## _cr08266

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### EPCA program progress and eligibility
- Four of six end-March quantitative indicators were met; payment of previous years’ arrears and new domestic arrears were missed for Q1 but expected to be met for the year as a whole.
- All structural indicators were implemented, albeit with some delay; one delayed measure was met on May 19, 2008.
- Donor support has resumed and economic confidence is improving.
- Authorities requested a second EPCA purchase equivalent to SDR 1.775 (12.5 percent of quota); staff support the request to consolidate performance, restore administrative capacity, and catalyze additional donor support.
- Guinea-Bissau continues to meet the Fund’s conditions for EPCA support, including: (i) capacity and commitment for policy planning and implementation; (ii) persistent need to meet essential external payments; and (iii) evidence of continued international support.

### Fiscal situation, recent performance, and measures
- 2007 outcome and early 2008:
  - Domestic primary balance in 2007: CFAF 19.1 billion (10.8 percent of GDP), worsened from CFAF 12 billion (7.5 percent of GDP) in 2006.
  - Domestic primary deficit for Q1 2008: CFAF 3.8 billion, below program target of CFAF 5.1 billion.
  - Domestic primary expenditures through March were below programmed levels by about CFAF 0.6 billion; revenues were higher by about CFAF 0.5 billion.
  - Four of six March quantitative indicators met: domestic primary deficit, government revenues, domestic financing of the budget, and external nonconcessional borrowing.
  - Missed indicators: payment of previous years’ arrears and new domestic arrears (expected to be met for year).
- Fiscal pressures and policy response:
  - Fiscal situation remains tight, with pressures from higher international food and fuel prices.
  - Authorities temporarily exempted rice imports from taxes and reduced customs fees on rice and diesel using below-market reference prices.
  - Direct revenue loss from lower tariffs is about CFAF 0.6 billion (compared to program projections).
  - If reference prices reflected actual import costs and tariffs were unchanged, additional tax revenues of some CFAF 1.4 billion from rice imports and CFAF 1 billion from fuel imports could have been collected in 2008.
  - These losses represent about 1 percent of GDP—10 percent of tax revenues—for the year.
- Measures agreed to fill CFAF 5 billion additional financing needs (MEFP ¶24):
  - Maintain Q1 expenditure saving: CFAF 0.5 billion.
  - Expenditure savings from better payroll management: CFAF 0.3 million.
  - Recovery of tax arrears: CFAF 0.5 billion (note other sections cite recovery of CFAF 1.2 billion including CFAF 0.7 billion budgeted).
  - Additional revenue from customs, sales taxes and nontax sources: CFAF 0.5 billion.
  - Reschedule CFAF 3.2 billion of debt owed to the BCEAO.
  - Authorities collected some CFAF 0.2 billion in tax arrears already.
- Revised fiscal targets and financing:
  - Domestic primary deficit now estimated at CFAF 8.8 billion (before additional gap-filling measures), about CFAF 1.3 billion higher than expected.
  - Target total revenues for 2008: CFAF 37.6 billion (20 percent of GDP).
  - Wage bill nominal freeze for 2008: CFAF 21.3 billion.
  - With planned measures, projected domestic primary deficit: CFAF 6.3 billion for 2008 (3.3 percent of GDP) — revised quantitative indicator for end-2008.
  - Financing table highlights (selected exact figures):
    - Fiscal financing needs: CFAF 45.3 / 49.1 / US$ 15.1 (Program / Update / 2/)
    - Expected budget support total: CFAF 24.8 / 26.1 / US$ 21.3
    - Additional financing: CFAF 10.8 / 14.6 / US$ 34.2
      - EPCA: CFAF 2.8 / 2.5 / US$ 5.9
      - World Bank debt relief: CFAF 4.2 / 3.6 / US$ 8.4
      - Authorities' measures: CFAF 3.8 / 8.5 / US$ 19.9
    - Exchange rates: CFAF per US$ (EPCA): 495; CFAF per US$ (Review): 426.6

### Macroeconomic effects of higher food and fuel prices (Box 1 and outlook)
- External current account (excluding official transfers):
  - Expected to widen to some 17 percent of GDP in 2008 (updated) rather than the 12 percent initially estimated; larger deficit comes equally from higher food and fuel imports.
- Composition and vulnerability (exact figures preserved):
  - Direct revenue composition (Percent of total taxes): Duties and Taxes on Imports 46.7; Of which: Rice 4.2; Of which: Fuel 9.9.
  - CPI weights (Weight in the CPI): Food and Beverage 59.7; Of which: Bread and Cereals 13.9; Fuel and Transport 5.6.
  - Trade composition (Percent of total imports): Rice 15.9; Other Food 17.5; Fuel 22.6.
- Inflation and monetary developments:
  - 12-month inflation: 3.2 percent at end-2006; 9.3 percent at end-2007; 9.1 percent at end-May 2008.
  - Food prices rose 15.5 percent during the same period.
  - Broad money grew by 25 percent in 2007; central bank accumulation of foreign assets and higher credit to the private sector increased domestic liquidity.
  - An econometric model suggests about 70 percent of total inflation for 2005–07 was explained by increases in international prices; domestic factors accounted for about 30 percent in the last six months of 2007.
- Macroeconomic outlook (2008):
  - Real GDP growth expected to increase to over 3 percent in 2008 (from 2.7 percent in 2007).
  - Inflation for 2008 would average about 6 percent (alternative statement: about 7 percent in some MEFP text), compared to the projected 3.3 percent, given international price projections for food and fuel products.
  - Program assumes external trade deficit financed by a large amount of exceptional transfers assumed for 2008 (mainly official transfers) which are volatile in timing.

### Structural reforms, public financial management, and capacity building
- Structural measures completed and planned:
  - Created IT Department in Ministry of Finance and began staff training.
  - Council of Ministers approved new legal framework for state budget classification (met with delay; approved in May).
  - Audit of domestic arrears for 2000–07 launched in May (EU-financed).
  - Decrees issued to: cease payment of outstanding 2007 domestic arrears as of March 12; mandate all expenditures be paid only through the Treasury account at the BCEAO; outlaw extrabudgetary expenditures unless authorized and regularized within 48 hours; transfer remaining Treasury funds in commercial banks to the BCEAO.
  - Install new software to improve Treasury accounting and information flows (structural indicator for end-June).
  - Merge Ministry of Finance and Ministry of Public Administration payroll databases (structural indicator for end-September).
  - Sign contract with pre-shipment inspection agency (Audit Contrôle Expertise) and upgrade automated customs systems to ASYCUDA++.
- Capacity-building priorities and TA providers (Table 3 highlights):
  - Highest priority areas: Customs, Treasury, Tax Departments, and the debt unit.
  - Providers: West AFRITAC, AFRISTAT, European Union, World Bank (LICUS), AfDB, IDB, DRI.
  - Specific TA: Debt management, ASYCUDA++ implementation, public finance experts, payroll and accounting systems.
- Monitoring and reporting:
  - Revised quantitative and structural indicators through December 2008; new quantitative indicator sets a ceiling on nonregularized expenditures.
  - Government to provide monthly reports on revenue and expenditure, nonregularized expenditures, accounts payable, previous years’ domestic arrears, monetary tables, and donor disbursements (timing specified in TMU).
  - TMU exchange rates: CFAF/US$ updated to 426,6; CFAF/Euro: 656.

### Risks, vulnerabilities, and mitigation
- Main risks to program:
  - Shortfalls or delays in donor disbursements.
  - Social instability as food and fuel prices rise.
  - Pressures to exceed budgeted election outlays.
- Program vulnerabilities:
  - Fragility of stabilization gains given spike in inflation and delays in budget support; risk of resorting to high-cost commercial borrowing.
  - Q1 2008 short-term commercial domestic loans: CFAF 4.7 billion at effective annual interest rates of about 15 percent (including fees and commissions); part repaid (principal CFAF 2.2 billion plus cost CFAF 100 million), remaining principal CFAF 2.5 billion expected to be repaid in June plus additional estimated cost CFAF 156 million.
- Mitigating measures and authorities’ commitments:
  - Commitments to additional revenue and expenditure measures to contain risks.
  - Preparedness to take further measures if necessary, including as last resort rescheduling part of debt owed to domestic commercial banks (about CFAF 10 billion).
  - Maintain nominal freeze of wage bill; keep wages current to minimize social tensions.
  - Improve coordination between Minister of Finance and BCEAO to forecast liquidity and ensure sterilization of donor funds.

### Medium-term projections and indicators (selected exact figures)
- Real GDP at market prices (annual percentage change, selected series): 3.5 / 1.8 / 2.7 / 3.3 / 3.3 / 3.2 / 3.4 (2005–2011 series).
- Consumer price index (annual average, selected): 3.4 / 2.0 / 4.6 / 3.3 / 6.3 / 3.0 / 2.5.
- Domestic primary balance (percent of GDP, selected): -6.9 / -7.5 / -10.8 / -4.1 / -4.7 / -3.2 / -2.6.
- External current account (excluding official current transfers, percent of GDP, selected): -9.7 / -27.3 / -12.5 / -12.0 / -17.8 / -16.3 / -15.1.
- Nominal stock of external debt, including arrears (selected): 440.6 / 436.3 / 384.8 / 505.4 / 325.0 / 254.6 / 165.5.
- Fiscal and monetary indicators (selected):
  - Budgetary revenue (percent of GDP): 17.6 / 19.6 / 15.5 / 20.7 / 20.0 / 18.4 / 18.4.
  - Broad money annual change: 20.6 / 5.3 / 25.5 / 20.7 / 8.5 / 6.8.

### Staff appraisal and recommended next steps
- Staff view: Support for second EPCA purchase to:
  - help absorb balance-of-payments pressures from higher food and fuel prices;
  - catalyze more donor support;
  - consolidate a track record of sound policy performance;
  - restore administrative capacity needed to initiate discussions of a new PRGF arrangement.
- Near-term priorities:
  - Fully implement planned revenue and expenditure measures and resist pressures for additional election spending.
  - Ensure timely donor disbursements to avoid new domestic arrears or high-cost commercial borrowing.
  - Strengthen customs administration, treasury operations, and public expenditure management.
  - Finalize audit of domestic arrears and seek external assistance for clearance.
  - Ensure all expenditure commitments are regularized within 48 hours to restore confidence.
- Longer-term emphasis:
  - Given limited capacity for targeted social safety nets, focus on raising domestic agricultural production and diversifying agriculture.
  - Seek greater donor assistance on highly concessional terms, preferably grants, given Guinea-Bissau’s debt burden.

*Executive Summary — IMF staff and Guinea-Bissau authorities, from _cr08266 - Executive Summary_*

### Executive Summary ......................................................................................................

### Executive Summary

### Progress on the EPCA-supported program
- Four of six end-March quantitative indicators were met; the other two (payment of previous years’ arrears and new domestic arrears) are expected to be met for the year as a whole.
- All structural indicators were implemented, albeit with some delay.
- Donor support has resumed and economic confidence is improving.
- The authorities request a second EPCA purchase; staff support the request to consolidate policy performance, restore administrative capacity, and catalyze more international support.
- If performance on the EPCA-supported program remains satisfactory, discussions for a new PRGF arrangement could be initiated later this year.

### Fiscal situation and recent measures
- The fiscal situation remains tight, with pressures emerging from the recent surge in food and fuel prices.
- Authorities have responded with tariff reductions on rice and fuel imports to alleviate the impact on the urban poor.
- Understandings were reached on offsetting revenue and expenditure measures to keep the 2008 fiscal program on track.
- Timely donor support will be critical.
- Authorities plan additional measures by year-end beyond EPCA commitments to:
  - improve import processing and customs revenue administration;
  - further strengthen treasury management.

### Macroeconomic effects of higher food and fuel prices (Box 1)
- External current account deficit (excluding official transfers) is now expected to widen to some 17 percent of GDP in 2008 rather than the 12 percent initially estimated; the larger deficit comes equally from higher food and fuel imports.
- Direct revenue composition (Percent of total taxes):
  - Duties and Taxes on Imports 46.7
  - Of which: Rice 4.2
  - Of which: Fuel 9.9
- CPI weights (Weight in the CPI):
  - Food and Beverage 59.7
  - Of which: Bread and Cereals 13.9
  - Fuel and Transport 5.6
- Trade composition (Percent of total imports):
  - Rice 15.9
  - Other Food 17.5
  - Fuel 22.6
- Policy actions since March 2008:
  - Rice imports temporarily exempted from taxes (rice imports pay only WAEMU-related taxes at a rate of about 2.5 percent).
  - Customs fees reduced on rice and diesel imports using below-market reference prices for taxation purposes.
- Fiscal revenue impact and foregone potential revenue:
  - Direct revenue loss from lower tariffs is about CFAF 0.6 billion (compared to program projections).
  - If reference prices reflected actual import costs and tariffs were unchanged, additional tax revenues of some CFAF 1.4 billion from rice imports and CFAF 1 billion from fuel imports could have been collected in 2008.
  - These losses represent about 1 percent of GDP—10 percent of tax revenues—for the year.
- Social protection constraints:
  - Limited capacity to replace tariff reductions with targeted social safety nets (e.g., cash transfers).
  - Two-thirds of the population below the poverty line; fiscal costs of cash transfer program would be prohibitive given the tight fiscal situation.
- Medium-term intent:
  - Government intends to promote subsistence agriculture and is discussing expansion and diversification of agricultural production with the World Bank and other development partners.

### Recent developments and program performance (Sections II & III excerpts)
- Economic recovery:
  - A gradual recovery has been underway since 2007, helped by increased agricultural production as normal rains returned.
  - Real GDP and cashew production showed improvement (Figure 1 referenced).
- Inflation:
  - Annual inflation accelerated sharply at end-2007 and stayed high in early 2008 driven mainly by the surge in international food prices.
  - Guinea-Bissau’s 12-month inflation rate rose to 9.3 percent by end-2007, from 3.2 percent at end-2006.
  - Annual inflation was 9.1 percent at end-May 2008, while food prices rose 15.5 percent during the period.
- Monetary developments:
  - Broad money grew by 25 percent in 2007.
  - Central bank accumulation of foreign assets and higher credit to the private sector increased domestic liquidity.
- External sector:
  - External current account deficit (excluding official current transfers) narrowed to 12.5 percent of GDP in 2007, from 27 percent in 2006, reflecting higher exports of cashews.
  - The current account is projected to worsen in 2008 due to higher import prices.
- Sources of inflation (Box 2):
  - An econometric model suggests about 70 percent of total inflation in Guinea-Bissau for 2005–07 was explained by increases in international prices; domestic factors (broad money growth) accounted for about 30 percent in the last six months of 2007.
  - Policy implication: prudent fiscal policies and close cooperation between fiscal and monetary authorities are crucial to ensure timely sterilization of budgetary use of donor support and contain liquidity growth.

### Fiscal performance details
- 2007 fiscal outcome:
  - Fiscal performance in 2007 was weaker than expected.
  - Unexpectedly high nonregularized expenditures worsened the domestic primary deficit to 10.8 percent of GDP, about 1.5 percent of GDP larger than previously expected.
  - Donor budget support resumed in 2007, but government had to reschedule most commercial debt due in 2007 and sizable domestic arrears accumulated.
- Early 2008 performance:
  - Four of six March quantitative indicators were met: domestic primary deficit, government revenues, domestic financing of the budget, and external nonconcessional borrowing.
  - Domestic primary deficit for Q1 was CFAF 3.8 billion, below program target of CFAF 5.1 billion.
  - Current expenditures through March were held below programmed levels by about CFAF 0.6 billion; revenues were higher by about CFAF 0.5 billion.
  - Corporate taxes higher-than-expected in early 2008 due in part to improved collection; export taxes buoyant reflecting a strong cashew campaign.
  - Government current on 2008 wages through May.
- Missed indicators and corrective actions:
  - Quantitative indicators on payment of previous years’ arrears and new domestic arrears were missed in Q1 but expected to be met for the year as a whole.
  - Government exceeded the amount of 2007 domestic arrears to be paid in Q1, causing accumulation of new domestic arrears.
  - Authorities issued a decree to avoid further payment of 2007 domestic arrears to remain within target for the year.
  - Administrative delays in disbursement of budget support in Q1 forced government to contract new short-term domestic commercial debt of CFAF 4.7 billion at effective annual interest rates of about 15 percent (including fees and commissions); these short-term loans are expected to be repaid in 2008 when delayed donor support is disbursed.
  - Costs associated with commercial borrowing (commissions and interest) have budgetary implications for 2008.

### Strengthening fiscal management and structural reforms
- March structural indicators were implemented; there was a slight delay in adopting the fiscal law to introduce better budget classification in line with WAEMU regulations and increased transparency.
- An audit of domestic arrears for 2000–07 begun in May should facilitate eventual clearance once additional donor resources are obtained.
- Authorities are going beyond EPCA commitments to:
  - cease payment of previous arrears;
  - tighten expenditure controls;
  - open up the flow of information on treasury operations;
  - clean up the payroll database;
  - identify possible sources of tax revenues.

### Risks and program vulnerabilities
- Main risks:
  - Shortfalls or delays in donor disbursements.
  - Social instability as food and fuel prices rise.
  - Pressures to exceed budgeted election outlays.
- Authorities’ mitigation:
  - Commitments to additional revenue and expenditure measures to contain risks.
  - Preparedness to take any additional measures needed to safeguard fiscal stability and avoid accumulation of new domestic arrears.
- Program challenge:
  - Implementation of the 2008 program is challenging given the spike in inflation and delays in budget support, highlighting fragility of stabilization gains and vulnerability to external shocks.

### Staff view and recommended next steps
- Staff support the authorities’ request for a second EPCA purchase to:
  - help absorb pressures on the balance of payments from higher food and fuel prices;
  - catalyze more donor support;
  - consolidate a track record of sound policy performance;
  - restore administrative capacity necessary to initiate discussions of a new PRGF arrangement.

*Executive Summary — IMF staff and Guinea-Bissau authorities, from _cr08266 - Executive Summary_*

### 11.      Guinea-Bissau continues to meet the Fund’s conditions for EPCA support.

### 11.      Guinea-Bissau continues to meet the Fund’s conditions for EPCA support.

### Program Eligibility and Conditions
- The Fund’s conditions for EPCA support continue to be met, including:
  - (i) indications of sufficient capacity and commitment on the part of the authorities for policy planning and implementation, despite continued disruptions to administrative and institutional capacity resulting from the conflict;
  - (ii) persistent need to meet essential external payments, including payments to multilaterals; and
  - (iii) evidence of continued concerted international support for the authorities’ program.

### Macroeconomic Outlook (2008)
- Overall assessment:
  - Risks are tilted to the downside, but the economic outlook for 2008 remains positive.
- Growth and production:
  - Real GDP growth is expected to increase to over 3 percent in 2008, based on a slight increase in cashew production and increasing construction activity.
- Inflation:
  - Inflation for 2008 would average about 6 percent, compared to the projected 3.3 percent, given international price projections for food and fuel products.
- External sector:
  - The external current account deficit will be higher-than-expected owing to higher food and fuel imports.
- Program assumptions and caveats:
  - The program assumes a level of external trade deficit financed by a large amount of exceptional transfers assumed for 2008, mainly official transfers, which are subject to a high degree of volatility in the timing of their disbursement.
  - The trade deficit is also subject to revision based on international price developments.
  - The remaining external financing gap for 2008 is equivalent to the fiscal financing gap and is assumed to be fully financed, including with EPCA.

### Fiscal Policy and 2008 Fiscal Program
- Revised program assumptions (MEFP ¶19-21):
  - (i) unchanged revenues for the year — direct revenue losses from tax and customs exemptions would be offset by the higher revenues in the first quarter of 2008, while other revenues are expected to perform in line with the program; and
  - (ii) higher domestic primary expenditures (by CFAF 1.3 billion) because of additional spending on elections.
- Wage policy:
  - Authorities intend to maintain the nominal freeze of the wage bill for 2008 and are committed to staying current on wage payments.
- Domestic primary deficit:
  - The domestic primary deficit is now estimated to increase to CFAF 8.8 billion (before additional gap-filling fiscal measures), about CFAF 1.3 billion higher than expected but still substantially less than in 2007.
- Financing side revisions:
  - Program assumes higher net bank financing (by about CFAF 3.8 billion), mainly because of higher debt payments to the BCEAO, offset in part by more donor budget support (by CFAF 1.3 billion).
  - Combined impact: higher gross financing needs by CFAF 3.8 billion.
- Note on BCEAO debt:
  - Debt owed to the BCEAO has been revised upwards to include payment of 2006 and 2007 arrears that were not previously included in 2008.
- Additional election expenditures:
  - Relate to arrears from previous elections which were not previously anticipated to be paid in 2008. The election arrears will be audited, as part of the EU audit of all domestic arrears, before they are paid.

### Financing the Budget (measures to fill additional needs)
- Measures agreed to fill about CFAF 5 billion of additional financing needs (MEFP ¶24):
  - maintaining the expenditure saving already achieved in 2008 (CFAF 0.5 billion);
  - expenditure savings of CFAF 0.3 million from better payroll management;
  - recovery of CFAF 0.5 billion in tax arrears;
  - additional revenue of CFAF 0.5 billion from customs, sales taxes and nontax (licenses) sources; and
  - agreement with the BCEAO to reschedule CFAF 3.2 billion of the higher debt owed to the BCEAO.
- Authorities’ measures already realized:
  - Collected some CFAF 0.2 billion in tax arrears.
- With these measures, the 2008 program is fully financed and the authorities can request the second purchase under EPCA.
- Financing table highlights (Text Table 2; figures preserved):
  - Fiscal financing needs: CFAF 45.3 / 49.1 / US$ 15.1 (table columns labeled Program / Update / 2/)
  - Expected budget support total: CFAF 24.8 / 26.1 / US$ 21.3
    - European Union: CFAF 3.6 / 3.6 / US$ 8.5
    - World Bank: CFAF 7.9 / 8.5 / US$ 20.0
    - AfDB: CFAF 0.8 / 0.9 / US$ 2.0
    - WAEMU: CFAF 1.5 / 1.5 / US$ 3.5
    - South Africa: CFAF 5.0 / 4.7 / US$ 11.0
    - Japan: CFAF 2.0 / 1.0 / US$ 2.4
    - Portugal: CFAF 1.5 / 1.3 / US$ 3.1
    - Spain: CFAF 1.5 / 1.0 / US$ 2.3
    - France: CFAF 0.0 / 0.7 / US$ 1.5
  - Additional regional support: CFAF 1.0 / 3.0 / US$ 7.0
  - External debt arrears: CFAF 9.7 / 8.4 / US$ 19.6
  - Additional financing: CFAF 10.8 / 14.6 / US$ 34.2
    - EPCA: CFAF 2.8 / 2.5 / US$ 5.9
    - World Bank debt relief: CFAF 4.2 / 3.6 / US$ 8.4
    - Authorities' measures: CFAF 3.8 / 8.5 / US$ 19.9
    - Previous measures: CFAF 3.8 / 3.5 / US$ 8.2
    - Additional measures: CFAF 5.0 / 11.7
  - Exchange rates:
    - CFAF per US$ (EPCA): 495
    - CFAF per US$ (Review): 426.6

- Residual risk and last-resort option:
  - Authorities committed to take further measures if necessary, including, as a last resort, rescheduling part of the debt owed to domestic commercial banks (about CFAF 10 billion), currently scheduled to be paid in full in 2008.
- Note on arrears accumulation:
  - Guinea-Bissau will continue to accumulate sizeable payment arrears to sovereign and multilateral creditors (IMF Country Report No. 07/309). The authorities have already informed their external creditors of this situation (IMF Country Report No. 08/4).

### Structural Reforms and Monetary Policy
- Structural measures planned by year-end (go beyond EPCA commitments):
  - Focus on improving import processing and customs revenue collection and firming up treasury management (MEFP ¶ 27).
  - EPCA program to be supported with technical assistance from West AFRITAC and AFRISTAT (MEFP Table 3).
- Monetary coordination and liquidity:
  - Improve coordination between the Minister of Finance and the monetary authorities to better forecast liquidity.
  - Ensure timely action to smooth the monetary impact of budgetary use of donor funds to finance government expenditures.
  - BCEAO will step up efforts to sterilize any excess liquidity.

### Program Monitoring and Risks
- Monitoring:
  - MEFP contains revised quantitative and structural indicators through December 2008.
  - A new quantitative indicator sets a ceiling on the amount of nonregularized expenditures.
  - New structural indicators are set to facilitate policy implementation through 2008.
- Main risks to the program:
  - Possible shortfalls and further delays in donor disbursements.
  - Social instability triggered by rising food and fuel prices.
  - Pressures to exceed budgeted election outlays.
- Mitigating measures:
  - Additional revenue and expenditure measures committed by authorities should help contain risks.
  - Paying civil servant wages on time will help alleviate social tensions.

### Medium-Term Outlook
- Assumptions and headline projections (Text Table 3; selected rows preserved exactly):
  - The revised scenario assumes that international food and fuel prices will remain high for the next three to five years, although the rate of domestic price inflation is expected to moderate.
  - Real GDP growth could be sustained at about 3 percent over the medium term, assuming normal rains and an increase in cereal and cashew production.
  - Over the medium term the external current account deficit will be somewhat higher than originally projected.
  - The fiscal position is expected to improve, assuming better fiscal controls and higher revenue.
- Selected medium-term table entries (2005–2010, annual percentage change or percent of GDP as labeled):
  - Real GDP at market prices: 3.5 / 1.8 / 2.7 / 3.3 / 3.3 / 3.2 / 3.4
  - Real GDP per capita: 0.3 / -1.1 / -0.4 / 0.3 / 0.3 / 0.2 / 0.4
  - Consumer price index (annual average): 3.4 / 2.0 / 4.6 / 3.3 / 6.3 / 3.0 / 2.5
  - Consumer price index (end of period): 1.0 / 3.2 / 9.3 / 2.4 / 3.5 / 2.5 / 2.5
  - Gross investment: 14.6 / 12.2 / 14.0 / 15.8 / 15.3 / 14.2 / 14.5
  - Gross national savings: 9.5 / 0.9 / 12.4 / 22.7 / 20.9 / 15.8 / 16.1
  - Budgetary revenue: 17.6 / 19.6 / 15.5 / 20.7 / 20.0 / 18.4 / 18.4
  - Total domestic primary expenditure: 24.5 / 27.1 / 26.1 / 24.9 / 24.7 / 21.7 / 21.0
  - Domestic primary balance: -6.9 / -7.5 / -10.8 / -4.1 / -4.7 / -3.2 / -2.6
  - Overall balance (commitment basis) including grants: -11.9 / -9.7 / -10.2 / 0.7 / 0.6 / -3.7 / -3.4
  - Overall balance (commitment basis) excluding grants: -24.6 / -21.6 / -26.0 / -20.9 / -20.9 / -18.4 / -17.7
  - Overall balance, including grants (cash basis): -10.2 / -4.6 / -6.9 / 0.0 / -0.3 / -3.0 / -3.6
  - Financing (Domestic and Foreign Financing): 10.2 / 4.6 / 6.9 / -6.0 / -7.4 / 3.0 / 5.7
  - Additional Financing: 0.0 / 0.0 / 0.0 / 5.9 / 7.8 / 0.0 / 0.0
  - Residual Financing gap ( + = financing needs): 0.0 / 0.0 / 0.0 / 0.0 / 0.0 / -0.1 / -2.1
  - External current account (including official current transfers): -5.1 / -13.9 / -2.2 / 7.0 / 4.5 / -5.0 / -4.4
  - Excluding official current transfers: -9.7 / -27.3 / -12.5 / -12.0 / -17.8 / -16.3 / -15.1
  - Nominal stock of external debt, including arrears: 440.6 / 436.3 / 384.8 / 505.4 / 325.0 / 254.6 / 165.5

### Staff Appraisal and Policy Recommendations
- Progress and near-term assessment:
  - Guinea-Bissau has made steady progress in fiscal stabilization under difficult circumstances; policies are moving steadily in the right direction.
  - Government revenue and expenditure efforts yielded encouraging results in the first part of 2008; the primary fiscal deficit was kept below target through March.
- Near-term priorities and challenges:
  - Keeping the 2008 fiscal program on track will be challenging given recent pressures.
  - Authorities need to fully implement planned revenue and expenditure measures and resist pressures for additional spending on the coming parliamentary elections.
  - Remain current on civil servant wages to minimize the social impact of recent food and fuel price increases.
  - Timely disbursement of external concessional assistance is critical to avoid new domestic arrears or further recourse to high-cost borrowing from commercial banks.
  - Continue to seek greater donor assistance on highly concessional terms, preferably grants, particularly considering the food and fuel shocks.
- Specific policy endorsements and longer-term recommendations:
  - The recent measures to reduce import tariffs are an appropriate short-term response to higher food and fuel prices; they help mitigate price increases and reduce inefficient trade distortions, and are well-targeted at imports most important to the poor (notably rice).
  - Over the longer term, given limited capacity to implement targeted social safety nets, focus should be on raising domestic agricultural production, especially subsistence agriculture.
  - Authorities need to focus on measures to boost revenues without relying on import tariffs.
  - Staff supports continuing efforts to strengthen customs administration and improve treasury operations.
  - Ensure that all expenditure commitments are regularized within 48 hours, in line with established procedures, to restore confidence in economic management.
  - Finalize the audit of domestic arrears as soon as possible and seek external assistance for their clearance to help alleviate social tensions.

*Source: IMF staff estimates and projections as presented in the document.*

### 25.      Guinea-Bissau continues to meet the requirements for Fund EPCA. Help in

### _cr08266 - 25.      Guinea-Bissau continues to meet the requirements for Fund EPCA. Help in

### EPCA status and staff recommendation
- Guinea-Bissau continues to meet the requirements for Fund EPCA.
- Help in meeting current external payments is urgently needed, particularly given recent food and fuel price shocks.
- Authorities have demonstrated capacity to implement the program and are determined to establish the track record necessary for a PRGF-supported program and for reaching the HIPC Initiative completion point.
- Assuming policy implementation may be even better in the coming months, discussions for a new PRGF arrangement might be possible later this year.
- Staff recommends approval of the authorities’ request for the second EPCA purchase to:
  - consolidate recent gains,
  - absorb heightened strains on the balance of payments,
  - catalyze greater international support.

### Key macroeconomic indicators and projections (selected)
- Real GDP at market prices: 3.5 (2005), 1.8 (2006), 2.7 (2007), 3.3 (2008 Prel./EPCA Est.), 3.3 (2009 Proj.), 3.2 (2010 Proj.), 3.4 (2011 Proj.).
- Real GDP per capita: 1 (2005), 0.3 (2006), -1.1 (2007), -0.4 (2008), 0.3 (2009), 0.3 (2010), 0.2 (2011), 0.4 (2012).
- GDP deflator: 7.7 (2005), -0.5 (2006), 4.2 (2007), 3.3 (2008), 5.8 (2009), 2.9 (2010), 2.5 (2011).
- Consumer price index (annual average): 3.4 (2005), 2.0 (2006), 4.6 (2007), 3.3 (2008), 6.3 (2009), 3.0 (2010), 2.5 (2011).
- Consumer price index (end of period): 1.0 (2005), 3.2 (2006), 9.3 (2007), 2.4 (2008), 3.5 (2009), 2.5 (2010), 2.5 (2011).
- Exports, f.o.b. (based on US$ values): 18.2 (2005), -32.5 (2006), 17.3 (2007), -4.0 (2008), 49.8 (2009), 8.6 (2010), 8.6 (2011).
- Imports, f.o.b. (based on US$ values): 25.7 (2005), 14.0 (2006), -5.2 (2007), 5.3 (2008), 51.3 (2009), 6.6 (2010), 6.4 (2011).
- Export volume growth (percent): 0.2 (2005), -17.7 (2006), 14.1 (2007), -7.3 (2008), 17.2 (2009), 5.6 (2010), 6.1 (2011).
- Import volume growth (percent): 14.1 (2005), 5.8 (2006), -14.4 (2007), 4.4 (2008), 4.4 (2009), 7.0 (2010), 6.2 (2011).
- Net present value of external debt/exports of goods and nonfactor services (percent): 788.5 (2005), 683.2 (2006), 607.5 (2007), 505.4 (2008), 428.4 (2009), 407.1 (2010), 186.2 (2011).
- Nominal stock of external debt, including arrears: 440.6 (2005), 436.3 (2006), 384.8 (2007), 389.2 (2008), 325.0 (2009), 254.6 (2010), 165.5 (2011).
- Nominal GDP at market prices (CFAF billions): 158.8 (2005), 160.8 (2006), 172.1 (2007), 182.5 (2008), 187.9 (2009), 199.6 (2010), 211.4 (2011).
- Current account balance (including official current transfers) (US$ millions): -15.3 (2005), -42.8 (2006), -7.5 (2007), 25.6 (2008), 17.1 (2009), -20.3 (2010), -18.7 (2011).

### Balance of payments and external sector (selected)
- Goods and services (percent of GDP): -35.9 (2005), -64.6 (2006), -42.9 (2007), -37.7 (2008), -43.9 (2009), -44.7 (2010), -45.4 (2011).
- Exports, f.o.b. (CFAF billions): 47.2 (2005), 31.6 (2006), 34.0 (2007), 44.3 (2008), 45.3 (2009), 49.2 (2010), 53.4 (2011).
  - Of which: cashew nuts: 44.7 (2005), 29.0 (2006), 31.2 (2007), 40.2 (2008), 42.6 (2009), 46.3 (2010), 50.3 (2011).
- Imports, f.o.b. (CFAF billions): -65.0 (2005), -73.5 (2006), -63.9 (2007), -68.0 (2008), -74.1 (2009), -79.0 (2010), -84.0 (2011).
  - Of which: food products: -20.8 (2005), -24.5 (2006), -18.0 (2007), --- (2008), 21.3 (2009), 22.7 (2010), 24.2 (2011).
  - Of which: petroleum products: -13.1 (2005), -15.2 (2006), -12.7 (2007), --- (2008), 20.2 (2009), 21.5 (2010), 22.9 (2011).
- Current transfers (net) (CFAF billions): 25.0 (2005), 36.8 (2006), 33.6 (2007), 54.5 (2008), 54.7 (2009), 39.3 (2010), 40.7 (2011).
  - Official transfers: 12.1 (2005), 21.6 (2006), 17.0 (2007), 34.6 (2008), 36.0 (2009), 19.4 (2010), 19.7 (2011).
  - Balance of payments support grants (included above): 5.1 (2005), 10.2 (2006), 17.0 (2007), 24.8 (2008), 26.1 (2009), 14.6 (2010), 14.6 (2011).
  - EU fishing compensation: 4.8 (2005), 4.8 (2006), 0.0 (2007), 9.8 (2008), 9.8 (2009), 4.8 (2010), 5.0 (2011).
  - Private current transfers: 12.9 (2005), 15.3 (2006), 16.6 (2007), 19.9 (2008), 18.7 (2009), 19.9 (2010), 21.1 (2011).
  - Fishing license fees (private transfers component): 2.8 (2005), 2.4 (2006), 2.5 (2007), 3.4 (2008), 3.4 (2009), 3.6 (2010), 3.8 (2011).
- Current account (including official transfers): -17.1 (2005), -32.7 (2006), -12.5 (2007), 12.7 (2008), 7.3 (2009), -8.7 (2010), -8.0 (2011).
- Capital and financial balance (CFAF billions): -3.0 (2005), 12.4 (2006), 9.1 (2007), -28.7 (2008), -23.7 (2009), 8.9 (2010), 7.6 (2011).
- Overall balance (percent of GDP): -12.7 (2005), -12.6 (2006), -2.0 (2007), -8.7 (2008), -8.7 (2009), 0.1 (2010), -0.2 (2011).
- Gross financing gap (percent of GDP): 0.00 (2005), 0.00 (2006), 0.00 (2007), 5.9 (2008), 7.8 (2009), -0.2 (2010), -2.1 (2011).

### Fiscal operations and public finances (selected)
- Budgetary revenue (percent of GDP): 17.6 (2005), 19.6 (2006), 15.5 (2007), 20.7 (2008), 20.0 (2009), 18.4 (2010), 18.4 (2011).
- Total domestic primary expenditure (percent of GDP): 24.5 (2005), 27.1 (2006), 26.2 (2007), 24.9 (2008), 24.7 (2009), 21.7 (2010), 21.0 (2011).
- Domestic primary balance (percent of GDP): -6.9 (2005), -7.5 (2006), -10.8 (2007), -4.1 (2008), -4.7 (2009), -3.2 (2010), -2.6 (2011).
- Overall balance (commitment basis) including grants (percent of GDP): -11.9 (2005), -9.7 (2006), -10.3 (2007), 0.7 (2008), 0.6 (2009), -3.7 (2010), -3.4 (2011).
- Overall balance excluding grants (commitment basis) (percent of GDP): -24.6 (2005), -21.6 (2006), -26.0 (2007), -20.9 (2008), -20.9 (2009), -18.4 (2010), -17.7 (2011).
- Central government operations (CFAF billions, selected): Revenue and grants: 48.2 (2005 EPCAPrel.), 50.6 (2006), 54.3 (2007 Est.), 53.8 (2008 Jan-08), 76.7 (2008 Jan-08 Proj.), 78.1 (2008 Est.).
  - Revenue: 28.0 (2005), 31.5 (2006), 27.5 (2007), 26.6 (2008 Jan-08), 37.6 (2008 Jan-08 Proj.), 37.6 (2008 Est.).
  - Grants: 20.2 (2005), 19.1 (2006), 26.8 (2007), 27.2 (2008 Jan-08), 39.1 (2008 Jan-08 Proj.), 40.5 (2008 Est.).
- Total expenditure (CFAF billions): 67.1 (2005), 66.2 (2006), 70.9 (2007), 71.4 (2008 Jan-08), 75.5 (2008 Jan-08 Proj.), 76.9 (2008 Est.).
  - Current expenditure: 44.0 (2005), 46.6 (2006), 46.8 (2007), 47.4 (2008 Jan-08), 47.7 (2008 Jan-08 Proj.), 49.1 (2008 Est.).
  - Wages and salaries: 21.3 (2005), 20.5 (2006), 21.8 (2007), 21.9 (2008 Jan-08), 21.3 (2008 Jan-08 Proj.), 21.3 (2008 Est.).
  - Capital expenditure and net lending: 23.1 (2005), 19.7 (2006), 24.0 (2007), 24.1 (2008 Jan-08), 27.8 (2008 Jan-08 Proj.), 27.8 (2008 Est.).
- Overall balance, including grants (commitment): -18.9 (2005 EPCAPrel.), -15.6 (2006), -16.6 (2007), -17.7 (2008 Jan-08), 1.2 (2008 Jan-08 Proj.), 1.2 (2008 Est.).
- Overall balance, excluding grants (commitment): -39.1 (2005 EPCAPrel.), -34.8 (2006), -43.4 (2007), -44.8 (2008 Jan-08), -37.9 (2008 Jan-08 Proj.), -39.3 (2008 Est.).
- Gross financing gap (+ = financing needs): 0.00 (2005), 0.00 (2006), 0.00 (2007), 0.0 (2008 Prel./EPCA), 10.8 (2008 Jan-08 Proj.), 14.6 (2008 Jan-08 Est.).
- Additional financing in 2008 includes World Bank debt relief, EPCA, and authorities' measures to fill the financing gap.

### Monetary survey (selected)
- Total assets (CFAF billions): 52.4 (2005), 55.2 (2006), 69.2 (2007), 83.6 (2008 Est.), 90.6 (2009 Proj.), 97.4 (2010 Proj.).
- Net foreign assets: 36.7 (2005), 43.2 (2006), 51.5 (2007), 59.6 (2008 Est.), 64.8 (2009 Proj.), 68.7 (2010 Proj.).
  - Central bank net foreign assets: 36.9 (2005), 33.9 (2006), 44.4 (2007), 51.6 (2008 Est.), 57.9 (2009 Proj.), 62.9 (2010 Proj.).
- Broad money (percent of GDP or CFAF billions as presented): 52.4 (2005), 55.0 (2006), 69.2 (2007), 83.6 (2008 Est.), 90.6 (2009 Proj.), 96.8 (2010 Proj.).
- Currency in circulation: 40.5 (2005), 39.7 (2006), 43.8 (2007), 54.1 (2008 Est.), 57.3 (2009 Proj.), 60.2 (2010 Proj.).
- Demand deposits and quasi-money: 11.8 (2005), 15.3 (2006), 25.4 (2007), 29.5 (2008 Est.), 33.3 (2009 Proj.), 36.6 (2010 Proj.).
- Credit to the economy (percent of beginning-of-period broad money stock): 3.4 (2005), 6.3 (2006), 10.5 (2007), 12.6 (2008 Est.), 14.7 (2009 Proj.), 16.9 (2010 Proj.).
- Broad money annual change: 20.6 (2005), 5.3 (2006), 25.5 (2007), 20.7 (2008 Est.), 8.5 (2009 Proj.), 6.8 (2010 Proj.).
- Velocity (GDP/broad money): 3.0 (2005), 2.9 (2006), 2.5 (2007), 2.2 (2008 Est.), 2.2 (2009 Proj.), 2.1 (2010 Proj.).

### Indicators of capacity to repay the Fund (2007–13, selected)
- Fund obligations based on existing credit (in millions of SDRs): Principal 2.17 (2007), 1.26 (2008), 1.02 (2009), 1.02 (2010), 0.67 (2011), 0.89 (2012), 0.22 (2013).
- Fund obligations based on existing and prospective credit include envisaged second EPCA purchase of SDR 1.775 million (12.5 percent of quota) in July 2008.
- Outstanding Fund credit (in millions of SDRs): 3.28 (2007), 5.58 (2008), 4.57 (2009), 3.55 (2010), 2.66 (2011), 0.89 (2012), 0.00 (2013).
- Outstanding Fund credit (in percent of government revenue): 8.7 (2007), 10.1 (2008), 8.5 (2009), 6.2 (2010), 4.4 (2011), 1.4 (2012), 0.0 (2013).
- Memo: Nominal GDP (in billions of CFAF): 170 (2007), 183 (2008), 195 (2009), 207 (2010), 219 (2011), 232 (2012), 246 (2013).

### Performance under EPCA and government letter (MEFP) highlights
- By end-March 2008, four of six quantitative indicators under EPCA were met.
- Two indicators not met by end-March (payment of previous years’ arrears and new domestic arrears) were expected to be met for the year as a whole.
- Structural indicators for end-March were met; one delayed measure was met on May 19, 2008.
- Government letter (Bissau, May 22, 2008) summarizes MEFP for remainder of 2008, stating:
  - Steps taken to stabilize an extremely difficult fiscal position, accelerate structural reforms, and improve financial relations with international partners.
  - 2008 fiscal situation improved in first part of 2008 after weaker than expected performance in 2007.
  - Real GDP growth subdued in 2007 but expected to improve in 2008.
  - Annual inflation accelerated sharply at end-2007 and remained high in early 2008, driven mainly by surge in international prices for food and oil.
  - Fiscal situation remains very tight; pressures emerging from world food and fuel prices.
  - Government determined to maintain fiscal stability for remainder of 2008 and avoid accumulating new domestic arrears for the year as a whole.
  - 2008 program envisages acceleration of critical structural reforms, particularly in public expenditure management and revenue collection, to improve confidence and secure additional donor support.

*Sources: Guinea-Bissau authorities, BCEAO, and IMF staff estimates and projections.*

### 5.      In support of the government’s objectives and policies, we are requesting a second

### _cr08266 - 5.      In support of the government’s objectives and policies, we are requesting a second

### Request and program assurances
- Requesting a second purchase of the EPCA in an amount equivalent to SDR 1.775 (12.5 percent of quota).
- Authorities believe the policies and measures set forth in the MEFP are adequate for achieving the objectives of the EPCA program, but will take any further measures that may become appropriate and will consult the Fund before implementing any policies that might adversely affect the program.
- Authorities will continue to regularly provide information as detailed in the attached Technical Memorandum of Understanding (TMU).
- Authorities invite Fund staff to continue quarterly reviews of program performance on the basis of the revised quantitative and structural indicators (Tables 1 and 2 of the MEFP) as well as overall program implementation.

### Performance through March 2008 and recent developments
- 2007 real GDP growth: 2.7 percent.
- 2007 12-month inflation rate: rose to 9.3 percent at end-2007, from 3.2 percent at end-2006; remained high in early 2008.
- Broad money growth in 2007: reached 25 percent; accumulation of foreign assets by the central bank accounted for about 75 percent of the total increase.
- Increase in credit to the private sector in 2007: equivalent to 29 percent of the increase in broad money growth.
- External current account deficit (excluding official current transfers): narrowed to 12.5 percent of GDP in 2007, from 27 percent in 2006.
- Domestic primary balance in 2007: CFAF 19.1 billion (10.8 percent of GDP), worsened from CFAF 12 billion (7.5 percent of GDP) in 2006.
- EPCA program performance by end-March 2008: four of six quantitative indicators met (domestic primary deficit, government revenues, domestic financing of the budget, and external nonconcessional borrowing). Indicators missed: payment of previous years’ arrears and new domestic arrears (target for year remains achievable).
- Structural indicators for end-March: met with a delay on one measure.
- First quarter 2008 fiscal outcomes:
  - Domestic primary expenditures: below target by some CFAF [0.6] billion.
  - Total revenues: higher than programmed by some CFAF 0.5 billion.
  - Domestic primary deficit for Q1 2008: CFAF 3.8 billion, below program target of CFAF 5.1 billion.
- Domestic arrears actions in Q1 2008:
  - EPCA allowed for repayment of about CFAF 3.6 billion of 2007 domestic arrears in 2008.
  - Authorities repaid most of this amount in Q1, exceeding programmed amount by about CFAF 2 billion; some new domestic arrears accumulated, exceeding adjusted quantitative indicator for end-March.
- Expected but delayed donor budget support in Q1 2008: about CFAF 7 billion (mainly World Bank), not disbursed as scheduled; expected subsequently.
- Short-term commercial domestic loans contracted in Q1 2008: CFAF 4.7 billion at effective annual interest rates of about 15 percent (including fees and commissions). Repayments and costs:
  - Part repaid: principal CFAF 2.2 billion plus cost (interest and fees) of CFAF 100 million.
  - Remaining principal expected to be repaid in June: CFAF 2.5 billion plus additional estimated cost of CFAF 156 million.

### Policy responses to food and fuel price shocks
- Import tax exemptions announced since March 2008: all rice imports temporarily exempted from taxes.
- Reference prices for import duties on rice and diesel established at levels much lower than actual import prices.
- Expected effect: alleviate impact of higher import prices on vulnerable groups, especially urban poor; fiscal cost in terms of lost revenue for the year as a whole.

### Fiscal management and structural reforms progress
- Ministry of Finance created an Information Technology (IT) Department and began staff training (as expected for end-March).
- Council of Ministers approved a new legal framework for the state budget classification system in line with WAEMU regulations (delayed from end-March target).
- Audit of domestic arrears for 2000–2007 launched in May; EU is paying the international firm conducting the audit (structural indicator for end-April).
- Decrees issued to:
  - Cease payment of outstanding 2007 domestic arrears as of March 12.
  - Mandate that all expenditures be paid only through the Treasury account at the BCEAO.
  - Outlaw payment of any extrabudgetary expenditures unless previously authorized by the Minister of Finance and the Prime Minister, and regularize them within 48 hours.
  - Transfer to the BCEAO any remaining funds in Treasury accounts in commercial banks.
- Additional fiscal management steps:
  - Installation of new software to improve accounting and information flows of all Treasury operations (structural indicator for end-June).
  - Final steps to merge Ministry of Finance and Ministry of Public Administration payroll databases (structural indicator for end-September).
  - Financial audit (financed by UNDP) of all government agencies and revenue-collecting entities to confirm transfers to the Treasury and identify below-potential tax collection.

### Macroeconomic outlook for 2008
- Real GDP growth expected in 2008: increase to over 3 percent (from 2.7 percent in 2007).
- Inflation forecast for 2008: would average about 7 percent, compared to the initial projection of 3.3 percent, assuming continued high food and fuel prices.
- External current account deficit (excluding official transfers) expected in 2008: widen to 17 percent of GDP, compared to 12 percent initially projected.

### Fiscal framework and 2008 targets
- Government commitment: reduce domestic primary deficit to CFAF 8.8 billion (4.7 percent of GDP) in 2008 (before additional gap-filling fiscal measures); initial expectation was CFAF 7.5 billion (4.1 percent of GDP).
- Wage bill nominal freeze for 2008: CFAF 21.3 billion (before additional gap-filling fiscal measures); intent to consolidate payroll database and remove duplications.
- Total revenues target for 2008: CFAF 37.6 billion (20 percent of GDP).
- Nontax revenues expected for 2008: CFAF 16.9 billion.
- Specific revenue and expenditure effects noted:
  - Import duties shortfall from rice tax exemptions: some CFAF 0.6 billion (0.3 percent of GDP).
  - Tax revenues overperformed in Q1 2008 by some CFAF 0.5 billion (0.3 percent of GDP).
- Estimated budget support for 2008: CFAF 26.1 billion, some CFAF 1.3 billion higher than expected; includes new support from traditional and nontraditional donors.
- Domestic financing costs higher than expected by CFAF 3.8 billion, reflecting higher debt owed to the BCEAO in 2008.
- Remaining financing gap for 2008 before measures: some CFAF 5 billion.

### Measures to fill the 2008 financing gap
- Planned measures to fill CFAF 5 billion gap:
  (i) Reduce expenditures by CFAF 0.5 billion by translating Q1 savings into permanent cuts.
  (ii) Achieve expenditure savings of CFAF 0.3 billion by consolidating the government payroll database and removing duplications.
  (iii) Raise additional revenue of CFAF 0.5 billion from customs, sales taxes, and non-tax revenues (licenses).
  (iv) Recover tax arrears of CFAF 1.2 billion, including CFAF 0.7 billion already budgeted and CFAF 0.5 billion in additional efforts.
  (v) Reschedule debt owed to the BCEAO in 2008 (CFAF 3.2 billion).
- Combined additional revenue and expenditure efforts: total CFAF 2.5 billion.
- Resulting projected domestic primary deficit with measures: CFAF 6.3 billion for 2008 (3.3 percent of GDP) — revised quantitative indicator for end-2008.
- Financing the remaining gap: second EPCA purchase (SDR 1.775 million) together with the measures above should fully cover the financing gap and allow avoidance of accumulating domestic arrears for 2008 as a whole.
- If donor budget grants exceed needs, priorities (in consultation with the Fund) will be: fully repay commercial debt, treasury bills, and audited domestic arrears, and increase priority spending in social sectors above budgeted levels.

### Additional structural reforms for 2008
- Planned additional measures to strengthen revenue collection and public expenditure management:
  (i) Upgrade automated customs systems to ASYCUDA++ (Automated System for Custom Administration).
  (ii) Sign a contract with a pre-shipment inspection agency (Audit Contrôle Expertise).
  (iii) Revitalize the PNG Committee of the BCEAO and Ministry of Finance with weekly meetings to reconcile Treasury operations with BCEAO and domestic banks.
- Monetary policy coordination:
  - BCEAO will step up efforts to sterilize excess liquidity in the market if inflationary pressures reflect increased liquidity since 2007.
  - Government will work to improve coordination between the Minister of Finance and the BCEAO to improve liquidity forecasting and ensure timely action to smooth monetary impact of donor fund use.

### Capacity building and technical assistance
- Ongoing and planned capacity-building measures include IT department staffing and training at the Ministry of Finance, payroll database consolidation, installation of new Treasury accounting software, and externally financed audits (EU, UNDP) to strengthen fiscal transparency and revenue mobilization.

*From Memorandum of Economic and Financial Policies (MEFP), Bissau, May 22, 2008; Letter of Intent and attachments as provided in the source content.*

### 29.      Capacity building remains a key complement to fiscal reform if we are to ensure

### _cr08266 - 29.      Capacity building remains a key complement to fiscal reform if we are to ensure

### Capacity building and technical assistance
- Capacity building is identified as a key complement to fiscal reform to ensure reforms are effective and sustainable.
- Technical assistance needs continue in all areas of public financial management and in macroeconomic statistics (Table 3).
- Highest priority areas: Customs, Treasury, Tax Departments, and the debt unit.
- Providers and initiatives mentioned:
  - IMF West AFRITAC and AFRISTAT providing technical support to strengthen public financial management, tax collection, and statistics.
  - European Union and World Bank (through LICUS) also assisting these reforms.
- Table 3 technical assistance highlights (departments and areas):
  - Minister’s Cabinet: Macrofiscal advisor (Long-term) — (WB LICUS/IMF)
  - Budget: Expert public finance (Short-term) — (EU); Expert computer systems (Short-term) — (EU)
  - Treasury: Advisor to the Treasurer (Long-term) — WB LICUS; Accounting system (Short-term) — (France)
  - Tax Department: Expert on tax code (Short-term) — (Portugal/IDB); Computerization of revenue accounting (Short-term)
  - Directorate of Large Enterprises: Advisor (6 months) — (West AFRITAC)
  - Customs: Expert to review organic law of customs (Long-term) — IDB/WB LICUS; Advisor implementing ASYCUDA++ (Short-term) — AfDB
  - External debt: Debt management (Long-term) — DRI/IDB/West AFRITAC
  - Microfinance: Advisor (Short-term) — (West AFRITAC)
  - Planning / National accounts: National accounts advisor; Implementation System of National Accounts 1993 — IMF/AFRISTAT
- Footnotes in Table 3:
  - TA requested and under consideration.
  - TA in place.
  - First mission conducted in January 2005.

### Program monitoring and quantitative indicators (EPCA for remainder of 2008)
- Monitoring based on revised quantitative and structural indicators (see Tables 1 and 2).
- Quantitative indicators (listed exactly):
  - (i) a floor on government revenue (tax and nontax);
  - (ii) a ceiling on the domestic primary deficit;
  - (iii) a ceiling on domestic financing of the budget;
  - (iv) no new domestic arrears;
  - (v) a ceiling on payment of previous arrears;
  - (vi) no short- or long-term nonconcessional external borrowing; and
  - (vii) a ceiling on nonregularized expenditures (new indicator).
- Quantitative indicators are based on the revised monthly treasury cash flow plan for 2008 (Table 4).
- Specific definitions and explanations are contained in the annexed Technical Memorandum of Understanding (TMU).
- Government will provide, on a timely basis, all necessary data to monitor the program, as indicated in the TMU.

### Government commitment measures before August (to demonstrate program commitment)
- Government intends to take the following measures before August:
  - collect at least CFAF 300 million in tax arrears;
  - regularize all nonaccounted expenditures for 2007 through April 2008 so that they are fully reflected in the expenditures tables of the National Direction of Budget;
  - sign a contract with Audit Contrôle Expertise; and
  - revitalize the PNG Committee of the BCEAO and Ministry of Finance with weekly meetings.

### Structural benchmarks under the EPCA (January 1, 2008—December 31, 2008)
- Select benchmarks, target dates, and status (verbatim):
  - Submit to Parliament the government budget fully consistent with the fiscal framework presented in this MEFP. — End-November 2007 — Done
  - Secure financing assurances from donors to fully cover the 2008 fiscal financing requirements. — End-November 2007 — Done
  - Approve and adopt by Council of Ministers legal framework for new state budget classification system in line with WAEMU regulations. — End-March 2008 — Met with delay; approved in May.
  - Create an Information Technology (IT) Department in Ministry of Finance and start training staff. — End-March 2008 — Done
  - Launch financial audit, by a reputable international firm, of domestic arrears for 2000-07. — End-April 2008 — Met with delay; audit launched in May 2008.
  - Regularize all nonaccounted expenditures for end-2007 and end-April 2008 so that they are fully reflected in the expenditure tables of the National Direction of Budget. — End-May 2008 — Met with delay; expenditures regularized as of July 10
  - Sign a contract with a pre-shipment inspection agency (Audit Contrôle Expertise). — End-June 2008 — Done
  - Revitalize the PNG Committee of the BCEAO and Ministry of Finance with weekly meetings to reconcile Treasury operations with BCEAO and domestic banks. — End-June 2008 — Done
  - Improve accounting and information flows of all Treasury transactions, including nonregularized expenditures (within 48 hours) and bank financing. — End-June 2008 — In progress
  - Collect at least CFAF 300 million in tax arrears. — End-July 2008 — (status column blank)
  - Install new software for payroll and personnel management in order to merge the payroll databases of the Ministry of Finance and Ministry of Public Administration. — End-September 2008 — (status column blank)
  - Implement an integrated management system for public accounts, linking data flows between customs (DGA), the tax department (DGCI), the budget office (DGO), and the Treasury. — End-December 2008 — (status column blank)
  - Upgrade the automated custom systems to ASYCUDA++ (Automated System for Customs Administrations). — End-December 2008 — (status column blank)
- Note: Audit financed by the European Union.

### Treasury cash-flow plan and key fiscal figures (selected exact figures)
- Table 1: Quarterly Targets (Cumulative, CFAF millions) — selected entries:
  - Government Revenues: Mar. 4,609.9; Jun. 11,388.7; Sep. 19,162.1; Dec. 24,580.3
  - Tax revenues (direct, 01.00.00, and indirect, 02.00.00, taxes): Mar. 4,116.8; Jun. 9,993.5; Sep. 16,483.3; Dec. 20,753.9
  - Recovery of tax arrears and additional revenue effort: 252.2; 903.9; 1,460.0
  - Fishing licenses (03.01.01): Mar. 493.1; Jun. 1,143.0; Sep. 1,774.8; Dec. 2,366.4
- Table 2: Estimates of Quarterly Domestic Primary Balance, New Domestic Arrears, and Payment of Previous Years' Arrears, 2008 (Cumulative, CFAF millions) — selected entries:
  - Total domestic primary deficit: Mar. -3,842; Jun. -3,049; Sep. -2,966; Dec. -8,782
  - Revenue: Mar. 6,571; Jun. 18,537; Sep. 31,025; Dec. 37,613
  - Domestic primary expenditure: Mar. 10,412; Jun. 21,587; Sep. 33,991; Dec. 46,395
  - Authorities’ measures (higher revenues + lower expenditures): Mar. 0; Jun. 3,661; Sep. 1,613; Dec. 2,500
  - New domestic arrears: 4,550; 0; 0; 0
  - Nonregularized expenditures (DNTs): 574; 200; 200; 200
  - Payment of previous years' domestic arrears: 3,457; 3,600; 3,600; 3,600
- Definitions and computation notes (verbatim):
  - Government revenue includes direct taxes, indirect taxes, and fishing licenses, as well as negotiated recovery of tax arrears and additional revenue efforts.
  - Domestic primary fiscal deficit (commitment basis) = government revenue − domestic primary expenditure on a commitment basis. Government revenue excludes external grants. Domestic primary expenditure consists of current expenditure plus domestically financed capital expenditure, excluding all interest payments and externally financed capital expenditures.
  - 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.
- Definition of new domestic arrears (verbatim):
  - (i) At end-March, end-June, and end-September, the stock of account payables (rest-a-payer).
  - (ii) At end-December, accounts payables accumulated during 2008 and still outstanding one month after December 31 in the case of wages and salaries (including pensions), and three months after in the case of goods and services and transfers.

### Monitoring, adjustors, and coverage
- Quantitative indicators set for end-June, end-September, and end-December 2008; values are cumulative from January 1, 2008.
- Indicative targets for new nonconcessional external debt are continuous.
- For EPCA purposes, “government” = central government of Guinea-Bissau, excluding public entities with autonomous legal personality whose budget is not included in the central government budget.
- Source of cash flow and tables: “Cash Flow 2008 revised” (Table 1; Table 2 notes reference Table 4 of MEFP).

*Attachment II, Technical Memorandum of Understanding, Bissau, May 22, 2008.*

### 7.      Nonregistered expenditures are defined as follows: any Treasury outlay (including

### _cr08266 - 7.      Nonregistered expenditures are defined as follows: any Treasury outlay (including

### Definitions and fiscal accounting rules
- Nonregistered expenditures: any Treasury outlay (including nontitularized expenditures, restitutions, etc.) not accounted for and therefore not reflected in the expenditures tables presented by the National Direction of Budget.
- Previous year’s domestic arrears: arrears in wages, transfers, and goods and services outstanding as of January 1, 2008. The program allows for partial payment of expenditure commitments related to 2007 that are still outstanding as of January 1, 2008, up to a maximum of CFAF 3.6 billion (see MEFP ¶ 14).
- Net domestic financing of the budget: defined on the basis of the cash flow estimates in Table 4 of the MEFP.
  - Bank financing: net changes in balances of treasury accounts at the BCEAO and at commercial banks (excluding balances not available for budget financing) and outstanding amounts of loans, including T-bills, from the BCEAO and commercial banks (local and regional).
  - Domestic nonbank financing: privatization receipts and any other domestic financial debt held outside the banking sector, other than new domestic arrears.

### Key domestic financing estimates (Table 3, cumulative, CFAF millions)
- Domestic financing: 2,094 -5,053 -7,399 -15,036
  - Bank financing: 2,094 -5,053 -7,399 -15,036
    - BCEAO: 0 -958 -2,995 -4,668
    - BCEAO rescheduling: 0 0 3,200 3,200
    - Commercial bank(s) (including regional banks): 2,094 -2,371 -5,880 -7,934
    - Regional Commercial banks and Treasury bills: 0 -1,724 -1,724 -8,464
    - T-bills rescheduling: 0 0 0 2,831
  - Non bank financing: 0 0 0 0

### External debt indicators and concessionality
- Indicators: cumulative ceilings on new nonconcessional external debt contracted or guaranteed by the government. External debt: debt held by creditors outside the WAEMU region.
- Debt definition (per Guidelines on Performance Criteria with Respect to Foreign Debt, Executive Board, August 24, 2000): current (not contingent) liabilities created under contractual arrangements through provision of value in the form of assets (including currency) or services, requiring future payments in assets or services to discharge principal and interest.
  - Debt forms include: (i) loans (advances, deposits, bonds, debentures, commercial loans, buyers credits, repurchase agreements, official swaps), (ii) suppliers’ credits, (iii) leases (present value at inception of lease payments expected, excluding operation/repair/maintenance).
  - Arrears, penalties, judicially awarded damages arising from failure to make payment on a contractual obligation that constitutes debt are debt.
- Concessionality assessment:
  - Based on OECD commercial interest reference rates (CIRRs).
  - A loan is concessional if, on the date contracted, the ratio of the present value of the loan (calculated using reference interest rates) to its nominal value is less than 50 percent (grant element of at least 50 percent).
  - For debts with maturity exceeding 15 years, the 10-year OECD reference rate is used; for shorter maturities, the six- (text truncated in source).

### Concept of government for external debt indicators
- Broader than budget aggregates: includes all debt that may ultimately be deemed a liability of the state. In addition to the government defined in paragraph 3, includes administrative public institutions, public enterprises authorized to contract/guarantee/accommodate nonconcessional borrowing, scientific and technical public institutions, professional p(ublic?) entities (text truncated in source).

### Adjusters and ceilings (program flexibility)
- Ceilings on domestic primary fiscal deficit adjusted for shortfall (excess) in E.U. fishing compensation:
  - Ceiling on domestic primary deficit (commitment basis) will be increased (lowered) for lower (higher) than programmed disbursement of E.U. fishing compensation.
  - Assumed E.U. fishing compensation (cumulative from January 1, 2008): by end-March CFAF 0 billions; by end-June CFAF 4.9 billions; by end-September CFAF 9.8 billions; by end December CFAF 9.8 billion.
- Ceilings on domestic financing and new domestic arrears adjusted for shortfall (excess) in external budgetary assistance (including E.U. fishing compensation):
  - Ceiling on domestic financing will be increased (lowered) by the full amount of shortfall (excess) in external budget support.
  - Assumed external budgetary assistance (including E.U. fishing compensation), cumulative from January 1, 2008: by end-June CFAF 15.7 billions; by end-September CFAF 26.04 billions; by end December CFAF 35.8 billion.
  - Ceiling on accumulation of new domestic arrears will be adjusted in line with available domestic financing; arrears of nonpersonnel expenditures will be adjusted upward (downward) by the difference if government cannot increase (decrease) domestic financing to cover shortfall (excess) in external support.

### Program monitoring and reporting requirements
- Ministry of Finance will provide regular reports to IMF staff, including:
  - Detailed reports on revenue and expenditure by budget line and a complete table on central government operations (TOFE) (monthly, two weeks after the end of the month).
  - Tables on nonregularized expenditures (DNT) (monthly, two weeks after the end of the month).
  - Table on accounts payable broken down by budget category (wages, goods and services, transfers, other) (monthly, two weeks after the end of the month).
  - Previous years’ domestic arrears (including 2007): stock and clearance, broken down by budget category (wages, goods and services, transfers, other) (monthly, two weeks after the end of the month).
  - Monetary survey, balance sheet of the central bank, and balance sheet of the commercial banks (monthly, within six weeks after the end of the month), including outstanding loans (including short-term advances) and deposits.
  - Treasury Committee monthly reports (monthly, within 10 days after the end of the month).
  - Amount and terms of new external debt (concessional or not) contracted or guaranteed by the government (within four weeks after the end of the month).
  - Monthly table on disbursements of budget support (grants and loans) by donors (two weeks after the end of the month).
  - Indicators to assess overall economic trends, such as the household consumer price index and exports of cashew nuts (when information becomes available).
  - Table describing status of implementation of structural indicators in Table 3 of the MEFP (within two weeks after the end of the month).
  - Information on any type of financial assistance received and not programmed (reported on a continuous basis).
- Data to be provided to IMF local office economist in Bissau (Mr. Fonseca) for transfer to the African Department in Washington.
- Additional data on extrabudgetary expenditures to be reported (monthly, two weeks after the end of the month), including incentives to tax collectors; restitutions to collectors; other retentions operated by collecting agencies (DGA, DGCI, Fishing Ministry, etc.).

### Exchange rates used for the TMU
- CFAF/US$ exchange rate updated to 426,6.
- CFAF/Euro exchange rate: 656.

### IMF decision and country economic assessment (Press Release No. 08/183 and Board discussion)
- IMF Executive Board approved disbursement equivalent to SDR 1.775 million (about US$2.9 million) under EPCA for Guinea-Bissau (second and final purchase under EPCA).
- EPCA objective: promote strengthening of administrative and institutional capacity to sustain economic recovery and secure higher levels of financial assistance.
- Guinea-Bissau performance highlights (Statement by Laurean Rutayisire; Board remarks by Mr. Murilo Portugal):
  - Four out of six quantitative indicators for end-March 2008 were met (domestic primary deficit, government revenues, domestic financing of the budget and external nonconcessional borrowing), some by large margins.
  - Missed targets: payment of previous years’ arrears and new domestic arrears, expected to be met at end of year for the year-target as a whole.
  - Real GDP: grew at 2.7 percent in 2007 and projected to grow by 3 percent in 2008.
  - External current deficit narrowed, reflecting higher exports of cashews after liberalized cashew-pricing policy since 2007.
  - Food and fuel accounted for 56 percent of total imports in 2007.
  - Recent surge in international food and fuel prices has sharply increased inflation and mounted pressures on fiscal and external current accounts.
- Policy recommendations and authorities’ commitments:
  - Maintain nominal freeze of the wage bill.
  - Strictly control non-wage discretionary outlays by enforcing procedures that allow expenditures only through the Treasury account at the BCEAO national office.
  - Maintain domestic expenditures within available domestic and external resources and in line with program projections.
  - Sustain strong revenue performance and offset revenue shortfalls from tax exemptions on rice imports through donor resources and additional measures to avoid accumulation of domestic arrears for 2008 as a whole.
  - Strengthen expenditure management and ensure all expenditure commitments are promptly regularized.
  - Improve import processing and customs administration; further strengthen treasury management.
  - Open up flow of information on treasury operations; clean up payroll database; identify possible sources of tax revenues.
  - Upgrade automated customs systems; subcontract an inspection agency for pre-shipment inspections.
  - Continue prudent monetary policy under BCEAO and strengthen coordination between fiscal and monetary policies to sterilize liquidity from donor funds.
  - Revitalize the PNG Committee for weekly reconciliation of Treasury operations with BCEAO and domestic banks.
  - Seek donor assistance on highly concessional terms, preferably grants, given Guinea-Bissau’s debt burden.
- Authorities’ reform intent: aim to build a track record to consider a PRGF-supported program by end of 2008 and to pursue debt relief.

*Source: IMF staff report excerpts, MEFP tables, Press Release No. 08/183, and Statement by Laurean Rutayisire (July 25–28, 2008).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08266.pdf_