Abstract
Our Bissau-Guinean authorities would like to express their appreciation to the IMF's Executive Board, Management, and Staff for the constructive engagement and continued support. The policy dialogue has helped design sound fiscal and debt management policies–notably to provide additional fiscal space to address priority and development needs–and address institutional capacity challenges. The engagement has critical for Guinea-Bissau to weather the impact of the pandemic and alleviate debt vulnerabilities. The authorities remain committed to consolidating the recent progress achieved under the Staff-Monitored Program (SMP) and welcome the comprehensive assessment of the country's economy during the Article IV consultations. They broadly concur with the main policy recommendations, which are rightly focused on maintaining long-term fiscal sustainability, enhancing state capacity, fostering financial intermediation, and promoting economic diversification.
Introduction
Our Bissau-Guinean authorities would like to express their appreciation to the IMF's Executive Board, Management, and Staff for the constructive engagement and continued support. The policy dialogue has helped design sound fiscal and debt management policies–notably to provide additional fiscal space to address priority and development needs–and address institutional capacity challenges. The engagement has critical for Guinea-Bissau to weather the impact of the pandemic and alleviate debt vulnerabilities. The authorities remain committed to consolidating the recent progress achieved under the Staff-Monitored Program (SMP) and welcome the comprehensive assessment of the country's economy during the Article IV consultations. They broadly concur with the main policy recommendations, which are rightly focused on maintaining long-term fiscal sustainability, enhancing state capacity, fostering financial intermediation, and promoting economic diversification.
Recent Economic Developments, Performance Under the SMP Arrangement, and Outlook
Recent Developments
Since 2021, the authorities have embarked on a bold fiscal consolidation and reform agenda under the SMP. During this program, they have managed to preserve macroeconomic stability while weathering the impact of the pandemic. As a result, many indicators suggest that economic recovery has taken hold since 2021. Cashew production and exports have seen record performance, business confidence has improved with a more favorable political environment, public investment in infrastructure has increased, and containment measures have been gradually lifted. These, coupled with a successful vaccination campaign, have led to an estimated growth rate of 5 percent for 2021 compared to 1.5 percent in 2020. Inflation is expected to have increased to about 3.3 percent, mainly on the back of the global rise in food and fuel prices.
The strong economic recovery and the authorities' efforts in revenue mobilization and spending restraint caused the overall fiscal deficit on a commitment basis to drop significantly to 5.7 percent of GDP in 2021 against 9.6 percent in 2020. External support and grants increased substantially, thanks to the disbursement under the Rapid Credit Facility (RCF), debt service relief under the Catastrophe Containment and Relief Trust (CCRT), the SDR allocation, and support from multilateral and bilateral partners moved by the SMP. Regarding the external sector, the current account deficit is projected to have increased to about 3.2 percent of GDP, notwithstanding record cashew nut exports and remittances.
Public sector debt rose slightly (by 2 percent of GDP) at the end-2021, mainly due to the increase in domestic debt associated with the SDR allocation on-lent by the central bank BCEAO. In contrast, the external debt was stable given the authorities' commendable move of pre-paying with SDR resources the debt due in 2022 to the regional development bank, BOAD. Public debt is expected to take a downward path from 2022 onwards and drop below the WAEMU ceiling criterion of 70 percent of GDP by 2026.
Against the backdrop of the accommodative stance of the BCEAO, the banking system has enjoyed comfortable liquidity and capital levels in line with the regional prudential criteria, except for one undercapitalized bank. On the lending activity, bank credit increased by 7 percent while non-performing loans (NPLs)—while still elevated—declined in 2021and are better provisioned.
Performance under the SMP
Progress under the SMP program was broadly satisfactory despite a challenging external and domestic environment. Most of the quantitative indicators for 2021 were largely met apart from the zero ceilings on new domestic arrears and new external arrears. Both were missed at the end of 2021. The latter was not observed due to technical problems and correspondent banking constraints, which were later addressed.
Regarding structural measures, the authorities consider having met all benchmarks, whereas one, the report with an exit strategy from the undercapitalized systemic bank. The authorities vehemently disagree with staff's status and emphasize that a comprehensive exit strategy plan was produced and sent to staff in a timely manner before December. The fact that staff would have wanted some additional information in the exit strategy plan report during the mission in April does not mean it was not submitted on time.
Other structural benchmarks met include key institutional, legal, and operational measures in the area of public financial management, including the amendment of the legal procurement framework for the collection and publication of beneficial ownership information of public procurement contracts, and the issuance of an executive order to stop the hiring of irregular employees, strengthen the role of the financial controller, and rationalize payroll bill. On revenue mobilization measures, the authorities have submitted to the Parliament a revised general tax code and tax penalty regime, and a new VAT bill, and fully implemented the Kontaktu system for tax returns filling and electronic payments.
Outlook and Risks
Looking forward, the authorities share the view that the economic outlook foreseen over the near and medium-term remains positive, with a moderate and sustained growth of 3.75 percent and 5 percent, respectively. This outlook is predicated on continued positive developments in the cashew sector, structural reforms, improved business environment, and greater access to financing. Nonetheless, the authorities are mindful of downside risks, notably stemming from prolonged pandemic and high food and energy prices. They reiterate their strong commitment and urgency to leverage the country's economic potential by stepping up their economic diversification efforts to reduce reliance on cashew.
Policies and Reforms for 2022 and the Medium-Term
Leveraging on the gains obtained under the SMP, the Bissau-Guinean authorities will pursue their ambitious fiscal and structural reform agenda. They are committed to remaining on a fiscal sustainability path, addressing state capacity constraints, and promoting financial intermediation.
Fiscal Reforms and Debt Policy
To mitigate the effects of the global increase in food and energy prices and maintain social cohesion, the authorities have put in place transitory supportive fiscal measures of around 0.3 percent of GDP. Notwithstanding, despite the challenging external and domestic environment, the authorities will implement the fiscal consolidation measures and the tax reform set out in the 2022 budget. They reaffirm their determination to take further expenditure containment measures, notably on non-priority spending and domestically financed projects, as needed, to achieve the fiscal deficit target of 4.4 percent of GDP and gradually move towards the WAEMU regional deficit ceiling of 3 percent by 2025.
On the revenue side, the revised general tax code, tax penalty regime and customs code, and modernized VAT statute have been critical to increasing domestic revenue mobilization and broadening fiscal space. On the spending side, the authorities are working with the IMF to implement blockchain technology to monitor and report funds spent under the wage bill across Ministries. This will complement their efforts to contain the payroll bill through record reconciliation.
On other structural fiscal reforms, the telecommunication and labor income taxes, and the full implementation of the digital tax filling platform are already bearing fruits and will play a key role in improving tax compliance and helping expand government revenue.
On the PFM front, strengthening the management and oversight of the utility company Electricidade e Aguas da Guinea-Bissau (EAGB), with World Bank' support, is at the forefront of the authorities' efforts to mitigate fiscal risks and keeping spending under control. Reforms taken include the recently renegotiated fuel supply agreement and the appointment by the Prime Minister of an experienced senior Treasury official as Government Commissioner to the EAGB. His mission is to put the EAGB's liabilities in a more sustainable position and to improve its financial management. Those operational reforms should make the company profitable, self-sufficient, efficient, and functional. In addition, the implementation of the Treasury Single Account (TSA) and the IMF's cash management and cash flow forecasting tools are progressing. The authorities are very appreciative of the Fund, World Bank, and other partners for their continued technical support.
Regarding debt, the authorities note that country's debt was assessed as sustainable in a forward-looking sense but at high risk of external debt distress under the debt sustainability analysis (DSA). The reclassification of the BOAD debt (denominated in CFA francs) from domestic to external debt contributes to this assessment. The Bissau-Guinean authorities strongly disagree with such reclassification. The authorities reiterate their strong commitment to bringing public debt below the WAEMU convergence threshold of 70 percent of GDP over the medium-term. To achieve this goal, they will complement their fiscal adjustment and reform strategy with prudent borrowing practices that imply no use of non-concessional project financing. Furthermore, efforts to enhance debt management will continue.
Strengthening Governance and the Fight against Corruption
Governance and transparency reforms committed by Guinea-Bissau to benefit from the RCF have been largely met. The Audit Court and Inspection General concluded the audit for the pandemic-related spending covering June 2020-August 2021, which is expected to be published by June 2022. The authorities have selected in April 2022 a reputable third-party auditor firm, which will work jointly with the Audit Court to conduct an ex-post independent audit covering the period until December 2021. The audit results will be published by September 2022.
Furthermore, the authorities are stepping up efforts to meet international standards in governance and transparency, including publishing financial reports and critical information on all pandemic-related contracts for 2020 and 2021. In addition, the submission to Parliament of the Asset Declaration Regime reform in May 2022 and the amendment of the procurement framework will help to disclose all beneficial ownership information of companies awarded COVID-19 contracts. The authorities remain committed to tackling the remaining governance weaknesses. In this regard, they intend to clear rules and practices for implementing the strengthened legal framework on anti-corruption and provide more resources for the functioning of the Audit Court, the financial intelligence unit (CENTIF), and the Public Procurement Authority.
Enhancing the Financial Sector
The authorities are determined to ensure that Guinea Bissau's financial system remains resilient and compliant with regulatory and regional standards. In this context, they will review the proposed exit strategy from the large undercapitalized bank, and request an assessment of the bank's financial position and a full independent audit of NPLs from a third-party auditing firm to be performed by end-August. Regarding the large undercapitalized bank, it is the authorities' firm intention to forcefully implement any recommendation that the regional banking supervisory commission deems appropriate to address the issue. The authorities recognize the need to boost financial intermediation to create a conducive environment for private-led growth. In this regard, they will step up their actions in strengthening the credit information bureau with the support of regional authorities and will encourage banks' efforts to use more mobile money services and other mobile phone services.
Promoting Economic Diversification
The authorities are cognizant that promoting stronger, more sustainable, and more inclusive growth will require diversifying the country's output and exports. Steps will be taken to underpin their economic transformation agenda by investing more in human capital, improving the regulatory system and tax regimes for natural resources sector, and expanding infrastructure projects, particularly in the energy sector. They will also focus on enhancing the business environment and promoting non-cashew agriculture.
Conclusion
Our Bissau-Guinean authorities remain committed to pursuing fiscal prudence and advancing reforms to overcome many challenges facing the economy. To preserve fiscal and debt sustainability, they will continue to build on recent achievements under the SMP, notably on the revenue and fiscal structural reforms fronts. Their efforts will also focus on implementing financial measures with the assistance of the WAEMU banking commission to maintain stability in the financial sector. The authorities will also step up structural reforms toward enhancing governance and transparency, the state capacity, fostering financial intermediation, and diversifying the economy.
Considering the above and the authorities' noteworthy achievements under the program, we would appreciate Directors' support for the completion of the 2022 Article IV consultation and completion of the third review under the SMP.