Guinea–Bissau: Staff Report for the 2010 Article IV Consultation and Request for a Three-Yea Arrangement Under the Extended Credit Facility and for Additional Interim Assistance Under the Enhanced Heavily Indebted Poor Countries Initiative—Informational Annex

Guinea-Bissau’s 2010 Article IV Consultation and request for a Three-Year Arrangement under the Extended Credit Facility are discussed. Despite the difficult external environment and its political challenges, in 2009, Guinea-Bissau made progress in stabilizing its economy through the Emergency Post-Conflict Assistance-supported program. Real GDP growth reached 3 percent, driven by a favorable cashew harvest and a pickup in construction activity. The main risks relate to political instability, vulnerability to external shocks, and the possibility of inadequate donor support.

Abstract

Guinea-Bissau’s 2010 Article IV Consultation and request for a Three-Year Arrangement under the Extended Credit Facility are discussed. Despite the difficult external environment and its political challenges, in 2009, Guinea-Bissau made progress in stabilizing its economy through the Emergency Post-Conflict Assistance-supported program. Real GDP growth reached 3 percent, driven by a favorable cashew harvest and a pickup in construction activity. The main risks relate to political instability, vulnerability to external shocks, and the possibility of inadequate donor support.

Guinea-Bissau: Relations with the Fund

(As of January 31, 2010)

I. Membership Status: Joined: March 24, 1977; Article VIII

II. General Resources Account:

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III. SDR Department:

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IV. Outstanding Purchases and Loans:

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V. Latest Financial Arrangements:

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Formerly PRGF

VI. Projected Payments to Fund 2/

(SDR Million; based on existing use of resources and present holdings of SDRs):

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When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section.

VII. Implementation of HIPC Initiative:

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Assistance committed under the original framework is expressed in net present value (NPV) terms at the completion point; assistance under the enhanced framework is expressed in NPV terms at the decision point. Hence the two amounts can not be added.

Under the enhanced framework, an additional disbursement is made at the completion point corresponding to interest income earned on the amount committed at the decision point but not disbursed during the interim.

VIII. Implementation of MDRI Assistance: Not Applicable

IX. Safeguards Assessments:

The Central Bank of West African States (BCEAO) is the common central bank of the countries of the West African Economic and Monetary Union, which includes Guinea-Bissau. The most recent safeguards assessment of the BCEAO was completed on November 4, 2005. The assessment indicates that progress has been made in strengthening the bank’s safeguards framework since the 2002 safeguards assessment.

The BCEAO now publishes a full set of audited financial statements and improvements have been made to move financial reporting closer to International Financial Reporting Standards (IFRS). Furthermore, an internal audit charter has been put in place, mechanisms for improving risk management and risk prevention have been established and follow-up on internal and external audit recommendations has been strengthened.

The 2005 assessment identified a number of areas where further steps would help solidify the progress made. The status report on the implementation of safeguards assessment recommendations, received from the BCEAO in March 2007, and 2005 audited financial statements, indicate some progress, achieved by the Bank, in improving the external audit process (including adopting a multi year audit program), applying IFRS, expanding disclosures in the notes to financial statements on financial positions with the Fund by countries, including Guinea-Bissau, and further strengthening of the effectiveness of the internal audit function.

X. Exchange System and Exchange Rate Arrangement

Guinea Bissau accepted the obligations of Article VIII, Sections 2, 3, and 4 with effect from January 1, 1997. It joined the West African Economic and Monetary Union (WAEMU) in 1997, and has no separate legal tender. The exchange system common to all members of the union is free from multiple currency practices and exchange restrictions on the making of payments and transfers for current international transactions. Since January 1, 1999, the CFA franc has been pegged to the Euro at a fixed rate of € l=CFAF 655.95. On April 30, 2007, the rate of the CFA franc in terms of the SDR was CFAF 733.8=SDR 1. Effective January 1, 2007, the exchange arrangement of the WAEMU countries has been reclassified to the category of conventional pegged arrangement from the category of exchange arrangement with no separate legal tender. The new classification is based on the behavior of the common currency, whereas the previous classification was based on the lack of a separate legal tender. The new classification thus reflects only a definitional change, and is not based on a judgment that there has been a substantive change in the exchange regime or other policies of the currency union or its members.

XI. Article IV Consultation

Guinea-Bissau is on the standard 12-month consultation cycle. The last Article IV consultation discussions with Guinea-Bissau were held in Bissau March 16-30, 2006. The staff report was discussed by the Executive Board on July 31, 2006. Selected Issues and Statistical Appendix (IMF Country report No. 06/313) was also circulated to the Board.

XII. Technical Assistance

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XIII. Resident Representative

The Resident Representative in Senegal also covered Guinea-Bissau from September 1997 through July 2007. There is no longer a Resident Representative for Guinea-Bissau, but the local office is still open and staffed by a local economist.

Table 1:

Guinea-Bissau—Arrangements with the IMF, 1984-2009

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Source: International Monetary Fund.

Guinea-Bissau: Relations with the World Bank Group As of February 28, 2010

1. As of February 28, 2010, IDA had approved altogether 29 credits and grants for Guinea-Bissau for a total value of commitments of US$347.9 million equivalent. The most important sectors were the following: Transport/Infrastructure/ Energy (seven operations, total commitments: US$ 108.8million), Structural Adjustment/Development Policy Operations (budget support, three operations approved in 1987-2000, and two since 2008, of which one exclusively for the payment of primary teachers’ salaries; total commitments: US$81.4 million) and Social Sectors, including Health and Education (eight operations and US$ 67.2 million of total commitments). Two operations were implemented to support private sector development (overall commitment: US$ 41million), and three to provide technical assistance for economic management (overall commitment: US$ 22.9 million). Projects supporting extractive industries and agriculture/natural resources management benefited from 2 operations, each, with over commitments of US$ 19.9 million and US$ 6.7 million, respectively.

Budget Support Operations

2. IDA discontinued budget support operations in the early 2000s, in the context of political instability. Starting in 2008, however, the Bank initiated new budget support operations to Guinea-Bissau, first with an emergency economic rehabilitation operation approved in 2008 that provided funds exclusively for the payment of primary teachers’ salaries, and then with the first of a series of two programmatic Development Policy Grants (US$8 million) approved in June 2009 and disbursed in early September. The second grant in this series (US$6 million) is under preparation for approval in mid-2010.

Lending program

3. In June 2009, the Bank approved an Interim Strategy Note for Guinea-Bissau for 2009-2011, based on two pillars: (i) Strengthening Economic Management and Laying the Foundations for Improvement in the Productive Sectors; and (ii) Increased Access to Basic Services. Capacity Development for efficient governance and project implementation is a cross-cutting topic.

4. The currently active IDA Portfolio is composed of three operations with a total commitment of US$23 million, including a Coastal and Biodiversity Management Project (CBMP, US$3 million), a Multi-Sector Infrastructure Rehabilitation Project (US$15 million), and a Rural Community-Driven Development Project. As of February 28, 2010, the IDA undisbursed balance was US$13.7 million.

5. In addition to the available country IDA allocation, the Bank has mobilized, in FY09-10, about US$10 million from both the Bank and EU under the Food Price Crisis Response Trust Fund to support the agricultural sector and for school feeding/food-for-work programs in collaboration with WFP. Further, the IDA Community-Driven Development operation is complemented by a similar Participatory Rural Development operation of US$5 million, funded from the State and Peace Building (SPF) Trust Fund window for fragile states. The SPF also provides funding for Technical Assistance on Economic Management to the Ministry of Finance, complementing the IDA budget support, and an operation to support the implementation of the National Health Development Plan. Further complementary (co-) funding is provided by the Global Environment Facility (GEF) to the CBMP. An important multi-donor Education sector operation is currently under preparation for delivery in 2010 to be submitted to the Education for All-Fast-Track Initiative (EFA-FTI) for funding.

6. IDA continues to provide interim assistance to the country as part of the Initiative for the Heavily Indebted Poor Countries (HIPC). On January 29, 2008, the IDA Board approved the extension of HIPC interim debt relief up to 50 percent (in NPV terms) of total IDA debt relief expected to be granted to Guinea-Bissau under the HIPC initiative. The extended interim debt relief is expected to have freed up about $7 million in government resources annually.

Non-lending Program

7. In FY09, the Bank completed an Education Country Status Report (in preparation of the EFA/FTI funding proposal), and an Investment Climate Assessment. A Diagnostic Trade Integration Study was disseminated in FY10; further a Dept Management Performance Assessment carried out in September 2009; and finally, a Public Expenditure Management and Financial Accountability Review (PEMFAR), drawing in part on a EU-funded PEFA diagnostic and covering public financial management and procurement performance as well as a review of public expenditure in education, was finalized in December 2009 (a dissemination workshop was held on February 22-25).

8. The World Bank Institute (WBI) recently started activities in Guinea-Bissau with a workshop on sustaining natural capital. It is envisaged that WBI will launch more activities in the coming fiscal year, through inputs and capacity development activities in areas such as leadership and governance (demand-side governance), and possibly by contributing to the establishment of a Global Development Learning Center in Bissau.

IFC and MIGA:

9. IFC: As of February 28, 2010, IFC has no committed portfolio in Guinea-Bissau.

10. MIGA’s portfolio in Guinea-Bissau consists of two projects, sponsored by Senegalese and Malian investors. The investments, in support of the country’s infrastructure (telecommunications) and tourism sectors, have a combined gross exposure of $24.1 million. MIGA is currently working with British and French investors to provide coverage of three projects in the infrastructure (water) and tourism sectors.

Guinea-Bissau: Relations with the African Development Bank Group As of March 1, 2010

1. As of March 1st, 2010, AfDB had approved 35 operations for Guinea-Bissau, excluding multinational projects. This includes twenty six projects, four studies and 5 institutional supports representing a net commitment of 197.3 Unit of Account (UA). 32% of these operations have been in the social sector, 21% in the transport and infrastructure sectors and 15% in multisector. A total of UA 145.6 million representing 77.7% have been disbursed. As of March 2010, the active portfolio comprises six ongoing projects representing a total net amount of UA 44.48 million and a disbursed amount of UA 15.6 million.

Structural adjustment credits

2. AfDB has approved a total of UA 13 million for structural adjustment operations. These include two structural adjustment credits (SACs), one supplementary SAC, and one economic rehabilitation and recovery credit (ERRC). The SACs supported the government’s program in the areas of economic liberalization and reform of the public administration and public enterprise sectors and the ERRC supports peace building following the political unrest, promotes the revival of the economy and encourages the pursuit of reforms.

Lending Program

3. During January2008-March 2010, AfDB approved an interim HIPC debt release (US dollar 17.48 million, a Fragile State Facility grant (UA2 million), a fish sector support grant (UA2 million), a health sector grant (UA6 million), an emergency support grant to cholera (UA0.33 million), a capacity building grant to public administration (UA7.86 million) and an emergency budget support to budgetary reforms (UA5.7 scheduled for March 24, 2010.

Nonlending Program

4. The Bank prepared a portfolio review in 2008 and a mid-term review of the Country Strategy Paper in 2009. The Bank also participated in a Public Expenditure Management and Financial Accountability Review (PEMFAR) in 2009 in collaboration with the World Bank and the European Commission.

Guinea Bissau—Statistical Issues As of March 1, 2010

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Guinea-Bissau: Table of Common Indicators Required for Surveillance (As of March 1, 2010)

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Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A), Irregular (I); Not Available (NA).

Guinea-Bissau: 2010 Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility and for Additional Interim Assistance Under the Enhanced Heavily Indebted Poor Countries Initiative
Author: International Monetary Fund