Guinea-Bissau: Staff Report for the 2015 Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility

EXECUTIVE SUMMARY Context: A series of coups d’état since independence have resulted in chronic political instability and deterred economic and social progress. Guinea-Bissau has re-initiated progress since the assumption of office of the current inclusive government in mid-2014. The economy is now recovering after a decline in 2012 and marginal growth in 2013. Inflation remains low, and socio-political stability seems achievable. The coup d’état of April 2012 stalled implementation of the three-year Extended Credit Facility (ECF)- supported program approved by the Board in May 2010, and the arrangement lapsed subsequently. The Fund’s support under the Rapid Credit Facility (RCF) disbursement of 2014 and the authorities’ commitment to reforms have re-ignited donor confidence. Article IV Discussions. Policy discussions focused on measures to overcome fragility; fiscal consolidation and public financial management reforms; restoring financial stability; borrowing policies and long-term debt sustainability; private sector development and structural reforms to enhance inclusive growth prospects. The Proposed Program. The authorities’ development program, anchored on the Strategic Plan for 2014–18, aims to consolidate the fiscal position through better expenditure management and enhanced revenue mobilization, deepen institutional reform, mitigate vulnerabilities, and develop the private sector to support growth and employment. The program focuses on improving the policy framework by addressing governance and security issues, strengthening budgetary transparency as well as public investment and debt management, and improving compilation of statistics. Structural benchmarks focus on these issues while QPCs include a floor on revenues collection and a ceiling on net credit to government (the anchor of the program). Request for an Extended Credit Facility Arrangement. To support their medium-term economic reform program, the authorities request a three-year arrangement under the ECF in an amount equivalent to SDR 17.04 million (120 percent of quota). Risks to the program include the still fragile political situation, which could delay implementation of reforms, adverse terms of trade developments, and weakening donor confidence, and the heightened risk of incursion of the Ebola virus from neighboring countries.

Abstract

EXECUTIVE SUMMARY Context: A series of coups d’état since independence have resulted in chronic political instability and deterred economic and social progress. Guinea-Bissau has re-initiated progress since the assumption of office of the current inclusive government in mid-2014. The economy is now recovering after a decline in 2012 and marginal growth in 2013. Inflation remains low, and socio-political stability seems achievable. The coup d’état of April 2012 stalled implementation of the three-year Extended Credit Facility (ECF)- supported program approved by the Board in May 2010, and the arrangement lapsed subsequently. The Fund’s support under the Rapid Credit Facility (RCF) disbursement of 2014 and the authorities’ commitment to reforms have re-ignited donor confidence. Article IV Discussions. Policy discussions focused on measures to overcome fragility; fiscal consolidation and public financial management reforms; restoring financial stability; borrowing policies and long-term debt sustainability; private sector development and structural reforms to enhance inclusive growth prospects. The Proposed Program. The authorities’ development program, anchored on the Strategic Plan for 2014–18, aims to consolidate the fiscal position through better expenditure management and enhanced revenue mobilization, deepen institutional reform, mitigate vulnerabilities, and develop the private sector to support growth and employment. The program focuses on improving the policy framework by addressing governance and security issues, strengthening budgetary transparency as well as public investment and debt management, and improving compilation of statistics. Structural benchmarks focus on these issues while QPCs include a floor on revenues collection and a ceiling on net credit to government (the anchor of the program). Request for an Extended Credit Facility Arrangement. To support their medium-term economic reform program, the authorities request a three-year arrangement under the ECF in an amount equivalent to SDR 17.04 million (120 percent of quota). Risks to the program include the still fragile political situation, which could delay implementation of reforms, adverse terms of trade developments, and weakening donor confidence, and the heightened risk of incursion of the Ebola virus from neighboring countries.

Background: Taking Stock

A. Addressing Political Stability and Related Challenges

1. Since independence in 1974, Guinea-Bissau has had 18 actual, attempted or alleged military coups; the resultant chronic political instability deterred growth. The last coup d’état took place in April 2012 in the midst of the presidential election and interrupted an otherwise successful three-year ECF-supported program. Its effects were profound, as external financing and tax collection collapsed, and political uncertainty under the transitional government formed in May 2012 fostered rent-seeking and corruption. Following pressure and financial support from the international community, successful presidential and parliamentary elections brought President Vaz’s government into power in July 2014. The security situation remains calm. A multi-party commission has been set up to review the constitution with the aim of clarifying the respective competencies of the President and the Prime Minister. In parallel, the government has initiated a comprehensive security sector reform that seeks to address pension benefits of the security forces, improve the efficiency of the national army, and end the recurrence of coups.

2. The April 2012 coup coupled with a fall in cashew nut prices exacerbated economic fragility and heightened food insecurity and poverty. Between 2012 and 2013, the Bissau–Guinean economy was hit by a 40 percent fall in the international price of cashew nuts, contributing to large trade deficits, despite a compression of imports. The external current account balance deteriorated by almost 13 percentage points of GDP during 2012–13; the overall balance of payments deteriorated as well and was financed mainly by drawing down government deposits at the Central Bank of West African States (BCEAO) as financial support from traditional foreign partners was suspended. The domestic impact of the shock was a large decline in farm-gate cashew nut prices by over 60 percent, and poverty soared. At the same time, food insecurity doubled to 40 percent in 2013, according to a survey by the World Food Program.

3. The reduction of international support and the institutional decay deteriorated public finances and depressed economic activity. Despite scaling back current and capital spending, the government accumulated domestic and external arrears and social conditions worsened (which, among other things, ignited teacher strikes). The cash-strapped government increased its reliance on simplified spending procedures.1 The economically disruptive coup d’état exacerbated the chronic regulatory forbearance in the banking sector, leaving two of the four banks with excessive levels of nonperforming loans.2 In 2012 the economy contracted by 1.8 percent and barely recovered in 2013 with a growth of 0.8 percent (Text Table 1).

Text Table 1.

Guinea-Bissau: Recent Economic Developments

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Source: IMF staff estimates

4. In July 2014, the new democratically-elected government initiated an ambitious reform agenda to address Guinea-Bissau’s developmental challenges within the framework of strategic plan with donor support. The government has recently adopted a Strategic Plan that aims to consolidate past progress and advance socio-economic development in 2014–18, and launch Guinea-Bissau onto a virtuous cycle of progress by 2025. Encouraged by the renewed commitment of the country, development partners resumed support, and reaffirmed this through commitments at the roundtable held in Brussels on March 25, 2015 (Box 1). Prior to this, the IMF provided policy advice and financing in November 2014 under the Rapid Credit Facility to help address the country’s urgent balance of payments and fiscal needs. The government successfully issued FCFA 15 billion in Treasury bonds to clear wage arrears, and prepared 2014 and 2015 budgets that were approved unanimously by the Parliament. While reforms largely halted under the military and transitional governments, the newly elected authorities have generally been responsive to Fund policy advice, and continue to build on technical assistance (TA) recommendations to advance structural reforms and improve policy formulation (Box 2).

Outcome of the Brussels Donor Roundtable of March 25, 2015

The Government prepared a 10-year development and transformation plan with an intermediate 2020 milestone, consisting of six axes, twenty-three fields of actions, fifty-three programs and 115 projects for a cost of US$2.1 billion. At the Brussels roundtable, bilateral and multilateral development partners pledged approximately US$1.5 billion, of which 40 percent would be grants, 30 percent loans and the conditions for the remainder yet to be determined.

The annual and sectoral breakdown of the pledges is yet to be confirmed. About US$48.2 million (out of an estimated cost of US$82 million) for the special pension fund for demobilization of army personnel have been committed so far by international partners. However, the details of a more comprehensive reform–with a possible cost of US$260 million, as presented at the roundtable–are yet to be defined.

The current macroeconomic framework integrates foreign-financed public investment of US$545 million for 2015–20, significantly less than pledged but a substantial scaling up compared to the past. This excludes any envisaged amounts for the security sector reform, which is expected to be financed from both foreign and domestic sources (including budgetary transfers into the special pension fund). The public investment program would be adjusted as more information becomes available.

Guinea-Bissau: Response to Fund Advice from the 2013 Article IV Consultation

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B. Assessment of the Last ECF-Supported Program

5. Performance under the previous ECF-supported program (May 2010–May 2012) was overall positive.3 Prior to the 2012 coup d’état, macroeconomic stability had improved and economic growth accelerated, while consumer price inflation rose as global food and fuel prices soared. Structural reforms included in the ECF-supported program included measures to restore fiscal sustainability, strengthen institutions, and reduce widespread poverty—most of these measures required TA and support from development partners. Progress in implementing measures to bolster public financial management was largely positive with some advancements made in tax and customs administration, including the adoption of indicative ceilings on exempted fuel imports by embassies and international organizations, preparation of a comprehensive inventory of non-tax revenues, and establishment of SYDONIA++ in two border posts. Public debt management was strengthened through the introduction and use of DMFAS to record, monitor, and manage all public debt (external and domestic).

Recent Economic Developments and Short-Term Outlook

6. Economic growth recovered in 2014, while inflation remained muted due to weak domestic demand (Figure 2 and Table 1). With a favorable cashew nuts harvest and a pickup in construction and telecommunication services, real GDP growth is estimated at 2½ percent in 2014 (up from 0.8 percent in 2013). Reflecting depressed domestic demand during the first half of 2014 and weakening in global food and fuel prices, consumer prices were depressed, and average inflation declined to -1 percent. Growth is projected to average around 4.7 percent in 2015, supported by the same drivers and continued public investment (MEFP ¶¶12, 13, and 14).

Table 1.

Guinea-Bissau: Selected Economic Indicators, 2012–20

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

Contribution to the growth of broad money in percent.

One-off revenues amounted to 0.9 percent of GDP in 2014 (due to FUNPI’s proceeds being transferred to the Treasury) and are expected to account for 0.5 percent of GDP in 2015 (due to the selling of 3G licenses) and 1.6 percent of GDP in 2016 (mostly due to revenue from the selling of seized illegal wood and the collection of associated taxes).

7. Domestic revenue mobilization exceeded expectations on account of quick-win measures (Tables 2 and Figure 3). Customs and tax revenues improved sharply in 2014 (by 39 percent and 9 percent, respectively), as the government tightened controls over fuel imports and streamlined tax exemptions (mainly on fuel), rehabilitated customs posts and intensified auditing of large taxpayers. These measures, coupled with the increase in tax revenues on account of output expansion and collection of FUNPI-related receipts by the Treasury (1 percent of GDP), increased total revenues to 12.0 percent of GDP in 2014 (from 8.1 percent in 2013). Expenditures also increased sharply in 2014 due to one-off spending related to elections, earmarked spending linked to EU fishing compensation, which resumed in 2014, as well as accounting of expenses that were previously recorded outside the budget.

Table 2a.

Guinea-Bissau: Central Government Operations, 2012–18

(CFA Billions)

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

For 2014 it refers to FUNPI’s proceeds, for 2015 is reflects the selling of 3G licenses, and for 2016 it mostly reflects the selling of seized illegal wood and the collection of associated taxes.

Recorded as arrears when payments were not made more than 30 days for wages and more than 90 days for other expenditure.

In early 2015 CFA 3.7 billion were used to pay 2014 expenses.

Table 2b.

Guinea-Bissau: Central Government Operations, 2012–18

(Percent of GDP)

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

Recorded as arrears when payments were not made more than 30 days for wages and more than 90 days for other expenditure.

Including transfers from FUNPI.

8. Enhanced revenue mobilization enabled the government to clear a large amount of arrears accrued in recent years. The increase in revenues, the financial assistance from the World Bank through the payment of six months of teachers and health workers’ salaries, and the placement of CFA 15 billion (2.7 percent of GDP) in one-year Treasury bills on the regional capital market, allowed the government to clear almost all wage arrears.4 At the same time, the government cleared all external arrears (excluding debt in technical arrears for which the government is reaching out to the creditors to start or formalize rescheduling negotiations).5

9. The external position improved significantly in 2014, and the real effective exchange rate appears to be in line with fundamentals (Table 4, Figure 2, and SIP section II). The current account deficit dropped from 4.4 percent of GDP in 2013 to 1.2 percent in 2014. The improvement reflects an increase in cashew-nuts export value, and more generally a sharp improvement in the terms of trade (31.4 percent) as cashew nut prices increased, global food and fuel prices declined, and current transfers increased substantially. The terms of trade are expected to improve further in 2015, and cashew export volumes to increase somewhat. Nevertheless, the current account deficit would increase to 3.6 percent of GDP on account of an expected increase in imports as foreign investment is scaled up and incomes recover, particularly in the context of the resumption of traditional support by development partners as expressed in the promising results of the recent roundtable conference. (Box 1 and MEFP ¶2). Based on the external balance assessment for emerging markets and developing countries (“EBA-lite”) Guinea-Bissau’s and the WAEMU region’s real effective exchange rate appears to be broadly in line with fundamentals.

Table 3.

Guinea-Bissau: Monetary Survey, 2011–181

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Sources: BCEAO; and IMF staff estimates and projections.

End of period

Table 4.

Guinea-Bissau: Balance of Payments, 2012–18

(CFAF billions)

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Sources: BCEAO; and IMF staff estimates and projections.

Includes food aid and technical assistance to projects.

Figures through 2014 reflect actual payments, while projections are based off of scheduled amortization

Medium-Term Framework

10. Creating employment opportunities and reducing poverty through sustained and inclusive growth are key objectives of the authorities’ medium-term policy framework. Under their development strategy for 2014–18, the authorities aim to reach these objectives by strengthening fiscal consolidation efforts through public financial management (PFM) and tax reforms, ensuring that economic policies support macroeconomic stability, stepping up implementation of structural reforms to improve the business environment, and enhancing human capital development by improving the quality of public service and access to education, health and social protection. The resumption of financial support from traditional development partners is critical for medium-term economic prospects and poverty reduction.

Staff’s assessment

11. The medium-term macroeconomic framework underpinning the ECF-supported program being requested by the authorities is consistent with their Strategic Plan (MEFP ¶¶12 and 13). It points to a favorable outlook with sustained growth, low inflation, and improving fiscal balances. The overall external position is expected to improve after a transitory worsening of the current account balance.

  • Growth prospects for 2015–18 are supported by buoyant cashew nuts production and diversification of agriculture; public investment spending financed by development partners as per commitments from the Brussels Donor Roundtable in March 2015, and continued expansion of the communication and other services sectors. Baseline projections show that growth is expected to average 4.9 percent per year. Achievement of this growth profile relies heavily on realization of donor commitments at the Brussels Roundtable, which anticipates some US$1.5 billions to support the government’s 10-year development and transformation plan. Staff stressed that effective public investment management, and structural reforms to improve the business environment would be needed to further enhance medium-term growth prospects.

  • Inflation is expected to pick up as economic activity expands and incomes recover. Continued weakening in global food prices along with the authorities’ planned measures to support agricultural production and diversification would help dampen food inflation somewhat. Reflecting these expectations, average inflation is projected to increase to 1.3 percent in 2015, 2.3 percent in 2016 and average just under 3 percent in 2017–18 (Text Table 2 and Figure 4).

  • While the current account deficit would increase in the next years, the overall external position would improve in the medium term. The external current account deficit is projected to widen to around 6 percent of GDP by 2018, owing to increased capital imports financed by increased foreign direct investment, project grants and highly concessional loans. With the increase in financial inflows, the overall balance of payments should improve (Text Table 2 and Figure 4).

Text Table 2.

Guinea-Bissau: Medium-Term Projections

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Source: IMF staff estimates
Figure 1.
Figure 1.

Ease of Doing Business, 2015*

(Rank among 189 economies)

Citation: IMF Staff Country Reports 2015, 194; 10.5089/9781513566825.002.A001

Sources: World Bank, Doing Business 2015*These indicators should be interpreted with caution due to a limited number of respondents, a limited geographical coverage, and standardized assumptions on business constraints and information availability.
Figure 2.
Figure 2.

Guinea-Bissau: Economic Developments, 2010–15

Citation: IMF Staff Country Reports 2015, 194; 10.5089/9781513566825.002.A001

Sources: Guinea-Bissau’s authorities and IMF staff estimates.
Figure 3.
Figure 3.

Guinea-Bissau: Additional Economic Developments, 2010–15

Citation: IMF Staff Country Reports 2015, 194; 10.5089/9781513566825.002.A001

Sources: Guinea-Bissau’s authorities and IMF staff estimates.
Figure 4.
Figure 4.

Guinea-Bissau: Medium-Term Outlook, 2013–18

Citation: IMF Staff Country Reports 2015, 194; 10.5089/9781513566825.002.A001

Sources: Guinea-Bissau’s authorities and IMF staff estimates.

12. The economic outlook is favorable but subject to considerable risks (Appendix II). Downside risks could arise from adverse terms of trade, weakening of donor confidence, and unexpected political disruptions. At the same time, the heightened risk of incursion of the Ebola virus from neighboring countries into Guinea-Bissau, if realized, could impose significant human and economic costs on the economy and stall program implementation. On the upside, the risks stem from unexpected surges in business confidence on account of the success of the Brussels Roundtable, a stable political climate, and firmer commitment to policy implementation.

Authorities’ views

13. The authorities agreed with staff’s medium-term projections and assessment of associated risks, but maintained that the growth prospects would be brighter than foreseen. They emphasized that with resumption of development partner support and the determination of the new government to implement reforms to improve the business environment, address the infrastructure gap, and enhance public service delivery, economic growth could rebound faster than in staff’s assessment. While acknowledging the possibility of the downside risks to the economic outlook, they accentuated the upside risks. They informed staff that they were taking measures, with support of development partners, to forestall the spread of the Ebola virus in Guinea-Bissau.

Policy Discussions and the Proposed Program

A. Overcoming Fragility

14. Fragility in Guinea-Bissau has been fueled by political instability, mainly through military coups d’état that disrupt the continuity of programs and structural reforms and hinder socio-economic progress (SIP section I). To address the burden of recurrent coups d’état by ill-controlled elements of the military forces, the government plans to restructure and modernize the defense and security sectors, including de-mobilizing excess troops. The government’s objective is to reduce the military forces gradually to around 3,500. Reaching this goal would require retiring some 2,500 military personnel. The government also plans to rationalize the security forces. The cost of the security sector reform has been estimated at US$260 million, or a fraction of the estimated cost of fragility: for example, real per capita GDP could have been at least two thirds higher in 2013 had there been political stability since the end of the civil war in 1999.

Staff’s assessment

15. In order to break from the past of economic stagnation the government needs to preserve political stability by reforming its security sector and by building a strong national consensus for its reform agenda. The last military coup d’état in April 2012 took a significant toll on the economy. Plagued by weak governance and growing corruption, rent seeking behavior soared, domestic revenue mobilization fell, and external financing shrunk. As a result, infrastructure investment and social spending declined and poverty soared. The new government that was elected in mid-2014 has made significant progress in tackling all of these issues. Staff underlined that sustained reform efforts, including security sector reform, would be critical to ensure durable economic and political stability and a decisive break with fragility (see SIP, section I).

Authorities’ views

16. The authorities concurred with staff on the key role of political stability for sustained economic growth and development, and are committed to implementing the security sector reform. They recognize that chronic political instability has taken a heavy toll on social and economic progress in Guinea-Bissau, and that political stability is a necessary condition for long-term inclusive growth. They are committed to break with the past of instability and poor governance and start implementing the security sector reform in 2015. They intend to retire the first group of 500 soldiers by the end of the year, and continue discussions with development partners on the implementation of the wider security sector reform.

B. Stepping Up Fiscal Reforms

17. Despite recent improvements, domestic revenue mobilization remains weak, along with expenditure and debt management. The 2012 coup d’état and its resultant adverse impact on economic activities eroded the tax base and weakened tax administration. Consequently, tax performance and buoyancy declined. In 2012, the tax-GDP ratio declined to 7.7 percent of GDP, and further to 7.0 percent in 2013, the lowest among all countries in SSA. Recent efforts by the authorities to enhance tax administration have yielded some gains, but the tax gap (between potential and actual tax collections) remains large (Box 3). In addition to eroding the revenue base, the coup d’état undermined fiscal discipline. This resulted in the proliferation of expenditures outside formal channels, the accumulation of domestic and external arrears, and subsequent disruptions in public services. Finally, the inefficient public electricity and water company (EAGB) is a drain on public finances. In 2015 alone, the Government is making transfers of CFA 2.8 billion to EAGB to cover current and past losses.

18. Building debt management capacity remains a challenge. Following a significant build-up in domestic debt in recent years, partly to finance infrastructure projects, the fiscal strategy adopts a zero-ceiling on domestic financing and anticipates a decline in the stock of domestic debt over the medium term. At the same time, the authorities are in discussions with WAEMU to help cover part of the interest costs of any new contracting of debt from BOAD, which would make the loans concessional. On this basis, domestic debt is projected to decline by 2.7 percentage points of GDP to 30.2 percent of GDP by the end of the ECF program. The authorities have requested TA from IMF AFRITAC West to bolster debt management, including by reviewing the legal and institutional framework for public debt management and the process of public debt contracting.

Staff’s assessment

19. The authorities’ medium-term fiscal strategy should aim to achieve a sustainable fiscal position to support macroeconomic stability and long-term debt sustainability (MEFP ¶15–24). To build on the recent strong performance focused at addressing lapses, in revenue mobilization, PFM, and debt management, staff discussed with the authorities a broad set of measures to:

  • Strengthen revenue mobilization. Key measures include: (i) implementing an intra-trade post in Safim(a major border post) to reconcile invoice merchandise data with actual contents of the cargo, and expansion of SYDONIA ++ to remaining posts (structural benchmark); (ii) drawing up a strategic plan for improving infrastructure and working conditions of officials of the domestic tax and customs administration; and (iii) implementing a new small-taxpayer regime through the introduction of taxpayer identification numbers (structural benchmark). Staff stressed the need to steadfastly implement these measures to expand the country’s tax base, which is low compared to peers and all sub-Saharan Africa countries, as a reliable domestic source of financing the budget.

  • Increase efficiency of public spending and improve controls. Infrastructure investment and other pro-poor spending will remain important priorities, while growth in spending on goods and services as well as wages and salaries will be muted in the medium term. To strengthen the efficiency of public investment management, the authorities will prepare quarterly reports on the execution of the public investment program (PIP) (structural benchmark). They are also committed to prepare a comprehensive study of the current mechanism of fuel pricing and subsidies. Although the government removed all fuel subsidies, it nonetheless intends to review its current fuel price mechanism to ensure that international prices are fully passed-through to domestic retail prices and that price movements are shielded from political interference (Box 4). Staff underscored the need for continued expenditure restraint in view of the low revenue base and financing constraints.

  • Accelerate PFM reforms. Steps to address weaknesses in budget processes and expenditure management will be critical to meet fiscal targets. They include strengthening public financial management through weekly Treasury Committee meetings, and creating a single treasury account to instill transparency and accountability of budgetary funds. In this connection, the authorities will prepare a monthly rolling Treasury cash flow projection table consistent with the 2015 budget (structural benchmark). In addition, by March 2016, the authorities intend to prepare an inventory of all revenue sources and government accounts, and require that revenue collections be exclusively through the banking system (MEFP ¶19).

  • Restore the government’s credibility by clearing remaining domestic arrears (MEFP ¶15). The 2015 spending plans include the clearance of all outstanding domestic arrears from 2013–14 (CFA 0.5 billion for teachers’ bonuses and CFA 2.4 billion to embassies). In addition, older arrears will also be cleared in 2016 after due audits and verification of the claims and the claimants’ fiscal compliance. The government intends to start clearance of these arrears in 2016 with a cash payment of CFA 3 billion and issuance of treasury bonds with maturities ranging from one to six years to cover the remaining balance.

Guinea-Bissau: Tax Potential versus Performance, 2001–14

Notwithstanding recent gains in tax administration that have boosted tax revenues, tax effort in Guinea-Bissau remains low and tax-GDP ratio is correspondingly low compared to peer countries in Sub-Saharan Africa. Panel econometric exercises carried out to investigate the extent of the tax gap, estimate the gap at around 12 percent of GDP in 2014.

A panel econometric analysis suggests a substantial gap between tax potential and actual tax collection in Guinea-Bissau. The analysis uses a stochastic time-varying tax frontier approach that measures tax capacity by regressing the tax-to-GDP ratio of sample countries on variables that serve as proxies for possible tax bases and other factors that affect the country’s ability to raise tax revenues. Following the economic literature, the independent variables are identified as (i) population; (ii) GDP per capita; (iii) consumer price inflation; (iv) trade openness; (v) financial deepening; and dummy variables, including political stability, and control of corruption. The results indicate that the tax gap (between tax potential and actual tax collected) declined from 16 percent in 2004 to around 12 percent of GDP in 2014. The tax effort (i.e., the actual tax collection relative to the taxable capacity) increased from 21 percent in 2004 to around 42 percent in 2014. This implies that the recent improvements in tax revenue are mainly due to an improved tax administration rather than to an increase in the “broadly-defined” tax potential itself.

Figure 2.
Figure 2.

Guinea-Bissau: Tax Revenue

(in percent)

Citation: IMF Staff Country Reports 2015, 194; 10.5089/9781513566825.002.A001

Guinea-Bissau’s tax revenue has not kept up pace with economic growth. The country’s revenue buoyancies are below unity, just as in SSA fragile states, but below all WAEMU and SSA averages for all three categories of taxes during 2000–11. At 0.73, the estimated average tax buoyancy for Guinea-Bissau fell below the estimates for WAEMU (0.76), SSA (0.84) and SSA fragile states (0.76).

20. Electricity tariffs need to be increased and EAGB restructured into an efficient and viable company. A tariff adjustment to at least cost recovery, together with a restructuring of the company—assisted by the World Bank—should help protect scarce budgetary resources while continuing to provide electricity. A World Bank study is underway to determine the current level of electricity subsidies, with results expected by November 2015. Staff stressed that remaining subsidized tariffs should be targeted to vulnerable households (MEFP ¶26).

21. The fiscal anchor for the 2015 economic program is a strict limit on domestic bank credit to the central government (effectively zero), making room for credit to the private sector. The drawdown of deposits by CFA 4.4 billion (0.7 percent of GDP) reflects the advance interest payment on Treasury bills in 2015 for 2016 (CFA 1.4 billion) and a large part of the payments made in 2015 that were committed in 2014 (CFA 3 billion)6. This leaves a financing gap of CFA 4.7 billion (0.8 percent of GDP), equivalent to the first two tranches of the ECF program. Staff stressed that achieving this objective would require restoration of fiscal discipline to avoid any accumulation of unpaid bills in 2015, and to buttress fiscal policy credibility. In this context, staff underscored the usefulness of the weekly treasury committee meetings and the avoidance of extra-budgetary and improperly-documented spending (DNTs).

Authorities’ views

22. The authorities concurred with the staff’s assessment of the importance of increasing substantially government revenues, but would have preferred a stronger increase in expenditures, in accordance to their Strategic Plan. They see success of the ongoing security sector reforms as a prerequisite for socio-economic progress, as well as the success of their broader reform agenda. They also stressed that restoring fiscal discipline through decisive PFM reforms and expenditure controls is at the center of their policy priorities. However, the authorities also believe that the current level of spending is below what the country needs in view of the daunting infrastructure and social needs it faces. They hope this gap could be filled by a higher than expected volume of external financing. Meanwhile, they aim to increase the efficiency of capital spending by enhancing the capacity for project selection and execution.

Guinea-Bissau: New Fuel Pricing Mechanism

Guinea-Bissau introduced a semi-flexible fuel pricing mechanism in March 2015, which is overseen by a committee on fuel pricing consisting of representatives from the Ministry of Energy, Ministry of Economy and Finance, and fuel market operators. The committee recommends maximum sale prices per liter for the various fuel products—petrol, diesel, kerosene, mixed fuel oil, and Fuel 380—and imposes import duties (at 10 percent), excise tax (15 percent), and sales tax (10 percent) on the landed cost per liter of products. A road-user charge (4 percent) and a community levy (0.5 percent) are also levied. Petrol and diesel are subject to all these taxes, while kerosene is subject to only the community tax and mixed fuel oil is subject to all but the road-user tax and excise tax. The system helped the country stem recent global oil price increases.

As global fuel prices have weakened, the authorities have acted swiftly to partially transmit the gains to the public while eliminating subsidies and remaining current on obligations to PetroMar:

  • The committee on fuel pricing maintained the semi-flexible pricing system.

  • Reflecting variations in global oil prices, the domestic ex-pump price of diesel fuel was reduced by 7.4 percent in February 2015 and re-increased by 2.2 percent in March 2015.

  • The initial reduction of fuel prices was lower than the reduction in international prices, which allowed the elimination of fuel subsidies with an estimated savings of around CFA 270 million;

  • The government settled all arrears inherited from the previous government to PetroMar.

Maintaining the current fuel pricing mechanism put in place this March would avoid a recurrence of subsidies and boost domestic revenues from fuel imports to an estimated CFA 9.5 billion (1.6 percent of GDP or 10 percent of domestic revenues in 2015). Going forward, the Government will analyze further improvements to the fuel pricing mechanism to ensure full pass-through of international prices to domestic prices and to shield price movements from political interference.

C. Restoring Financial Stability

23. Guinea-Bissau’s financial sector is shallow and faces diverse challenges that hamper its effective support of growth (Box 5). The number of people with an account at a financial institution has increased recently, owing to the government’s decision to pay salaries only through the banking sector. However, Guinea-Bissau’s financial intermediation remains the lowest in the WAEMU region, credit to the private sector remains lower than implied by the country’s fundamentals, and the sector contributes only marginally to firms’ investment programs, with banks preferring to invest in Treasury bills or deposit excess liquidity at the BCEAO as they perceive credit risk in the private sector as very high.

Staff’s assessment

24. Recent financial soundness indicators point to financial sector vulnerabilities but a market-based solution to curb high levels non-performing loans (NPLs) and re-capitalize those banks affected by them is underway (Table 7, SIP section III). As a result of the 2012–13 decline in international cashew prices, and fueled by political uncertainty, credit quality has declined substantially. In particular, Guinea-Bissau’s NPLs increased substantially (from 6.5 percent as of end December 2011 to 25.7 percent in June 2014), far above the average for the WAEMU despite lower provisioning rates. Profitability remains low, with average rates of return on assets below 3 percent. The banking sector remains overly exposed to the retail and wholesale trade, restaurants and hotels, and other services, which together account for around 75 percent of total credit. However, those banks which have been plagued by high NPLs have started to seize collateral and one bank agreed with the WAEMU Banking Commission on a phased increase in capital from CFA 5 billion to 20 billion.

Table 5.

Guinea-Bissau: Indicators of Capacity to Repay the Fund, 2014–24

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Sources: IMF staff estimates and projections.