Press Release: IMF Approves ESAF Loans for Guinea-Bissau
January 19, 1995The International Monetary Fund (IMF) approved a series of loans for Guinea-Bissau over the next three years under the enhanced structural adjustment facility (ESAF)1 totaling the equivalent of SDR 9.45 million (about US$14 million) to support the Government's economic and financial reform program for 1994-97. The first loan, equivalent to SDR 3.15 million (about US$5 million), will be disbursed in equal semi-annual installments, the first of which is available immediately.
Guinea-Bissau made significant progress in 1993-94 in redressing its severe economic and financial situation. Monetary expansion slowed, exchange rate distortions were broadly corrected, and the growth of government spending was held in check. There was a sharp fall in the rate of inflation, as well as a marked narrowing of the external current account deficit. However, progress has been less satisfactory in strengthening the Government's revenue performance and in advancing structural reforms.
Medium-Term Strategy and the 1995 Program
To maintain the momentum of the progress made in the past two years and move the economy decisively onto a path of sustainable growth, Guinea-Bissau has embarked on a three-year economic program for 1994-97, supported by the current three- year ESAF loans. The basic macroeconomic objectives of the program are to promote real economic growth of about 3 1/2 percent per year, permitting an annual average increase of 1 percent in per capita incomes; reduce inflation to 8 percent a year by 1997; and move towards external viability.
In the context of the medium-term strategy, the authorities' main macroeconomic objectives for 1995 are to achieve economic growth of 3.3 percent, cut inflation to 15.5 percent, and limit the external current account deficit (excluding official transfers and interest payments) to 20 percent of GDP.
In the fiscal area, the chief goal is to limit the overall deficit to under 23 percent of GDP in 1995. Enhanced government revenue performance will be at the core of the fiscal effort, while expenditure restraint will be sought primarily through containment of the government wage bill and capital outlays. To complement the program's fiscal consolidation, the authorities intend to tighten monetary and credit policies.
Structural Reform Policies
On the structural side, the authorities will start a major reform of the legal and regulatory framework during 1995. This will encompass revisions of land tenure, property rights, and business laws and regulations. In the agricultural sector, the authorities are aiming for self-sufficiency in rice and other staple cereal grains, as well as substantially expanded production of exportable goods, through more effective use of inputs. Actions are to be taken during 1995 to provide for the rehabilitation of the energy sector, improve transportation, and speed up public enterprise and civil service reform.
Addressing Social Costs
Some direct safety cushions are already being provided to ease the social cost of macroeconomic adjustment, most notably a generous severance pay package under the voluntary departure scheme for the civil service. The Government also plans to strengthen the provision of basic social services--especially in health and primary education--during 1995.
The Challenge Ahead
Despite the authorities' determination to intensify their macroeconomic adjustment efforts and broaden structural reforms, significant risks are attached to the proposed program, especially with respect to possible revenue shortfalls and/or less-than-satisfactory performance in growth and diversification. Very large financing gaps remain in prospect for the medium term, and the success of the program will require adequate and timely external assistance on concessional terms.
Guinea-Bissau joined the IMF on March 24, 1977; its quota2 is SDR 10.5 million (about US$15 million); and its outstanding use of IMF credit currently totals SDR 3.2 million (about US$5 million).
Sources: Guinea-Bissau authorities; and IMF staff estimates and projections.
1. The ESAF is a concessional IMF lending facility for assisting low-income members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent and are repayable over 10 years with a 5 1/2-year grace period.
2. A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.