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Bissau, November 13, 2000
Mr. Horst Köhler
International Monetary Fund
700 19th Street NW
Washington, D.C. 20431
Dear Mr. Köhler:
1. The attached memorandum describes the policies and reforms that the government
of Guinea-Bissau intends to adopt during 2000-03. The main objectives
of our medium-term policies are to consolidate peace and reduce poverty
in a context of high economic growth and good governance. In support of
these policies and reforms, the government of Guinea-Bissau requests a
three-year arrangement supported by the Poverty Reduction and Growth Facility
(PRGF) in the amount of SDR 14.2 million (100 percent of quota), including
an amount equivalent to 25 percent of quota for replacement of purchases
under the post-conflict emergency assistance.
2. In consultation with the representatives of civil society, the private
sector, and development partners, the government of Guinea-Bissau has
prepared an Interim Poverty Reduction Strategy Paper (I-PRSP) which it
has submitted to the Fund and the World Bank. The government aims to develop
a full-fledged PRSP by end-2001 with the full participation of all major
3. Guinea-Bissau's performance under the program supported by the Fund's
post-conflict emergency assistance was satisfactory, with most performance
indicators and many of the structural benchmarks having been met. The
government of Guinea-Bissau believes that this progress provides a good
basis both for a PRGF and for external debt relief under the enhanced
Heavily Indebted Poor Countries (HIPC) Initiative.
4. The first program review will be completed by May 31, 2001; the review
will examine the demobilization program, civil service reform, domestic
arrears repayment, debt relief granted by multilateral and bilateral creditors,
the implementation of the action plan for the Banco Internacional da Guiné-Bissau
(BIGB), budget execution (including in the social sectors), the structure
of domestic petroleum prices, and progress in the preparation of the full
PRSP. Subsequent reviews will follow the standard semiannual pattern;
specifically, the second review of the first-year program will be completed
by November 30, 2001. The government of Guinea-Bissau will provide all
information that the Fund requests in connection with Guinea-Bissau's
progress in implementing the economic and financial policies.
5. The government will consult with the Fund regarding the implementation
of major policy initiatives not considered during the PRGF discussions.
6. The government of Guinea-Bissau believes that the policies set forth
in the attached memorandum of economic and financial policies (MEFP) are
adequate to achieve the objectives of the program. During the arrangement
period, the government of Guinea-Bissau stands ready to take additional
measures that may become appropriate to ensure the achievement of the
Very truly yours,
Dr. Caetano Intchama
Dr. Purna Bia
Minister of Finance
Memorandum of Economic and Financial Policies for 2000-2001
1. Following a year-long military conflict that ended in May 1999, the
government of Guinea-Bissau embarked on a program of political consolidation
and economic reconstruction and rehabilitation. This program was supported
by the International Monetary Fund under the guidelines for assistance
to post-conflict countries, approved in two tranches on September 14,
1999 and January 7, 2000, respectively, for a total amount of SDR 3.55
2. The government that took office following presidential and legislative
elections in November 1999 and January 2000 has developed its national
Interim Poverty Reduction Strategy Paper (I-PRSP)1
in a broadly-based participatory manner. The program aims at reducing
poverty in the context of a high-growth strategy, financial stability,
and enhanced governance. To implement this program, for which Guinea-Bissau
will continue to require sustained international support, the government
intends to pursue its policies under a three-year arrangement supported
by the Fund's Poverty Reduction and Growth Facility (PRGF). The government
also seeks external debt relief in the context of the enhanced Heavily
Indebted Poor Countries (HIPC) Initiative. This memorandum briefly describes
the results achieved under the program supported by the emergency post-conflict
assistance, establishes the objectives of the PRGF, and sets out the policies
and measures that the government of Guinea-Bissau intends to pursue in
the first year of the program.
II. Performance under the Emergency Post-Conflict Assistance
and Poverty Conditions
3. Performance under the economic program supported by the Fund's emergency
post-conflict assistance was satisfactory, and most of the objectives
for December 1999-June 2000 were met (Table 1).
Following a decline of 28 percent in 1998 as a result of the war, real
GDP grew by almost 8 percent in 1999; cashew nut production and reconstruction-related
investment were the main engines of growth. The average annual change
of consumer prices turned to a negative 2 percent in 1999, reflecting
improved food supplies and tight credit policies.
4. Fiscal performance in 1999 was broadly satisfactory. The current primary
fiscal balance,2 on
a commitment basis, improved to a surplus of 3.2 percent of GDP from a
deficit of 6½ percent of GDP in 1998, thanks to strong fiscal
revenue and despite current primary expenditure higher than projected,
in part because of military spending related to the increased number of
soldiers. However, since capital expenditure also exceeded projections,
owing to rehabilitation-related outlays, the overall fiscal deficit (on
a commitment basis and including grants), equivalent to 9.9 percent of
GDP (and 14.4 percent of GDP excluding grants), was higher than envisaged;
the deficit was financed by a larger-than-projected accumulation of external
and domestic arrears.
5. External sector developments during 1999 were mixed. There was a very
strong recovery of exports (owing to higher volume and better prices)
and official transfers (mainly fishing license fees, for which basically
no payments had been received in 1998). However, since imports of goods
and services increased rapidly after the end of the conflict, the current
account deficit (including official transfers) improved less than expected,
to 12½ percent of GDP (23 percent of GDP excluding official transfers).
In addition, the private capital account (including errors and omissions)
recorded a very large deficit, owing to capital outflow during the conflict
and under recording of imports (as customs were not operational for part
of the year). Despite a further accumulation of external arrears, net
official reserves decreased by CFAF 1½ billion.
6. The fiscal stance deteriorated in the first quarter of 2000, reflecting
large repayments of domestic arrears, and net bank credit to the government
expanded rapidly. This situation was reversed in the second quarter of
the year, as revenue collection improved strongly and outlays on account
of the 1999 budget almost stopped. External arrears continued to accumulate
during this period.
7. Reflecting the rapid expansion of net credit to the government and
the seasonal nature of the cashew crop, broad money increased by over
16 percent in the first quarter of 2000. The excess liquidity, exacerbated
by serious power shortages, contributed to a rise in consumer prices of
over 20 percent during this period. Since then, however, monthly inflation
rates have come down to less than one percent, largely reflecting the
fiscal adjustment during the second quarter of 2000.
8. Progress has been made in the reconstruction and rehabilitation of
the economy. By early 2000, most of the displaced persons had returned,
60 percent of damaged houses were restored, de-mining had started, and
roads were being re-opened. Also, the government adopted a new fishing
law, submitted a draft law on electricity to parliament, and promulgated
the decree establishing the institutional framework for the demobilization
and reinsertion of military personnel. However, reconstruction of social
infrastructure and resumption of basic social services, as well as electricity
and water supply, have been slow, mainly owing to limited available financing.
9. Poverty remains severe; some 88 percent of the population are estimated
to live on an income of less than US$1 a day, while access to basic social
services and water and sanitation remains limited. The incidence of poverty
is highest in rural areas, among large households, particularly where
the breadwinner has no formal education, and among women.
III. The Main Challenges Ahead and the Medium-Term
10. The main challenges that lie ahead for the people of Guinea-Bissau
are to consolidate peace, complete the reconstruction effort and lay the
foundation for sustainable high growth and significant poverty reduction.
The consolidation of durable peace requires permanent demobilization and
reinsertion of part of the armed forces, ex-combatants, and police (whose
combined size had swollen from an estimated pre-conflict level of 15,000
to about 26,000 by end-December 1999) as well as the development and strengthening
of democratic institutions. Laying the foundations for sustained growth
and poverty reduction requires maintaining macroeconomic stability by
implementing prudent demand management policies in the context of the
West African Economic and Monetary Union (WAEMU) zone, accelerating structural
reforms, and introducing specific policy measures aimed at reducing poverty.
11. Guinea-Bissau's post-conflict situation requires special sequencing
for the next three years. The first year of the program will be a
transition period, preparing the ground for major reforms in the years
to follow. An increase in spending related to the regularization of conscripts
into the army at end-1999 and essential spending in reconstruction and
the social areas will result in a temporary worsening of the fiscal balance
in 2000 and 2001. Meanwhile, structural reforms will focus on areas critical
for economic revival, including in the fiscal, banking, and energy sectors.
During later years, the fiscal balance will be strengthened, even as social
expenditures continue to increase, reflecting improved revenue collection
and savings made on account of the demobilization-reinsertion program
and a civil service reform. Other structural reforms will be implemented,
including privatization of remaining state-owned enterprises. In addition,
the government will press ahead with further improvements in key health
and education services and other poverty-reduction programs.
12. In terms of quantitative targets, the government's program for 2000-03
aims at (i) achieving GDP growth of 8-9 percent a year; (ii) reducing
average annual inflation from a projected 10 percent in 2000 to 3 percent
in 2003; and (iii) contributing to the further build-up of the international
reserves of the Central Bank of West African States (BCEAO). Gross domestic
investment is expected to expand strongly to reach 23½ percent
of GDP by 2001, above the pre-conflict level, and to increase basically
in line with GDP in 2002-03. Gross domestic dissaving will temporarily
increase to 4½ percent of GDP in 2000 but should improve thereafter
with the gradual return of confidence, and reach a positive level by 2002.
Foreign savings will increase from 17 percent of GDP in 1999 to 21½
percent of GDP in 2000 and 25 percent in 2001, reflecting intensified
donor assistance with the consolidation of peace and democracy, and the
implementation of structural reforms; it will decline afterwards to about
21 percent of GDP.
13. The poverty reduction strategy of the government in 2000-03 also
will be based on (i) increased access to basic health services and
primary education (including of girls) through substantial increases in
budget allocations and improved efficiency; (ii) policy measures
specifically targeted at the poor; and (iii) improved access to employment
opportunities. Achievement of durable peace also will greatly benefit
the poor, who have the least opportunities for avoiding violence and hedging
against war-related losses. In this regard, an important role will be
played by the government's demobilization and reinsertion program and
post-conflict consensus-building among interest groups in the context
of the participatory process used during the preparation of the PRSP.
IV. Economic Program for 2000-01
A. Macroeconomic Policies
14. In line with the medium-term objectives outlined in paragraphs 10-13,
the program for 2000-01 (starting in November 2000) projects an increase
in GDP growth from 7.8 percent in 1999 to over 8½ percent in
2000 and 2001, and aims at (i) reducing the average inflation rate
from 10 percent in 2000 to 4 percent in 2001 (almost meeting the WAEMU
objective of 3 percent); and (ii) containing the external current account
15. The government is committed to pursuing a prudent fiscal policy in
both 2000 and 2001. However, because of the expected temporary rise in
spending (see paragraph 11) and a transitory decline in the ratio of revenue
collection to GDP (related to significant collection of tax arrears in
1999), the program envisages a temporary worsening in the current primary
fiscal balance from 3.2 percent of GDP in 1999 to about 1 percent of GDP
in 2000 and in 2001. The government is determined to implement steadfastly
the demobilization program and to further strengthen revenue collection
(see paragraph 16), so as to provide appropriate resources to reinforce
social sector expenditure. Total expenditure on health, education, targeted
poverty programs and investment in infrastructure and rural development
are programmed to increase from 13.3 percent of GDP in 2000 to 16.6
percent of GDP in 2001. The overall fiscal deficit (on a commitment basis
and including grants) is projected to decline from about 10 percent of
GDP in 1999 to 7½ percent of GDP in 2000 and to widen to 13½ percent
of GDP in 2001. The latter is on account of a strong increase in restructuring
programs and capital expenditure (mainly foreign financed), including
demobilization, civil service reform, and reconstruction-related and social
infrastructure investment. The 2001 budget was endorsed by the Cabinet
in early-November and will be submitted to parliament for its approval
before the end of the year.
16. The government is committed to implementing revenue-enhancing measures
aimed at ensuring that budgetary revenues will rise in 2001, to the equivalent
of 16.4 percent of GDP. The main measures include (i) an increase
in domestic prices of petroleum products (paragraph 42); (ii) the
progressive computerization of the customs database (SYDONIA) and the
streamlining of customs procedures; (iii) an increase in the VAT
rate from 10 percent to 15 percent and improvements in VAT administration
(with Fund technical assistance); and (iv) improvements in tax administration
in general (including the implementation of a taxpayers identification
system and the creation of a fiscal tribunal).
17. In 2000, current primary expenditures, as a percent of GDP, will
expand slightly, reflecting mainly an increase in the wage bill and food
aid-related transfers. The wage bill will rise from CFAF 6.9 billion (5.1
percent of GDP) to CFAF 9.8 billion (6.1 percent of GDP, or about
68 percent of tax revenue), owing to (i) an increase in army personnel
(paragraph 11); and (ii) starting July 1, an increase (of between CFAF 1,000
to CFAF 2,000) for public servants in the non-management wage grids
(A to Z), including soldiers. In addition, transfers will increase
owing to the distribution of food aid in the form of 50 kilograms
of rice per month to a maximum of 15,120 public servants in categories
C to Z, including soldiers who do not receive food in the barracks. The
government has ensured full donor financing for the distribution of the
latter during 2000, and intends to discontinue this program in 2001. Capital
expenditures, financed mainly by foreign resources, will rise from 11.1 percent
of GDP in 1999 to 13.1percent of GDP in 2000, boosted by spending on,
inter alia, the priority social sectors.
18. In 2001, current primary expenditures will increase by about 1 percent
of GDP, as a decline in military spending in wages and food distributed
in the barracks (excluding the cost of demobilization) will be more than
offset by a rise in social spending. The government will set nominal wage
increases in the civil service in the context of the civil service reform
(paragraph 21). With implementation of the demobilization program,
the ratio of the overall wage bill to GDP will decline despite the recruitment
of new teachers and health personnel. Capital expenditures will continue
to rise, to over 14 percent of GDP, with most of the spending being
directed to reconstruction of social and physical infrastructure.
19. With a view to revitalize the economy, the government is committed
to gradually repay its domestic arrears. To this end, it will (i) prepare,
by end-November 2000, a manual of procedures that is acceptable to donors;
(ii) pre-audit a subset of claims by end-November 2000, with a view
to initiate a first phase of payments before the end of the year, and
perform a complete post-audit at a later date to be agreed with foreign
donors; and (iii) pre-audit, with the assistance of the European Union,
all remaining claims by end-March 2001 so that they can be financed fully
by donor contributions. Table 2 indicates the
program's repayment schedule of domestic arrears in 2000-01.
20. The government will implement a number of poverty-reducing measures
in its program for 2000 and 2001 (described in paragraphs 32-37), to achieve
the following social targets: (i) total spending on health is programmed
to double to 2.4 percent of GDP in 2000, and increase further to 2.8 percent
of GDP in 2001; (ii) total spending on education will double in 2000
to reach over 3½ percent of GDP and increase further to 4½ percent
of GDP in 2001; (iii) spending on targeted poverty reducing programs will
reach 6 percent of GDP on average. Given the pressing nature of social
needs, in the event that resources from privatization and debt relief
exceed those envisaged in the program, one-half of the additional resources
will be used to finance additional projects in the social and basic infrastructure
areas, to be identified in collaboration with the World Bank.
21. A civil service reform will be implemented in 2001-02, with
expected donor assistance. The reform will mainly aim at (i) reducing
the size of the civil service by about 2,800 workers in lower wage
categories in 2001-02, in tandem with contracting out selected services
to the private sector; (ii) retiring an estimated 300 workers over the
compulsory retirement age; and (iii) eliminating "ghost" workers
and double jobs. In addition, recruitment procedures will be made more
transparent and competitive, and promotion will be based on merit. The
civil service reform and the demobilization program will contribute to
progress in meeting the WAEMU convergence criterion limiting the wage
bill to no more than 35 percent of government tax revenue (this ratio
is expected to fall to under 44 percent in 2003). The government also
intends to reform the pension system and is in the process of identifying
an appropriate source of technical assistance.
22. The government is aware of the need to ensure that the support received
from the international financial community under the framework of the
enhanced HIPC Initiative helps to promote pro-poor public spending and
is committed to increasing the share of poverty-reducing expenditures
in the budget accordingly. In this regard, the government is committed
to take substantial action to improve accounting and audit systems and
to develop monitoring and reporting mechanisms. Specifically, the government
will (i) improve the budget classification system to identify expenditures
by economic function and program categories; (ii) improve the treasury
system with technical assistance from FAD; (iii) introduce the legal and
institutional framework for the reform of the public procurement system
by June 2001, with a pilot system fully operational by December 2001 in
five ministries; (iv) carry out public expenditure reviews, with
technical assistance from the World Bank; (v) strengthen budget execution
by implementing the WAEMU manual of regulations on supporting budget documentation;
(vi) prepare detailed quarterly budget execution reports; and (vii) reinforce
the independent office of the Comptroller General. Additional actions
to further enhance the government's ability to monitor and assess social
sector expenditures will be developed in the context of the full PRSP.
23. In view of its strong commitment to poverty-reducing macroeconomic
and structural reforms and the post-conflict situation, the government
is requesting exceptional treatment from its multilateral and bilateral
creditors to help cover the projected budgetary financing requirements
for 2000, amounting to CFAF 178 billion (about US$255 million).
The government seeks external debt relief on concessional terms with the
Paris Club and other bilateral creditors and assistance under the enhanced
HIPC Initiative, for which Guinea-Bissau was declared eligible by the
Executive Boards of the Fund and the World Bank in April 1998.
24. Monetary policy and banking supervision are set within the context
of the WAEMU. The inflation and net official reserve targets are consistent
with the general objectives for the region. Broad money is projected to
increase by 16½ percent in 2000 and 15 percent in 2001.
The expected decline of net credit to the government after the first quarter
of 2000 and the tight fiscal stance for 2001 will ensure that sufficient
credit will be available to the private sector. Net foreign assets are
projected to increase by about US$ 6 million in 2001, to reach the
equivalent of 3¼ months of imports of goods and services.
External sector policies
25. The external current account deficit (excluding official current
transfers) is expected to widen to 26½ percent of GDP in 2000 and
to 29½ percent of GDP in 2001, mainly on account of strong imports
related to donor-financed investment projects and the recovery of the
economy. Export volumes are projected to rise by about 8½ percent
in 2001, boosted primarily by good cashew production. The higher trade
deficit is expected to be more than covered by an increase in official
transfers and concessional loans. An accumulation of net official reserves
is anticipated in both 2000 and 2001. As indicated in paragraph 23, Guinea-Bissau
will seek concessional external debt relief to regularize its external
arrears and cover its financing gap in 2000-01.
26. The residual financing gap—after projected official transfers
and loans, possible debt relief from Paris Club creditors, other bilateral
creditors and multilateral creditors—is projected at about a total
of US$11 million during 2000-01. The gap is expected to be fully covered
by budgetary support from the International Development Association (IDA),
the African Development Bank, the European Union, and bilateral donors.
Given Guinea-Bissau's very limited debt-servicing capacity, the government
will continue to pursue a prudent external debt policy and will not contract
or guarantee any external loans on nonconcessional terms. The ministry
of finance will continue to have the sole authority over the contracting
or guaranteeing of all public external borrowing.
27. Guinea-Bissau's external debt situation is likely to remain very
difficult in the medium-term. The updated debt sustainability analysis,
prepared in consultation with Fund and World Bank staffs, indicates that
even under buoyant export projections, Guinea-Bissau's net present value
(NPV) of debt-to-exports ratio, after application of traditional debt
relief mechanisms, was about 1,000 percent at end-1999 and is projected
to remain substantially above the debt sustainability threshold under
the enhanced HIPC Initiative in the medium term. The government will,
therefore, seek assistance under the enhanced HIPC Initiative, based on
its track record under Fund- and IDA-supported programs.
28. In August 2000, the government started to implement the harmonization
of external tariffs within the WAEMU zone, to be completed by end-2000.
Under the common external tariff (CET) system, the number of tariff rates
will be cut from five to four; the maximum tariff rate will be reduced
from 30 percent to 20 percent. The government also will examine the possibility
of gradually reducing the current 10 percent export tax on cashew starting
29. During the period of implementation of the PRGF, the government of
Guinea-Bissau will not, without Fund approval, introduce new or intensify
existing exchange restrictions, introduce or modify any multiple currency
practices, impose or intensify import restrictions for balance of payments
reasons, or conclude bilateral payments agreements that are inconsistent
with Article VIII.
30. The government believes that a precondition for economic and social
development is durable peace. Therefore, it accords high priority to a
comprehensive and transparent demobilization of a substantial part of
the armed forces, ex-combatants, and police. With technical and financial
assistance from the World Bank and other donors, the government is in
the process of finalizing the preparation of a Demobilization, Reinsertion,
and Reintegration Program (DRRP), to be launched before the end of 2000
and implemented in the following three years. The main objective of the
program is to reduce the size of the armed forces by some 12,000 soldiers
and ex-combatants and provide them with skills and financial means to
be reintegrated into civilian life. Following the government's approval
of the DRRP, the decrees on the eligibility criteria for demobilization
and for DRRP assistance were promulgated in October 2000, and the government
has undertaken a census of the armed forces (including police and veterans
of war), to be completed and results made available by December 2000.
Also, based on a manual of procedures, to be approved by December 2000,
a pilot project of demobilizing 500 ex-combatants will be completed by
January 2001; an additional 3,500 soldiers and ex-combatants will be demobilized
by end-June 2001; and another group of 1,000 by end-December 2001. The
remaining 7,000 soldiers and ex-combatants will be demobilized prior to
reaching the HIPC completion point, and no later than by end-2003.
31. The total cost of the DRRP is expected to be fully financed with
the assistance of the international community. Part of this financing
has already been obtained through counterpart funds generated in the context
of the World Bank's Economic Rehabilitation and Recovery Credit approved
in May 2000. The government is in the process of mobilizing the required
additional financing to ensure the timely and successful completion of
the DRRP. Upon completion, the projected annual savings related to the
reduction of personnel will be equivalent to about 1 percent of GDP.
C. Poverty Reduction Policies
32. In line with the government's poverty strategy, the program for 2000-01
aims at establishing durable peace and increasing access to primary health
care and basic education; implementing specific poverty alleviation measures;
and improving the opportunities for employment. A reflection of the government's
commitment to fighting poverty is the creation of a ministry in charge
of designing and coordinating the policies of various government agencies
to combat poverty. In the paragraphs below, the main policy objectives
are described; targets to measure progress toward achieving these objectives
are discussed in detail in the government's I-PRSP that has been prepared
for submission to the Executive Boards of the Fund and the World Bank.
33. In the area of health care, for 2000 the primary objectives
are to restore a minimum level of basic service so as to avert the outbreak
of epidemics of tuberculosis and meningitis and to increase vaccination
from the presently dangerously low levels. The main policy objectives
for 2001 are to (i) increase access to health services by building
and rehabilitating health centers lost during the conflict; (ii) increase
the proportion of health centers that are fully operational by ensuring
adequate staffing; (iii) improve the supply of essential drugs; (iv) increase
utilization rates in local health centers; (v) strengthen child vaccination
programs; (vi) provide more medical assistance to women during pregnancy
and child birth; and (vii) conduct outreach programs in the areas of illness
34. In the area of primary education, the government's priorities
are to (i) rehabilitate classrooms damaged during the conflict; (ii) recover
the pre-conflict level of gross enrollment; (iii) promote girls'
education; (iv) improve the quality and efficiency of primary education;
and (v) correct serious regional imbalances in primary education.
In addition, the government intends to take measures to restore vocational
35. The government intends to provide targeted poverty-alleviation
programs. First, it will alleviate food shortages in the wake of the
post-conflict situation, in part by promoting rice cultivation for domestic
consumption. Second, the government will complete the rehabilitation of
3,000 dwellings for low-income households, damaged during the conflict.
Finally, the government also will complete the removal of the remaining
18,000 mines with expected donor assistance.
36. The government intends to improve access to income-generating
activities for the poor through the following channels: (i) investing
in human development (health and education); (ii) creating the conditions
for durable growth through structural reforms; (iii) promoting small-scale
business, including establishing a framework for microfinance (as described
below); and (iv) introducing high-labor intensive infrastructure
work projects with the multiple objectives of employment creation, enhancing
infrastructure, and reducing regional inequities.
37. The government attaches high priority to reducing the gender gap
in various areas, as discussed above: education of girls will be promoted
with a view to catch up with that of boys later in the decade.
D. Structural Reforms
38. In addition to structural measures described in the above paragraphs
concerning reforms in taxation and expenditure management, civil service,
pension system, demobilization, and settlement of domestic arrears, the
government is committed to implementing structural policies in key sectors
of the economy, including banking and energy, and will pursue forcefully
a privatization program.
39. The government is fully committed to ensuring rigorous banking supervision
in coordination with the Banking Commission of the WAEMU and to address
the serious problems affecting the largest commercial bank (BIGB). Regarding
the BIGB, on the basis of recommendations by the Banking Commission of
the WAEMU, a definitive action plan will be drawn by December 31, 2000.
The formulation of this action plan will pay due regard to related budgetary
costs; the authorities will discuss with the Fund how to face any financial
cost for the government associated with the proposed solution for the
BIGB. If the BIGB is to remain in operation, it must be adequately capitalized
and should meet all prudential regulations; in addition, a serious effort
is needed to recover bad assets (in connection with the plan to settle
domestic arrears). In the meantime, and as recommended by the BCEAO, a
provisional administrator for BIGB was named in October 2000 to ensure
that the capital of the bank is not further eroded and to elaborate the
aforementioned plan of action. The government will keep its deposits at
the BCEAO and it also commits not to provide any financial aid to the
BIGB before a definitive plan of action is adopted and that it will not
provide operational advantages to any bank operating in the country.
40. The government is aware that the benefits deriving from the development
of a modern banking system may still take some time to reach lower-income
groups. Against this background, with the support of its development partners,
the government will also promote the development of a suitable framework
for microfinance activities. This framework will take into account the
particular financing needs of lower-income groups and not involve subsidized
41. The government will implement, with assistance from the World Bank
and the West African Development Bank (BOAD), a program of rehabilitation
of the energy sector. The government submitted in October 2000
an electricity law to parliament, reforming the institutional framework
of the sector. In addition, to deepen structural reform in the sector,
the government will (i) open financial bids for a long-term leasing
contract (contrat d'affermage) of the power and water utility (EAGB)
by November 15, 2000; and (ii) create an independent regulatory
agency by end-January 2001. Meanwhile, the EAGB will accelerate the recovery
of its claims on major enterprises, helped in part by the domestic arrears
settlement program. In the water sector, a master plan will be approved
before end-2000 with a view to expand rural and urban supply coverage.
42. The government is committed to maintaining prices of domestic petroleum
products in line with those prevailing in world markets, and will review
with the Fund actions in this regard during the scheduled program reviews.
On August 15, 2000, the prices of petroleum products were increased by
between 15-18 percent; by December 15, 2000, the government
will increase prices by an additional 8 percent. Moreover, the government
supports the harmonization of taxation of petroleum products within the
WAEMU, which is expected to be carried out as soon as it has been approved
at the level of the zone.
43. The government will implement its updated privatization program
in 2000-01, adopted by the Cabinet of Ministers in October 2000.
By July 2001, two hotels and a ceramic factory will be brought to
the point of sale and the liquidation of five identified enterprises completed.
Overall, the government is committed to privatize the remaining 34 major
enterprises by end-2003, with assistance from the World Bank. Privatization
will be carried out in a transparent manner, using public bidding procedures;
the government will reestablish the centralization of privatization by
creating a Central Privatization Unit in the context of its updated program.
Finally, the government will adopt an action plan for the port and telecommunications
by June 2001.
44. The government will revise the April 6, 2000 decree-law on cashew
nut marketing and exports by November 15, 2000, with a view to eliminate
the sections discriminating against nonresidents, and permanently remove
the section on compulsory domestic processing along the lines suggested
by an independent study.
45. The government will make the necessary efforts to reestablish a fully
operational statistical system with the assistance of its development
partners. To this end, it will take measures to improve the timely compilation
of national accounts, and to ensure the prompt harmonization of the consumer
price index according to WAEMU guidelines. Also, the government will ensure
the timely production of fiscal, monetary and balance of payments data
to ensure adequate program monitoring. Finally, the government will introduce
statistical procedures for monitoring the program's poverty and social
E. Good Governance
46. Promoting good governance, a cornerstone of government policies,
will be achieved through (i) the reform of the procurement system;
(ii) the enhancement of fiscal accountability by reinforcing, with
donor assistance, the independent Court of Accounts, that will perform
the audit of budget execution, including military outlays (there will
be also special independent audits of the demobilization program); (iii) fiscal
decentralization with a view to improve fiscal efficiency and involve
the local community; and (iv) the publication twice a year of reports
on budget execution.
47. The government has established a high-level committee presided by
the Vice-Prime Minister to ensure full and timely implementation of the
program supported by the PRGF. This committee will be assisted by a technical
committee chaired by the Secretary of State of the Treasury and includes
the representatives of various key ministries, the BCEAO, and the Fund
Resident Representative to Guinea-Bissau.
INTERNATIONAL MONETARY FUND
Technical Memorandum of Understanding
(November 13, 2000)
This memorandum provides the definitions of the quantitative performance
criteria and benchmarks for the three-year program supported by the Fund
under the Poverty Reduction and Growth Facility (PRGF). These definitions
may need to be re-visited during the program reviews, so as to ensure
that this memorandum continues to reflect best understanding between the
government of Guinea-Bissau and Fund staff. This memorandum also sets
out the data-reporting requirements for monitoring the program.
I. Quantitative Performance Criteria and Benchmarks3
A. Government Finances
1. For program purposes, total government revenue is defined as
the sum of all tax and nontax revenues, cumulative since the start of
the calendar year, excluding tax exemptions (isenções
aduaneiras) on imports by government and donors, privatization proceeds,
2. The primary current budgetary balance is defined as the difference
between total government revenue and current primary expenditures on a
commitment basis, which equals government expenditures less payments made
on external and domestic debt, capital expenditures, and foreign-financed
demobilization expenditures and public administration reforms.
3. Pre-2000 domestic budgetary arrears are defined as budgetary
payment obligations, committed until December 31, 1999, but not yet settled
by the government of Guinea-Bissau for goods and services rendered by
individuals and enterprises operating in Guinea-Bissau. In 2000, the expected
reduction of CFAF 7.2 billion includes: (i) payments made between
January 1 and June 30 (CFAF 6.1 billion);4
and (ii) repayments of verified domestic budgetary arrears to be made
between in the last quarter of 2000, as programmed in the MEFP in the
context of the Domestic Arrears Settlement Plan (CFAF 1.1 billion).
4. The avoidance of new budgetary arrears constitutes a benchmark under
the program. New budgetary arrears are defined as arrears accumulated
during the fiscal year on wages, goods and services, and transfers. Payment
on salaries, wages and pensions are deemed in arrears when they remain
unpaid more than 30 days beyond the due payment date. Payments to suppliers
are deemed to be in arrears if they have not been made within the normal
grace period of 90 days or such other period as has been contractually
agreed after the verified delivery of the concerned goods or services,
unless the amount or the timing of the payment is subject to good faith
negotiations between the government and the creditor.
5. Under the program, a continuous performance criterion of no accumulation
of new external arrears will apply. External arrears are defined
as total obligations of the government that have not been paid by the
time they are due, excluding arrears on external debt service pending
the conclusion of debt rescheduling agreements.
Reporting requirements: Data on the implementation of the budget
compiled by the State Secretary's Office of Planing and the Budget in
the Ministry of Finance, together with a summary text concerning central
government operations, will be provided on a quarterly basis, to be submitted
not later than a month following the end of each quarter. On a monthly
basis, the following indicators will be provided with a maximum delay
of four weeks: (i) government revenue, total and main components;
and (ii) primary current expenditure, on a commitment basis and on
a cash basis, total and main components, including for the ministries
of health and education. Detailed data on repayment of domestic arrears
and information on the remaining stock of arrears carried over from previous
years will be provided once the audit of domestic debt arrears has been
finalized and transmitted on a monthly basis, within four weeks of the
end of each month. Monthly data on the public sector's scheduled external
debt service and actual payments on current maturities and on arrears,
detailed by creditor, compiled by the State Secretary's Office of Planing
and the Budget will be transmitted on a quarterly basis within six weeks
of the end of each quarter.
B. Net Credit to the Government from the Banking System
6. The ceiling on the cumulative change, from the beginning of the calendar
year, in net credit to the government from the banking system constitutes
a performance criterion. Net credit to the government from the banking
system is defined as all government liabilities minus all assets held
by the government at the central bank and commercial banks. Government
liabilities to the banking system include, inter alia, (i) advances from
the BCEAO under Article XVI; (ii) consolidated loans from the BCEAO; and
(iii) obligations to the IMF. Government assets towards the banking system
include inter alia: (i) the government current account at the BCEAO; (ii)
deposits for funds received from the European Union; (iii) the multilateral
debt fund; (iv) deposits set up to for the financing of the demobilization
program; (iv) any other deposits at the BCEAO; and (v) all deposits
at commercial banks.
7. The ceiling on net bank credit to government will be adjusted downward
by any shortfall in the actual net reduction of domestic payment arrears
relative to the programmed amount of CFAF 7.2 billion at end-December
2000, up to an amount of CFAF 1.1 billion.
8. If proceeds from privatization differ from the amount programmed (CFAF 2.5 billion
in the period between September 2000 and December 2001), the ceiling on
net credit to government will be adjusted by one-half of the difference.
In the case of an upward adjustment to the ceiling, the additional resources
will be spent on social and infrastructure projects identified in collaboration
with the World Bank.
9. In case the debt relief from multilateral and bilateral creditors
exceeds (falls short of) the programmed amount of CFAF 130.6 billion in
December 2000, and CFAF 21.3 billion in December 2001, the ceiling
on net bank credit to the government will be revised downward (upward)
by one half of the difference between the actual and programmed amounts.
In case of an upward adjustment to the ceiling, the additional resources
will be spent on social and infrastructure projects identified in collaboration
with the World Bank.
10. The ceiling on net bank credit to government will be adjusted downward
(upward) by one-half of any excess (shortfall) in non-project-related
budgetary external assistance cumulative since the beginning of the calendar
year (excluding IMF financing, food aid, and HIPC debt relief) relative
to the programmed amount of CFAF 24.4 billion at end-December 2000, and
CFAF 16½ billion at end-December 2001. There will be no adjustment
for project-related external financial assistance. Underlying the calculations
are a program exchange rate of CFAF 697.7 per U.S. dollar for December
2000 and CFAF 707.6 per U.S. dollar in 2001. Cross rates vis-à-vis
other currencies are defined by the performance criteria table in footnote 7.
11. Once a decision is taken regarding the future of the BIGB, the authorities
and the Fund will discuss ways in which the government can finance its
obligations as partial owner of the bank.
12. For the period September 2000-December 2001, the maximum cumulative
combined upward adjustment to net bank credit to the government from adjustors
in paragraphs 7-10 should not exceed CFAF 5 billion.
Reporting requirements: The preliminary monthly balance sheet
of the BCEAO-Bissau will be transmitted on a monthly basis, with a maximum
delay of six weeks. In addition, the preliminary table on net credit to
government (position nette du gouvernement, PNG) calculated by
the Ministry of Finance will be submitted on a monthly basis within four
weeks of the end of each month. The government will ensure that the BCEAO
receives all necessary information in this regard, including with respect
to its operations with commercial banks. The definitive version of the
monthly balance sheet of the BCEAO-Bissau and the PNG will be provided
as soon as they are available.
C. Nonconcessional External Borrowing
13. Under the program, nonconcessional external borrowing constitutes
a continuous performance criterion. Nonconcessional external debt is defined
as contracting or guaranteeing by the government of loans with a grant
element of less than 50 percent, calculated by using currency-specific
commercial interest reference rates. For loans with a maturity of at least
15 years, the 10-year average "Commercial Interest Reference Rate"
(CIRR), published by the Development Assistance Committee of the Organization
for Economic Cooperation and Development (OECD), should be used to calculate
the level of concessionality. For loans with shorter maturities, the 6-month
average CIRR should be used. For purposes of the program through December
31, 2000, the 6-month and 10-year CIRRs published by the OECD in June
2000 will be used, and of the program through September 2001, the CIRRs
published in November 2000 will be used. To both the 10-year and 6-month
averages, the following margins for differing repayment periods should
be added: 0.75 percent for repayment periods of less than 15 years;
1 percent for 15-19 years; 1.15 percent for 20-29 years; and 1.25
percent for 30 years or more. Debt rescheduling and debt reorganization
are excluded from the limits on nonconcessional borrowing. There will
be no new nonconcessional debt contracted or guaranteed by the central
government, local governments, or the BCEAO (excluding borrowing from
the Fund) throughout 2000-01. In addition, the government will
also not guarantee any external debt contracted by state enterprises,
and maintain the policy of not guaranteeing private sector external debt.
Reporting requirements: The government of Guinea-Bissau will consult
with Fund staff before assuming any liabilities in circumstances where
they are uncertain whether the instrument in question falls under the
performance criterion. Details of all new external debt, including government
guarantees, indicating terms of loans and creditors, will be provided
on a monthly basis within four weeks of the end of each month.
D. Short-Term External Debt
Short-term external debt is defined as debt contracted or guaranteed
by the government with contractual maturity of one year or less, excluding
normal import-related credits. There will be no new short-term external
debt throughout 2000/01.
Reporting requirements: Data on all new short-term borrowing and
guarantees, including terms of loans and creditors, will be transmitted,
with detailed description, on a monthly basis, within four weeks of the
end of each month.
E. Structural Benchmarks and Performance Indicators
14. For program purposes, the wage bill is defined as the sum of the
wage bill for regular employees and contractual employees (including civil
servants and armed forces), and embassy personnel, as well as all personnel
subsidies, gratification, and representation allowances.
Reporting requirements: Data on the wage bill compiled by State
Secretary's Office of Planning and the Budget will be provided on a monthly
basis, with a delay of four weeks.
II. OTHER DATA REQUIREMENTS FOR PROGRAM MONITORING
15. Data on exports and imports, including volumes and prices,
compiled by the National Institute of Statistics and Census (INEC) will
be transmitted on a quarterly basis within six weeks of the end of each
16. Monthly disaggregated consumer price index for Bissau, compiled
by the INEC will be transmitted monthly within four weeks of the end of
17. The new price structure of petroleum goods will be submitted
within five days of any decision to revise petroleum prices. Revised estimates
on the yearly consumption for each petroleum product will be included.
18. Documentation of all measures taken by the government, will
be transmitted within five working days after the day of implementation.
In particular, the Fund will be permanently informed of all measures taken
to deal with the BIGB.
III. PROGRAM REVIEW
19. Before May 2001, the Fund will review economic and financial development
and reassess the program targets. The review will examine (i) the demobilization
program; (ii) the civil service reform; (iii) domestic arrears repayment;
(iv) debt relief granted by multilateral and bilateral creditors; (v)
the implementation of action plan for the BIGB; (vi) budget execution,
including in the social sectors; (vii) the structure of
domestic petroleum prices; and (viii) progress made in the preparation
of the full PRSP.
document's original title in Portuguese is Documento de Estratégia
Nacional para a Redução da Pobreza (DENARP).
2 The current primary
fiscal balance is defined as the difference between budgetary revenue (including
tax and nontax revenue and excluding grants) and current primary expenditure.
3 See Table 2 of
the Memorandum of Economic and Financial Policies (MEFP).
4 The reduction
of domestic arrears up to June includes payments made on account of the
1999 budget during the complementary period and scheduled amortization of
the domestic debt.