Introduction

On behalf of the Bissau-Guinean authorities, we would like to express our appreciation to the IMF's Executive Board and Management for supporting the country in its ongoing efforts to preserve macroeconomic stability and promote stronger economic growth and social development. We also thank Fund staff for the constructive engagement and candid discussions, which rightly focused on policies to withstand the economic fallout from the war in Ukraine and the lingering effects of the pandemic while addressing structural challenges facing this economy.

The authorities broadly share staff's assessment and concur with the main policy recommendations. They have renewed their commitments to continue implementing the reforms set forth under the SMP and to stay the course with policies under an ECF-supported program. These commitments were strongly affirmed by the President of Guinea-Bissau, H.E. Umaro Sissoco Embaló, during the fruitful discussion held with the Managing Director at the IMF headquarters in Washington, DC, on December 15, 2022, in the margins of the Second USA-Africa Leaders' Summit.

Recent Economic Developments and Outlook

Recent Developments

Economic recovery is underway and has taken firm hold despite moderating in 2022. Real GDP growth is expected to have decelerated to 3.5 percent in 2022, from 6.4 percent in 2021 on account of a decline in cashew production and exports. Following the rise in commodity prices related to the war in Ukraine, average inflation is expected to reach 7.8 percent in 2022 against 3.3 percent in 2021.

Following the strong economic rebound of 2021 and ensuing reduction in the overall fiscal deficit, the fiscal outcome deteriorated in 2022. The deficit is expected to exceed staff projections by 1.3 percentage points, leading to missed fiscal targets. This largely reflects an acceleration in spending related to the critical hiring of public workers in the health, education, and security sectors, as well as commitments on the preparation of elections. Nonetheless, the authorities have taken bold corrective measures to ensure control and accountability for the public sector wage bill. Especially noteworthy was the drastic reduction in wages and in the number of advisors to senior government officials, including the President of the Republic, the Prime Minister, the President of the Supreme Court, and the President of the National Assembly. Other key measures included freezing new hires and promotions in the public sector and dismissing all employees whose recruitment did not follow due process. The Ministry of Finance requested an audit by the Court of Auditors on the irregular hiring of civil servants in 2021 and 2022. The authorities stand ready to implement any recommendation deemed necessary by the audit. Moreover, a new decree from the Prime Minister orders that all new hiring contracts are the exclusive joint competence of the Ministry of Labor and the Ministry of Finance. Further, the authorities have recently announced the extinction of the so-called sovereignty benefits or allowances to high-ranking government officials and travel representation allowances. All these strong and politically sensitive measures were possible thanks to the firm determination on the part of the authorities and the spirit of solidarity of Guinea-Bissau's senior government officials and other branches of power to keep the budget within program targets and the public finances on a sound footing.

The overall debt was stable in 2021 on the back of the authorities' decision to pre-paying with SDR resources the loan due in 2022 to the regional development bank, BOAD. However, the debt level is estimated to have risen slightly in 2022 mainly due to the increase in financing needs, new government guarantees on the national water and electricity company (EAGB), and recognition of legacy arrears. Despite these developments, public debt is anticipated to take a downward path from 2023 onwards and drop below the WAEMU criterion of 70 percent of GDP by 2026.

Regarding the external sector, the current account deficit is projected to have increased to about 5.9 percent of GDP from 0.8 percent of GDP in 2021 due to lower performance of cashew exports.

With measures taken by BCEAO to mitigate the impact of the Covid-19 pandemic on the financing of economic activity in the monetary union, Guinea-Bissau's banking system has enjoyed comfortable liquidity and capital levels in line with the regional prudential criteria, except for one undercapitalized bank. On lending activity, bank credit improved while non-performing loans (NPLs), albeit still elevated, declined in 2022 and are better provisioned.

Outlook and Risks

The authorities share staff's view on the economic outlook for the near-term. They project growth to rebound to 4.5 percent in 2023—due mostly to a return to 2021 cashew export levels and expected increase in private sector investments. Over the medium-term, growth should reach 5 percent, supported by improvements in agriculture, mining, tourism, and fisheries activities and underpinned by sounder fiscal management. Nonetheless, the authorities are mindful of the downside risks stemming notably from challenging domestic and external environments and the country's vulnerability to shocks. To mitigate these risks and unleash the country's economic potential, the authorities reiterate their strong commitment to reforms under the program.

Policies and Reforms for 2023 and the Medium-Term

Following months of steadfast policy and reform implementation, with support from the IMF staff, the authorities successfully completed their SMP program in June 2022 in challenging circumstances. They view the ECF-supported program as the appropriate anchor for notably ensuring fiscal discipline and advancing governance reforms.

Fiscal Reforms and Debt Policy

The authorities remain engaged in ensuring continuous reduction in the fiscal deficit-to-GDP and debt-to-GDP ratios, starting in 2023, towards meeting the WAEMU convergence criteria of 3 percent by 2025 for the deficit and 70 percent by 2026 for debt. To that end, the 2023 budget approved by the government in December is the basis of the newly agreed program. It sets out critical fiscal and tax reform measures to strengthen fiscal and debt sustainability, including ambitious targets for tax revenues, wage bill, priority expenditures, domestic primary balance, and financing conditions.

On the revenue front, the authorities continue to implement measures to enhance domestic revenue mobilization, including by broadening the tax base. To this vein, their tax reform, supported by Fund technical assistance, has allowed the enactment of a much-needed package to enhance the transparency of the tax system, improve the tax penalty regime, promote a new VAT law, and ensure full implementation of the electronic filing of tax returns. The authorities expect to generate more revenues by implementing the VAT this year. They are grateful for the continued Fund assistance in this regard. They look forward to Fund support on modernizing the general exemptions regime and stepping up tax administration reforms.

On spending and public financial management, the authorities reaffirm their determination to take further expenditure containment measures, especially regarding the wage bill growth, to provide better and sustainable public service delivery. Therefore, to ensure the integrity of the payroll process and strengthen wage bill management, they will implement the Fund's innovative Blockchain Project, a flexible and secure technological solution promoted by the IMF and a reputable private consulting firm, and which was selected as one of the winners of the 2020 IMF Anticorruption Challenge. This will help contain the payroll bill and address other red flags by monitoring and reporting resources spent as well as potential discrepancies between budgeted and executed wage payments across ministries. Furthermore, actions are underway to conduct a more comprehensive and modern civil service census based on other countries' experiences, with support from the World Bank. The authorities have also elaborated an action plan to implement the Treasury Single Account (TSA) to help with their cash management and cash flow forecasting.

The authorities acknowledge the need to address fiscal risks associated with SOEs, especially EAGB, and create fiscal space for much-needed social and investment spending. To this end, the ongoing restructuring of the utility company, with support from the World Bank, is expected to address its financial and operational weaknesses. In addition, the company is about to install new pre-paid analog meters starting February 15, which would help increase revenue. The government has followed through with its commitment to not intervene financially or issue bank guarantees to fulfill EAGB's obligations. The authorities agree that fully restoring the company's financial situation is essential to complete the interconnection to the regional energy project (OMVG). The authorities highly appreciate the technical support from the Fund, World Bank, and other partners on this front.

Regarding debt, the authorities have reiterated their plan to reinforce debt management. They intend to pursue prudent policies focusing on concessional resource mobilization to the extent possible.

Strengthening Governance and the Fight against Corruption

It has been made clear at the highest level that strengthening governance and fighting corruption are the at the forefront of the authorities' reform priorities. The continued Fund support in this area, including in preparing the decree-law on public procurement, is well appreciated. The legality and accountability requirements for the COVID-19 emergency expenditures committed by Guinea-Bissau when requesting the Rapid Credit Facility (RCF) have been largely met. The audits conducted by the Audit Court and Inspection General on pandemic-related spending were published in June 2022. The ex-post independent audit by a reputable third-party auditor firm was also published in January 2023. The authorities intend to follow up and implement all recommendations of the independent auditor promptly.

The authorities remain determined to bring transparency requirements to international standards and continue to publish all financial reports, critical information on pandemic-related contracts, and beneficial ownership information. They are preparing guidelines for the successful implementation of the 2022 decree on beneficial ownership to help further disclose all beneficial ownership information on all publicly awarded contracts.

Regarding institutional measures, the authorities intend to step up efforts to strengthen the effectiveness of the AML/CFT mechanism 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 will act to preserve the resilience of the financial system and ensure compliance with regulatory and regional requirements, including curbing NPLs and successfully exiting the undercapitalized bank. In this regard, all due diligences were made with a potential investor to buy the government's stake and inject more capital into the bank to bring it in compliance with prudential standards. The authorities are optimistic and expect to receive the investor's final position soon. Meanwhile, they settled a considerable amount of debt owed by the government, which has helped improve the bank's financial position. Notwithstanding, the government stands ready to implement any recommendation that the regional banking supervisory commission deems appropriate in case the operation with the investor did not materialize, and it will prepare a plan to disengage from the bank by 2024.

Conclusion

Building on the achievements made under the SMP, the Bissau-Guinean authorities intend to pursue economic and structural measures to preserve macroeconomic stability, strengthen governance and transparency, and tackle sources of fragility to enhance resilience. We would appreciate Executive Directors' support of Guinea-Bissau's request for an ECF arrangement.