Global economic developments in Guinea-Bissau, especially lower export demand and prices, are expected to slow growth significantly and put pressure on the balance of payments. The 2009 fiscal framework aims to stabilize public finances and avoid new domestic arrears. The authorities are requesting a third Emergency Post-Conflict Assistance (EPCA) purchase of 12.5 percent of quota to support their 2009 economic framework. A third EPCA purchase would give them time to demonstrate a track record of policy performance that could pave the way for a new Poverty Reduction Growth Facility arrangement.

Abstract

Global economic developments in Guinea-Bissau, especially lower export demand and prices, are expected to slow growth significantly and put pressure on the balance of payments. The 2009 fiscal framework aims to stabilize public finances and avoid new domestic arrears. The authorities are requesting a third Emergency Post-Conflict Assistance (EPCA) purchase of 12.5 percent of quota to support their 2009 economic framework. A third EPCA purchase would give them time to demonstrate a track record of policy performance that could pave the way for a new Poverty Reduction Growth Facility arrangement.

III. Background

1. At end-2008, Guinea-Bissau’s stock of public and publicly guaranteed (PPG) external debt amounted to US$1,040 million (246 percent of GDP), of which US$383 million were in arrears (Figure 1 and Tables 1 and 2). Bilateral debt accounts for about 51 percent of total PPG external debt (37 percent is owed to Paris Club creditors). Multilateral debt accounts for about 49 percent of total PPG external debt (28 percent is owed to IDA, 14 percent to AfDB/AfDF and 0.9 percent to the IMF), with a marginal amount outstanding to commercial creditors. In end-2008 Present Value (PV) terms, external debt was US$788 million or 171 percent of GDP and 573 percent of exports. Despite the concessional nature of most of the external debt, the debt burden indicators far exceed the relevant policy dependent debt thresholds (Text Table 1).2

Figure 1.
Figure 1.

Stock of External Debt, 2000-08

Citation: IMF Staff Country Reports 2009, 236; 10.5089/9781451815870.002.A002

Source: World Bank and IMF staff estimates.
Table 1.

Guinea-Bissau: External Debt Outstanding, 2000-081

(In millions of U.S. dollars, including arrears)

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

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

Table 2.

Guinea-Bissau: External Arrears Outstanding, 2000-081

(In millions of U.S. dollars)

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

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

Text Table 1.

Summary of Baseline External Debt Sustainability Indicators 1/

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Source: IMF staff estimates.

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

Threshold over which countries considered as poor performers according to their CPIA would have at least a 2 5 percent chance of having a prolonged debt distress episode in the coming year. Guinea-Bissau lies within the bottom quintile of countries ranked by CPIA.

2. Domestic debt has continued to increase in recent years, reaching CFAF 144 billion (70 percent of GDP) at end-2008, from CFAF 125 billion in 2006, and CFAF 91.1 billion in 2000, mainly as a result of steady accumulation of arrears on government wages, goods and services, and new regional borrowing. A large amount of domestic debt corresponds to outstanding arrears on wages, goods and services (CFAF 56 billion at end- 2008) (figure 2).3 Other large domestic debt corresponds to a required capital contribution to join WAEMU. Under the terms of its accession to the WAEMU in 1998, Guinea-Bissau agreed to a contribution of CFAF 70 billion to be paid over 25 years starting in 2005, but only a small fraction has been paid using distributed dividends.4 At end-2008, some CFAF 58.8 billion remains to be paid. Other components of domestic debt include commercial debt (CFAF 14 billion) outstanding to WAEMU banks, of which CFAF 7.2 billion are Treasury bills outstanding since 2006. The government has also accumulated some CFAF 15 billion in arrears owed to the central bank (BCEAO), including to compensate the BCEAO for repayments to the IMF made on behalf of the government. Including the domestic debt, the PV of total public sector debt stood at 256 percent of GDP and 807 percent of government revenue and grants at end-2008.

Figure 2.
Figure 2.

Composition of Public Debt (Debt Stock at end-2008

Citation: IMF Staff Country Reports 2009, 236; 10.5089/9781451815870.002.A002

Source: World Bank and IMF staff estimates.

3. Guinea-Bissau reached the decision point under the HIPC Initiative in 2000, but has so far not reached the completion point. In 2000, the government failed to maintain macroeconomic stability causing its PRGF supported program to go off track at a very early stage.5 Two Fund staff-monitored programs (SMP) followed, in 2005 and 2006. Progress under both SMPs was mixed. 6 A full Poverty Reduction Strategy Paper (PRSP) was finalized in 2006 after delays owing to political instability and capacity constraints.7 In 2008, the government agreed to a new timeline to re-engage in a program supported by the IMF. The Fund approved two purchases under Emergency Post-Conflict Assistance (EPCA) in 2008. A third EPCA purchase is scheduled for Fund Board discussion in June 2009. A PRSP Progress Report is under preparation. Contingent on satisfactory performance under the 2009 EPCA-supported program, discussions for a new PRGF arrangement could be initiated in the second half of 2009. Satisfactory performance under a PRGF arrangement, in turn, is a necessary condition for reaching the HIPC completion point in the first half of 2010.

4. Since the completion point has not been reached, Guinea-Bissau has not benefited from most of the debt relief committed at decision point. At the decision point in 2000, external creditors of Guinea-Bissau were expected to provide HIPC relief amounting to US$416 million in end-1999 PV terms (currently estimated at about US$579.9 million in nominal terms).8 But as Guinea-Bissau went off-track with its PRGF program, it has been liable for servicing a large share of external debt in full since 2001. Many agreements signed with multilateral and bilateral creditors have not been implemented because the country failed to remain current on debt service obligations.9 The Paris Club declared null and void any debt rescheduling agreements beyond end-2001 and the IMF suspended interim debt relief after the 2000 PRGF had gone off track. The African Development Bank (AfDB)10 and IDA11 are currently providing interim debt relief which is expected to continue until 2011. Since 2000, only China and Cuba have cancelled all outstanding claims.

5. After the decision point in 2000, Guinea-Bissau could not service its external debt and accumulated arrears to most of its external creditors. Since 2001, the country has not repaid any creditor that did not provide interim relief, with the exception of the IMF. The stock of external arrears has increased from US$142 million before decision point in December 2000 to US$383 million at end-2008.

IV. Underlying Assumptions

6. The macroeconomic framework underlying the DSA is based on the implementation of sound macroeconomic and structural policies, and external financing (grants and highly concessional loans). Box 1 summarizes the key macroeconomic assumptions.12 Growth projections average 4.2 percent over 2009 to 2028. This reflects a stabilization of the political environment and the government’s intention to raise the growth potential of the economy, mainly through investments in agriculture, infrastructure and energy provision, as well as efforts to improve the business environment and to attract FDI related to investments in the mining sector. Over the medium and long term, these efforts are expected to lead to fiscal consolidation and to stimulate significant export growth that also outpace any FDI-related import growth. Grants and loans from donors as a percentage of GDP are projected to remain at historical levels. Going forward, the entire financing gap is assumed to be filled through multilateral grants and loans.

7. The DSA assumptions underlying the baseline scenario differ slightly from the previous DSA in 2007.13 They stem from updating key macroeconomic variables in the short and medium term based on recent evidence and a newer global economic outlook. For this reason, projections for growth and exports have worsened in the near term, in line with current global economic conditions. Further differences arise as the evolution of the domestic borrowing situation requires adjusted repayment assumptions.14 Long-term growth assumptions for 2015–29 remain broadly unchanged.15 But with fiscal consolidation still under way, the domestic primary fiscal deficit is now assumed to decline less rapidly relative to previous projections. Without access to non-concessional loans and the regional financial market, any remaining gap will have to be covered by higher budget grants. These are expected to slightly increase relative to the average levels observed over the last few years, stimulated by the ongoing political and macroeconomic stabilization. Moreover, the external sector outlook has been revised downwards, mainly because of slow progress in achieving export diversification.

Macroeconomic Assumptions Underlying the DSA Baseline Scenario

The macroeconomic assumptions over the period 2009 to 29 are as follows:

Real GDP growth is expected to first drop from 3.3 percent in 2008 to 1.9 percent in 2009 and then to gradually recover until it reaches 4.5 percent over the period from 2016 onward. This exceeds the historical average by roughly one percentage point, reflecting an assumed stabilization following a history marked by great political instability and inappropriate macroeconomic policies which are expected to improve in the period ahead.

Inflation, as measured by the GDP deflator, is assumed to grow at a rate slightly below CPI inflation in the medium term, reflecting a worsening in the terms of trade. Over the long term, both GDP deflator and CPI are projected to return to their historical level of 2 percent.

The non-interest current account deficit (including grants) is expected to deteriorate over the medium term from 0.2 percent of GDP in 2008 to about 7 percent by 2015, reflecting projected sustained weakness in cashew prices, Guinea-Bissau’s dominant export. This is significantly above the deficit of 2 percent of GDP observed over the 2000-08 period. Over the longer term to 2029, real export volumes are projected to grow at around 4.5 percent per year, contributing to a reduction in the current account deficit back to under 3 percent of GDP. Growth in overall exports also reflects in part expected strong growth in non-cashew exports over the medium term, as structural reforms and a more stable political environment contribute to an improved investment climate.

The domestic primary fiscal deficit (i.e. revenue, excluding grants, minus non-interest expenditure, excluding foreign-financed investment projects) is assumed to gradually decrease from 8.3 percent of GDP in 2009 to 5.3 percent from 2019 onwards, due to stable revenues as a percentage of GDP and improved public expenditure management.

Net aid flows (grants and concessional loans) are expected to slightly increase in line with GDP. Budget support grants are projected at 10 percent of GDP per annum. Project grants are projected at nearly 27 percent of GDP during the period of 2009–11 due to large foreign-supported projects (e.g., new government office complex, hospitals and schools). They will gradually decrease to 19 percent of GDP in 2017, reflecting continued implementation of public investment programs. It is assumed that there will be no nonconcessional borrowing, in an environment in which the country will not have meaningful access to commercial debt markets. It is expected that all borrowing would be from multilateral sources. Fiscal financing gaps will thus have to be filled through highly concessional loans, especially since running further domestic arrears over the medium and long term would not be feasible. The grant element in new disbursements is assumed to remain above 50 percent. Concessional loans are assumed to be on standard terms.

Access to public sector domestic borrowing will remain difficult in view of the sizeable arrears. It is assumed that the part owed to the regional banking sector will be rescheduled in the course of 2009 and then gradually repaid by end-2028. Annual capital contributions to WAEMU are expected to be fully made from 2010 onwards, and to continue until arrears accumulated up to then are fully paid off. Domestic arrears owed to commercial banks, in turn, are projected to be fully rescheduled in 2010 and, along with other domestic arrears, repaid by 2029 using concessional loans.

V. External DSA

A. Baseline: No Debt Relief

8. Under the baseline scenario, all PPG external debt indicator ratios decline from their historical levels, but remain well above the policy-dependent debt burden thresholds (Tables 1a, 1b and figure 1a). The baseline presumes that the HIPC completion point is not attained, but that real GDP growth converges to the long-run average of about 4.5 percent per annum.35 Both, in nominal and PV terms, external debt indicators persist at very high levels. All debt indicators stay far above the indicative thresholds for poor performers (Text Table 1). Any downward trend is mainly driven by the assumption that Guinea-Bissau only takes out highly concessional loans to finance fiscal gaps.

Table 1a.

External Debt Sustainability Framework, Baseline Scenario, 2006–2029 1/

(In percent of GDP, unless otherwise indicated)

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Source: IMF and World Bank staff simulations.

Includes both public and private sector external debt.

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

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

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

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

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

Defined as grants, concessional loans, and debt relief.

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

Table 1b.

Guinea-Bissau: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2009–2029

(In percent)

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Source: IMF and World Bank staff projections and simulations.

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

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

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

Includes official and private transfers and FDI.

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

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

Figure 1a.
Figure 1a.

Guinea-Bissau: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2009–2029 1/

Citation: IMF Staff Country Reports 2009, 236; 10.5089/9781451815870.002.A002

Source: IMF and World Bank staff projections and simulations.1/ The most extreme stress test is the test that yields the highest ratio in 2019. In figure b. it corresponds to a One-time depreciation shock; in c. to a Exports shock; in d. to a One-time depreciation shock; in e. to a Exports shock and in picture f. to a One-time depreciation shock

B. Alternative Scenarios and Stress Tests

9. Should Guinea-Bissau reach the HIPC completion point in the first half of 2010, its debt burden will be significantly alleviated, although most debt burden indicators will continue to remain high (Table 1b, Scenario A3). Satisfactory performance under the PRGF arrangement as well as achievement of other completion point triggers would help the country reach completion point in the first half of 2010. This alternative scenario assumes total debt relief—including HIPC, MDRI and additional rescheduling of arrears—of US$620 million in end-2010 PV terms.36 In this context, the NPV of external debt to GDP falls significantly due to the assumed clearance of external arrears, and the lower debt service after HIPC and MDRI debt relief (down by about 5 percent of GDP per year). Yet even in the long run, the PV of debt stays above the relevant indicative thresholds (except for PV of debt-to-revenue in 2029), irrespectively of whether debt is measured relative to GDP, exports or government revenues. Only debt service is expected to decline to below-threshold levels, reflecting highly concessional terms of existing debt and the terms assumed for the treatment of arrears and new borrowing.37

10. Standard stress tests to the baseline scenario confirm the vulnerabilities to unexpected shocks. The external debt of Guinea Bissau is extremely vulnerable to a onetime 30 percent depreciation in the nominal exchange rate (Table 1b, Scenario B6): the PV of debt would increase by 77 percentage points of GDP in 2010, relative to the baseline in that year. Nominal exchange rate depreciation is the most extreme shock in terms of PV/GDP, debt/revenue, and debt service/revenue (Figure 1a). The other shock that the country is highly vulnerable to is a one-standard deviation negative export shock (Table 1b, B2): shocks on exports can have a large impact on both the PV debt/exports and debt service/export ratios. All other stress tests (Table 1b, B1 and B3 to B5) confirm these vulnerabilities from different angles.

VI. Public DSA

A. Baseline: No Debt Relief

11. The baseline scenario, adapted from the same assumptions and consistent with the external DSA, shows a deterioration of domestic debt indicators in the short term (Table 2a, 2b and Figure 2a). Over the long run, total public debt (domestic and external) as a percent of GDP decreases, similar to the behavior of external debt described in the previous section. Despite a long run downward trend, the PV of total public debt to GDP ratio remains very high. This points to a highly vulnerable debt position, particularly in view of the possibility that any deterioration in the underlying fiscal stance or limited access to concessional loans could further deteriorate the situation. Shocks to the economy are also likely to significantly increase the debt burden.

Table 2a.

Guinea-Bissau: Public Sector Debt Sustainability Framework, Baseline Scenario, 2006–2029

(In percent of GDP, unless otherwise indicated)

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

Gross general government debt (external and domestic).

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

Revenues excluding grants.

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

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