 2008 Budget

21. To ensure the success of the program, and as prior actions, the government has (i) submitted to parliament its 2008 government budget consistent with the agreement in this Memorandum; and (ii) sought firm assurances from donors to fully cover the 2008 fiscal financing requirements. The authorities have received assurances that there are no objections to EPCA from official Paris Club creditors to whom Guinea-Bissau is currently in arrears. They have also informed non-Paris Club creditors that they will continue to have difficulties servicing their external debt service obligations, including during the EPCA program period.

Attachment II Technical Memorandum of Understanding for Program for 2008 to be Supported Under Emergency Post-Conflict Assistance

Bissau, January 9, 2008

1. This memorandum describes the definitions of the quantitative indicators for the Program for 2008 to be supported under Emergency Post-Conflict Assistance (EPCA) (Table 2) of the Memorandum on Economic and Financial Policies (MEFP) in accordance with the understandings reached between the authorities of Guinea-Bissau and the staff of the IMF. It also specifies the agreed periodicity and deadlines for transmission of data to the staff of the IMF for program monitoring purposes.

I. Quantitative Indicators and Adjustors
A. Quantitative Indicators

2. The quantitative indicators are the following:

a. cumulative floors on government revenue;

b. cumulative ceilings on the domestic primary fiscal deficit (on a commitment basis);

c. cumulative ceilings on the change in net domestic financing of the budget;

d. cumulative ceiling on new domestic arrears of the government, including wage arrears;

e. ceiling on payments of previous years domestic arrears (before 2008);

f. cumulative ceilings on new nonconcessional external debt contracted or guaranteed by the government.

Quantitative indicators have been set for end-March, end-June, end-September and end-December 2008, and their values are cumulative from January 1, 2008. Indicative targets for new nonconcessional external debt are continuous.

Definitions and computation

3. For the purposes of the EPCA, the government is defined as the central government of Guinea-Bissau. This definition excludes public entities with autonomous legal personality whose own budget is not included in the central government budget.

4. For the targeted ceiling presented in Table 1 below, government revenues include direct taxes, indirect taxes, and fishing licenses. The cash-flow estimates are based on the tax revenues and fishing licenses estimated in the draft budget for 2008.

Table 1.

Quarterly Targets for Government Revenues and Other Current Expenditures, 2008

(Cumulative, in millions of CFAF)

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Source: Budget 2008.

5. The domestic primary fiscal deficit on a commitment basis is based on the cashflow estimates provided in Table 4 of the MEFP. It is calculated as the difference between government revenue and domestic primary expenditure on a commitment basis. Government revenue includes all tax and nontax receipts and excludes external grants. The domestic primary expenditure consists of current expenditure plus domestically-financed capital expenditure, excluding all interest payments and externally financed capital expenditures. Government commitments include all expenditure for which commitment vouchers have been approved by the Ministry of Finance; automatic expenditure (such as wages and salaries, pensions, utilities, and other expenditure for which payment is centralized); and expenditure by means of offsetting operations. The estimated domestic primary balances for the program period are provided in Table 2 below.

Table 2.

Estimates of the Quarterly Domestic Primary Balance, New Domestic Arrears, and Payment of previous years’ arrears, 2008

(Cumulative, in millions of CFAF)

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Source: Table 4, MEFP.

6. New domestic arrears of the government are defined as follows: (i) At end-March, end-June and end-September defined as the stock of account payables (rest-a-payer); (ii) At end-December, defined as accounts payables accumulated during 2008 and still outstanding one month after end-December in the case of wages and salaries (including pensions), and three months after end-December in the case of goods and services and transfers. The targets for the program period are presented in Table 2 above.

7. Previous year’s domestic arrears are defined as domestic arrears in wages, transfers, and goods and services previous to 2008 and outstanding as of January 1, 2008. The targets for the program period are presented in Table 2 above. The program allows a partial payment of expenditure commitments related to 2007, that were not paid during that year and are still outstanding as of January 1, 2008, up to a maximum of CFAF 3.6 billion (see MEFP ¶ 14).

8. Net domestic financing of the budget is defined on the basis of the cash-flow estimates in Table 4 of the MEFP. Bank financing consists of the net changes in the balances of the treasury accounts at the BCEAO and at commercial bank(s)—excluding balances in those accounts that are not freely available for budget financing, such as accounts that are held under double signature arrangements with donors—as well as the outstanding amounts of loans, including T-bills, from the BCEAO and the commercial banks (local and regional). Domestic nonbank financing encompasses privatization receipts, as well as any other domestic financial debt held outside the banking sector, other than new domestic arrears as defined above, that may arise.Table 3 below provides the details.

Table 3.

Estimates of Domestic Financing by Quarter, 2008

(Cumulative, in millions of CFAF)

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Source: Table 2, MEFP.

9. The indicators for external debt are cumulative ceilings on new nonconcessional external debt contracted or guaranteed by the government. External debt is defined as debt held by creditors outside the WAEMU region. For the purposes of the EPCA, the definitions of “debt” and “concessional borrowing” are as follows:

a. The indicator for external borrowing applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt, adopted by the Executive Board of the IMF on August 24, 2000 but also to commitments contracted or guaranteed for which value has not been received. For purposes of these guidelines, the term “debt” is understood to mean a current, that is, not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows: (i) loans, that is, advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans, and buyers’ credits) and temporary exchanges of assets that are equivalent to fully collateralized loans, under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers’ credits, that is, contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided; and (iii) leases, that is, arrangements under which property is provided that the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lesser retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement, excluding those payments that cover the operation, repair, or maintenance of the property. Under the definition of debt set out above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g. payment on delivery) will not give rise to debt. For the purposes of monitoring the EPCA, arrangements to pay over time obligations arising form judicial awards to external creditors do not constitute nonconcessional external borrowing.

b. Loan concessionality is assessed on the basis of the commercial interest reference rates (CIRRs) established by the OECD. A loan is said to be on concessional terms if, on the initial date of contraction of the loan, the ratio of the present value of the loan, calculated on the basis of the reference interest rates, to its nominal value is less than 50 percent (that is, a grant element of at least 50 percent). For debts with a maturity exceeding 15 years, the tenyear reference interest rate published by the OECD is used to calculate the grant element. For shorter maturities, the six-month market reference rate is used. Purchases from the IMF are excluded from this limit.

10. The concept of government for the purposes of the indicators on external debt is broader than the one used for the budget aggregates, including all debt that may ultimately be deemed to be a liability of the state. In addition to the government as defined in paragraph 3, the definition includes administrative public institutions, public enterprises authorized to contract, guarantee, or accommodate nonconcessional borrowing, scientific and technical public institutions, professional public institutions, industrial and/or commercial public institutions and local governments.

B. Adjusters

11. The following adjusters will be in effect:

The ceilings on domestic primary fiscal deficit will be adjusted upward (downward) for any shortfall (excess) in E.U. fishing compensation:1

  • The ceiling on the domestic primary deficit (on a commitment basis) will be increased (lowered) in case of lower (higher) than programmed disbursement of E.U. fishing compensation, for the full amount of the shortfall (excess). The program assumes the following amounts of E.U. fishing compensation (cumulative from January 1, 2008): by end-March CFAF 0 billions; by end-June CFAF 4.9 billions; by end-September CFAF 9.8 billions; and by end December CFAF 9.8 billion.

The ceilings on domestic financing and on new domestic arrears will be adjusted upward (downward) for any shortfall (excess) in external budgetary assistance (including E.U. fishing compensation),

  • The ceiling on domestic financing will be adjusted in line with the amount of external budget support (including E.U. fishing compensation). In particular, the ceiling will be increased (lowered) in the case of shortfall (excess) in external budget support, by the full amount of the shortfall (excess). The program assumes the following amounts of external budgetary assistance (including E.U. fishing compensation) (cumulative from January 1, 2008): by end-March CFAF 6.8 billions; by end-June CFAF 21.2 billions; by end-September CFAF 31.9 billions; and by end December CFAF 34.6 billion.

  • The ceiling on the accumulation of new domestic arrears will be adjusted in line with available domestic financing of the budget. In particular, if the government is not able to increase (decrease) the domestic financing of the budget by the full amount of the shortfall (excess) in external budget support, the ceiling in the accumulation of new domestic arrears of nonpersonnel expenditures will be adjusted upward (downward) by that difference.

II. Program Monitoring

12. To allow monitoring of developments under the program, the Ministry of Finance will regularly report the following information to the staff of the IMF:

  • The detailed reports on revenue and expenditure by budget line and a completed summary table on central government operations (TOFE) (monthly, two weeks after the end of the month);

  • Data on any extra-budgetary expenditure (not included above), including: (i) incentives to tax collectors; (ii) restitutions to collecting agencies; (iii) and any other retentions operated by collecting agencies (DGA, DGCI, Fishing Ministry, etc.) (monthly, two weeks after the end of the month;

  • Tables on nonregularized expenditures (DNT) (Monthly, two weeks after the end of the month);

  • Table on accounts payable (rest-a-payer) broken down by budget category (wages, goods and services, transfers, other) (monthly, two weeks after the end of the month);

  • Previous years domestic arrears (including 2007): stock and clearance, broken down by budget category (wages, goods and services, transfers, other) (monthly, two weeks after the end of the month);

  • The monetary survey, the balance sheet of the central bank, and the balance sheet of the commercial banks, (monthly, within six weeks following the end of the month);

  • A table with data on Treasury/Central Government outstanding loans (including short-term advances) from/and deposits in local and regional commercial banks (monthly, two weeks after the end of the month);

  • The Treasury Committee monthly reports (monthly, within ten days after the end of the month);

  • The amount and terms of new external debt (concessional or not) contracted or guaranteed by the government (within four weeks after the end of the month);

  • A monthly table on the disbursements of budget support (grants and loans), by donors (two weeks after the end of the month);

  • Indicators to assess overall economic trends, such as the household consumer price index and exports of cashew nuts (when such information becomes available);

  • A table with a description of the status of implementation of the structural indicators in Table 3 of the MEFP (within two weeks after the end of the month); and

  • Information on any type of financial assistance received and not programmed. This should be reported on a continuous basis.

13. The Ministry of Finance will provide the staff of the IMF with any other information that the Ministry or the staff of the IMF deem necessary for programmonitoring purposes.

14. The above data will be provided to the Economist at the local office of the IMF in Bissau (Mr. Fonseca) for further transfer to the African Department of the IMF in Washington, D.C.
1

IMF Country Report No. 07/370.

2

Owing to delays in concluding a new fishing agreement in 2007, the E.U. will not disburse annual compensation (US$9 million), previously expected in 2007, until early 2008.

3

The delays in disbursement of World Bank and AfDB budget support reflected in part the delay in concluding a program for EPCA in 2007.

4

Guinea-Bissau’s total concessional external assistance needs over the medium term are significant. In addition to budget support to cover the domestic primary deficit, Guinea-Bissau also requires significant amounts of project grants and loans to finance minimal capital expenditures, mostly in the Public Investment Program. Guinea-Bissau will also need comprehensive debt relief to reduce the burden of annual scheduled debt service. For more on Guinea-Bissau’s external assistance requirements, see IMF Country Report No. 07/370.

5

See IMF Country Report No. 07/370.

6

The 2008 budget was approved by the National Assembly on December 7, 2007. This was a prior action for submission of the EPCA request to the Board (MEFP Table 1).

7

The European Union has already committed about US$1 million for the 2008 parliamentary elections. The budget incorporates CFAF 0.6 billion (US$1.2 million) in domestically financed election spending.

8

Installation of the system was supported by technical assistance from FAD and West AFRITAC.

9

The salaries of retrenched civil servants are being paid from a special fund set up at the Ministry of Public Administration pending full reintegration into the private sector. The E.U. is planning to roll out in 2008 the first phase of a US$ 10 million civil service reform project, which includes some support for reintegration of retrenched civil servants.

10

Guinea-Bissau also has sizeable external payment arrears to sovereign bilateral creditors and multilateral creditors and further accumulation of external arrears are expected during the EPCA-supported program period. See IMF Country Report No. 07/370.

11

The audit is to be financed by the European Union and is expected to be conducted in the first half of 2008.

12

See IMF Country Report No. 07/370.

13

Includes EU (US$7.3 million), World Bank (US$16 million), WAEMU (US$3 million), and other traditional donors, as well as nontraditional donors including South Africa (US$10 million). Most of these pledges are conditional on an EPCA for 2008 and good policy performance.

14

See IMF Country Report No. 07/370.

1

Minimum Program for Restoration of Fiscal Stability, May 2007.

2

A special account used to honor outstanding debt service is also held at the BCEAO.

3

Such expenditures were at the heart of the fiscal deterioration observed at the end of 2006 and the beginning of 2007.

4

Owing to delays in concluding a new fishing agreement, the E.U. will not disburse the annual compensation (amounting to CFAF 4.5 billion or US$9 million) expected in 2007 until early 2008.

5

Including World Bank (US$16 million), European Union (US$7 million), WAEMU (US$3 million), and the African Development Bank (US$1.7 million). The World Bank figure includes US$6 million delayed from 2007, as is the African Development Bank disbursement. The total also includes South Africa (US$10 million), Japan (US$4 million), Portugal (US$3 million), and Spain (US$3 million).

6

This audit will be conducted by a reputable international firm and financed by the E.U. The audit is expected to be launched before May 2008 and completed later in 2008.

7

The monthly cash flow also serves as an informal indicative monthly framework for regular assessments of performance under the EPCA.

8

Audit financed by E.U..

1

For the purposes of the TMU, the CFAF/US$ exchange rate is 495 and the CFAF/Euro exchange rate is 656.

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Cover IMF Staff Country Reports
Guinea-Bissau: Use of Fund Resources -Request for Emergency Post-Conflict Assistance: Staff Report; Press Release; and Statement by the Executive Director for Guinea-Bissau
Author:
International Monetary Fund
Volume/Issue:
Volume 2008: Issue 077
Publisher:
International Monetary Fund
ISBN:
9781451815856
ISSN:
1934-7685
Pages:
55
DOI:
https://doi.org/10.5089/9781451815856.002

Guinea Bissau: Wages, 2000-07

(In percent)
Figure 1.

Guinea-Bissau: Main Economic Trends, 2000-08

Cumulative Tax Revenues

Years 2006 and 2007 In CFAF Millions

Average Monthly Tax Revenues

Comparative Performance In CFAF Billions
Figure 2.

Guinea-Bissau: Main Fiscal Indicators, 2000-08