Public Information Notice: IMF Concludes Article IV Consultation with Guinea-Bissau
October 8, 1999
|Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.|
On September 14, 1999, the Executive Board concluded the Article IV consultation with Guinea-Bissau.1
The military conflict that took place in Guinea-Bissau from June 1998 to early 1999 has caused severe damage to the infrastructure and disrupted economic activity, in addition to bringing intense hardship and suffering to the civilian population. Economic activity shrank dramatically following the outbreak of the conflict. Agricultural production is estimated to have fallen by about 17 percent; in addition, the interruption of formal industrial, trade and service activities are estimated to have resulted in a drop of real GDP of about 28 percent in 1998. Cashew nut output, the main export crop, declined in 1998 by an estimated 30 percent. Commercial imports stopped in the period June-November 1998, but some essential foodstuffs and medicine were imported under humanitarian aid programs. The country's two commercial banks remained closed during the period of the conflict, resuming business only in July 1999. The private sector suffered serious losses, with many warehouses looted or destroyed. The crisis resulted in the buildup of substantial government payments obligations, while tax collection grounded to a halt; these obligations include consumption of electricity and petroleum products by the belligerents during the conflict, war-related losses by private traders, compensation for requisitioned goods and equipment, and salary arrears.
Emergency measures and priority public expenditures
Following the formation of a national unity government at end-February 1999, the authorities started tackling the most urgent problems in the economic and humanitarian area, while seeking to reinforce the political institutions. Presidential and legislative elections have been set for November 28, 1999, and preparations have started with external financial assistance to ensure a democratic and transparent vote.
Priority reconstruction needs were presented by the government to an emergency roundtable conference held in Geneva on May 4-5 ,1999. These needs cover the costs involved in (i) the reconstruction of residential housing and basic infrastructure; (ii) the return of displaced persons; (iii) the troop demobilization, reunification of the armed forces and housing for the military; (iv) the removal of land mines; (v) the rehabilitation of the social sector; (vi) the support needed for the private sector; (vii) the repayment of government arrears; (viii) the organization of elections, consolidation of democracy and restoration of law and order. These costs have been estimated at about US$138 million, to be spread over several years.
The macroeconomic framework and financial and structural policies
Macroeconomic projections for 1999 are based on an upturn in exports and in private and public investment from the low 1998 levels, as well as on an increase in consumption. Overall real GDP could increase by approximately 7.5 percent, taking into account the low level of activity during the early months of the year. Cashew exports could reach 50,000 tons, up from 38,000 tons in 1998. Imports of goods and services are expected to increase by approximately 50 percent in value, as a result of the recovery in investment and reconstruction activities. The external current account deficit, excluding grants other than fishing licenses, is expected to widen in 1999 to 33 percent of GDP owing to the sharp recovery in imports.
The first annual tranche of the emergency program, including the cost of elections scheduled for the end of the year, was included in the 1999 budget. During the roundtable in Geneva, pledges were broadly in line with the support requested. The pace of implementation of the annual program will depend on the timely release of funds, the capacity to implement the various programs, and the projects' implementation rates. The 1999 budget has been prepared on the basis of a recovery in tax and nontax revenues, and adequate allocations for essential services. Domestic arrears incurred in 1998 are to be repaid at the pace made possible by the mobilization of external assistance. Budgetary revenues are expected to reach the equivalent of 11.7 percent of GDP, as against 15.3 percent in 1997. Tax revenue will be constituted mainly by proceeds of customs tariff and indirect taxes. The authorities are in the process of rehabilitating the customs and domestic taxation offices and restoring rigorous procedures for the commitment and payment of expenditures. Expenditures will include the cost of the upkeep, on a temporary basis, of the enlarged armed forces. The primary deficit, excluding foreign financed investment, is targeted at 4.2 percent of GDP. The authorities are keen to reduce rapidly the size of the armed forces, with a demobilization program that is in the process of being formulated with assistance from the World Bank.
The structural policies to be pursued in 1999 include, in addition to the strengthening of the revenue and expenditures administration and the demobilization of the armed forces, the strengthening of the banking system, and the resumption of the restructuring of the public enterprises, including of the electricity company. After the disruption of social services during the conflict period, the authorities are focusing on the restoration of services with external assistance; this involves the rehabilitation of schools and health centers, and the return of personnel who left the country.
The external financing expected to be available to Guinea-Bissau in 1999 includes purchases from the IMF under the emergency post-conflict assistance, disbursements from the World Bank under a rehabilitation and recovery credit, assistance from the European Union and from bilateral donors. The external debt burden, that remains very high, is expected to be alleviated when the country will reach the decision point under the HIPC Initiative; this will be concomitant with the finalization of a new ESAF-supported program, which the authorities intend to prepare following the November elections.
Executive Board Assessment
Executive Directors regretted that the 1998/99 conflict had inflicted grave suffering on the civilian population and caused severe damage to the economy and infrastructure. Directors were encouraged by the steps taken by the government to redress the damage caused by the conflict, in particular the restoration of basic services and the rehabilitation of the administrative structures. They expressed the hope that the institutional situation would consolidate rapidly, and that the scheduled elections would be held in an orderly manner in order to give confidence to the international community and help establish an environment conducive to economic development.
Directors welcomed the fact that the large 1999 cashew crop was having beneficial effects on overall economic activity, exports, income generation, and budget revenue collection.
Directors supported the efforts undertaken by the authorities to restore the tax system and reintroduce rigorous budget procedures. It was important that the efforts to improve governance that had begun in recent years be further reinforced, inter alia, through adequate control procedures on expenditures and centralization of all government revenues in the Treasury. On the tax side, Directors considered it essential to fully restore the collection of the recently introduced generalized sales tax, and to adequately strengthen tax and customs administration, with appropriate external technical assistance.
Directors stressed the need to make rapid progress in reducing the size of the armed forces, which had swelled during the conflict. In this context, Directors urged the authorities to work closely with the World Bank to design an effective demobilization scheme. They emphasized the critical importance of reducing military spending so as to provide room for much needed budgetary allocation for high priority social spending.
Directors emphasized that the repayment of domestic arrears was important to provide the needed support to the private sector, which had suffered serious losses during the conflict. They therefore urged the authorities to complete rapidly the inventory of such arrears and to formulate an appropriate plan for repayment. Directors noted that the authorities were giving appropriate priority to strengthening the banking sector, which needed to be recapitalized in view of the high level of nonperforming loans.
Directors agreed that satisfactory performance under the 1999 program and the establishment of a strong foundation for further reforms in the areas of public finance, civil service, and public enterprise restructuring could pave the way for the negotiation of a new arrangement under the ESAF and the reaching of the decision point under the HIPC Initiative; this was essential in order to reduce the extremely high external debt burden, and to lay the basis for sustained growth over the medium term.