I. Introduction

1. At the outset, I would like to express my Bissau-Guinean authorities’ gratitude to the international community for its continuing support received over the past years, which has been helpful for the country to prevail over the difficulties of conflict and political instability. I would also like to thank the Fund for having maintained a constructive policy dialogue with my authorities amidst the challenges, and the staff for the constructive discussions, particularly during the 2007 Article IV consultations and their recent visit to Bissau.

2. As in my statement of September 17, 2007, I would like to express my authorities’ resolve to overturn the legacy of the past decade, and move the country into a sustainable political and economic situation, albeit significant challenges that still lie ahead. Since April 2007, the new government - appointed with strong support of the main political parties and trade unions - has embarked on an Emergency Program for the Restoration of Fiscal Stability with aim at stemming the economic deterioration, rein in fiscal policy and improve good governance including fight against corruption. The minimum program involved forceful measures to increase collection of revenue, recover tax arrears, control expenditures, and improve fiscal management and transparency. The government has successfully implemented these measures, which translated in improved fiscal situation during the second half of 2007 and resumption of donors’ support.

3. Moving forward, my Bissau-Guinean authorities intend to consolidate these gains through further measures to put the country’s public finances on a more sustainable path, build capacity for policy implementation, and lay grounds for the implementation of the much-needed structural reforms, especially in the civil and military services. My authorities have reiterated their wish to pursue this reform agenda under a program supported by the Fund’s Emergency Post-Conflict Assistance (EPCA). They still believe that an EPCA program would help further restore confidence in their macroeconomic management, improve domestic and external credibility, and build the necessary track record for consideration of a new PRGF-supported program and eventually progress towards the completion point for debt relief under the HIPC and MDR initiatives.

4. Although efforts have been made to gain increased support from the donor community, including non-traditional donors, my Bissau-Guinean authorities are confident that an EPCAsupported program will catalyze additional donors’ assistance to cover not only current pressing spending needs but also to finance the country’s long-term development agenda. They are grateful to their bilateral and multilateral partners for the significant financial and technical support pledged so far for the 2008 program. They would also like to reassure the international community that they are fully committed to implement all measures set out in their 2008 program, especially regarding revenue mobilization and expenditure execution and control. Moving forward, my authorities expect to continue working in concerted efforts with the international community, in order to create the necessary conditions for the implementation of programs that will continue to promote stability and contribute to higher economic growth and poverty reduction.

II. Recent economic development

5. Years of conflicts and political instability have left Guinea-Bissau in a very fragile situation, with a heavy toll particularly on the country’s infrastructure, on the institutional capacity for policy implementation as well as the fiscal situation, thereby wiping out the basis for higher economic growth. The real GDP growth for 2007 is estimated at 2.7 percent, lower than the initially projected 3.7 percent, owing mainly to less than expected production and exports of cashews, and the difficulties in the agricultural area which was affected by inadequate climate conditions. In addition, the extreme difficult fiscal situation as well as the lack of infrastructure, especially for energy and transport, continue to hold down private businesses. Inflation has remained low, although the continued rise of international oil prices in 2007 and recent surge in food prices could push inflation rate slightly above the WAEMU targeted rate of 3 percent.

6. The erosion of donor support, the difficulties experienced in exports of cashew as well as in imports, and the lower capacity in fiscal management led to a substantial deterioration of the fiscal stance at end 2006 and throughout the first half of 2007. The authorities resorted to borrowing from commercial banks and issuing of treasury bills in order to cover the financing shortfalls. These solutions could not stern the cash flows difficulties leading to the accumulation of large domestic and external arrears, notably the civil service salaries. To reverse this situation, the new government undertook to restore fiscal stability through implementation of policy measures that increase revenue collection, institute tight control on discretionary spending, abolish tax compensation for tax collectors, re-instate and strengthen the Treasury Committee to monitor cash flow, and improve transparency and financial management. Consequently, tax revenues were some 28 percent higher in July-October 2007 than during the same period in 2006, and current expenditure were brought down to 27 percent of GDP from 29 percent in 2006. Importantly, discretionary spending were kept within budget and the government was able to fully pay government wages, thereby lowering the risks of further civil unrest.

7. While disbursements of donor pledges resumed in the second half of 2007, some were delayed to early 2008 awaiting, among other things, the adoption of an EPCA program. To cover up the financing shortfalls, in addition to the delayed disbursement of EU fishing compensation following the tardy conclusion of related agreement, the government negotiated the rescheduling of domestic commercial debts, and eventually could not avoid some accumulation of domestic arrears. The authorities plan to clear a portion of these domestic arrears once the delayed donor support is disbursed in early 2008 and intend to mobilize additional donor assistance for clearing the remaining portion, as well as for other domestic arrears accumulated over the past years, after their audit.

III. Policy agenda for 2008 and beyond

8. Over the medium-term, the authorities’ program aims at pursuing the fiscal stabilization, shoring up donor support so as to increase international aid inflows and laying groundwork for the implementation of strategies and structural reforms that would revive economic growth, reduce poverty and achieve long-term fiscal and external sustainability. In line with these reforms, the program for 2008 targets a real GDP growth of 3.3 percent on ground of expected improvement in agriculture, particularly in the cashew sector, and an increase in public investments. Owing to the continued prudent monetary policy conducted by the regional central bank BCEAO, to which my authorities will continue to adhere to, inflation is expected to decline to levels below the 3 percent regional convergence criteria. The current account deficit is expected to widen slightly from 11 percent of GDP in 2007 to 12 percent - nonetheless a strong improvement compared to the 25 percent of 2006 - owing to expected higher prices for rice and oil imports and lower export volume of cashews.

9. The encouraging progress made in the implementation of the emergency fiscal program and the approval by parliament of the 2008 budget, which is in line with the macroeconomic framework agreed for EPCA, reflect the authorities’ strong commitment to implement bold measures meant to boost fiscal revenue mobilization, restrain public expenditure and promote a transparent financial management. The authorities intend to keep up the momentum and, on the fiscal front, they plan to achieve an overall fiscal balance (excluding grants) of about 21 percent of GDP in 2008, which is lower than in previous years. To this end, revenues are projected to increase by 5 percent to about 21 percent of GDP compared to 16 percent last year, owing mainly to the disbursements of fishing compensation and to tax collections projected to remain at the same share of GDP of last year. On the expenditure side, the program aims at a nominal freeze of current expenditure, including the wage bill, and at maintaining expenditures within available resources, both domestic and external. My authorities consider the nominal wage freeze as only temporary, and major steps have been undertaken in the design of strategies as well as action plans for the civil and military service reforms.

10. On the financing side, the authorities have already secured financial resources to fully cover the financing gap and avoid accumulation of domestic arrears for 2008 as a whole. Nonetheless, they continue to mobilize the donor community for increased support to their overall reform agenda and intend to hold a meeting in the course of this year to follow up on the November 2006 Donor Round Table conference. Furthermore, they remain ready to making further efforts to re-negotiate the rescheduling of domestic debts to the extent of any shortfalls in the external financing in 2008.

11. Building on the recommendations made by recent FAD and West AFRITAC technical assistance missions, the government will further implement policy measures to address the remaining structure weaknesses in their public financial management. Key among them are measures to improve accounting and information flows of all Treasury transactions, strengthen the inspection capabilities of the General Audit Department of the Ministry of Finance and the Financial Control Unit of the Budget Office, adoption of new state budget classification system in line with WAEMU and finalize the merger of the payroll databases. In view of the capacity constraints facing the country, my authorities are hopeful that the international community, especially the Fund and World Bank, will continue to provide their assistance in institutional and capacity building. My authorities are thankful to the recent missions from the World Bank and the Fund, which have identified technical assistance needs in all areas of public financial management as well as macroeconomic statistics. They look forward to working with the two institutions in these endeavors.

IV. Conclusion

12. My authorities are aware that the main challenges they face are to build up public institutions in order to sustain the socio-political environment, and to revive economic growth. In this regard, obstacles to growth and poverty reduction have been identified through the country’s PRSP, and policies and measures to address all the challenges need to be urgently implemented. Among these obstacles are the unsustainable fiscal situation, the lack of resources to finance basic public services notably in infrastructure as well as in the legal and judiciary sectors, and the low skills base of the labor force. My authorities’ approach is to urgently restore the sustainability of the fiscal stance and build the necessary fiscal space that would enable them to tackle the more difficult challenges above. My Bissau-Guinean authorities highly value the support they continue to receive from the international community as well as the constructive dialogue with the Fund over the past years. They consider the EPCA program as key in helping them to catalyze this momentum, and would appreciate Board’s approval.