Guinea-Bissau: Staff Report for the 2017 Article IV Consultation and Fourth Review Under the Extended Credit Facility Arrangement, and Financing Assurances Review
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International Monetary Fund. African Dept.
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Publication Date:
18 Dec 2017
eISBN:
9781484333150
Language:
English
Keywords:
ISCR; CR; authority; West AFRITAC; government support; Bissau Guinean authorities; Guinea-Bissau authorities; reform agenda; debt issuance authority; government faces claim; government saving; Credit; West Africa; Global; government change
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2017 Article IV Consultation and Fourth Review Under the Extended Credit Facility Arrangement, and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for Guinea-Bissau

Abstract

2017 Article IV Consultation and Fourth Review Under the Extended Credit Facility Arrangement, and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for Guinea-Bissau

Context: Overcoming Fragility

1. A resource-rich but longstanding fragile state, Guinea-Bissau faces a wide range of developmental challenges. The country has abundant natural resources for agriculture, forestry, fisheries, and tourism. Nevertheless, it has in past decades trailed its peers in the West African Economic and Monetary Union (WAEMU) and ranks in the bottom decile globally on average income and on key social indicators. Political instability (including civil war in 1998–99 and military coups in 2003 and 2012) and weak governance have held back progress. Moreover, with agriculture accounting for about 40 percent of GDP and a narrow export base consisting largely of unprocessed cashew nuts, the country is highly exposed to weather and commodity price shocks. Poverty, last measured at around 70 percent in 2010, is endemic.

A01ufig1

Human Development Index (HDI) and Components, 2005-2015

Citation: IMF Staff Country Reports 2017, 380; 10.5089/9781484333150.002.A001

Source: United Nations Development Programme.

2. Resumption of constitutional order in 2014 brought prospects for better outcomes. Elections in mid-2014 helped anchor peace. The incoming government launched an ambitious 10-year plan for social progress targeting political stability, inclusive development, good governance, and preservation of biodiversity. While the security situation has remained calm, political instability has, however, persisted. Divisions within the largest political party led to four changes of government since mid-2015 and Parliament has not been sitting since late 2015.

3. The economy has rebounded strongly, despite continued political tensions and reduced external financial assistance. Supported by the calm security situation and improvements in electricity supply, growth averaged almost 6 percent in 2015–16, up sharply from an average of 0.8 percent during 2012–14 and double the average since 1980. Moreover, higher cashew prices and lower prices for imported food and oil products boosted the country’s terms of trade, prompting a swing in the current account from a deficit of 5 percent of GDP in 2013 to a surplus in 2014–16. This occurred even as donors, in part reflecting the continued political instability, did not increase financial assistance as planed after the last elections. Total budget and project support (excluding IMF) fell from 12 percent in 2014 to 6 percent of GDP in 2016 before recovering somewhat in the first half of 2017.

Guinea-Bissau: Official Financial Assistance1

(percent of annual GDP)

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Source: Guinea-Bissau authorities.

Includes only aid to the government sector.

4. The currently favorable economic conditions offer an opportunity to advance reforms to strengthen foundations for longer-term development. Low and volatile government revenue is an obstacle to necessary infrastructure and social spending, and a weak business environment is holding back private sector investment and economic diversification. Building on past Fund advice and ongoing technical assistance (TA) (Annexes I–II), the 2017 Article IV discussions have focused on priorities to tackle the key developmental constraints and anchor macroeconomic stability.

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Source: IMF, World Economic Outlook database.

Recent Developments and Program Performance

5. Helped by higher cashew prices, the strong economic growth of the previous two years continued into 2017 (Table 1).1 Cashew producers’ income rose, as record high prices outweighed a small decline in output (Selected Issues, The Cashew Economy and the Unfolding of the 2017 Campaign). The increased income from cashew supported growth in other sectors, as seen by a surge in imports of construction material. CPI inflation has remained subdued at around 2 percent overall, although with high demand leading to mid-year price pressures for rice and other foodstuffs.

Table 1.

Guinea-Bissau: Selected Economic Indicators1

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

Values exclude the 2015 bank bailout of CFA 34.2 billion. A final determination by the courts on the legality of the bailout contracts is still pending.

Contribution to the growth of broad money in percent.

6. Favorable price developments boosted Guinea-Bissau’s exports, extending gains from previous years (Table 2). The country’s terms of trade improved by 14 percent in 2016, helping keep the trade balance broadly steady despite cessation of timber exports due to concerns about illegal logging. The current account surplus narrowed to 1.3 percent of GDP in 2016 from 2.5 percent in 2015 due mainly to a reduction in official grants. In 2017, the large increase in cashew prices resulted in a further improvement in the terms of trade of about 30 percent and partly compensated for the surge in imports, leaving the current account broadly in balance.

Table 2.

Guinea-Bissau: Balance of Payments1

(CFAF billions)

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Sources: BCEAO; and IMF staff estimates and projections.

Balance of Payments Manual 6 format. Reflects revised historical data.

Project grants for EBS/17/66 have been reclassified into capital account.

The figure for 2017 includes CFAF 25 billion in debt relief from Taiwan Province of China.

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Export, Import Prices and Terms of Trade

(index, 2005 = 100)

Citation: IMF Staff Country Reports 2017, 380; 10.5089/9781484333150.002.A001

Sources: Guinea-Bisau authorities; IMF staff claculations

7. Government revenue exceeded expectations for the first half of 2017 (Table 3). Robust economic activity supported revenue mobilization, and the timing of the cashew campaign meant that receipts came earlier in the year than anticipated. Tax revenue exceeded the program target for the first half of 2017 by 0.8 percent of annual GDP, with strong collections of import duties, sales tax and corporate income tax. At the same time, a dividend payment (0.7 percent of GDP) from the Central Bank of West African States (BCEAO) more than offset lower nontax revenues from fishing licenses, fees, and penalties, leaving nontax revenue 0.5 percent of GDP above the end-June program target. In addition, the authorities received a budget support grant (0.4 percent of GDP) from Saudi Arabia and project grants were 1 percent of GDP higher than programmed. Altogether, this pushed total revenue and grants 2.6 percent of GDP above the end-June program target.

Table 3a.

Guinea-Bissau: Central Government Operations1

(CFAF billions)

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

Values exclude the voided 2015 bank bailout of CFAF 34.2 billion.

Transfers in 2016 include a CFAF 10.0 billion debt repayment on behalf of Guinea-Telecom. In 2017, it includes a CFAF 6.6 billion debt repayment for EAGB.

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

From 2016, domestic financing is sourced from the monetary survey.

In 2017 the government received 90 percent debt relief on loans from Exim Bank of Taiwan Province of China.

For 2014 refers to FUNPI’s proceeds; for 2015 sale of 3G licenses, sale of seized illegal wood, and Euroatlantico receipts; for 2016 sale of 3G licenses.

For 2017, NCG as shown does not include the CFAF 1.7 billion loan guarantee to Bissau City.

Excludes grants, foreign financed capital spending, and interest.

Table 3b.

Guinea-Bissau: Central Government Operations1

(Percent of GDP)

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

Values exclude the voided 2015 bank bailout of CFAF 34.2 billion.

Transfers in 2016 include a CFAF 10.0 billion debt repaymest on behalf of Guinea-Telecom. In 2017, it includes a CFAF 6.6 billion debt repayment for EAGB.

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

From 2016, domestic financing is sourced from the monetary survey.

In 2017 the government received 90 percent debt relief on two loans from Exim Bank of Taiwan Province of China.

For 2014 refers to FUNPI’s proceeds; for 2015 sale of 3G licenses, sale of seized illegal wood, and Euroatlantico receipts; for 2016 sale of 3G licenses.

For 2017, NCG as shown does not include the CFAF 1.7 billion loan guarantee to Bissau City.

Excludes grants, foreign financed capital spending, and interest.

Guinea-Bissau: Summary of Central Government Finances

(percent of GDP)

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Sources: Ministry of Finance; and IMF staff estimates.

8. Spending has been tightly controlled and fiscal balances have improved sharply. Domestic spending has generally followed the budget closely, with total current expenditure in the first half of 2017 slightly (0.1 percent of GDP) below program due to lower outlays on wages and interest. At the same time, capital spending was 0.6 percent of GDP above program, as foreign financed investment spending exceeded expectations. Combined with above-expectation revenue and higher clearance of arrears (0.2 percent of GDP above the program target), this meant an overall cash balance of −0.6 percent of GDP against the program target of −2.6 percent of GDP.

9. Better public financial management (PFM) has underpinned the improved fiscal position. The twice-weekly Treasury Committee meetings since the start of 2017 have greatly improved budget execution and expenditure control. Notable accomplishments include the elimination of non-regularized expenditures (“DNTs”), no new accumulation of arrears, retirement of expensive bank overdraft facilities, and reprofiling of debts to reduce servicing costs. Moreover, the authorities created a fiscal buffer by building up deposits of 0.6 percent of GDP at the central bank.

10. In the private sector, financial intermediation remains weak against a backdrop of large non-performing loans (NPLs) (Tables 4–5). Before provisions, commercial bank credit to the private sector expanded on average by 9.4 percent a year during 2014–16, but shrunk by 0.8 percent (year-on-year) at end-June 2017 despite the arrival of a new bank that has been expanding rapidly. The weak extension of credit to the private sector despite strong economic growth reflects risk aversion by banks in the context of high levels of NPLs and still unresolved questions relating to the voided bank bailout of 2015 (Box 1).

Table 4.

Guinea-Bissau: Monetary Survey1

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Sources: BCEAO; and IMF staff estimates and projections.

End of period. The authorities’ monetary survey includes the bank bailout in the data for 2015-16 and does not include Bank Atlantique.

Gross of provisions and including Bank Atlantique.

Table 5.

Guinea-Bissau: Financial Soundness Indicators of the Banking System

(Percent)

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Source: BCEAO.

11. While financial soundness indicators point to a broadly satisfactory situation for the banking system overall, one bank is seriously undercapitalized. Provisioning for the NPL portfolio transferred to government under the voided bailout, as required by the WAEMU Banking Commission (BC), caused in early 2017 a large drop in regulatory capital of one bank. The shareholders of the bank subsequently failed to make good on their decision to inject the fresh capital needed to meet the CFAF 10 billion minimum capital requirement that came into force on July 1, 2017. Discussions with potential investors that would raise capital to the required minimum are ongoing. Moreover, the BC is expected to announce in the coming weeks remedial measures for all non-compliant banks in WAEMU.

The 2015-Bank Bailouts and Aftermath

The problems of the two commercial banks bailed out in 2015 stemmed mainly from loans that became non-performing in 2013–14, in the wake of the 2012 coup and falling cashew prices in 2012–13. The bailouts involved government taking over at face value NPLs totaling CFAF 34.2 billion (about 5 percent of GDP), financed by 10-year credit lines with the same banks in a non-cash transaction. The bailouts were done against IMF advice and raised serious governance concerns.

In mid-2016, government declared the bailouts null and void, noting that the contracts had not followed proper procedures and lacked required signatures. The legality of the bailout contracts is still being evaluated in court. Nevertheless, following recommendations by the Banking Commission in early 2017, the banks were obliged to fully provision the bailout NPLs. The subsequent provisions resulted in negative earnings and large drops in equity capital of both banks. Shareholders in the banks subsequently resolved to inject funds to meet the new capital requirement that came into force on July 1, 2017 (CFAF 10 billion, up from 5 billion previously). One of the two banks did not implement the increase, however, and remains significantly undercapitalized.

Guinea-Bissau: Selected Commercial Banking Sector Indicators1

(percent of GDP, unless otherwise indicated)

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Sources: BCEAO; and IMF staff estimates.

Values for 2015 and 2016 have been adjusted to exclude the bailout.

Values for 2017 include entries for the new bank, Banque Atlantique.

While the ratio of gross NPLs to total loans remains near its pre-bailout level, NPLs net of provisioning are now at a more manageable level. With recognition of the bailout NPLs, the latest data show a system-wide gross NPL ratio of 32 percent at end-June 2017 compared to a ratio of 39 percent at end-2014. The still very high NPL ratio reflects limited progress towards collecting on the large stock of NPLs that prompted the original bailouts. After provisioning, however, the ratio of provisions to gross NPLs rose to 65 percent compared to 46 percent at end-2014.

Program Performance

12. Performance relative to program targets for the fourth review was good (Tables 6–7).

  • All performance criteria for end-June were met. The domestic tax revenue floor was exceeded by CFAF 8 billion (24 percent) and net domestic bank credit to central government was CFAF 9 billion below the program ceiling. In addition, consistent with their zero-ceilings, there was no new non-concessional nor short-term external borrowing; and no external arrears were accumulated.

  • All indicative targets for end-June 2017 were met. There were no new domestic arrears, social and priority spending was CFAF 1.5 billion above the floor, the domestic primary balance registered a surplus rather than the programmed deficit, and there were no non-regularized expenditures.

  • Five out of seven structural benchmarks (SBs) for 2017 were observed as envisaged. Two benchmarks were not met on time. Application of upgraded debt management software (SB for September 2017) was delayed due to problems in the procurement process but is now expected to be effected by end-2017. Submission of monthly financial reports for the public electricity and water utility (EAGB) (SB for July 2017) was also delayed but accomplished in October 2017, although with weaknesses in the quality of data.

Table 6.

Guinea-Bissau: Quantitative Performance Criteria and Indicative Targets for 2018

(Cumulative from beginning of calendar year to end of month indicated; CFAF billions, unless otherwise indicated)

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The performance criteria and indicative targets are defined in the Technical Memorandum of Understanding (TMU). Targets for end-March and end-September are indicative.

Figures for Sept. and Dec. 2017 include the CFAF 1.7 billion debt guarantee given to Bissau City.

These apply on a continuous basis.

Comprises budget support grants and program loans (for budget support).

Comprises project loans with grant elements exceeding or equal to 35 percent.

Table 7a.

Guinea-Bissau: Past Structural Benchmarks Under the ECF Program, 2017

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Table 7b.

Guinea-Bissau: Structural Benchmarks Under the ECF Program, 2017–18

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Quantitative Performance Criteria and Indicative Targets1

(Cumulative from beginning of calendar year; CFAF billions)

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1 The performance criteria and indicative targets are defined in the Technical Memorandum of Understanding (TMU). 2 These apply on a continuous basis.

Outlook and Risks

13. Based on continued strong policies and effective fiscal management, the economic expansion is likely to remain robust into the medium term (MEFP ¶¶14–15). With a continued calm security situation, Guinea-Bissau’s largely untapped economic potential—especially in agriculture, tourism, and fisheries—coupled with ongoing improvements in public administration, offer the prospect of rapid development. The program assumes that:

  • Real GDP growth, projected at 5.5 percent in 2017, remains steady at 5 percent a year over the medium term (2018–22). Growth is supported by continued high cashew prices, public investments in road and other infrastructure, improvements in electricity and water supply, and policies to improve the business environment.

  • Consumer price inflation increases somewhat, given buoyant demand and higher global oil prices, from 2.2 percent in 2017 to 3 percent at the end of the medium term, but staying within the WAEMU convergence criterion.

  • The external current account moves from broad balance in 2017 to a deficit of 2–3 percent of GDP over the medium term because of higher investment and expanding economic activity.

  • Improvements in revenue administration along with restrained growth in expenditure keeps the overall fiscal deficit well within the WAEMU convergence criterion. The overall fiscal (cash basis) deficit is projected to widen slightly from 1.8 percent of GDP in 2017 to 2.3 percent of GDP in 2018, due to higher domestic capital spending, and then remain at that level.

Guinea-Bissau: Performance on WAEMU Convergence Criteria

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

Showing cash balance.

Guinea-Bissau: Economic Performance and Medium-Term Program Scenario

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

14. The baseline outlook is subject to significant risks (Annex III). A reescalation of political tensions with attendant disruptive government changes could undermine progress in institution building, dent investor confidence, and erode support from development partners. In addition, the fiscal outlook and public debt sustainability could deteriorate if courts rule against the voiding of the bank bailout, and banking sector instability could ensue if undercapitalization is not properly addressed. Further, agricultural output is vulnerable to adverse weather conditions, and the high dependence on cashew (90 percent of exports) means that the economy is highly exposed to international cashew price movements. On the upside, the possible start of a FDI-financed phosphate mining project could boost exports, there is substantial scope for greater value-addition in agriculture, and the nascent tourism industry offers large potential.

15. Staff’s external balance assessment suggests that the external position is stronger than implied by economic fundamentals (Box 2). EBA-lite methodologies indicate that the real exchange rate is moderately undervalued relative to fundamentals, with estimates in the 5–10 percent range to be interpreted cautiously given shortcomings in the data. What is more clear from the analysis is that achieving political stability and undertaking structural reforms to improve the business environment and advance diversification would help bolster external stability. It is also notable that the IMF’s most recent WAEMU assessment (SM/17/58) found that the exchange rate for the union was broadly in line with fundamentals, albeit with shrinking external buffers. More recent data indicate that this shrinking of buffers has been partially reversed, with WAEMU official reserves increasing by $3.3 billion (to 4.6 months of imports) in the first half of 2017 following Eurobond issuances in Senegal and Côte d’Ivoire.

External Stability Assessment

An application of EBA-lite methodologies suggests a moderate undervaluation of Guinea-Bissau’s exchange rate in the range of 5-10 percent in 2016 (Annex IV). The CA approach compares Guinea-Bissau’s actual current account balance to a norm implied by macroeconomic fundamentals and policies. The norm is calculated at −2.2 percent of GDP, 3.5 percent of GDP lower than the actual current account balance, implying an estimated exchange rate undervaluation of 7.2 percent. The ES and REER approaches give broadly similar results.

These estimates should be interpreted with caution. Data for Guinea-Bissau, not least those relating to its balance of payments statistics, are associated with a high degree of uncertainty. Moreover, by relying on coefficients estimated for other countries, the EBA-lite models do not fully capture the implications of Guinea-Bissau’s exceptionally high dependence on a single agricultural export commodity or that it is a member of a currency union with a fixed exchange rate to the Euro.

Guinea-Bissau: External Balance Assessment

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Note: A positive CA gap indicates undervaluation. A positive REER gap indicates overvaluation. Estimates are based on data available as of October 2017.

Authorities’ views

16. The authorities broadly concurred with staff’s assessment of the medium-term outlook and risks, although they were more optimistic on growth prospects. They emphasized the improvements in infrastructure, including road construction and electricity supply, that have been achieved in the past three years, and the substantial further improvements planned for the medium term. They also highlighted policy initiatives underway to unlock the country’s potential in rice production, tourism, fisheries, and minerals extraction. The authorities acknowledged the risks associated with cashew as the sole export produce, but noted that the increasing trend in global cashew demand should keep prices from falling.

Article IV Policy Discussions: Deepening Reforms for Inclusive Growth

17. Staff argued for a medium-term focus on economic policies to support sustained and inclusive growth in line with the country’s development objectives.2 The emphasis was on private sector development through healthy financial intermediation and supportive improvements in the business environment. This would be backed by a parallel strengthening of revenue mobilization to ensure adequate government financing. Discussions centered on required reforms, tailored to the country’s institutional capacity and supported by TA and training from the Fund and other development partners, as well policies to ensure macroeconomic and debt sustainability.

A. Building Capacity and Expanding Fiscal Space

18. The primary fiscal challenge in Guinea-Bissau is revenue mobilization (Selected Issues, Tax Revenue Mobilization in Guinea-Bissau). Low revenue is a binding constraint for needed social and infrastructure spending. Efforts to strengthen customs and tax administration are gradually making inroads but operations suffer from widespread deficiencies, including lack of basic equipment, undefined work procedures, and insufficiently trained staff. Despite some increases over the last decade, domestic revenue in Guinea-Bissau falls far behind that of comparators. In 2016 tax revenue amounted to just 9.2 percent of GDP, below the averages of other WAEMU countries and fragile states by 6.7 and 4.2 percentage points, respectively. With grants and concessional loans (excluding IMF) projected to increase slightly to 6.1 percent of GDP in 2017 from 6 percent in 2016, the previous years’ decline in donor assistance looks to have turned. Continued strong economic policies could encourage donors to provide additional support going forward. A large increase in resources would, however, need to rely mainly on strengthening domestic revenue mobilization.

A01ufig4

Tax Revenue and Income Per Capita, 2016

Citation: IMF Staff Country Reports 2017, 380; 10.5089/9781484333150.002.A001

Source: IMF, World Economic Outlook database.

19. On the expenditure side, tight control of spending has helped strengthen the fiscal position but there is scope to improve the composition and quality of spending (Selected Issues, Government Expenditure Management in Guinea-Bissau). The wage bill is relatively high compared to current spending (34 percent in 2016). “Other current expenses”, a residual category, is also significant (20 percent). Conversely, social and priority spending (encompassing spending on education, health and gender affairs) is low (4.7 percent of GDP). Capital expenditure, having had only a minimal domestically financed component, is also lower than the regional average and has been low for years. This has left large gaps in critical infrastructure. Moreover, outcomes are often poor even considering the low level of spending.

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Guinea-Bissau: Composition of Current Expenditure

(percent of GDP)

Citation: IMF Staff Country Reports 2017, 380; 10.5089/9781484333150.002.A001

Sources: Guinea-Bissau’s authorities; and IMF staff estimates.
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Guinea Bissau: Components of Government Spending, 2016

(percent of GDP)

Citation: IMF Staff Country Reports 2017, 380; 10.5089/9781484333150.002.A001

Source: IMF, FAD Expenditure Assessment Tool (EAT).

20. A distinct concern is apparent low efficiency of spending coinciding with low levels of spending in social areas. In healthcare, Guinea-Bissau not only spends less than almost any other African country but also appears to be achieving relatively low results for each dollar spent. It has, among others, relatively high infant mortality and low life expectancy. In education, Guinea-Bissau has the lowest level of public spending in WAEMU and outcomes are mostly also on the low side. Data from national surveys and UNESCO indicate that 44 percent of primary school age children are out of school, almost double the WAEMU average.

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Public Health Expenditure and Life Expectancy (2010-14)

Citation: IMF Staff Country Reports 2017, 380; 10.5089/9781484333150.002.A001

Source: World Bank, World Development Indicators; and World Health Organization

21. An immediate challenge is that revenue in the second half of 2017 is likely to be lower than planned, leaving less room for spending even as savings are being realized in some areas. Total revenue and grants in 2017 are projected to be 1.4 percent of GDP below program, despite overperforming in the first part of the year. Cashew exports had largely wound down by August, raising the prospect of a drop in related activity and tax revenue. In addition, non-tax revenue has been revised down sharply, mainly because of lower fishing receipts. EU fishing compensation (previously projected at 0.8 percent of GDP) is not expected to materialize this year due to protracted negotiations, and other fishing-related revenues have underperformed. Compensating for the lower revenue, transfer payments are expected to be lower than previously projected due to reduced financial pressures at EAGB. In addition, a recent review of civil service staffing records is expected to reduce the wage bill. Even with these savings, however, the financial position is likely to be strained and other expenses may have to be scaled back slightly (0.1 percent of GDP) to meet program targets.

Guinea-Bissau: Summary of Central Government Finances

(percent of GDP)

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Sources: Ministry of Finance; and IMF staff estimates.

Staff’s assessment

22. Reforms to tax and customs administration should be extended and broadened. Measures to strengthen revenue administration (MEFP ¶18) are supporting a projected increase in the ratio of tax revenue to GDP. These activities need to be properly resourced, however, including by finalizing contracts for recently hired staff and ensuring that infrastructure is in place for extending the SYDONIA system to customs posts across the country. Moreover, there is a need to review elements of tax policy, including excise rates, to identify discrepancies from regional peers, modernize outdated legislation, and broaden the tax base. Also, while tax revenue is performing well, the underperformance of non-tax revenue requires closer attention, especially in areas such as fisheries that have showed a notable decline in transfers to the treasury.

23. Accommodating more spending in priority areas will require improvements in the planning framework. Stepped-up social and infrastructure spending should be backed by continued efforts to strengthen budget processes and contain non-priority spending, as well as clearer processes for vetting investment projects and other new spending initiatives. Supporting reforms are taking place in relation to PFM and expenditure management (MEFP ¶19). The recent step to ensure accurate staffing records, together with the development of a wage policy, can help to better control the wage bill. Extending the coverage of the SIGFIP information management system is key to ensuring better oversight and control and it will be important that this is done comprehensively to cover all categories of revenue and expenditure. To enhance prioritization, it will be important to develop a planning and execution framework that effectively steers in-year spending decisions toward meeting medium-term social and investment policy objectives.

24. To anchor prudent fiscal policy and debt sustainability, the authorities should adhere to the budgeted target for the overall balance in 2017 and continue to strictly limit net domestic bank credit over the medium term. This would entail a domestic (i.e. excluding grants and foreign-financed capital spending) primary surplus of about 0.4 percent of GDP in 2017 and 0.8–1 percent of GDP over the medium term, sufficient to put the ratio of government debt to GDP on a clear downward trajectory. Underpinning this outturn, increased revenue from steadfast implementation of the administrative reform agenda would enable a steady increase in priority capital and social spending, which with careful prioritization and execution would allow for a narrowing of infrastructure and social gaps. Overall deficits should largely be filled by low-cost foreign project financing, helping address the country’s investment needs.

Authorities’ views

25. The authorities concurred with staff’s views on the fiscal stance and direction of reforms. They stressed their devotion to fiscal prudence, noting how domestic bank debt had been essentially eliminated during 2017. While viewing staff’s projection of revenue as conservative and emphasizing infrastructure development as the main priority for additional spending, they stressed that the level of expenditure would be based on the level of revenue mobilized to keep the deficit within program targets (MEFP ¶20). They underscored their dedication to advancing fiscal structural reforms, and were appreciative of supporting Fund TA and committed to implementing the advice received. Going forward, they intend to review the tax policy system, with a view to modernization and simplification, and to develop frameworks for fiscal management of natural resources. On the expenditure side, they were keen to extend reforms to improve recording and management of expenditure and to undertake initial steps towards a medium-term framework to help guide development initiatives.

Selected Social Indicators1, 2006-2015

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Sources: World Development Indicators; and IMF staff estimates.

Poverty headcount measures percent of population that earn less than $1.9 a day (in PPP terms). Income distribution is measured by the GINI coefficient (lower value = more equal income/wealth distribution). Human development is a composite index of three basic dimensions of human development - a long and healthy life, knowledge and a decent standard of living. Per capita income measures GDP per Capita (at constant 2010, US$).

A simple average: for Benin, Burkina Faso, Cote d’Ivoire, Guinea Bissau, Mali, Niger, Senegal and Togo.

B. Promoting Strong and Inclusive Growth

26. Guinea-Bissau’s legacy of conflict and weak governance has left an underdeveloped economy and widespread poverty. Poor government services, low human capital, and inadequate infrastructure, coupled with an unfriendly business environment, corruption, and chronic political instability, have over past decades fed a vicious cycle of low economic growth, dependence on basic commodity exports, rent seeking, and unmet social needs. Thus, the country has fallen behind comparator countries in human development indicators and poverty alleviation. The calm security situation since the 2012 coup, improved electricity supply in 2014–16, and strengthened macroeconomic management in 2017 have alleviated some of the most pressing obstacles to progress. However, Guinea-Bissau continues to rank near the bottom on a range of doing business indicators, including frameworks for starting a business and resolving insolvency. Moreover, the country is ranked weaker than other WAEMU countries on a range of governance indicators.

A01ufig8

Doing Business Indicators, 2018

(rank among 190 economies, higher=worse)

Citation: IMF Staff Country Reports 2017, 380; 10.5089/9781484333150.002.A001

Source: World Bank, Doing Business database.
A01ufig9

Governance Indicators, 2016

(higher value = better)

Citation: IMF Staff Country Reports 2017, 380; 10.5089/9781484333150.002.A001

Source: International Country Risk Guide (ICRG).

Staff’s assessment

27. The growth performance of recent years represents marked progress but the business environment needs further improvement to ensure durable and inclusive growth. Significant investment in infrastructure and social services along with reforms aimed at enforcing the rule of law and enhancing governance are needed to kindle a break from the past. A key task will be to enhance electricity provision, which remains deeply inadequate (Box 3). Transforming EAGB to an autonomous entity operated under a service contract (MEFP ¶27), as planned under a World Bank supported project, would be instrumental in this regard and should be done as soon as possible.

28. Fostering diversification and reducing the reliance on cashew for exports would help develop new income streams and make the economy more resilient. Growth in sectors where the poor are active, including cashew production, helps alleviate poverty, as the recent strong cashew performance has shown. However, a more diversified growth path that raises productivity has the potential to reduce poverty more quickly, with a more even income distribution and lower risk of poverty persistence (Selected Issues, Impact of Economic Structure and Policy on Poverty Incidence and Distribution). As one of the least diversified economies globally, both in terms of number of products and partners, there is large scope for improvement in this area. Reform areas that would support diversification include investing in human capital, improving the business environment, promoting financial deepening, and improving the quality of infrastructure (Selected Issues, Diversification in Guinea-Bissau).

Electricity Supply

Electricity supply is a major constraint to economic development in Guinea-Bissau. The public electricity and water utility, EAGB, only covers the capital, and power generation is entirely from diesel generators under a lease arrangement with an international provider of emergency power. Capacity of around 15 MW, although having increased sharply since 2013, covers only about half of demand, resulting in frequent outages. Electricity tariffs, unchanged since 1997, are among the highest in the world at US$0.37–0.50 per kWh.

Several initiatives to tackle Guinea-Bissau’s chronic electricity problems are underway. A World Bank project is focusing on distribution infrastructure and reform of EAGB. In addition, financing from BADEA and BOAD has been secured towards adding 37 MW of new generation to come online in 2018–19 and replace the current lease agreement. A project for solar-powered generation is also being considered. Finally, the OMVG (Gambia River Basin Development Organization) hydroelectric project should come online in 2019–20, promising to substantially reduce the cost of power.

Selected Indicators of Electricity Provision, 2014

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Source: World Bank, World Development Indicators.
A01ufig10

Guinea-Bissau: Electricity Production

(GWh)

Citation: IMF Staff Country Reports 2017, 380; 10.5089/9781484333150.002.A001

Source: EAGB.

29. Regulatory frameworks should target stability, transparency, and promotion of free competition. A recent draft bill for regulation of the cashew sector was meant to encourage development and value-addition in the sector but was rightly rejected for concern that it would have hampered free competition. A cashew policy framework that brings clarity and stability to the cashew sector without undercutting competition is still needed. In addition, the price cap on rice, which was introduced mid-year in response to spiking prices, should be removed as scheduled by end-2017 to avoid distorting market mechanisms and attendant inefficiencies. The policy framework for fuel pricing should be adhered to with regular and automatic adjustments.

Authorities’ views

30. The authorities agreed with the need to encourage private sector-led development and diversification, emphasizing the positive developments underway in this area (MEFP ¶26). They stressed their commitment to promoting healthy competition. They highlighted reforms underway to improve electricity supply and strengthen management of public enterprise, as well as initiatives to encourage promotion of non-cashew agriculture, including mechanisms for helping farmers access inputs and equipment. They further pointed to recent private investments, including a cement factory and warehouse facilitates, as signs of the positive momentum.

C. Strengthening Financial Intermediation and Inclusion

31. Guinea-Bissau’s financial sector remains shallow, with a range of challenges that limit effective intermediation and inclusion (Selected Issues, Recent Credit Developments and Obstacles to Financial Deepening). The number of people with bank accounts has increased in recent years, owing in part to the government’s decision to pay salaries only through the banking sector. However, use of financial services remains low, and the stock of credit to the private sector, at just 14.5 percent of GDP at end-2016, is far below the WAEMU average of 26 percent of GDP. The increased prevalence of mobile phones along with remittances from abroad have not been fully leveraged to raise financial inclusion. Moreover, traditional land ownership practices and the large informal economy are holding back the availability and use of collateral, and weak accounting practices make it difficult for banks to evaluate loan requests.

A01ufig11

Depositors with Commercial Banks

(per 1000 adults)

Citation: IMF Staff Country Reports 2017, 380; 10.5089/9781484333150.002.A001

Source: IMF, Financial Access Survey database.

32. Steps to deepen financial markets, bolster financial sector stability, and enhance financial inclusion are underway. With support of regional authorities, the government is undertaking a series of initiatives to improve financing for SMEs (in accordance with measures adopted by the WAEMU Council of Ministers in September 2015) (MEFP ¶25). In parallel, the BCEAO is at an advanced stage of implementing projects to foster financial safety nets and banking system stability. Specifically, a deposit guarantee fund has been established, and principles for contribution and access to fund resources are being developed; the full size of the fund is to be built over a ten-year period. Furthermore, an official regional credit bureau has been created, providing more debtor information than the existing national office, including on loan defaults. Finally, elements of the Basel II/III framework will be introduced in January 2018, with BCEAO having trained banks in complying with the new prudential standards.

Staff’s assessment

33. Resolving the disputed bailout and related overhang of legacy NPLs would help boost credit to the private sector. The undercapitalized bank used to be instrumental in providing credit to the private sector, including in rural areas, but is now scaling back lending under the burden of high NPLs, negative capital, and lack of recourse to BCEAO facilities. Once recapitalized the bank would be in a much better position to support a rebound of credit to the private sector. Stakeholders should move swiftly to secure fresh capital and achieve compliance with prudential norms. If the necessary capital injection is not achieved very quickly, the Banking Commission is expected to act promptly by taking all necessary action to protect financial stability, in line with its regulations.

Authorities’ views

34. The authorities shared staff’s assessment of the need to develop the financial sector, enhance access to credit, and reduce financial sector vulnerabilities. They intend to revise the national strategy document for the microfinance sector by consolidating existing initiatives and by signing a partnership agreement with the African Microfinance Network to boost the development of microfinance in rural areas as well as credit facilities for small- and medium-sized enterprises, consistent with the regional initiative. In line with staff’s recommendation and following through on the regional initiative, they also intend to draft a national strategy for financial inclusion. They are also encouraging use of the banking system (including for private real estate transactions) to bolster financial intermediation, and are strengthening their credit information bureau with support of regional authorities.

D. Maintaining Prudent Borrowing Policies

35. Improved fiscal performance, enhanced debt management, and progress in resolving external debt arrears are helping reduce Guinea-Bissau’s debt burden. With a lower fiscal deficit, government debt as a ratio to GDP is projected to fall from 54.1 percent of GDP in 2016 to 49.2 percent of GDP at end-2017. In addition, the interest burden of the overall debt stock has been reduced by eliminating expensive domestic debts and obtaining more favorable terms on borrowings from BOAD (MEFP ¶22). External legacy arrears have also been reduced, with the government obtaining 3.2 percent of GDP in debt relief following a recent agreement with the Exim Bank of Taiwan Province of China, which cancels 90 percent of debts originating from two 1990 loans (MEFP ¶21). Contingent liabilities have proven to be a risk, however, with calls on government debt guarantees (to Guiné-Telecom (1.4 percent of GDP) last year and to EAGB (0.8 percent of GDP) this year) leaving less resources for other spending.3

Staff’s assessment

36. The debt sustainability analysis (DSA) indicates moderate risk of debt distress. Guinea-Bissau’s economy is highly vulnerable to export shocks, and the poor financial state of public enterprises and generally weak debt management also represent risks. The assessment of moderate risk is unchanged from the previous DSA, as updated in December 2016. The trajectories of external debt indicators remain below their respective thresholds in the baseline scenario, with only the PV of debt-to-exports ratio exceeding its threshold in an extreme export shock scenario. The PV of public debt-to GDP ratio breaches its benchmark in all scenarios until 2023, while debt-service ratios remain comfortable throughout the projection period.

Guinea-Bissau: Borrowing Plan, 2016–18

(New public debt, contracted or guaranteed, in billions of CFAF)1

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Source: Bissau-Guinean authorities.

Includes only aid to the government sector. PV of all borrowing is evaluated at a 5-percent discount rate.

BOAD financing (shown on gross basis) is a mix of concessional and non-concessional loans.

IMF, bank financing, and regional T-bills.

37. Domestic currency debt is relatively high but associated risks are moderate. Domestic currency debt of the central government amounted to 39.7 percent of GDP at end-2016, with the largest exposures being to BOAD (12.9 percent of GDP) and BCEAO (14.2 percent of GDP, largely reflecting debts to the previous central bank from before Guinea-Bissau joined WAEMU). These debts have zero interest and amortization due in 2017-18 following recent rescheduling, and debt servicing will only increase gradually over the medium term given relatively low interest rates. Debts to domestic commercial banks (2.9 percent of GDP at end-2016) were in 2017 reduced and consolidated into cheaper Treasury securities scheduled for re-payment over three years.

38. While arrears accumulation has been stopped, there is an outstanding stock of old arrears that should be resolved. This includes $42.2 million (3.1 percent of GDP) in external arrears to Angola, Brazil, Libya, Russia, and Pakistan that were not covered in the HIPC process. Domestically, government faces claims totaling over 13 percent of GDP, most of which are more than a decade old and never validated (MEFP ¶23).4 A plan for comprehensively resolving legitimate domestic arrears should be developed but claims should be carefully vetted first, as many could be spurious.

39. Staff emphasized need to address operational risks and for continued prudent borrowing policies. To support debt sustainability, it will be critical for the authorities to maintain prudent borrowing policies, as per the borrowing plan (see text table), and to the maximum extent seek grants and concessional loans for priority projects. This should be supported by further strengthening of debt management capacity and procedures, including regular production of reports on external debt developments. Contingent liabilities should be contained and monitored, including by requiring all state-owned enterprises to produce audited financial statements.

Authorities’ views

40. The authorities broadly concurred with staff’s views on debt. While noting the urgent need to address the country’s infrastructure gap, they stressed that that the pace of public investment would be determined by available external concessional resources. They would continue to avoid non-concessional and short-term foreign currency debt. They also recognized the need to strengthen debt management and explained that the debt management unit had for this reason been elevated to a full Directorate of the Finance Ministry. Moreover, the upgraded debt management software (DMFAS 6.0) would be operational by end-2017. They explained that the CFAF 1.7 billion government guarantee issued this year for borrowing by Bissau City to finance construction of a market would be secured by vendor fees deposited directly in an escrow account. They further noted their best efforts to: (i) negotiate with bilateral creditors for outright cancellation and/or rescheduling of legacy arrears; and (ii) carefully vet outstanding domestic claims with a view to permanently resolving legitimate arears. Moreover, audits of public enterprises have been comprehensively expanded and accelerated for completion by end-2017 (MEFP ¶28).

E. Statistical Issues

41. Quality and timeliness of economic data. Weaknesses in economic statistics continue to hamper surveillance, with different datasets often inconsistent and subject to large revisions. TA has helped the production of national accounts and government finance statistics, and ongoing initiatives are expected to help improve balance of payments and international investment position statistics. Still, many data issues remain. The authorities underscored the role of TA in strengthening statistics, and pointed to their progress in improving national accounts source data and plans to publish by March 2018 revised national accounts with an updated base year (MEFP ¶31).

F. Governance

42. The authorities have taken steps to strengthen their framework for Anti-Money Laundering and Financing of Terrorism (AML/CFT) with assistance from development partners (MEFP ¶30). They have approved a national strategic plan and enhanced the autonomy of the Financial Intelligence Unit (CENTIF). On its part, CENTIF has intensified information dissemination with TA from the Inter-Governmental Group against Money Laundering in West Africa (GIABA), resulting in some initial declarations of suspicious financial transactions. In addition, ongoing IMF TA is helping develop capacity at CENTIF to undertake its core functions, and at the Ministry of Economy and Finance to undertake AML/CFT supervision of exchange houses.

43. Staff advised further strengthening of the legal and institutional framework to combat corruption. Important steps are required to improve governance, in particular the implementation of a comprehensive asset disclosure regime for public officials. The authorities were encouraged to (i) ensure that the Inspeção Superior de Luta Contra a Corrupção has the necessary resources and support to effectively carry out its mandate, (ii) prepare a comprehensive template for the declaration of assets and interests by all officials concerned, and (iii) prepare amendments to Law 7/99 to cover all politically exposed persons per Financial Action Task Force (FATF) standards. The authorities expressed support for such actions but noted that aspects that require the enactment of legislation are under the control of Parliament.

G. Other Surveillance Issues

44. Safeguards Assessment. The latest safeguards assessment of the BCEAO from December 2013 found that the bank continued to have a strong control environment. An updated safeguards assessment is planned to take place in the coming months, in line with a four-year cycle for regional central banks.

45. Exchange System and Exchange Rate Arrangement. Guinea-Bissau accepted the obligations of Article VIII, Sections 2, 3, and 4 with effect from January 1, 1997. It joined the WAEMU in 1997, and has no separate legal tender. The exchange system is free of multiple currency practices and exchange restrictions on the making of payments and transfers for current international transactions.

Program Issues

46. Program performance will continue to be assessed semi-annually (MEFP ¶32, Tables 6-8). Performance criteria for end-December 2017 are unchanged. The performance criteria and indicators are defined in the attached Technical Memorandum of Understanding (TMU) along with the relevant adjustors. The fifth (and last) program review will be based on the end-December 2017 performance criteria and is scheduled to be completed on or after April 15, 2018.

Table 8.

Guinea-Bissau: Schedule of Disbursements Under the ECF Arrangement, 2015–181

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Source: IMF staff estimates.

The first and second ECF-reviews were combined and completed on December 2, 2016. The third review was completed on July 6, 2017.

Based on the new quota for Guinea-Bissau under the 14th General Quota Review.

47. The program envisages structural measures for the remainder of 2017 and 2018 (Table 7b and MEFP ¶¶18-19):

  • Completing a draft law for a new small taxpayer regime with technical assistance from the IMF to improve tax administration and facilitate small taxpayer compliance (SB for December 2017).

  • Preparing (i) a monthly rolling treasury cash-flow projection table consistent with the 2017 budget; (ii) quarterly reports on ministry-level budget execution with details along economic classification of expenses; (iii) quarterly reports on external debt commitments, agreements, and disbursements; and (iv) monthly reports detailing financial flows for EAGB (all ongoing SBs).

  • Completing the upgrade of debt management software (DMFAS 6.0) and commencing its use for effective debt analysis and debt service projections (SB for December 2017, reset from September 2017).

  • In addition, the authorities are proposing two new structural benchmarks involving submission to the Council of Ministers of: (i) a draft budget for 2018 in line with the understandings outlined above (SB for end-December 2017); and (ii) a management improvement plan for EAGB to pave the way for implementation of a service contract around mid-2018 (SB for March 2018).

48. Financing assurances are in place for the fourth review. The program is fully financed until its expiry In July 2018, with the bulk of the financing expected to be met through external support. Guinea-Bissau owes arrears to Angola, Brazil, Russia, Libya, Pakistan, [all of whom have consented to Fund financing notwithstanding these arrears]. In addition to resolving its arrears to Taiwan Province of China, Guinea-Bissau has this year cleared its arrears to the UAE. It remains current on its remaining external debt service obligations while pursuing negotiations for rescheduling and/or outright cancellation of its arrears. Adequate safeguards remain in place for the further use of Fund resources, and Guinea-Bissau’s adjustment efforts have not been undermined by developments in debtor-creditor relations.

49. Guinea-Bissau’s capacity to repay the Fund is adequate. The use of Fund resources under the ECF arrangement will have a negligible impact on debt and debt service ratios, increasing Guinea-Bissau’s obligations to the Fund to 85¼ percent of quota or 2.28 percent of GDP at the end of the current ECF-supported program in 2018 (Table 9). Guinea-Bissau’s risk of debt distress remains moderate.

Table 9.

Guinea-Bissau: Indicators of Capacity to Repay the Fund

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Source: IMF staff estimates and projections.

Staff Appraisal

50. Guinea-Bissau’s economy has continued to register strong growth. Increased cashew prices and improved terms of trade have boosted incomes of rural households and supported generally buoyant economic activity. The external current account is broadly balanced, overall inflation has remained low, and real GDP growth is projected at 5.5 percent in 2017. Financial intermediation has, however, remained subdued, with banks burdened by high levels of non-performing loans and still unresolved issues from the voided 2015 bank bailout.

51. Fiscal management has strengthened, supporting macroeconomic stability. Notable accomplishments this year include elimination of non-regularized expenditures, avoidance of new arrears, reduced debt servicing costs, and creation of a cash buffer. Moreover, expenditure is being better controlled. The fiscal deficit has narrowed sharply and the debt-to-GDP ratio is set to fall by several percentage points in 2017.

52. Ensuring sustained and inclusive growth will require investments in physical and human capital alongside improvements in the business environment. Guinea-Bissau cannot rely on continued terms of trade gains to support growth. Instead, the large gaps in the country’s infrastructure and social services must be filled. Rule of law, good and transparent governance, and policy stability all need to be more firmly entrenched to encourage private investment, expand and diversify the economy, and create more and better paying jobs. Steps to combat corruption should be supported by strengthening of AML/CFT efforts.

53. Obstacles to effective financial intermediation should be tackled. Rapid action towards a solution that recapitalizes the undercapitalized bank and resolves the ongoing court case is in the interest of all parties. At this point, however, it is incumbent on the regional Banking Commission to take strong action to safeguard financial stability. This should involve quickly laying out a firm time-bound action plan, backed by sanctions and interventions, to end regulatory non-compliance by the undercapitalized bank. Developing a national plan for financial inclusion would support efforts to deepen the financial system.

54. To anchor debt sustainability, the authorities should maintain over the medium term the low fiscal deficits set to be achieved in 2017. It will be important to maintain prudent borrowing policies and to the maximum extent seek grants and concessional loans for priority projects. This would be supported by further strengthening of debt management capacity and procedures. Contingent liabilities should be contained and monitored, including by requiring all state-owned enterprises to produce audited financial statements on a regular annual basis.

55. A needed step up in social and investment spending will require continued progress on domestic revenue mobilization as well as improvements in the planning framework. Reforms in tax and customs administration should be extended and broadened, and tax policy reviewed with a view to simplification and modernization. Efforts to strengthen public financial management should be deepened, and it will also be important to enhance procedures for project selection and to develop a supporting planning and execution framework.

56. The authorities’ reform agenda, as articulated in their MEFP, remains appropriate. The outlined policies support attainment of macroeconomic stability and inclusive growth. The authorities are encouraged to place emphasis on improving statistics and bolstering transparency and healthy competition in all areas.

57. Staff recommends conclusion of the 2017 Article IV Consultation, and completion of the fourth program review and financing assurances review. This recommendation is based on the strong progress made under the program, including structural reforms to ensure lasting progress. It is recommended that the next Article IV consultation with Guinea-Bissau be held on the 24-month cycle, in accordance with Decision No. 14747–(10/96) on consultation cycles.

Figure 1.
Figure 1.

Guinea-Bissau: Recent Economic Developments

Citation: IMF Staff Country Reports 2017, 380; 10.5089/9781484333150.002.A001

Sources: Guinea-Bissau authorities; and IMF staff estimates.
Figure 2.
Figure 2.

Guinea-Bissau: Fiscal and Credit Developments

Citation: IMF Staff Country Reports 2017, 380; 10.5089/9781484333150.002.A001

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

Guinea-Bissau: Medium-Term Outlook

Citation: IMF Staff Country Reports 2017, 380; 10.5089/9781484333150.002.A001

Sources: Guinea-Bissau’s authorities; and IMF staff estimates and projections.
Table 10.

Guinea-Bissau: Table of Common Indicators Required for Surveillance

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Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means.

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

Foreign, domestic bank, and domestic nonbank financing.

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

Including currency and maturity composition.

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

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

Annex I. Recommendations from the 2015 Article IV Consultation

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Annex II. Capacity Building Amid Fragility

Political instability and frequent government changes have weakened institutions and delayed reforms. In the current period of relative stability and drive for reform, the Fund and other development partners are assisting the country through TA and training to enhance administrative capacity in revenue mobilization, public financial management, and debt management. The capacity building program is intertwined with surveillance and program priorities.

A. Background

1. Guinea-Bissau is among the world’s most fragile states. Since independence in 1973, the country has experienced a civil war (in 1998–99) and a series of coups with marked negative consequences for the country’s economy and social fabric.

2. Conflict and political instability has stymied development of economic institutions and weakened administrative capacity. The history of coups and governments driven by rent-seeking have hindered important economic decisions and reforms. Weak institutions, high political uncertainty, and low resource mobilization are key features of fragility in Guinea-Bissau.

A01ufig12

Guinea-Bissau: Real GDP Per Capita

(percent change)

Citation: IMF Staff Country Reports 2017, 380; 10.5089/9781484333150.002.A001

Source: IMF, World Economic Outlook database.

3. Restoration of peaceful civilian rule in 2012 offered new hope. Following reinstatement of normal executive functions after the April 2012 coup d’état, general elections were held successfully in April-May 2014. This set the stage for reform efforts and engagement with development partners. The Fund’s Executive Board approved a Rapid Credit Facility (RCF) for Guinea-Bissau in November 2014. At a March 2015 Roundtable in Brussels donors pledged assistance totaling about $1.5 billion to support the country’s 10-year development plan. The present ECF-supported program was approved in July 2015.

4. While the security situation has remained quiet, political instability has continued and progress towards the development agenda has been sporadic. Divisions within the PAIGC party, led to four changes of government between mid-2015 and late-2016. The early part of this period coincided with the problematic bank bailouts and setbacks to effective treasury management, which caused the ECF-supported program to go off track and eroded development partner support.

B. Fostering Resilience by Building Capacity

5. The period since end-2016 has been one of relative political stability and strong economic reform drive. While there are ongoing demands for President Vaz to agree to a consensus government in line with the ECOWAS-brokered Conakry agreement of October 2016, 2017 has been a year of relative calm. During this period, under the guidance of a new Minister of Finance, the ECF-supported program has been back on track and TA activities have received new impetus. The current environment represents a window of opportunity to advance reforms and improve economic policies.

6. The Fund is taking a leading role in strengthening capacity of Guinea-Bissau’s economic institutions. TA and training activities are geared towards achieving the main objectives of the ECF-supported program through broad-based capacity building ranging from helping put in place systems for data compilation and dissemination and strengthening key AML/CFT institutions like the Financial Intelligence Unit (CENTIF), to assisting with policy reform. The Fund’s activities are coordinated with other development partners (mainly the African Development Bank, the European Union, and the World Bank), to improve traction and minimize duplication.

7. Capacity building is intertwined with surveillance and focus on reforms. The Fund’s Capacity Development Strategy for Guinea-Bissau identifies tax administration, public financial management, debt management, and improving statistics as key priorities for technical assistance (TA) and training by IMF TA Departments and AFRITAC West. For FY2018, the TA plan includes:

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Beyond FY2018, the capacity development strategy will be guided by progress on the FY2018 priorities. In addition, staff are exploring options for establishing peer-leaning ties with neighboring countries such as Cabo Verde, to develop synergies and provide the Guinea-Bissau authorities with firsthand examples of capacity building.

8. The reform strategy is subject to risks, including political instability and weak absorption capacity. The authorities are enthusiastic in receiving TA and are of the view that TA delivery at this juncture should have a strong field presence, emphasizing training and long-term advisors. The careful tailoring of the TA agenda to the specific circumstances and needs of the country should help mitigate some of the risks.

Annex III. Risk Assessment Matrix1

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Annex IV. External Stability Assessment

The external position of Guinea-Bissau is stronger than suggested by fundamentals, reflecting strong positive terms of trade developments. The EBA-lite methodologies indicate moderate exchange rate undervaluation, subject to data uncertainties. The current account registered surpluses for the last three years, unprecedented for Guinea-Bissau. Exports depend heavily on cashew nuts and have benefited from higher international prices; competitiveness elsewhere is weak.

A. External Sector Developments

1. Guinea-Bissau’s external position has improved significantly since 2012–13. The current account moved from a deficit of 8.4 percent of GDP in 2012 to a surplus averaging 1.5 percent of GDP in 2014–16. The movement reflects an increase in the volume of cashew nut exports and a sharp improvement in the terms of trade. As the price of cashew nuts increased by a cumulative 40 percent during 2012–16 period and as fuel and non-fuel import prices fell, Guinea-Bissau’s terms of trade improved by 80 percent during this time.

2. With the CFA franc fixed to the euro, the Real Effective Exchange Rate (REER) has remained broadly stable since 2010, with shifts mainly following those of the euro/US dollar exchange rate. REER movements in Guinea-Bissau tend to follow those in the nominal effective exchange rate (NEER), since the inflation differential with trading partners is relatively small. The REER has depreciated by about 6 percent since its peak in 2008 but remains more appreciated than in the 1990s.

A01ufig14

Exchange rates and Prices

(index, 2010=100)

Citation: IMF Staff Country Reports 2017, 380; 10.5089/9781484333150.002.A001

Sources: Guinea-Bisau authorities; IMF staff claculations.

B. Assessment Using the EBA-Lite Methodology

3. Guinea-Bissau’s current account position is assessed using the EBA-lite methodology. The EBA-lite methodology includes three approaches (current account (CA), real exchange rate (REER), and external sustainability (ES)) that can be used to assess exchange rate misalignment. The CA and REER approaches are based on panel regressions that generate estimated “norms” consistent with fundamentals and desirable policies.

Guinea-Bissau: External Balance Assessment

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Note: A positive CA gap indicates undervaluation. A positive REER gap indicates overvaluation. Estimates are based on data available as of October 2017.

4. An application of the EBA-lite methodologies suggests a moderate currency undervaluation in the 5–10 percent range. These estimates should be interpreted with caution. The equilibrium exchange rate (REER) approach suggests the largest undervaluation but the estimate is not statistically significant. More generally, data for Guinea-Bissau data, not least those relating to its balance of payments statistics, are associated with a high degree of uncertainty. In addition, by relying on coefficients estimated for a large panel of countries, the CA and REER models do not fully capture the implications of Guinea-Bissau’s high dependence on cashew or that it is a member of a currency union with a fixed exchange rate to the Euro.

CA approach

5. The CA approach compares the actual current account for 2016 against a current account norm based on a “fitted” value for the current account derived from an equation of fundamental variables, which is then adjusted for a “policy” gap to reflect desired adjustments to capital controls, reserves, private credit and the fiscal balance.

CA approach Summary

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A01ufig15

Current Account: Actual, Fitted, and Norm

Citation: IMF Staff Country Reports 2017, 380; 10.5089/9781484333150.002.A001

6. Based on this methodology, Guinea-Bissau’s current account stance in 2016 is moderately stronger than its fundamentals. The current account benchmark implied is −2.2 percent, of which 1.5 percent of GDP are driven by the policy gap, and 0.7 percent by Guinea-Bissau’s macroeconomic fundamentals and temporary and statistical factors. The actual current account balance registered a surplus of 1.3 percent of GDP in 2016. The implied misalignment of the current account is 3.5 percent of GDP, implying 7.2 percent appreciation of the REER with an elasticity of the current account to movements in the real exchange rate of −0.49 (Tokarick, 2010).1

REER Approach

7. The REER approach focuses directly on the exchange rate as the dependent variable. It is a reduced form model (based on the REER regression from the EBA-lite toolkit) and estimates a fitted value for the real effective exchange rate as a function of a set of economic variables that cause persistent deviations from long-run purchasing power parity, such as terms of trade, productivity, aid, and remittances. Guinea-Bissau’s REER is estimated to be undervalued by 9 percent in 2016. This result is driven by the higher terms of trade. Higher reserve accumulations moderated the REER overvaluation.

A01ufig16

Ln(REER): Actual, Fitted, and Norm

Citation: IMF Staff Country Reports 2017, 380; 10.5089/9781484333150.002.A001

ES Approach

8. The external sustainability approach determines the level of current account balance needed to stabilize the net foreign position (NFA) at its current level. The NFA ratio in 2015 (latest available data) was estimated to be at −16 percent of GDP, a net debt position. To prevent this indebtedness from growing, the current account deficit should not be larger than −6 percent of GDP. If the actual medium-term current account level is used, the current account gap is 3.2 percent of GDP and closing the NFA-stabilizing level would require a modest REER appreciation of 6 percent. The ES approach should be interpreted with caution, since the IIP data are of poorer quality than the balance of payments statistics. External sustainability currently is not a major concern for Guinea-Bissau.

ES Approach Summary

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C. Structural Competitiveness

9. Guinea-Bissau’s business climate has improved in recent years but remains challenging. Per the World Bank’s “Doing Business Index, the biggest improvement since 2010 was made in the areas of starting a business and registering property. The improvement in relation to starting a business happened as Guinea-Bissau established a one-stop shop, eliminated the requirement for an operating license, and simplified the method for providing criminal records and publishing the registration notice. Transferring property became easier because of a reduced property registration tax and an increased number of notaries dealing with property transactions. In 2018, Guinea-Bissau improved its credit reporting system by introducing regulations that govern the licensing and functioning of credit bureaus in the member states of the West African Economic and Monetary Union (UEMOA) and by launching a new credit bureau. At the same time, trading across borders became more difficult, mainly because of higher cost to export and import goods. Getting credit and electricity remain the main bottlenecks, it takes almost 4 times longer to get electricity in Guinea-Bissau than in SSA. Notwithstanding the different improvements, Guinea-Bissau still ranks the lowest in WAEMU.

A01ufig17

Doing Business Indicators, 2018

(distance from frontier)

Citation: IMF Staff Country Reports 2017, 380; 10.5089/9781484333150.002.A001

Source: World Bank, Doing Business database.Note: 0 represents the lowest performance, 100 is the frontier.
A01ufig18

Worldwide Governance Indicators, 2016

(estimate, higher value = better)

Citation: IMF Staff Country Reports 2017, 380; 10.5089/9781484333150.002.A001

Source: World Bank, Worldwide Governance Indicators.

10. Guinea-Bissau’s institutions and policies are consistently ranked weaker than other WAEMU countries. Per the Worldwide Governance Indicators (WGI), governance indicators in Guinea-Bissau deteriorated in all 6 categories since 2010, including relative to peers in the region.

D. Conclusions

11. While there is no strong evidence of significant exchange rate misalignment, Guinea-Bissau’s external position remains vulnerable to a range of risks. The country scores particularly low on the five country risk indicators used in the EBA-lite framework, and three of the five indicators (socioeconomic conditions, investment profile and corruption) have deteriorated since 2010. Moreover, the high export concentration in cashew leaves the country vulnerable to international price fluctuations, as well as to weather conditions, posing risks to external stability. In addition, high dependence on imported rice and petroleum implies vulnerability to increases in prices of those items.

Appendix I. Letter of Intent

Madame Christine Lagarde

Managing Director

International Monetary Fund

Washington, D.C. 20431

USA

Bissau, Guinea-Bissau

November 17, 2017

Dear Managing Director,

1. The Government of Guinea-Bissau remains strongly committed to the economic program supported by the three-year Extended Credit Facility (ECF) Arrangement approved by the IMF Board on July 10, 2015. Our economic program continues to be focused on revitalizing our institutions and strengthening the business environment to promote strong and inclusive growth. The Government is encouraged by the good results witnessed to date and reaffirms its commitment to the ECF Arrangement.

2. The attached Memorandum of Economic and Financial Policies (MEFP) updates the MEFP dated June 17, 2017. It describes recent economic developments and summarizes our progress in implementing policies and structural measures under the ECF-supported program. As explained in the MEFP, we observed all performance criteria and indicative targets for end-June 2017. We further met all structural benchmarks, except that for financial reporting by the public utility, EAGB, and that for installation and use of upgraded debt management software, which were both delayed due to administrative capacity challenges. The MEFP also outlines our macroeconomic policies and structural measures for 2017–18, and discusses our implementation of longer-term policy recommendations from the 2015 Article IV consultation to bolster growth and financial inclusion and to reduce poverty.

3. The pickup in economic activity seen since the 2014 elections has continued and has become more entrenched. Benign developments in our terms of trade, mainly due to strengthening of cashew prices, has benefitted exports. Fiscal balances are improving due to enhanced revenue mobilization and careful management of expenditures. Economic growth is becoming more broad-based, supported by increased investment activity. Expansion in private credit, after a decline in 2014-15, is supporting financial inclusion, despite lingering challenges from a high level of non-performing loans.

4. For the medium term, we anticipate continued strong cashew production and supportive domestic policies to underpin continued economic progress. We expect real GDP growth to stay around 5 percent a year, as we improve the business environment and as the country’s economic potential in, among others, agriculture, fisheries, and tourism is gradually realized. Prudent economic policies will support continued improvements in our external and fiscal positions. Moreover, our cautious approach to borrowing will keep public debt in check and help reinforce macroeconomic stability.

5. To underpin macroeconomic stability and forestall risks to our development agenda, the government will zealously ensure the integrity of public finances. We will maintain our policies of zero non-regularized expenditures, zero new arrears, and zero net domestic currency credit to central government from commercial banks. Working closely with development partners to address infrastructure and other investment needs, we will avoid all non-concessional borrowing in foreign currency. We will further continue to strengthen our debt management capacity and to quickly resolve all outstanding domestic and external arrears.

6. To promote stability in the banking system, we are working closely with stakeholders to ensure compliance with prudential requirements, notably the new minimum capital. We are committed to a speedy and transparent resolution of the voided bank bailouts of 2015. Any intervention in the sector will be in line best international practices, and any direct government involvement, should it be necessary, will be temporary and with a view to minimizing risk to the treasury.

7. Based on these policies and the performance relative to the end-June 2017 targets as described in the MEFP, the government requests completion of the fourth review under the ECF-supported program and the related financing assurances review.

8. The government believes that the measures and policies set out in the attached MEFP are adequate for achieving the objectives of the program. It, however, stands ready to take any additional measures that may become necessary for this purpose. To ensure successful implementation of our economic program, we will keep a close policy dialogue with the IMF and seek technical assistance, as needed. We will consult with the IMF on the adoption of any additional measures and in advance of revisions to policies contained in the attached MEFP, in accordance with IMF policies on such matters. Furthermore, we will continue to provide the IMF with information and data to aid the monitoring of policies and reforms under the program.

9. The government authorizes publication of this letter, its attachments, and the related staff report, including placement of these documents on the IMF website in accordance with IMF procedures.

Yours sincerely,

/s/

João Alage Fadia

Minister of Economy and Finance

Guinea-Bissau

Attachments:

  • I. Memorandum of Economic and Financial Policies

  • II. Technical Memorandum of Understanding

Attachment I. Memorandum of Economic and Financial Policies: Bissau, November 17, 2017

Background

1. The government remains fully committed to the three-year economic and financial program (2015–18) supported by the International Monetary Fund (IMF) under the Extended Credit Facility (ECF).1 The program, with the third review completed in July,2 aims to entrench macroeconomic stability and advance structural reforms to support efficient public service delivery, private sector development, and inclusive growth. While the security situation has remained calm, political tensions have prevented a smooth functioning of Parliament since end-2015, delaying the passing of legislation. Nonetheless, there is a functional government under Prime Minister Umaro Sissoco Embaló and steady progress is being made on the reform agenda.

2. This Memorandum of Economic and Financial Policies (MEFP) supplements the MEFP of July 17, 2017. It presents our performance relative to the performance criteria and other targets under the three-year ECF-arrangement, and outlines economic and financial policies as well as structural reforms for 2017 and 2018.

Recent Economic Developments

3. Economic activity has remained buoyant. Real GDP growth for 2015 and 2016 has been revised up from 5.1 percent in both of those years to 6.1 percent in 2015 and 5.8 percent in 2016. The revisions reflect additional survey information and have benefited from IMF technical assistance. Buoyed by increasing incomes from cashew production as well as increased public and private investment, real GDP growth is projected at 5.5 percent in 2017. Consumer price inflation averaged 1.5 percent per year in 2015-16 and is projected to increase slightly to a year-average rate of 2.2 percent in 2017, reflecting a mid-year increase in rice and other food prices that occurred as increased incomes drove up demand.

4. Cashew production has benefitted from record high prices. On the back of rising international prices as well as domestic policies to ensure healthy competition and curtail smuggling, cashew nut production rose from an estimated 191 thousand tons in 2015 to 207 thousand tons in 2016, and is projected at 189 thousand tons in 2017. A draft decree that would have blocked foreign traders from cashew marketing created uncertainty. The cancelation of this decree at the start of the 2017 campaign season removed this uncertainty, helping reactivate activity. Moreover, reflecting higher international prices, the farmgate reference price was increased from CFAF 350 per kg in 2016 to CFAF 500 per kg in 2017 and the export reference price was increased from USD 950 per ton in 2016 to USD 1,150 per ton in 2017. In the first eight months of 2017, the average realized export price was USD 1,949 per ton, compared to an average of USD 1,390 in 2016, entailing a significant increase in overall export proceeds despite the slightly lower volume of cashew exports.

5. The external current account surplus has narrowed. While cashew proceeds have risen, other exports have remained subdued with timber exports halted due to the CITES ban. Moreover, imports have increased sharply, especially for construction materials, reflecting higher incomes of consumers and rising investment. The current account surplus is accordingly estimated to have declined from 2.5 percent of GDP in 2015 to 1.3 percent of GDP in 2016 and is projected at 0 in 2017.

6. Government revenue has benefitted from the favorable trends in the economy as well as from strengthened tax and customs administration. Ongoing efforts to strengthen revenue mobilization, supported by technical assistance from the IMF and other partners, has supported a general upwards trend in collections, with the ratio of tax revenue to GDP rising from 6.8 percent in 2013 to 9.2 percent in 2016. For the first half of 2017, tax revenue exceeded the program target on the back of strong collections of import duties, sales tax, and corporate income tax. In addition, non-tax revenue and grants were unexpectedly boosted by a dividend payment (0.7 percent of GDP) from the regional central bank (BCEAO) and budget support (0.4 percent of GDP) from Saudi Arabia. Altogether, total revenue and grants were 2.6 percent of GDP above the end-June target.

7. Strengthened public financial management has further helped improve our fiscal position. The twice weekly Treasury Committee meetings have significantly tightened budget execution and expenditure control. We have maintained during 2017 the avoidance of non-regularized expenditures (DNTs) as well as domestic and external arrears. In addition, improved debt management has helped reduce borrowing costs. By shifting towards cheaper financing on the regional market for Treasury securities, we had by end-June 2017 essentially paid back all loans and overdrafts from domestic banks. Moreover, debts with BOAD were reprofiled, resulting in lower debt servicing costs. These steps helped keep total expenditure in the first half of 2017 well in line with the program target (10.3 percent of GDP compared to the targeted 9.8 percent of GDP). The overall balance on a commitment basis accordingly registered a deficit of 0.3 percent of GDP, against the programed deficit of 2.4 percent of GDP. In parallel, despite a slightly higher than planned clearance of arrears (mostly for salaries, goods and services, and debt service) of 0.3 percent of GDP, the cash deficit (0.4 percent of GDP) was 2.2 percent of GDP below the program.

8. Development partners have continued to provide project support but budget support is lacking. Grants and loans to finance development projects have continued to be provided at broadly the same aggregate level since 2014, helping build capacity and address infrastructure needs. New undertakings in 2017 include World Bank projects in the energy and the telecommunication sectors. Our main development partners—the EU, the World Bank and the African Development Bank—have, however, not provided budget support since 2015.

9. High non-performing loans in the banking system continue to constrain financial intermediation. Private credit (gross of provisions) expanded by 6.1 percent in 2016 and shrunk by 0.8 (year-on-year) at end-June 2017. The weak evolution of credit despite a pick-up in economic activity reflects risk aversion by banks in the context of a large overhang of non-performing loans (NPLs). At end-June 2017, gross NPLs amounted to 32 percent of net bank credit; still very high but down from 39 percent at end-2014. Following on-site inspections in late 2016 and subsequent recommendations by the Banking Commission, banks increased provisioning to cover 65 percent of gross NPLs at end-June 2017 from 46 percent at end-2016. However, the large provisioning for NPLs coupled with the failure of its shareholders to inject capital has left one bank with capital significantly below the regulatory minimum of the CFAF 10 billion (previously CFAF 5 billion) that came into force at the start of July.

Program Performance

10. All performance criteria for end-June 2017 were met (Table 1). The floor on domestic tax revenue was exceeded by CFAF 8 billion (24 percent), thanks to the strong cashew production and prices, robust economic activity, and vigilant tax and customs administration. Net domestic bank credit to central government was CFAF 8.9 billion below the program ceiling. In addition, consistent with their zero-ceilings, there were neither non-concessional nor short-term external debt; and no external arrears were accumulated.

11. Performance relative to indicative quantitative targets was also good, with all indicators met. There were neither new domestic arrears nor non-regularized expenditures in the first half of 2017, reflecting the government’s efforts to strengthen public financial management and adhere to the budget. In addition, the floor on social and priority spending was met, along with the ceiling on the domestic primary balance on commitment basis

12. Progress in implementing structural measures was generally good (Table 2). Five of the seven structural benchmarks for the first nine months of 2017 were observed as envisioned. The government:

  • prepared rolling monthly cash-flow projections consistent with the 2017 budget;

  • prepared, as envisaged for operations during the first and second quarters of the year, quarterly reports on (i) ministry-level budget execution with details along economic classification of expenses, and (ii) external debt commitments, agreements, and disbursements;

  • completed ahead of the April 15 deadline, with the assistance of the WAEMU Banking Commission, an assessment of the two banks affected by the bailout and recommended actions to bring these banks into compliance with prudential norms; and

  • designed a draft bill to regulate cashew trading with a view to promoting cashew production and processing.

Two structural benchmarks were not completed on time:

  • Due to capacity constraints and delayed progress in strengthening financial management and oversight of the public utility, EAGB, government could not submit the monthly reporting on that company’s financial flows as envisioned for July 2017. The World Bank, via its Emergency Water and Electricity Services Upgrading Project, is assisting us in this area, and we produced the first of what will be regular monthly reports in October 2017. An audit of EAGB, to be completed by end-2017, will shed further light on the finances of the company and provide a basis for improving the quality of financial reporting.

  • The upgrade of our debt management software to the latest version (DMFAS 6.0) was not completed as envisioned for September 2017 due to problems in the procurement process. However, the purchase of the new license has now been completed and the upgraded software will be operational by end-2017, with technical assistance from UNCTAD.

13. More generally, the government remains fully committed to the structural reform agenda outlined in the previous MEFP. Our objectives for strengthening revenue mobilization, expenditure management, debt management, public service delivery, and the business environment all remain unchanged. We recommit to timely implementation of the envisioned structural reform agenda under the ECF-supported program.

Medium-Term Economic Outlook and Policies
A. Economic outlook

14. We anticipate robust economic expansion, supported by prudent policies and effective fiscal management. The updated macroeconomic framework projects real GDP growth at 5.5 percent in 2017. This represents an upward revision from the earlier projection of 5 percent, reflecting the buoyant activity seen so far this year. For the medium term (2018–22), the growth rate is maintained at 5 percent per year, with strong activity in agriculture, construction, and services supported by improvements in electricity supply and a better business environment. Private credit is expected to expand on average by about 3 percent per year during 2017-18, in response to continued strong economic activity and measures to encourage financial intermediation. The current account deficit is expected to turn to a modest deficit averaging around 3 percent of GDP per year into the medium term reflecting increased investment activity. Consumer price inflation is expected to average 2.5 percent per year (below the WAEMU convergence criteria of 3 percent).

15. Fiscal deficits are expected to remain well contained, supported by vigilant tax administration and improved PFM. For 2017, the overall fiscal deficit (cash basis) is projected at 1.8 percent of GDP. This figure is consistent with the zero-program target for net domestic bank credit, including a CFAF 1.7 billion government guarantee issued to Bissau City Council for construction of a municipal market and secured by revenue from vendors that will be deposited into an escrow account. The anticipated performance excludes revenue from seized timber and EU fishing compensation (previously projected at 0.8 percent of GDP), as negotiations in these areas are yet to be concluded, contributing to a 1.1 percent of GDP reduction in non-tax revenue compared to budget. The 2018 budget will target a cash deficit of 2.3 percent, reflecting an increase in investment. The deficit is then expected to remain near this level through the medium term, well below the WAEMU convergence criteria of 3 percent of GDP. The fiscal position will be supported by continued improvements in treasury management procedures and practices, with a vigilant eye on the evolution of public debt. Thus, infrastructure projects, including the planned increase in electricity generation capacity and construction of high-tension power distribution lines, as well as improvements in the country’s road network and other infrastructure investments, will continue to be financed mostly through concessional loans and grants. At the same time, social expenditure will be geared to support enhanced service delivery in health and education.

B. Economic Policies

16. The country’s medium-term development program (2014–18) will continue to guide our policy strategies, consistent with our growth and poverty-reduction objectives. Private sector development through healthy financial intermediation and supportive improvements in the business environment will be critical for durable inclusive growth. In parallel, strengthening resource mobilization, including from our development partners, is essential for adequate financing of the nation’s development agenda. To underpin this medium-term policy priority, the government will continue to focus on improving the business environment, on promoting policy transparency, good governance, and the rule of law, and on better targeting of social support.

Fiscal policies and public financial management

17. Revenue mobilization is a key priority. To this end, we will: strengthen coordination between the tax and customs departments with effective use of taxpayer information; vigorously pursue the recovery of tax arrears from state-owned enterprises; move forcefully to ensure that procedures required to export the stock of seized timber are in place; minimize and better target tax exemptions and subsidies through the tax exemptions committee at the Ministry of Finance; and regularly adjust domestic fuel and electricity prices in line with the evolution of global fuel prices. Over the medium term, we will review tax and excise rates and adjust as needed to re-align with our regional peers.

18. Revenues will be supported by measures to strengthen tax and customs administration. A dedicated commission has been analyzing the use of tax exemptions with a view to reducing evasion. This has resulted in steps to increase compliance, with vigorous pursuit of irregularities and disciplinary action. In 2016, we started to issue taxpayer identification numbers and introduced a new uniform sales invoice for large companies. Both have now been rolled out comprehensively (structural benchmarks (SB) for end-September 2017). As of September 2017, taxpayer identification numbers have been assigned to more than 11,000 individuals and almost 2,000 corporations, and the uniform sales invoices were used by some 400 companies. For the remainder of 2017 and beyond, the government will take steps to enhance revenue collection by:

  • Preparing quarterly reports (starting September 2017 for performance as of end-June 2017, and quarterly thereafter) on its progress in minimizing tax exemptions.

  • Completing a draft law for a new small taxpayer regime with technical assistance from the IMF to improve tax administration and facilitate small taxpayer compliance (SB for December 2017).

  • Extending SYDONIA to custom posts across the country and ensuring its secure use.

  • Ending the temporarily introduced practice of applying flat-rate customs fees for goods imported by land and move to the general tariff regime.

  • Stepping up customs controls at land border posts and enhancing the focus on high-tax items.

  • Setting and enforcing higher standards for customs clearing agents.

19. Public financial management (PFM) and the quality of spending will be advanced with focus on improvements in treasury management and broader institutional reforms. The government, through the Treasury Committee, plans to strengthen compliance with PFM rules at the ministerial levels and align expenditures with available resources. In this regard, the government will:

  • Continue to equip and task the Treasury Committee to ensure timely regularization of all expenses and avoid the use of DNTs, and to maintain a continuous limit of CFAF 1 billion on the outstanding stock and a quarterly limit of 1 percent of current expenditure (as envisaged by the Treasury Plan) on the flow of DNTs.

  • Continue to avoid any accumulation of domestic or external arrears.

  • Extend the use of the information management system (SIGFIP) to incorporate the remaining parts of revenue operations not currently captured.

  • Tighten annual budget management procedures, institute clearer processes for vetting investment projects, and take credible steps towards instituting a medium-term expenditure framework.

  • Consolidate medium-term payroll management reforms by instituting a wage policy to inform annual public sector wage increases and to contain growth in the wage bill.

  • Enhance management and prioritization of capital spending by strengthening the investment database, developing a matrix of short term expenditure priorities, improving the system for formal project appraisal and evaluation, and integrating infrastructure maintenance needs in the recurrent budget.

  • Continue to prepare and review rolling monthly treasury cash-flow projection tables consistent with the 2017 budget (SB for December 2016 and monthly thereafter), to guide and inform our Treasury operations; and

  • Further the preparation of timely quarterly reports on ministry-level budget execution with details along economic classification of expenses (SB for December 2016 and quarterly thereafter).

20. Expenditures will be contained in line with the overall deficit target and the program performance criteria of zero net domestic bank credit to central government. For 2017, we foresee total expenditure at 17.5 percent of GDP. For 2018, our plans involve an increase in total expenditure to 19 percent of GDP. Moreover, transfer payments in 2018 will be lower than in 2017, which included a payment of CFAF 6.6 billion to cover a debt guarantee that was called. The resulting additional fiscal space will be directed primarily to domestically financed capital spending to address pressing infrastructure needs, and costs (0.5 percent of GDP) of undertaking parliamentary elections.

Borrowing Policies and Debt Management

21. Technical enhancement, capacity building, and debt renegotiation efforts are yielding dividends. The debt management unit has been strengthened by converting it to a Directorate General reporting directly to the Minister of Finance. Moreover, we continue to strengthen information flow between the enhanced debt Directorate and the Treasury, and we are training staff to enhance capacity. Following last year’s progress in addressing external legacy arrears, we have this year secured debt relief on near-Paris Club terms of our arrears to Exim Bank of Taiwan Province of China. In addition, we have paid off half of our arrears to the United Arab Emirates and have scheduled to clear the remainder by year-end. Negotiations with other bilateral creditors for the remaining legacy arrears are continuing. The government remains current on its remaining external debt obligations.

22. The government is also strengthening domestic debt management. To reduce the financial burden of temporary borrowings, we have consolidated outstanding loans from commercial banks into Treasury securities, and have cancelled all credit lines with the banks. In addition, following the successful rescheduling of loans in February this year, the government has negotiated higher concessionality in recent loans from the West African Bank for Development (BOAD).

23. Dealing with the large stock of arrears to domestic suppliers is the next major challenge. The total claims outstanding exceed CFAF 100 billion, of which 14 billion correspond to the balance of a first audit covering claims from 1994–99 and 86 billion is from a second audit for 2000–07 that has still to be validated. To ensure greater clarity, the Government intends to audit all outstanding claims by September-2018. The Government will, by the end of 2018, draw up a reimbursement strategy to settle the legitimate domestic arrears, after deduction of any tax liability of the beneficiaries.

Fostering Sound Financial Intermediation

24. To shore up financial stability, the government is firmly committed to ensuring compliance with prudential norms. Government has been seeking to facilitate a resolution to the voided bailout that would settle the court cases and open the door for a private investor to inject needed capital. The possibility of such a solution, however, in no way diminishes the need for strong supervisory enforcement of prudential regulation. We firmly support forceful and rapid action by the regional Banking Commission and stand ready to assist in its implementation.

25. The government is taking steps to deepen financial markets and enhance financial inclusion. To this end, the government has, with the assistance of development partners, undertaken initiatives for developing financial markets (including for SMEs), while encouraging use of the banking system (including for private real estate transactions) to bolster financial intermediation. The incentives for SMEs comprise, in accordance with measures adopted by the WAEMU Council of Ministers in September 2015, (i) re-financing of BCEAO claims on eligible SMEs, and (ii) regulatory incentives to banks for credit to eligible SMEs, including reduced weighting of claims on these enterprises in reckoning compliance with prudential ratios. The government continues to maintain a credit registry to aid financing decisions of banks and to enhance access to credit. Moreover, we will follow BCEAO recommendations and elaborate a national plan for financial inclusion.

C. Other Structural Reforms

26. We are committed to advancing private sector development within a business environment that promotes healthy competition. Among others, we will move quickly to sell state assets that have been slated for privatization, including the fruit and vegetable processing plant near Safim that was constructed with a loan from Exim Bank of India. Moreover, the temporary cap on rice prices introduced in August in response to surging prices will not be maintained beyond the originally envisioned timetable of end-December.

27. Government is acting forcefully to address shortcomings in the electricity sector. We are investing in new generation capacity with loans from BOAD and BADEA. Moreover, to foster accountability, arrest financial deterioration in the utility, and enhance the supply and reliability of electricity supply, the government is restructuring EAGB with World Bank support. The restructuring aims to transform the utility into an autonomous entity operated under a service contract. To this end, a management improvement plan will be submitted to the Council of Ministers by March 2018 (new structural benchmark).

28. To ensure sound financial management and avoid contingent liabilities on public resources, the government is pursuing audits of a series of state-owned enterprises. These comprise (i) National Institute for Social Insurance, (ii) ANAC (Civil Aviation Administration), (iii) EAGB, (iv) GuinéTelecom, (v) GuinéTel, (vi) APGB (Sea Port), (vii) ARN (National Regulatory Authority for Communications), and (viii) Fundo Rodoviário (Road Fund). These audits will all be comprehensive, covering both financial and management aspects, and will be completed by end-2017.

29. The government has taken steps to ensure transparency in military spending. Terms of reference for an audit of military spending in 2016 were completed and calls for interest issued in August this year. The audit results are expected by March 2018. Moreover, military spending continues to be on budget and executed per normal expenditure procedures, with almost all salary payments made by bank transfer directly to the beneficiaries.

Combating Corruption and Rent Seeking

30. The government will continue to advance and strengthen its anti-corruption and anti-rent-seeking framework with assistance from development partners. We have approved the national strategic plan for Anti-Money Laundering/Combating of the Financing of Terrorism (AML/CFT), and have increased the autonomy and financial resources of the Financial Intelligence Unit (CENTIF) to help it conduct its mandate. In response, CENTIF has improved information dissemination, through an electronic declaration system and with TA from the Inter-Governmental Group against Money Laundering in West Africa (GIABA). Nonetheless, more needs to be done to (i) bring exchange houses into the AML/CFT regulatory system (including through effective licensing and supervision), (ii) require enhanced due diligence over all politically exposed persons (domestic, foreign, and international), (iii) implement the asset disclosure framework that is already in place, and (iv) draft laws on asset recovery, criminalization of human trafficking, and piracy in accordance with requirements of GIABA.

Improving Economic Statistics

31. The government continues to utilize TA and training to improve the compilation and dissemination of statistics. The government will reinvigorate, with assistance of long-term and local consultants and experts, the unit responsible for identifying technical assistance needs and helping implement data-enhancing recommendations. Supported by IMF technical assistance, we plan to publish by March 2018 revised national accounts with updated base year following a mini household survey. We are continuing regular coordination meetings to reconcile official statistics between the BCEAO, the national cashew authority (ANCA), the Ministry of Agriculture, Ministry of Commerce, and the Bureau of National Statistics (INE). The practice has helped improve statistics for cashew nuts production and export, the national incomes accounts, and balance of payments statistics. We are also dedicating resources to improve relevant infrastructure and strengthen administrative capacity.

D. Program Monitoring

32. The program will continue to be monitored semi-annually, based on quantitative performance criteria, indicative targets, and structural benchmarks (Tables 1 and 2). Performance criteria for end-December 2017 are unchanged. The performance criteria and indicators are defined in the attached Technical Memorandum of Understanding (TMU) along with the relevant adjustors. The fifth (and last) program review will be based on the end-December 2017 performance criteria and is scheduled to be completed on or after April 15, 2018. We are proposing two new structural benchmarks: one for finalizing a management improvement plan for EAGB; and one for a draft budget for 2018 that will seek to maintain the gains realized so far in budget management.

33. The government believes that the policies and measures included in this memorandum are adequate to achieve the objectives of the economic program for the remainder of 2017. It stands ready, however, to take any further financial and structural measures that may become necessary to ensure the success of its policies. It reaffirms its commitment to the ECF-supported program, and further undertakes:

  • To refrain from accumulating any new domestic arrears (IT) other than those specified in the TMU, and from contracting non-concessional external loans; and

  • Not to introduce or increase restrictions on payments and transfers related to current international transactions, to enter into any bilateral payment agreements not in conformity with Article VIII of the IMF Articles of Agreement, or to impose or intensify any import restrictions for balance of payments purposes; and

  • To adopt any additional financial and structural measures that may become necessary to ensure the success of its policies, only in consultation with the IMF.

Table 1.

Guinea-Bissau: Quantitative Performance Criteria and Indicative Targets for 2017

(Cumulative from beginning year to end of month indicated; billions of CFAF, unless otherwise indicated)

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The performance criteria and indicative targets are defined in the Technical Memorandum of Understanding (TMU). Targets for end-March and end-September are indicative.

Figures for Sept. and Dec. 2017 include the CFAF 1.7 billion debt guarantee given to Bissau City.

These apply on a continuous basis.

Comprises budget support grants and program loans (for budget support).

Comprises project loans with grant elements exceeding or equal to 35 percent.

Table 2.

Guinea-Bissau: Structural Benchmarks Under the ECF Program, 2017–18

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Attachment II. Technical Memorandum of Understanding: Bissau, November 17, 2017

Introduction

1. This memorandum sets out the understandings between the Bissau-Guinean authorities and the International Monetary Fund (IMF), regarding the definitions of the quantitative performance criteria (PCs) and structural benchmarks (SBs) for the program supported by the Extended Credit Facility (ECF) arrangement, as well as the related reporting requirements. Unless otherwise specified, all quantitative PCs and indicative targets will be evaluated in terms of cumulative flows from the beginning of the period, as specified in Table 2 of the Memorandum of Economic and Financial Policies (MEFP).

2. Program exchange rates.1 For the purpose of the program, foreign currency denominated values for 2017 will be converted into local currency (CFA francs) using a program exchange rate of CFA 622.47/US$ and cross rates as of end-December 2016.

Quantitative Performance Criteria
A. Floor on Total Domestic Tax Revenue

3. Definition. Tax revenue is defined to include direct and indirect taxes as presented in the central government financial operations table, as well as programmed recovery of tax arrears.

4. Adjustment clauses. The floor on the total domestic tax revenue will be adjusted downwards (upwards) by the amount of any shortfall (excess) in programmed recovery of tax arrears.

B. Net Domestic Bank Credit to the Central Government (NCG)

5. Definition. NCG refers to the net banking system’s claim on the central Government as calculated by the Treasury Department. It is defined as follows:

  1. the net position of the Government with the national BCEAO, including: treasury bills and bonds; less (a) central Government deposits (excluding project-related deposits) at the BCEAO;

  2. the net position of the Government with commercial banks, including: (a) treasury bills; (b) treasury bearer bonds; and (c) loan and advances of commercial banks to the central Government; less central Government deposits (excluding project-related deposits) in commercial banks; and

  3. Any domestic loan guarantees issued by the government will be included in the net position of the government as defined in a. and b. above.

6. Adjustment clauses. The ceiling on changes in NCG will be adjusted (a) upwards (downwards) by up to the CFA value of the shortfall (excess) in external program grants and loans, including IMF drawings—the upward adjustment will be capped at the equivalent of CFA 10 billion; and (b) downwards (upwards) by the excess (shortfall) in the CFA value of any programmed privatization receipts. In addition, central government deposits at the BCEAO and the commercial banks will be adjusted downwards by any clearance of domestic arrears (excluding any arrears accumulated during the program period, 2015-18) in excess of program; (c) downwards by the excess in CFAF value of corporate tax revenue that results from the bank bailout, in light of the court injunction freezing transactions associated with the bank bailout; and (d) upwards by the amount of the bank bailout (CFAF 34.2 billion), if NCG includes the bailout and the pending court case is not completed by the time of the fourth review.

7. Data source. The data source for the above will be the monetary survey (Position Nette du Gouvernement (PNG)) table, submitted monthly to the IMF staff by the BCEAO.

8. Definition of Central Government. Central government is defined for the purposes of this memorandum to comprise the central administration of the Republic of Guinea-Bissau and does not include any local administration, the central bank nor any other public or government-owned entity with autonomous legal personality not included in the government flow-of-funds table (TOFE).

C. New Non-Concessional External Debt Contracted or Guaranteed by the Central Government with an Original Maturity of One Year or More

9. Definition. Those are defined as all forms of new debt with original maturity of one year or more contracted or guaranteed by the central government. For this purpose, new non-concessional external debt will exclude normal trade credit for imports and debt denominated in CFA franc, but will include domestically held foreign exchange (non-CFA franc) debts. This PC applies not only to debt as defined in the Guidelines on Public Debt Conditionality in Fund Arrangements attached to Decision No. 15688-(14/107), adopted December 5, 2014, point 8, but also to commitments contracted or guaranteed for which value has not been received. Excluded from this PC are disbursements from the IMF and those debts subject to rescheduling or for which verbal agreement has been reached. This PC will apply on a continuous basis.

10. Reporting requirement. The government will report any new external borrowing and its terms to Fund staff as soon as external debt is contracted or guaranteed by the government, but no later than within two weeks of such external debt being contracted or guaranteed.

D. External Short-Term Debt Contracted or Guaranteed by Central Government

11. Definition. External short-term debt is defined as external debt stock with a maturity of less than one year contracted or guaranteed by central government. Debt is defined in Annex I of this TMU. For this purpose, short-term debt will exclude normal trade credit for imports and debt denominated in CFA franc, but will include domestically held foreign exchange (non-CFA franc) debts. For the purposes of this PC, central government is as defined in paragraph 8 above. This PC will apply on a continuous basis.

E. External Payment Arrears of the Central Government

12. Definition. For the purposes of this performance criterion, external payment arrears, based on the currency test, are debt service payments that have not been paid on due dates (taking into account the contractual grace periods, if any) and that have remained unpaid 30 days after the due dates. Arrears not to be considered arrears for the performance criteria, or “non-program” arrears, are defined as: (i) arrears accumulated on the service of an external debt for which there is a request for rescheduling or restructuring; and/or (ii) the amounts subject to litigation which are not considered as arrears for the performance criteria. They are defined as “non-program” arrears.

Quantitative Indicative Targets
F. New Domestic Arrears of Central Government

13. Definition. The ceiling on domestic arrears are defined as accounts payable (resto-a-paga) accumulated during the year, and still unpaid by one month after the quarter for wages and salaries (including pensions), and three months for goods, services and transfers.

G. Social and Priority Poverty-Related Expenditures

14. Definition. Social and Priority Poverty-related expenditures are defined to include spending on health, education, and the gender ministry (MEFP Table 2).

H. Domestic Primary Balance (Commitment Basis)

15. The domestic primary fiscal deficit on a commitment basis is calculated as the difference between government revenue and domestic primary expenditure on commitment basis. 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.

I. Non-Regularized Expenditure (DNTs)

16. Definition. Any treasury outlay not properly accounted for by the National Budget Directorate and/or not included in the budget.

Program Monitoring

17. The fourth program review will be based on end-June 2017 performance criteria and is scheduled to be completed on or after October 15, 2017. The fifth review (the last after the December 2016 re-phasing of disbursements and reduction in the number of reviews in view of delays in program implementation) will be based on end-December 2017 performance criteria and is scheduled to be completed on or after April 15, 2018. The Bissau-Guinean authorities shall recommend policy responses, inform the IMF monthly about the progress of the program, and transmit supporting information necessary for the evaluation of QPCs and benchmarks in electronic format as indicated in the attached summary table to IMF staff (Table 1).

18. To properly monitor key macroeconomic variables, including performance indicators under the ECF, coordinate technical assistance and monitor progress in implementation of reforms, the government will continue to adequately support its reform unit. This reform unit periodically reports to the Minister of Finance progress in achieving agreed performance indicators and development objectives. It will also keep an updated list of all its partners, prioritize technical assistance and agree with partners on the division of labor in technical assistance. Finally, it will ensure the information sharing, including TA reports, with partners involved in the same area to avoid conflicting and/or overlapping advice.

Table 1.

Guinea-Bissau: Summary of Reporting Requirements

article image

Directorate General for Forecasts.

Central Statistics Office/Ministry of Economy and Finance.
1

Overall real GDP growth was revised to 6.1 percent in 2015 and 5.8 percent in 2016 from previously 5.1 percent in both years.

2

The government’s latest program, covering 2016–18, reiterates the objectives of the broader Terra Ranka development strategy from March 2015, highlighting creation of employment opportunities through sustained and inclusive growth.

3

An inventory of outstanding debt guarantees shows a total of 4 guarantees totaling CFAF 5.4 billion (0.7 percent of GDP).

4

Based on an audit of domestic arrears from 2000, extended by net arrears accumulation recorded in the fiscal table, the debt figures reported in Table 1 include domestic arrears of 5 percent of GDP.

1

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

1

Stephen S. Tokarick (2010), A Method for Calculating Export Supply and Import Demand Elasticities, IMF Working Paper, No. 10/180.

1

IMF Country Report No. 15/194. Guinea-Bissau: Request for a Three-Year Arrangement under The Extended Credit Facility―Staff Report.

2

IMF Country Report No. 17/228. Guinea-Bissau: Third Review Under the Extended Credit Facility Arrangement―Staff Report.

1

The source of the cross-exchange rates is International Financial Statistics.

Other IMF Content

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Cover IMF Staff Country Reports
Guinea- Bissau: 2017 Article IV Consultation and Fourth Review Under the Extended Credit Facility Arrangement, and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for Guinea-Bissau
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2017: Issue 380
Publisher:
International Monetary Fund
ISBN:
9781484333150
ISSN:
1934-7685
Pages:
110
DOI:
https://doi.org/10.5089/9781484333150.002

Human Development Index (HDI) and Components, 2005-2015

Export, Import Prices and Terms of Trade

(index, 2005 = 100)

Tax Revenue and Income Per Capita, 2016

Guinea-Bissau: Composition of Current Expenditure

(percent of GDP)

Guinea Bissau: Components of Government Spending, 2016

(percent of GDP)

Public Health Expenditure and Life Expectancy (2010-14)

Doing Business Indicators, 2018

(rank among 190 economies, higher=worse)

Governance Indicators, 2016

(higher value = better)

Guinea-Bissau: Electricity Production

(GWh)

Depositors with Commercial Banks

(per 1000 adults)
Figure 1.

Guinea-Bissau: Recent Economic Developments
Figure 2.

Guinea-Bissau: Fiscal and Credit Developments
Figure 3.

Guinea-Bissau: Medium-Term Outlook

Guinea-Bissau: Real GDP Per Capita

(percent change)

Exchange rates and Prices

(index, 2010=100)

Current Account: Actual, Fitted, and Norm

Ln(REER): Actual, Fitted, and Norm

Doing Business Indicators, 2018

(distance from frontier)

Worldwide Governance Indicators, 2016

(estimate, higher value = better)