Abstract
GUINEA-BISSAU
Title Page
GUINEA-BISSAU
REQUEST FOR A THREE-YEAR ARRANGEMENT UNDER THE EXTENDED CREDIT FACILITY—DEBT SUSTAINABILITY ANALYSIS
January 13, 2023
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, 2
| Guinea-Bissau: Joint Bank-Fund Staff Debt Sustainability Analysis | |
| Risk of external debt distress | High3 |
| Overall risk of debt distress | High |
| Granularity in the risk rating | Sustainable |
| Application of judgment | No |
| Guinea-Bissau: Joint Bank-Fund Staff Debt Sustainability Analysis | |
| Risk of external debt distress | High3 |
| Overall risk of debt distress | High |
| Granularity in the risk rating | Sustainable |
| Application of judgment | No |
Guinea-Bissau's risks of external and overall debt distress remain high, in line with the June 2022 Debt Sustainability Analysis (DSA). 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 spillovers on the fiscal and external accounts. The macroeconomic outlook underpinning the DSA assumes a gradual economic recovery in 2022-24 and sustained growth in the medium-term supported by an improvement of 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 of the fiscal deficit to the West African Economic and Monetary Union's (WAEMU) convergence criterion of 3 percent of GDP by 2025, which creates fiscal space for higher social spending and growth-enhancing public investment. The ratio of public debt to GDP increased in 2021 but is projected to start falling in 2023 and converge to below the 70 percent of GDP debt ceiling by 2027.
Risks include an adverse political scenario, limited capacity, weaker cashew nut exports, tighter global financial conditions, volatile global food and oil prices, and climate change-related natural disasters. Financial stress in state-owned enterprises and high NPLs could generate contingent liabilities and pose macro financial risks.
The present value (PV) of public and publicly guaranteed (PPG) debt relative to GDP exhibits a prolonged and substantial breach of its indicative benchmark. 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 following a downward trend over the medium-term, public debt is assessed as sustainable.
This conclusion is contingent on the authorities' continued commitment to an ambitious, yet feasible, fiscal adjustment that aims 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 continue during the Extended Credit Facility (ECF) arrangement. The downward trend of the baseline debt indicators would further improve with full multilateral donor re-engagement and a further shift towards debt obligations on 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.4 Data limitations preclude the inclusion of other units of general government and 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 Eletricidade e Águas da Guiné-Bissau (EAGB), which has non-publicly guaranteed debts estimated at 2.7 percent of GDP in 2021.5
2. Debt classification follows a hybrid approach in which debt to the West African Bank for Development (Banque Ouest Africaine de Développement or BOAD) is classified as external and bonds issued in the regional market are classified as domestic. Since the previous Guinea-Bissau DSA, debt denominated in Communauté Financière Africaine francs (CFA francs or CFAF) to BOAD, amounting to 12.8 percent of GDP at end-2021, is classified as external whereas the remaining debt sources follow a currency-based classification. Treasuries issued in CFA francs in the regional market remain treated as domestic for the purpose of this DSA.6 The stock of such treasury securities (held by both local and regional banks) at end-2021 was CFAF 193.3 billion, equivalent to 52 percent of domestic debt or 20.2 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 start in 2022. The World Bank, through the Performance and Policy Actions supported under the Sustainable Development Finance Policy, is supporting authorities with the publication and expansion of the debt bulletin. Additionally, the Word Bank is supporting EAGB on implementing a Management Improvement Plan and a financial restructuring plan. Both plans have yielded a more accurate assessment of the utility's stock of debt by end-2022. The Statistics Department of the IMF has planned two technical assistance missions during 2022–23 to support the authorities to improve debt recording and data coverage expansion.
Background
4. Guinea-Bissau's public debt rose to 78.9 percent of GDP in 2021. The ratio of public debt to GDP increased by an estimated 0.7 percentage points with respect to 2020. This increase was observed in the domestic debt side and is mostly explained by the resources of the Special Drawing Rights (SDR) allocation on-lent by the regional central bank (Banque Centrale des États de l'Afrique de l'Ouest or BCEAO). 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's Rapid Credit Facility (RCF) and project financing from the World Bank. BOAD and the World Bank are the main holders of Guinea-Bissau's external debt (Text Table 2). 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 that were accumulated in 2019-20, but only recognized in 2021. The stock of debt also reflects the authorities' efforts to resolve legacy external arrears following advice from the IMF and the World Bank.
Guinea-Bissau: Total Public Debt
Guinea-Bissau: Total Public Debt
 |
Guinea-Bissau: Total Public Debt
|
5. The special SDR allocation contributed to lower financing costs and closed the 2021 financing gap associated with the emergency response to the pandemic. In line with the WAEMU agreement, the BCEAO on-lent the counterpart of the SDR allocation.8 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.9 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 2022.10 The remaining amount financed part of 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, central government domestic debt amounted to 36.6 percent of GDP at end-2021. The largest source of net borrowing was Treasury securities, the stock of which rose by 5 percentage points of GDP between 2020 and 2021, with the bulk purchased by commercial banks from elsewhere in the WAEMU region.
Public Debt Stock
(Percent of GDP)
Citation: IMF Staff Country Reports 2023, 087; 10.5089/9798400234361.002.A002
Sources: Guinea-Bissau authorities and IMF staff calculations.Public Debt Stock
(Percent of GDP)
Citation: IMF Staff Country Reports 2023, 087; 10.5089/9798400234361.002.A002
Sources: Guinea-Bissau authorities and IMF staff calculations.Public Debt Stock
(Percent of GDP)
Citation: IMF Staff Country Reports 2023, 087; 10.5089/9798400234361.002.A002
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 3 percentage points of GDP in 2021 whereas more concessional external borrowing increased by 2.4 percentage points. Since 2017, the World Bank has been the main source of new concessional financing, promoting large regional telecommunications and energy projects as well as national projects to support rural transportation.11 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. External debt includes 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 down from 3.4 percent of GDP in 2020 to 0.3 percent of GDP at end-2021.12
CG Domestic Debt, 2021
(Staff Estimate, Percent of Total)
Citation: IMF Staff Country Reports 2023, 087; 10.5089/9798400234361.002.A002
Sources: Guinea-Bissau authorities and IMF staff calculations.CG Domestic Debt, 2021
(Staff Estimate, Percent of Total)
Citation: IMF Staff Country Reports 2023, 087; 10.5089/9798400234361.002.A002
Sources: Guinea-Bissau authorities and IMF staff calculations.CG Domestic Debt, 2021
(Staff Estimate, Percent of Total)
Citation: IMF Staff Country Reports 2023, 087; 10.5089/9798400234361.002.A002
Sources: Guinea-Bissau authorities and IMF staff calculations.
CG External Debt, 2021
(Staff Estimate, Percent of Total)
Citation: IMF Staff Country Reports 2023, 087; 10.5089/9798400234361.002.A002
Sources: Guinea-Bissau authorities and IMF staff calculations.CG External Debt, 2021
(Staff Estimate, Percent of Total)
Citation: IMF Staff Country Reports 2023, 087; 10.5089/9798400234361.002.A002
Sources: Guinea-Bissau authorities and IMF staff calculations.CG External Debt, 2021
(Staff Estimate, Percent of Total)
Citation: IMF Staff Country Reports 2023, 087; 10.5089/9798400234361.002.A002
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 8.4 percent of revenues (4.3 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. 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 International Development Association's Sustainable Development Finance Policy and to disclose all public sector financial commitments involving debt.13
9. Regional institutions with a strong capacity to help manage debt provide support to Guinea-Bissau's debt management capacity. 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 almost 90 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 eight countries in this currency union.
Baseline Scenario
10. The near-term outlook projects a moderate recovery and sustained growth over the medium term, but risks are tilted to the downside. The main changes relative to the previous DSA of June 2022 (Text Table 3) include an upward revision on inflation, a reduction in GDP growth, and a depreciation of the currency in 2022 and 2023. The main macroeconomic assumptions are as follows:
Real GDP growth. After a modest GDP growth of 1.5 percent in 2020, growth is estimated to have accelerated to 6.4 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 moderate to 3.5 percent in 2022 due to lower-than-expected cashew nut exports and spillovers from the war in Ukraine, and gradually reach 5 percent by 2024-2027. In the medium term, growth will be supported by higher cashew nut export prices and volumes driven by a recovery in global trade, and a more stable political situation, with structural reforms and stronger business environment expected to support private investment growth. Long-term growth is projected at 4 percent in line with the growth potential of the economy.14
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 to reach 7.8 percent. This is substantially above the 3 percent convergence WAEMU criteria, reflecting persistent inflationary pressures due to supply chain disruptions, the impact of the war in Ukraine on global commodity prices, and a stronger dollar.15
Text Table 3.Guinea-Bissau: Key Macroeconomic Projections
(Percent of GDP, Unless Otherwise Indicated)
Source: Bissau-Guinean authorities and staff estimates. 1 Covers the period 2028-42 for current DSA, and 2028-42 for the previous DSA. 2 Adjusted based on the reclassification of BOAD as external debt.Text Table 3.Guinea-Bissau: Key Macroeconomic Projections
(Percent of GDP, Unless Otherwise Indicated)
Source: Bissau-Guinean authorities and staff estimates. 1 Covers the period 2028-42 for current DSA, and 2028-42 for the previous DSA. 2 Adjusted based on the reclassification of BOAD as external debt.
Text Table 3.Guinea-Bissau: Key Macroeconomic Projections
(Percent of GDP, Unless Otherwise Indicated)
Source: Bissau-Guinean authorities and staff estimates. 1 Covers the period 2028-42 for current DSA, and 2028-42 for the previous DSA. 2 Adjusted based on the reclassification of BOAD as external debt.Fiscal deficit. Greater revenue mobilization and expenditure controls reduced the overall fiscal deficit from 9.6 percent in 2020 to 5.6 percent of GDP in 2021. However, the overall fiscal deficit in 2022 is expected to reach 5.5 percent of GDP, higher than the 2022 Article IV report by 1.3 percentage points of GDP mainly due to higher-than-expected expenditures. The wage spending overrun was caused mainly by the irregular hiring of workers, which has already been addressed. The authorities are also rationalizing non-priority spending in the last three months of 2022. In addition, other current expenditure is higher mainly due to spending on the upcoming election as well as higher spending related to security and defense, social and diplomatic services. While budget support has been higher than expected, with France and Portugual each providing CFAF 3.3 billion in 2022, lower tax revenue has also impacted fiscal goals.
In the medium-term, the overall deficit is expected to converge to the WAEMU regional target of 3 percent of GDP by 2025. Consistent with the authorities' commitment to consolidate and improve debt sustainability, an annual average of 1.1 percentage points of GDP adjustment in the domestic primary balance (on a commitment basis) is projected over three years (2022-25).16 A balanced and durable growth-supportive fiscal consolidation would be supported by following measures:
Enhancing revenue mobilization. Tax revenues increased by 2.0 percentage points of GDP in 2021 compared to 2020 and are expected to further increase around 0.7 percentage points by 2025. Measures to enhance tax revenue mobilization cover both revenue administration and tax policy reforms, including the broadening of the tax base, simplifying the tax system, and strengthening tax administration and compliance. In 2022, the authorities promulgated a tax package to simplify and enhance transparency of the tax system and fully implemented a digital tax filling platform (the Kontaktu system). To further accelerate revenue mobilization and modernize the tax regime, authorities will submit to Parliament the revised law on the general exemption regime (structural benchmark (SB), end-December 2023) and the revised income tax and stamp duties bills (SB, end-June 2025). They will also implement the new VAT law and the action plans for improving the custom and tax administrations with support from continued technical assistance of the IMF. Notably, fiscal yield from the implementation of VAT is expected to be 2.6 percent of GDP by 2027. To improve revenue generation from natural resources and its transparency, authorities will prepare an action plan to develop a register of resource rights holders and undertake diagnosis of the fiscal regime for natural resources (SB, end-June 2024) with IMF technical assistance (TA) support.
Strengthening PFM and expenditure control. The government is committed to decrease domestic primary expenditures by around 2.3 percentage points of GDP between 2022 and 2025, of which 1.3 percentage points come from wage bill management measures. The recent FAD wage bill management mission provided additional reform options for wage bill management while protecting social priority spending.17 To address the wage bill overrun in 2022, the government has taken a series of corrective actions: (i) the dismissal of irregular hirings18; (ii) total freezing of hirings; (iii) capping salary expenses for key ministries; (iv) full inventory-taking of health and education facilities to assess the personal needs and identify irregular workers; (v) a new decree was also issued which stipulated that all contracts should be carried out by submitting the vacancies authorized by the Ministry of Labor and the Ministry of Finance; and (vi) elimination of two-thirds of advisor positions at the Presidency, Prime Minister's Office, the Presidency of the Parliament, and the Presidencies of the Constitutional and Audit Courts. To meet the wage spending ceiling quantitative performance criteria in 2023, the authorities will undertake additional containment measures in 2023, including conducting new census of public administration19 and redistribution of staff workload in the Ministry of Education -the ministry with the largest number of civil servants. They will also undertake reforms aim to strengthen PFM and expenditure control in line with the ECF structural benchmarks, including measures to reconcile the personnel and the payroll records20, enhancing the treasury and cash management function with the implementation of a Treasury Single Account (TSA) and executing expenditure from the TSA, starting with the wage bill.
Improving SOE oversight and mitigating fiscal risks. The IMF SOE oversight and fiscal risk TA mission identified the national utility company, EAGB, as one of the biggest sources fiscal risks amongst the four SOEs.21 The authorities are taking several measures to improve the finanical sustainability of EAGB and mitigate fiscal risks.22 Customer management and revenue collection will be improved with the instalation of 35,000 post- and pre-paid electricity meters. EAGB also plans to progress in the connection to the Gambia River Basin Development Organization (OMVG) regional project, supported by the World Bank, which will bring hydropower from neighboring Guinea and should lower the average generation costs and diversify Guinea-Bissau's sources of power generation. Fiscal oversight of EAGB and governance could also be enhanced with support from IMF TA. Support by the World Bank in revamping EAGB's management and operations, including a financial restructuring plan, will also enhance the performance of the electricity sector and mitigate fiscal risks over the medium term.
Safeguarding social and priority spending and investment. The authorities are committed to safeguarding social and priority spending and public investment over the medium term. During 2022-27, social and priority spending is projected to increase by 0.7 percentage points of GDP compared to pre-COVID-19 period (2010-19). Public investment is projected to average around 7.4 percent of GDP per annum during 2022-27, 1.5 percentage points higher than pre-COVID-19 period (2010-19). Notably, domestically financed capital investment is projected to be higher than historical average, underpinned by the fiscal space created.
11. Current account deficit. The non-interest current account deficit is estimated to have remained broadly stable in 2021 and is projected to widen by 5.5 percentage points in 2022, reaching 5.2 percent of GDP. The deterioration of the current account mostly reflects higher import prices and lower private transfers. Improvements in the trade balance, driven by an improvement in the terms of trade and a rebound in export volumes, are expected to reduce the current account deficit to 3.2 percent of GDP by 2025.
12. Public debt to GDP is expected to increase by 2.1 percentage points in 2022. The stock of domestic debt is projected to increase by 0.8 percentage points of GDP compared to 2021. The authorities will continue to seek financing through the issuance of treasury bills. As a result, the stock of securities (held by local and regional commercial banks) is projected to further grow by 3.3 percentage points of GDP. Except for guarantees, which increased due to new guarantees issued to debt of EAGB, 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 2.8 percentage points of GDP. The stock of external debt is projected to increase by 1.2 percentage points of GDP, mostly driven by a revaluation effect from the weaker domestic currency.
Guinea-Bissau: 2022 Borrowing Plan
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.
Guinea-Bissau: 2022 Borrowing Plan
| PPG external debt contracted or guaranteed | Volume of new debt in 20221 (US$ million) |
Present value of new debt in 20221 (US$ million) |
| Sources of debt financing | 73.1 | 43.0 |
| Concessional debt2 | 73.1 | 43.0 |
| Multilateral debt | 73.1 | 43.0 |
| Uses of debt financing | 73.1 | 43.0 |
| Education | 17.0 | 8.7 |
| Energy | 40.3 | 26.2 |
| Roads | 15.8 | 8.1 |
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.
Guinea-Bissau: 2022 Borrowing Plan
| PPG external debt contracted or guaranteed | Volume of new debt in 20221 (US$ million) |
Present value of new debt in 20221 (US$ million) |
| Sources of debt financing | 73.1 | 43.0 |
| Concessional debt2 | 73.1 | 43.0 |
| Multilateral debt | 73.1 | 43.0 |
| Uses of debt financing | 73.1 | 43.0 |
| Education | 17.0 | 8.7 |
| Energy | 40.3 | 26.2 |
| Roads | 15.8 | 8.1 |
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.
13. 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 may require restructuring some projects. Contracting of new loans is expected to be also constrained. Gross annual project disbursements from loans and grants are assumed to between 65 and 75 percent of capital expenditure, which is expected to average 5.3 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, multilateral creditors are expected to provide most project financing on grant or concessional terms. Borrowing from BOAD, which is almost entirely non-concessional, is projected to decline significantly.23 The baseline assumes better investment planning and execution to ensure value for money and better alignment with the budget process. Treasury securities with longer maturities are expected to fill most non-investment-related financing needs in the medium-term (2023 onwards). Interest rates are projected to increase to 6.2 percent for bonds with maturities of one to three years, to 6.5 percent for bonds with maturities of four to seven years, and to 6.7 percent for bonds with maturities beyond seven years. These interest rates reflect the effect of the recent tightening of financial conditions in the WAEMU.24
14. 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 debt dynamics over the past five years. This driver of debt is expected to be offset by sustained growth, increased reliance on committed grants (captured in the residual of the drivers of debt dynamics in Figure 425) and higher-than-expected inflation. It is assumed that multilateral donors will prioritize grant disbursements considering the structural fragility of the country, its large development needs, and limited access to alternative financing sources. Fiscal consolidation and improvements in governance are also expected to crowd in grants. 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 conducive to growth. The projected three-year adjustment in the primary deficit is marginally larger than the 25th percentile observed in historical data from low-income countries (LICs) with Fund-supported programs (Figure 5), which is consistent with the authorities' commitment to continued fiscal consolidation during the IMF financial program. Actual fiscal results, however, tend to be highly volatile in Guinea-Bissau.26 Real GDP growth is projected at 3.5 percent in 2022 consistent with a small fiscal multiplier (Figure 5), 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.
Country Classification and Determination of Stress Test Scenarios
15. Guinea-Bissau is assessed to have weak debt carrying capacity, unchanged from the June 2022 DSA. The Composite Indicator (CI) score for Guinea-Bissau is 2.63, based on data on macroeconomic indicators from the October 2022 WEO and from the 2021 Country Policy and Institutional Assessment (CPIA) of the World Bank (Text Table 5). This score is below the 2.69 cutoff, thus resulting in a weak debt-carrying capacity.
16. The magnitude of the combined contingent liability shock is higher than in most DSAs (Text Table 6). This DSA runs a stress test with a contingent liability shock for SOE debt of 6.7 percent of GDP instead of the default value of 2 percent.27 The increase in the shock mostly captures the potential liabilities related to the possible recapitalization needs of a systemic bank that does not meet the WAEMU's minimum capital requirements. The shock also 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 (2.4 percent of GDP at end-2021). 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.
Debt Sustainability
A. External Debt Sustainability Analysis
17. Guinea-Bissau's risk of external debt distress remains high, in line with the June 2022 DSA. External debt reaches 40 percent of GDP at end-2021. A worsening external environment, including the sharp depreciation of the CFA, explains some of the increase in the external debt-to-GDP ratio compared to the June 2022 DSA. 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 a one-year breach of the PV of debt-to-exports ratio in 2022, which becomes below the threshold in 2023).28 However, the indicators based on the debt-service ratios breach their indicative thresholds under the baseline, which implies a mechanical 'high' risk rating (Figure 1 and Table 3).29 That said, since Guinea-Bissau is in a currency union with FX reserve pooling, the effective impact of these indicators is rather limited.
18. The adverse commodity price stress test was designed to reflect Guinea-Bissau's vulnerability to cashew price fluctuations. In 2020, cashew prices fell by 33 percent amid the global slowdown. In line with the June 2022 DSA, the analysis shows the debt sustainability prospects after a hypothetical 15 percent fall in cashew export prices in the first year of the projection (Figure 1).
B. Public Debt Sustainability Analysis
19. Guinea-Bissau's overall risk of debt distress is assessed as high. The PV of total public debt-to-GDP ratio stays above its indicative benchmark (35 percent) through 2032, a substantial and prolonged breach (Table 4 and Figure 2).30 Moreover, debt service as a percentage of revenues and grants increases to 74 percent in 2028 from 66 percent in 2022. Despite the expected improvement in revenues and authorities' efforts to shift to concessional financing, this increase is projected because of higher future amortization of existing debt in the medium run.
20. Public debt sustainability is vulnerable to a commodity price shock. After a 15 percent drop in cashew prices, the present value of the debt-to-GDP ratio reaches 78 percent in 2028 and keeps rising, and the debt service-to-revenue ratio reaches 116 percent in 2028 before stabilizing at around 90 percent.
Conclusions
21. Public debt is considered sustainable based on the authorities' commitment to the fiscal consolidation towards the WAEMU deficit convergence criteria and the support provided by the regional institutions with strong capacity to help manage debt. Guinea-Bissau's external debt burden indicators are consistent with sustainability in the sense of following a downward trend over the medium-term, but the present value of total public debt-to-GDP and indicators based on the external debt-service ratios show large and prolonged breaches of their indicative benchmarks. 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. 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 contingent on the authorities' commitments to sound policies in the context of an engagement with the Fund and other development partners, together. This engagement should ensure that policies are in place that would put debt on a robust downward trajectory.
22. Under the staff's baseline scenario, Guinea-Bissau's public debt is kept on a sustainable path, with the overall public debt burden falling below the regional convergence criterion of 70 percent by 2027. If the policy agenda is successfully executed and barring a resurgence of the pandemic or unexpected external shocks, total public debt would decline steadily from 78.9 percent of GDP estimated at end-2021 to 68 percent of GDP by 2027.
23. A Fund-supported program and strong multilateral donor engagement will underpin the policy actions necessary for achieving the baseline projection. Key policy actions include (i) continued fiscal consolidation efforts including revenue enhancement measures, containing current spending below nominal GDP growth, a sharp reduction in the wage bill, and robust implementation of growth-enhancing reforms; (ii) prudent borrowing policies, including the avoidance of non-concessional project financing; (iii) enhanced debt management, with more rigorous compilation and monitoring of debt statistics, 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 substantial scaling up of grants by multilateral institutions; and (ii) a reprofiling of selected debt obligations to extend maturities and reduce interest rates when financing terms are favorable.
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 this DSA. The debt outlook remains highly vulnerable to a weaker economic recovery as well as the materialization of unexpected contingent liabilities, a potential wage-bill overrun, and renewed political conflict after the parliamentary elections. Since the June 2022 DSA, downside risks from a deteriorating global outlook have intensified. A further tightening of financial conditions in the regional bond market, weakening global demand, and continued pressure on exchange rate pose risks for debt sustainability. If realized, these downside risks could lead to higher external and public debt burden indicators and increase the risk of arrears accumulation. It is also contingent on the limited impact of the pandemic with its effects mitigated by a relatively high vaccination rate.31 Risks also arise from high 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 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 the fiscal consolidation envisioned during the program. They emphasized (i) their commitment to the agreed fiscal path and reforms, while relying on concessional borrowing and (ii) the need to carefully calibrate the financing of the public investment plan and select investment projects with critical contributions to growth that are aligned with the budget targets and improved coordination among the different agencies involved in the Debt Committee. The authorities recognize the risks to the debt outlook and expect that satisfactory performance during the Extended Credit Facility (ECF) will contribute to mitigate the country's high risk of debt distress.
Guinea-Bissau: Indicators of Public and Publicly Guaranteed External Debt Under Alternatives Scenarios, 2022–321
Citation: IMF Staff Country Reports 2023, 087; 10.5089/9798400234361.002.A002
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.Guinea-Bissau: Indicators of Public and Publicly Guaranteed External Debt Under Alternatives Scenarios, 2022–321
Citation: IMF Staff Country Reports 2023, 087; 10.5089/9798400234361.002.A002
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.Guinea-Bissau: Indicators of Public and Publicly Guaranteed External Debt Under Alternatives Scenarios, 2022–321
Citation: IMF Staff Country Reports 2023, 087; 10.5089/9798400234361.002.A002
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.
Guinea-Bissau: Indicators of Public Debt Under Alternative Scenarios, 2022–32
Citation: IMF Staff Country Reports 2023, 087; 10.5089/9798400234361.002.A002
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.Guinea-Bissau: Indicators of Public Debt Under Alternative Scenarios, 2022–32
Citation: IMF Staff Country Reports 2023, 087; 10.5089/9798400234361.002.A002
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.Guinea-Bissau: Indicators of Public Debt Under Alternative Scenarios, 2022–32
Citation: IMF Staff Country Reports 2023, 087; 10.5089/9798400234361.002.A002
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.
Guinea-Bissau: Drivers of Debt Dynamics - Baseline Scenario
Citation: IMF Staff Country Reports 2023, 087; 10.5089/9798400234361.002.A002
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.Guinea-Bissau: Drivers of Debt Dynamics - Baseline Scenario
Citation: IMF Staff Country Reports 2023, 087; 10.5089/9798400234361.002.A002
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.Guinea-Bissau: Drivers of Debt Dynamics - Baseline Scenario
Citation: IMF Staff Country Reports 2023, 087; 10.5089/9798400234361.002.A002
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.
Guinea-Bissau: Realism Tools
Citation: IMF Staff Country Reports 2023, 087; 10.5089/9798400234361.002.A002
Guinea-Bissau: Realism Tools
Citation: IMF Staff Country Reports 2023, 087; 10.5089/9798400234361.002.A002
Guinea-Bissau: Realism Tools
Citation: IMF Staff Country Reports 2023, 087; 10.5089/9798400234361.002.A002
Guinea-Bissau: External Debt Sustainability Framework, Baseline Scenario, 2019–42
(In percent of GDP, unless otherwise indicated)
Guinea-Bissau: External Debt Sustainability Framework, Baseline Scenario, 2019–42
(In percent of GDP, unless otherwise indicated)
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Guinea-Bissau: External Debt Sustainability Framework, Baseline Scenario, 2019–42
(In percent of GDP, unless otherwise indicated)
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Guinea-Bissau: Public Sector Debt Sustainability Framework, Baseline Scenario, 2019–42
(In percent of GDP, unless otherwise indicated)
Guinea-Bissau: Public Sector Debt Sustainability Framework, Baseline Scenario, 2019–42
(In percent of GDP, unless otherwise indicated)
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Guinea-Bissau: Public Sector Debt Sustainability Framework, Baseline Scenario, 2019–42
(In percent of GDP, unless otherwise indicated)
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Guinea-Bissau: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2022–32
(In percent)
Guinea-Bissau: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2022–32
(In percent)
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Guinea-Bissau: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2022–32
(In percent)
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Guinea-Bissau: Sensitivity Analysis for Key Indicators of Public Debt, 2022–32
(In percent)
Guinea-Bissau: Sensitivity Analysis for Key Indicators of Public Debt, 2022–32
(In percent)
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Guinea-Bissau: Sensitivity Analysis for Key Indicators of Public Debt, 2022–32
(In percent)
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Annex I. Debt Holder Profile Table
Guinea-Bissau: Decomposition of Public Debt and Debt Service by Creditor, 2021-231/
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.
Guinea-Bissau: Decomposition of Public Debt and Debt Service by Creditor, 2021-231/
| Debt Stock (end of period) | Debt Service | ||||||||
| 2021 | 2021 | 2022 | 2023 | 2021 | 2022 | 2023 | |||
| (In US$ million) | (Percent of total debt) | (Percent of GDP)5 | (In US$ million) | (Percent of GDP) | |||||
| Total | 1,300.1 | 100.0 | 78.9 | 142.5 | 154.0 | 120.9 | 8.3 | 9.0 | 6.7 |
| External | 659.5 | 50.7 | 40.0 | 61.1 | 13.8 | 42.2 | 3.5 | 0.8 | 2.3 |
| Multilateral creditors2 | 522.6 | 40.2 | 31.7 | 57.6 | 10.7 | 38.2 | 3.3 | 0.6 | 2.1 |
| IMF | 45.5 | 3.5 | 2.8 | ||||||
| World Bank | 168.7 | 13.0 | 10.2 | ||||||
| AfDB | 47.7 | 3.7 | 2.9 | ||||||
| BOAD | 210.2 | 16.2 | 12.8 | ||||||
| Other Multilaterals | 50.5 | 3.9 | 3.1 | ||||||
| o/w: Islamic Development Bank | 21.8 | 1.7 | 1.3 | ||||||
| BADEA | 9.7 | 0.7 | 0.6 | ||||||
| Bilateral Creditors | 136.8 | 10.5 | 8.3 | 3.6 | 3.1 | 4.0 | 0.2 | 0.2 | 0.2 |
| Paris Club | 10.1 | 0.8 | 0.6 | 0.0 | 0.3 | 0.7 | 0.0 | 0.0 | 0.0 |
| o/w: Brazil | 1.9 | 0.1 | 0.1 | ||||||
| Russia | 1.5 | 0.1 | 0.1 | ||||||
| Non-Paris Club | 126.7 | 9.7 | 7.7 | 3.6 | 2.8 | 3.3 | 0.2 | 0.2 | 0.2 |
| o/w: Angola | 49.1 | 3.8 | 3.0 | ||||||
| Kuwait | 28.9 | 2.2 | 1.8 | ||||||
| Domestic | 640.6 | 49.3 | 38.9 | 81.4 | 140.2 | 78.7 | 4.7 | 8.2 | 4.4 |
| Held by residents, total | n/a | n/a | n/a | n/a | n/a | n/a | n/a | n/a | n/a |
| Held by non-residents, total | n/a | n/a | n/a | n/a | n/a | n/a | n/a | n/a | n/a |
| Regional T-bills | 333.1 | 25.6 | 20.2 | - | 121.2 | 69.4 | - | 7.1 | 3.8 |
| BCEAO | 224.9 | 17.3 | 13.6 | 1.3 | 1.2 | 1.2 | 0.1 | 0.1 | 0.1 |
| Loans local commercial banks3 | 43.3 | 3.3 | 2.6 | 61.7 | 0.7 | 1.9 | 3.6 | 0.0 | 0.1 |
| Payment Arrears | 39.3 | 3.0 | 2.4 | 18.3 | 17.1 | 6.3 | 1.1 | 1.0 | 0.4 |
| Memo items: | |||||||||
| Collateralized debt4 | 0 | 0.0 | 0.0 | ||||||
| Contingent liabilities | 22.5 | 1.7 | 1.4 | ||||||
| Public guarantees | 22.5 | 1.7 | 1.4 | ||||||
| Nominal GDP | 1,725.5 | 1,725.5 | 1,709.7 | 1,803.6 | |||||
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.
Guinea-Bissau: Decomposition of Public Debt and Debt Service by Creditor, 2021-231/
| Debt Stock (end of period) | Debt Service | ||||||||
| 2021 | 2021 | 2022 | 2023 | 2021 | 2022 | 2023 | |||
| (In US$ million) | (Percent of total debt) | (Percent of GDP)5 | (In US$ million) | (Percent of GDP) | |||||
| Total | 1,300.1 | 100.0 | 78.9 | 142.5 | 154.0 | 120.9 | 8.3 | 9.0 | 6.7 |
| External | 659.5 | 50.7 | 40.0 | 61.1 | 13.8 | 42.2 | 3.5 | 0.8 | 2.3 |
| Multilateral creditors2 | 522.6 | 40.2 | 31.7 | 57.6 | 10.7 | 38.2 | 3.3 | 0.6 | 2.1 |
| IMF | 45.5 | 3.5 | 2.8 | ||||||
| World Bank | 168.7 | 13.0 | 10.2 | ||||||
| AfDB | 47.7 | 3.7 | 2.9 | ||||||
| BOAD | 210.2 | 16.2 | 12.8 | ||||||
| Other Multilaterals | 50.5 | 3.9 | 3.1 | ||||||
| o/w: Islamic Development Bank | 21.8 | 1.7 | 1.3 | ||||||
| BADEA | 9.7 | 0.7 | 0.6 | ||||||
| Bilateral Creditors | 136.8 | 10.5 | 8.3 | 3.6 | 3.1 | 4.0 | 0.2 | 0.2 | 0.2 |
| Paris Club | 10.1 | 0.8 | 0.6 | 0.0 | 0.3 | 0.7 | 0.0 | 0.0 | 0.0 |
| o/w: Brazil | 1.9 | 0.1 | 0.1 | ||||||
| Russia | 1.5 | 0.1 | 0.1 | ||||||
| Non-Paris Club | 126.7 | 9.7 | 7.7 | 3.6 | 2.8 | 3.3 | 0.2 | 0.2 | 0.2 |
| o/w: Angola | 49.1 | 3.8 | 3.0 | ||||||
| Kuwait | 28.9 | 2.2 | 1.8 | ||||||
| Domestic | 640.6 | 49.3 | 38.9 | 81.4 | 140.2 | 78.7 | 4.7 | 8.2 | 4.4 |
| Held by residents, total | n/a | n/a | n/a | n/a | n/a | n/a | n/a | n/a | n/a |
| Held by non-residents, total | n/a | n/a | n/a | n/a | n/a | n/a | n/a | n/a | n/a |
| Regional T-bills | 333.1 | 25.6 | 20.2 | - | 121.2 | 69.4 | - | 7.1 | 3.8 |
| BCEAO | 224.9 | 17.3 | 13.6 | 1.3 | 1.2 | 1.2 | 0.1 | 0.1 | 0.1 |
| Loans local commercial banks3 | 43.3 | 3.3 | 2.6 | 61.7 | 0.7 | 1.9 | 3.6 | 0.0 | 0.1 |
| Payment Arrears | 39.3 | 3.0 | 2.4 | 18.3 | 17.1 | 6.3 | 1.1 | 1.0 | 0.4 |
| Memo items: | |||||||||
| Collateralized debt4 | 0 | 0.0 | 0.0 | ||||||
| Contingent liabilities | 22.5 | 1.7 | 1.4 | ||||||
| Public guarantees | 22.5 | 1.7 | 1.4 | ||||||
| Nominal GDP | 1,725.5 | 1,725.5 | 1,709.7 | 1,803.6 | |||||
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.
The previous DSA was dated June 2, 2022 (IMF Country Report No. 22/196) and accompanied the third review under Guinea-Bissau's Staff-Monitored Program (SMP).
The DSA compares the evolution of debt-burden indicators against thresholds and benchmarks pre-determined by the country's debt-carrying capacity. Guinea-Bissau's Composite Indicator (CI) index, based on October 2022 WEO update and the World Bank's 2021 World Bank's Country Policy and Institutional Assessment (CPIA), indicates that the country's debt carrying capacity remains weak (Para.15).
This DSA follows the Guidance Note of the Join Bank-Fund Debt Sustainability Framework for Low Income Countries, February 2018.
Debt management was strengthened after the approval by the Council of Ministers in July 2021 of 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 to receive technical assistance from the IMF and the World Bank to improve debt reporting to the International Debt Statistics (IDS) and the Quarterly External Debt Statistics (QEDS). Technical assistance from the IMF's statistics department planned for 2022-23 aims at expanding data coverage and improving public data debt according to international guidance.
Government clearance of EAGB debt amounted to CFAF 6.6 billion in 2017, CFAF 2.5 billion in 2018, CFAF 5.9 billion in 2019, and CFAF 3.6 billion in 2020. There were no transfers in 2021. Also, the government guaranteed loans to EAGB with a total value of CFAF 5.6 billion in 2020 and CFAF 7.4 billion in 2021 as part of debt service restructuring agreements with local commercial banks. In 2022, guarantees increased to CFAF 11.9 billion. These guarantees are included in the DSA.
In 2021, local banks held 7 percent of outstanding domestic debt issued in the regional market.
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 Directorate-General for Public Debt (Direção Geral da Dívida Publica); and (iii) regulating the process of debt issuance and management.
The end-August SDR 27.2 million allocation was transferred by the BCEAO, as a currency repo operation of CFAF 21.6 billion (2.3 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.
In general, domestic debt is treated in nominal terms in the DSA.
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.
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 grants.
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.
Regarding the DSSI, the authorities declined to suspend the small debt service involved (0.7 percent of revenues) and some creditors did not respond.
Potential growth is estimated at around 4 percent for 2021 based on standard techniques such as the Hodrick-Prescott Filter and estimation using an aggregate production function.
The WAEMU's CFA is pegged to the euro, which is expected to depreciate by 10.7 percent against the US dollar in 2022.
The domestic primary balance excludes grants and foreign financed capital spending.
The estimated fiscal saving of wage bill and expenditure control is about 1.9 percent of GDP by 2027.
Except for regularized workers in the education sector and justice administration.
The new census will be conducted within the framework of the World Bank project on capacity building in the public sector.
This will be supported by the deployment of the blockchain technology-based solution supported by the IMF. The design of block-chain solutions will be interwoven into governance reforms.
The other SOEs are Administration of the Ports of Guinea-Bissau (APGB); Civil Aviation Agency of Guinea-Bissau (AACGB); and National Petroleum Exploration and Exploration Company of Guinea-Bissau (PetroGuin).
See Staff Report for the Request of a Three-Years Arrangement under the Extended Credit Facility (Annex III) and 2022 Article IV Consultation and Third Review of the SMP (Annex IX).
For 2022, staff estimate that only 34 percent of contracted BOAD loans were disbursed. For 2023, staff project that 41 percent of contracted BOAD loans will be disbursed. BOAD accounted for 20 percent of external disbursements in 2022. Authorities are committed to only borrow on concessional terms from BOAD and will finalize the execution of projects already contracted.
In addition, interest rates on short-term T-bills are projected to increase to 6 percent from 2023 onwards.
For 2017-2021, the reclassification of BOAD debt from domestic to external accounts for the large unexplained increase in external debt (Figure 4). For the 5-year forecast period, the residual is also affected by the financing from treasury securities in the regional market, which are considered domestic debt in the DSA, but account for sizable capital inflows in the financial account.
Past debt forecast errors are mostly explained by unexpected changes in the primary deficit driven by cashew campaigns, the impact of political instability on reform implementation, and large investments. The country's structural fragility accounts for the large difference in unexpected debt changes compared to other LICs. Given efforts to diversify the economy, recent political stability, and commitments of the authorities to reform implementation, forecast errors are expected to subside in the future. For the 2017-2021 period, residuals, were also a large contributor to the unexpected increase in public debt (Figure 5). 2017 and 2020 account for most of these residuals. About three-fourth of the residuals are explained by unaccounted external debt, new guarantees, and BOAD's reclassification and membership rights. Most of these factors are not likely to reoccur.
Breakdown of the SOE shock: bank recapitalization (2 percent), EAGB debt (2.7 percent) and domestic arrears (2 percent).
Under the most extreme (combination) shock, the PV of debt-to-GDP ratio breaches the threshold until 2025, but steadily declines afterwards. The most extreme shocks for other indicators show a repeated breach of the threshold.
For the standard export shock, 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 reflects the fact that the ten-year lagged standard deviation of export growth (excluding the covid-shock of 2020) is half of the historical standard deviation. 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).
Under the most extreme (commodity price) shock, the PV of debt-to-GDP ratio increases to 81 percent in 2032, and the PV of debt-to-revenue increases to 453 percent. The impact of the most extreme shock on debt service-to-revenue increases this ratio from 56 percent in 2022 to 120 percent in 2027.
By December 2022, there were 8,931 confirmed cases and 176 deaths. The authorities contained infections and limited the economic impact of the pandemic. About 58 percent of the adult population has been vaccinated. Donors have supported vaccine procurement and rollout.
