Guinea-Bissau: 2022 Article IV Consultation and Third Review under the Staff-Monitored Program; Press Release; and Statement by the Executive Director for Guinea-Bissau

1. Guinea-Bissau is a small fragile state facing significant developmental challenges while endowed with abundant natural resources. The country lags its peers and ranks near the bottom of global key economic and social indicators (Figure 1). Conflict,1 weak governance, and large infrastructure gaps have constrained development. Poverty, last measured in 2014 at 67.1 percent, is endemic and human capital is weak, with 44 percent of the adult population having not completed primary education. Agriculture accounts for about 45 percent of GDP and the export base is concentrated in unprocessed cashew nuts,2 making the country highly exposed to weather and commodity price shocks. The country has a privileged geographical location and the highest proportion of natural wealth per capita in West Africa, including agricultural land, fisheries, and forest.

Abstract

1. Guinea-Bissau is a small fragile state facing significant developmental challenges while endowed with abundant natural resources. The country lags its peers and ranks near the bottom of global key economic and social indicators (Figure 1). Conflict,1 weak governance, and large infrastructure gaps have constrained development. Poverty, last measured in 2014 at 67.1 percent, is endemic and human capital is weak, with 44 percent of the adult population having not completed primary education. Agriculture accounts for about 45 percent of GDP and the export base is concentrated in unprocessed cashew nuts,2 making the country highly exposed to weather and commodity price shocks. The country has a privileged geographical location and the highest proportion of natural wealth per capita in West Africa, including agricultural land, fisheries, and forest.

Context

1. Guinea-Bissau is a small fragile state facing significant developmental challenges while endowed with abundant natural resources. The country lags its peers and ranks near the bottom of global key economic and social indicators (Figure 1). Conflict,1 weak governance, and large infrastructure gaps have constrained development. Poverty, last measured in 2014 at 67.1 percent, is endemic and human capital is weak, with 44 percent of the adult population having not completed primary education. Agriculture accounts for about 45 percent of GDP and the export base is concentrated in unprocessed cashew nuts,2 making the country highly exposed to weather and commodity price shocks. The country has a privileged geographical location and the highest proportion of natural wealth per capita in West Africa, including agricultural land, fisheries, and forest.

Figure 1.
Figure 1.

Guinea-Bissau: Growth and Living Standards

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A001

Sources: World Bank, Worldwide Development Indicators; EM-DAT, CRED database; Guinea-Bissau authorities; and IMF staff calculations.

2. Growth has been low and volatile and food insecurity is significant. Per capita income is low and has grown on average 0.6 percent annually between 2000 and 2020, making Guinea-Bissau among the poorest countries in SSA (Text Figure 1). It ranks 99 out of 119 in the 2019 Global Hunger Index and large part of the population face undernutrition. The country has the second-highest proportion of undernourished population in West Africa after Liberia (25 percent of the population, Box 1).

Text Figure 1.
Text Figure 1.

Gross National Income Per Capita

(Constant 2015 US$)

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A001

Source: World Bank Database

Rising Food Insecurity1

The country is experiencing food insecurity despite favorable conditions for higher agricultural output. It ranked 110 out of 135 in the 2021 Global Hunger Index and has made no progress towards achieving Zero Hunger by 2030 (SDG2). It has the second-highest proportion of undernourished population in West Africa after Liberia. The level of food insecurity is particularly high in rural areas: 34 percent of rural population are food insecure during the lean season. During those months (July-September), households' stocks run low, while revenue from the cashew nut campaign2 dries up.

More than two thirds of the population do not have a healthy diet. A minimum energy diet is unaffordable for more than a quarter of the population (28 percent) estimated by the WFP at US$2.3 per day for an average household of seven people. The cost of a nutritious diet (US$ 4.00) would be unaffordable for about 68 percent of the population. Vulnerable rural households fail to diversify their diet from rice, causing micronutrient deficiencies (Iron, Vitamin A, Zinc).

Maternal and child malnutrition is prevalent. Stunted growth affects 28 percent of children aged 6-59 months, peaking above 30 percent in certain regions (Oio, Bafatá, Gabu). The proportion of children under 2 years old receiving an appropriate diet is extremely low (about 4 percent). Only 32 percent of females aged 15-49 years achieve minimum dietary diversity, while 44 percent suffer from anemia. This negatively impacts labor productivity.

The number of vulnerable households has doubled in one year. In March 2022, the number of households needing immediate assistance reached 131,444 (9.8 percent of people surveyed), while people “under pressure” facing a serious risk of food insecurity reached 349,610 (26.3 percent). The price effect of Ukraine war contributed to the pressure: the country is entirely import-dependent for wheat flour and refined petroleum. WFP's monitoring of 44 local markets indicates an increase by 20 percent of the price of flour between January and March 2022, and by 9 percent, 25 percent and 40 percent for rice, beans and sugar, respectively.

Short term policy responses focus on social transfers and resilience to shocks. The WFP implements a feeding program for 150,000 school children combined with a support to smallholder farmers associations to supply fresh food to schools. It also assists 21,000 children through a stunting prevention program. Other critical policy sides include agricultural resilience to climate shocks, such as costal erosion and recurring flooding, higher market access and upgraded food supply chain services.

A strategy geared towards promoting food security requires a multifold approach. The pandemic has emphasized the need to integrate education, health, food and nutrition strategies to address multidimensional poverty. Various Ministries (Women, Family and Social Solidarity; Agriculture and Rural Development; Health; Interior; Finance) and several international partners (AfDB, FAO, IFAD, UNFPA, UNICEF, World Bank, WFP3, WHO) work on core aspects of food security. Strong inter-institutional coordination is necessary to strengthen data collection and monitoring tools, better target recipients of social assistance and assess the needed fiscal space while building sustainable food-related infrastructure and logistics.

1 IMF-World Food Programme (WFP) joint analysis in the context of a pilot collaboration. All data are from WFP.2 The cashew nut campaign corresponds to the annual period of harvest and commercialization. Following the raining season, in January and February the cashew trees bloom and the fruit is harvested between April and June. The commercialization typically occurs from April to September. Harvesting cashew is the most dominant economic activity among Bissau-Guinean households. More than 50 percent of households engages in production, processing, or sale of cashew nuts.3 WFP Country Strategic Plan 2023-2027.

3. Despite the persistence of the pandemic, Guinea-Bissau has had a period of relative political stability.

  • COVID-19. By end-April 2022, there were 8,202 confirmed cases and 171 deaths.3 The authorities have been taking actions to protect the population and limit the economic impact of the pandemic.4 Measures to contain a fourth wave of infections in January 2022 was successful.

  • Vaccination. Guinea-Bissau launched a national vaccination program in April 2021. By end-April 2022, about 50 percent of the adult population was vaccinated,5 placing Guinea-Bissau as among 20 countries in SSA with the highest vaccination rates. Additional donor support is needed to obtain more vaccines and accelerate the vaccine rollout.6

  • Political situation. Guinea-Bissau has enjoyed relative political stability since the appointment of the new government in 2020. However socio-political tensions could arise due to demands for higher public sector salaries, the adoption of new taxes, increases in food and fuel prices, persistent weak governance and corruption, high levels of poverty, and weak public service delivery. A putsch attempt against the government took place in February 2022 which was attributed by the authorities to drug traffickers and corrupt officials. Investigations are ongoing.7 Next legislative and presidential elections are scheduled for end-2022 and 2024, respectively.

4. However, the global spillovers from the war in Ukraine are having an adverse impact on Guinea-Bissau. Higher food and fuel prices are expected to slow down economic growth, adding inflationary pressures, widening the current account deficit, and weighing on the fiscal position. The authorities are taking policy actions through focalized transfers and transitory tax expenditures on gasoline and key food prices to protect the livelihood of the most vulnerable. Support from international partners may contribute to these mitigation policies while creating conditions to recover from the pandemic and preserving political stability.

5. The authorities are implementing an ambitious reform agenda supported by the SMP to strengthen and foster long-term development. A high wage bill and interest burden combined with relatively low revenue mobilization constrain the infrastructure investment and social spending. Poor governance is holding back private sector investment and donor support to sustain inclusive economic growth. The reform agenda includes securing macroeconomic stability through ambitious fiscal consolidation, preserving debt sustainability, fighting corruption, and improving governance. The authorities are leveraging digitalization to enhance wage bill control and revenue mobilization. The 2022 budget and tax reform package approved by parliament supports strong fiscal consolidation. Building on the SMP achievements, ongoing technical assistance (TA), and past Fund advice (Annexes III, IV and V), the Article IV consultation focused on critical medium-term priorities to anchor debt sustainability, macroeconomic stability, and sustain inclusive growth.

Recent Developments and Program Performance

6. The economic activity is recovering from the pandemic and inflation increased. After a modest GDP growth of 1.5 percent in 2020,8 growth is estimated to have accelerated to 5 percent in 2021 on the back of record cashew nut production, public investment in infrastructure, the gradual lifting of COVID containment measures, and an improvement in business confidence associated with a more stable political situation. Historical record level of cashew nut exports generated a positive impact on fiscal and external accounts, and economic activity (Text Table 1).9,10 Timely measures to contain several waves of the pandemic mitigated economic activity disruptions including the deployment of the COVID-19 vaccination campaign. However, average inflation accelerated to 3.3 percent in 2021, reflecting pressures on prices of imported goods, especially food and fuel due to disruptions in global supply chain and increase in maritime transportation costs.

Text Table 1.

Guinea-Bissau: Macro Performance during the Pandemic

article image
Sources: Guinea-Bissau authorities; and IMF staff estimates and projections.1/ Projections as of January 2020, before COVID-19 shock.2/ Projections as of January 202 1, before Ukraine war shock.3/ In 2019 the current account deficit includes the one-off import (3.5 percent of GDP) of a power-generation ship that is anchored off the coast of Bissau and supplies electricity to the city.4/ Revised figures based on the re lease of the national account estimates for 2018.

7. The improved economic situation and progress in revenue mobilization had a positive impact on the fiscal accounts, partially compensating pandemic-related spending pressures. The overall fiscal deficit on commitment basis fell to 5.7 percent of GDP in 2021 from 9.6 percent in 2020. This adjustment reflected the unwinding of pandemic-related effects, greater revenue mobilization and expenditure controls adopted in the 2021 budget (Text Table 2). The January 2021 RCF disbursement contributed 1.1 percent of GDP toward financing needs, the CCRT debt service relief an additional 0.2 percent of GDP, and the August 2021 SDR allocation 2.4 percent of GDP. Other multilateral organizations and bilateral donors stepped in along with the IMF reducing the need for non-concessional regional financing (Table 2b).

Text Table 2.

Guinea-Bissau: Fiscal Performance in 2021

(Percent of GDP)

article image
Sources: Guinea-Bissau Authorities and IMF staff estimation

See TMU paragraph 11

8. External current account slightly deteriorated in 2021 despite of a record cashew nut campaign and remittances. Cashew nut exports have increased by 39.9 percent in 2021, compared to 13.2 percent growth of imports, and reduced the trade balance deficit. Workers' remittances reached a historical record level at 7 percent of GDP and contributed to the improvement in the secondary income account.11 As a result, the current account deficit is estimated to have reached to 3.2 percent of GDP. The August 2021 SDR allocation contributed to closing the external financing gap and enabled the authorities to pay debt service of BOAD —the regional development bank—for 2021 and 2022.

9. The stock of public debt increased slightly despite the improvement of the fiscal position. The stock of public debt increased by 2.0 percent of GDP in 2021 with an increase in domestic debt corresponding to the SDR allocation on-lent by the BCEAO. External debt remained broadly stable in 2021 with the pre-payment of debt to BOAD due in 2022 compensating the budget support from the IMF RCF and project financing from the World Bank.12 The stock of debt is nonetheless projected to begin falling in 2022 and converge to the WAEMU 70 percent of GDP debt ceiling by 2026.

10. Pandemic-related measures implemented by BCEAO, the regional central bank, have contributed to support credit. The liquidity of the banking system has been supported by the accommodative stance of the BCEAO. The banking sector excluding one large undercapitalized bank has adequate capital levels, meeting regional prudential criteria. Credit to the economy grew 7 percent in 2021 after strong pre-pandemic growth, showing that the supportive measures provided by the BCEAO helped the financial system withstand the pandemic shock, avoiding a credit crunch (Table 5). Gross NPLs to total loans remain high but declined in 2021 and are well provisioned. However, the financial situation of the large undercapitalized bank represents an important vulnerability.

11. Five out of seven quantitative targets (QTs) were met (Table 6). The domestic primary balance QT was met, despite higher domestic primary expenditure, largely due to pandemic-related and social priority spending. Social and priority spending exceeded the QT. The QTs on the non-recurrence to contracting (or guaranteeing) new non-concessional debt and non-regularized expenditure (DNTs) were also met. The domestic tax revenue floor QT was met despite lower-than-expected telecom tax collection, supported by robust cashew-related tax revenues. The zero ceilings on new domestic arrears and new external arrears were missed because of the irregular hirings by the health sector and the clearance of small remaining external arrears in November,13 respectively. Staff identified the accumulation of arrears is a recurring problem in the public administration and advised the authorities to take corrective actions to address the issue (¶19 and ¶30).

12. All but one structural benchmarks (SBs) were met for the third review (Table 7). SBs met included the adoption and publication by the Council of Ministers of a decree to enable the collection and publication of beneficial ownership information of public procurement contracts and the full implementation of the Kontaktu system for electronic filing of tax returns. Moreover, as part of the commitments of the MEFP, the government submitted to parliament a reform of the asset declaration regime. While the authorities have provided a report with a proposed exit strategy from the large undercapitalized bank to the Fund, staff advised to include key financial information and reconsider the viability of the proposed disengagement strategy.

Outlook and Risks

13. The near-term outlook projects a moderate recovery and sustained growth over the medium term, but risks are tilted to the downside.

  • Near-term.14 A continued strong performance of the cashew sector and a relatively stable political support a moderate economic recovery this year, partially offsetting the effects of the COVID-19 pandemic and surge in energy and food prices associated with the war in Ukraine. Growth is expected to slow down to 3¾ percent (from 5 percent in 2021) while average inflation is expected to accelerate to 5.5 percent in 2022 (from 3.3 percent in 2021), reflecting renewed pressures on prices of imported goods, especially food and fuel. Growth is supported by a continued strong performance of the cashew sector and a relatively stable political situation.

  • Medium term. Guinea-Bissau should tap its economic potential—especially in agriculture, tourism, and fisheries, despite effects of the war in Ukraine,15 through the authorities' sustained sound fiscal management, greater political stability, and donor support catalyzed by IMF engagement (Text Table 3).

    • Growth should accelerate above potential (Box 2) to around 5 percent a year in 2024, supported by continued high cashew prices, structural reforms, greater donor engagement, enhancements in business environment and access to finance which are expected to boost private investment. Higher public investment in key infrastructure and greater state capacity underpinned by governance reforms, will also contribute to sustain growth until 2027 (Box 1).16

    • Inflation is expected to accelerate to 5.5 percent in 2022, because of persistent high oil and food prices, and remain above 3 percent until 2024, gradually converging to about 2 percent by 2025 as the pandemic and the security crisis in Europe subsidize.

    • The current account deficit is expected to worsen in 2022-23 reflecting higher import prices and lower private transfers before gradually improving due to sustained fiscal consolidation and more favorable terms of trade.

    • Sustained fiscal consolidation and greater donor support should make the overall fiscal deficit converge to the 3 percent WAEMU criterion by 2025.

  • Outlook risks (Annex I). Downside risks arise from domestic political risks and weak capacity, disappointing cashew nuts exports and the extent of the on-going security crisis in Europe which could impact food and oil prices and donor support. Guinea-Bissau is also subject to severe climate change-related natural disasters. Financial stress in state-owned enterprises and banking fragilities could also generate contingent liabilities and additional fiscal pressures. An eventual failure of the largest SOE to comply with debt service restructuring agreements with local commercial banks could trigger public guarantees. A large domestic bank remains undercapitalized even after a capital injection by the government in 2019 and could require additional public resources. Should downside risks materialize, the authorities are committed to further rationalize non-priority expenditures and domestically financed investment. However narrow margin to react to further deterioration of external conditions may need IFIs' support. To mitigate governance and fragility risks, the authorities are committed to implement the structural reforms discussed below. On the upside, a stronger performance of the cashew sector and a successful vaccination campaign would underpin a faster recovery.

Text Table 3.

Guinea-Bissau: Economic Performance and Medium-Term Scenario

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Sources: Guinea-Bissau authorities; and IMF staff estimates and projections.1/ Projections as of January 2021, before Ukraine war shock.2/ Revised figures based on the release of the national account estimates for 2018.

Potential Output

Guinea-Bissau has been highly exposed to significant economic fluctuations and political instability. The potential output evaluation is relevant for discussions on the medium-term economic outlook as well as impacts of structural reforms on the growth dynamics and development strategies. Staff estimated the potential output based on standard techniques such as Hodrick-Prescott (HP) filter and production function (PF).

The results show the potential GDP growth rate has increased using both methodologies (Figures 1.1 and 1.2). The HP filter approach estimates the potential output has grown since the country's last coup recorded in 2012. The results of the production function approach show more variability, but with an upward trend since 2016. For 2021, the potential GDP growth is estimated at 4.2 percent with the HP filter and 4.5 percent using the PF, respectively. These results should be interpreted with caution due to the degree of uncertainty associated with national accounts revisions in Guinea-Bissau.1,2

Figure 1.1:
Figure 1.1:

HP Filter Potential Output Estimates

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A001

Figure 1.2:
Figure 1.2:

PF Potential Output Estimates

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A001

Ongoing structural reforms strengthening governance, deepening financial inclusion in a stable political environment, may boost potential growth trend on the upside. Empirical evidence suggests GDP growth could accelerate if the country preserves political stability3 and implement its ambitious governance's reform agenda.4 Ongoing reforms may, in addition, catalyze donors' support to invest in infrastructure and human capital, supporting authorities' strategy to address the country's vast developmental needs and boosting factor accumulation over the medium term.

1 The national accounts data from 2019 onwards are not final and therefore subject to future revisions.2 The World Bank's potential output estimate for Guinea-Bissau is 4 percent.3Da Silva Filho (2015) the cost in term of annual GDP per capita growth of chronic political instability in Guinea-Bissau is estimated between 3.6 and 4.7 percent points.4Gyimah-Brempong (2002) estimates the impact of a reduction of one unit of the corruption index to be between 0.75 and 0.9 percentage points in GDP growth.

14. Staff shared with the authorities a downside scenario.17 The scenario combines shocks to growth, remittances, cashew prices, revenue mobilization and the fiscal deficit (Annex II). It shows the importance of implementing the baseline fiscal consolidation to keep the debt dynamic on a downward trend in line with WAEMU convergence criteria and diversifying the economy and exports to mitigate external vulnerabilities. In case risks materialize without further concessional support, the authorities would need to consider additional revenue measures, rationalization of non-essential current spending and delaying lower-priority investment.

Authorities' Views

15. The authorities broadly concurred with staff's assessment of the medium-term outlook and risks. They emphasized that improvements in social and priority spending and infrastructure—including road construction and electricity supply—are fundamental to achieve developmental objectives in the medium term. They also highlighted the need to unlock the country's economic potential in rice production, tourism, fisheries, and mining. The authorities acknowledged the risks associated with the export concentration in cashew nut and noted the need to diversify the economy, including by investing in health and education. Regarding the downside scenario (¶14), the authorities acknowledge that implementation of the medium-term fiscal consolidation plan and an economic diversification strategy are needed to ensure macroeconomic stability while facing an uncertain global environment.

Policy Discussions: Continuing Reforms for Inclusive Development

Policy discussions focused on (i) long-term fiscal sustainability through revenue mobilization, expenditure control, and debt management to foster effective fiscal policy, ensure debt sustainability and create fiscal space supporting priority spending and public investment; (ii) building on the SMP achievements, improving state capacity through governance and anticorruption frameworks reforms, including in key SOEs, to reduce fiscal risks; and (iii) fostering financial intermediation by promoting financial inclusion and managing banking sector vulnerabilities

16. To lift Guinea-Bissau's potential for sustained and inclusive growth, the medium-term policy agenda should focus on improving fiscal and legal capacities while fostering financial intermediation. Strengthening domestic revenue mobilization and effective expenditure management is fundamental to finance the country developmental needs. Efficient allocation of social and priority spending and public goods, such as roads, transport, and power provision would enhance private sector productivity, support job creation, and reduce poverty. Implementing governance and transparency reforms can mitigate corruption risks and attract donor support. In addition, sound and inclusive financial intermediation would boost private-led growth, harnessing the untapped potential in the areas of agriculture, natural resources, and tourism.18

A. Creating Fiscal Space and Ensuring Debt Sustainability

17. Strengthening revenue mobilization and expenditure control are essential to create fiscal space and foster countercyclical fiscal policy.19 In 2021, measures agreed with the authorities under the SMP enabled a balanced and growth-friendly consolidation strategy, which protected social priority spending and public investment. The domestic primary deficit declined to 1.9 percent of GDP in 2021, from 4.6 percent in 2020, underpinned by significant improvements in revenue mobilization, public financial management (PFM), rationalization of expenditures and avoidance of expensive non-concessional financing.

18. Revenue mobilization. Measures implemented included the new taxes on telecommunications and labor income along with other revenue-enhancing measures have bolstered revenue in 2021.20 The authorities are also expected to enhance revenue collection with greater tax compliance through the full implementation of a digital tax filling platform (Text Figure 2).

Text Figure 2.
Text Figure 2.

Number of Companies and Revenue Collected in Kontaktu System

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A001

Sources: Guinea-Bissau authorities and IMF staff estimates

19. Wage bill and expenditure control. Driven by the authorities' commitment and efforts21 to control the wage bill, it fell by 0.3 percentage points of GDP in 2021. To avoid recurrence in wage arrears, the authorities issued a ministerial order to census the public administration personnel by end-April and dismiss all employees hired irregularly. Moreover, the 2022 budget gives the authority only to the Minister of Finance to confirm the availability of budget allocation for the government ministries to proceed with the hiring process. Staff supports the authorities' expenditure control efforts, especially the wage bill control measures,22 which also include the deployment of the IMF-supported blockchain-based project (Box 3) to assist in the reconciliation of the personnel and payroll records.23

A Blockchain Solution for Wage Bill Management in Guinea-Bissau

An IMF governance technical assistance mission in Guinea-Bissau identified in 2019 key governance vulnerabilities in the wage bill management1. A proposal to enhance transparency of the wage bill management leveraging blockchain technology was one of the winning projects of the IMF Anti-Corruption Challenge in 2020.

The project is an innovative approach to fiscal management. The implementation of the prototype started in 2022 at the Ministry of Finance and the Ministry of Public Administration. The solution, which is owned by the authorities, integrates existing databases and information systems and creates a single shared record of truth of employment and expenditure between the two Ministries. It aims at providing visibility into various indicators on a near real-time basis, including budget allocated versus executed, the number of people hired, the number of people receiving various components of compensation. It will signal data integrity issues and inconsistencies. The timely availability of reliable data without costly reporting overheads will help make informed decisions, better track utilization of funds and thereby increase transparency and efficiency in the management of the wage bill.

There is scope for scaling-up the solution. With continued ownership of the authorities and the support of international partners, the solution could be extended to the wage bill management of additional Ministries and other public institutions. It could also apply to multiple areas of public financial management such as procurement and various public registries. A successful implementation of this project in Guinea-Bissau would showcase the value of digital solutions for transparent public management in comparable fragile countries. Enhanced transparency and delivery of better societal outcomes could help strengthen trust in public policies.

1https://www.imf.org/en/Publications/CR/Issues/2020/06/30/Guinea-Bissau-Technical-AssistanceReport-Enhancing-Governance-and-the-Anti-Corruption-49540

20. Mitigating fiscal risk emanating from state-owned enterprises (SOEs). The authorities are taking steps, with the support of the World Bank, to strengthen the management and oversight of the company's financial situation of the largest SOE, the utility company Electricidade e Aguas da Guinea-Bissau (EAGB). Also, following staff advice, they have renegotiated the fuel supply agreement which will result important savings for EAGB. However, comprehensive reforms are needed to ensure its long-term financial sustainability and limit fiscal risks (Annex IX).24 IMF will provide TA to enhance fiscal governance and mitigate fiscal risks of SOEs.

2022 Budget Implementation and Medium-Term Fiscal Consolidation Path

21. The authorities remain committed to maintaining the fiscal deficit close to that in the 2022 budget. The domestic primary deficit is projected to be slightly higher by 0.3 percentage points of GDP compared to 2022 budget due to a confluence of exogenous factors. Amid rising global food and energy prices due to the war in Ukraine, the authorities have implemented transitory measures to ease cost-of-living pressures for the population, estimated at 0.3 percent of GDP.25 In addition, they have increased other expenditure by 0.4 percentage points of GDP. Tax revenue is projected to be lower by 0.2 percentage points of GDP due to lower-than-expected collection in the first quarter of 2022 and tax expenditures on fuel and essential items, which are partially cushioned by higher revenues from higher cashew nuts export prices. The authorities are also rationalizing non-priority spending.

22. The domestic primary deficit is projected at CFAF 14.8 billion in 2022. In the first half of the year, the deficit is projected to worsen to CFAF 18.6 billion and improve toward the target in the second half supported by the measures to improve revenues and expenditure control (LOI Table 3). Staff emphasized that mitigating measures to cope with the cost of living should be transitory, supported by rationalization of non-priority spending and focus on targeted transfers to needy households as implemented during the COVID-19 crisis (LOI, Section B).26

23. Over the medium-term, staff advised enhancing fiscal management and institutional reforms to strengthen revenue mobilization, PFM and expenditure control to create fiscal space for priority spending and infrastructure. Staff estimates that strengthening revenue mobilization and enhancing PFM and expenditure control (e.g., wage bill control, enhancing SOEs control, reducing non-essential transfers) would create at least 5 percentage points of GDP in fiscal space over the medium term (Text Figure 3). In addition, clearing the stock of domestic arrears will improve trust in the government, reduce procurement costs, and support financial intermediation. Consistent with the authorities' commitment to consolidate and improve medium-term debt sustainability, an annual average of 0.7 percentage points of GDP adjustment in the domestic primary balance (commitment basis) is projected over four years (2022-25), with higher consolidation in 2023 as the transitory measures to ease cost-of-living pressures are phased out.

Text Figure 3.
Text Figure 3.

Domestic Primary Balance With and Without Fiscal Measures

(Percent of GDP)

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A001

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

24. A balanced and durable growth-supportive fiscal consolidation should be underpinned by governance reforms and the following measures:

  • Enhancing revenue mobilization. Measures to enhance tax revenue mobilization cover both revenue administration and tax policy reforms, including the broadening of tax bases, simplifying the tax system and strengthening tax administration and compliance. Tax revenues are expected to further increase around 1.4 percentage points of GDP by 2025.27 In 2022, the authorities have promulgated a tax package to simplify and enhance transparency of the tax system28 and fully implemented the Kontaktu system for electronic filing of tax returns. Moreover, they are strengthening the collection of the new telecom tax; modernizing the stamp duties and the general exemption regime; and preparing the implementation of the new VAT law in 2023. For the medium-term, the authorities have requested IMF support to undertake a tax reform29 to improve compliance, reduce administrative costs and the negative impact of the tax system on economic growth.

  • Strengthening PFM and expenditure control. Wage bill rationalization is critical.30 Domestic primary expenditures are projected to decline around 1.4 percentage points of GDP by 2025, of which 1 percentage point comes from measures to contain the wage bill. Measures to improve PFM and expenditure control include: (i) strengthening the treasury and cash management function with the implementation of a Treasury Single Account (TSA) and IMF cash management/cash-flow forecasting tool; (ii) continuing efforts to control the public sector wage bill, via implementation of the census of regular employees of the public administration and the IMF-supported blockchain project to reconcile personnel and payroll records, as well as strengthening the wage bill policy with IMF TA support; (iii) strengthening the fiscal oversight of SOEs and mitigating fiscal risk; and (iv) improving public investment management.31

  • Enhancing fiscal governance and transparency. The authorities have made significant progress on governance reforms, meeting all the SMP's targets on governance and transparency reforms (Section B). These reforms have contributed to enhance domestic revenue and expenditure management, supporting fiscal consolidation over the medium term.

  • Implementing TA recommendations (Annex V). These include (i) enhancing cash management by combining various ministerial accounts into a TSA; (ii) improve the investment planning framework; (iii) strengthen coordination between the tax and customs departments; (iv) streamline tax exemptions and subsidies; (v) review current tax and excise rates; and (vi) enhance debt and arrears management.

25. Safeguarding social and priority spending and public investment. Importantly, the fiscal consolidation strategy protects social priority spending and public investment over the medium term. Social priority spending increased by 2 percentage points of GDP to reach about 8.5 percent of GDP in 2021 (Text Figure 4). Over the medium term, social priority spending is projected to increase by 1.1 percentage points of GDP compared to pre-COVID-19 period (2010-19). In addition, the authorities are undertaking investment plans to strengthen priority sectors and infrastructure to sustain economic growth.

Text Figure 4.
Text Figure 4.

Priority Spending

(Percent of GDP)

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A001

Sources: Guinea-Bissau authorities; and IMF staff estimates and projections. The projection for the High Commission for COVID-19 is not available yet.

Medium-Term Financing and Debt

26. The IMF emergency financing, the CCRT debt relief, concessional loans of multilateral institutions, and budget support from a bilateral donor have eased budget financing pressures in 2021. The January 2021 RCF and the current SMP are helping catalyze additional donor support and alleviate financing pressures stemming from reliance on non-concessional lending from BOAD and Treasury issuances in the regional market. The reengagement strategy included joining the Debt Service Suspension Initiative (DSSI) and taking steps towards solving all legacy external arrears.32 French budget support of €1.3 million was disbursed in October.

27. The government is committed to auditing and starting the clearance of domestic arrears over the medium term. Domestic arrears of CFAF 10.2 billion accumulated in 2019-20 were recognized and paid in 2021. The authorities plan on start clearing the stock of domestic arrears accumulated between 1974 and 1999 in the coming years, amounting to CFAF 14.3 billion. Furthermore, by end-2022, the government intends to determine the true amount of any outstanding arrears through further auditing and verifications,33 verify full tax compliance of all creditors, and determine net government arrears after correcting for any tax obligations. This will allow the government to decide on a strategy towards clearing all outstanding domestic arrears over the medium term.

28. The SDR allocation helped reduce financing costs and close the 2021 financing gap associated with the emergency response to the pandemic. The authorities used the SDR 27.2 million allocation (about US$38.4 million) to pre-pay non-concessional debt to the regional development bank BOAD, due at end-2021 and in 2022. Staff estimates the debt management operation saved up to CFAF 3.4 billion (0.4 percent of 2021 GDP) on interest payments up to 2026. Staff recommended that any pandemic spending and its financing should be transparently recorded in the budget in accordance with the IMF's Fiscal Transparency Code.

29. Supporting the authorities' fiscal consolidation and preserving debt sustainability may require additional financing needs of 2.2 percent of GDP over the next three years. Staff estimates a financing gap of CFAF 7.7 billion each year—around 0.7 percent of GDP (Tables 2, 3a and 3b). The authorities should seek to cover this financing gap by identifying highly concessional loans catalyzed by fiscal discipline and the track record of policy implementation under the SMP.34 The fiscal space associated with a lower interest burden could be used to support much-needed investment in infrastructure and priority sectors.

30. Authorities are taking action to strengthen debt management. In the context of the implementation of the legislation approved in June 202135 and to avoid coordination problems that led to delays in debt service payments in the past, the Directorate Generals of Treasury and Debt are holding weekly coordination meetings. Biannual meetings of the recently created National Committee of Public Debt started in 2022. This committee also holds extraordinary meetings to discuss any new loan agreements. The authorities are seeking technical assistance from international partners to improve their capacity for debt recording, monitoring and overall debt management. In addition, they will keep publishing annual reports on debt covering debt service, disbursements, and agreements, as well as continue reporting to international debt statistics databases. Staff discussed ways to improve debt management with TA support.

31. Debt classification follows a hybrid approach after the reclassification of the debt to the West African Bank for Development (BOAD) as external. The authorities noted that debt classification in the Debt Sustainability Analysis (DSA) and debt limits will consider debt to BOAD (denominated in CFA francs) as external.36 However, the classification continues to be currency-based for other creditors because of the challenges in identifying the holders of debt issued in the WAEMU regional market. Considering the importance of this creditor to the country (17 percent of total debt), this reclassification will improve the coverage of debt limits in prospective UCT-quality arrangements.

32. Guinea-Bissau is at a high risk of external and overall debt distress. With the reclassification of BOAD, the share of external debt reaches 40.1 percent of GDP (from 26.7 percent in the July 2021 DSA). The risk of external debt distress is high because the indicators based on the debt-service ratios breach their indicative thresholds under the baseline. Overall risk of debt distress is also high because the PV of public debt relative to GDP remains well above its indicative benchmark throughout the projection period (DSA).

33. Guinea-Bissau's debt is assessed as sustainable in a forward-looking sense based on the authorities' commitment to sound policies supported by strong donor engagement. Guinea-Bissau's supportive regional context37 reduces medium-term rollover risks associated with domestic debt, and staff projects a gradual decline of the PV of public debt relative to GDP over the medium term, with the fiscal deficit within 3 percent of GDP and debt below 70 percent of GDP WAEMU convergence criteria. The assessment continues to be contingent on the authorities' commitment to: (i) an ambitious fiscal adjustment strategy; (ii) prudent borrowing policies, including avoiding non-concessional project financing; (iii) enhanced debt management; and (iv) cautious management of the existing loan pipeline and application of assessment procedures based on best international practices to ensure criticality of investment projects. The debt outlook remains vulnerable to a weaker economic recovery and a lack of authorities' adherence to macroeconomic stability and prudent fiscal policies.

Authorities' Views

34. The authorities concurred with staff's views on the fiscal stance and direction of reforms. They agreed with the medium-term consolidation trajectory path and would harness the SMP reform momentum. The authorities stressed their strong commitment to fiscal prudence and fiscal sustainability, noting the efforts to achieve the program quantitative targets and the corrective actions and reforms to strengthen revenue mobilization and reign over expenditures including on the wage bill. Also, the authorities agreed that measures to ease cost-of-living should be transitory and targeted at vulnerable households. They underscored that corrective actions and reform will support the execution of the 2022 budget and the 2023 budget formulation in line with the fiscal consolidation needed to put debt in a downward trend and in line with WAEMU convergence criteria by 2025. (LOI ¶5-8).

35. The authorities are strongly committed to advancing fiscal structural reforms. They appreciate Fund TA and are committed to implementing the advice received. The authorities intend to modernize and simplify the tax framework by preparing a new law on tax exemptions and allowances for Parliament submission in August 2022 and implementing the VAT and start reviewing the income tax in 2023. On PFM and expenditure control, the authorities are keen to reform the public sector administration including wage bill control and public employment quality, continue progressing towards stablishing a single treasury account. They will enhance SOE supervision and mitigate fiscal risks, with IMF TA support.

B. Structural Reforms Enhancing Governance and Anti-Corruption Frameworks

36. Efforts to address governance and corruption vulnerabilities in Guinea-Bissau can have a far-reaching impact. Under the SMP, governance reforms are contributing to enhance domestic revenue and expenditure management to support developmental objectives.38 Authorities are taking steps to gradually address institutional vulnerabilities and strengthen anti-corruption practices in the areas of (i) PFM; (ii) wage bill and public administration; (iii) tax policy framework; (iv) tax and customs administration; and (v) anti-corruption and anti-money laundering regimes.

37. The authorities are committed to complete the implementation of the RCF's governance safeguards on COVID-19 spending.39 An audit of COVID-19 expenses by the Audit Court started in October 2021 at the request of the High Commissioner for COVID-19, covering the period June 2020-August 2021 and expected to be published by end-June 2022. This audit will be complemented by an ex-post independent audit of all COVID-19 expenditures until end-2021 by a reputable third-party auditor40 who will work jointly with the Audit Court to be published by end-September 2022. Moreover, the government has published financial reports and key information of all crisis-related contracts for the years 2020 and 2021.41 Furthermore, to legally enable the collection and publication of this beneficial ownership information of all entities awarded public procurement contracts, the government amended the procurement legal framework through a decree-law (SB end-March 2022, LOI ¶5 bullet 2 and Table 6). The government will also publish full text of contracts and ex-post validation of delivery and will start to disclose beneficial ownership information of all companies awarded COVID-19 related contracts as per the amended legal procurement framework this year. Staff encourages continued coordination between the CFE and Registry Office to ensure accuracy of beneficial ownership information.

38. The government met all the SMP's governance and transparency reforms (Annex IV and Table 7).42 Implementation of the governance and transparency reform adopted is essential in 2022-2023. The mission recommended measures based on IMF TA and the governance diagnostic report43 in the areas of: (i) expenditure control; (ii) SOEs oversight; (iii) revenue mobilization; and (iv) anti-corruption and anti-money laundering frameworks (Box 4). It will also be essential for the government to take steps to establish clear rules and practices for implementing the strengthened legal framework on anticorruption, including expanding the competencies of institutions responsible for the asset declaration system and the overall leadership of anticorruption efforts. To enhance the institutional capacity of governance and oversight, the government will provide more resources for the Audit Court, CENTIF and the Public Procurement Authority (LOI, ¶7 bullet 7).

Key Recommendations on Governance and Anti-Corruption Reforms

  • Expenditure control. Conduct a census of all public employees and retirees (LOI, ¶7 bullet 2). Follow-up up on the implementation of the procedures stated in the “Manual for procedures on public expenditures” developed with IMF TA support (LOI, ¶7 bullet 5). Approve the annual work program of the Inspector General for Finance by supporting staffing and proper allocation of financial resources.

  • SOEs control. Progressively publish all pending SOE consolidated financial statements and conducts audits by the Tribunal de Contas.

  • Revenue mobilization. Rationalize tax exemptions and allowances (LOI, ¶7 bullet 5), and consolidate those that remain in a tax statute, the Investment Code or the General exemptions regime. Implement a simplified Customs transit control from the border to Safin, and a physical structure for the inspection of goods imported across the land borders

  • Anti-corruption and anti-money laundering frameworks. Prioritize the implementation of the recommendations of the Inter-Governmental Action Group against Money Laundering in West Africa (GIABA) mutual evaluation report, including additional resources for the CENTIF and designating the AML/CFT supervisory authority over NBFIs and DNFBPs. Implement the decree amending the procurement framework and the revised assets declaration regime law once approved (LOI, ¶5 bullet 2). Land registry fees should be uniform, accessible, and publicly posted. Post all legislation online. Develop plain language guides describing tax, licensing, and other regulatory obligations. Strengthen supervision of preventive AML/CFT measures related to politically exposed persons. Review progress in implementing the recommendations of the Governance Diagnostic Assessment, and establish clear priorities for next steps, including addressing the gaps in Guinea-Bissau criminal legislation in line with the recommendations of United Nations Convention against Corruption review, notably, on criminalization of corruption offenses.

Authorities' Views

39. The authorities are committed to implement and undertake further governance reforms to increase public policy effectiveness. They agreed to complete the implementation of the RCF's governance safeguards on COVID-19 spending including the completion of an independent and complementary audit of all related spending until 2021 by the audit court, supported by a third-party auditor in late 2022 (LOI ¶5 and 7). Also, the authorities will implement a ministerial decree amending the legal procurement framework by publishing awarded public contracts and beneficial ownership information in the webpage of the procurement authority. They recognize the need to strengthen the audit court, CENTIF and the public procurement authority to enhance the institutional capacity of governance oversight (LOI ¶7)

C. The Diversification Challenge

40. The real effective exchange rate (REER) does not appear overvalued and should not seem to undermine Guinea-Bissau's external competitiveness. The External Sector Assessment (ESA) points to a position broadly in line with fundamentals (Annex VI). The REER undervaluation is estimated between 7 and 10 percent, but this estimate should be interpreted with caution because of data methodical limitations (Annex VI, ¶5 and ¶6).

41. Output and export diversification would contribute to promote strong and inclusive growth while strengthening Guinea-Bissau's external position. Export diversification declined significantly in the last three decades when cashew nuts production took off which are still exported unprocessed which present 97 percent of total exports with India and Vietnam representing about 80 percent of the exports' market. It mostly replaced rather than added to other production such as rice and groundnuts (Text Figure 5). The decline in diversification is evident across a range of diversification measures that consider the number of products exported, the number of trading partners, and the relative value of exports in different product codes. Export diversification could increase resilience to external shocks (Annex VI), climate change, and boost economic growth (Annex VII). The country can also benefit from the diversification process by moving up the value chain. The introduction of higher value-added products is associated with improvements in productivity and creation of high-skilled jobs.

Text Figure 5.
Text Figure 5.

Export Concentration Index

(Higher values=more concentrated)

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A001

Sources: Guinea-Bissau authorities and World Bank database.

42. Opportunities for Guinea-Bissau's economic diversification lie in areas related to its abundant natural endowments. Natural resources include bauxite, wood, oil and phosphates, while its coastline is rich in fish and offers attractive touristic destinations. Moreover, the potential for diversification includes the agriculture, the dominant sector of the economy with a large, underutilized potential, together with the unexplored sectors of mining and oil. Development of agriculture would particularly contribute to poverty reduction because it employs about 75 percent of rural households and there is scope to increase value-added in the cashew sector by processing the cashew nut and targeting niche markets, which include social and environmentally responsible businesses.

43. Fostering diversification requires a wide range of reforms. It is critical to address the constraints that have hindered the process, which include prioritizing spending to invest in human capital, improving regulatory system and natural resources tax regimes (Annex VII), and expanding infrastructure projects, especially in the electricity sector where only 33 percent of the population have access to electricity accessibility, one of the lowest in West Africa (Annexes VIII and IX). The country needs to improve its governance framework which continues to lag other countries in the region, and is a source of perpetuating fragility (Annex IV). Moreover, the consolidation of political and macroeconomic stability will also help anchor business confidence, a necessary condition for increasing private investment. In this respect, the 2019 Parliamentary and Presidential elections paved the way to the first peaceful presidential transition in the country's history, and represented a major step towards achieving political stability which could lay the grounds for promoting a major institutional reforms.

Authorities' Views

44. The authorities agreed that economic diversification is crucial for the country's development strategy. They stressed their commitment to take measures to foster diversification and enhance business environment by improving governance standards and stable regulatory framework. They highlighted the urgent need 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.

D. Fostering Financial Intermediation

45. Addressing NPLs and a successful disengagement strategy with the large undercapitalized bank would support financial stability and intermediation. NPLs have decreased but remain high since 2012. A large part of the NPLs is related to an undercapitalized bank which played an important role in the provision of credit to the private sector, through financing the cashew campaign and bringing financial services to rural areas. Currently, the bank's lending capacity is constrained by high NPLs, negative capital, and limited access to BCEAO refinancing facilities. The bank continues to seek strategic investors with the support of an external consultant.44 While the authorities have provided a report with a proposed exit strategy from the large undercapitalized bank to the Fund (SB, end-December 2021), staff advised to include key financial information and reconsider the viability of the proposed disengagement strategy.

46. The financial vulnerabilities stemming from the sovereign debt and exchange rate exposures in the banking sector are low. In 2021, the domestic banking sector held 9 percent of its total assets in central and local government debt while their exposure to SOEs was only 2 percent. However, the bank sector exposure to regional securities in local currency was 30 percent of total assets, reflecting the relatively high degree of regional financial integration in the WAEMU area. Most of public sector financial needs are covered through concessional loans from multilateral organizations and the regional market issuances. Private sector credit has been constrained by low returns in the private sector projects due political instability, and weak institutions and governance (Annexes VII and X). Unless these structural constraints are addressed, changes in sovereign WAEMU holdings in Guinea-Bissau's banks should have limited impact in private sector credit. The exchange rate exposure of the banking system is also low due to the CFA franc peg to the Euro and the foreign currency-denominated liabilities account for less than one percent of total liabilities. Moreover, if the situation of the large undercapitalized bank is left unaddressed (¶ 45), risk of hampering the provision of banking services, including credit intermediation, would remain.45

47. Shallow financial markets and obstacles in key areas limit financial inclusion and development. Access and use of financial services have increased in the last decade fostered by 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 is just 15 percent of GDP at end 2021 (compared with 12 percent of GDP at end-2017), below the WAEMU average of 22 percent of GDP. Strengthening credit information bureau with support of regional authorities would foster financial intermediation in the country. The increasing intermediation of remittances from abroad through mobile phones and the extended use of mobile phone services could be leveraged to increase financial inclusion. Moreover, the country may benefit from agreements with regional partners to boost the development of microfinance in rural areas as well as credit facilities for small- and medium-sized enterprises.

48. Mobile money can contribute to inclusive growth by offering an efficient way to transfer money and save to a previously financially constrained population. It has the potential to fill the gap left by the limited infrastructure of conventional financial services (Annex X). This is even more important in the case of Guinea-Bissau because of the current challenges in the banking sector with high level of NPLs. Despite the significant growth in terms of transactions among individuals, acceptance of mobile money by commercial establishments is still very limited. This situation tends to improve as commercial banks are starting to partner with mobile money operators. Mobile money services can encourage saving behavior of the population and foster formalization of small-scale businesses. Moreover, it can enable small-scale entrepreneurs to use safer and more efficient means of storing and transferring money, and being a source of provision of microcredit, which can help to promote economic growth and development.

Authorities' Views

49. The authorities shared staff's assessment of the need to develop the financial sector, enhance access to credit, and reduce financial sector vulnerabilities. In the context of the report with a proposed exit strategy from the large undercapitalized bank, the government committed to (i) review the document; (ii) implement the recommendations of the Banking Commission; and (iii) request an assessment on the bank's financial position and a full independent audit of NPLs from a third-party auditing firm to be performed by end-August (LOI, ¶10). The regional authorities also committed to request a new assessment of NPLs of the undercapitalized bank by the regional Banking Commission in 2022.

E. Statistical Issues

50. Poor quality and timeliness of economic data due to capacity constraints are significant obstacles to good policymaking. National Accounts data are not timely as the latest definitive estimate of GDP, published by the National Statistical Office, is for the calendar year 2018. Definitive estimates for 2019 and provisional for 2020 are, however, expected to be published this year with the support of IMF TA. Balance of payments data have improved, but some inconsistencies between financial account transactions and IIP data remain. The mission discussed the authorities' plans to produce and improve the statistics. The mission encouraged the authorities to consider implementing the IMF's Enhanced General Data Dissemination System to enhance transparency by publishing data essential for surveillance and supporting statistical development. The authorities are addressing the shortcomings, including with support of IMF TA, and have made a commitment to allocate more resources to strengthen the national statistical system (LOI, ¶7, bullet 8).

F. Other Surveillance Issues

51. Safeguards Assessment. The BCEAO has implemented all recommendations provided in the 2018 safeguards assessment. The assessment found that the BCEAO had broadly appropriate governance arrangements and a robust control environment. In line with the safeguards policy's four-year cycle for regional central banks, an update assessment of the BCEAO is due in 2022.

Staff Appraisal

52. Despite the persistence of the pandemic, economic activity improved in 2021 but downside risks and long-standing socioeconomic challenges remains. The economic conditions have improved on the back of record cashew nut production, gradual lifting of COVID containment measures, supportive economic policies, and higher business confidence associated with a more stable political environment. However, the surge in international food and energy prices associated with the war in Ukraine raises concerns for the near-term growth and inflation outlook. In 2021, growth accelerated and inflation increased because of price pressures from imported goods while in 2022 both indicators are expected to decelerate with inflation transitorily above the WAEMU convergence criteria. Downside risks include a more protracted pandemic or food inflation that could trigger social tensions and political instability.

53. The authorities deserve credit for a satisfactory SMP performance towards establishing a track record and pursuing fiscal consolidation in 2021-22. Supported by the RCF disbursement, the CCRT debt relief, and the SDR allocation, the authorities have made progress on their reform program securing macroeconomic stability. The overall fiscal deficit including grants was contained to 5.7 percent of GDP in 2021, representing a substantial fiscal adjustment in line with program objectives. Further fiscal consolidation is envisioned in the 2022 budget approved by Parliament in early December, to bring the fiscal deficit down to 4.4 percent of GDP, and gradually converge to the WAEMU regional deficit criteria of 3 percent of GDP by 2025. For the second consecutive year, the budget was submitted by the authorities observing the legal time frame. Parliament also approved in mid-December a tax reform package including a revised general tax code, the tax penalty regime and customs code, together with a modernized VAT Statute. These actions will create fiscal space and catalyze donor support to protect social spending in education, health, and pandemic-related expenditures and to undertake key infrastructure investments.

54. Staff welcomes the prudent use of the SDR allocation. The authorities decided to use the recent SDR 27.2 million allocation (about US$38.4 million) to buttress debt sustainability by pre-paying debt service on BOAD non-concessional loans due up to 2022, and cover COVID-related expenditures, including vaccination and improvement in health services. Staff commends the authorities' efforts to strengthen debt management, including holding weekly coordination meetings between directories of treasury and debt, and reviewing the debt management framework.

55. Staff recommends the authorities to closely monitor the restructuring of the large undercapitalized bank and implement measures to improve governance and the financial condition of the utility SOE. Staff encourages the authorities make further progress a viable disengagement strategy of the undercapitalized bank by 2024. The authorities should enhance the fiscal oversight of SOEs. In particular, they should closely monitor the power and water utility management and its governance restructuring plan aimed at revamping operations and enhancing financial management controls to ensure financial sustainability and limit fiscal risks. Over the medium term, transition to cleaner energy sources such as hydro-based electricity imports from Guinea and solar and wind energy would reduce costs and carbon emissions.

56. Output and export diversification would contribute to promote strong and inclusive growth while strengthening Guinea-Bissau's external position. The economy is highly dependent on the production and export of cashew nuts and diversification opportunities lie in areas such as agriculture, processing industries, natural resources, and tourism. Staff encouraged authorities to address structural constraints including a challenging business environment, weak governance, infrastructure bottlenecks, and low financial intermediation.

57. Implementation of governance and transparency reforms are key to the success of the authorities' reform agenda. Staff commends the authorities for the implementation PFM strategy to enhance fiscal governance, transparency and accountability including measures to strengthen expenditure control, tax and custom frameworks, the fight against corruption and mitigation of SOEs' risks. Staff welcomes the amendment of the procurement legal framework to ensure full transparency on the awarded public contracts and the submission to Parliament of the Asset Declaration Regime reform in May 2022. Moreover, additional resources to the Audit Court, the Financial Intelligence Unit and the public procurement authority should play a significant role in enhancing governance. Also, staff welcome the full implementation of the Kontaktu tax payment solution to all large tax taxpayers by to end-March 2022.

58. Staff recommends conclusion of the 2022 Article IV consultation, and completion of the third review under the SMP. The recommendation is based on the strong progress made under the program, including meeting structural benchmarks that will enhance governance and future policy implementation. To overcome capacity constraints, the IMF is supporting the authorities' efforts in all policy areas covered by the SMP through tailored TA.

59. It is recommended that the next Article IV consultation with Guinea-Bissau be held on the 12-month cycle.

Figure 2.
Figure 2.

Guinea-Bissau: COVID-19 Pandemic, Activity and Prices

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A001

Sources: Google Mobility database, Our World in Data, Guinea-Bissau authorities and IMF staff calculations.
Figure 3.
Figure 3.

Guinea-Bissau: Fiscal, External and Monetary Developments

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A001

Sources: Guinea-Bissau authorities; BCEAO; and IMF staff calculations.
Table 1.

Guinea-Bissau: Selected Economic and Financial Indicators, 2019–27

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Sources: Guinea -Bissau authorities; and IMF staff estimates and projections.1 Coverage expanded to include legacy arrears.
Table 2.

Guinea-Bissau: Balance of Payments, 2019–27

(CFAF billions)

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Sources: BCEAO; and IMF staff estimates and projections.
Table 3a.

Guinea-Bissau: Consolidated Operations of the Central Government, 2019–27

(CFAF billions)

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Sources: Guinea-Bissau authorities; and IMF staff estimates and projections.1 Recorded as arrears when payments were not made for more than 30 days for wages and more than 90 days for other expenditures.2 Financing is on currency basis.3 WARCIP project from 2018 onwards; in 2019 equity investment and bank recapalization; in 2020 on-lending support to banks.4 Excludes grants, foreign and BOAD financed capital spending, and interest.
Table 3b.

Guinea-Bissau: Consolidated Operations of the Central Government, 2019–27

(Percent of GDP)

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Sources: Guinea-Bissau authorities; and IMF staff estimates and projections.1 Recorded as arrears when payments were not made for more than 30 days for wages and more than 90 days for other expenditures.2 Financing is on currency basis.3 WARCIP project from 2018 onward s; in 2019 equity investment and bank recapitalization; in 2020 on-lending suppo rt to banks.4 Excludes grants, foreign and BOAD financed capital spending, and interest.
Table 4.

Guinea-Bissau: Monetary Survey, 2019–241

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Sources: BCEAO; and IMF staff estimates and projections.1 End of period.
Table 5.

Guinea-Bissau: Selected Financial Soundness Indicators, 2017–21

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Source: BCEAO.1 Excluding tax on banking operations.
Table 6.

Quantitative Targets Under the Staff-Monitored Program

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

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The quantitative targets are defined in the Technical Memorandum of Understanding.

These apply on a continuous basis.

Defined as spending by the Ministries of Health, Education and the Ministry of Women, Family and Social Cohesion, and the High Commissioner for COVID-19.

Excludes grants, foreign and BOAD financed capital spending, and interest. To account for domestically financed current expenditures associated to COVID vaccination implementation (TMU paragraph 11), the SMP targets for end-June and end-September (deficits of CFAF 16.4 billion and CFAF 23.4 billion) have been adjusted downwards by CFAF 1.3 billion and CFAF 2.0 billion respectively; and the First Review target for end-Dec (deficit of CFAF 18.9 billion) has been adjusted downwards by CFAF 2.1 billion. The domestically financed current expenditures related to COVID-19 vaccination implementation is CFAF 4.3 billion and exceed the CFAF 2.2 billion programmed. The adjustor of 2.1 billion is applied to the end-2021 DPB target (CFAF -18.9 billion) which yields an adjusted target of CFAF -21.0 billion. The DPB target is met by the outturn of CFAF - 17.8 billion. The actual figures for end-June, end-September and end-Dec have been updated to (i) exclude payment of wage arrears incurred in 2019-20 previously accounted in wage expenditures in 2021; and (ii) include wage expenditure for the hiring of irregular workers in the health sector, which will considered as accummulation of new domestic arrears (Footnote 9).

Comprises budget support grants and program loans (for budget support) excluding RCF disbursements and CCRT debt relief.

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

All guarantees are denominated in CFAF.

Arrears of US$0.34 million to Libya and US$0.11 million to the Islamic Development Bank (IDB) were accumulated for technical reasons. The transfer to Libya was initially rejected due to correspondent banking constraints. The payment to the IDB was delayed due to coordination problems. Residual amounts (less than US$20,000) were due to the African Development Bank. Those payments were executed by end-November. At end-2021, there were remaining arrears of US$0.1 million to the Saudi Fund, fully paid in March 2022. As it is a continuous QT, the status is considered “not met” in December also due the arrears that were fully cleared during 2021Q4.

To improve the delivery of services in the health sector, the Ministry of Health hired irregular workers, amounting to CFAF 3.0 billion in 2021. As the wage payment is only executed in 2022, it will be considered as accummulation of new domestic arrears in 2021.

Based on preliminary data and estimates.

Table 7.

Guinea-Bissau: Structural Benchmarks

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Sources: Guinea-Bissau authorities and IMF staff.

Annex I. Risk Assessment Matrix1

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Annex II. Downside Scenario

1. Staff has developed a downside scenario to illustrate the macroeconomic impact of the materialization of risks, including more severe effects from the war in Ukraine.

The scenario assumes:

  • Lower growth in the short and medium term due to a more protracted global recovery, prolonged supply chain disruptions and further outbreaks of the pandemic1.

  • Higher current account deficit due to a nominal freeze in remittance inflows in 2022 and 2023, and weaker cashew nut exports.

  • Higher fiscal deficit due to lower domestic revenues in tandem with lower economic growth, and higher expenditures associated with transfers to mitigate the negative impact of higher energy prices in 2022 and 2023.

Annex II Text Table 1.

Guinea-Bissau: Downside Scenario

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

2. Debt vulnerabilities increased in such a scenario (Text Figure 1). The public debt-to-GDP ratio would remain above 70 percent WAEMU convergence criterion until 2029, delaying convergence by 4 years, but remaining in a downward path. Debt service-to-revenues would increase by 3 percentage points on average. Fiscal deficit would remain above the 3 percent WAEMU convergence criterion throughout the projection horizon.

3. Policy implications. The scenario underscores: (i) the importance of controlling non-priority spending growth and mobilizing domestic revenue to create room for investments and pro-growth expenditure; (ii) the need to follow the medium-term fiscal consolidation strategy to bring the debt-to-GDP ratio firmly on a downward trajectory; and (iii) mitigate external vulnerabilities by diversifying the economy and exports. Against this backdrop, full implementation of the medium-term fiscal consolidation plan and an economic diversification strategy should be the cornerstones to a more resilient macroeconomic stability in the future.

Annex II Figure 1.
Annex II Figure 1.

Guinea-Bissau: Downside Scenario and the DSA

(Indicators of Public and Publicly Guaranteed External Debt 2021-2031)

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A001

Source: IMF staff calculations

Annex III. Recommendations from the 2017 Article IV Consultation

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Annex IV. SMP: Achievements on Governance and Anti-Corruption

Main Achievements

1. During the SMP the government has adopted reforms in governance and transparency to strengthen expenditure control, revenue mobilization and fight against corruption (Table 7).1 These reforms cover the following areas:

  • Expenditure control. The Treasury Committee has continued its weekly meetings without interruption and the other expenditure control measures agreed under the SMP have been adopted.2 Steps have been taken towards establishing a TSA (SB, end September 2021) and strengthen cash management. IMF TA continues to support the improvement of the treasury and cash management. The Ministry of Finance created a unit within the Directorate General of Treasury that will use the IMF tool. An executive order was issued to end the hiring of employees without contract (SB, end-September 2021) and other order was approved to enforce control by the financial controller over all public salaries and reconcile personnel and payroll records (SB end-December 2021) supported by the blockchain project. The Council of Ministers decided3 that these measures must be implemented by all public entities whose wages are included in the budget. The government is preparing a ministerial order to enforce normal expenditure execution procedures by requiring certification of goods and services delivery before payment to providers. Spending units must adopt and implement the procedures as stated in the “Manual for procedures on public expenditures” developed with IMF TA support. A pilot in at least five selected line ministries will start at the beginning of 2022. IMF TA has been requested to support the implementation.

  • Public financial management. Continuous IMF TA has been provided to support the improvement of the treasury and cash management function, including establishing a Treasury Single Account. The Ministry of Finance created a unit within the Directorate General of Treasury to implement the cash management function using the IMF tool.

  • SOEs sector. The government is preparing a follow-up report on recommendations from previous Tribunal de Contas (TC) audit reports on EAGB to strengthen its management and transparency to be published by end-March 2022. The TC included EAGB in the 2022 plan of audits. IMF TA will support the enhancement of SOEs fiscal oversight and mitigation of fiscal risk.

  • Revenue mobilization. Parliament approved in December a tax package including the revised tax code and tax penalty regime (SB, end July), the customs code (SB, end-September) and a new VAT law (SB, end-December).4 To strengthen tax administration, the Kontaktu system is operational to all large taxpayers achieving full implementation. In addition, the government will ensure information exchange between the Directorates General of Taxes (DGCI), Customs (DGA), and Treasury (DGTCP), and the National Institute of Social Security (INSS)5.

  • Fighting against corruption. In mid-October 2021, the Council of Ministers mandated Ministers and State Secretaries to abide by the strict observance of the legal framework6 of assets declaration and interest owned. The Council of Ministers approved and submitted to Parliament the reform of the asset declaration regime supported by IMF TA7. The procurement legal framework was ammended with the support of IMF TA to enable the collection and publication of beneficial ownership (BO) information of entities awarded public contracts through a Ministerial Decree approved by the Council of Ministers in February 2022.8

Adopted Measures on Governance and Anti-Corruption

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Source: Guinea-Bissau Authorities.

The information is available on the website of the High Commissioner: https://www.accovid-gw.org/relat%C3%B3rios

Annex V. Capacity Development Strategy

Context

1. Guinea-Bissau is a fragile state. Socio-economic development has historically been held back by political conflict and weak governance (perceived corruption, weak judicial system and law enforcement). With a narrow export base consisting of unprocessed cashew nuts, the country is vulnerable to commodity price shocks and climate change. While poverty is endemic, social priority spending is insufficient and outcomes are often poor. Debt has increased with the need to fill large infrastructure gaps.

2. The Covid-19 pandemic has underscored the need for capacity development (CD) assistance. The pandemic has had a significant impact on economic activity and opened up large balance of payments and fiscal gaps. The policy response has been undermined by weak institutional capacity to mobilize additional resources, execute and control expenditures, ensure fiscal governance and transparency, and maintain debt on a sustainable path. The government has thus renewed its demand for TA in these areas.

3. A nine-month Staff-Monitored Program (SMP) was approved to support the government's reform program in late July. After a Rapid Credit Facility (RCF) was approved in January to provide urgent financing to support critical spending to fight the pandemic, the SMP has paved the way for a Extended Credit Facility (ECF) negotiation expected for the second half of 2022. Guinea-Bissau's previous ECF expired in July 2019 with the last two reviews uncompleted.

4. Past substantial TA enabled reforms in core functions by improving the legal framework and the government's operational capacity. Results have been mixed due to low absorption capacity. Protracted political uncertainty in FY2020 led to a loss of traction in CD engagement but has stepped out in a more stable environment in FY2021. Remote missions during the pandemic have been effective despite some connectivity issues.

Key CD Activities in Recent Years

A. Revenue Administration

5. Substantial FAD assistance helped strengthen the taxpayer registry, arrears management, audits and IT modernization. However, political instability and high staff turnover delayed reforms. Five TA missions in FY 2017-19 aimed at strengthening customs procedures. FAD also supports customs as part of a regional three-year project (2020-April 2023) financed by Japan. In FY2020 AFRITAC West (AFW) conducted two visits on customs valuation, the sanctions scheme and reform of custom litigation. TA on valuation of imports was assessed as successful. FAD has worked with Customs to prepare a new Customs Code aligned to ECOWAS, which shall be submitted to Parliament by end-September (part of SMP). It includes the application of deterrent penalties to change traders' behavior and raise compliance.

B. Tax Policy

6. A tax reform was approved in Parliament supported by years of technical assistance and reform efforts1. TA mission started in FY2021 to refine and update bills for a new tax code and penalties regime, review the legislation for a modern VAT, and estimate its revenue impacts. The bills were approved by parliament in December 2021 and promulgated in February 2022. Coordination with the World Bank's legislative LTX was essential to prepare the new laws, as well as follow-up FAD STX to help incorporate recent FAD recommendations.

C. Governance Assessment

7. Macro-critical weaknesses in fiscal governance, rule of law, market regulation, anti-money laundering (AML) and anti-corruption were diagnosed by a FAD/LEG mission in FY2020. The authorities welcomed the recommendations and authorized the publication of the report.2 Seven LEG missions in FY2017-19 aimed at strengthening the financial intelligence unit (CENTIF) and prepared the passing of the WAEMU law on AML/CFT.

D. Public Financial Management

8. Sustained assistance has focus on strengthening public financial management functions. FAD provided ten PFM missions in FY2017-19. They supported the enhancement of budget execution and control to eliminate non-regularized expenditure, operationalize a Treasury Committee and improve the financial management system (SIGFIP) as well as the oversight of the Treasury over line ministries' expenditures. AFW helped drafting a new regulation for ex-ante controls. TA also supported the drafting of the chart of accounts. Two AFW missions in FY2020 assisted with manuals for expenditure and accounting procedures. Only a few of the treasury management recommendations were implemented due to capacity constraints and weak systems. One FY2019 mission made recommendations on public investment management (PIM) and capital budgeting and another in FY2020 focused on the oversight and surveillance of SOEs. Two missions in FY2019-20 focused on macroeconomic programming. TA missions in FY2021-22 included providing support to strengthen cash management and implementing the blockchain-based solution for the public wage bill management.

E. Debt Management

9. Increasing debt management function has been the focus of technical assistance. MCM missions helped drafting a debt management decree, proposed an organizational structure and functional responsibilities of the new Public Debt Directorate and trained its staff. Debt management has been strengthened by the approval by the Council of Ministers of the decrees related to the creation of a National Committee of Debt Policy, the organization and functioning of the General Directorate of Public Debt, and the issuance of debt and debt management.

F. Bank Restructuring

10. Assisting authorities to mitigate baking vulnerabilities has been an area of TA. MCM also assisted with the restructuring and resolution of two problem banks with an overhang of non-performing loans. As a result, one of the banks is now compliant with prudential norms, while the larger one remains undercapitalized.

G. Statistics

11. TA has focused on building capacities to improve core statistics. In 2019, the National Statistics Institute released rebased GDP data for 1997-2017 and implemented SNA2008 with AFW support (six missions in FY 2017-19). In April and September 2021, TA missions supported the estimations of the annual national accounts for 2018 and 2019, and a mission in December 2021 also reviewed the conditions to introduce quarterly GDP. The mission recommended to develop more high-frequency indicators and to produce timely annual national accounts. A new rebasing project is also being considered by the authorities. However, limited resources remain an issue for the National Statistical Institute. Progress towards the compilation of Government Finance Statistics (GFS) includes a government financial operations table (TOFE) consistent with regional directives, despite source data problems. Yearly GFS TA missions during 2019–21 further supported authorities' efforts to gradually adopt the GFSM 2001/2014 for the general government, but some data gaps (mainly on extrabudgetary units, the social security fund, and local governments) remain to be addressed. The balance of payments JSA/AFR project ended in April 2020 after four missions. The BCEAO implemented a large majority of the TA recommendations. The last FY2020 mission focused on improving source data, the compilation and dissemination of high frequency data, and staff training. A balance of payments mission in March 2022 assisted in the development of data sources and estimation techniques for the compilation of balance of payments and international investment position (IIP) for 2018-20.

CD Strategy and Priorities

12. The COVID-19 pandemic has underscored the need for continued CD assistance to the workstreams below, with the overall objective of improving fiscal governance and debt sustainability. Modernization of support functions such as IT systems has become an urgent need as it will provide the basis to implement sustained reforms and adjustment. Over the medium-term, natural resources taxation and climate change mitigation are critical. This strategy meets the authorities' demands for assistance and is aligned with the governance commitments of the 2021 RCF and the policy priorities of the current SMP.

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Engagement Strategy

13. Engagement with the authorities. Absorptive capacity is constrained by insufficiently trained staff, undefined work procedures and changing policy priorities. The authorities thus prefer TA delivered by long-term resident advisors fluent in Portuguese as well as hands-on training. While remote missions during the Covid-19 pandemic face the challenge of inadequate IT systems, the current period of political stability is an opportunity for sustained buy-in. To regain traction, a limited set of practical and actionable recommendations from past CD missions will be shared with new members of the Executive. Other more medium-term priorities (natural resource taxation, climate change) require raising awareness.

14. Coordination within the Fund. The country team will continue to reach out to functional departments and AFW to identify CD priorities, learn about reform implementation, devise policy benchmarks, review mission reports, organize joint missions, participate in regional CD seminars and facilitate take-up by the authorities.

15. Engagement with outside partners. Continued efforts to sequence and complement CD initiatives will be undertaken with the WB (PFM, tax policy and SOE's oversight, public sector reform), the EU (fiscal governance, external audit function) UNCTAD (debt management), the AfDB (justice), WFP (food security and agricultural development) and possibly the UNDP and other UN agencies.

Annex VI. External Stability Assessment

The recent improvement in the current account deficit, estimated at 3.2 percent of GDP in 2021 and 2.7 percent in 2020, contrasts with the sharp deterioration observed in 2019, when the external deficit recorded 8.5 percent of GDP1. The real effective exchange rate appreciated in 2021, but has remained broadly stable over the past decade, anchored by the CFA franc's peg to the euro. While the EBA-lite CA and REER models indicate a moderately stronger position than the economic fundamentals imply, GNB is at high risk of external debt distress. The country's external position is considered to be broadly in line with fundamentals and desired policies based on the ongoing fiscal consolidation strategy to mitigate the risk of debt distress in the context of the WAEMU fixed exchange rate regime. Guinea-Bissau's external sector remains vulnerable to a range of risks and reducing vulnerabilities to external shocks will require increased export diversification, which in turn will depend on reforms to improve public sector governance and business environment.

External Sector Developments

1. Guinea-Bissau's external position has recently improved. The current account moved from a deficit of 8.5 percent of GDP in 2019 to a deficit averaging 2.9 percent of GDP in 2020–21. The movement reflects an ongoing fiscal consolidation strategy to address country's high level of debt and the risk of debt distress, increase in official transfers and remittances inflows during the Covid-19 pandemic2, lower volume of imports due to containment measures and the strong recovery in the cashew nut sector production and exports which reached their highest historical levels.

Figure 1.
Figure 1.

Current Account Developments

(Percent of GDP)

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A001

Source: Guinea-Bissau authorities; IMF staff calculation.
Figure 2.
Figure 2.

Export, Import Prices and Terms of Trade

(Index, 2010=100)

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A001

Source: Guinea-Bissau authorities; IMF staff calculation.

2. Despite a deterioration in the terms of trade due to a sharp increase in food and fuel imports prices, the current account deficit improved underpinned by an ambitious fiscal consolidation strategy, larger cashew nuts exports and higher remittances. The overall fiscal deficit reduced from 9.6 percent of GDP in 2020 to 5.7 percent in 2021, representing one of the largest fiscal consolidations in SSA in 2021 and contributing to the reduction of the current account deficit. The trade balance has improved on the back of the cashew nut export volumes, which increased by 22.5 percent,3 thereby compensating for the negative impact of higher import prices on subdued volumes.4 The country's external position is highly dependent on the cashew nut sector, which represents 97 percent of total export, and remains vulnerable to a range of risks such as international price fluctuations, as well as to weather conditions.

Figure 3.
Figure 3.

Exchange Rates and Prices

(Index, 2010 = 100)

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A001

Sources: Guinea-Bissau authorities; IMF staff calculations.

3. With the CFA franc pegged to the euro, the Real Effective Exchange Rate (REER) has remained broadly stable since 2010. 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 appreciated by about 4 percent since 2019 but remains approximately at the same level of 2010.

Assessment Using the EBA-Lite Methodology

5. EBA-lite methodologies converge on their diagnostic for the real exchange rate. Two regression-based approaches were used to assess exchange rate misalignment: the current account (CA) and the real exchange rate (REER) approaches. The CA and REER approaches are based on panel regressions that generate estimated “norms” consistent with fundamentals and desired policies.5

External Sector Assessment Results1

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Note: A positive CA gap and a negative REER gap indicate undervaluation.

Based on the EBA-lite 3.0 methodology

6. An application of the EBA-lite methodologies suggests a currency undervaluation. These estimates should be interpreted with caution. Data for Guinea-Bissau, including balance of payments statistics, are associated with a high degree of uncertainty, and are subjected to significant reviews. 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 sector or that it is a member of a currency union with a fixed exchange rate to the Euro.

A. CA Approach

Guinea-Bissau: Model Estimates for 2021 (in percent of GDP)1

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Based on the EBA-lite 3.0 methodology

Additional cyclical adjustment to account for the temporary impact of the pandemic on tourism (0.45 percent of GDP) and remittances (0.73 percent of GDP).

Cyclically adjusted, including multilateral consistency adjustments.

7. Based on this methodology, Guinea-Bissau's current account position in 2021 is moderately stronger than its fundamentals and desired policies. The current account benchmark implied (CA Norm) is -5.7 percent. The actual current account balance registered a deficit of 3.2 percent of GDP in 2021 and, applying the correction of cyclical contributions and conflicts estimated effects, the Adjusted CA deficit is at 4.0 percent. The implied misalignment of the current account is 1.6 percent of GDP, implying 9.6 percent undervaluation of the REER with an elasticity of the current account to movements in the real exchange rate of -0.17 (Tokarick, 2010).6

B. REER Approach

8. 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 7.1 percent in 2021.

9. The country's external position is regarded to be broadly in line with fundamentals and desired policies. While the EBA-lite, CA, and REER models indicate a moderately stronger position than the economic fundamentals imply, GNB is at high risk of external debt distress. This judgment is based on the impact of the ongoing fiscal consolidation strategy to mitigate the risk of debt distress and ensure debt sustainability in the context of the WAEMU currency area and its fiscal convergence framework.

Figure 4.
Figure 4.

Current Account (%GDP): Actual, Fitted, and Norm

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A001

Figure 5.
Figure 5.

IREER: Actual, Fitted, and Norm

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A001

Structural Competitiveness

10. Output and export diversification will be critical to durably strengthening Guinea-Bissau's external position. Over the past two decades, Guinea-Bissau has become increasingly dependent on cashew nuts, which are still exported unprocessed. Diversification would increase resilience to external shocks and boost economic growth. Progress in this area will depend on maintaining a foundation of macroeconomic and political stability, amplifying infrastructure projects, especially on the electricity sector (Annex IX), prioritizing public spending on education and healthcare, and making the business environment more conducive to private investment.

11. Guinea-Bissau's governance indicators continue to lag that of other countries in the region. The Worldwide Governance Indicator reveals the challenging situation of Guinea-Bissau in governance standards. Compared to WAEMU and other Sub-Saharan Africa, the country has poor indicators on control of corruption, rule of law, government effectiveness and regulatory quality. Poor governance perpetuates fragility, and the SMP has established important governance reform benchmarks on asset declaration regime, declaration of beneficial ownership on public procurement process and improvement in auditing process. The authorities have implemented important measures and the performance of the program has been satisfactory (Annex IV).

Figure 6.
Figure 6.

Guinea-Bissau: Governance Indicators

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A001

Sources: World Governance Indicators; Mo Ibrahim Index of African Governance.

Conclusion

12. The country's external position is regarded to be broadly in line with fundamentals and desired policies, and the country's external sector remains vulnerable to a range of risks. While the EBA-lite CA and REER models indicate a moderately stronger position than the economic fundamentals imply, Guinea-Bissau is at high risk of external debt distress. The external assessment is based on the ongoing fiscal consolidation strategy to mitigate the risk of debt distress in the context of the WAEMU fixed exchange rate regime. The governance reform implementation is critical to any development strategy to the country overcoming fragility. Moreover, the high export concentration in cashew nuts and dependence on imported food and fuel leave the country vulnerable to international price fluctuations, as well as to weather conditions, posing risks to food security and external stability.

Annex VII. Diversification: Long Term Trends, Areas of Potential1

Guinea-Bissau is highly dependent on the production and export of cashew nuts, which leaves the country highly exposed to fluctuations in international prices and local weather conditions. Output and export diversification can contribute to higher and more sustainable growth. Opportunities lie in a range of areas such as agriculture, natural resources, and tourism. Taking advantage of these opportunities requires addressing constraints that have hindered diversification to date. Actions include addressing human capital needs, improving the regulatory environment, encouraging financial deepening, removing infrastructural bottlenecks, and consolidating political stability.

1. Guinea-Bissau is highly dependent on the production and export of cashew nuts, which leaves the country highly exposed to international prices and local weather conditions. More than 50 percent of households are thought to be engaged in production, processing, or sale of cashew nuts. Cashew nuts have over recent years accounted for about 90 percent of total exports. In addition, as almost the totality of cashew nuts is exported unprocessed, the destination of exports is highly concentrated, with India accounting for more than 70 percent of exports. Changes in this segment of the international cashew market, due to players that have increased their processing capacity, while potentially contributing to sustain international prices of raw cashew nuts in the medium term, have added considerable volatility in recent years, directly affecting Guinea-Bissau's terms of trade.2

2. Indicators suggest that both export diversification and export quality have declined in Guinea-Bissau. Export diversification declined significantly during the 1990s when cashew production took off, as it mostly replaced rather than added to other production such as rice and groundnuts. The decline in diversification is evident across a range of diversification measures that consider the number of products exported, the number of trading partners, and the relative value of exports in different product codes. While the quality of Guinea-Bissau's cashew nuts is high, the fact that they are mostly exported unprocessed reduces the relative value in addition to limiting the number of export partners. The decline in diversification contrasts to the rest of WAEMU where the degree of diversification has been broadly unchanged over time.

3. Diversification could contribute to higher and more sustainable growth in Guinea-Bissau. As discussed in IMF (2017), economies at early stages of development benefit significantly from export diversification. By widening the range of exports, the economy increases its resilience to external shocks, reducing output volatility, and is able to sustain a higher rate of growth. If the diversification process includes moving up the value chain, the introduction of higher value-added products is associated with improvements in productivity and creation of high-skilled jobs.

Figure 1.
Figure 1.

Export Diversification and Concentration

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A001

Source: World Bank Database.; Guinea-Bissau authorities.Note The diversification index indicates whether the structure of exports or imports by product of a given country or country group differs from the world pattern. The product concentration index shows how exports and imports of individual countries or country groupings are concentrated on a few products or otherwise distributed in a more homogeneous manner among a series of products.

4. Opportunities for Guinea-Bissau's economic diversification lie in a range of areas. Natural resources include bauxite, wood, oil and phosphate, while its coastline is rich in fish and offers an attractive touristic destination. The fisheries sector has a great potential but currently modestly contributes to the national economy and exports as it is mostly explored by European vessels that pay a license fee to operate in Guinea-Bissau's waters. Tourism can be promoted by taking advantage of the country's natural biodiversity, especially the Bijagós Islands, which can become a prominent ecotourism destination. Guinea-Bissau's agriculture sector operates below its potential, as its forests are mostly exploited informally. The following sections highlight the potential in agriculture, the dominant sector of the economy, and the virtually unexplored sectors of mining and oil.

Agriculture

5. Guinea-Bissau has large underutilized agricultural potential. The growth of cashew production to a large extent replaced rather than added to other production. For example, the country used to be a net exporter of rice but production currently corresponds to only some 40 percent of domestic consumption, using only about 30 percent of the land suitable for rice cultivation. The country's favorable climate and its substantial water and arable land resources offer potential for a range of crops. By exploring those characteristics, the country could expand the range of cultivated crops, reducing the dependency on cashew. Options include a diverse range of cereals, cash crops, fruits and tubers.

Figure 2.
Figure 2.

Area Harvested

(1000 hectares)

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A001

Source: FAOSTAT (2019).

6. Development of agriculture would contribute to poverty reduction since around 75 percent of rural households work in agriculture. Diversifying agricultural income would mitigate the risks faced by both the country and its farmers due to the high concentration on cashew. To increase production, infrastructural deficiencies would have to be addressed, such as irrigation systems to reduce the dependency on rainfall. Additional bottlenecks include an outdated land management system, which results in unclear land rights; limited access to inputs and technology to support production; and limited market information, which is exacerbated by low levels of organization among farmers.

7. In the short term, there is also significant scope for increased value-added in the cashew sector. Guinea-Bissau's organically produced cashew nuts are prized for their quality in international markets. The country could take advantage of it and increase the value-added of its cashew kernels by targeting niche markets, which include social and environmentally responsible businesses that focus on consumers willing to pay a premium for products that can ensure sustainable benefits. However, by lacking the processing capacity and exporting almost all of the nuts in raw form, the country misses out on the higher prices paid for processed kernels and remains exposed to the relatively uncertain and limited market for unprocessed cashew nuts, which is limited to a small number of purchasing countries. The government has an important role in supporting private agricultural investment by improving infrastructure (water, electricity, connectivity) and access to markets, which could generate incentives to move up the value chain.

Mining

8. Guinea-Bissau's endowment of natural resources includes unexplored deposits of phosphates and bauxite. Although the existence of those deposits has been known since the 1970s, exploration has been precluded by infrastructure concerns, low international prices and political instability. The extraction of those resources, with appropriate environmental consideration, would significantly contribute to export diversification and has the potential to significantly increase the country's GDP and fiscal revenue.

9. Planned investment in phosphates would have large implications on the overall economy. A $200 million (12 percent of GDP in 2021) mining project located in Farim (120 km northeast of Bissau) aims to explore an extensive 100 million tons geological deposit of phosphate. The deposit is easily accessible, entailing for low-cost production. After concluding feasibility studies and environmental and social impact assessments, the international mining company in charge of the project is currently building installations to lodge workers and resettle the local population. However, capital investment financing has been delayed due to pending revisions to the project's mining agreement, which were required to ensure its compliance with national and regional laws. Although still uncertain, if it goes ahead full steam, the country's exports could potentially increase by more than 50 percent in just a few years.3

Oil

10. Interest in the offshore oil exploration in Guinea-Bissau waters increased after the significant oil discovery in Senegal in 2014. Three offshore blocks in Guinea-Bissau waters, licensed for exploration under the Sinapa and Esperança permits, have similar geological settings with the ones that host the Senegalese oilfields. The prospects for viable oil exploration in area are regaining strength after the minor oil discoveries in 2004 in the Sinapa permit area, which were never commercially explored.

11. The first deep-water exploration well offshore Guinea-Bissau is expected to be drilled in 20224. After the review of the blocks, conducted in 2017, two prospects—Atum and Anchova— were considered for drilling. The best estimate of prospective resources is of 472 million barrels.5 In the same year, the joint venture responsible for the operation negotiated the license terms with the National Oil Company of Guinea-Bissau (Petroguin) and was granted a three-year extension of the exploration period, up to November 2020. The exploration well is then expected to be drilled within this licensing period.

A. Addressing the Constraints that Hinder Diversification

12. A history of political instability and corruption prevented the materialization of many development opportunities. Since the independence, the country has struggled to secure stable governance and leadership. Recurrent changes in government have limited the development of Guinea-Bissau's institutional capacity. The peaceful conduct of both Parliamentary and Presidential elections in 2019 and the chance of having the first president to step down after completing his mandate represent a major step towards achieving political stability, which would lay the grounds for promoting a major institutional consolidation in the country.

Figure 3.
Figure 3.

Literacy Rate

(Percent of people)

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A001

Source: World Development Indicators.

13. An inadequate educational system limits the built of human capital. Education is central to development by promoting the capacity to acquire and transmit new knowledge, be able to utilize new technologies as well as to think and innovate. According to latest data, even though the literacy rate in Guinea-Bissau is in line with most WAEMU countries, it is around 15–20 percentage points lower than averages for Sub-Saharan Africa and low-income countries. Poverty and food insecurity are among the many factors behind limited access to school and reduced primary school completion rates. The educational system can benefit from grants and technical support provided by internationally financed educational programs to change this scenario, promoting actions such as improving the nutritional value of school meals and implementing a program of cash transfers to households.

14. An unclear regulatory environment precludes private-sector development and discourages entrepreneurial activity. Running a business is complicated by the lack of clear information, both for businesspeople and for public officials involved. Different officials often require different documentation and different fees, which are not transparently levied. The complexity and opacity of the regulatory environment, including in the area of trade, creates significant incentives for corruption of public officials and, more generally, hinders private business. To tackle these issues, authorities would need to develop communication channels to better disseminate information and receive feedback from the public.

B. Final Considerations

15. The exploration of natural resources must be guided by policies to guarantee sustainable natural resource management. Natural resources are essential for the livelihoods of local communities and a potential source of increased fiscal revenue. Guinea-Bissau's natural resource base is being rapidly depleted due to inappropriate activities,6 which adds to its vulnerability to climate change and natural disasters. Current fishing practices, for example, are unsustainable and threaten the long-term viability of its marine resources, which is evidenced by declining catches.7 The depletion of these resources, combined with rising dependency on cashew significantly harms the country's outlook.

16. It is essential to implement a natural resource tax regime that guarantees that the country is compensated with an adequate level of revenues. The fiscal regime should be structured to secure a reasonable minimum share of revenue from the start of the production and provide a fair and efficient sharing of the profits between the investor and the government over the life of the project, including adequate safeguards against profit-shifting. The quick implementation of a resource profits tax to the mining sector, for example, would reach these objectives and avoid the complex administrative and legislative process associated with the replacement of the current antiquated income tax system.

17. Output and export diversification are important components of Guinea-Bissau's development agenda. Options to diversify include developing the country's agricultural potential, exploring its natural resources, and promoting tourism. To create conditions to explore these opportunities, it is critical to address the constraints that have hindered the process to date, which include low human capital, weak regulatory environment, and infrastructural bottlenecks. The consolidation of political and macroeconomic stability will also help anchor business confidence, a necessary condition for increasing private investment.

References

  • Cadot, O., C. Carrere, and V. Strauss-Kahn (2011). “Export Diversification: What's Behind the Hump?Review of Economics and Statistics 93: 590-605.

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    • Export Citation
  • Henn, C., C. Papageorgiou, and N. Spatafora (2013). “Export Quality in Developing Countries.” IMF Working Paper 13/108, International Monetary Fund, Washington, DC.

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  • International Monetary Fund (IMF) (2017). “Economic Diversification in Sub-Saharan Africa”. Regional Economic Outlook: Sub-Saharan Africa. Chapter 3. October.

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  • República de Guiné-Bissau (2015). Guiné-Bissau 2025 Plano Estratégico e Operacional 2015-2020 “Terra Ranka” Documento II: Relatório Final.

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  • World Bank Group (2015). Guinea-Bissau: Country Economic Memorandum – Terra Ranca! A Fresh Start.

Annex VIII. Assessing Fiscal Stance and Economic Cycles in Guinea-Bissau1

This note assesses the fiscal stance by estimating the cyclically adjusted primary balance and analyzing its relationship with the output gap. While results have to be interpreted with caution due to data quality issues, preliminary findings suggest some degree of countercyclicality of fiscal policy since 2000. While the country has weak fiscal institutions, these results could be associated with: (i) an expansionary fiscal stance during crises that have afflicted Guinea-Bissau because it had access to financing from the WAEMU regional market, and (ii) the role of supporting counter-cyclical fiscal policies of IMF lending.

1. The objective of this note is to assess the fiscal stance in Guinea-Bissau by estimating the cyclically adjusted primary balance and its relationship with the output gap. Assessing fiscal stance based on the adjusted cyclical fiscal balances improves the government's capacity to manage budget policies effectively, coordinate macroeconomic policies to smooth economic cycles, and protect long-term fiscal sustainability. While prudent macroeconomic management would require countries to implement neutral to countercyclical fiscal policy, fiscal policies in low income and developing countries tends very often to intensify economic cycles . Procyclical policies occur when governments need to implement contractionary fiscal policy by cutting spending or raising taxes during crises to deal with financing constraints. Conversely, during upswings, when financial conditions ease, governments are more willing to increase spending financed by higher cyclical revenues, creating risks to the medium-term sustainability of public finance.

2. The study applied three methodologies to estimate the potential output and elaborated a sensitivity analysis of the revenue-to-GDP elasticity. The potential output was estimated by the linear trend, Hodrick-Prescott (HP) filter, and the production function methodologies (Figure 3).2 The production function output gap estimate is close to the HP filter results. The study adopted the HP filter due to its better comparability and simplicity.3 The sensitivity analysis of the revenue-to-GDP elasticity suggests the variability of the parameter does not significantly affect the results (Figure 4). This result is mainly explained by the low share of revenue to GDP. The study has used elasticity equal to one for the revenue-to-GDP, and zero for expenditure as it has not identified social programs (e.g., automatic stabilizers) that would be negatively correlated with the economic cycle.4

Figure 1.
Figure 1.

Guinea-Bissau: Output Gap 2000-2021

(in percent of potential GDP)

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A001

Figure 2.
Figure 2.

Guinea-Bissau: Revenue-to-GDP Elasticity Sensitivity on Fiscal Impulse 2000-2021

(in percent of GDP)

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A001

Figure 3.
Figure 3.

Guinea-Bissau: Output Gap, Change in Output Gap and Fiscal Impulse 2000-2021

(In percent of potential GDP)

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A001

Figure 4.
Figure 4.

Guinea-Bissau: Fiscal Impulse (y-axis) and Change in Output Gap (x-axis) 2000-2021

(in percent of potential GDP)

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A001

3. Preliminary findings suggest some degree of countercyclicality of the fiscal policy in Guinea-Bissau since 2000. While results have to be interpreted with caution due to weak economic and fiscal data quality for Guinea-Bissau5, the analysis of the fiscal impulse and the change in the output gap suggests a negative relationship.6 From 2000 to 2021, the data reveals the fiscal policy in Guinea-Bissau was countercyclical in 14 years, procyclical in 7 years and neutral in one year. The fiscal stance was estimated based on the cyclically adjusted domestic primary balance, and the output gap followed the (HP) filter methodology.7

Table 1.

Guinea-Bissau: Cyclically Adjusted Fiscal Balance

(In percent of GDP)

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

Includes grants

Comprises tax and non-tax revenues

Defined as the change in the cyclicaly adjusted primary domestic (positive means expansionary policies)