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
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.