## cr17228 ## Source details **Canonical URL:** [cr17228](https://www.imf.org/-/media/files/publications/cr/2017/cr17228.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17228.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17228.pdf.json) --- ### EXECUTIVE SUMMARY - ECF arrangement: - Three-year ECF arrangement approved on July 10, 2015. - Disbursements received: - Primary disbursement: SDR 2.84 million (10 percent of quota) upon approval. - Disbursement following combined first and second review (December 2, 2016): SDR 5.11 million (18 percent of quota). - Disbursement to be made available upon Executive Board completion of the third review: SDR 3.03 million (11 percent of quota). - Authorities request: - Waiver of nonobservance of a performance criterion. - Completion of the third review. - Completion of a financing assurances review. - Staff position: Supports completion of the third review under the ECF arrangement and the authorities’ request for a waiver of nonobservance of a performance criterion. - Political and institutional context: - Political crisis with four changes of government over the past two years; absence since late 2015 of a sitting Parliament. - ECOWAS calling for decisive implementation of the Conakry Accord for inclusive government. - Security situation remains calm; authorities committed to macroeconomic stability and structural reforms. - Development partners continue support of tax administration and public financial management (PFM). - WAEMU Banking Commission onsite inspections triggered progress toward bringing affected banks into compliance with prudential norms. - Recent macroeconomic developments (selected figures): - Real GDP growth estimated 5.1 percent in 2016. - Sectoral growth in 2016: - Primary sector: 5.2 percent. - Secondary sector: 5.6 percent. - Tertiary sector: 4.7 percent. - Cashew production: record high of 206 thousand tons in 2016; cashew export price increased by 8 percent in 2016; by May 2017 seasonal onset, cashew export price was some 20–30 percent higher than last year. - Inflation: consumer price inflation year-average rate of 1.5 percent in 2016. - Terms of trade: improved by 14 percent in 2016. - External current account: overall current account surplus narrowed to an estimated 0.9 percent of GDP from 2 percent in 2015. ### FISCAL PERFORMANCE AND PUBLIC FINANCIAL MANAGEMENT - Revenue and grants performance: - Tax revenue in line with program target at 9.3 percent of GDP (2016). - Non-tax revenue fell 0.8 percent of GDP below target. - Grants fell short by 0.6 percent of GDP. - Overall revenue and grants fell 1.5 percent of GDP below program. - Specific one-off shortfalls: sale of seized timber, a fine on a telecommunication company, collection of tax arrears from two public enterprises, implementation of a telecommunications gateway system. - Expenditure and financing: - Total expenditure 1.2 percent of GDP below program in 2016. - Wage bill slightly higher than programmed (reclassification of embassy worker compensation). - Cash deficit 0.3 percent of GDP smaller than programmed. - Total financing in 2016: 4.2 percent of GDP; foreign project financing contributed 2 percent of GDP. - Early 2017: nominal tax revenue rose by 24.7 percent in Q1 2017 vs Q1 2016; preliminary data indicate total expenditure grew by 6.4 percent over the same period. - PFM strengthening measures: - Twice-weekly Treasury Committee meetings improved budget execution and elimination of expenditures outside required procedures (DNTs). - Preparation and monitoring of monthly cashflow projections. - Decree clarifying debt issuance authority and procedures passed in early June 2017 (draft prepared with AFRITAC West TA). - EAGB monthly financial reporting requirement not met for Oct–Dec 2016; compliance work underway to ensure submissions by end-July 2017. - Key fiscal projections and anchors: - Domestic revenue expected to increase to 13.2 percent of GDP in 2017. - Total expenditure excluding foreign financed capital spending projected at 13 percent of GDP in 2017. - Transfer to EAGB to cover government guaranteed domestic debts: 1 percent of GDP (debts totaling CFAF 6.6 billion). - Domestic primary balance projected to reach 0.6 percent of GDP in 2017 (a 2.7 percentage point improvement from 2016). - Overall cash deficit implied at 2.2 percent of GDP in 2017. - Net domestic bank credit (NDC) projected at 0.9 percent of annual GDP in the first half of 2017 and at zero for the year overall. ### BANKING AND FINANCIAL SECTOR DEVELOPMENTS - Credit and banking indicators: - Credit to the private sector expanded by 10.6 percent in 2016 (13.2 percent in 2015). - Credit concentrated in commerce, construction, and manufacturing (about two-thirds); agriculture and fishing accounted for 2 percent. - Overall NPL ratio: 19.4 percent as of end-March 2017 (annex reports around 20 percent at end-March 2017; peak 26 percent in 2014). - Ratio of net income to average assets: 2.8 percent at end-March 2017. - Average deposit rate: 4.7 percent. - WAEMU Banking Commission actions and recapitalization: - Commission ordered two bailout banks to provision fully the non-collateralized part of NPL portfolios transferred to the government; provisioning led equity capital to fall sharply, negative at one bank. - Shareholders voted to increase capital at one bank but shares not yet subscribed; that bank likely non-compliant with the raised minimum capital requirement coming into force regionally at end-June. - The other bank is expected to meet the recapitalization requirement. - Banking-sector minimum capital requirement set at CFAF 10 billion (previously 5 billion) to be met by end-June 2017. - Constraints and policy approach: - Constraints: shortage of bankable projects, risk aversion amid high NPLs, slow recovery of collateral value due to legal uncertainties. - Authorities’ three-pronged strategy: increase minimum capital requirements, strengthen debtor information collection, bolster supervision. - Authorities support cleanup of balance sheets and substantial recapitalization for banks to resume lending. ### PROGRAM PERFORMANCE, TARGETS, AND STRUCTURAL BENCHMARKS - End-2016 performance criteria: - Four of five end-2016 PCs for the third review were met (including tax revenue target and net domestic bank credit target); one PC not met: zero-ceiling on non-accumulation of external arrears missed by CFAF 0.6 billion (0.1 percent of GDP) due to late payment to a group of Arab Funds and ECOWAS; these arrears were cleared in early 2017. - Indicative targets: - Three of four end-2016 indicative targets met (new domestic arrears below ceiling; non-regularized spending below ceiling; social and priority spending above the floor). - One indicative target not met: domestic primary balance (commitment basis) was CFAF 3 billion below the floor. - Structural benchmarks (late 2016/early 2017): - Six of eight SBs met on time. - Two SBs not met on time: - Decree clarifying debt issuance authority and procedures (draft prepared; passed in early June 2017). - Submission of EAGB monthly financial reports (not observed at end-December 2016; reset for end-July 2017). - Selected quantitative highlights (program tables and memoranda): - Total domestic tax revenue (floor) for 2016 actual: 31.2 (context in program table). - Net domestic bank credit to the central government (ceiling) for 2016 actual: 19.8 (CFAF billions in table). - External payment arrears (ceiling) for 2016 actual: 0.6 (CFAF billions) — not met. - New domestic arrears (ceiling) for 2016 actual: 0.0 — met. - Social and priority spending (floor) for 2016 actual: 19.4 — met. - Domestic primary balance (commitment basis, floor) for 2016 actual: -14.2 — not met. - ECF disbursements (SDR millions, flow): 2.8 (2015); 5.1 (follow-up disbursement reflected for 2016). ### BASELINE OUTLOOK, RISKS, AND SCENARIOS - Baseline outlook (2017–18): - Growth projected to remain steady at about 5 percent a year. - Inflation expected to average no more than around 2 percent in 2017 and 2018. - Current account projected to turn to a deficit of around 1 and 2 percent of GDP in 2017 and 2018, respectively. - Fiscal discipline envisaged to contain overall fiscal deficit to around 2 percent of GDP in 2017 and 2018. - Risks and upside scenarios: - Downside risks: - Reescalation of political tensions with disruptive government changes. - Fiscal outlook and public debt sustainability could deteriorate if courts rule against the voiding of the bank bailout. - Vulnerability to adverse commodity price developments and adverse weather conditions affecting agricultural output. - Upside potential: - Possible start of a FDI-financed phosphate mining project. - Substantial scope for greater value-addition in agriculture. - Nascent tourism industry potential. - Key macro and fiscal numbers and projections: - Recovery of NPLs related to the 2015 bank bailouts: only 5 percent of the stock has been recovered since 2015. - Use of Fund resources under the ECF arrangement will increase Guinea-Bissau’s obligations to the Fund to 85¼ percent of quota or 2.58 percent of GDP at the end of the current ECF-supported program in 2018. - Nominal GDP (US$ millions) series: 1,041; 1,168; 1,152; 1,189; 1,268. - Current account including official transfers (percent of GDP) series excerpt: 0.6 2.0 -2.2 0.9 -3.1 -0.6 -1.5 -1.2 (selected rows in tables). ### STRUCTURAL REFORMS, GOVERNANCE, AND SOCIO-ECONOMIC MEASURES - Agriculture and power sector: - Authorities committed to open competition in cashew trading; pilots to improve seed quality and farmer training underway. - Electricity reliability improved but supply remains inadequate; EAGB incurs losses despite high tariffs. - With World Bank support, authorities aim to improve EAGB commercial performance, including moving the company to a service contract. - Transparency, procurement, and anti-corruption: - Strengthen enforcement of public procurement laws and budget processes, including military spending. - Government approved national AML/CFT strategic plan and allocated resources to CENTIF; CENTIF intensified information dissemination and increased declarations of suspicious transactions. - Statistics and data: - Data provision timely but coverage and quality need strengthening. - Statistics institute enhancing coverage with enterprise and agricultural surveys; new methodologies for monetary and balance of payments statistics ongoing. - A statistics law still awaiting enactment and statistics production is under-resourced. - SOE reforms and audits: - Audit plan for all State-owned Enterprises and autonomous funds prepared (status: met). - EAGB to be audited by end-2017 with World Bank assistance; government expects monthly financial reports from EAGB from end-July 2017. ### FINANCING, FUND OBLIGATIONS, AND ASSURANCES - ECF disbursement schedule (selected entries): - July 10, 2015: 2.84 SDR millions, 10 percent of Quota. Status: Disbursed. - October 15, 2015: 2.84 SDR millions, 10 percent of Quota. Status: Disbursed. - April 15, 2016: 2.27 SDR millions, 8.00 percent of Quota. Status: Disbursed. - April 15, 2017: 3.03 SDR millions, 10.67 percent of Quota. Condition: Board completion of the third review. - Total Disbursements (program): 17.04 SDR millions, 60.0 percent of Quota. - Note: The first and second ECF-reviews were combined and the second and third disbursements occurred on December 2, 2016. - Financing assurances and arrears: - Program fully financed to its end in April 2018, with bulk of financing expected through external support. - Guinea-Bissau owes arrears to Angola, Brazil, Russia, the UAE, Libya, Pakistan, and Taiwan Province of China; all have consented to Fund financing notwithstanding these arrears. - Negotiations on arrears with Taiwan Province of China progressing with preliminary broad agreement on debt relief and rescheduling on near-Paris Club terms. - Impact on debt ratios: Use of Fund resources under the ECF will have a negligible impact on debt and debt service ratios; obligations to the Fund to 85¼ percent of quota or 2.58 percent of GDP at end-2018. - Guinea-Bissau’s risk of debt distress remains moderate. - Safeguards: - 2013 assessment of BCEAO found a continuing strong control environment; all recommendations implemented (including appointment of an international firm with ISA experience for audits of FY 2015–17, reinforcing audit committee capacity, and adoption of IFRS starting with FY 2015). - An updated safeguards assessment planned for 2017. ### ANNEX I — THE 2015 BANK BAILOUT AND ITS SUBSEQUENT REVERSAL - Bailout summary: - In 2015 government contracts purchased NPLs at face value totaling CFAF 34 billion (about 5 percent of GDP). - Transactions financed by non-amortizing loans from bailout banks with 10-year maturity and interest rates of 6 and 1.5 percent. - Contracts later declared null and void in mid-2016 due to missing signatures; national court in September 2016 stayed effects from bailout contracts. - Attorney General investigating bailout; civil and criminal cases presented to the court. - Banking inspections and provisioning: - WAEMU Banking Commission on-site inspections in late 2016; requested full provisioning of non-collateralized NPL portions and improvements in governance. - Provisioning caused banks’ capital to drop considerably; shareholders resolved to inject capital to meet CFAF 10 billion minimum, but subscription failure occurred at the larger bank. - Program implications: - Combined first and second review approved in December 2016 due to reversal action and adequate performance elsewhere. - Government requests completion of third review, financing assurances review, and waiver of external arrears PC based on corrective action. - Key macro/fiscal figures repeated: - ECF approved amount: SDR 17.04 million (approved July 10, 2015); drawn to date: SDR 7.95 million (28 percent of quota). - Cashew domestic reference price raised to $950 per ton for 2016 season; cashew exports 194 thousand tons in 2016 (up from 175 thousand tons). - Private credit growth: 13.2 percent in 2015 and 10.6 percent in 2016. - Tax revenue: 9.3 percent of GDP in 2016. - Domestic primary deficit: 2.1 percent of GDP in 2016 (programmed 1.7 percent of GDP). ### PROGRAM MONITORING, TECHNICAL MEMORANDUM, AND REPORTING REQUIREMENTS - Program monitoring: - Program performance assessed semi-annually; fourth review based on end-June 2017 PCs and fifth review based on end-December 2017 PCs. - Three new structural benchmarks proposed for September 2017: installation and effective use of DMFAS 6.0; rollout of new uniform tax invoice; rollout of taxpayer identification numbers. - SB relating to submission of financial reports by EAGB reset for July 2017. - Technical Memorandum of Understanding (selected definitions and clauses): - Program exchange rate: CFA 622.47/US$ and cross rates as of end-December 2016 for 2017 conversions. - Quantitative PCs defined for Total Domestic Tax Revenue (floor), Net Domestic Bank Credit to the Central Government (NCG) (ceiling) with specific adjustment clauses, new non-concessional external debt (continuous PC), external short-term debt (continuous PC), and external payment arrears (currency test, 30 days after due date). - Indicative targets and definitions: New domestic arrears (ceiling); Social and Priority Poverty-Related Expenditures (floor); Domestic Primary Balance (commitment basis, floor); Non-Regularized Expenditure (DNTs). - Reporting timetables (selected): - Fiscal sector: central government budget and outturn — Monthly, 30 days after the end of the month. - Monetary/Financial sector: detailed central bank and bank-by-bank balance sheets, monetary survey, PNG — Monthly, 45 days after the end of the month. - Debt: external and domestic debt stocks, disbursements, amortization, interest payments, arrears — Monthly, 30 days after the end of the month. - Real and external sector: CPI — Monthly, 30 days after the end of the month; exports/imports breakdowns — Quarterly, 30 days after the end of the quarter. - Reform unit responsibilities: - Support reform unit to monitor key macroeconomic variables, coordinate TA, and monitor reform implementation; periodic reporting to Minister of Finance; maintain updated list of partners and TA division of labor. *International Monetary Fund staff report text provided in the content unit.* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Extended Credit Facility (ECF) Arrangement and Disbursements - Three-year ECF arrangement approved on July 10, 2015. - Disbursements received: - Primary disbursement: SDR 2.84 million (10 percent of quota) upon approval. - Disbursement following combined first and second review (December 2, 2016): SDR 5.11 million (18 percent of quota). - Disbursement to be made available upon Executive Board completion of the third review: SDR 3.03 million (11 percent of quota). - Authorities request: - Waiver of nonobservance of a performance criterion. - Completion of the third review. - Completion of a financing assurances review in view of continued good-faith efforts and progress in addressing external arrears. - Staff position: Supports completion of the third review under the ECF arrangement and the authorities’ request for a waiver of nonobservance of a performance criterion. ### Context and Political Environment - Political crisis characterized by four changes of government over the past two years; absence since late 2015 of a sitting Parliament. - ECOWAS calling for decisive implementation of the Conakry Accord for inclusive government. - Despite tensions: - Security situation remains calm. - Authorities show strong commitment to consolidating macroeconomic stability and advancing structural reforms. - Development partners continue support of tax administration and public financial management (PFM). - Onsite inspections by the WAEMU Banking Commission triggered progress toward bringing banks affected by the voided 2015 bank bailout into compliance with prudential norms. ### Recent Economic Developments - Real GDP growth: estimated 5.1 percent in 2016. - Growth by sector in 2016: - Primary sector: 5.2 percent. - Secondary sector: 5.6 percent. - Tertiary sector: 4.7 percent. - Cashew sector: - Cashew production: record high of 206 thousand tons. - Cashew export price increased by 8 percent in 2016. - By May 2017 seasonal onset, cashew export price was some 20–30 percent higher than last year; farmers receiving record prices. - Inflation: consumer price inflation year-average rate of 1.5 percent in 2016. - Terms of trade: improved by 14 percent in 2016 driven by higher cashew prices and lower import prices. - External current account: - Overall current account surplus narrowed to an estimated 0.9 percent of GDP from 2 percent in 2015. - Merchandise trade surplus increased despite halting of wood exports and rise in construction-related imports. - Other current receipts declined mainly due to a reduction in official grants. ### Fiscal Performance and Public Financial Management - Revenue and grants performance: - Tax revenue in line with program target at 9.3 percent of GDP. - Non-tax revenue fell 0.8 percent of GDP below target. - Grants fell short by 0.6 percent of GDP. - Overall revenue and grants fell 1.5 percent of GDP below program. - Specific revenue shortfalls: failure to realize planned one-off receipts (sale of seized timber, a fine on a telecommunication company, collection of tax arrears from two public enterprises, implementation of a telecommunications gateway system). - Expenditure and deficit control: - Total expenditure 1.2 percent of GDP below program. - Wage bill slightly higher than programmed (reclassification of embassy worker compensation). - Reduced foreign-financed capital expenditure and improved expenditure controls. - Cash deficit 0.3 percent of GDP smaller than programmed despite slightly higher net arrears clearance. - Financing in 2016: Total financing amounted to 4.2 percent of GDP; foreign project financing contributed 2 percent of GDP and commercial banks provided most of the remainder. - Early 2017 developments: - Nominal tax revenue rose by 24.7 percent in Q1 2017 compared to Q1 2016. - Preliminary data indicate total expenditure grew by 6.4 percent over the same period, improving the overall balance. - Institutional strengthening: - Introduction of twice weekly Treasury Committee meetings strengthened budget execution and elimination of expenditures outside required procedures (DNTs). - Tax and customs administration continue to receive technical assistance, increasing tax mobilization. - Political instability has impeded some structural reforms and one-off revenue measures. ### Banking and Financial Sector Developments - Credit and banking indicators: - Credit to the private sector expanded by 10.6 percent in 2016. - Credit distribution concentrated in commerce, construction, and manufacturing (about two-thirds of total credit); agriculture and fishing accounted for 2 percent. - Overall NPL ratio: 19.4 percent as of end-March 2017 (lower than the 26 percent rate immediately before the 2015 bailout). - Ratio of net income to average assets: 2.8 percent at end-March 2017. - Average deposit rate: 4.7 percent. - WAEMU Banking Commission actions and bank recapitalization: - Commission ordered two bailout banks to make high provisions on the non-collateralized part of NPL portfolios transferred to the government; additional provisions led equity capital to fall sharply, negative at one bank. - One bank’s shareholders voted in favor of a capital increase but shares not yet subscribed; bank likely to be non-compliant with raised minimum capital requirement coming into force regionally at end-June. - The other bank is expected to meet the recapitalization requirement. - Constraints to credit growth: shortage of bankable projects and risk aversion by banks amid high NPLs, particularly in agriculture. ### Program Performance (Targets, Structural Benchmarks, and Arrears) - End-2016 performance criteria: - Four of five end-2016 PCs for the third review were met. - Tax revenue target met. - Net domestic bank credit to central government target met. - Zero-ceilings on new non-concessional or short-term external borrowing were respected. - One PC not met: zero-ceiling on non-accumulation of external arrears missed by CFAF 0.6 billion (0.1 percent of GDP) due to late payment of debt service to a group of Arab Funds and ECOWAS; these arrears were cleared in early 2017. - Indicative targets: - Three of four end-2016 indicative targets were met: - New domestic arrears below ceiling (net arrears clearance CFAF 1.1 billion above programmed level). - Non-regularized spending below ceiling. - Social and priority spending above the floor. - One indicative target not met: domestic primary balance (commitment basis) was CFAF 3 billion below the floor. - Structural benchmarks: - Six of eight structural benchmarks for late 2016 and early 2017 were met on time. - Two not met on time due to capacity and coordination weaknesses in a fractured political environment: - Decree to clarify debt issuance authority and procedures was not issued on time (draft prepared with AFRITAC West TA); decree passed in early June 2017. - Submission of EAGB monthly financial reports not observed at end-December 2016; earlier quarterly reports had been submitted. Work underway to ensure compliance by end-July 2017. - Quantitative performance highlights (selected figures from program table): - Total domestic tax revenue (floor) for 2016 actual: 31.2 (percent of GDP context in table). - Net domestic bank credit to the central government (ceiling) for 2016 actual: 19.8 (CFAF billions in table). - External payment arrears (ceiling) for 2016 actual: 0.6 (CFAF billions) — not met. - New domestic arrears (ceiling) for 2016 actual: 0.0 — met. - Social and priority spending (floor) for 2016 actual: 19.4 — met. - Domestic primary balance (commitment basis, floor) for 2016 actual: -14.2 — not met. - ECF disbursements (SDR millions, flow): 2.8 (2015); 5.1 (follow-up disbursement reflected for 2016). ### Economic Outlook, Policies, and Risks - Program objectives (2016–18): Reiterate broader development strategy emphasizing employment creation through sustained and inclusive growth. - Program pillars: - Good governance. - Economic growth through structural transformation and revitalization of key sectors. - Strengthening of human capital. - Policy emphasis: - Improving effectiveness of public administration, including strengthening of payment controls and tax administration. - Improving business environment; promoting tourism, industrialization of agricultural production, and effective natural resource management as drivers of medium-term growth. - Development partner stance: Continue to support the strategy, but have not yet resumed budget support. *International Monetary Fund; June 19, 2017.* ### 12. The updated macroeconomic framework for 2017–18 renders a favorable baseline ### 12. The updated macroeconomic framework for 2017–18 renders a favorable baseline ### Baseline outlook - Economic growth is projected to remain steady at about 5 percent a year, supported by high cashew prices, investments in road and other infrastructure, and improvements in electricity and water provision. - Inflation is expected to increase slightly, given higher global oil prices, but should average no more than around 2 percent in 2017 and 2018. - The current account is projected to turn to deficit of around 1 and 2 percent of GDP in 2017 and 2018, respectively, because of higher oil prices as well as imports associated with increased investment and expanding economic activity, moderated by continued healthy growth in cashew exports. - Fiscal discipline, supported by improvements in PFM and tax administration, is envisioned to contain the overall fiscal deficit to around 2 percent of GDP in 2017 and 2018. ### Risks and upside scenarios - Downside risks: - Reescalation of political tensions with disruptive government changes could impact fiscal discipline and dent support from development partners. - Fiscal outlook and public debt sustainability could deteriorate if courts rule against the voiding of the bank bailout. - Vulnerability to adverse commodity price developments and to adverse weather conditions affecting agricultural output. - Upside potential: - Possible start of a FDI-financed phosphate mining project could help boost exports. - Substantial scope for greater value-addition in agriculture. - Nascent tourism industry offers potential. ### Key statistics and fiscal framework indicators - Domestic revenue expected to increase to 13.2 percent of GDP in 2017. - Total expenditure excluding foreign financed capital spending projected at 13 percent of GDP in 2017. - Transfer to EAGB to cover government guaranteed domestic debts: 1 percent of GDP (debts totaling CFAF 6.6 billion, dated back to 2011 and held by three local banks). - Net domestic bank credit (NDC) projected at 0.9 percent of annual GDP in the first half of 2017 and at zero for the year overall. - Domestic primary balance projected to reach 0.6 percent of GDP in 2017 (a 2.7 percentage point improvement from 2016 and 0.3 percentage points more than previously programed). - Overall cash deficit implied at 2.2 percent of GDP in 2017. - Recovery of non-performing loans related to the 2015 bank bailouts: only 5 percent of the stock has been recovered since 2015. - Use of Fund resources under the ECF arrangement will increase Guinea-Bissau’s obligations to the Fund to 85¼ percent of quota or 2.58 percent of GDP at the end of the current ECF-supported program in 2018. - Nominal GDP (US$ millions): 1,041; 1,168; 1,152; 1,189; 1,268. ### Improving fiscal management (findings and measures) - Overarching challenge: raise revenue and strengthen expenditure controls to enable priority spending while keeping debt in check. - Causes of weak revenue and PFM: frequent leadership changes, inadequate budgets and infrastructure, deficiencies in records and work procedures, weak budget processes, lacking expenditure controls. - Strengthening revenue mobilization: - Full rollout in coming months of a uniform sales invoice and of tax identification numbers for all taxpayers. - Efforts to minimize tax exemptions and strengthen the legal basis for taxing small and medium-sized businesses. - Buoyant economic growth and a dividend payment from BOAD expected to support revenue gains. - Progress towards instituting missed one-off revenue measures from 2016 has been limited. - Government increased maximum fuel prices in May 2017 in line with a cost-based formula (first such increase since September 2016). - Strengthening expenditure controls and treasury management: - Treasury Committee used to improve budget execution, with twice-weekly meetings imposing controls. - Measures include preparation and monitoring of monthly cashflow projections. - Debts to BOAD rescheduled to reduce debt servicing costs. - Updated spending plans formalized in a 2017 budget approved by the Council of Ministers in early June 2017. - Fiscal anchor and targets: - Authorities committed to reducing NDC to zero (program fiscal anchor). - Domestic primary balance, overall cash deficit, and debt-to-GDP ratio expected to improve, allowing increased developmental spending in 2018. ### Debt management - Measures to improve debt contracting procedures and avoid contingent liabilities: - Council of Ministers approved a decree in early-June 2017 clarifying procedures for issuance of government debt and guarantees in line with WAEMU regulations. - Authorities compiling an inventory of possible contingent liabilities, improving EAGB financial reporting, and expanding audits to include four additional SOEs. - External borrowing strategy: - Authorities plan to continue limiting external debt contracting to concessional loans. - Risk of debt distress assessed as moderate; economy vulnerable to shocks and public enterprise weakness increases risks. - Commitment to avoid non-concessional and short-term external debt given absorption capacity constraints. ### Bolstering sound financial intermediation - Status and challenges: - Credit to the private sector averaged 13.6 percent of GDP in 2014–16—low relative to WAEMU and Sub-Saharan Africa. - High NPL ratios and sluggish credit growth linked to voided 2015 bank bailouts and resulting legal uncertainties. - Consolidation of loans and elimination of overdrafts shifted financing to Treasury securities with lower interest costs. - Authorities’ approach: - Three-pronged strategy: increase minimum capital requirements (regional requirement effective end-June, 2017), strengthen debtor information collection, and bolster supervision. - Banking Commission requested improvements in corporate governance and high provisioning of NPLs transferred to government but likely returning to banks’ balance sheets. - One bank likely not to meet new minimum capital requirement at end June; Banking Commission to evaluate compliance in September and decide remedial measures. - Authorities support resolute action, and a cleanup of balance sheets plus substantial recapitalization are considered necessary for banks to resume lending. ### Structural reforms and governance measures - Agriculture and power sector constraints: - Sustaining growth requires addressing constraints in agriculture and power. - Authorities committed to open competition in cashew trading; pilots to improve seed quality and farmer training are underway. - Electricity reliability improved but supply remains inadequate; EAGB incurs losses despite high tariffs. - With World Bank support, authorities aim to improve EAGB commercial performance, including moving the company to a service contract. - Transparency, procurement, and anti-corruption: - Efforts to improve tax administration and PFM to stimulate private sector activity via transparent procurement and timely payments. - Strengthening enforcement of public procurement laws and budget processes, including in relation to military spending. - Government approved national AML/CFT strategic plan and allocated resources to CENTIF; CENTIF intensified information dissemination, increasing declarations of suspicious transactions. - Statistics improvements: - Data provision timely but coverage and quality need strengthening. - Statistics institute enhancing coverage with projects including enterprise and agricultural surveys; adoption of new methodologies for monetary and balance of payments statistics ongoing. - A statistics law is still awaiting enactment and statistics production is under-resourced. ### Program modalities, monitoring, and financing assurances - Program assessment: - Program performance assessed semi-annually; for 2017, assessed relative to end-June PCs and proposed end-December PCs (including three continuous PCs), indicative targets for end-September, and SBs. - SB relating to submission of financial reports by EAGB (originally set for December 2016) reset for July 2017. - Three new structural benchmarks proposed for September 2017: installation and effective use of DMFAS 6.0; rollout of new uniform tax invoice; rollout of taxpayer identification numbers. - Financing assurances: - Program fully financed to its end in April 2018, with bulk of financing expected through external support. - Guinea-Bissau owes arrears to Angola, Brazil, Russia, the UAE, Libya, Pakistan, and Taiwan Province of China; all have consented to Fund financing notwithstanding these arrears. - Arrears with the erstwhile Franco-Portuguese bank cancelled by Portugal; arrears with EIB cleared; half of arrears to the UAE cleared with remainder budgeted for clearance this year. - Negotiations on arrears with Taiwan Province of China progressing with preliminary broad agreement on debt relief and rescheduling on near-Paris Club terms. - Capacity to repay the Fund: - Use of Fund resources under the ECF will have a negligible impact on debt and debt service ratios; obligations to the Fund to 85¼ percent of quota or 2.58 percent of GDP at the end of the ECF-supported program in 2018. - Guinea-Bissau’s risk of debt distress remains moderate. - Safeguards: - 2013 assessment of BCEAO found a continuing strong control environment; all recommendations implemented (including appointment of an international firm with ISA experience for audits of FY 2015–17, reinforcing audit committee capacity, and adoption of IFRS starting with FY 2015). - An updated safeguards assessment planned for 2017 in line with a four-year cycle for regional central banks. *Source: IMF staff report text provided in the content unit.* ### 32. Guinea-Bissau’s economy has continued to register solid growth, despite a still ### 32. Guinea-Bissau’s economy has continued to register solid growth, despite a still ### Political context and risks - Continued political uncertainty is impeding more fundamental economic progress and reescalation of tension is a risk to the outlook. - Staff welcomes the ECOWAS-brokered roadmap for inclusive government and Guinea-Bissau’s adherence to peaceful constitutional means in settling its political disputes. - Staff encourages stakeholders to build a sustainable political consensus and emphasizes the importance of a rapid resumption of Parliamentary operations to pass key pending legislation, including: - the state budget - statistics laws - AML/CFT laws ### Growth outlook and macroeconomic projections - The economy is poised for continued growth supported by high cashew prices, investments in infrastructure, and improvements in water and electricity supply. - Growth is projected to remain at around 5 percent a year during 2017–18. - Inflation is projected to remain well contained at about 2 percent. - The external position is expected to stay comfortable with current account deficits below 2 percent of GDP. - Continued movement on this path offers the prospect of tangible improvements in living standards and reductions in poverty, if underpinned by sustained advances on the reform agenda. ### Public financial management and fiscal policy - Continued strengthening of public financial management will be essential to supporting macroeconomic stability and growth. - The Treasury Committee has been instrumental in eliminating non-regularized spending and reducing arrears, but the scope and depth of its operations can still be expanded. - Reforms in tax and customs administration are bearing fruit, but there is ample room for further revenue mobilization needed for social and investment spending. - Debt management should be strengthened and steps should be taken to avoid accumulation of contingent liabilities. - Fiscal reforms should be supported by strengthening anti-corruption and AML/CFT efforts. ### Banking sector and financial stability - The Banking Commission’s corrective action against the bailout banks is welcome but further actions will be required. - Loan losses have now been adequately recognized, but this has resulted in a sharp fall in equity capital (becoming negative in one bank). - The high volume of NPLs remains largely unchanged. - The slow rate of collection at the bailout banks suggests that developing a time-bound action plan for asset recovery would be crucial to avoid loss in value of the underlying collateral. - It is important that banks meet the new minimum capital requirement applicable from end-June. - Should any bank fail to meet the new minimum capital requirement, prompt and vigorous regulatory enforcement should be pursued by the Banking Commission and WAEMU Council of Ministers. ### Authorities’ reform agenda and structural reforms - The authorities’ reform agenda, as articulated in their MEFP, is appropriately ambitious. - The outlined fiscal, financial, and structural reforms support attainment of macroeconomic stability and inclusive growth. - Authorities are encouraged to place emphasis on: - improving statistics - bolstering transparency - promoting healthy competition in all areas - Reforming state-owned enterprises to improve the finances will be important. - Continued automatic adjustment of fuel prices to ensure full pass-through from international to domestic prices is important. *GUINEA-BISSAU 16 INTERNATIONAL MONETARY FUND* ### 37. Staff recommends completion of the third program review and a financing assurances ### 37. Staff recommends completion of the third program review and a financing assurances review ### Recommendation - Staff recommends completion of the third program review and a financing assurances review based on the good general progress made under the program and decisive corrective actions taken to address shortcomings. - Staff supports the authorities request for a waiver of nonobservance of the performance criterion on external payment arrears by the central government on the basis of corrective action taken. *Guinea-Bissau: Recent economic developments and program assessment* ### Recent economic developments - After being adversely affected by the 2012 coup, real GDP growth has recovered (see Figure 1 narrative). - Improvements in the terms of trade and boosted external balances, supported by increasing cashew nut export volumes and values. - Per capita income growth is again positive and inflation remains muted (Figure 1 narrative). - Cashew export volumes and values: cashew export value and cashew export volume series shown in Figure 1 (see tables for detailed series). - Cashew export prices (Table 2 memorandum): 1,0001,3001,4001,4001,4001,6801,7221,765. ### Fiscal and credit developments - Revenues and expenditures have jumped since 2013, but revenue gains have fallen behind expenditure increases (Figure 2 narrative). - Domestic receipts show some recent weakness; expenditures have declined as well. Fiscal balances deteriorated in 2016. - Overall debt has remained broadly stable relative to GDP (Figure 2 narrative). - Private credit growth has slowed, and non-performing loans remain high (Figure 2 narrative). - Selected fiscal pointers (Table 3b, percent of GDP): - Revenue and grants: 22.1 20.3 17.9 16.4 7.6 7.4 17.9 17.3 17.9 - Total expenditure: 24.7 23.3 22.4 21.2 10.2 9.8 19.8 19.8 20.1 - Overall balance, including grants (commitment): -2.6 -3.0 -4.5 -4.8 -2.6 -2.4 -1.8 -1.9 -2.2 - Overall balance, excluding grants (commitment): -12.1 -9.5 -9.2 -8.8 -4.4 -4.2 -7.0 -6.0 -6.3 - Central government arrears and cash outcomes (Table 3a highlights): - Change in arrears series: -1.8 -6.1 -0.4 -1.5 -0.4 -1.0 -2.6 -4.4 0.0 - Net domestic arrears: -1.8 -5.2 -0.4 -2.1 -0.4 -0.4 -2.6 -3.8 0.0 - External arrears: 0.0 -0.9 0.0 0.6 0.0 -0.6 0.0 -0.6 0.0 ### Medium-term outlook and projections - Economic prospects remain good, reflecting benign domestic and external factors (Figure 3 narrative). - As incomes increase, inflation is expected to rise but stabilize at low levels. - Domestic tax revenue should continue to increase, as tax administration is strengthened and the tax base expands, while current expenditure moderates (Figure 3 narrative). - External current account deficit is expected to remain broadly stable (Figure 3 narrative). - Selected projection items (Table 1 and Table 2 excerpts): - Real GDP at market prices series as presented in Table 1: Real GDP at market prices1.05.14.85.15.05.0 5.05.0 - Real GDP per capita series as presented in Table 1: -1.22.82.52.82.72.72.72.7 - Consumer price index (annual average) series as presented in Table 1: -1.01.52.41.52.62.02.22.3 - Exports, f.o.b. (US$ values) series as presented in Table 1: 8.451.915.28.80.45.77.99.6 - External current account (percent of GDP) including official transfers (Table 2): 0.62.0-2.20.9-3.1-0.6-1.5-1.2 - Current account excluding official transfers (percent of GDP, Table 2): -3.91.0-4.10.6-5.43.52.62.9 ### Program conditionality, performance criteria, and targets - Staff supports waiver request for nonobservance of the external payment arrears performance criterion given corrective actions taken. - Quantitative performance and indicative targets (Table 7 and Table 8 highlights): - 2016 actual and program status (Table 7): - Total domestic tax revenue (floor): 61.9 ... 63.5 (status: met) - Net domestic bank credit to the central government (ceiling): 11.5 ... 16.1 14.6 (status: met) - External payment arrears (ceiling): 0.0 ... 0.6 (status: not met) - Domestic primary balance (commitment basis, floor): -9.3 ... -14.2 (status: not met) - 2017 proposed targets (Table 8): - Total domestic tax revenue (floor): 63.5 ... 65.2 65.2 - Net domestic bank credit to the central government (ceiling): 14.6 ... 0.0 -3.7 0.0 - External payment arrears (ceiling): 0.6 ... 0.0 0.0 0.0 - Domestic primary balance (commitment basis, floor): -14.2 ... 2.3 4.4 ### Structural benchmarks under the ECF program (2016–17) - Revenue mobilization: - Prepare a draft law for a new small taxpayer regime (December 2017). Rationale: To improve tax administration and compliance. (Status: Proposed benchmark) - Extend the new uniform sales invoice to all taxpayers (September 2017). Rationale: To improve tax administration and compliance. (Status: Proposed benchmark) - Complete assignment of taxpayer identification numbers to all taxpayers (September 2017). Rationale: To improve tax administration and compliance. (Status: Proposed benchmark) - Expenditure management: - Prepare a monthly rolling Treasury cash flow projection table consistent with the 2017 budget (December 2016 for January 2017, and monthly thereafter). Rationale: Enhance expenditure management. Status: Met. - Prepare timely quarterly reports on ministry-level budget execution (December 2016, and quarterly thereafter). Rationale: Enhance budget execution and monitoring. Status: Met. - Draw up a list of own-source revenues collected by ministries, departments and government agencies (December 2016). Rationale: Strengthen public financial management. Status: Met. - Debt management: - Prepare a quarterly report on external debt commitments, agreements, and disbursements (December 2016 for September 2016 report, and quarterly thereafter). Rationale: Enhance debt management capacity and transparency. Status: Met. - Council of ministers to issue a decree clarifying debt issuance authority and procedures (December 2016). Rationale: Bring Guinea-Bissau’s debt management policy in line with the WAEMU Regulation. Status: Not Met. Completed in June 2017. - Install DMFAS 6.0 and commence its use (September 2017). Rationale: Strengthen debt management and eschew payment arrears. Status: Proposed benchmark. - Business environment and SOE transparency: - Prepare an audit plan for all State-owned Enterprises and autonomous funds (November 2016). Rationale: Improve service delivery and financial sustainability of public enterprises. Status: Met. - EAGB reporting requirements (December 2016): Not Met; EAGB submitted quarterly reports for the first three quarters of 2016 but failed to submit required monthly reports for October-December 2016. Proposed reset for July 2017. - Complete assessment of two banks affected by the bailout and articulate an action plan (April 15, 2017). Rationale: Strengthen the health of the banking system. Status: Met. Banking Commission Report submitted to Finance Minister in February 2017. - Design a strategy to promote cashew production and transformation based on FUNPI audit results (June 2017). Rationale: Reduce transaction costs. (Status: listed) ### Financing, Fund obligations, and proposed disbursements - Proposed schedule of disbursements under the ECF arrangement (Table 10): - July 10, 2015: 2.84 SDR millions, 10 percent of Quota. Condition: Approval of the three-year ECF arrangement. Status: Disbursed. - October 15, 2015: 2.84 SDR millions, 10 percent of Quota. Condition: Board completion of the first review based on observance of performance criteria for June 30, 2015. Status: Disbursed. - April 15, 2016: 2.27 SDR millions, 8.00 percent of Quota. Condition: Board completion of the second review based on observance of performance criteria for December 31, 2015. Status: Disbursed. - April 15, 2017: 3.03 SDR millions, 10.67 percent of Quota. Condition: Board completion of the third review based on observance of performance criteria for December 31, 2016. - October 15, 2017: 3.03 SDR millions, 10.67 percent of Quota. Condition: Board completion of the fourth review based on observance of performance criteria for June 30, 2017. - April 15, 2018: 3.02 SDR millions, 10.66 percent of Quota. Condition: Board completion of the fifth review based on observance of performance criteria for December 31, 2017. - Total Disbursements: 17.04 SDR millions, 60.0 percent of Quota. - Note: The first and second ECF-reviews were combined and the second and third disbursements occurred on December 2, 2016 (Table 10 note). - Indicators of capacity to repay the Fund (Table 6 excerpts): - Fund obligations based on existing credit, principal series (SDR millions): 1.451.451.451.451.291.591.591.591.591.02 - Outstanding Fund credit (SDR millions series): 22.6324.2122.7620.6118.6016.3012.498.374.962.12 - CFAF billions memorandum for outstanding Fund credit series: 18.9120.2719.0517.2415.5913.7310.527.054.181.79 *International Monetary Fund staff assessment and supporting data as presented in the original document.* ### Annex I. The 2015 Bank Bailout and its Subsequent Reversal ### Annex I. The 2015 Bank Bailout and its Subsequent Reversal ### Summary of the 2015 bailout and reversal - In the aftermath of the military coup in 2012, non-performing loans (NPLs) rose sharply, particularly in exposures to the cashew sector; the banking system's overall NPL ratio reached around 25 percent in late 2014 and was even higher at two banks that later received bailouts. - The defaulted portfolio was concentrated on large debtors, many of them politically connected. - In the second half of 2015, the then government entered contracts with two banks to purchase non-performing loans at face value totaling CFAF 34 billion (about 5 percent of GDP). - The transactions were financed by non-amortizing loans from the bailout banks with a 10-year maturity and interest rates of 6 and 1.5 percent, respectively. - Repayments on the NPL portfolios as well as interest and tax payments were to be put into escrow accounts and then used to pay off the loans after 10 years; amounts recovered from debtors would thus not lower the basis for calculating interest. - The bailout contracts stipulated that any unrecovered exposures would return to the banks' balance sheets in 2025. - The government’s taking out loans for the bailout would have caused a miss on the performance criterion on net domestic bank credit to government and put the ECF-supported program off track. - Having initially considered cancelling the contracts with penalty payments, the subsequent administration, in mid-2016, declared the contracts null and void because of missing signatures by high-level government officials. - The national court in September 2016 ruled that all effects from the bailout contracts were to be stayed; this meant the banks could not accrue interest on the bailout loans, with significant implications for their operational income. - The Attorney General is investigating issues surrounding the bailout, with both civil and criminal cases presented to the court. ### Banking-sector inspections, provisioning, and capital implications - The WAEMU Banking Commission carried out on-site inspections of the two banks in late 2016 (mid-April 2017 Structural Benchmark). - The Commission requested that the non-collateralized part of the NPL portfolios be fully provisioned and called for improvements in risk management and governance. - The associated provisioning costs caused the banks’ capital to drop considerably. - The two banks’ shareholders resolved to inject additional capital to meet the minimum capital requirement of CFAF 10 billion (previously 5 billion) at end-June 2017. - In the case of the larger bailout bank, shareholders subsequently failed to subscribe the additional shares as planned. ### Program implications and IMF engagement - Because of the government’s action to reverse the bailout and adequate performance in other policy areas, a combined first and second review of the ECF was finally approved in December 2016. - The government reported that the WAEMU Banking Commission completed an assessment of the two banks and articulated an action plan to bring these banks into compliance with prudential norms (one of six structural benchmarks observed). - The government requests completion of the third review and the related financing assurances review and a waiver of nonobservance of the performance criterion on external payment arrears by the central government on the basis of corrective action taken. - The government authorized publication of the Letter of Intent, its attachments, and the related staff report. ### Key macroeconomic and fiscal outcomes (selected exact figures) - ECF approved amount: SDR 17.04 million (approved July 10, 2015); drawn to date: SDR 7.95 million (28 percent of quota). - Cashew policy and outcomes: - Domestic reference price of cashew nuts raised to $950 per ton for the 2016 season. - Cashew nut exports reached 194 thousand tons in 2016, up from 175 thousand tons in the previous year. - Real GDP growth: an estimated 5.1 percent in 2016. - Sector growth in 2016: - Primary sector: 5.2 percent. - Secondary sector: 5.6 percent. - Tertiary sector: 4.7 percent. - Consumer price inflation: year-average rate of 1.5 percent in 2016. - Private credit growth: 13.2 percent in 2015 and 10.6 percent in 2016. - Tax revenue: 9.3 percent of GDP in 2016 (in line with the program target). - Non-tax revenue and grants shortfalls: short of program target and 2015 performance by 0.8 and 0.6 percentage points of GDP, respectively. - Domestic primary deficit: 2.1 percent of GDP in 2016 (programmed 1.7 percent of GDP; 2015 outturn 1.5 percent of GDP). - Terms of trade: improved by 14 percent in 2016. - Current account surplus: 0.9 percent of GDP in 2016, down from 2 percent in 2015. - Non-performing loans: around 20 percent of total loans at end-March 2017, down from a peak of 26 percent in 2014. - Performance criteria and arrears: - All but one of the performance criteria for end-December 2016 were met. - The zero-ceiling on non-accumulation of external arrears was missed by CFAF 0.6 billion (or 0.1 percent of GDP); these arrears were cleared in early 2017. - Banking-sector minimum capital requirement set at CFAF 10 billion (previously 5 billion) to be met by end-June 2017. - New structural benchmark: Government will by September 2017 complete installation of the updated debt management software DMFAS 6.0. ### Structural reforms, public financial management, and corrective measures undertaken - Improvements in public financial management helped contain the overall fiscal deficit despite revenue shortfalls: - Reinforced procedures for weekly Treasury Committee meetings to eliminate non-regularized spending and accelerate DNT (non-regularized expenditure) regularizations. - Introduced a continuous limit of CFAF 1 billion on the outstanding stock of DNTs and a quarterly limit of 1 percent of current expenditure on the flow of DNTs. - Use of SIGFIP/SIGFIB software modules to automate registration and improve accounting (double-entry system, accounting module of SIGFIP). - Council of Ministers approved in early June 2017 the decree clarifying debt contracting authority and procedures, drafted with TA from AFRITAC West, aligning legislation with WAEMU debt management regulations. - Council of Ministers approved the 2017 budget in early June 2017. - Government created and enforced via ministerial decree a “negative list” detailing expenses/payments which cannot be processed as DNTs. - Structural benchmarks observed (six of eight for late 2016/early 2017): - Rolling monthly cash-flow projection prepared consistent with draft 2017 budget. - Quarterly reports on ministry-level budget execution and on external debt commitments, agreements, and disbursements prepared. - List of own-source revenues collected by ministries, departments, and government agencies drawn up (precursor to Treasury Single Account). - Audit plan for all state-owned enterprises and autonomous funds prepared. - Continued preparation of quarterly reports on external debt commitments, agreements, and disbursements. - WAEMU Banking Commission assessment of the two banks and articulation of an action plan to restore prudential compliance. - Structural benchmarks delayed: - Decree to clarify debt issuance authority and procedures was delayed due to the change of government in late 2016 (later approved in early June 2017). - Submission of monthly EAGB (electricity and water company) financial reports starting from October 2016 was not observed at end-December 2016; reports for the first three quarters of 2016 were submitted. Government expects monthly submissions to start from end-July 2017 after World Bank auditing assistance. - Additional commitments: - Government will steadfastly require EAGB to submit monthly financial reports, expected from end-July 2017. - Government will by September 2017 complete installation of DMFAS 6.0. ### Policy stance and outlook for 2017–18 - Macroeconomic framework projects real GDP growth at 5 percent per year in 2017–18, supported by continued strong activity in agriculture, construction, and services. - Growth drivers cited: improvements in energy and water supply, strengthened business environment, and an expected increase in gross investment. - Government commitments: - Advance tax administration and vigorously pursue nontax revenue mobilization. - Strengthen public financial management and expenditure oversight (weekly Treasury Committee meetings). - Implement structural reform agenda to enhance efficiency of public institutions in revenue mobilization, expenditure management, and debt management. - Design a strategy to promote cashew production and transformation based on results of the FUNPI audit. *Source: Annex I. The 2015 Bank Bailout and its Subsequent Reversal (cr17228).* ### 11.5 percent of GDP per year during 2017–18) sustained for the most part by the public component. ### cr17228 - 11.5 percent of GDP per year during 2017–18) sustained for the most part by the public component. ### Macroeconomic outlook and external sector - Growth investment plan: 11.5 percent of GDP per year during 2017–18, sustained for the most part by the public component. - Terms of trade and exports: - Recent improvements in the terms of trade are expected to weaken somewhat due to higher oil prices. - High cashew prices, including an increase in the domestic reference price to US$1,150 per ton in 2017, should stimulate cashew exports and help offset higher imports. - Current account: - Current account deficit contained to about 1 percent of GDP in 2017 and about 2 percent in 2018. - Inflation: - Inflation is expected to average 2 percent per year (below the WAEMU convergence criteria of 3 percent) during the period. ### Fiscal policy, public finance, and budget - Fiscal stance and financing: - Fiscal policy to remain consistent with macroeconomic stability and debt sustainability. - Annual access to domestic bank credit and the regional securities market will be limited to rollovers for obligations falling due, consistent with the program objective of zero net domestic bank credit to government (PC for 2017). - External borrowing limited to project financing on concessional terms. - 2017 budget: - Overall deficit of CFAF 16.5 billion (or 2.2 percent of GDP). - Overall fiscal deficit projected to be well within the WAEMU convergence criteria of 3 percent of GDP. - Revenue mobilization: - Domestic revenue excluding one-offs projected at 13.2 percent of GDP in 2017 (exceeds previous program expectation of 12.8 percent of GDP) and represents a 0.8 percentage point increase over 2016. - Improvement expected largely from enhanced tax administration amid robust rebound of economic activities. - One-off revenues expected from expedited sales of seized illegally-cut timber (0.7 percent of GDP) once agreement is reached with CITES, and from collection of tax arrears from state-owned enterprises. - Expenditure management: - Expenditures will be tightly contained. - Infrastructure projects (high-tension power distribution lines, expanding road network) to be financed mostly through concessional loans and grants, consistent with debt sustainability. - Treasury and cash flow management: - Government will step up domestic revenue mobilization efforts and strengthen expenditure and treasury cash flow management. ### Financial sector and banking supervision - Financial intermediation: - Nascent recovery of financial intermediation expected to continue into 2017–18. - Anticipated strong economic activity expected to expand private credit on average by about 7 percent a year during the period and to enhance financial inclusion. - Supervisory response and prudential measures: - Rebounding financial intermediation should be guarded by sound banking practices. - BCEAO will continue to strengthen banking supervision by strictly enforcing prudential norms and seeking to strengthen these further in collaboration with the WAEMU Banking Commission, particularly in context of the fallout from last year’s voiding of the 2015 bank bailout operation. - Required minimum capital of banks is scheduled to be increased to CFAF 10 billion effective July 1, 2017, for all banks in the WAEMU. - With recent decisions by shareholders to inject capital in the banks where this was needed, expectation that all Guinea-Bissau banks will meet the new capital requirements by end-June. ### Medium-term strategy and governance - Policy framework: - The country’s medium-term development program (2014–18) will continue to guide policy strategies, consistent with growth and poverty-reduction objectives. - Government focus: improving the business environment, promoting policy transparency, good governance, and respect for the rule of law to build confidence of households, private investors, and development partners. - Public financial management: - Strengthened PFM and budget execution, along with vigilant tax administration, expected to enable a narrowing of fiscal deficits. *International Monetary Fund — extract from country chapter content.* ### 19.2 percent of GDP. This is down from 21.2 percent in 2016, reflecting the limited domestic ### cr17228 - 19.2 percent of GDP. This is down from 21.2 percent in 2016, reflecting the limited domestic ### Fiscal outturn and envelope - Total spending envelope: 19.2 percent of GDP. This is down from 21.2 percent in 2016, reflecting the limited domestic resources and the loss of budget support from development partners. - Within that reduced envelope are unforeseen costs of CFAF 6.6 billion (1 percent of GDP) relating to a realization of a debt guarantee provided to EAGB that the company was unable to honor, necessitating a scaling back of other expenditure. - The government will leverage gains in public financial management to cut out waste and expand resources for social and priority capital spending. ### Measures to strengthen public financial management - Recent improvements in treasury management (weekly Treasury Committee meetings strengthened) to bolster budget execution and fiscal discipline. - Government monitoring of compliance with PFM rules at the ministerial level and along the expenditure chain to align expenditures with available resources and to solidify elimination of non-regularized spending (DNTs) and avoid new arrears. - Specific PFM actions: - Continue to equip and task the Treasury Committee to in as far as possible ensure timely regularization of all expenses and avoid the use of DNTs. - Maintain a continuous limit of CFAF 1 billion on the outstanding stock and a quarterly limit of 1 percent of current expenditure (as envisaged by the Treasury Plan) on the flow of DNTs. - Mandate continued use by the Treasury Department of the software application in SIGFIP that automatically registers DNT payments with the Budget department. - Continue to prepare and review rolling monthly treasury cash-flow projection tables consistent with the 2017 budget (SB for December 2016 and monthly thereafter; Table 3) to guide weekly treasury operations. - Further the preparation of timely quarterly reports on ministry-level budget execution with details along economic classification of expenses (SB for December 2016 and quarterly thereafter; Table 3). - Utilize the list of own-source revenues to draw up a strategy for incorporating these resources into the national budget, aiding domestic revenue enhancement and fostering transparency; banks provided a list of all government related accounts of ministries, departments, and government agencies for this purpose. ### Revenue measures - Ongoing and planned measures to expand the tax base and strengthen tax administration: - In 2016 a new uniform sales invoice for large companies was implemented; a list of 5412 taxpayers was compiled and taxpayer identification numbers were assigned to about a third of these taxpayers. - Tax exemptions committee continued to minimize tax exemptions and fine-tune subsidies. - For 2017 and beyond, government will: - Extend the new uniform sales invoice to all taxpayers by September 2017 (new structural benchmark). - Complete the assignment of taxpayer identification numbers to all taxpayers by September 2017 (new structural benchmark). - Prepare quarterly reports (starting September 2017 for performance as of end-June 2017, and quarterly thereafter) on progress in minimizing tax exemptions. - Complete a draft law for a new small taxpayer regime with technical assistance from the IMF (December 2017). - Minimize tax exemptions and subsidies. ### Borrowing policies and debt management - Technical enhancements, capacity building, and debt renegotiation efforts: - Upgrade debt management software to DMFAS 6.0 and restore vendor support. - Strengthen communication between the Debt Management Unit and the Treasury; continuous staff training. - 2016 achievements: cancellation of obligations to the erstwhile Franco-Portuguese bank; full repayment of indebtedness to the European Investment Bank. - Progress in negotiations with Taiwan Province of China on Paris Club terms (preliminary agreement yet to be signed by both parties). - Continued negotiations with other bilateral creditors; ongoing efforts to formalize agreements with Brazil, Russia and Angola, and to initiate negotiations with United Arab Emirates, Libya, and Pakistan. - Government remains current on remaining external debt obligations. - Strengthening domestic debt management and avoiding contingent liabilities: - Cabinet issued a decree clarifying debt issuance authority and procedures for government guarantees, on-lending, and assumption of large liabilities (brings practices in line with WAEMU Regulation 09/2007/CM/UEMOA). - Establish a comprehensive inventory of all debt guarantees and include debts and repayment schedules in the public debt database. - Based on the audit of 2008-12 domestic arrears, draft a repayment strategy to clear legitimate arrears after netting out tax liabilities of beneficiaries. - Finance short-term liquidity needs through issuance of Treasury bills; if financing from commercial banks is needed, undertake loans through transparent auctions as much as possible. - Continue negotiations for a higher grant element on loans from BOAD; rescheduling secured in February 2017 without interest for outstanding payments as of end-2016. Outstanding liabilities totaling CFAF 16.5 billion (payments for entry rights, contributions to the new loan-subsidization fund, and unpaid debt service for 2016) are rescheduled to be paid over 30 years, starting from March 2018. ### Fostering sound financial intermediation and banking sector measures - Government supports remedial action plans and urges banks to act on Banking Commission inspection reports to restore compliance with regulatory norms. - Banks urged to comply with new minimum capital requirements for end-June 2017 (doubling to CFAF 10 million) and enhance risk assessment capabilities. - Government moving to end legal uncertainties surrounding its voiding of the 2015 bank bailout at minimal budgetary cost. - Need for accelerated NPL resolution: - Attorney General investigating bailout issues; civil and criminal court cases pending; legal uncertainty may persist due to banks' appeal rights and affect collateral recovery. - Recovery efforts stalled since government declared bailout contracts null and void in mid-2016; banks need to redouble collection efforts to safeguard collateral value. - Government initiatives to improve business climate for banks and SME finance: - Initiatives include re-financing of BCEAO claims on eligible SMEs and regulatory incentives to banks for credit to eligible SMEs (reduced weighting of claims in prudential ratios). - Government will transact its business entirely through the banking system and encourage avoidance of cash settlements in private real estate transactions. ### State-owned enterprises (SOEs) and autonomous funds - Planned audits and reporting to address financial deterioration in SOEs and autonomous funds: - Audit of public enterprises to strengthen accountability and enhance public service delivery; EAGB to be audited by end-2017 using available financial information to inform planned restructuring (with World Bank support) to an autonomous entity operated under a service contract. - Financial reporting extended to other public enterprises effective September 2017 as precursor to full audits by March 2018 for: (i) GuinéTelecom, (ii) GuinéTel, (iii) National Institute for Social Insurance, (iv) APGB (Sea Port), (v) ANAC (Civil Aviation Administration), (vi) ARN (National Regulatory Authority for Communications), and (vii) Fundu Rodoviário (Road Fund). - EAGB reporting status: EAGB submitted quarterly reports for the first three quarters of 2016 but failed to submit required monthly reports for October-December. ### Security sector reform and military spending transparency - Security sector reform delayed by inadequate financing and political crises; demobilization and reintegration of soldiers not progressed as intended. - Estimated cost for 2500 security personnel: US$82 million; about $64.2 million secured (from ECOWAS Commission, UN Peace Building Fund, and the government). - Government created a special pension fund. - Military spending: all military spending now on budget and executed per normal procedures; almost all salaries (96 percent) for military personnel made by bank transfer directly to beneficiaries (except few without bank accounts); other expenditures for goods and services provided following open procurement; an audit of the armed forces is being prepared. ### Improving economic statistics - Government set up a unit (long-term foreign consultants and local experts) to identify TA needs and implement data-related recommendations. - Regular meetings among BCEAO, ANCA, Ministry of Agriculture, Ministry of Commerce, and Bureau of National Statistics (INE) to reconcile official statistics, particularly cashew production and export statistics for national accounts and balance of payments. - Follow-up to FUNPI audit and elimination: designing a strategy to enhance cashew productivity and transformation (SB for June 2017, Table 3); a draft strategy under cabinet consideration. - Government will avoid clauses that curtail competition in the cashew trade or increase costs to the detriment of farmers; will seek technical assistance as needed. ### Combating corruption and rent seeking - CENTIF given autonomy and resources to conduct its mandate, including verification of asset declarations of high-ranking public officials. - Cabinet approved national strategic plan for AML/CFT, awaiting parliamentary approval. - Strengthening operational modalities with development partner assistance to align with the 2012 FATF standard. - Strict enforcement of public procurement laws and procedures; efforts to prosecute violators swiftly. - CENTIF intensified information dissemination (electronic declaration system) with TA from GIABA, increasing declarations of suspicious financial transactions and mitigating money laundering risks identified by IMF diagnostics TA mission. ### Program monitoring, targets, and performance criteria (selected numerical highlights) - Program monitored semi-annually by the IMF Executive Board based on quantitative performance criteria, indicative targets, and structural benchmarks (Tables 2 and 3). - Fourth program review based on end-June 2017 performance criteria scheduled to be completed on or after October 15, 2017. - Fifth review (after re-phasing of December 2016) based on end-December 2017 performance criteria scheduled to be completed on or after April 15, 2018. - Government commitments: - Refrain from accumulating any new domestic arrears (IT) other than those specified in the TMU, and from contracting non-concessional external loans. - Not to introduce or increase restrictions on payments and transfers related to current international transactions, enter into bilateral payment agreements not in conformity with Article VIII of the IMF Articles of Agreement, or impose/intensify import restrictions for balance of payments purposes. - To adopt any additional financial and structural measures only in consultation with the IMF. - Selected figures from Tables (preserve exact numbers as reported): - Performance criteria and indicative targets for 2016 (cumulative): Total domestic tax revenue (floor) 61.9 (2015 Act.), various interim values including 63.5 met; Net domestic bank credit to the central government (ceiling) 11.5 (2015 Act.) and met; External payment arrears (ceiling) 0.0 throughout but 0.6 not met. - Indicative target New domestic arrears (ceiling) values include 1.3, 0.0, 4.6, 6.6, ... with status met. - Social and priority spending (floor) values include 36.5, 7.7, 6.0, 21.7, ... with status met; result 32.2 met. - Domestic primary balance (commitment basis, floor) examples: -9.3, -0.7, -7.1, -1.3, -15.8, ... with status not met at -14.2. - Table 2 proposed 2017 figures include Total domestic tax revenue (floor) 63.5 and proposed PC target 65.2; Net domestic bank credit to the central government (ceiling) recent values include 14.6, 8.0, ... proposed PC 0.0; Social and priority spending (floor) proposed PC 31.0; Domestic primary balance (commitment basis, floor) proposed PC 4.4. - Memorandum items in Table 2: Clearance of domestic payment arrears values include 6.1, 0.4, ... projected 3.8; ECF disbursements (SDR millions, flow) entries include 5.1, 0.0, 3.0, 3.0; Concessional loans (US$ million) entries include 7.1, 4.6, 2.7, 9.3, 18.6, 10.9. ### Structural benchmarks (selected entries from Table 3) - Revenue mobilization: - Prepare draft law for new small taxpayer regime (December 2017) — To improve tax administration and compliance. - Extend uniform sales invoice to all taxpayers (September 2017) — Proposed benchmark. - Complete assignment of taxpayer identification numbers to all taxpayers (September 2017) — Proposed benchmark. - Expenditure management: - Prepare monthly rolling Treasury cash flow projection table consistent with the 2017 budget (December 2016 for January 2017, and monthly thereafter) — Status: Met. - Prepare timely quarterly reports on ministry-level budget execution (December 2016, and quarterly thereafter) — Status: Met. - Draw up list of own-source revenues collected by ministries, departments and government agencies (December 2016) — Status: Met. - Debt management: - Prepare quarterly report on external debt commitments, agreements, and disbursements (December 2016 for September 2016, and quarterly thereafter) — Status: Met. - Council of ministers to issue decree clarifying debt issuance authority and procedure for government guarantees and large liabilities (December 2016) — Status: Not Met. Completed in June 2017. - Install DMFAS 6.0 and commence use (September 2017) — Proposed benchmark. - Business environment: - Prepare an audit plan for all State-owned Enterprises and autonomous funds (November 2016) — Status: Met. - EAGB to submit detailed financial flow reports (December 2016) — Status: Not Met (submitted quarterly reports for first three quarters of 2016 but failed to submit required monthly reports for October-December). *International Monetary Fund — Guinea-Bissau: excerpt from the ECF program memorandum and accompanying tables contained in the provided PDF content.* ### 2016. The utility ### 2016. The utility ### Audit, governance, and sectoral measures - The utility maintains that the monthly reports need to be audited and approved prior to submission. - Proposed reset for July 2017. - Complete, with assistance of the WAEMU Banking Commission, an assessment of the two banks affected by the bailout, and articulate an action plan to bring these banks into compliance with prudential norms. - April 15, 2017: To strengthen the health of the banking system. Met. Banking Commission Report submitted to Finance Minister in February 2017. - Design a strategy to promote cashew production and transformation based on results of the FUNPI audit. - June 2017: Reduce transaction costs. ### Program scope, exchange rate convention, and evaluation timing - Memorandum sets out understandings between the Bissau-Guinean authorities and the IMF regarding definitions of quantitative performance criteria (PCs) and structural benchmarks (SBs) for the ECF-supported program. - All quantitative PCs and indicative targets evaluated in terms of cumulative flows from the beginning of the period, as specified in Table 2 of the MEFP, unless otherwise specified. - Program exchange rate: foreign currency denominated values for 2017 will be converted into CFA francs using a program exchange rate of CFA 622.47/US$ and cross rates as of end-December 2016. - Review schedule: - Fourth program review based on end-June 2017 performance criteria; scheduled to be completed on or after October 15, 2017. - Fifth review based on end-December 2017 performance criteria; scheduled to be completed on or after April 15, 2018. ### Quantitative performance criteria (PCs) — definitions and adjustments - A. Floor on Total Domestic Tax Revenue - Definition: Tax revenue includes direct and indirect taxes as presented in the central government financial operations table, as well as programmed recovery of tax arrears. - Adjustment clauses: The floor will be adjusted downwards (upwards) by the amount of any shortfall (excess) in programmed recovery of tax arrears. - B. Net Domestic Bank Credit to the Central Government (NCG) - Definition: NCG is the net banking system’s claim on the central government as calculated by the Treasury Department and comprises: - a. the net position of the Government with the national BCEAO, including: treasury bills and bonds; less central Government deposits (excluding project-related deposits) at the BCEAO; - b. the net position of the Government with commercial banks, including: (a) treasury bills; (b) treasury bearer bonds; and (c) loan and advances of commercial banks to the central Government; less central Government deposits (excluding project-related deposits) in commercial banks; - c. Any domestic loan guarantees issued by the government will be included in the net position of the government as defined in a. and b. above. - Adjustment clauses: - (a) The ceiling on changes in NCG will be adjusted upwards (downwards) by up to the CFA value of the shortfall (excess) in external program grants and loans, including IMF drawings—the upward adjustment will be capped at the equivalent of CFA 10 billion; - (b) downwards (upwards) by the excess (shortfall) in the CFA value of any programmed privatization receipts; - central government deposits at the BCEAO and the commercial banks will be adjusted downwards by any clearance of domestic arrears (excluding any arrears accumulated during the program period, 2015-18) in excess of program; - (c) downwards by the excess in CFAF value of corporate tax revenue that results from the bank bailout, in light of the court injunction freezing transactions associated with the bank bailout; - (d) upwards by the amount of the bank bailout (CFAF 34.2 billion), if NCG includes the bailout and the pending court case is not completed by the time of the third review. - Data source: monetary survey (Position Nette du Gouvernement (PNG)) table, submitted monthly to IMF staff by the BCEAO. - Definition of Central Government for this memo: central administration of the Republic of Guinea-Bissau and does not include any local administration, the central bank nor any other public or government-owned entity with autonomous legal personality not included in the TOFE. - C. New Non-Concessional External Debt Contracted or Guaranteed by the Central Government with an Original Maturity of One Year or More - Definition: All forms of new debt with original maturity of one year or more contracted or guaranteed by the central government. Excludes normal trade credit for imports and debt denominated in CFA franc, but includes domestically held foreign exchange (non-CFA franc) debts. Applies also to commitments contracted or guaranteed for which value has not been received. Excluded: disbursements from the IMF and debts subject to rescheduling or with verbal agreement. This PC applies on a continuous basis. - Reporting requirement: Government will report any new external borrowing and its terms to Fund staff as soon as external debt is contracted or guaranteed, but no later than within two weeks of such external debt being contracted or guaranteed. - D. External Short-Term Debt Contracted or Guaranteed by Central Government - Definition: External debt stock with a maturity of less than one year contracted or guaranteed by central government. Excludes normal trade credit for imports and debt denominated in CFA franc, but includes domestically held foreign exchange (non-CFA franc) debts. PC applies on a continuous basis. - E. External Payment Arrears of the Central Government - Definition: External payment arrears (currency test) are debt service payments not paid on due dates (accounting for contractual grace periods, if any) that have remained unpaid 30 days after the due dates. - Arrears not considered for performance criteria (“non-program” arrears) are: - (i) arrears accumulated on the service of an external debt for which there is a request for rescheduling or restructuring; and/or - (ii) amounts subject to litigation which are not considered as arrears for the performance criteria. ### Quantitative indicative targets — definitions - A. New Domestic Arrears of Central Government - Definition: Ceiling on domestic arrears defined as accounts payable (resto-a-paga) accumulated during the year, and still unpaid by one month after the quarter for wages and salaries (including pensions), and three months for goods, services and transfers. - B. Social and Priority Poverty-Related Expenditures - Definition: Include spending on health, education, and the gender ministry (MEFP Table 2). - C. Domestic Primary Balance (Commitment Basis) - Definition: Domestic primary fiscal deficit on a commitment basis is government revenue minus domestic primary expenditure on commitment basis. Government revenue includes all tax and nontax receipts and excludes external grants. Domestic primary expenditure consists of current expenditure plus domestically financed capital expenditure, excluding all interest payments. Government commitments include all expenditure for which commitment vouchers have been approved by the Ministry of Finance; automatic expenditure (such as wages and salaries, pensions, utilities, and other expenditure for which payment is centralized); and expenditure by means of offsetting operations. - D. Non-Regularized Expenditure (DNTs) - Definition: Any treasury outlay not properly accounted for by the National Budget Directorate and/or not included in the budget. ### Program monitoring, reform unit, and reporting responsibilities - Program monitoring: - Authorities shall recommend policy responses, inform the IMF monthly about program progress, and transmit supporting information necessary for evaluation of QPCs and benchmarks in electronic format as indicated in the attached summary table to IMF staff (Table 1). - Reform unit responsibilities: - Continue to adequately support the reform unit to monitor key macroeconomic variables, coordinate TA, and monitor reform implementation. - Reform unit periodically reports to the Minister of Finance on progress in achieving agreed performance indicators and development objectives. - Keep an updated list of all partners, prioritize technical assistance, agree on division of labor, and ensure information sharing (including TA reports) with partners to avoid conflicting or overlapping advice. ### Reporting requirements and deadlines (Table 1 summary) - Fiscal sector (submitted by Budget Directorate): - Central Government budget and outturn: Monthly — 30 days after the end of the month. - Grants: Monthly — 30 days after the end of the month. - Budgetary grants: Monthly — 30 days after the end of the month. - Project grants: Monthly — 30 days after the end of the month. - Change in the stock of domestic arrears: Monthly — 30 days after the end of the month. - Unpaid claims: Monthly — 30 days after the end of the month. - Interest arrears: Monthly — 30 days after the end of the month. - Proceeds from bonds issued in the regional WAEMU market: Monthly — 30 days after the end of the month. - Real and External Sector (submitted by CSO/MOEF): - Updates on annual National Accounts by sector: Annually — Within 6 weeks of availability. - Balance of Payments data: Annually — Within 6 weeks of availability. - Details of exports breakdown: Quarterly — 30 days after the end of the quarter. - Details of imports breakdown: Quarterly — 30 days after the end of the quarter. - CPI: Monthly — 30 days after the end of the month. - Debt (submitted by DMU): - External and domestic debt and guaranteed debt by creditor: Monthly — 30 days after the end of the month. - Disbursements: Monthly — 30 days after the end of the month. - Amortization: Monthly — 30 days after the end of the month. - Interest payments: Monthly — 30 days after the end of the month. - Stock of external debt: Monthly — 30 days after the end of the month. - Stock of domestic debt: Monthly — 30 days after the end of the month. - Arrears on interest and principal: Monthly — 30 days after the end of the month. - Exceptional domestic financing: Monthly — 30 days after the end of the month. - Copies of any new loan agreements: As occurring. - Monetary/Financial Sector (submitted by BCEAO/MOEF): - Detailed balance sheet of the central bank (national BCEAO): Monthly — 45 days after the end of the month. - Detailed bank-by-bank balance sheets: Monthly — 45 days after the end of the month. - Detailed consolidated balance sheet of commercial banks: Monthly — 45 days after the end of the month. - The monetary survey: Monthly — 45 days after the end of the month. - Detailed net position of central government (PNG): Monthly — 45 days after the end of the month. - Financial Stability Indicators: Monthly — 45 days after the end of the month. - Interest rates: Monthly — 45 days after the end of the month. - Deposit rates on all types of deposits at commercial banks: Monthly — 45 days after the end of the month. - Short- and long-term lending rates of commercial banks: Monthly — 45 days after the end of the month. *Attachment II. Technical Memorandum of Understanding. Bissau, Guinea-Bissau, June 17, 2017.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17228.pdf_