## Joint Staff Advisory Note (JSAN) review of the first full Poverty Reduction Strategy Paper (PRSP) for Guinea-Bissau

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---

### Background and PRSP preparation
- PRSP preparation started in 2001 and was repeatedly delayed due to political instability and weak technical capacity.
- Transition government prepared a first draft in 2004; draft revised in 2005 and finalized in 2006.
- Implementation period initially designed for 2006–2008; now covers 2007–2010.
- Participatory process with three levels:
  - (i) political and institutional (government and development partners);
  - (ii) technical (national public and private sector leaders and civil society leaders);
  - (iii) popular and community (stakeholders in rural and urban areas).

### Long-term vision and PRSP pillars
- Long-term vision “Djitu ten” aims to:
  - improve per capita income;
  - gradually reduce the incidence of poverty to less than 60 percent by 2015;
  - improve access to basic education by increasing gross enrollment rates to nearly 100 percent by 2015;
  - reduce infant mortality rates to less than 80 deaths per thousand by 2015.
- Four PRSP pillars:
  - (i) strengthening governance, modernizing the public administration and ensuring macroeconomic stability;
  - (ii) enhancing economic growth and job creation;
  - (iii) increasing access to social services and basic infrastructure;
  - (iv) improving the living conditions of vulnerable groups.

### Poverty, employment, and sectoral profiles (key statistics)
- 2002 household-level poverty: 64.7 percent lived in poverty; 20.8 percent in extreme poverty.
- National unemployment rate (population over 15) in 2002: 12.4 percent.
- Unemployment in 2002: Bissau 19.3 percent; other regions 10.2 percent.
- 63.5 percent of the working age population employed in agriculture.
- Gender note: higher incidence of poverty in the male population than female; reasons include differing family structures and women’s engagement in income-generating activities (e.g., processing of cashew nuts).
- Staff advice:
  - deepen analysis of links between employment, agriculture and gender and their impact on growth;
  - alleviate labor market rigidities (restrictive labor and minimum wage regulations in the formal sector) in the medium term to boost job creation.

### Strategic issues, prioritization and MDGs
- PRSP projects that, at current trends, none of the seven Millennium Development Goals (MDGs) will be achieved by 2015.
- Staff recommendations:
  - further define the PRSP’s two sets of measures (accelerated growth and well defined structural reforms) to identify key enabling policies and programs, with focus on governance, education and health;
  - improve prioritization, sequencing and programmatic vision—particularly for rural development activities under the second pillar;
  - revise prioritization during the next APR phase.

### Governance, security sector, and natural resources
- Governance:
  - PRSP highlights need to improve governance but lacks a detailed and sequenced strategy.
  - Government recognizes need to: (i) restructure public administration; (ii) strengthen rule of law via judiciary reform; (iii) carry out decentralization reforms.
  - Staffs recommend a well sequenced set of actions and development of an anti-corruption strategy through broad consultation focusing on:
    - (i) management and incentive structures of the public sector;
    - (ii) public financial management, including procurement practices;
    - (iii) judicial sector reforms;
    - (iv) improving the business climate, including regulation, customs and taxation.
- Security sector reform:
  - Ongoing dialogue to define reform program including reducing size of armed forces and improving living conditions in military barracks.
  - Successful reform expected to preserve peace and contribute to fiscal consolidation via reduction of the wage bill and reallocation to priority poverty-reducing expenditures.
- Emerging mining/oil governance and resource figures:
  - Authorities authorized Premier Oil (PO) to start oil exploration along coastal areas; PO has drilled two oil wells and plans two additional sites; other companies are in discussion to drill seven additional sites.
  - Phosphate reserves at Salquenha estimated at 94 million tons with annual production estimated at 2 million tons per year; Guinea-Bissau phosphate has 36.5 percent of Phosphorous Oxide.
  - Staffs advise strengthening legal and regulatory frameworks; consider joining the Extractive Industries Transparency Initiative (EITI); set up transparent systems for management of resources and related revenues; design strategy to manage potential macroeconomic impact of resource revenues.
  - NGO workshop (SWISSAID, Tiniguena, Action for Development, IUCN) recommended increased transparency and review of environmental impacts.

### Macroeconomic framework, fiscal policy and debt
- Macroeconomic stance:
  - PRSP priorities include safeguarding macroeconomic stability via cautious fiscal policy and prudent monetary policy by BCEAO.
  - Authorities commit to achieving and maintaining WAEMU convergence criteria.
- Fiscal commitments in PRSP:
  - (i) execute a budgetary policy in line with WAEMU norms;
  - (ii) implement fiscal reforms to broaden the tax base;
  - (iii) limit current spending to generate primary fiscal surpluses;
  - (iv) downsize the public sector through retrenchment of redundant workers;
  - (v) ensure domestic arrears do not accrue at levels harming private sector functioning.
  - Staffs urge authorities to avoid any new accumulation of domestic arrears.
- Debt management:
  - Plans to improve external debt management by creating a debt monitoring committee and strengthening the external debt unit at the Ministry of Finance.
  - For domestic debt, authorities plan an audit of all arrears through the end of 2005 and conversion of all audited arrears into formal debt.
- Staffs recommend considering alternative medium-term macroeconomic scenarios and contingent policies to address potential realization of risks.

### Private sector development, privatization and business environment
- Role of private sector: PRSP acknowledges private sector as main player in economic recovery; need for favorable business climate, legal/regulatory framework and political stability.
- Privatization progress and costs:
  - 31 out of 44 small and medium State Owned Enterprises (SOEs) have been privatized/liquidated.
  - Retrenchment payments for 23 companies covered 1,608 workers and totaled CFAF 2.2 billion (about US$4.5 million).
  - Government established a Unit under the Ministry of Economy to monitor privatization processes and contracts.
- Business environment indicators:
  - Country ranked 173rd out of 175 on the Doing Business indicators for 2007.
  - Private savings are weak and only four financial institutions operate in the country (all located in Bissau).
- Legal harmonization: adopted OHADA business legislation in 2003.

### Infrastructure, transport, telecommunications and utilities
- Infrastructure priorities: transportation, telecommunication, and utilities improvements seen as cornerstones for poverty reduction.
- Transport and aviation:
  - Staffs recommend assessing management options (concessions, leases, “affermage”, management contracts) and implementing retained option to bring in private participation.
  - Civil Aviation Authority legally established in March 2005 and becoming operational.
  - Since January 2006, airspace managed by ASECNA; scaled-down Airport Authority (ENAG) handles infrastructure; terminal and ground handling managed by private sector.
  - Staffs recommend adoption of aviation codes complying with regional and international standards.
  - Partial perimeter fence and access road constructed for Bissau airport; finalization of full perimeter fence ongoing under Bank-supported project.
- Telecommunications and utilities:
  - Staffs urge implementation of the interconnection regulatory framework published by the Institute of Telecommunications of Guinea-Bissau (ICGB).
  - Rehabilitation of water and energy services considered preconditions to growth—staffs recommend creation of a multisectoral single agency to regulate telecommunications, electricity, water and public terrestrial transport sectors.

### Cashew and fisheries sectors
- Cashew sector:
  - Cashew production and marketing remain essential for rural incomes.
  - Staffs recommend government abstain from intervention in marketing arrangements to avoid past disruptions.
  - Over the medium term, staff recommend developing alternative fiscal revenue sources rather than relying on export taxes from cashews.
- Fisheries sector:
  - PRSP envisions about US$14 million of investment in fisheries to diversify the economy.
  - Staffs emphasize need for enhanced control over exploitation and sustainable resource management:
    - illegal vessels and foreign industrial vessels heavily exploit resources; many do not land or process catch in country.
  - Staffs encourage strengthening management and control mechanisms in collaboration with neighboring countries and regional initiatives supported by IDA and the European Union.

### Health and education: prioritization and capacity
- Health sector:
  - PRSP identifies priorities but lacks short- to medium-term prioritization given budgetary and capacity constraints; many critical activities remain unfunded.
  - Staffs recommend revising and prioritizing interventions by available financing and donor commitments.
  - Critical unfunded areas include increased wages for public sector health workers and key activities under the Second National Health Development Program (PNDS-2).
  - Planned PNDS-2 reforms to highlight: health insurance schemes (private and public) with a minimum package of benefits; pilot community health mutual funds; strengthening cost recovery; improving drugs and vaccines supply chains; enhancing stewardship/regulatory role of Health Ministry; building health sector capacity.
- Education sector:
  - PRSP should better prioritize activities to facilitate an education sector plan aligned with domestic and external financial resources.
  - Priority issues:
    - teacher training, especially pre-service training; teacher proficiency remains low following civil conflict losses;
    - restructuring primary education into a six-year cycle (from current 4+2 structure) to reduce cost burdens; pilot of six-year cycle tried and new curriculum drafted.
  - Staffs advise quick roll-out of the new primary education structure.

### Implementation issues and staff summary recommendations
- Prioritization and sequencing:
  - Clearly prioritize actions under each pillar to ensure sequencing and consistency with resources; revise during next APR phase.
- Governance and anti-corruption:
  - Develop well sequenced governance reforms and an anti-corruption strategy focusing on public sector management, PFM and procurement, judicial reform, and business climate.
- Natural resource management:
  - Design transparent systems and regulatory frameworks for oil and phosphate; prepare macroeconomic management strategy for resource revenues.
- Fiscal discipline and debt:
  - Avoid new accumulation of domestic arrears; implement planned debt audit and conversion of arrears; broaden tax base and seek primary surpluses.
- Private sector and infrastructure:
  - Continue privatization monitoring; assess and implement private participation options for infrastructure; establish a multisectoral regulator.
- Sectoral prioritization:
  - Prioritize health and education interventions according to available financing; focus on teacher training, primary cycle reform, health worker wages, PNDS-2 priorities, and supply chains.
- Sector-specific measures:
  - Abstain from market interventions in cashew marketing; develop alternative fiscal revenues.
  - Invest in fisheries control and sustainable management to complement planned US$14 million investments.

### Absorptive capacity, donor support and monitoring
- Absorptive capacity:
  - Substantial portion of PRSP programs expected to be financed with external budget and project support; if realized, represents a sizeable increase in external assistance compared to current levels.
  - Staffs advise authorities to take measures to maximize effectiveness of increased donor support and reduce potential negative macroeconomic effects.
  - Regular Public Financial Management (PFM) reviews (as in 2004 and 2006 with IDA and IMF) are necessary to:
    - provide information on the efficiency of government outlays under the PRSP;
    - assess implementation capacity of different sector ministries;
    - allow revision of original targets as necessary.
- Monitoring and evaluation (M&E):
  - Staffs welcome institutional and reporting mechanisms proposed and use of MDGs as M&E indicators.
  - Limitations:
    - MDGs cover only medium-term goals while PRSP covers a three-year time span; short-term indicators are needed.
    - MDG indicators focus mainly on social and environmental sectors and do not address governance, growth, and macroeconomic and structural policies.
  - Recommendations:
    - adopt a more comprehensive but selective set of indicators covering priority areas of poverty reduction over short- and medium-term;
    - integrate indicators within planned activities to strengthen statistical capacity, including participation in the General Data Dissemination Standards (GDDS) and associated plans;
    - ensure establishment and maintenance of an M&E system is appropriately funded in the context of the PRSP.
- Poverty measurement and statistics:
  - PRSP contains wealth of information but lacks a poverty trend analysis due to methodological differences between 1994 and 2002 household surveys.
  - Recommendations:
    - develop poverty statistics comparable over time and strengthen capacity to collect and analyze poverty data;
    - implement a new household survey to update 2002 poverty data and serve as baseline for PRSP impact assessment;
    - ongoing donor statistical capacity building could assist authorities.
- Definition and targeting of vulnerable groups:
  - Staffs encourage review of definition of “vulnerable groups” to improve policy targeting.
  - Observations/recommendations:
    - recognize widespread vulnerability and explain resource-imposed choices in targeting;
    - prioritize youth given potential costs of inaction (violence, conflict, etc.);
    - target land-mine victims (de-mining operations and health care);
    - distinguish groups served under other pillars (e.g., education) from those specific to the vulnerable-groups pillar (e.g., youth programs, de-mining).

### Risks, challenges and mitigation
- Risks of lower than expected growth:
  - Government target: average real annual growth rate of at least 5 percent for period beyond 2006.
  - Staffs regard this as overly optimistic given historical trends and recovery from the 1998 conflict.
  - 2001–2005: economy contracted by about 1 percent on average.
  - Fiscal situation by end-2006: low tax performance (about 11 percent of GDP) and relatively high wage bill (around 13 percent of GDP).
  - Economy heavily dependent on a single commodity (raw cashew nut).
  - Mitigation: accelerate fiscal and economic diversification reforms, particularly in cashew sector.
- Risks of shortfalls in external assistance:
  - Four-fifth of PRSP financing needs expected to be funded by external donors as concessional assistance.
  - As assistance is tied to policy performance, reform setbacks would limit resource mobilization.
  - Short-term mitigation:
    - (i) stabilize the political situation;
    - (ii) develop a contingency plan to prioritize actions in line with actual domestic and external resources.
  - Medium-term mitigation:
    - (i) accelerate and sustain economic reforms while preserving political stability;
    - (ii) continue sound macroeconomic policies to minimize negative effects of foreign aid.
- Risks related to external debt:
  - Recent debt sustainability analysis (DSA) indicated Guinea-Bissau is currently in a debt distress position.
  - Risks include inability to timely service debt to development partners and potential delays or suspension of financial support.
  - Prudent debt management and accelerated economic reforms are critical.

### Conclusion and priority recommendations
- Staffs view the PRSP as an encouraging first step and note progress including:
  - (i) updating the poverty profile;
  - (ii) divestiture of public enterprises;
  - (iii) reducing bureaucratic barriers to private sector activities;
  - (iv) adoption and implementation of a strategic framework to fight HIV/AIDS;
  - (v) strengthening treasury management, public procurement and monitoring public expenditures through an independent treasury committee;
  - (vi) improving costing, monitoring, and the participatory approach of the poverty reduction strategy.
- Priority areas for further work:
  - (i) prioritize proposed activities under each strategic pillar;
  - (ii) clearly identify constraints to growth (low productivity, unexplored comparative advantages) and define specific policies/programs to address them;
  - (iii) develop a detailed and sequenced strategy to improve governance, including emerging mining and oil activities;
  - (iv) prepare a security sector reform strategy through a broad consultative process;
  - (v) strengthen the monitoring and evaluation framework, including developing poverty statistics comparable over time and strengthening capacity to collect and analyze poverty data.
- Executive Directors’ views are sought on agreement with main areas identified by staffs as priorities and concurrence with areas identified as key implementation risks.

*Source: Joint Staff Advisory Note (JSAN) reviewing the PRSP for Guinea-Bissau, content unit _cr07340.*

### 1. This Joint Staff Advisory Note (JSAN) reviews the first ever full Poverty

### Joint Staff Advisory Note (JSAN) review of the first full Poverty Reduction Strategy Paper (PRSP) for Guinea-Bissau

### Background and preparation process
- The PRSP preparation started in 2001 and was repeatedly delayed due to political instability and weak technical capacity.
- A transition government prepared a first draft in 2004; the draft was revised in 2005 and finalized in 2006.
- The implementation period was initially designed to cover 2006–2008, and will now cover the period 2007–2010.
- The PRSP was prepared within a participatory process with three levels of participation:
  - (i) political and institutional (government and development partners);
  - (ii) technical (national public and private sector leaders and civil society leaders);
  - (iii) popular and community (stakeholders in rural and urban areas).

### Long-term vision and PRSP pillars
- The PRSP reflects the government’s long-term vision “Djitu ten,” which aims to:
  - improve per capita income;
  - gradually reduce the incidence of poverty to less than 60 percent by 2015;
  - improve access to basic education by increasing gross enrollment rates to nearly 100 percent by 2015;
  - reduce infant mortality rates to less than 80 deaths per thousand by 2015.
- The PRSP is based on four pillars:
  - (i) strengthening governance, modernizing the public administration and ensuring macroeconomic stability;
  - (ii) enhancing economic growth and job creation;
  - (iii) increasing access to social services and basic infrastructure;
  - (iv) improving the living conditions of vulnerable groups.

### Poverty, employment, and sectoral profiles
- Poverty and unemployment findings:
  - In 2002, at the household level, 64.7 percent of the population lived in poverty, with 20.8 percent living in extreme poverty.
  - National unemployment rate among population over 15 years of age was 12.4 percent in 2002.
  - Unemployment rate in Bissau was 19.3 percent and 10.2 percent in other regions in 2002.
  - 63.5 percent of the working age population is employed in agriculture.
- Gender and poverty:
  - Higher incidence of poverty in the male population compared to the female population is noted; explanations include differing family structures and women’s engagement in income-generating activities (e.g., processing of cashew nuts).
- Staff advice on analysis and labor policy:
  - Deepen analysis of links between employment, agriculture and gender and their impact on growth.
  - Alleviate labor market rigidities (restrictive labor and minimum wage regulations in the formal sector) in the medium term to boost job creation.

### Strategic issues, prioritization and sequencing
- MDGs and growth:
  - The PRSP indicates that, at current trends, none of the seven Millennium Development Goals (MDGs) will be achieved by 2015.
  - Staff recommend further defining the PRSP’s two sets of measures (accelerated growth and well defined structural reforms) to identify key enabling policies and programs, with special attention to governance, education and health.
- Prioritization:
  - The PRSP highlights broad intervention areas but lacks clear prioritization, sequencing and programmatic vision—particularly noted for rural development activities under the second pillar.
  - Staffs recommend clearer prioritization while revising the PRSP at the next APR phase.

### Governance, security sector, and natural resources
- Governance weaknesses:
  - PRSP emphasizes need to improve governance but lacks a detailed and sequenced strategy.
  - Government recognizes need to: (i) restructure public administration; (ii) strengthen rule of law via judiciary reform; (iii) carry out decentralization reforms.
  - Staffs recommend a well sequenced series of actions and development of an anti-corruption strategy through broad consultation focusing on:
    - (i) management and incentive structures of the public sector;
    - (ii) public financial management, including procurement practices;
    - (iii) judicial sector reforms;
    - (iv) improving the business climate, including regulation, customs and taxation.
- Security sector reform:
  - Dialogue ongoing to define a reform program including reducing size of armed forces and improving living conditions in military barracks.
  - Successful security sector reform expected to preserve peace and contribute to fiscal consolidation via reduction of the wage bill and reallocation to priority poverty-reducing expenditures.
- Emerging mining/oil governance:
  - Staffs recommend PRSP consider specific measures for emerging mining (including oil) activities.
  - Authorities authorized Premier Oil (PO) to start oil exploration along coastal areas; PO has drilled two oil wells and plans two additional sites; other companies are in discussion to drill seven additional sites.
  - Phosphate reserves at Salquenha are estimated at 94 million tons with annual production estimated at 2 million tons per year; Guinea-Bissau phosphate has 36.5 percent of Phosphorous Oxide.
  - Staffs advise strengthening legal and regulatory frameworks and consider joining the Extractive Industries Transparency Initiative (EITI); set up transparent system for management of resources and related revenues; design strategy to manage potential macroeconomic impact of resource revenues.
  - NGO-sponsored workshop (SWISSAID, Tiniguena, Action for Development, IUCN) recommended increased transparency and review of environmental impacts.

### Macroeconomic framework, fiscal policy and debt
- Macroeconomic stance:
  - PRSP priorities include safeguarding macroeconomic stability via cautious fiscal policy and prudent monetary policy by BCEAO.
  - Authorities commit to achieving and maintaining WAEMU convergence criteria.
- Fiscal commitments in PRSP:
  - (i) execute a budgetary policy in line with WAEMU norms;
  - (ii) implement fiscal reforms to broaden the tax base;
  - (iii) limit current spending to generate primary fiscal surpluses;
  - (iv) downsize the public sector through retrenchment of redundant workers;
  - (v) ensure domestic arrears do not accrue at levels harming private sector functioning.
  - Staffs urge authorities to avoid any new accumulation of domestic arrears.
- Debt management:
  - Plans to improve external debt management by creating a debt monitoring committee and strengthening the external debt unit at the Ministry of Finance.
  - For domestic debt, authorities plan an audit of all arrears through the end of 2005 and conversion of all audited arrears into formal debt.
- Risk scenarios:
  - Staffs recommend the PRSP consider alternative medium-term macroeconomic scenarios and contingent policies to address potential realization of risks.

### Private sector development, privatization and business environment
- Role of private sector:
  - PRSP acknowledges private sector as main player in economic recovery; need for favorable business climate, legal/regulatory framework and political stability.
- Privatization progress:
  - 31 out of 44 small and medium State Owned Enterprises (SOEs) have been privatized/liquidated.
  - Retrenchment payments for 23 companies covered 1,608 workers and totaled CFAF 2.2 billion (about US$4.5 million).
  - Government established a Unit under the Ministry of Economy to monitor privatization processes and contracts to ensure financial obligations and investment commitments are honored and incentives are executed according to law.
- Business environment indicators:
  - The country ranked 173rd out of 175 on the Doing Business indicators for 2007.
  - Private savings are weak and only four financial institutions operate in the country (all located in Bissau).
- Legal harmonization:
  - Country adopted business legislation approved at the regional level under OHADA in 2003.

### Infrastructure, transport, telecommunications and utilities
- Infrastructure priorities:
  - PRSP emphasizes transportation, telecommunication, and utilities improvements as cornerstones for poverty reduction.
- Transport and aviation:
  - Staffs recommend assessing various management options (concessions, leases, “affermage”, management contracts) and implementing retained option to bring in private participation.
  - Civil Aviation Authority legally established in March 2005 and becoming operational.
  - Since January 2006, airspace managed by ASECNA; a scaled-down Airport Authority (ENAG) handles infrastructure; terminal and ground handling operations managed by private sector.
  - Staffs recommend adoption of aviation codes complying with regional and international standards.
  - A partial perimeter fence and access road constructed for Bissau airport; finalization of full perimeter fence ongoing under Bank-supported project.
- Telecommunications and utilities:
  - Staffs urge implementation of the interconnection regulatory framework published by the Institute of Telecommunications of Guinea-Bissau (ICGB).
  - Rehabilitation of water and energy services considered preconditions to growth—staffs recommend creation of a multisectoral single agency to regulate telecommunications, electricity, water and public terrestrial transport sectors.

### Cashew and fisheries sectors
- Cashew sector:
  - Cashew production and marketing remain essential for rural incomes.
  - Staffs recommend government abstain from intervention in marketing arrangements to avoid past disruptions.
  - Over the medium term, staff recommend developing alternative fiscal revenue sources rather than relying on export taxes from cashews.
- Fisheries sector:
  - PRSP envisions about US$14 million of investment in fisheries to diversify the economy.
  - Staffs emphasize need for enhanced control over exploitation and sustainable resource management:
    - Illegal vessels and foreign industrial vessels heavily exploit resources; many do not land or process catch in country.
  - Staffs encourage strengthening management and control mechanisms in collaboration with neighboring countries and regional initiatives supported by IDA and the European Union.

### Health and education: prioritization and capacity
- Health sector:
  - PRSP identifies overall priorities but lacks short- to medium-term prioritization considering budgetary and capacity constraints; many critical activities remain unfunded.
  - Staffs recommend revising and prioritizing interventions by available financing and donor commitments.
  - Critical unfunded areas include increased wages for public sector health workers and key activities under the Second National Health Development Program (PNDS-2).
  - Planned PNDS-2 reforms to highlight: health insurance schemes (private and public) with a minimum package of benefits; pilot community health mutual funds; strengthening cost recovery; improving drugs and vaccines supply chains; enhancing stewardship/regulatory role of Health Ministry; building health sector capacity.
- Education sector:
  - PRSP should better prioritize activities to facilitate an education sector plan aligned with domestic and external financial resources.
  - Priority issues:
    - Teacher training, especially pre-service training; teacher proficiency remains low following civil conflict losses.
    - Restructuring primary education into a six-year cycle (from current 4+2 structure) to reduce cost burdens; pilot of six-year cycle tried and new curriculum drafted.
  - Staffs advise quick roll-out of the new primary education structure.

### Implementation issues and staff recommendations (summary)
- Prioritization and sequencing:
  - Clearly prioritize actions under each pillar to ensure sequencing and consistency with resources; revise during next APR phase.
- Governance and anti-corruption:
  - Develop well sequenced governance reforms and an anti-corruption strategy focusing on public sector management, PFM and procurement, judicial reform, and business climate.
- Natural resource management:
  - Design transparent systems and regulatory frameworks for oil and phosphate; prepare macroeconomic management strategy for resource revenues.
- Fiscal discipline and debt:
  - Avoid new accumulation of domestic arrears; implement planned debt audit and conversion of arrears; broaden tax base and seek primary surpluses.
- Private sector and infrastructure:
  - Continue privatization monitoring; assess and implement private participation options for infrastructure; establish a multisectoral regulator.
- Sectoral prioritization:
  - Prioritize health and education interventions according to available financing; focus on teacher training, primary cycle reform, health worker wages, PNDS-2 priorities, and supply chains.
- Sector-specific measures:
  - Abstain from market interventions in cashew marketing; develop alternative fiscal revenues.
  - Invest in fisheries control and sustainable management to complement planned US$14 million investments.

*Source: Joint Staff Advisory Note (JSAN) reviewing the PRSP for Guinea-Bissau, as supplied in the content unit.*

### 19. Staffs caution that the absorptive capacity of the economy needs to be improved.

### 19. Staffs caution that the absorptive capacity of the economy needs to be improved.

### Absorptive capacity and donor support
- A substantial portion of the PRSP programs are expected to be financed with external budget and project support.
- If such support materializes, it will represent a sizeable increase in external assistance compared to current levels.
- Staffs advise the authorities to take the necessary measures to maximize the effectiveness of increased donor support and reduce the potential negative macroeconomic effects.
- Staffs view regular Public Financial Management (PFM) reviews, as performed in 2004 and 2006 in collaboration with IDA and the IMF, as necessary. The reviews would:
  - provide important information on the efficiency of government outlays under the PRSP;
  - assess the implementation capacity of the different sector ministries;
  - allow revision of the original targets as necessary.

### Monitoring and evaluation (M&E)
- Staffs advise the government to strengthen the PRSP monitoring and evaluation (M&E) mechanisms.
- Staffs welcome the institutional and reporting mechanisms proposed by the PRSP and the use of the MDGs as M&E indicators.
- Limitations noted:
  - The MDGs cover only medium-term goals, while the PRSP covers a three-year time span; short-term indicators are needed for evaluation.
  - The MDG indicators focus mainly on the social and environmental sectors and do not address governance, growth, and macroeconomic and structural policies.
- Recommendations:
  - Consider a more comprehensive but still selective set of indicators covering priority areas of poverty reduction over the short- and medium-term to serve as a basis for a full M&E system.
  - Integrate such indicators within the overall umbrella of planned activities to strengthen Guinea-Bissau’s statistical capacity, including participation in the General Data Dissemination Standards (GDDS) and associated plans for statistical improvement.
  - Ensure the establishment and maintenance of an M&E system is appropriately funded in the context of the PRSP.

### Poverty measurement and statistical capacity
- Staffs welcome the wealth of information on the main characteristics and determinants of poverty in Guinea-Bissau.
- Limitations noted:
  - The PRSP’s poverty profile does not include a poverty trend analysis due to methodological differences in the design of the 1994 and 2002 household survey data.
- Recommendations:
  - Develop poverty statistics that are comparable over time and strengthen capacity to collect and analyze poverty data.
  - Implement a new household survey to update the 2002 poverty data and serve as a baseline for assessing PRSP implementation impacts.
  - Ongoing statistical capacity building support by donors could assist the authorities.

### Definition and targeting of vulnerable groups
- Staffs encourage the authorities to review the definition of ‘vulnerable groups’ to make it more useful for policy targeting.
- Observations and recommendations:
  - Under the current definition a large share of the population would qualify as vulnerable; a more realistic approach is to recognize widespread vulnerability and explain that limited resources impose choices in determining targeted groups.
  - Staffs recommend that youth be a priority in light of the potential cost of inaction (violence, conflict, etc.).
  - Land-mine victims are an important identifiable vulnerable group to target, with preventive actions needed (e.g., pursuing de-mining operations in areas still affected by land-mines, and providing health care to land-mine victims).
  - Distinguish between vulnerable groups pursued under other pillars (e.g., access to education) and those that only fit under this pillar (e.g., programs for youth or de-mining).

### Risks and challenges
- Risks of lower than expected economic growth:
  - The government aims to achieve an average real annual growth rate of at least 5 percent for the period beyond 2006.
  - Staffs regard this target as overly optimistic given historical trends and the economy’s recovery from the 1998 conflict.
  - During 2001–2005, the economy contracted by about 1 percent on average.
  - The fiscal situation was still difficult by end-2006 with a low tax performance (about 11 percent of GDP) and a relatively high wage bill (around 13 percent of GDP).
  - The economy heavily depends on production and export of a single commodity (raw cashew nut) subject to climatic and price fluctuations.
  - To mitigate these risks, staffs encourage acceleration of fiscal and economic diversification reforms, particularly in the cashew sector.
- Risks of shortfalls in external assistance:
  - Four-fifth of the PRSP financing needs are expected to be funded by external donors in the form of concessional assistance.
  - As concessional assistance is tied to policy performance, any setback in implementing reforms would limit the government’s capacity to mobilize such resources.
  - Short-term mitigation measures:
    - (i) stabilize the political situation;
    - (ii) develop a contingency plan to prioritize actions in line with actual domestic and external resources.
  - Medium-term mitigation measures:
    - (i) accelerate and sustain the implementation of economic reforms while preserving political stability;
    - (ii) continue to implement sound macroeconomic policies to minimize potential negative effects of foreign aid.
- Risks related to external debt:
  - A recent debt sustainability analysis (DSA) indicated that Guinea-Bissau is currently in a debt distress position.
  - Risks include inability to timely service debt to development partners and potential delays or suspension of financial support.
  - Prudent debt management and sustained, accelerated implementation of economic reforms are critical.

### Conclusion and priority recommendations
- Staffs believe the PRSP is an encouraging first step toward addressing Guinea-Bissau’s medium-term development challenges and note progress including:
  - (i) updating the poverty profile;
  - (ii) divestiture of public enterprises;
  - (iii) reducing bureaucratic barriers to private sector activities;
  - (iv) adoption and implementation of a strategic framework to fight HIV/AIDS;
  - (v) strengthening treasury management, public procurement and monitoring public expenditures through an independent treasury committee;
  - (vi) improving costing, monitoring, and the participatory approach of the poverty reduction strategy.
- Staffs recommend further work to strengthen PRSP implementation. Priority areas for the authorities are:
  - (i) prioritizing proposed activities under each strategic pillar;
  - (ii) clearly identifying constraints to growth such as low productivity and unexplored comparative advantages, and defining specific policies and programs to address them;
  - (iii) developing a detailed and sequenced strategy to improve governance, including in emerging mining and oil activities;
  - (iv) preparing a security sector reform strategy through a broad consultative process;
  - (v) strengthening the monitoring and evaluation framework, including by developing poverty statistics that are comparable over time and strengthening the capacity to collect and analyze poverty data.
- Executive Directors’ views are sought on whether they agree with the main areas identified by staffs as priorities for strengthening the PRSP and its implementation, and whether they concur with the areas identified by staffs as key implementation risks.

*IMF staff summary (content unit: _cr07340 - 19. Staffs caution that the absorptive capacity of the economy needs to be improved.)*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07340.pdf_