Press Release: IMF Approves Second Annual ESAF Loan for Guinea-Bissau
May 31, 1996
The International Monetary Fund (IMF) today approved an augmented second annual loan for Guinea-Bissau under the enhanced structural a djustment facility (ESAF)1 equivalent to SDR 4.2 million (about $6 million), in support of the Government's 1996 macroeconomic and structural adjustment program. The loan, which includes part of an undisbursed amount under the first annual ESAF loan, will be made in two equal installments, the first of which is available shortly. The three-year ESAF credit, for the equivalent of SDR 9.45 million (about $13.6 million) was approved in January 1995.
Guinea-Bissau's adjustment effort spans the last decade. Following a period of relapse and renewed large financial imbalances, a major tightening of the fiscal and monetary policy stance took place in 1993, and laid the basis for adoption of a program that could be supported by the ESAF. The 1994-95 ESAF-supported program achieved real GDP growth of 4-5 percent, but inflation rose to 45.4 percent, and fiscal performance under the program ran into serious difficulties. The authorities initiated corrective measures in March 1995, and performance was satisfactory under a program for the second half of 1995 that was monitored by the IMF staff. Tax revenues increased, monetary policy was considerably tightened, and international reserves were used more effectively. Nonetheless, inflation remained high.
The 1996 Program
Guinea-Bissau's macroeconomic objectives for the period 1996-98 are to achieve a real GDP growth rate of at least 4 percent a year, lower the average rate of inflation to about 7.5 percent by 1998, and reduce the external current account deficit from 18.9 percent of GDP in 1995 to about 15.5 percent of GDP in 1998.
Consistent with the medium-term strategy, the 1996 economic program aims at achieving real GDP growth of 4 percent, reducing the average annual rate of inflation to 26.5 percent, and limiting the external current account deficit to about 18 percent of GDP. The Government intends to remain current on its external debt obligations during 1996.
To these ends, fiscal policy is aimed at containing the overall budget deficit at 21.5 percent of GDP. A sharp reduction in widespread import duty exemptions, combined with efforts to collect direct tax arrears, is expected to enhance revenue mobilization. To strengthen expenditure control during 1996, the Government will assess the decentralized expenditure authorization system introduced in 1995 and re-introduce treasury control over all expenditures should it find a rise in domestic arrears accumulation by spending ministries. The monetary program has been designed to reduce inflation sharply.
Structural reforms are intended to increase the role of the private sector in the economy and to support broad-based growth. These reforms center on an acceleration of the privatization program initiated in 1994, a civil service reform, and a strengthening of the legal framework through revisions of the investment code, adoption of a land code, and an extension of the network of judicial courts. Sectoral programs in agriculture, fisheries, and infrastructure have been prepared in consultation with donors and will be adopted shortly.
The Government attaches high priority to providing education and primary health care, particularly to the rural areas where the majority of the population lives, and to developing measures aimed at reducing poverty. An emergency program has been adopted for 1996 to address the declining quality of basic education and enrollment rates by strengthening the financial capacity and management of the Ministry of Education. In the health sector, a five-year program has been introduced to increase the number of primary care centers, particularly in the rural areas, and to ensure the availability of essential drugs.
The Challenge Ahead
Guinea-Bissau has an extremely heavy debt burden, which continues to hinder the country's prospects for growth. Its debt stock at end-1995 was in excess of 360 percent of GDP, with a net present value of 19 times its exports, and an estimated debt service equivalent to 94 percent of projected fiscal revenue for 1996, after debt relief. Guinea-Bissau cannot achieve debt sustainability in the foreseeable future unless it receives exceptional treatment of its debt-service obligations beyond the Naples terms already granted by the Paris Club creditors on official bilateral debt.
Guinea-Bissau joined the IMF on March 24, 1977. Its quota2 is SDR 10.5 million (about $15 million), and its outstanding use of IMF credit currently totals SDR 3.6 million (about $5 million).
Sources: Guinea-Bissau authorities and IMF staff estimates and projections.
1. The ESAF is a concessional IMF facility for assisting eligible members that are undertaking 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 allocation of SDRs.