Guinea-Bissau: Staff Report for the 2022 Article IV Consultation and Third Review Under the Staff-Monitored Program—Debt Sustainability Analysis
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International Monetary Fund. African Dept.
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Publication Date:
27 Jun 2022
eISBN:
9798400213045
ISBN:
9798400213045
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English
Keywords:
debt sustainability prospect; baseline debt dynamics; burden indicator; increase debt vulnerability; debt recording; Debt sustainability; Contingent liabilities; Global
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GUINEA-BISSAU

Abstract

GUINEA-BISSAU

Title Page

GUINEA-BISSAU

STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION AND THIRD REVIEW UNDER THE STAFF-MONITORED PROGRAM—DEBT SUSTAINABILITY ANALYSIS

June 2, 2022

Approved By

Montfort Mlachila and Eugenio Cerutti (IMF) and Abebe Adugna and Marcello Estevão (IDA)

Prepared jointly by the Staffs of the International Monetary Fund and the International Development Association1

Guinea-Bissau: Joint Bank-Fund Staff Debt Sustainability Analysis

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Guinea-Bissau's risks of both external and overall debt distress remain high, in line with the July 2021 DSA.3 GDP growth accelerated in 2021 on the back of the gradual lifting of COVID containment measures and the record high cashew nut production, with positive spillover effects to the fiscal and external accounts. The macroeconomic outlook underpinning the DSA assumes a gradual economic recovery by 2024, after the effects of the war in Ukraine wane out. Sustained growth in the medium-term is supported by the rebound of international cashew markets, favorable terms of trade, a more stable socio-political environment, and the ongoing governance and structural reforms. The baseline assumes that the fiscal consolidation efforts will ensure convergence to the regional convergence criterion of 3 percent of GDP by 2025, which creates fiscal space for higher social spending and steady growth-enhancing public investment. The ratio of public debt to GDP increased in 2021 but it is projected to stabilize in 2022 and start declining in 2023 towards the WAEMU 70 percent of GDP debt ceiling by 2026. Risks include an adverse political scenario, limited capacity, weaker cashew nuts exports, spillovers from on-going international crisis, volatile global food and oil prices, and climate change-related natural disasters. Financial stress in state-owned enterprises and banking fragilities arising from high NPLs and undercapitalization of a systemically important bank could generate additional outflows adding to fiscal and public debt pressures.

The present value (PV) of public and publicly guaranteed (PPG) debt relative to GDP exhibits a prolonged and substantial breach of its indicative benchmark under the baseline. However, considering that (i) the country benefits from WAEMU currency union safeguards that provide for financial and technical support from the regional debt market institutions and larger regional members with strong debt carrying capacity; (ii) the PV of public debt shows a consistent downward trend from 2022 onwards under the baseline scenario, and (iii) the external DSA indicators are consistent with sustainability in the sense of a following a downward trend over the medium-term, public debt is assessed as sustainable on a forward-looking basis.

This conclusion is contingent on the authorities' continued commitment to an ambitious, yet feasible, fiscal adjustment aiming to bring the fiscal deficit within the 3 percent of GDP WAEMU convergence criterion by 2025. This fiscal adjustment was supported by the Fund's Staff Monitored Program (SMP) which is expected to underpin the authorities' request for an Extended Credit Facility (ECF), and help catalyze multilateral grants and concessional financing. The downward trend of the baseline debt indicators would further improve with full multilateral donor re-engagement and a reprofiling of debt obligations to highly concessional terms. The authorities are also following IMF/WB advice on improving debt management and dedicating efforts to resolve legacy external arrears.

Debt Coverage

1. The perimeter of public debt is limited to the central government, the central bank and government-guaranteed debt. Data limitations preclude the inclusion of state-owned enterprises (SOEs) (Text Table 1). In general, SOEs are not likely to represent a major contingent public liability. A notable exception is the electricity and water utility EAGB, which has non-publicly guaranteed debts estimated at 2.5 percent of GDP. The DSA includes only the utility's debts guaranteed by the government (additional 0.8 percent of GDP).4

Text Table 1.

Guinea-Bissau: Public Debt Coverage Under the Baseline Scenario

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2. Debt classification follows a hybrid approach after the reclassification of the debt to the West African Bank for Development (BOAD) as external.5 Differently from previous Guinea-Bissau's DSA, debt denominated in CFA francs to BOAD, amounting to 13.5 percent of GDP at end-2021, is classified as external whereas the remaining debt sources will continue to follow a currency-based classification.6 This reclassification will improve the coverage of debt limits in prospective UCT programs, under the IMF Debt Limits Policy and the IDA's Sustainable Development Finance Policy (SDFP) of the World Bank. Following this approach, debt issued in CFA francs in the regional market remains treated as domestic for the purpose of this DSA. The stock of such treasury securities (held by both local and regional banks) at end- 2021 was CFAF 193.3 billion, equivalent to 53.4 percent of domestic debt or 20.5 percent of GDP.

3. The authorities are seeking long-term technical assistance from international partners to improve their capacity for debt recording, monitoring and overall debt management. In the context of the implementation of three decrees approved in June 2021,7 the Directorate Generals of Treasury and Debt are holding weekly coordination meetings. Biannual meetings of the recently created National Committee of Public Debt will start in 2022. The World Bank is supporting EAGB on implementing a Management Improvement Plan and a financial restructuring plan. It is expected that both will yield by end-2022 a more accurate assessment of the utility's stock of debt upon which consider the extension of DSA debt coverage. The authorities' efforts to improve debt recording and data coverage expansion are supported by IMF TA8 and the FY22 PPAs under the IDA's SDFP.

Background

4. Guinea-Bissau's public debt rose to 78.5 percent of GDP in 2021. The ratio of public debt to GDP increased by an estimated 2 percentage point with respect to 2020. This increase was observed on the domestic debt side and is mostly explained by the resources of the special SDR allocation on-lent by the BCEAO which is treated as domestic debt. External debt remained broadly stable in 2021 as a large part of those on-lent resources was allocated to pre-pay non-concessional external debt to BOAD due in 2022, which offset the budget support from the IMF RCF and project financing from the World Bank. The main holders of Guinea-Bissau's external debt are BOAD and the World Bank. On the domestic side, government financing has relied on the regional treasury market (Text Table 2 and Debt Holder Profile Table in Annex 1). Part of the resources raised on the regional market allowed for the payment of domestic expenditure arrears accumulated in 2019-20, but recognized in 2021 (1.1 percent of GDP).9 The stock of debt also reflects the authorities' efforts to resolve legacy external arrears following IMF/WB advice. In the case of Angola, the debt stock at end-2020 was adjusted from US$32.9 million to US$49.1 million, an increase of 1 percent of GDP, after a rescheduling agreement was reached in July 2021.

Text Table 2.

Guinea-Bissau: Total Public Debt

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Sources: Guinea-Bissau’s authorities and IMF Staff estimates and projections. 1 Non-Paris Club: Angola, Exim Bank of India, Kuwait, Libya, Pakistan, Saudi Fund, Exim Bank of Taiwan Province of China. 2 Legacy Arrears are due to Brazil, Russia as well as Pakistan.

5. The special SDR allocation contributed to reduce financing costs and close the 2021 financing gap associated with the emergency response to the pandemic. In line with the WAEMU-wide agreement, the BCEAO on-lent the counterpart of the SDR allocation.10 Despite being treated as domestic debt, the DSA calculates the present value of the loan to incorporate its highly concessional nature, which reduces its initial impact on the DSA's assessment of the overall risk of debt distress.11 The concessional terms of the on-lending operation provided an alternative to more costly financing such as contracting non-concessional debt and issuing Treasury bills in the WAEMU regional market. The authorities used most of those resources to pre-pay non-concessional debt to BOAD, due at end-2021 and in 2022.12 The remaining amount added to the January 2021 RCF to finance the emergency response to the pandemic.

6. Non-concessional domestic borrowing slightly decreased in 2021 after the significant increase observed in 2020 to finance the response to the pandemic (Text Table 2). Excluding the SDR allocation, which was on-lent in concessional terms, central government domestic debt amounted to 36.1 percent of GDP at end-2021, unchanged from the level at end-2020. The largest source of net borrowing was Treasury securities, the stock of which rose by 4.5 percentage points of GDP, with the bulk purchased by commercial banks from elsewhere in the WAEMU region.

uA001annex10fig01

Public Debt Stock

(Percent of GDP)

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A003

Sources: Guinea-Bissau authorities and IMF staff calculations.

7. External borrowing remained broadly stable with an increase in concessional sources compensated by the pre-payment of non-concessional debt to BOAD. Debt to BOAD decreased by 2.9 percentage points of GDP in 2021 whereas more concessional external borrowing increased by 2.6 percentage points, helping preserve investment. Since 2017, the World Bank has been the main source of concessional financing, promoting large regional telecommunications and energy projects as well as national projects to support rural transportation.13 Altogether, multilaterals held 80 percent of Guinea-Bissau's external debt at end-2021. The remaining external debt was bilateral, mainly to non-Paris Club creditors, including legacy arrears that the authorities have been actively seeking to resolve. In July 2021, an agreement was reached with Angola, the main creditor in this context, bringing the stock of legacy arrears to 0.4 percent of GDP at end-2021, from 3.5 percent in the previous year.14

uA001annex10fig02

CG Domestic Debt, 2021

(Staff Estimate, Percent of Total)

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A003

Sources: Guinea-Bissau authorities and IMF staff calculations.
uA001annex10fig03

CG External Debt, 2021

(Staff Estimate, Percent of Total)

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A003

Sources: Guinea-Bissau authorities and IMF staff calculations.

8. Debt service has significantly increased in 2021 due to the pre-payment of debt to BOAD and payment of domestic arrears. The ratio of debt service to revenue excluding grants increased from 78.7 percent in 2020 to 101 percent in 2021, of which 9.7 percent of revenues corresponds to the debt service to BOAD originally due in 2022. Additionally, payment of domestic arrears accumulated in 2019-20 represented 8.3 percent of revenues (4.2 percentage points above the corresponding amount in 2021). The Catastrophe Containment and Relief Trust (CCRT) grant helped alleviate the debt service burden, amounting to 1.3 percent of revenues.15 The authorities requested by end-2020 and again in 2021 to join the Debt Service Suspension Initiative (DSSI). Even without any debt suspension, debt sustainability prospects are expected to be enhanced through the commitment to limit non-concessional borrowing to levels agreed under IMF programs and the World Bank's SDFP and to disclose all public sector financial commitments involving debt.16

Baseline Scenario

9. Compared to the last DSA (July 2021) the macroeconomic assumptions underlying the projections have been adjusted to reflect domestic developments and the impact of the Ukraine conflict. The main changes include an upward revision on GDP growth in 2020 and 2021, due to a significant increase in cashew nut production—Guinea-Bissau's main export product, reaching record high levels, with positive spillover effects on the fiscal and external accounts (Text Table 3). Long-run macroeconomic assumptions reflect a lower potential growth based on recent estimations. The main macroeconomic assumptions are as follows:

Text Table 3.

Guinea-Bissau: Key Macroeconomic Projections

(percent of GDP, unless otherwise indicated)

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Source: Bissau-Guinean authorities and staff estimates.

Covers the period 2028-42 for current DSA, and 2027-41 for the previous DSA (CR 21/172 of July 19, 2021).

Adjusted based on the reclassification of BOAD as external debt.

  • Real GDP growth. After a modest GDP growth of 1.5 percent in 2020, growth is estimated to have accelerated to 5 percent in 2021 on the back of record high cashew nut production, public investment in critical externally financed infrastructure, the gradual lifting of COVID containment measures, and an improvement in business confidence associated with a more stable political situation. Growth is projected to decelerate to 3¾ percent in 2022, due to the effects of the conflict in Ukraine, mainly transmitted through higher energy prices, and then gradually accelerate to 5 percent by 2024 supported by higher cashew nut export prices and volumes driven by a recovery in global trade, and a more stable political situation,17 with structural reforms and stronger business environment expected to support private investment growth. In the long term, growth converges to the potential rate of 4 percent.18

  • Inflation. Average price inflation reached 3.3 percent in 2021 reflecting pressures on prices of imported goods, especially food and oil. In 2022, average inflation is expected accelerate and remain above the 3 percent convergence WAEMU criteria until 2023, reflecting persistent inflationary pressures due to supply chain disruptions and impact of the security crisis in Europe.

  • Fiscal deficit. The overall deficit (commitment basis) of the central government is projected at 4.4 percent in 2022, 1.3 percentage points lower than 2021, and is expected to converge to 3 percent of GDP by 2025, the WAEMU regional target. Amid rising global food and energy prices due to the war in Ukraine, the authorities have implemented temporary measures to ease cost-of-living pressures for the population, estimated at 0.3 percent of GDP.19 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)20 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. Measures to enhance revenue mobilization and public financial management (PFM) and expenditure control would underpin a growth-friendly and quality fiscal consolidation. Staff estimates that strengthening revenue mobilization and enhancing PFM and expenditure control (e.g., wage bill control, enhancing SOEs supervision, reducing non-essential transfers) would create at least 5 percentage points of GDP in fiscal space over the medium term.

    • ∘ Revenues. Tax revenues increased by 2.2 percentage points of GDP in 2021 compared to 2020, and are expected to further increase around 1.4 percentage points by 2025. 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. Progress since the beginning of 2022 includes: simplification and transparency of tax system with the promulgation of a tax package in April 2022 (including the revised tax code and tax penalty regime, the customs code and a new VAT law); and full implementation of the Kontaktu system for electronic filing of tax returns in 2022. Additional actions are planned for the short-term, including: strengthening the collection of the new telecom tax; modernization of the Stamp Duties and the General Exemption Regime; and implementation of VAT. For the medium-term, the authorities have requested support to undertake a repeal and replace income tax reform that would enhance compliance, lower administrative costs and reduce the negative impact of the tax system on economic growth.

    • ∘ Expenditures. Domestic primary expenditures declined by 1.2 percentage points of GDP in 2021 compared to 2020, and are expected to further declined around 1.4 percentage points of GDP by 2025, of which 1 percentage point comes from 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;21 (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,22 as well as strengthening the wage bill policy with IMF TA support;23; (iii) strengthening the fiscal oversight of SOEs and mitigating fiscal risk;24 and (iv) improving public investment management.25

  • Safeguarding social and priority spending and public investment. 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. 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. Domestically financed investment spending is projected to increase by 1.6 percentage points of GDP by 2027, compared to 2021.

  • Fiscal governance and transparency. The authorities have made significant progress on governance reforms, meeting all the SMP's targets on governance and transparency reforms. These reforms have contributed to enhance domestic revenue and expenditure management, supporting fiscal consolidation over the medium term. In the first quarter of 2022, the Council of Ministers adopted a decree amending the legal procurement framework to allow for the collection and publication of beneficial ownership information of all entities awarded public contracts. Moreover, the adoption of the new asset declaration regime by the Parliament, and additional resources to the Audit Court, the Financial Intelligence Unit and the public procurement authority should play a significant role in enhancing fiscal governance.

  • Current account deficit. The non-interest current account deficit is estimated to have remained broadly stable in 2021 and is projected to widen to 5.8 percent of GDP, mostly reflecting higher import prices and lower private transfers. Improvements in the trade balance will contribute to the convergence to around 3 percent of GDP by 2025.

10. Public debt to GDP is expected to decline in 2022 with lower net domestic and external borrowing. The stock of domestic debt is projected to drop by 0.3 percentage points of GDP. The authorities will continue to seek financing through treasury bill issuances. As a result, the stock of securities (held by local and regional commercial banks) is projected to further grow by 3.6 percentage points of GDP. On the other hand, the stock of other domestic debt sources is expected to fall in 2022. Debt to the regional central bank (BCEAO), loans from local commercial banks and domestic payment arrears are projected to jointly drop by 3.8 percentage points of GDP. The stock of external debt is projected to stabilize.

Text Table 4.

Guinea-Bissau: 2022 Borrowing Plan

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Source: Guinea-Bissau authorities and IMF staff estimates.

Contracting and guaranteeing of new debt excluding IMF. The present value of debt is calculated using the terms of individual loans and applying the 5 percent program discount rate.

Debt with a grant element of at least 35 percent.

11. The DSA assumes that authorities will implement a prudent borrowing strategy and medium-term investment-related borrowing is projected to prioritize concessional financing. Given the large pipeline of contracted yet undisbursed investment project loans, bringing down public debt would require downsizing some projects. Contracting of new loans is expected to be constrained during this period. Gross annual project disbursements from loans and grants are assumed to finance 80 percent of capital expenditure, which is expected to average 7.5 percent of GDP in the next five years, given the low absorption capacity. In the medium term, in line with the government's policy to prioritize low-cost funding, project financing is expected to be provided mainly by multilateral external creditors on grant or concessional terms. Borrowing from BOAD, which is almost entirely non-concessional, is projected to decline significantly. The baseline assumes strengthened investment planning and execution to ensure value for money and better alignment with the budget process. Non-investment related financing needs are assumed to be filled in the medium term mostly by Treasury securities with longer maturities, with interest rates projected at 5.8 percent for 3-year bond and 6.3 percent for 5-years bond, in line with the trend of improving financing conditions shown by auction results since 2017. The authorities expect to cover a projected financing gap of around 0.7 percent of GDP in 2022-24 by mobilizing highly concessional loans catalyzed by fiscal discipline and a strong track record of policy implementation under the SMP.

12. The macroeconomic scenario is broadly realistic. The non-interest current account deficit in 2022-27 is projected to contribute to external debt accumulation, in line with the past five years dynamics. This driver of debt is expected to be offset by sustained growth, increased reliance on already committed grants (captured in the residual)26 and more favorable price developments (Figure 3).27 It is assumed that multilateral donors will prioritize grants disbursements considering the structural fragility of the country, its large development needs, and limited access to alternative sources as well as progress in fiscal consolidation and governance. The dynamics of total public debt are dominated by developments of the primary fiscal balance and real GDP growth. Both factors are expected to have a greater debt-containment effect than in the past, due to increased authorities' commitment to fiscal and governance reforms, as well as a stable political environment more conductive to growth. The projected 3-year adjustment in the primary deficit is marginally larger than the 25th percentile observed in historical data from LICs with Fund-supported programs (Figure 4), which is consistent with the authorities' commitment with continued fiscal consolidation during the expected transition from the SMP to a financial program. Actual fiscal results are however highly volatile in Guinea-Bissau.28 The deceleration of real GDP growth in 2022 is consistent with fiscal multipliers (Figure 4). The recovery projected for 2023, in turn, is in line with a small fiscal multiplier as presumed by a high import content of government spending and evidenced by essentially zero correlation between real GDP growth and changes in the fiscal primary balance since 2010.29

Country Classification and Determination of Stress Test Scenarios

13. Guinea-Bissau is assessed to have weak debt carrying capacity, unchanged from the July 2021 DSA. The Composite Indicator (CI) score for Guinea-Bissau is 2.66, based on data on macroeconomic indicators from the April 2022 WEO and from the 2020 Country Policy and Institutional Assessment (CPIA) of the World Bank (Text Table 5).

Text Table 5.

Guinea-Bissau: Debt Carrying Capacity and Thresholds

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Source: IMF staff estimates.

14. The magnitude of the combined contingent liability shock has been increased (Text Table 6). This DSA runs a stress test with a contingent liability shock of 11.5 percent of GDP.30 The shock reflects the potential fiscal costs of operational losses of the electricity utility (EAGB), contingent liabilities linked with increased public guarantees and the possibility of the domestic arrears being larger than what is already included in the debt stock (1.4 percent of GDP at end-2021). The shock also captures the potential liabilities related to the possible recapitalization needs of a large bank that does not meet the WAEMU's minimum capital requirements.31 The current estimate builds on audits that still need to be validated by the authorities. The authorities requested support from the World Bank to finalize those audits.

Text Table 6.

Guinea-Bissau: Combined Contingent Liabilities Shock

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The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country's public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE's debt not guaranteed by the government is assessed to be negligible, a country team may reduce this to 0%.

15. A tailored adverse commodity price stress test was designed to reflect Guinea-Bissau's vulnerability to cashew price fluctuations. In line with the July 2021 DSA, it shows the debt sustainability prospects after a hypothetical 15 percent fall in cashew export prices in the first year of projection (Figure 1). Following a significant terms-of-trade shock in 2018-19, cashew nut prices fell by an additional 9 percent amid the global slowdown in 2020. The shock reverts the price recovery observed in 2021.

Figure 1.
Figure 1.

Guinea-Bissau: Indicators of Public and Publicly Guaranteed External Debt Under Alternatives Scenarios, 2022–32

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2032. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.

External DSA

16. Guinea-Bissau's risk of external debt distress remains high, in line with the July 2021 DSA. With the reclassification of BOAD debt as external, the share of external debt reaches 40.1 percent of GDP at end-2021. The external debt indicators based on PV ratios remain below the relevant indicative thresholds throughout the projection period (2022–42) under the baseline scenario (except for one breach of the PV of debt-to-exports ratio in 2022). However, the indicators based on the debt-service ratios breach their indicative thresholds under the baseline, which imply a mechanical 'high' rating (Figure 1 and Table 3).32

17. The four external debt burden indicators breach their threshold under the sensitivity analysis. For the PV debt-to-GDP ratio, the most extreme shock is a combination shock. For the two export-related indicators, the most extreme shock is a shock to exports, but sustained breaches also occur for the combination shock (Table 3). Overall, these results point to potential vulnerabilities under adverse conditions, including a slower global recovery that would hit Guinea-Bissau's main export markets. A key difference between the baseline and the historical scenario is that the baseline scenario reflects fiscal consolidation and governance reforms implemented in the context of the SMP and a successful reengagement with international donors.

Overall Risk of Public Debt Distress

18. Guinea-Bissau's overall risk of debt distress is assessed as high. The PV of total public debt-to-GDP ratio is above its indicative benchmark (35 percent) through 2042, a substantial and prolonged breach (Table 4 and Figure 2). Moreover, the medium-term increase in debt service up to 76 percent of revenues and grants in 2028 from 67 percent in 2021 despite the projected increase in revenues calls for efforts, as intended by the authorities, to seek debt reprofiling and take advantage of lower interest rates for new borrowing whenever market conditions allow.

Figure 2.
Figure 2.

Guinea-Bissau: Indicators of Public Debt Under Alternative Scenarios, 2022–32

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A003

* Note: The public DSA allows for domestic financing to cover the additional financing needs generated by the shocks under the stress tests in the public DSA. Default terms of marginal debt are based on baseline 10-year projections.Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2032. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.

19. Public debt sustainability is vulnerable to a commodity price shock. For this shock, the PV of debt-to-GDP ratio reaches 80 percent in 2031 and keeps rising, and the debt service-to-revenue ratio reaches 105 percent in 2028 before stabilizing at around 90 percent. The vulnerability to commodity price shocks follows from the very high concentration of the export base in unprocessed cashew nuts.

Risk Rating and Vulnerabilities

20. Public debt is considered sustainable on a forward-looking sense based on expected strong macroeconomic policies which will boost growth and ensure sound fiscal policy, facilitated by Guinea Bissau's membership of the currency union. The country's external debt burden indicators are consistent with sustainability in the sense of a following a downward trend over the medium-term, but the PV of total public debt-to-GDP shows large and prolonged breaches of its indicative benchmark. Nonetheless, the country benefits from financial and technical support from the regional institutions and debt markets and larger regional currency union members with stronger debt carrying capacity.33 The supportive WAEMU context bolsters the country's capacity to carry domestic/regional debt beyond what is captured by the standard composite indicator. Taking this into consideration underpins the conclusion that Guinea-Bissau's public debt is sustainable on a forward-looking basis contingent on the authorities' commitments in the context of an engagement with the Fund and other development partners, together with the assumption (see below) that policies are in place that would put debt on a robust downward trajectory.34

21. Under staff's baseline scenario, Guinea-Bissau's public debt is brought back to a sustainable path, with overall public debt falling to 70 percent of GDP, the regional convergence criteria, by 2026. If the policy agenda is successfully executed, and barring a more protracted pandemic and/or longer war in Ukraine, total public debt would decline steadily from 78.5 percent of GDP estimated at end-2021 to 68.8 percent of GDP by 2026.

22. Achieving the baseline projection will require significant policy actions underpinned by a Fund-supported program and strong multilateral donor engagement. Key policy actions include (i) continued fiscal consolidation efforts including revenue enhancement measures, containing current spending below nominal GDP growth, and strong implementation of growth-enhancing reforms; (ii) prudent borrowing policies, including avoidance of non-concessional project financing, in line with the DSSI commitments; (iii) enhanced debt management, with more rigorous compilation and monitoring of debt, upgraded procedures and publication of regular debt reports to improve transparency and (iv) improved management of the existing loan pipeline and application of recognized assessment procedures to ensure criticality of investment projects. The baseline debt dynamics could further improve with full donor re-engagement leading to (i) a significant scaling up of grants by multilateral institutions; and (ii) a reprofiling of selected debt obligations to extend maturities and reduce interest rates.

23. The authorities have undertaken measures to improve debt management. The Council of Ministers in July 2021 approved decrees related to the creation of a National Committee of Debt Policy and the organization and functioning of the Debt Directorate. The authorities use the Debt Management and Financial Analysis system (DMFAS) to record external debt and seek to start incorporating domestic debt into the system. The first annual debt bulletin was published in 2021, followed by an improved version in 2022, which will partially cover debt held by SOEs. Additionally, the World Bank implemented a Debt Management Performance Assessment (DEMPA) in 2022 that identified needed reforms to further strengthen debt management. Guinea-Bissau continues receiving technical assistance from the IMF and the WB to improve debt reporting to the International Debt Statistics (IDS) and the Quarterly External Debt Statistics (QEDS). STA technical assistance planned for 2022-23 aims at expanding data coverage and improving public data debt according to international guidance.

24. There are significant downside risks to the baseline scenario. Strong and sustained political commitment is needed to deliver the envisaged medium-term fiscal adjustment embedded in the DSA. The debt outlook remains highly vulnerable to a weaker economic recovery, adverse terms-of-trade and export shocks as well as the materialization of contingent liabilities (as coverage of public debt is limited) and a relapse into socio-political turmoil. If realized, all these downside risks could lead to higher external and public debt burden indicators and increased risk of accumulation of arrears. It is also contingent on limited impact of the pandemic with its effects mitigated by a relatively high vaccination rate. Risks also arise from volatile global food and oil prices, including the effects of a protracted political security crisis in Europe, and climate change-related natural disasters. Financial stress in state-owned enterprises and banking fragilities could generate contingent liabilities adding to fiscal pressures. If these risks materialize, social tensions could increase, triggering political instability that may constrain the fiscal adjustment and increase debt vulnerabilities.

Authorities' Views

25. The authorities broadly concur with staff's views on debt sustainability and the recommendations. They agree that debt sustainability depends crucially on sound macroeconomic policies including a strong and sustained fiscal consolidation. They emphasized (i) their commitment to a sustained fiscal consolidation path and to limit non-concessional borrowing and (ii) that the pace of public investment would be determined by careful consideration of the project's critical contribution to growth, and alignment with the budget process, with improved coordination among the different agencies involved through the Debt Committee. The authorities recognize the risks to the debt outlook and expect that the satisfactory performance during the Staff-Monitored Program (SMP) has paved the way to the authorities' request for an arrangement under the Extended Credit Facility (ECF). Finally, based on a WAEMU position, the authorities support a classification of BOAD debt on currency basis.

Figure 3.
Figure 3.

Guinea-Bissau: Drivers of Debt Dynamics - Baseline Scenario

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A003

1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LIC DSAs were produced.3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.4/ Difference between current and previous DSA due to the reclassification of debt to BOAD as external.
Figure 4.
Figure 4.

Guinea-Bissau: Realism tools

Citation: IMF Staff Country Reports 2022, 196; 10.5089/9798400213045.002.A003

Table 1.

Guinea-Bissau: External Debt Sustainability Framework, Baseline Scenario, 2019–42

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections. 1/ Public sector external debt only. With respect to DSA 2018, coverage expanded to include legacy arrears. 2/ Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms. 3/ Includes exceptional financing (i.e., changes in arrears and debt relief, including IMF CCRT 2020-2022); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes. The residual is also affected by grants and the financing from treasury securities in the regional market, which are considered domestic debt in the DSA. 4/ Current-year interest payments divided by previous period debt stock. 5/ Defined as grants, concessional loans, and debt relief. 6/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt). 7/ Assumes that PV of private sector debt is equivalent to its face value. 8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 2.

Guinea-Bissau: Public Sector Debt Sustainability Framework, Baseline Scenario, 2019–42

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Coverage of debt: The central government, central bank, government-guaranteed debt . Definition of external debt is Currency-based. Includes external legacy arrears.

The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections.

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

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows.

Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.

Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.

Table 3.

Guinea-Bissau: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2022–32

(In percent)

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

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

Includes official and private transfers and FDI.

Table 4.

Guinea-Bissau: Sensitivity Analysis for Key Indicators of Public Debt, 2022–32

(In percent)

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the benchmark.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.

Annex I. Debt Holder Profile Table

Guinea-Bissau: Decomposition of Public Debt and Debt Service by Creditor, 2021-231

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As reported by Country authorities according to their classification of creditors, including by official and commercial. Debt coverage is the same as the DSA.

"Multilateral creditors" are simply institutions with more than one official shareholder and may not necessarily align with creditor classification under other IMF policies (e.g. Lending Into Arrears).

Including public guarantees.

Debt is collateralized when the creditor has rights over an asset or revenue stream that would allow it, if the borrower defaults on its payment obligations, to rely on the asset or revenue stream to secure repayment of the debt. Collateralization entails a borrower granting liens over specific existing assets or future receivables to a lender as security against repayment of the loan. Collateral is “unrelated” when it has no relationship to a project financed by the loan. An example would be borrowing to finance the budget deficit, collateralized by oil revenue receipts. See the joint IMF-World Bank note for the G20 “Collateralized Transactions: Key Considerations for Public Lenders and Borrowers” for a discussion of issues raised by collateral.

Calculated based on the amounts in CFA francs.
1

The previous DSA was dated July 19, 2021 (IMF Country Report No. 21/172) and accompanied the Guinea-Bissau's Nine-Month Staff-Monitored Program (SMP) request.

2

Guinea-Bissau's debt-carrying capacity is classified as weak based on the Composite Indicator (CI) score of 2.66, calculated based on the April 2022 WEO and the 2020 World Bank Country Policy and Institutional Assessment (CPIA).

3

Differently from the July 2021 DSA, the high risk of debt distress for both external and overall public debt is now solely based on the mechanical rating.

4

The government guaranteed loans to EAGB of CFAF 5.8 billion (8 years) in 2020 and CFAF 1.6 billion (5 years) in 2021 as part of debt service restructuring agreements with local commercial banks. EAGB has been strictly complying with the debt amortization schedule.

5

The reclassification of BOAD as external explains the shift of external debt with respect to the previous DSA in Figure 3.

6

Debt in CFAF to BOAD has also been treated as domestic debt for Benin, Cote d'Ivoire, Senegal and Togo. For those countries, the classification of the BOAD debt will be revised in line with the LIC DSF guidance in the context of upcoming Article IV or new program discussions. It was already treated as external debt for Burkina Faso, Mali and Niger. Regarding the regional treasury securities, data constraints on WAEMU's secondary market trading make a full residency-based coverage challenging.

7

In June 2021 the Council of Ministers approved decrees related to: (i) the creation of a National Committee of Debt Policy; (ii) the organization and functioning of the Direção Geral da Dívida Publica; and (iii) the issuance of debt and debt management.

8

IMF STA has planned two technical assistance missions during 2022–23.

9

Starting in 2023 and in consultation with IMF staff, the authorities plan to securitize a remaining amount of CFAF 12.6 billion of historical domestic arrears that were already audited and recognized. They also requested World Bank support to audit the remaining stock of domestic arrears.

10

The end-August SDR 27.2 million allocation was transferred by the BCEAO, as a currency repo operation of CFAF 21.6 billion (2.4 percent of GDP) with 20-year maturity and a single bullet payment at end-period. With an interest rate fixed at 0.05 percent, this operation is equivalent to a loan with a grant element of 62 percent. At maturity, this operation could be renewed for 20-years at an interest rate linked to SDR interest rate. See Annex IV in CR 21/252 for additional explanations.

11

In general, domestic debt is treated in nominal terms in the DSA.

12

Out of the total amount, CFAF 14.8 billion (69 percent) was used to pre-pay BOAD principal due in September 2021–December 2022, and CFAF 2 billion (9 percent) to pre-pay BOAD interest due in the same period. The remaining amount, CFAF 4.8 billion (22 percent), was used to finance COVID-related expenditures.

13

World Bank national operations also include projects to support food security, improve health service delivery, enhance the quality of education, and boost social safety nets. These operations are all in grants, given Guinea-Bissau's classification as IDA-only country at high risk of debt distress (red light country).

14

Guinea-Bissau has external arrears, totaling US$5.7 million at end-2021, to Brazil, Russia, and Pakistan for longstanding debts that were not covered in the HIPC process and that are eligible for debt relief. In 2017, Guinea-Bissau secured extensive debt relief on arrears of US$43.2 million to Taiwan Province of China. In 2018, a debt rescheduling agreement was reached with Libya for arrears of US$6.9 million with limited net debt relief. In 2021, a debt rescheduling agreement was reached with Angola for arrears of US$49.2 million with limited net debt relief. Negotiations with Brazil resumed in 2022 (US$1.9 million) after the agreement reached in 2017 was never signed. A settlement was negotiated with Russia in 2018 (US$1.5 million) but the agreement is still pending signature. Negotiations with Pakistan (US$2.2 million) have been protracted. This DSA includes some conservative repayment assumptions that will be revised once rescheduling agreements are reached.

15

A new rescheduling agreement is expected to be signed with Libya in 2022, to cover the remaining US$4.9 million from the 2018 agreement, which was paid until June 2021.

16

Regarding the DSSI, the authorities declined to suspend the small debt service involved (0.7 percent of revenues) and some creditors did not respond.

17

There was a failed attempted coup in February 2022. While investigations are being conducted to establish responsibilities, there were no further consequences for the political situation as the cabinet members remain in office and the electoral agenda remains in place.

18

Potential growth is estimated at around 4-4.5 percent based on standard techniques used by the IMF and the World Bank including among others the HP filter and the production function. In addition, empirical analyses (see “The Costs of Fragility in Guinea-Bissau: Chronic Political Instability” da Silva Filho, 2015, IMF SM/15/160 and “Corruption, economic growth, and income inequality in Africa", Gyimah-Brempong Journal of Economics of Governance 3(3):183-209, 2002) find that political stability, and sustained structural and governance reforms could temporarily yield an additional 3/4-1 percentage point in annual potential growth conditional on Guinea-Bissau reaching the average level of SSA countries in terms of the corruption index.

19

Fiscal measures to ease cost-of-living pressures in 2022 include: (i) tax expenditures by capping prices on fuel and essential products (i.e., rice, flour and sugar) at 0.2 percent of GDP; and enhancing social protection with transfers to households 0.1 percent of GDP.

20

The domestic primary balance is calculated by removing grants and foreign financed capital spending from the primary balance.

21

Continuous IMF TA has been provided in these areas. The Ministry of Finance created a unit within the Directorate General of Treasury to implement the cash management function using the IMF cash management tool.

22

Moreover, despite additional efforts to contain expenditures, the government remains committed to safeguard spending in priority sectors, and not using irregular and improperly documented expenditure (DNTs).

23

The authorities requested IMF TA to inform wage bill control policies.

24

IMF TA on enhancement of SOE supervision will be launched in June 2022.

25

Supported by IMF TA, this will strengthen the institutional processes for vetting investment projects (cost-benefit analysis) and laying the foundations for a medium-term expenditure framework.

26

The residual is also affected by the financing from treasury securities in the regional market, which are considered domestic debt in the DSA.

27

Compared to the July 2021 DSA, the trajectory of gross nominal PPG external debt is higher due to reclassification of debt to BOAD as external debt.

28

Past debt forecast errors are mostly explained by unexpected changes in the primary deficit driven by aleatory cashew campaigns, the impact of political instability on reform implementation and large investments. The country structural fragility accounts for the large difference in unexpected debt changes with respect to other low-income countries (LICs).

29

There is a risk of a more significant impact of the fiscal adjustment on growth, despite reduced impacts in the past, considering that most of the prospective fiscal adjustment is on the revenue side, while the fixed exchange rate would typically imply higher multipliers.

30

Breakdown: EAGB debt (2.5 percent), domestic arrears (2 percent) and bank recapitalization (2 percent).

31

There is high uncertainty around the estimates of the potential liabilities associated with the bank due to critical inadequacies in the availability of information needed to gauge the bank's true financial condition, including its portfolio composition, sectoral asset quality, profitability drivers, and viability.

32

In line with the July 2021 DSA, alternative scenarios include a tailored export shock in which the nominal export growth is set to its historical average (5.5 percent) minus 0.5 standard deviation (SD), instead of 1 SD (default parameter, which amounts to 28 percent in Guinea-Bissau). This scenario results in an annual drop of 8.6 percent in exports both in 2023 and 2024 (as opposed to 5.8 percent average export growth in the baseline).

33

WAEMU currency union regional institutions manage both the debt issued by Guinea-Bissau in the regional sovereign treasury securities market (UMOA-Titres) as well as the debt held by the central bank (BCEAO). These two components account for 93 percent of Guinea-Bissau's domestic debt at end-2021. Moreover, Guinea-Bissau's borrowing through WAEMU sovereign securities market is expected to account for an insignificant share of available regional financing to the 8 countries in this currency union.

34

The downward trajectory of debt is robust to an alternative scenario with growth converging to 4 percent.

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Cover IMF Staff Country Reports
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
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2022: Issue 196
Publisher:
International Monetary Fund
ISBN:
9798400213045
ISSN:
1934-7685
Pages:
135
DOI:
https://doi.org/10.5089/9798400213045.002

Public Debt Stock

(Percent of GDP)

CG Domestic Debt, 2021

(Staff Estimate, Percent of Total)

CG External Debt, 2021

(Staff Estimate, Percent of Total)
Figure 1.

Guinea-Bissau: Indicators of Public and Publicly Guaranteed External Debt Under Alternatives Scenarios, 2022–32
Figure 2.

Guinea-Bissau: Indicators of Public Debt Under Alternative Scenarios, 2022–32
Figure 3.

Guinea-Bissau: Drivers of Debt Dynamics - Baseline Scenario
Figure 4.

Guinea-Bissau: Realism tools