Guinea-Bissau: Staff Report for the 2017 Article IV Consultation and Fourth Review Under the Extended Credit Facility Arrangement, and Financing Assurances Review

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.

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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 III), 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.