Guinea-Bissau: Staff Report for the 2017 Article IV Consultation and Fourth Review Under the Extended Credit Facility Arrangement, and Financing Assurances Review—Debt Sustainability Analysis
Author: International Monetary Fund. African Dept.
Publication Date:
18 Dec 2017
eISBN:
9781484333150
Language:
English
Keywords:
ISCR; CR; authority; West AFRITAC; government support; Bissau Guinean authorities; moderate debt service; sustainability analysis; debt trajectory; baseline PV of debt-to-GDP ratio; debt service-to-revenue ratio; Debt sustainability analysis; Public and publicly-guaranteed external debt; Fiscal stance; debt-to-exports ratio
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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

Background

1. Overall, Guinea-Bissau’s public external debt position has improved. The authorities have maintained their commitment to shun non-concessional debt, while bolstering debt management. They are increasingly benefitting from TA from development partners, including AFRITAC West, to enhance their administrative capacity. They secured significant debt relief from Taiwan, China,4 paid down some other legacy arrears, and continue to negotiate rescheduling and/or outright cancellation of remaining legacy arrears with external creditors. They are financing priority projects in infrastructure and social sectors mainly with concessional loans and grants, and continue to seek better terms for loans from the West African Bank for Development (BOAD). The advances in debt management have been supported by prudent fiscal policies that have resulted in a marked reduction of the fiscal deficit in 2017 and are expected to yield domestic primary surpluses into the medium term.

2. Robust growth has helped improve baseline debt and debt service ratios relative to the December 2016 Update. Economic growth has averaged close to 6 percent in 2015–16 and is projected to remain strong into the medium and long term. International cashew prices, which hit a record in the 2017 cashew campaign, are expected to remain high, adding incentives for continued strong cashew production and export. Domestic policies to improve the business environment, enhance the supply and availability of electricity and water, and address other large infrastructure gaps are also expected to support economic activity and moderate debt and debt service ratios.

3. Debt trajectories, although improved, remain subject to adverse shocks. Guinea-Bissau’s economy is vulnerable to adverse export shocks due to its limited diversification. If cashew prices dip, export earnings would decline and fiscal receipts dwindle in the baseline scenario of no policy adjustments. This would weaken the present value (PV) of debt-to-exports and of debt-to-revenue ratios along with related debt service ratios. Further, considering Guinea-Bissau’s history of conflict, a reescalation of political tensions could frustrate prudent economic and fiscal policies, and dent debt sustainability.

Baseline Assumptions

4. Macroeconomic projections are slightly different from the December 2016 Update. Compared to the previous projection for 2017, real GDP growth and external and fiscal balances have all improved. Beyond 2017, the external debt-GDP ratio increases in line with expected expansion in the externally-financed public investment program (including disbursement of a newly contracted concessional loan to enhance electricity supply).5 Nevertheless, a projected decline in the domestic debt-GDP ratio more than offsets the external debt increase, leading to a projected decline in the total debt-GDP ratio.

5. The baseline macroeconomic assumptions indicate favorable debt trajectories (Box 1):

Baseline Macroeconomic Assumptions

Real GDP growth: Real GDP growth, projected at 5.5 percent in 2017 (up from 5.0 percent previously), is projected to remain strong and average 5.0 percent per year over the medium and long term. The better growth performance in 2017 reflects high cashew prices and generally positive economic trends. The strong projected growth performance over the medium and long term is supported by anticipated investments in key infrastructure (including electricity, water, and roads), structural reforms (in public financial management, tax administration and debt management) with associated efficiency gains in public service delivery and reliability, and enhancements in the business environment generally.

Consumer price inflation: Reflecting increasing economic activity and rebound in global oil prices, consumer price inflation is expected to increase and average 2.6 percent per year in the medium-term, remaining below the WAEMU convergence criterion (3.0 percent).

Government balances: Reflecting a strong performance in the first half of 2017, the primary fiscal deficit (cash basis) is projected to narrow sharply to 1.4 percent of GDP in 2017 from 3.6 percent in 2016. The primary deficit is then expected to widen slightly to 1.9 percent of GDP in 2018, reflecting increased capital expenditure, and stay around that level through the medium term. Reforms to improve debt management are anticipated to reinforce the positive fiscal trends. In line with these expectations, external debt is projected to average 14.2 percent of GDP per year in 2017–22, reflecting the public investment program. Domestic debt is projected to decline by 3 percent of GDP to 36.7 percent in 2017 and to fall further and average around 19.5 percent of GDP in the long term, reflecting continued prudent domestic bank borrowing—consistent with the anchor of the ECF-supported program.

Key Macroeconomic Assumptions

(in percent of GDP, unless otherwise indicated)

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Source: Bissau-Guinean authorities and staff estimates.

Covers the period 2023-37 for the current DSA, 2022-36 for the previous DSA.

External current account balance. Reflecting the good cashew exports as well as higher imports, of construction materials especially, the external current account balance is expected to be broadly balanced in 2017. Thereafter, the non-interest balance is expected to decline to show deficits averaging around 1.5 percent of GDP in the medium term, reflecting increased FDI-related and other imports as incomes increase, and 2.8 percent in the long term.

Official financing flows: Official transfers are expected to average around 4 percent of GDP in the medium term (2017–22), and to decline to 3.6 percent of GDP in the long term. Concessional loans are assumed to be at the standard terms—i.e., on 0.75 percent interest rate with 40 (IDA) and 50 (AFDB) years maturity and ten-year grace period. Paris Club (Non-Paris Club) loans assume average interest rates of 1.9 (1.6) percent with 23 (23) years of maturity and 11 (6) years grace period.

External and Public Debt Sustainability

A. External Debt Sustainability Analysis

6. Guinea-Bissau remains at moderate risk of debt distress. The PV of debt-to-GDP and PV of debt-to-revenue ratios and the debt service-to-revenue ratio have seen significant reductions compared to the December 2016 update, reflecting positive movements in nominal GDP and tax revenue. All the baseline indicators are lower than their respective policy-dependent thresholds throughout the projection period (2017–37).

7. The PV of debt-to-exports and debt service-to-exports ratios have, however, worsened relative to the earlier update. The deterioration of these indicators reflects lower projected exports (an average of 29 percent of GDP over the projection period, compared to 35 percent under the previous DSA) due mainly to delays in the start of an earlier anticipated phosphate project. Nonetheless, except for the scenario with an extreme export shock, the ratios remain below their respective thresholds in the baseline and historical scenarios for the entire projection period. The results indicate some room for debt-financed projects, so long as the loans are on favorable/concessional terms and the selected projects meet appropriate return and criticality criteria, as per recognized assessment procedures.

8. The external debt outlook remains vulnerable to adverse export and currency depreciation shocks. The stress tests indicate that Guinea-Bissau is vulnerable to adverse shocks to exports, underscoring the need to diversify the economy and increase its resilience to such shocks. Compared to the December 2016 update, the PV of debt-to-exports ratio breaches its threshold for a longer period in the exports shock scenario; it falls slightly below the threshold only in the final seven years of the projection period. The realization of such an adverse export shock would strain debt sustainability. A depreciation of the Communauté Financière Africaine Franc (CFAF) relative to the currencies of main trading partners would add to this vulnerability, as debt service costs would rise in domestic currency terms.

B. Public Debt Sustainability Analysis

9. The public DSA is broadly unchanged from the December 2016 update. The main difference is that historical debt levels have been revised upward, by an average of 4.3 percent in 2014–15, due mainly to more comprehensive data on domestic debt.6 This has shifted the baseline PV of debt-to-GDP ratio upwards and it breaches the benchmark until 2021, with breaches in the other three scenarios as well. At end-2016, domestic debt (currency basis) amounted to 39.7 percent of GDP. This included project financing from BOAD (12.9 percent of GDP), debt to BCEAO (14.2 percent), local banks (2.9 percent), government debt guarantees (0.5 percent of GDP), T-bills held by other regional institutions (4.0 percent of GDP), and arears to local suppliers (estimated at 5.0 percent of GDP). Despite somewhat longer breaches of the PV of debt-to-GDP benchmark compared to the previous DSA, there are improvements in the baseline PV of debt-to-revenue and debt service-to-revenue ratios, reflecting projected improvements in fiscal revenues.

10. Sensitivity tests indicate greater vulnerability to shocks. In a scenario with growth and the fiscal primary balance at historical averages, all PV of debt ratios exceed the December 2016 update (particularly in 2017-22), while the debt service ratios fall below the previous update over the whole projection period. This comparative performance does not change under the other two alternative scenarios—(i) primary balance unchanged from 2016, and (ii) permanently lower GDP growth.

External and Public Debt Sustainability

11. Despite the moderate risk of external debt distress, the authorities should remain prudent in debt contracting. Vulnerabilities remain, particularly as exports are derived almost exclusively from cashew and related activity. This risk could be moderated by policies on three broad fronts: ((i) vigorous pursuit, and conclusion with relevant creditors of a rescheduling and/or outright cancellation of arrears outstanding after the Paris Club agreement; (ii) continued prudent borrowing policies, including borrowing on mostly concessional terms; and (iii) revenue enhancement, sustained fiscal consolidation efforts, continued implementation of growth-enhancing reforms, and advances in economic diversification. Thus, despite room for concessional borrowing, the authorities need to exercise caution in new debt contracting and apply recognized assessment procedures to ensure criticality as well as concessionality.

Authorities’ Views

12. The authorities broadly concur with staff’s views on debt sustainability and the recommendations. They agree that debt sustainability depends crucially on sound macroeconomic policies that would in turn increase their chances of accessing concessional financing. They emphasized that the pace of public investment would be determined by available external concessional resources. Thus, some risks identified in this DSA may not materialize. The authorities recognize the contributory role of prudent debt management and implementation of structural reforms to improve the business environment and to enhance overall growth and export prospects.

Figure 1.
Figure 1.

Guinea-Bissau: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2017–37 1/

Citation: IMF Staff Country Reports 2017, 380; 10.5089/9781484333150.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2027. In figure b. it corresponds to a Exports shock; in c. to a Exports shock; in d. to a Exports shock; in e. to a Exports shock and in figure f. to a Exports shock
Figure 2.
Figure 2.

Guinea-Bissau: Indicators of Public Debt under Alternative Scenarios, 2017–37 1/

Citation: IMF Staff Country Reports 2017, 380; 10.5089/9781484333150.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2027.2/ Revenues are defined inclusive of grants.
Table 1.

Guinea-Bissau: External Debt Sustainability Framework, Baseline Scenario, 2014–37 1/

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1 +g)]/(1 +g + ρ + gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

/ Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Table 2.

Guinea-Bissau: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2017–37

(In percent)

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Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Table 3.

Guinea-Bissau: Public Sector Sustainability Framework, Baseline Scenario, 2014–37

(In percent of GDP unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Comprises public and publicly guaranteed central government debt on a gross basis.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Table 4.

Guinea-Bissau: Sensitivity Analysis for Key Indicators of Public Debt, 2017–37

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Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

1

The DSA was prepared jointly by the staffs of the IMF and IDA, in consultation with the Debt Directorate of Bissau-Guinean Ministry of Finance, and benefitted from comments from the World Bank. The fiscal year of Guinea-Bissau is January 1—December 31.

2

Debt sustainability thresholds are determined by the three-year (2014–16) average of the Country Policy and Institutional Assessment (CPIA) rating (2.48), which classifies Guinea-Bissau as having weak policy performance and institutional framework.

3

The previous DSA update was prepared in December 28, 2016. IMF Country Report No. 16/384.

4

Guinea-Bissau successfully achieved debt relief and rescheduling of its legacy arrears with Exim-Bank of Taiwan, China. The agreement cancelled 90-percent of the arrears (of US$ 48.2 million, equivalent to 3.6 percent of GDP or 55 percent of total arrears outstanding after the Paris Club agreement in 2011); it requires an upfront payment by Guinea-Bissau of US$1.5 million in late 2017 and re-profiles the remaining amount (US$3.5 million) at an interest rate of 2.5 percent and a maturity of 5 years.

5

Earlier this year, Guinea-Bissau contracted a US$11 million (0.9 percent of GDP) loan from the Arab Bank for Economic Development in Africa (BADEA) to boost electricity supply. The loan carries an interest rate of 1 percent, a grace period of 10 years, and maturity of 30 years. It is thus concessional, with a grant element of 49 percent.

6

The new data includes additional information on BOAD loans and government guarantees. The estimate of domestic arrears has also been updated.

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