Guinea-Bissau
First Review Under the Three-Year Arrangement Under the Extended Credit Facility and Financing Assurances Review-Staff Report; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Guinea-Bissau
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International Monetary Fund
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Publication Date:
22 Dec 2010
eISBN:
9781455213542
Language:
English
Keywords:
ISCR; CR; financing; government; cooperation agreement; government's effort; budget support; discussion of Guinea-Bissau; World Bank's International Development Association; Government finance statistics; Arrears; Tax administration core functions; West Africa; Africa; revenue collection; Nontax revenue; customs revenue base; financing gap; Debt relief; Budget planning and preparation
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1. The political situation was volatile in the first half of 2010 owing to the April 1 military incident, when a group of soldiers arrested the chief of staff of the armed forces and briefly detained the prime minister. Since then, the political situation has been stable. However, the former chief of staff of the armed forces and other officers arrested on April 1 are still detained, and development partners have asked the government to release or legally prosecute the detainees, with significant implications for budget support. Spillovers to the functioning of the civilian government have been limited, and the government ministries and parliament are operating normally.

Abstract

1. The political situation was volatile in the first half of 2010 owing to the April 1 military incident, when a group of soldiers arrested the chief of staff of the armed forces and briefly detained the prime minister. Since then, the political situation has been stable. However, the former chief of staff of the armed forces and other officers arrested on April 1 are still detained, and development partners have asked the government to release or legally prosecute the detainees, with significant implications for budget support. Spillovers to the functioning of the civilian government have been limited, and the government ministries and parliament are operating normally.

I. Economic Resilience Amid Challenging Political Circumstances

1. The political situation was volatile in the first half of 2010 owing to the April 1 military incident, when a group of soldiers arrested the chief of staff of the armed forces and briefly detained the prime minister. Since then, the political situation has been stable. However, the former chief of staff of the armed forces and other officers arrested on April 1 are still detained, and development partners have asked the government to release or legally prosecute the detainees, with significant implications for budget support. Spillovers to the functioning of the civilian government have been limited, and the government ministries and parliament are operating normally.

2. Macroeconomic performance benefitted from a rebound in the price of cashew and improved liquidity in the banking system.

  • Economic growth has been resilient. Strong terms-of-trade gains more than offset a weather-related decline in the cashew harvest. Construction activity, in particular in the energy sector and infrastructure, has been buoyant despite a delay in the government investment program. Overall, growth is expected to accelerate slightly to 3.5 percent in 2010, up from 3.0 percent in 2009 (Figure 1, Table 1), broadly in line with growth in the WAEMU region (Figure 2).

  • Private sector credit accelerated (Table 2). The government’s arrears clearance early in 2010 helped improve liquidity in domestic commercial banks.

  • Inflation is expected to be within the WAEMU target of 3 percent for the region. Inflation rose during the year driven by rising import prices for fuel and a weaker euro. However, monthly prices have stabilized, and with the expected WEO decline in the price of food imports, annual average inflation is projected at 2.5 percent for the year.

  • The external current account deficit, excluding official transfers, is expected to narrow moderately this year. While exports benefited from higher cashew prices, the income effect was moderated by a slight decline in the volume of cashew exports. With imports growing moderately, and net remittances stable, the external current account deficit (excluding official transfers) is expected to narrow, albeit less than envisaged under the program, to about 9¼ percent of GDP (Table 3).

Figure 1.
Figure 1.

Guinea-Bissau: Economic Developments, 2005–10

Citation: IMF Staff Country Reports 2010, 379; 10.5089/9781455213542.002.A001

Sources: Guinea-Bissauan authorities and IMF estimates.
Table 1.

Guinea-Bissau: Selected Economic and Financial Indicators, 2008–12

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

EBS/10/56.

Based on new GDP figures which doubled the previous GDP level due to broader coverage of the economy, consistent with System of National Accounts 1993.

Project grants in 2009 include externally financed large public investments.

Contribution to the growth of broad money in percent.

Nontax revenues decline by 0.4 percentage of GDP in 2011 because of lower EU fishing compensation after a one-off increase in 2010.

In 2010, the difference between program and projection is due to revised estimates of HIPC and MDRI assistance using debt data and incorporating news estimates of Paris Club comparable treatment based on the terms of the July Paris

Values in 2010 and thereafter reflect assumed impact of HIPC and MDRI debt relief.

Exclude domestic arrears estimated at 23 percent of GDP at end-2009.

Figure 2.
Figure 2.

Guinea-Bissau: Regional Perspective, 2000–10

Citation: IMF Staff Country Reports 2010, 379; 10.5089/9781455213542.002.A001

Source: African Department database, BCEAO, Guinea-Bissauan authorities and IMF staff estimates.
Table 2.

Guinea-Bissau: Monetary Survey, 2008–12

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Sources: BCEAO; and IMF staff estimates and projections.

EBS/10/56.

Table 3.

Guinea-Bissau: Balance of Payments, 2008–12

article image
Sources: BCEAO; and IMF staff estimates and projections

EBS/10/56.

Includes food aid and technical assistance to projects.

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

In 2010, arrears are assumed to be treated at HIPC completion point.

Assumed to be filled with IMF resources and additional donor support.

At program exchange rates.

3. The government had to adjust to a shortfall in budget support and uncertainty about its prospects (Figure 3). Guinea-Bissau received only a quarter of the budget support expected through June. The resulting shortfall was 2 percent of GDP (or CFAF 8.4 billion). Some of the support was simply delayed, having been disbursed (AfDB) or approved (WB) in July. However, for the year, the authorities expect a significant shortfall in budget support and financial assistance of 3.2 percent of GDP (or CFAF 13.3 billion).

Figure 3.
Figure 3.

Guinea-Bissau: Macroeconomic Policies, 2005–10

Citation: IMF Staff Country Reports 2010, 379; 10.5089/9781455213542.002.A001

Source: African Department database, BCEAO, Guinea-Bissauan authorities and IMF staff estimates.

4. Fiscal adjustment—a tightening of about 2 percentage points of GDP compared with the program—was achieved in the first half of the year through higher revenue and lower spending (Text Table 1):

  • Revenues exceeded the program target by ½ percentage point of GDP, driven by direct and indirect taxes, reflecting healthy economic activity and tighter controls at customs (DGA) and revenue administration (DGCI).

  • Expenditures were contained by 1½ percentage points of GDP below program. Savings reflected lower current primary spending due to reduced outlays in goods and services, and substantial underexecution of the public investment program.

Text Table 1.

Guinea-Bissau: Fiscal Developments 2009—10

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Sources: GNB authorities and IMF staff estimates and projections.

Includes EU Fishing Compensation.

II. Performance Under the ECF Program

5. Performance has been satisfactory despite the shortfall in budget support. All quantitative performance criteria (PCs) at end-June 2010 and all structural benchmarks were met (Tables 4 and 5). Fiscal revenues were above target, with strong tax collection more than offsetting delays in the disbursement of fishing compensation (nontax revenue). Except for the indicative target on social and priority spending, all quantitative targets for end-June have been met. Shortfalls in budget support and uncertainty about its prospects led the government to contain spending below program levels, including social and priority spending.

Table 4.

Guinea-Bissau: Quantitative Indicators for the ECF Program for 2010 Quarterly Targets 1

(Cumulative, CFAF millions)

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

Adjusted target under the program.

Performance criteria (PC) are defined for June and December. March and September are indicative. All performance criteria (PC) are ceillings and PC 3, 4 and 5 apply continously.

Indicative target for social and priority spending is adjusted from CFAF 16,246 to CFAF 8,647.

Table 5.

Guinea-Bissau: Structural Benchmarks Under the ECF

January 1, 2010–December 31, 2010

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Ministry of Finance

Ministry of Labor and Public Administration

Ministry of Economy

6. The government made progress implementing structural measures in several areas. To strengthen oversight and control over public procurement, the National Assembly passed a new procurement law in July establishing a central procurement unit and a public procurement regulatory authority. As part of government efforts to better disseminate information on budget execution, the government started publishing and releasing to parliament quarterly budget execution reports. For the first time since independence, the general administrative accounts for FY2009 were submitted to the Court of Accounts. With respect to defense and security sector reform (SSR), laws governing reorganization of the armed forces, the police, and the national guard were approved by the National Assembly in June and published in September. The legal framework for a pension fund for the military and security forces was approved in June, with a view to making the fund operational once financing from development partners becomes available.

7. The government implemented its arrears clearance plan. In addition to the clearance of the arrears with the commercial banks at the beginning of the year, the government paid CFAF 3.5 billion (about 0.8 percent of GDP) in arrears clearance to the private sector in June 2010 (Table 6), as envisaged under the program.

Table 6.

Guinea-Bissau: Medium-Term Action Plan to Address Domestic

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Source: Guinea-Bissau authorities; and IMF staff estimates.

Part of the 2008 wage arrears were paid in December 2009 (CFAF 1,900 million).

Part of the arrears to comercial banks (CFAF 2,900 million) were paid in 2009.

The government has requested to renegotiate all of its obligations to the BCEAO in a manner consistent with financing under the ECF-supported program.

Rescheduled over a period of 5 years.

Indicative only. The amounts do not include netting out of tax arrears.

Preliminary estimates of the uncompleted 2000–07 audit financed by the EU.

III. Macroeconomic Outlook and Economic Policies

8. The authorities reiterated their commitment to maintaining macroeconomic stability and pursuing the medium-term macroeconomic objectives under the ECF-supported program: (i) raise real growth to 4½ percent by program end, (ii) contain annual inflation below the WAEMU convergence norm of 3 percent, (iii) narrow the external current account gradually (excluding official transfers), and (iv) keep the budget deficit consistent with available financing, without adding to the government’s debt problem. The medium-term outlook is in line with these objectives (Figure 4).

Figure 4.
Figure 4.

Guinea-Bissau: Medium-Term Outlook, 2008–12

Citation: IMF Staff Country Reports 2010, 379; 10.5089/9781455213542.002.A001

Sources: Guinea-Bissauan authorities and IMF estimates and projections.

A. Macroeconomic Outlook

9. Staff and the authorities agreed the 2011 macroeconomic outlook is broadly unchanged compared with the program approved in May.

  • Economic growth is expected to accelerate moderately to 4.3 percent in 2011, driven by sustained cashew production, increased activity in cashew nut processing, and rebuilding of infrastructure.

  • Inflation is expected to remain within the WAEMU convergence norm, supported by the CFA peg to the euro.

  • The external current account (excluding official transfers) is projected to narrow slightly, assuming a slight rebound in the volume of cashew exports.

B. strengthening Public Finances

10. The authorities remain committed to strengthening public finances. Fiscal policy will contain the domestic primary deficit in line with available financing through higher revenue collection and expenditure control. This, combined with HIPC/MDRI debt relief, should help improve fiscal and debt sustainability. Fiscal reforms will aim at reinforcing revenue collection, deepening public financial management, and improving debt management.

Fiscal Policy

11. The government agreed to adjust its fiscal plans for 2010 to address the expected shortfall in budget support (3.2 percent of GDP). The adjustment reflects budget execution through August 2010, preserves priority spending, and minimizes the use of deposits at the BCEAO. Measures consist of preserving savings from higher revenues and lower spending in goods and services (by about 1 percentage point of GDP); underexecuting the budget for domestically financed capital spending by about 1½ percentage points of GDP; and drawing on government deposits at the BCEAO to raise domestic financing (by about ¾ percentage point of GDP). The government expressed its commitment to use resources that may become available from donors to restore spending in the priority areas of infrastructure, agriculture, health, and education, as well as rebuilding deposits at the BCEAO.

MEFP ¶16

12. Staff held discussions on the draft budget for 2011, which the authorities intend to send to parliament by early December, consistent with the following parameters: a domestic primary budget deficit of 1.7 percent of GDP, consistent with domestic primary spending of CFAF 55.3 billion and budget support of about CFAF 7.5 billion, without adding to Guinea-Bissau’s debt problem (Text table 2, Table 7).

MEFP ¶17

Text Table 2.

Guinea-Bissau: Fiscal Developments 2010—11

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Sources: GNB authorities and IMF staff estimates and projections.

Includes EU Fishing Compensation.

Table 7.

Guinea-Bissau: Central Government Operations, 2008–12

(CFAF billions)

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

EBS/10/56.

In 2009 includes 1.3 percent of GDP of V-Flex 2009 from the EU for payment of 2008 arrears.

Project grants in 2009 include new public investments externally financed.

In 2010, arrears are assumed to be treated as debt relief at HIPC completion point.

In 2010 assumed to be covered with EU V-Flex.

Assumed to be covered with IMF resources.

Table 7.

Guinea-Bissau: Central Government Operations, 2008–12 (concluded)

(Percent of GDP)

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

EBS/10/56.

In 2009 includes 1.3 percent of GDP of V-Flex 2009 from the EU for payment of 2008 arrears.

Project grants in 2009 include new public investments externally financed.

In 2010, arrears are assumed to be treated as debt relief at HIPC completion point.

In 2010 assumed to be covered with EU V-Flex.

Assumed to be covered with IMF resources.

  • On the revenue side, the budget foresees the government will adopt revenue measures worth 0.5 percent of GDP, by raising the reference price for cashew exports and that for imports of certain products that need valuation adjustments, mainly staples, and by increasing the tax rate on advance payment of profit tax (ACI) from 3 percent to 5 percent for the informal sector.

  • On the spending side, the government will freeze wages while accounting for contractual workers in the health and education sector in the wage bill.

13. The 2011 fiscal program is fully financed. Budget support is expected from the AfDB and the World Bank and no other budget support has been programmed for 2011. The HIPC completion point is assumed to be reached by end-2010 and creditors are expected to provide debt relief in accordance with the HIPC Initiative. There is a residual financing gap of CFAF 3.5 billion, which is expected to be filled by the ECF disbursement in 2011. The government is committed to further efforts to reduce spending, or recover more revenues, to make up for financing shortfalls. If, on the other hand, budget support is higher than envisaged in the program, staff and the government agreed that the resources would be used to restore the public investment program (PIP) and increase other priority spending, as well as rebuilding deposits at the BCEAO.

14. Staff and the authorities agreed it will be important to make best efforts to restore budget support from development partners to pre-2010 levels. The compression of spending on investment and non-wage goods and services that has taken place in 2010 and is projected to continue in 2011 delays progress on growth and poverty reduction. Sustained donor support and sufficient concessional financing will still be required in the coming years, in support of progress toward the MDGs.

Fiscal Reforms

15. Staff and the authorities agreed that fiscal reforms in 2011 will aim at mobilizing more revenue and deepening public financial management reforms, including debt management.

Mobilizing More Revenue

16. The authorities continue to see strengthening revenue collection as a priority (see Box 1). In addition to the tax measures in the 2011 budget, the government will continue modernizing and improving customs and tax administration as detailed in the MEFP, reflecting advice from the Fund’s Fiscal Affairs Department. Structural benchmarks are: (i) customizing and testing the ASYCUDA ++ system (August 2011); (ii) conducting a comprehensive review of all custom exemptions (June 2011); (iii) cross-checking customs data with tax returns for the largest importers (June 2011); and (iv) auditing importers underreporting tax liabilities (December 2011).

MEFP ¶20–22

Deepening public financial management reforms

17. The government is committed to continue strengthening public financial management (PFM). Structural benchmarks focus on (i) reviewing the legal framework that regulates revenue sharing agreements (“restitutions”) with the objective of increasing the share of nonearmarked revenues in the budget (December 2011), and (ii) establishing an operational link from budget/treasury under the SIGFIP to the customs and tax administration (March 2011).

MEFP ¶23

C. Medium-term Plan to Address Domestic Arrears

18. The government will address domestic arrears in line with the medium-term strategy under the ECF. In 2011, the government agreed to (i) monitor budget execution and available resources before carrying out its plan to pay CFAF 1.85 billion to the private sector; and (ii) complete the audit of the 2000-2007 arrears.

MEFP ¶18

D. Modernizing the Public Administration

19. To create fiscal space for priority spending, the authorities will pursue a gradual reform that modernizes the public administration and makes it more efficient. The Ministry of Labor and Public Administration is preparing a medium-term plan that gradually downsizes the civil service through mandatory retirement and removal of redundant workers and increases the efficiency of public administration by upgrading the qualifications and working conditions for civil servants (structural benchmark).

MEFP ¶24–25

Revenue Mobilization: A Cross-Country Comparison.

We put in perspective revenue mobilization by looking at how much and how fast countries in SSA have managed to mobilize more revenue in recent decades.

Weak revenue mobilization is the root cause of Guinea Bissau’s fiscal imbalances. It explains the dependence on budget support and lack of space to raise priority spending. In 2009, Guinea-Bissau collected revenues equal to 9 percent of GDP, the lowest ratio among all countries in Sub Saharan Africa (SSA) (Figure 1).

uA01fig01

SSA: Fiscal Revenue, 2009

(percent of GDP)1,2

Citation: IMF Staff Country Reports 2010, 379; 10.5089/9781455213542.002.A001

Source: African Department Database.1Countries not showing due to inconsistent data: Namibia.2Countries not showing due to unavailability of data: Eritrea, Kenya, Nigeria, South Africa, and Uganda.

While mobilizing more revenue is a policy objective and challenge for many SSA countries, some have managed to mobilize revenues faster than others. We look into the experience of 27 SSA-LICs in raising fiscal revenues, including tax and nontax revenues, from 1980 to 2009 and review 1-, 3-, 5- and 10-year periods to determine how much and how fast countries were able to mobilize more revenues.1/

Almost all SSA-LICS (26) managed to increase revenue ratios by 2 percentage points of GDP or more in at least one 3-year period in the last 3 decades (Figure 2). Over longer periods, countries have been able to achieve higher increases in revenue ratios, with the frequency distribution shifting to the right in 10-year periods. By comparison, Guinea-Bissau is raising its revenue ratio by 1.7 percentage points of GDP in the first two years of the program (2010–11).

uA01fig02

SSA LICs: Frequency Distribution: Change in Fiscal Revenue, 1980 - 2009

(percentage points of GDP)

Citation: IMF Staff Country Reports 2010, 379; 10.5089/9781455213542.002.A001

Source: African Department Database.Note: SSA LICs including fragile countries. Overlapping observations.1Excludes Eritrea, and Uganda.2Excludes Zimbabwe.3Excludes Liberia, and Zambia.

Can Guinea-Bissau do more in the coming years? Yes. Given the low base, Guinea-Bissau should be able to raise more revenues. While few countries managed to increase their revenue ratios by double digits, 16 SSA-LICs were able to raise revenue ratios by 5 percentage points of GDP or more in at least one 3-year period in the last decades. The revenue administration measures under the ECF-supported program should help Guinea-Bissau mobilize more revenues in the coming years, while tax policy reform, including the introduction of VAT, should help raise revenues in the longer term.

1/ Based on a cross-country study “Mobilizing Revenue in SSA LICs: How and How Fast?” being prepared by Paulo Drummond, Wendell Daal, Santiago Pena, and Luiz Edgard Oliveira.

20. Staff and the government agreed that implementing stricter payroll controls and establishing a more comprehensive payroll database are priorities. The database will rely on the census of the public administration, and should allow for adequate control and regular updating of civil service employment (Annex 1). In early 2011, the government will start using the computerized and unified payroll and personnel management system in the Ministries of Finance and Labor and Public Administration (structural benchmark). The system will be extended to all ministries by August 2011 (structural benchmark).

21. The government will work closely with partners to implement the defense and security sector reform. The government intends to build on the steps taken earlier this year. Following a decision by the EU not to deploy a new mission to monitor the implementation phase of the security sector reform, the government strengthened coordination with the United Nations Integrated Peace-Building Office in Guinea-Bissau (UNIOGBIS) and regional and bilateral partners, including ECOWAS and the Community of Portuguese Language Countries (CPLP), with the aim of preparing a plan of action to ensure adequate financing of the reform, especially that of the pension fund.

MEFP ¶26

E. Removing impediments to Private Sector Development

22. Faster economic growth will require a better business environment, more developed infrastructures, and sound management of the country’s natural resources. To improve the business environment, the government intends to identify and remove impediments to private sector development and improve the ease of doing business in Guinea-Bissau (structural benchmark, August 2011). The government will prepare a plan that can help the country start tapping into unexploited natural resources in the mining, oil, and gas sectors (structural benchmark, December 2011).

MEFP ¶27–30

F. Improving Access to Social Services

23. The government intends to make further progress on high rates of poverty. It will finalize the new five-year poverty reduction strategy (PRS) by the first quarter of 2011. Staff concur with authorities that increasing per capita income and reducing the incidence of poverty will require efforts on several fronts, including access to basic services (health and education) and agricultural development.

MEFP ¶31

G. Reinforcing Debt Management

24. Guinea-Bissau is still in debt distress and a prudent debt management strategy is imperative. Although its external debt outlook is expected to improve significantly after HIPC/MDRI debt relief, Guinea-Bissau would remain vulnerable to shocks. The government has committed not to contract or guarantee nonconcessional or short-term external debt, as defined in the technical memorandum of understanding (TMU). Moreover, any government or government-guaranteed borrowing (external or domestic) will be subject to prior approval by the finance minister. The government will improve debt management by (i) strengthening the unit of public debt management; (ii) producing quarterly reports on public debt (structural benchmark, June 2011); and, (iii) using the Debt Management Financial and Analysis System (DMFAS; SYGADE in French) to record and manage all public debt (structural benchmark, December 2011).

MEFP ¶32

H. Financial Sector and Monetary Policies

25. The authorities will continue to pursue monetary policy within the WAEMU framework. This arrangement has enabled the country to contain inflation and maintain a stable exchange rate.

26. Access to credit is still low. Much work is needed in contract enforcement. To strengthen legal rights the government will provide resources for the commercial tribunal to function and it will seek donor support for setting up a credit bureau and a collateral registry.

IV. Financing Assurances

27. The authorities are working to normalize relations with all external creditors, and are making good-faith efforts to resolve arrears to a single private external creditor. Arrears to Paris Club creditors are addressed in the Paris Club Agreed Minutes of July 2010. The authorities plan to address all remaining external arrears—including to multilateral creditors and to a single private creditor—through debt relief at HIPC completion point. The government has implemented 10 of 11 HIPC completion point triggers and is requesting a waiver for lack of continuous implementation of one trigger, for which it has taken remedial action. The authorities have contacted all external creditors to request their participation in the HIPC Initiative. To date, creditors accounting for over 80 percent of HIPC-eligible debt have confirmed their intention to provide debt relief at completion point consistent with the HIPC Initiative.

V. Program Monitoring and Risks

A. Program Monitoring

28. While the underlying objectives of the program remain unchanged, it has become necessary to modify the indicative target on social and priority spending for end-December 2010 in light of the significant shortfall in budget support (Table 4). All other quantitative indicative targets and all performance criteria remain unchanged.

29. The second year of the program covers the 12 months from January 1, 2011, to December 31, 2011, and includes quantitative indicators and structural measures relating to core areas of Fund expertise. The authorities and staff agreed on quantitative indicators and performance criteria (Table 8) and on structural benchmarks that focus on revenue mobilization and fiscal and debt management (Table 9). The second review is expected in May 2011 and the third review in November 2011 (Table 10).

Table 8.

Guinea-Bissau: Quantitative Indicators for the ECF Program for 2011

Quarterly Targets 1

(Cumulative, CFAF millions)

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

Performance criteria (PC) are defined for June and December. March and September are indicative. All performance criteria (PC) are ceillings and PC 3, 4 and 5 apply continously.

Table 9.

Guinea-Bissau: Structural Benchmarks Under the ECF January 1, 2011–December 31, 2011

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Ministry of Finance

Ministry of Labor and Public Administration

Ministry of Labor and Public Administration

Table 9.

Guinea-Bissau: Structural Benchmarks Under the ECF (concluded)

January 1, 2011–December 31, 2011

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Ministry of Finance

Ministry of Economy

Table 10.

Guinea-Bissau: Reviews and Disbursements under the Three-Year ECF Arrangement, 2010–13

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Source: IMF estimates.

For the amount approved for disbursement at the time of Board approval of the arrangement, 37.5 percent of quota, or SDR 5.325 million, was approved for the purpose of immediately repurchasing previously provided EPCA credit.

B. Program Risks

30. Guinea-Bissau faces significant risks, but risks to the Fund’s resources are moderate. The main concerns are political instability, vulnerability to external shocks, and the possibility of inadequate donor support, including delays in donor disbursements. Continued technical assistance will be vital to reinforcing the authorities’ implementation capacity. The country’s capacity to repay the Fund seems reasonably sound (Table 11). Risks to Fund resources are mitigated to a significant degree by the BCEAO’s role as fiscal agent and its solid track record in making payments to the Fund, even without reimbursement by Guinea-Bissau.

Table 11.

Guinea-Bissau: Indicators of Capacity to Repay the Fund, 2008–18

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Sources: IMF staff estimates and projections.

Data are actual through September 2010 and are projected after that.

Effective on January 7, 2010 interest on ECF credit outstanding would be zero in 2010 and 2011. It is assumed the ECF interest rate would be at 0.25 percent from 2012 and onward. Charges include net SDR charges and SDR assessments.

A new ECF arrangement of 157.5 percent of quota (SDR 22.365 million) was approved in May 2010, of which 37.5 percent of quota (SDR 5.325 million) was used for early repurchase of outstanding EPCA credit.

Total debt service includes IMF repurchases and repayments.

Assuming Guinea-Bissau reaches HIPC completion point in December 2010 and receives the remaining HIPC assistance on stock basis.

VI. Statistical Issues and Capacity Development

31. Staff agreed with the authorities on the need for better data dissemination and for capacity building to ensure effectiveness of fiscal reforms. The authorities will publish national account data this year for 2009, based on the SNA93. They will continue to publish a WAEMU harmonized consumer price index. On capacity building, priorities are customs, tax, and financial control departments. The Fund is providing technical support in public financial management, revenue administration, and national accounts statistics.

VII. Staff Appraisal

32. The authorities managed to maintain macroeconomic stability amid challenging political circumstances. Pursuit of prudent policies while moving forward on structural reform was critical for successful implementation of the program.

33. Staff welcomes the authorities’ satisfactory performance under the ECF-supported program. In light of shortfalls in budget support and limited sources of financing, fiscal policy had to find an appropriate balance between carrying out an already reduced spending envelope and preserving government deposits at the BCEAO to reduce vulnerability. The adjustments introduced by the government in the 2010 fiscal plans are in line with the understanding envisaged under the program.

34. The 2011 draft budget is realistic. It is consistent with available financing. Staff encourages the authorities to implement decisively the policies underlying the draft budget to control spending and raise domestic revenue through the implementation of new tax measures and better revenue administration next year. Staff supports the authorities’ decision to use additional budget support that may become available to restore spending in priority areas, including the public investment program. At the same time, the authorities are committed to pursuing fiscal adjustment to make up for financing shortfalls.

35. Staff welcomes the well-placed emphasis on collecting more revenue, better controlling budget execution, and improving PFM. These efforts will help create fiscal space for priority spending, while gradually reducing dependence on external budget support in the longer term. However, sustained donor support and sufficient concessional financing will still be required in the coming years, in support of progress toward the MDGs.

36. HIPC and MDRI debt relief is critical to securing debt sustainability. It is important that Guinea-Bissau reach the completion point before World Bank and AfDB interim debt relief expires. Debt relief will help Guinea-Bissau normalize relations with its creditors, and should open up space for needed poverty-related spending. But debt ratios will remain high. Therefore, the authorities’ medium-term strategy of filling financial needs with grant support and concessional financing will continue to be essential to help Guinea-Bissau have a sustainable debt path.

37. Staff recommends the completion of the first review under the ECF arrangement and the financing assurances review, and supports the authorities’ request for the second disbursement under the three-year ECF arrangement. Despite program risks, the authorities’ satisfactory performance under challenging circumstances, their efforts to normalize relations with external creditors and move ahead with economic reforms, and their commitment to successful implementation of the program warrant support from the Fund and Guinea-Bissau’s development partners.

Appendix I. Census of the Public Administration

For the first time in years the government of Guinea-Bissau has an accurate account of all employees working at the public administration. The authorities conducted a comprehensive biometric census of all public administration employees, excluding the military personnel covered by a separate census conducted in 2008.1 The biometric census was subject to verification through controls during the first half of 2010 and published in July 2010. It has helped to lay the groundwork for the government to prepare a broad civil service reform to achieve a more modern, efficient civil service.

The census was organized and carried out by the Ministry of Labor and Public Administration, and covered all employees in the public administration. The preliminary results were reviewed and validated by a committee, and on-site payroll controls were conducted to detect “ghost” workers and those collecting double salaries. Close to 4,000 out of 22,000 employees could not be verified.

According to the census, Guinea-Bissau has 18,317 employees in the public administration, of which 16,147 are nonmilitary personnel in the direct administration and the judiciary sector and are paid by the budget (see the table). Civil servants account for half of all public employees working in the direct administration. About 60 percent of all civilian employees in the direct administration work for the education and health sectors. Paramilitary employees are mostly concentrated in the Ministry of Interior, which includes police for public order, national guard, immigration, and the information services agency.

The census is being used to create a database that will feed into the Integrated Personnel Management System of the Public Administration (IPMSPA). This system will be an important tool for adequate and transparent management of the wage bill, allowing for a unified payment system.

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Public employees in wage bill include military forces, magistrate and direct administration.

Appendix II. Letter of Intent

Bissau, November 16, 2010

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

Washington, D.C. 20431

U.S.A.

Dear Mr. Strauss-Kahn,

1. This letter and the attached memorandum of economic and financial policies (MEFP) update and supplement our correspondence of March 11, 2010, describe performance under the government’s economic program for 2010, and propose our economic program for 2011.

2. The government economic program, supported by a three-year Extended Credit Facility (ECF), is on track. All performance criteria through end-June 2010 have been observed, and structural benchmarks for the first review were met (see Tables 1 and 2 of the MEFP). Except for the indicative target on social and other priority spending, all quantitative targets for end-June have also been met. The government is determined to speed up implementation of its investment program and priority spending in line with available financing.

3. In view of this performance, the Government of Guinea-Bissau requests completion of the first review and the second disbursement under the ECF arrangement of SDR 2.414 million. Completion of the first review will help pave the way for Guinea-Bissau to reach the Heavily Indebted Poor Countries (HIPC) Initiative completion point in late 2010.

4. The attached MEFP articulates the economic policies the government intends to pursue during 2011, as well as the targets and objectives under the program (performance criteria and structural benchmarks are included in Tables 3 and 4 of the MEFP). The government’s objectives continue to be achieving fiscal and external sustainability, reviving economic growth, reducing poverty, and making progress toward the Millennium Development Goals (MDGs). The policies elaborated in the MEFP are adequate to achieve the objectives of the ECF-supported program. However, if necessary, the government will adopt additional measures to achieve these objectives. It will consult with the Fund before adopting such measures or if there are changes in the policies contained in the MEFP, in accordance with the Fund’s policies on such consultations.

5. In line with our commitment to transparency, we request the IMF to publish this letter of intent, the attached MEFP, the Technical Memorandum of Understanding, the staff report, and the HIPC completion point document.

Sincerely yours,

/s/

Jose Mario Vaz

Minister of Finance

Attachment I. Memorandum of Economic and Financial Policies for 2011

I. Introduction

1. This memorandum summarizes the progress achieved since the adoption of the ECF-supported program and describes the macroeconomic policies and structural reforms the government plans to implement in 2011. The program objectives are unchanged: achieving fiscal and external sustainability, reviving economic growth, and making progress toward poverty alleviation and the Millennium Development Goals (MDGs). Policy priorities continue to focus on strengthening public finances; modernizing the public administration and rebuilding technical and policy implementation capacity; increasing access to social services and basic infrastructure; and developing the private sector.

2. Program implementation has taken place against the background of the April 1 military incident. Since then, the political situation has been stable. Spillovers to the functioning of the civilian government have been limited and the government ministries as well as the parliament are operating normally. Development partners continue to follow the resolution of the military incident closely, with implications for budget support.

II. Recent Economic Developments and Performance Under the ECF-Supported Program

A. Recent Economic Developments

3. Economic growth has been resilient. Strong terms-of-trade gains more than offset a weather-related decline in cashew harvest. Higher exports had a positive impact on disposable income and domestic demand. Construction activity has been buoyant despite a delay in the government investment program. Overall, growth is expected to accelerate slightly to 3.5 percent in 2010, up from 3.0 percent in 2009.

4. Shortfalls in budget support and uncertainty about its prospects led the government to contain spending below program levels, including social and other priority spending. Guinea-Bissau received a quarter of the budget support expected during the first half of the year, resulting in a shortfall in financing of CFAF 8.4 billion. This shortfall was accommodated through a combination of higher revenues and lower expenditures, ultimately affecting social and capital spending. In July, the AfDB disbursed its budget support and the World Bank approved its budget support operation. For the year, the expected shortfall in budget support and financial assistance amounts to 3.2 percent of GDP (or CFAF 13.3 billion).

5. Fiscal adjustment through June more than offset delays in donor support, reflecting strong revenue performance, lower current primary spending, and delays in investment spending. End-June 2010 fiscal data show a domestic primary balance of 0.5 percent of GDP (about 2 percentage points of GDP higher than programmed).

  • Revenues were ½ percentage point of GDP above program driven by direct and indirect taxes, reflecting healthy economic activity and tighter controls at customs (DGA) and revenue administration (DGCI).

  • Expenditures were kept below program. Spending in goods and services and capital investment were contained in light of delays in disbursement of donor support.

6. Inflation is still projected to be within the WAEMU target of 3 percent for the region. Private sector credit accelerated, reflecting the government’s domestic arrears clearance with the commercial banks early in the year.

7. The external current account excluding official transfers is expected to narrow moderately this year. Exports benefited from sharp increases in the price of cashew, only partly offset by a drop in volume of cashew exports. Stable net remittances also helped contain balance of payments pressures.

B. Performance Under the ECF Program

8. Fiscal performance has been satisfactory despite delays in the disbursement of external budget support, and all quantitative performance criteria (PCs) at end-June 2010 were met (Table 1). Fiscal revenues were above target, with strong tax collection more than offsetting delays in the disbursement of fishing compensation (nontax revenue) by the EU. Except for the indicative target on social and priority spending, all quantitative targets for end-June have been met. Shortfalls in budget support and uncertainty about its prospects led the government to contain spending below program levels, including social and priority spending.

Table 1.

Guinea-Bissau: Quantitative Indicators for the ECF Program for 2010

Quarterly Targets 1

(Cumulative, CFAF millions)

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

Adjusted target under the program.

Performance criteria (PC) are defined for June and December. March and September are indicative. All performance criteria (PC) are ceillings and PC 3, 4 and 5 apply continously.

Indicative target for social and priority spending is adjusted from CFAF 16,246 to CFAF 8,647.

9. All structural benchmarks have been met (Table 2). The treasury committee became operational, and it is proving to be an effective tool in improving cash management. The committee includes the minister of finance, the secretary of state of the treasury, the secretary of state of fiscal affairs, the financial controller, and the general directors of the treasury and budget. The government has also approved and implemented norms that helped tighten the recourse to simplified spending procedures. As a result, the government managed to keep nonregularized expenditures (the so-called “DNTs”) within program ceilings. In July, the data of the biometric census of the public administration was published. The Council of Ministers approved a law creating the legal framework for the “one-stop” shop. The treasury’s accounting system under the government’s financial management system (SIGFIP) became operational by end-August. The Automated System for Customs Data (ASYCUDA ++) has been installed in Bissau with assistant from UNCTAD.

Table 2.

Guinea-Bissau: Structural Benchmarks Under the ECF January 1, 2010–December, 31, 2010

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Ministry of Finance

Ministry of Labor and Public Administration

Ministry of Economy

10. Progress has been made implementing other structural reform measures. To strengthen oversight and control over public procurement, the National Assembly passed a new procurement law in July establishing a central procurement unit and a public procurement regulatory authority. As part of government efforts to better disseminate information on budget execution, the government started publishing and releasing to parliament quarterly budget execution reports. On defense and security sector reform (SSR), laws governing reorganization of the armed forces, the police, and the national guard were approved by the National Assembly in June and published in September. The legal framework for a pension fund for the military and security forces was approved in June, with a view to be made operational once financing from development partners becomes available.

11. The government is on track with the execution of its arrears clearance plan. The plan includes addressing the 1974–99 arrears to the private sector, which have already been audited, and completing the audit of the 2000–07 arrears. In addition to the clearance of the arrears with the commercial banks at the beginning of the year, the government paid CFAF 3.5 billion (about 0.8 percent of GDP) in arrears clearance to the private sector in August 2010.

III. Macroeconomic Outlook and Economic Policies for 2011

A. Macroeconomic Outlook

12. The government’s medium-term macroeconomic objectives are unchanged under the ECF-supported program: (i) raise real growth to 4½ percent by program end, (ii) contain annual inflation below the WAEMU convergence norm of 3 percent, (iii) narrow the external current account gradually (excluding official transfers), and (iv) keep the domestic primary budget deficit below 4 percent of GDP annually through 2012.

13. The 2011 macroeconomic outlook is projected to improve. Economic growth is expected to accelerate to 4.3 percent, driven by a rebound in cashew production, increased activity in cashew nut processing, and rebuilding of infrastructure, especially roads, ports, electricity, and water. Stable cashew prices and remittances, stemming from an improved global environment, should help support domestic demand and a further narrowing of the external current account deficit.

14. Inflation is expected to remain below the WAEMU convergence norm, supported by the CFA peg to the euro. Monetary and exchange rate policy will continue to be pursued within the WAEMU framework.

B. Fiscal Policy

15. The medium-term fiscal program will continue to aim at strengthening fiscal policy and achieving debt sustainability. The strategy seeks to reinforce revenue collection—low by regional standards—and make space for priority spending. The government will continue to address domestic arrears in line with available resources. The fiscal program reduces the domestic primary deficit gradually. This, combined with HIPC/MDRI debt relief, will improve fiscal and debt sustainability while limiting reliance on external budget support.

16. The government is adjusting its fiscal plans for 2010 to address the expected shortfall in budget support (3.2 percent of GDP). The adjustment is driven by several considerations: budget execution through August 2010 and preservation of priority spending and deposits at the BCEAO. Measures consist of higher revenues and lower spending in goods and services (by about 1 percentage point of GDP); underexecuting the budget for domestically financed capital spending by about 1½ percentage points of GDP; and drawing on government deposits at the BCEAO to raise domestic financing (by about ¾ percentage point of GDP). If budget support is higher than envisaged in the program, the government is committed to using resources to restore spending in the priority areas of infrastructure, agriculture, health, and education, as well as rebuilding deposits at the BCEAO.

17. The 2011 budget will implement strong measures and will be consistent with available financing. It will target a domestic primary budget deficit of 1.7 percent of GDP, consistent with domestic primary spending of CFAF 55.3 billion and budget support of about CFAF 7.5 billion, without adding to Guinea-Bissau’s debt problem. On the revenue side, the government will raise the reference price for cashew exports to US$ 750 per ton and for imports that need valuation adjustments (rice to CFAF 6000, sugar to CFAF 8500, and flour to CFAF 8500) and increase the tax rate on advance payment of profit tax (ACI) from 3 to 5 percent for the informal sector. On the spending side, the government will freeze wages while incorporating contractual workers in the health and education sector in the wage bill. Budget support is expected from the AfDB and the World Bank. The residual financing gap of CFAF 3.5 billion is expected to be filled by the ECF. The government will submit the 2011 budget to the National Assembly consistent with these parameters. In the event that budget support is higher, the government will restore its public investment program (PIP) and increase other priority spending.

18. The government will continue to address domestic arrears in line with the medium-term strategy under the ECF. For 2011, it will carefully monitor budget execution and available resources before carrying out its plan of paying a total of CFAF 1.85 billion. The government will also complete the audit of the arrears of 2000–07.

C. Structural Reforms

19. The government’s program will continue to center on strengthening revenue collection; improving public financial management; modernizing the public administration and creating space for priority spending; removing impediments to private sector development; improving access to social services; and reinforcing debt management.

(i) Strengthening Revenue Collection

20. A major source of fiscal imbalances in Guinea-Bissau is the low level of revenue compared with other Sub-Saharan African countries, including countries in WAEMU. Revenue depends heavily on tax collection at customs (export and import duties, as well as sales taxes on imports). Measures to mobilize revenue focus partly on improving customs administration, especially import processing and customs clearance, and the tax base also needs broadening.

21. To achieve its revenue collection targets, the government will modify customs and tax policy to enhance revenue collection and broaden the tax base. The government plans to (i) start raising the reference prices for customs purposes of certain imports toward market values in the 2011 budget; (ii) raise the reference price for cashew exports; (iii) increase the tax rate on the advance payment of the profit tax collected at customs (anticipation of industrial contribution); and (iv) start preparing for a transition from the general sales tax to the VAT, similar to other WAEMU countries. The government will request technical assistance from development partners on tax policy, possibly through a resident advisor.

22. To continue modernizing and improving customs and tax administration, the government will

  • On customs, (i) reintroduce seals on alcoholic beverages and tobacco to combat smuggling (by January); (ii) customize and test the system of ASYCUDA ++ with the parameters for Guinea-Bissau and train staff with the help of UNCTAD (by August); and (iii) conduct a comprehensive review of all customs exemptions to further broaden the customs revenue base, submitting a report to Council of Ministers (by June).

  • On tax administration, (i) revise taxpayer segmentation based on turnover criteria, with thresholds for small and large taxpayers at CFAF 10 and 40 million, respectively (by June); (ii) cross-check ASYCUDA ++ data with tax returns for 300 largest importers in 2009-10 (by June); (iii) audit importers underreporting tax liabilities, beginning with largest gaps (by December); (iv) increase to 90 percent large taxpayers filing rate for the general sales tax; and (v) continue to reinforce the large taxpayer unit in the Ministry of Finance to ensure compliance with tax declarations. Measures (i), (ii), and (iii) are prerequisites for preparing an action plan for the VAT in line with recommendations from the Fund’s fiscal affairs department (FAD).

(ii) Improving Public Expenditure and Financial Management

23. The government will continue to implement its public financial management (PFM) action plan. Measures will focus on bettering budget planning, improving predictability and control in budget execution, strengthening reporting procedures, and reinforcing internal and external controls.

Bettering budget planning

  • The government will review the legal framework that regulates revenue sharing agreements (“restitutions”) to increase the share of nonearmarked revenues in the budget, and will submit a proposal to the Council of Ministers (by December 2011). The review will include all restitutions between the collecting ministries (including allocated revenue from fishing, mining, and forestry; and administrative revenue such as revenue from passports) and the treasury.

  • The government will seek technical assistance from development partners to reinforce budget preparation procedures.

Improving predictability and control in budget execution

  • To ensure adequate cash management, the treasury committee in the Ministry of Finance will prepare and regularly update the treasury plan for the 2011 budget.

  • To improve financial management the government will establish an operational link form budget/treasury under the SIGFIP to the customs and tax administration (by March 2011).

Strengthening reporting procedures

  • The government will continue publishing quarterly budget execution reports, and send detailed budget execution reports to all sovereign institutions.

Reinforcing internal and external controls

  • The government will modify the organic law for the Audit Court to harmonize it with the WAEMU directives. It will submit to the Court of Accounts the budgetary execution accounts of 2010 (by September 2011).

(iii) Modernizing the Public Administration and Creating Space for Priority Spending

24. The government will launch a gradual civil service reform program to achieve a more modern, efficient civil service. The minister of labor and public administration is preparing a plan to submit to the Council of Ministers by January 2011. The plan will (i) include a medium-term schedule with annual targets to gradually downsize the civil service through mandatory retirement and removal of redundant workers and (ii) increase the efficiency of public administration by upgrading the qualifications and working conditions for civil servants. The government will use savings in the wage bill to help cover the cost of severance payments.

25. The government is working to implement stricter payroll controls and establish a more comprehensive payroll database. This will allow for adequate control, regular updating, and verification of civil service employment. By January 2011, the government will start using the computerized and unified payroll and personnel management system in the Ministries of Finance and Labor and Public Administration. The system will be extended to all ministries by August 2011.

26. The government continues to work with development partners to modernize defense and security sectors. The government is preparing an operational plan with a list of potential retirees and projects for the construction of military and security installations. The government will facilitate donor coordination with the participation of ECOWAS, CPLP, the UN, and other development partners. Financing will be needed for the pension fund.

(iv) Removing Impediments to Private Sector Development

27. The government program to remove impediments to private sector development has three main objectives: (i) improve the business environment; (ii) restore and develop basic power, transportation, and communication infrastructures; and (iii) start managing the country’s natural resources.

28. To improve the business and investment environment, the government will

  • Adopt the implementing regulations of the new investment code, which removes the multiplicity of investment regimes, eliminates the discretion of granting incentives under the old law, and provides a level playing field for private investors.

  • Prepare an action plan to further identify and remove impediments to private sector development and improve the ease of doing business in Guinea-Bissau (by August).

29. As part of its new strategy for growth and poverty reduction, the government identified areas where investments are most promising in terms of medium-term growth. These consist of sectors where the country has comparative advantage, such as agriculture and fishery, or sectors that constitute a significant constraint on growth, energy, transport and the port. The government is working with the World Bank to reactivate electricity generation and distribution installations in Bissau and will develop a sectoral strategy to promote alternative domestic energy sources. The government will coordinate closely with the BOAD and other development partners, with a view to improve roads connecting Bissau to neighboring countries and provide access to production areas. The construction of a fishing port should be ready by 2011.

30. The government wants to exploit mineral deposits and other natural resources over the medium term. Such resources could contribute to foreign exchange earnings and tax revenues, and enhance the country’s overall financial position, thus helping reduce poverty. The government will prepare a plan to manage the country’s natural resources by December 2011. This plan will help ensure that as preparatory work are undertaken in these areas, transparent and accountable practice will be followed in the mining, oil, and gas sectors, including dealing with the environmental impact of the development of mineral deposits. The plan would also include the feasibility studies of needed infrastructure such as the deep water port for developing bauxite deposits and roads for the phosphate deposits.

(v) Improving Access to Social Services

31. The government aims to make further progress toward addressing high rates of poverty. The government will adopt a new five-year poverty reduction strategy (PRS) that incorporates the lessons learned in implementing the 2007 PRS (by December 2010). Increasing per capita income and reducing the incidence of poverty will require efforts on several fronts, including improving access to basic services (health and education) and agricultural development because most of the poor live in rural areas and practice subsistence agriculture.

(vi) Reinforcing Debt Management

32. The government plans to improve debt management by

  • Strengthening the unit of public debt management;

  • Producing quarterly electronic reports on public debt (external and domestic) no later than three months after each quarter, in a manner consistent with the BCEAO reporting requirements, with the first report to be published by June 2011; and

  • Using the Debt Management Financial and Analysis System (DMFAS; SYGADE in French) to record, monitor, and manage all public debt (external and domestic) by December 2011.

33. The government will pursue a prudent debt management strategy. The government will not contract or guarantee any nonconcessional or short-term external debt, as defined in the Technical Memorandum of Understanding (TMU). Moreover, any government or government-guaranteed borrowing (external or domestic) will be subject to prior approval by the finance minister.

D. Financial Sector and Monetary Policies

34. Monetary policy will continue to be pursued within the WAEMU framework. This arrangement has enabled the country to contain inflation and maintain a stable exchange rate.

35. Access to credit is still low. Much work is still needed in the area of contract enforcement. To strengthen legal rights the government will provide resources to allow the commercial tribunal to function. The government will seek donor support for setting up a credit bureau and a collateral registry. The government’s arrears clearance strategy will continue to improve the liquidity of the private sector.

E. Reaching the HIPC Completion Point

36. The government is committed to reach the HIPC completion point by end-2010. The government has implemented all but one completion point trigger and is requesting a waiver for lack of continuous implementation of one trigger. The triggers that have been implemented are (i) a track record of satisfactory macroeconomic performance lasting at least six months, which will coincide with the first review of performance under the ECF; (ii) a satisfactory record of PRS implementation for at least one year, as shown by a joint WB-IMF staff assessment of the country’s annual progress report (APR); (iii) better outcomes in the areas of health, education, and demobilization; and (iv) reforms in the area of governance, including the external audit of the 1997–99 budget outturns and the reform of the public procurement system. The government is requesting a waiver for lack of continuous publication of comprehensive budget execution reports since 2001. In 2010, the government started publishing quarterly budget execution reports and submitted the general administrative accounts for FY2009 to the Court of Accounts by end-September 2010.

37. The government is seeking to normalize relations with all creditors in a manner consistent with the country’s debt service capacity and consistent with the HIPC initiative. The government has already received HIPC financing assurances from creditors representing over 80 percent of HIPC eligible debt and will continue to seek maximum participation in the HIPC initiative beyond the minimum threshold of 80 percent.

F. Statistics

38. The government plans to better disseminate data. It will publish national account data for 2009 this year, based on the SNA93, and will continue to publish WAEMU harmonized consumer price index.

G. Capacity Building and Technical Assistance

39. Capacity building will be needed to ensure effectiveness and sustainability of fiscal reforms. In the Ministry of Finance, the highest priorities are: customs, treasury, budget, and tax and financial control departments. The IMF is providing technical support, including technical assistance from FAD and West AFRITAC, in public financial management, revenue administration, and national accounts statistics.

H. Program Monitoring

40.While the underlying objectives of the program remain unchanged, it has become necessary to modify the indicative target on social and priority spending for end-December 2010 because of a shortfall in budget support (Table 1). All other quantitative indicators and all performance criteria remain unchanged.

41.The second year of the program covers the 12 months from January 1, 2011, to December 31, 2011. The program will be monitored using quarterly quantitative indicators and structural benchmarks, as well as semiannual reviews and the quantitative performance criteria presented in Table 3. Tables 4 and 5 contain a list of structural measures identified by the government. The definitions of quantitative performance criteria and benchmarks are in the attached TMU. We expect the second review to take place in May 2011 and the third review in November 2011.

Table 3.

Guinea-Bissau: Quantitative Indicators for the ECF Program for 2011

Quarterly Targets 1

(Cumulative, CFAF millions)

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

Performance criteria (PC) are defined for June and December. March and September are indicative. All performance criteria (PC) are ceillings and PC 3, 4 and 5 apply continously.

Table 4.

Guinea-Bissau: Structural Benchmarks Under the ECF

January 1, 2011-December 31, 2011

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Ministry of Finance

Ministry of Labor and Public Administration

Ministry of Economy

Table 4.

Guinea-Bissau: Structural Benchmarks Under the ECF (concluded)

January 1, 2011-December 31, 2011

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Ministry of Finance

Ministry of Economy

Table 5.

Guinea-Bissau: Structural Measures for 2011

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Attachment II. Technical Memorandum of Understanding

Bissau

November 16, 2010

1. This memorandum describes the definitions of the quantitative and structural performance criteria, indicative targets, and structural benchmarks to monitor the program supported by an arrangement under the Extended Credit Facility (ECF). It also specifies the agreed periodicity and deadlines for transmission of data to IMF staff for program monitoring.

Quantitative Indicators and Adjustors

A. Quantitative Indicators

2. The quantitative indicators are as follows:

  1. Cumulative floors on government tax revenue

  2. Cumulative ceilings on the domestic primary fiscal deficit (on a commitment basis)

  3. Cumulative ceiling on the amount of nonregularized expenditures (DNTs).

  4. Cumulative floor on social and other priority spending

  5. Cumulative ceilings on the change in net domestic financing of the budget

  6. Cumulative ceiling on new domestic arrears of the government, including wage arrears

  7. Cumulative ceilings on new nonconcessional external debt contracted or guaranteed by the government

  8. Cumulative ceiling on new external short term debt

  9. Cumulative ceiling on new external payment arrears.

Quantitative indicators are set for end-March, end-June, end-September, and end-December. Quantitative performance criteria are proposed for end-June and end-December 2011 for indicators (e) through (i). Indicators for new nonconcessional external debt, new external short-term debt, and new external payment arrears are continuous.

Definitions and computation

3. For program purposes the government is defined as the central government of

Guinea-Bissau. This definition excludes public entities whose budget is not included in the central government budget.

4. The targeted floor on government tax revenues includes direct and indirect taxes, as well as recovery of tax arrears and additional revenue efforts (Table 1).

Table 1.

Quarterly Floors for Government Tax Revenues, 2011

(Cumulative, CFAF millions)

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5. The domestic primary fiscal deficit on a commitment basis is calculated as the difference between government revenue and domestic primary expenditure on a commitment basis (Table 2). Government revenue includes all tax and nontax receipts and excludes external grants. Domestic primary expenditure consists of current expenditure plus domestically financed capital expenditure, excluding all interest payments. 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.

Table 2.

Quarterly Domestic Primary Balance, New Domestic Arrears, and Nonregularized Expenditures, 2011

(Cumulative, CFAF millions)

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6. New domestic arrears of the government are defined as accounts payable (rest-a-payer) accumulated during the year, still outstanding one month after the quarter for wages and salaries (including pensions), and three months after for goods and services and transfers, at end-March, end-June, end-September, and end-December 2011.

7. Nonregularized expenditures are defined as any treasury outlay not classified in the expenditure tables presented by the National Budget Directorate.

8. Net domestic financing consists of bank and nonbank financing (Table 3). Bank financing consists of net changes in the balances of the treasury accounts at the BCEAO (excluding net disbursement from the IMF) and commercial banks (excluding balances in those accounts that are not available for budget financing, such as accounts held under double signature arrangements with donors) and in the outstanding amounts of loans, including T-bills, from the BCEAO and commercial banks, local and regional. Nonbank financing encompasses privatization receipts and any other financial debt held outside the banking system other than new domestic arrears.

Table 3.

Domestic Financing by Quarter, 2011

(Cumulative, CFAF millions)

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

  1. The indicator for external borrowing applies to debt including commitments contracted or guaranteed for which value has not been received. The term “debt” is understood to mean a current liability, not contingent, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services that requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s); these payments will discharge the principal and interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being (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 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 a 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 periods, usually shorter than the total expected service life of the property, while the lessor retains the title to the property. 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 that cover the operation, repair, or maintenance of the property. Under this definition of debt, arrears, penalties, and judicially awarded damages arising from failure to make payment on a contractual obligation that constitutes debt are also debt. Failure to make payment on an obligation that is not considered debt under this definition (for example, payment on delivery) will not give rise to debt. For monitoring the ECF, arrangements to pay over time obligations arising from judicial awards to external creditors do not constitute nonconcessional external borrowing.

  2. Debt concessionality, for program purposes, is assessed based on its calculated grant elements. A debt is concessional if it includes a grant element of at least 50 percent, calculated as follows: the grant element of a debt is the difference between the present value (PV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt. The PV of debt at the time of its contracting is calculated by discounting the future stream of payments of debt service due on this debt. The discount rates used for this purpose are the currency specific commercial interest reference rates (CIRRs), published by the Organisation for Economic Cooperation Development (OECD). For debt with a maturity of at least 15 years, the 10-year-average CIRR is used to calculate the PV of debt and hence, its grant element. For debt with a maturity of less than 15 years, the six-month average CIRR is used. To both the 10-year and six-month averages, the same margins for differing repayment periods as those used by the OECD need to be added (0.75 percent for repayment periods of less than 15 years, 1 percent for 15 to 19 years, 1.15 percent for 20 to 29 years, and 1.25 percent for 30 years or more).

10. Ceiling on short-term external debt newly contracted or guaranteed by the government. Short-term external debt is debt with the contractual term of less than one year. Debt-relief operations and treasury bills issued in CFA francs on the WAEMU regional market are excluded from this performance criterion. In the context of the program, the government and public enterprises will not contract, or guarantee, short-term external debt. This performance criterion is monitored on a continuous basis.

11. Ceiling on new external payment arrears. External payment arrears are defined as external payments due but not paid on the due date. In cases where a creditor has granted a grace period after the contractual due date, arrears are incurred following the expiration of the grace period. Under the program, the government undertakes not to accumulate arrears on its external debt, except those arising from government debt that is being renegotiated with creditors, including non-Paris Club bilateral creditors. This performance criterion is monitored on a continuous basis.

12. The concept of government for the external debt is broader than the one used for the budget aggregates; it includes all debt that may ultimately be deemed to be a liability of the state. In addition to the central government, 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.

13. Social and other priority spending is defined as total current expenditures in the education, health, and agricultural sector, and domestically financed capital spending (Table 4).

Table 4.

Social and Priority Spending1 by Quarter, 2011

(Cumulative, CFAF millions)

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Current and domestically financed capital spending.

B. Adjustors

14. The following adjustors will be in effect:

  1. The ceiling on the domestic primary deficit (on a commitment basis) will be increased in case of lower than programmed disbursement of fishing compensation, by the amount of the shortfall up to a maximum of CFAF 3 billion. The program assumes the following amounts of fishing compensation (cumulative from January 1,2011): zero by end-March; zero by end-June; by end-September CFAF 5 billion; and by end-December CFAF 5 billion.1

  2. The ceiling on domestic financing will be increased for any shortfall in external budget support, and fishing compensation, by the amount of the shortfall up to a maximum of CFAF 3.5 billion. The program assumes the following amounts of external budget support, and fishing compensation (cumulative from January 1,2011): zero by end-March; zero by end-June; by end-September CFAF 8.9 billion; and by end-December CFAF 12.5 billion.

  3. The ceiling on domestic financing for March, June, and September will be increased for payment of previous years arrears in excess of programmed amounts up to a maximum of CFAF 1.85 billion. The program assumes the following arrears payments from previous years (cumulative from January 1, 2011): zero by end-March; zero by end-June CFAF; zero by end-September; and by end-December CFAF 1.85 billion.
1

The government conducted a census of the military forces in 2008.

1

For this TMU, the CFAF/euro exchange rate is 655.956 and the CFAF/US$ exchange rate is 524.

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Cover IMF Staff Country Reports
Guinea-Bissau: First Review Under the Three-Year Arrangement Under the Extended Credit Facility and Financing Assurances Review-Staff Report; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Guinea-Bissau
Author:
International Monetary Fund
Volume/Issue:
Volume 2010: Issue 379
Publisher:
International Monetary Fund
ISBN:
9781455213542
ISSN:
1934-7685
Pages:
77
DOI:
https://doi.org/10.5089/9781455213542.002
Figure 1.

Guinea-Bissau: Economic Developments, 2005–10
Figure 2.

Guinea-Bissau: Regional Perspective, 2000–10
Figure 3.

Guinea-Bissau: Macroeconomic Policies, 2005–10
Figure 4.

Guinea-Bissau: Medium-Term Outlook, 2008–12

SSA: Fiscal Revenue, 2009

(percent of GDP)1,2

SSA LICs: Frequency Distribution: Change in Fiscal Revenue, 1980 - 2009

(percentage points of GDP)