Guinea-Bissau
Third Review Under the Three-Year Arrangement Under the Extended Credit Facility and Financing Assurances Review: Staff Report; Joint IMF/World Bank Debt Sustainability Analysis; Informational Annex; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Guinea-Bissau
Author: International Monetary Fund
Publication Date:
14 Dec 2011
eISBN:
9781463928513
Language:
English
Keywords:
ISCR; CR; West AFRITAC; revenue; debt; deficit; revenue collection; Nontax revenue; excl. fishing comp; budget support; IMF staff estimate; Arrears; Current spending; Capital spending; West Africa
Download PDF (681.6 KB)

A confluence of developments is creating a more favorable economic situation for Guinea-Bissau. The country has moved away from debt distress with the debt relief granted after the Highly Indebted Poor Countries completion point last year. Fiscal sustainability has improved considerably through expenditure control and substantial increases in revenue. For the first time, the 2012 budget envisages sufficient fiscal revenue to cover current spending. The immediate challenge is to maintain fiscal prudence, modernize the public administration and defense and security sectors, and create space for private sector development.

Abstract

A confluence of developments is creating a more favorable economic situation for Guinea-Bissau. The country has moved away from debt distress with the debt relief granted after the Highly Indebted Poor Countries completion point last year. Fiscal sustainability has improved considerably through expenditure control and substantial increases in revenue. For the first time, the 2012 budget envisages sufficient fiscal revenue to cover current spending. The immediate challenge is to maintain fiscal prudence, modernize the public administration and defense and security sectors, and create space for private sector development.

I. Overview

1. A confluence of developments is creating a more favorable economic situation for Guinea-Bissau:

  • High prices for the predominant export (cashews) and robust cashew harvests.

  • Continued political stability since the presidential election in 2009, a representative civilian government, and an unchanged economic team for three years.

  • Improved institutions and technical capacity, with extensive technical assistance from development partners.

2. Effective implementation of the ECF-supported program is beginning to yield measurable results:

  • The country has moved away from debt distress with the debt relief granted after the HIPC completion point last year.

  • Fiscal sustainability has improved considerably through expenditure control and substantial increases in revenue. For the first time, the 2012 budget envisages sufficient fiscal revenue to cover current spending. This will allow all budgetary assistance to be directed to support investment projects.

  • While the wage bill swallowed all tax revenues in 2008, it now accounts for less than two thirds. Better expenditure control has created space for spending in priority areas identified by the government (infrastructure, agriculture, health, education).

3. It will be important to stay the course for sustainable growth and poverty alleviation.

  • With mounting domestic pressure for faster delivery of tangible economic results along with a subdued outlook for the external environment, the authorities’ determination to keep on track and deepen reforms will be paramount. Political stability and improved security continue to be critical to economic prospects.

  • The immediate challenge is to maintain fiscal prudence, modernize the public administration and the defense and security sectors, and create space for the private sector development.

  • The medium-term challenge is to create a competitive economy and to reduce vulnerability and dependency on one export by improving the business environment and diversifying the economy.

II. Recent Developments and Performance Under the ECF

4. The economy benefitted from high prices for cashew exports and a good cashew harvest (Figures 1–2 and Tables 1–2). Prices reached about a third higher than envisaged at the previous review, and due to favorable weather, the cashew harvest was about 30 percent higher. This helped contain balance of payments pressures arising from higher food and fuel import bills. Headline inflation rose to 5.5 percent (year-on-year) in September 2011, but core inflation, which excludes food and energy, has remained subdued. The increase in income from rising cashew exports helped improve the external current account (Table 3).

Figure 1.
Figure 1.
Figure 1.

Guinea-Bissau: Macroeconomic Developments, 2006–11

Citation: IMF Staff Country Reports 2011, 355; 10.5089/9781463928513.002.A001

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

Guinea-Bissau: Medium-Term Outlook, 2009–14

Citation: IMF Staff Country Reports 2011, 355; 10.5089/9781463928513.002.A001

Sources: Guinea-Bissau authorities and IMF staff estimates and projections.
Table 1.

Guinea-Bissau: Selected Economic and Financial Indicators, 2008–14

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

As of May 2011 (IMF Country Report No. 11/67)

The figure for 2012 reflects the impact of administrative measures to mobilize more revenues.

Contribution to the growth of broad money in percent.

As of end–2010, includes 8.3 percent of GDP in domestic arrears, consisting of pre-1999 arrears (3.3 percent of GDP) and preliminary estimates of the 2000–07 arrears registered at the treasury (5 percent of GDP). It does not include the preliminary estimates of 2000–07 arrears (13.4 percent of GDP) not registered at the treasury.

Table 2.

Guinea-Bissau: Monetary Survey, 2008–14

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

As of May 2011 (IMF Country Report No. 11/67).

Ratios calculated on the basis of average annual stocks.

Table 3.

Guinea-Bissau: Balance of Payments, 2008–14

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

As of May 2011 (IMF Country Report No. 11/67).

Includes food aid and technical assistance to projects.

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

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

Until 2011, BCEAO average prices. The prices for 2011 and onward are based on the WEO projections for ground nuts’ prices

At program exchange rates.

5. The FY 2011 budget execution has been broadly consistent with program targets (Text Table 1). Through September, tax revenue was in line with the program while nontax revenue fell short of the programmed level due to lower-than-envisaged fishing compensation from the EU. Primary expenditure (excluding the counterpart to fishing compensation) were also broadly in line with the program, with slightly higher current spending (underbudgeted representation and other expenses) offset by lower domestically financed capital spending (delays in implementing the public investment program). As a result, the domestic primary deficit target was met as envisaged under the program.

Text Table 1.

Guinea-Bissau: Fiscal Outturn, January-September

article image
Sources: GNB authorities and IMF staff estimates and projections.

Projected at the Second ECF Review in May 2011.

6. Program performance has been satisfactory. All performance criteria through end-June were observed (Table 4). All but one structural benchmark for the third review were met. The unified payroll system has been extended to most ministries and work is underway to have it completed in the ministries of defense and interior (Table 5). Also, all but one of the indicative targets were met through end-September. The target on non-regularized expenditures (DNTs) was missed due to insufficient control in the face of spending pressures. The authorities managed to bring DNTs below target by end-October and agreed to strictly enforce the existing regulation which restricts such spending only to exceptional circumstances.

Table 4.

Guinea-Bissau: Quantitative Indicators for the ECF Program for 2011 Quarterly Targets 1

(Cumulative, CFAF millions)

article image

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 PC are ceillings and PC 3, 4, and 5 apply

At the time of the second ECF review (IMF Country Report No. 11/67), the indicative targets 6, 7, and 9 were revised compared to program (IMF Country Report No. 10/379) to reflect the higher revenue base from 2010 and the additional budget support.

Table 5.

Guinea-Bissau: Structural Benchmarks under the ECF

article image
article image

Ministry of Finance

Ministry of Labor and Public Administration

Ministry of Economy

III. The Economic Outlook And Risks

7. The near-term outlook remains favorable.

  • Real GDP growth is expected to accelerate to 5.3 percent in 2011, backed by a good harvest of cashews and favorable terms of trade. Economic prospects for 2012 remain favorable, owing to restoration of the public investment program and buoyant construction activity. The gradual return of confidence after the HIPC completion point heralds an improved economic outlook.

  • Annual average inflation is projected to reach 4.8 percent in 2011. Core inflation, however, will remain subdued. Headline inflation should taper off to below the WAEMU’s target range of 2(±1) percent in 2012 because international food and fuel prices are expected to weaken.

  • The large improvement in the terms of trade is expected to reduce the current account deficit in 2011, but only moderately, due to the offset of higher imports, especially food and fuel. Assuming cashew export prices revert to their medium-term average, the current account would widen modestly in 2012.

8. Risks to the outlook persist. From the external environment, risks arise from lower-than-expected cashew prices or growth in advanced economies. Domestically, pressures for pre-election shifts in economic policies could pose risks as well.

IV. Policy Discussion

9. The discussions focused on the need to stay the course, consolidating gains on an improved fiscal situation and deepening the post-HIPC reforms. Reform areas continue to be mobilizing more revenue, modernizing the public administration, and accelerating growth under the new Poverty Reduction Strategy Paper (PRSP).

A. Maintaining Fiscal Prudence

10. The fiscal program for 2011 continues to be fully financed1 (Text Table 2 and Tables 6a–6b). For the year as a whole, tax revenue is projected to reach the program objective, consolidating a gain of almost 3 percentage points of GDP in the last three years. Nontax revenue will reflect lower-than-expected fishing compensation from the EU and fishing licenses. Also, budget support is expected to be slightly below program owing to lower-than-envisaged assistance from the World Bank and the AfDB. On the spending side, higher current spending (mostly underbudgeted representation expenses) would be more than offset by lower-than-programmed capital expenditure, reflecting delays in the foreign financing and execution of capital projects, even though domestically financed capital expenditure increased compared to last year. As a result, the overall balance and financing remains as projected in the program without recourse to domestic financing.

Text Table 2.

Guinea-Bissau: Fiscal Projection, 2010–11

article image
Sources: GNB authorities and IMF staff estimates and projections.

Projected at the Second ECF Review in May 2011.

Table 6.

Guinea-Bissau: Central Government Operations, 2008–14

(CFAF billions)

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

IMF Country Report No. 11/119.

Excludes the cashew export surcharge introduced in April 2011

The figure for 2012 reflects the impact of administrative measures to mobilize more revenues.

Beginning in 2013, assumes payment of scheduled domestic debt owed to the BCEAO and rescheduling of scheduled interest and amortization falling due in 2010 and principal falling due in 2011 and 2012 with terms similar to previous reschedullings.

For 2010 arrears are treated as debt relief at HIPC completion point.

Assumed covered with IMF resources under the ECF arrangement until 2012.