## _cr10117 ## Source details **Canonical URL:** [_cr10117](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10117.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10117.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10117.pdf.json) --- ### Article VIII and Fund Relations - Guinea-Bissau has accepted the obligations of Article VIII, Sections 2, 3, and 4. - Shares the CFA franc with WAEMU; CFA franc pegged to the euro. BCEAO conducts regional monetary and exchange rate policy. WAEMU Banking Commission supervises banks. - Previous Article IV consultation concluded on August 28, 2007. ### Executive summary — main findings and program orientation - Political context and program rationale: - Peaceful presidential election and representative civilian government improved political stability and enabled a medium-term reform focus. - Opportunity for a medium-term program supported by an ECF based on favorable EPCA performance. - 2009 outcomes: - Real GDP growth: 3 percent. - Inflation slowed; budget stabilized. - EPCA performance: all but two EPCA quantitative performance indicators were met through December. - Medium-term objectives (2010–12): - Reinforce public finances; modernize public administration; raise quality of public services; remove impediments to private sector development; enhance provision of financial services. - Debt relief prospects: - Satisfactory performance could pave the way for debt relief by year-end through the enhanced HIPC Initiative and MDRI. - Main risks: - Political instability; vulnerability to external shocks; possibility of inadequate donor support. ### Recent economic developments and EPCA performance - Growth and inflation: - Real GDP growth in 2009: 3 percent. - Inflation subdued due to lower food and fuel prices and CFAF peg to the euro. - External sector: - External current account deficit (excluding grants): widened to 6½ percent of GDP in 2009. - Deficit largely financed by an increase in grants. - Fiscal performance and donor support: - Tax revenues overperformed by about 2 percentage points of GDP in 2009. - Through September 2009 Guinea-Bissau had received only 50 percent of pledged budget support; by year-end donor support exceeded programmed levels (WAEMU, EU, France). - Government contained spending and kept domestic arrears within target except for a breach in the ceiling on repayment of previous years’ arrears when 2008 wage arrears were paid. - Structural reform progress: - Completed: biometric survey of civil servants; approval of annual PRSP progress report; action plan for PFM; enactment of new investment code. - Decisions/delays: chose not to sign a contract with a pre-shipment customs inspection company; ASYCUDA++ to operate in three customs posts (Bissau, the airport, and Safim) by July 2010; unified payroll/payment system pilot in two ministries by January 2011. ### Macroeconomic framework and medium-term targets (2010–12) - Macroeconomic objectives: - Raise real GDP growth to 4½ percent by program end. - Contain annual inflation below 3 percent (WAEMU convergence norm). - Gradually narrow external current account deficit (excluding official transfers) to about 5 percent of GDP over the medium term. - Keep domestic primary budget deficit below 4 percent of GDP annually through 2012. - Projections and risks: - Real GDP growth projected: 3½ percent in 2010. - Downside risks: weaker export prices; lower-than-expected fiscal spending due to financing constraints; unexpected political disruptions. - Upside risks: liquidity effects from settling outstanding arrears; surge in business confidence. ### Strengthening public finances — 2010 budget and medium-term fiscal program - Fiscal targets and strategy: - Reduce domestic primary deficit gradually to 3½ percent of GDP by 2012. - 2010 domestic primary budget deficit target: just under 4 percent of GDP. - 2010 budget specifics: - Total revenues expected to increase by 1¼ percentage points of GDP; EU fishing compensation rises by 0.7 percentage point of GDP in 2010. - Domestic primary spending projected to rise by about 2¼ percentage points of GDP, reflecting higher capital outlays on infrastructure (about 1½ percent of GDP) and increases in education, health, and agriculture. - Budget support expected: CFAF 13 billion (mostly EU, AfDB, World Bank, bilaterals). - General budget reserve: CFAF 0.5 billion. - Financing gap: CFAF 13.4 billion expected to be filled by EU Vulnerability-Flex (up to CFAF 9.8 billion) and the ECF (CFAF 3.6 billion). - Fiscal numbers from Text Table 1 (Percent of GDP; GDP in CFAF billions): - Revenues: 7.6 9.0 10.3 - Tax revenue: 4.8 6.7 7.2 - Non-tax revenue: 2.8 2.2 3.1 - Of which: EU fishing compensation: 1.2 0.8 1.5 - Total primary expenditure: 12.2 11.8 14.2 - Of which: current primary: 11.6 11.5 12.3 - Of which: domestically financed capital: 0.5 0.3 1.9 - Domestic primary balance: -4.5 -2.9 -3.9 - Memorandum items: - Gross financing gap: 0.7 0.0 3.2 - Overall fiscal balance (incl. grants): -1.7 1.8 -3.2 - GDP (CFAF billions): 391.1 395.1 418.8 ### Domestic arrears: stock, strategy, and operations - End-2009 facts: - Domestic arrears about 23 percent of GDP (about CFAF 93 billion). - Components include wage arrears (2008), commercial bank arrears (T-bills matured since 2006 and unpaid interest), arrears to the BCEAO, and arrears to the private sector (1974–99 and 2000–07 audits). - Outstanding from 1974–99 audit: about CFAF 17 billion. - Two-step arrears clearance plan: - Step 1: Settle verified arrears to commercial banks, the BCEAO, and wage arrears of 2008. In January 2010, the government settled about CFAF 20 billion using donor support, domestic BCEAO loans (local currency counterpart to the SDR allocation), and rescheduling. - Step 2: Start addressing verified private sector arrears up to 1999 and complete audit of 2000–07 arrears. - Operational rules for 2010: - Verify claims and monitor budget execution; pay individual claims up to about CFAF 30 million for a total of CFAF 3.5 billion and reschedule the remainder. ### Modernizing public administration — civil service and security sector reforms - Civil service context: - Wage bill close to 60 percent of fiscal revenues (vs. 20 percent pre-conflict); about 20,000 employees; about 13 public employees per 1,000 inhabitants (WAEMU average 6-7 per 1,000). - Civil service reform measures: - Medium-term schedule to remove from payroll employees exceeding mandatory retirement age; address redundant workers for reinsertion; dismiss overstaffed positions. - Stricter payroll controls and comprehensive payroll database; verify biometric census data to identify “ghost” workers (structural benchmark, June 2010). - Pilot unified payroll and payment system in Ministry of Finance and Ministry of Labor and Public Services by January 2011. - Improve management, performance incentives, job grading, and training; establish a school of public administration with donor help. - Security sector reform measures: - Reduce military forces from 4,500 to 3,500; of the 3,500 only 1,500 (about 30 percent) will be permanent with mandatory national service. - Mechanics: retire about 2,200 soldiers and demobilize about 800 without re-enlistment. - Rationalize security forces with National Guard incorporating several police forces. - Create a pension fund; seek donor support equivalent to additional pension outlays for 2011–2015 (about € 30 million). - Illustrative fiscal impact: - Combined reforms could generate savings of about 1.1 percent of GDP annually between 2011 and 2015. - Assumes interim donor financing of about €30 million for the Pension Fund (2011—15). - Operational assumptions: civil service reform assumes about 600 civil servants retire in 2010—15 and 2,200 excess employees move to the private sector over four years; security sector reform assumes about 3,000 security forces retire in 2011—15 and about 800 demobilized over four years. - Tabulated illustrative parameters (verbatim presentation): - 2011—15 2016—20 - C urrent expenditure- 0.3- 0.4 - Additional financing - 4 - 0.80.1 - Fiscal space1.10.6 - C a p ita l e xp e nd iture0 . 50 . 6 - Capitalization of Pension Fund0.50.0 ### Removing impediments to private sector development and access to credit - Key actions: - Improve business environment and judicial system. - Restore and develop infrastructure: power, transportation, communication. - Establish a one-stop shop for business (structural benchmark, June 2010). - Prepare regulations for new Investment Code and a telecommunications law. - Make CENTIF operational and enact AML/CFT legislation. - Infrastructure constraints: - Installed power capacity about half of what it was a decade ago. - Ports, roads, and rail insufficient to tap mineral resources (bauxite, phosphate). - Access to credit: - Low financial intermediation; M2 to GDP ratio low. - Settlement of government arrears to domestic banks improves liquidity. - Government seeks donor assistance to expand SME credit. - Non-performing loans increased with financing of cashew exports. ### Social services, agriculture policy, and poverty reduction - Fiscal commitment: - In 2010–2012, government committed to using at least 50 percent of tax revenues for current and domestically financed capital spending in health, education, agriculture, and infrastructure (quantitative indicator). - Agriculture priorities: - Cashews main rural income source; focus on diversification, local processing to increase value-added, reduce rice-for-cashew operations, and pursue donor-coordinated land recovery and equipment projects. - Agricultural plan envisages gradual self-sufficiency in rice. ### External sector sustainability, debt, and DSA findings - Debt and arrears context: - Guinea-Bissau in debt distress; debt ratios well in excess of sustainability thresholds. - End-2008 external arrears: $388.6 million—almost 40 percent of official external debt. - Program assumes continuation of interim relief from World Bank and AfDB until early 2011 and resumption of interim relief from the IMF as requested. - Almost 90 percent of arrears owed to bilateral official creditors in process of rescheduling through Paris Club on Cologne terms; comparable treatment assumed for non-Paris Club creditors. - Remaining arrears (about 10 percent) to multilateral institutions other than IMF, World Bank, AfDB; authorities committed to clearing these during ECF in a manner consistent with payment capacity. - DSA baseline and scenarios (selected findings): - Baseline PV external debt: US$855.5 million or 103 percent of GDP and 528 percent of exports under interim relief assumptions. - HIPC completion point scenario would significantly alleviate debt burden; PV of public debt would fall to 50 percent of GDP in 2010 under full relief (an immediate PV reduction of 77 percentage points of GDP relative to baseline). - Stress tests: a one-time 30 percent devaluation in 2010 increases PV of debt by 39 percentage points of GDP. - Conclusion: without HIPC/MDRI relief, Guinea-Bissau would remain in debt distress; achieving completion point crucial. ### Program design, financing, and ECF access - Total financing requirements for 2010–12: CFAF 548 billion (US$ 1.2 billion); about two-thirds reflects HIPC/MDRI completion point debt relief. - Composition and shares: - About 9 percent projected for program support to fill budget gaps. - Large part expected from traditional donors (EU, World Bank, AfDB, regional partners); remainder from bilaterals. - 2010 specifics and Text Table 3 excerpt (verbatim figures): - 2010 2011 2012 2010—12 - Total budget financing needs427.259.261.9548.3 - Domestic primary deficit16.316.616.649.6 - Donor-financed projects35.437.740.2113.2 - Scheduled external interest debt service5.41.51.58.4 - Amortization (scheduled)362.41.92.2366.5 - Bank domestic financing-0.20.00.0-0.2 - Payment of previous years arrears7.91.51.510.9 - Total external financing sources427.259.261.9548.3 - Project grants and loans35.437.740.2113.2 - Program support13.018.018.249.2 - HIPC completion point debt relief358.50.00.0358.5 - Change in external arrears2.60.00.02.6 - External interest arrears4.30.00.04.3 - Gross Financing Gap13.43.53.520.5 - IMF (120 percent of quota)3.63.53.510.6 - Additional Financing - 1 - 9.80.00.09.8 - Sources: Guinea-Bissau authorities and IMF staff estimates and projections. - 1 - Assumed to be covered with EU V-Flex. - ECF access and phasing: - Proposed total ECF access: 157.5 percent of quota. - Net access: 120 percent of quota. - ECF expected to be catalytic, about 15 percent of envisaged donor support at proposed access. - Access phased equally across three-year arrangement reviews: net amount equivalent to 18 percent of quota available after Board approval; balance in equal tranches of 17 percent of quota after each of the six ECF reviews. ### ECF reviews, disbursements, and repurchase of EPCA credit - ECF review and disbursement schedule (Table 10 figures, verbatim): - Board approval: Late March 2010 — Board approval — 55.5 percent of quota — SDR millions 7.881 - Note: For the amount approved at Board approval, 37.5 percent of quota, or SDR 5.325 million, would be approved for the purpose of immediately repurchasing previously provided EPCA credit. - Late November 2010 — End-June 2010 — First review — 17 percent of quota — SDR millions 2.414 - Late May 2011 — End-December 2010 — Second review — 17 percent — SDR millions 2.414 - Late November 2011 — End-June 2011 — Third review — 17 percent — SDR millions 2.414 - Late May 2012 — End-December 2011 — Fourth review — 17 percent — SDR millions 2.414 - Late November 2012 — End-June 2012 — Fifth review — 17 percent — SDR millions 2.414 - Late March 2013 — End-December 2012 — Sixth review — 17 percent — SDR millions 2.414 - Total: 157.5 percent of quota — SDR millions 22.365 ### Quantitative indicators, structural benchmarks, and TMU highlights - Quantitative indicators (cumulative floors/ceilings) set for end-March, end-June, end-September, end-December 2010 include: - Government tax revenues (Cumulative, CFAF millions): March Prog. 5,420; June Prog. 15,148; Sept. Prog. 24,218; Dec. Prog. 30,101. - Domestic primary balance (commitment basis) (Cumulative, CFAF millions): March Prog. -7,789; June Prog. -6,779; Sept. Prog. -11,030; Dec. Prog. -16,333. - Nonregularized expenditures (DNTs): 200 at each quarter. - Social and priority spending (Cumulative, CFAF millions): March Prog. 4,062; June Prog. 8,123; Sept. Prog. 12,185; Dec. Prog. 16,246. - Selected structural benchmarks (January 1, 2010–December 31, 2010): - Fiscal management: prepare quarterly and monthly Treasury plans and make operational the Treasury committee — June 2010. - Implement norms tightening recourse to simplified spending procedures — May 2010. - Make operational the accounting system at the Treasury under SIGFIP — July 2010. - Put ASYCUDA++ into operation in three customs posts — July 2010. - Publish verified data of biometric census of public administration employees — June 2010. - Council of Ministers to approve legal framework for one-stop shop — June 2010. - Establish operational link from SIGFIP budget/Treasury to customs and tax administration — Dec 2010. - Submit public administration reform action plan with medium-term downsizing schedule — Jan 2011. - Adjustors in the TMU: - Ceiling on domestic primary deficit can be increased for shortfalls in EU fishing compensation (up to CFAF 3 billion). - Ceiling on domestic financing increased for shortfalls in external budget support, EU V-Flex and fishing compensation (up to CFAF 12 billion). - Ceiling on domestic financing increased for payment of previous years arrears in excess of programmed amounts (up to CFAF 3.5 billion). - Program assumes CFAF/Euro = 655.956 and CFAF/US$ exchange rate updated to 450 for TMU purposes. ### Indicators of capacity to repay the Fund (selected IMF credit figures) - Assumption: new ECF arrangement of 157.5 percent of quota (SDR 22.365 million) approved in March 2010; 37.5 percent of quota (SDR 5.325 million) used for early repurchase of outstanding EPCA credit. - Fund obligations based on existing and prospective credit (SDR millions) — selected: - 2008 Principal 1.3; Charges and interest 0.1 - 2009 Principal 1.0; Charges and interest 0.1 - 2010 Principal 6.3; Charges and interest 0.0 - 2014 Principal 2.3; 2015 Principal 3.3; 2016 Principal 4.2 - Outstanding Fund credit (SDR millions) — selected: - 2008 5.6; 2009 6.3; 2010 10.3; 2011 15.1; 2012 20.0; 2013 22.4; 2014 22.4; 2015 21.6; 2016 19.3; 2017 16.0; 2018 11.8 - Outstanding Fund credit as percent of quota — selected: - 2008 39.3; 2009 44.6; 2010 72.5; 2011 106.5; 2012 140.5; 2013 157.5; 2014 157.5; 2015 152.0; 2016 135.8; 2017 112.7; 2018 83.0 ### Statistics, capacity building, and data improvements - National accounts: - Revised national account data for 2003–08 (SNA93) to be published in second quarter of 2010; revisions doubled GDP level. - Plans to start producing national accounts based on SNA08 with technical assistance. - Data weaknesses and priorities: - Highest TA priorities: Customs, Treasury, Budget, and Tax departments. - Monetary statistics compiled by BCEAO; CPI collected only for Bissau. - Regular monthly TOFE compiled since 2007. - Reporting requirements under program (selected): - Monthly detailed revenue and expenditure reports — two weeks after end of month. - Monthly tables on nonregularized expenditures and accounts payable — two weeks after end of month. - Monetary survey and bank balance sheets — monthly, within six weeks. - Data on new external debt — within four weeks after end of month. ### Staff appraisal, Board views, and implementation risks - Staff appraisal: - Political stability and government determination create a critical juncture for reforms. - Continued adherence to fiscal targets and implementation of medium-term program will improve fiscal and debt sustainability. - Civil service and security sector reforms are central to curbing the wage bill and creating fiscal space. - Satisfactory ECF performance should help pave the way to HIPC/MDRI completion point in late 2010. - Executive Board and Directors’ recommendations: - Emphasized importance of political stability, governance, rigorous implementation of 2010 budget, PFM improvements, tax administration reform, civil service reform, and preventing accumulation of domestic arrears. - Noted ECF and second tranche of interim HIPC assistance approved: ECF equivalent to SDR 22.365 million (US$33.3 million) and SDR 1.016 million (US$1.5 million) for interim HIPC assistance. - Main implementation risks: - Political instability, external shocks affecting cashew prices/exports, and delays or inadequacy of donor financing. - Capacity constraints in implementation; continued technical assistance vital. *Source: IMF staff report and supporting material as provided in the content unit.* ### 37.5 percent of quota for early 2008–09 EPCA repurchase. The authorities are also ### _cr10117 - 37.5 percent of quota for early 2008–09 EPCA repurchase. The authorities are also ### Article VIII and Fund Relations - Guinea-Bissau has accepted the obligations of Article VIII, Sections 2, 3, and 4. - It shares a common currency (the CFA franc), pegged to the euro, with other members of the West African Economic and Monetary Union (WAEMU). - The regional central bank, the BCEAO, conducts monetary and exchange rate policies for the region. - Banks are supervised by the WAEMU Banking Commission. - The previous Article IV consultation was concluded on August 28, 2007; the staff report and PIN are available at the IMF country page. ### Executive Summary — Main findings and program orientation - Political conditions: Peaceful presidential election and a representative civilian government have created improved political stability and allowed a medium-term reform focus. - 2009 economic performance: Real GDP growth reached 3 percent, driven by a favorable cashew harvest and a pick-up in construction activity; inflation slowed; the budget was stabilized. - EPCA performance: Performance in the EPCA-supported program was broadly satisfactory; all but two EPCA quantitative performance indicators were met. - Medium-term program objectives (requesting ECF support): reinforce public finances; modernize public administration; raise quality of public services; remove impediments to private sector development; enhance provision of financial services. - Debt relief prospects: Satisfactory performance could pave the way for debt relief by year-end through the enhanced HIPC Initiative and MDRI. - Financing expectations: Authorities expect broad-based donor support in line with annual commitments of recent years, with residual financing gaps that could be filled by an ECF arrangement. - Main risks: political instability, vulnerability to external shocks, and the possibility of inadequate donor support. The economy is highly dependent on the agricultural sector and a narrow export base. ### I. Introduction — Context and what is different now - Chronic issues over the prior decade: - Years of political instability since the 1999 civil conflict. - Unsustainable fiscal deficits due to a low tax base, high expenditure-to-revenue ratio, and overreliance on external budget support. - Vulnerability to unfavorable external conditions linked to dependence on a single export product and market. - Debt distress. - IMF involvement since 1999: EPCA (1999–2000), PRGF (2000–2003), SMPs, capacity building, EPCA (2008, 2009). - Conditions creating an opportunity for a medium-term program: - Political stability after the peaceful presidential election. - Improved institutions and technical capacity with development partner support. - Favorable performance under the 2009 EPCA-supported program. - Determined political will to reach HIPC and MDRI completion point. ### II. Recent Economic Developments and Performance under the EPCA - 2009 macro outcomes and drivers: - Real GDP growth: 3 percent. - Drivers: favorable cashew harvest and construction activity pick-up despite lower cashew prices and falling remittances. - Inflation: slowed due to lower food and fuel prices and the CFAF peg to the euro. - Private sector credit: decelerated as banks became more cautious. - External sector: - External current account deficit (excluding grants): widened to 6½ percent of GDP. - Financing: deficit largely financed by an increase in grants. - Causes of wider deficit: lower cashew prices, surge in imports of oil and construction material, decline in remittances. - Fiscal performance: - Tax revenues overperformed by about 2 percentage points of GDP, reflecting the good cashew harvest and stepped-up collection efforts. - Through September Guinea-Bissau had received only 50 percent of the budget support pledged; by year-end donor support exceeded programmed levels with disbursements from WAEMU, the EU, and France. - Government contained spending and kept domestic arrears within target. - Program performance: - All but two EPCA quantitative targets were met through December. - The ceiling on repayment of previous years’ arrears was breached when the government decided to pay 2008 wage arrears. - Nonregularized expenditures grew temporarily because of mid-year elections but have since been classified into the budget; authorities are tightening norms to curb them. - Structural reforms: - Completed: biometric survey of civil servants; approval of the annual PRSP progress report; action plan for public financial management; enactment of new investment code. - Decisions/delays: government chose not to sign a contract with a pre-shipment customs inspection company and to reinforce local capacity; automated customs administration system to operate in three customs posts (Bissau, the airport, and Safim) by July 2010; unified payroll and payment system to be operational in two pilot ministries (Ministry of Finance and Ministry of Labor and Public Services) by January 2011 after required preparatory work. ### III. Policy Discussions and Medium-Term Program (overview points drawn from contents) - Program timeframe and focus: medium-term program for 2010–12 centered on fiscal consolidation, public administration modernization, poverty reduction through improved public services, and private sector development. - Key program components (topics listed in the source’s table of contents): - Macroeconomic framework for 2010-12. - Strengthening public finances and addressing domestic arrears. - Modernizing public administration including civil service and security sector reforms. - Removing impediments to private sector development. - Improving access to social services, agriculture policy, and poverty reduction. - Achieving external sector sustainability. - Program design elements include financing for 2010-12, program access, conditionality, and risk assessment. ### IV. Main risks and implementation challenges - Political instability remains a primary risk despite recent stabilization. - High vulnerability to external shocks because of dependence on cashew exports and a narrow export base. - Donor support uncertainty: inadequate donor financing could create residual financing risks. - Capacity constraints and past institutional fragilities could affect implementation of structural reforms and arrears normalization. *Source: IMF staff report and supporting material as provided in the content unit.* ### 7. Policy discussions focused on the authorities’ medium-term program and fiscal ### _cr10117 - 7. Policy discussions focused on the authorities’ medium-term program and fiscal ### Policy priorities - Strengthen public finances, in PFM and other areas, with a view to containing the fiscal deficit and supporting macro stability. - Normalize the government’s relations with domestic banks and the private sector by addressing the large stock of domestic arrears. - Modernize the public administration to create space for priority spending and raise the quality of public services. - Promote job creation by removing impediments to private sector development and strengthening the provision of financial services. - Improve access to social services and step up efforts to alleviate poverty. - Move toward debt sustainability, particularly by helping the country achieve the HIPC/MDRI completion point. ### Macroeconomic Framework for 2010–12 - Main macroeconomic objectives: - Raise real GDP growth to 4½ percent by program end. - Contain annual inflation below 3 percent, the WAEMU convergence norm. - Gradually narrow the external current account deficit (excluding official transfers). - Keep the domestic primary budget deficit below 4 percent of GDP annually through 2012. - Growth and inflation projections: - Real GDP growth is projected to accelerate to 3½ percent in 2010. - Beginning in 2010 and into the medium term, inflation is expected to be in line with the WAEMU convergence norm, below 3 percent. - External sector and balance of payments: - External current account deficit (excluding grants) is projected to narrow gradually over the medium term to about 5 percent of GDP. - The overall balance of payments (excluding grants) is projected to be in deficit throughout, with small financing gaps expected to be covered by donor support and the ECF arrangement. - Risks to the outlook: - Downside risks: weaker-than-expected export prices; lower-than-expected fiscal spending due to financing constraints; unexpected political disruptions. - Upside risks: unexpected impact of government settling outstanding arrears generating additional liquidity; surge in business confidence from a more stable political climate and firmer policy implementation. ### Strengthening Public Finances — Medium-term fiscal program - Strategy objectives: - Heighten revenue collection. - Make space for priority spending. - Keep current-year spending within available resources. - Start to address domestic arrears. - Fiscal target: - Reduce the domestic primary deficit gradually to 3½ percent of GDP by 2012. - Combined with HIPC/MDRI debt relief, improve fiscal and debt sustainability while limiting reliance on external budget support. - 2010 budget specifics: - Targets a domestic primary budget deficit of just under 4 percent of GDP. - Total revenues expected to increase by 1¼ percentage points of GDP as customs duties on certain products are restored and one-off increases in EU fishing compensation occur. - EU fishing compensation rises by 0.7 percentage point of GDP in 2010. - Domestic primary spending projected to rise by about 2¼ percentage points of GDP, reflecting higher capital outlays on infrastructure (about 1½ percent of GDP) and targeted increases in education, health, and agriculture. - Budget support of CFAF 13 billion is expected mostly from the EU, the African Development Bank (AfDB), the World Bank, and bilaterals. - General budget reserve allocation of CFAF 0.5 billion for contingencies. - Financing gap of CFAF 13.4 billion expected to be filled by a European Commission Vulnerability-Flex grant under the 2010 exercise (up to CFAF 9.8 billion) and the ECF (CFAF 3.6 billion). - Structural reforms to strengthen public finances: - Mobilizing revenue: restore customs duties for certain products; improve customs and tax administration (structural benchmark, July 2010); broaden the tax base; shift to a value-added tax (VAT) in the medium term; revisit revenue-sharing agreements (“restitutions”). - Deepening PFM reforms: implement the PFM action plan to strengthen budget preparation and execution and cash flow management; make payroll controls more effective. - Short-term PFM goals: - Reinforce standard budget execution procedures, avoiding “simplified” ones for significant portions of the budget (structural benchmark, May 2010). - Improve cash management, moving away from daily allocation of funds (structural benchmark, June 2010); implement the single Treasury account. - Better integrate budget preparation and execution, and improve monitoring of budget execution and Treasury operations (structural benchmark, July 2010). - Other PFM goals: ex-ante control of all government budget expenditures; strengthen accounting and reporting procedures and dissemination of financial statements; reinforce procurement by harmonizing legislation with WAEMU standards. - Fiscal numbers from Text Table 1 (Percent of GDP unless otherwise indicated; GDP in CFAF billions): - Revenues: 7.6 9.0 10.3 - Tax revenue: 4.8 6.7 7.2 - Non-tax revenue: 2.8 2.2 3.1 - Of which: EU fishing compensation: 1.2 0.8 1.5 - Total primary expenditure: 12.2 11.8 14.2 - Of which: current primary: 11.6 11.5 12.3 - Of which: domestically financed capital: 0.5 0.3 1.9 - Domestic primary balance: -4.5 -2.9 -3.9 - Memorandum items: - Gross financing gap: 0.7 0.0 3.2 - Overall fiscal balance (incl. grants): -1.7 1.8 -3.2 - GDP (CFAF billions): 391.1 395.1 418.8 ### Medium-term Plan to Address Domestic Arrears - Two-step arrears clearance plan: - Step 1: Address verified arrears that include arrears to commercial banks and the BCEAO and wage arrears of 2008. By January 2010, these arrears were settled with cash payments using available financing consisting of donor support, domestic currency loans from the BCEAO representing a local currency counterpart to the SDR allocation, and rescheduling. - Step 2: Start addressing verified arrears to the private sector up to 1999 and complete the audit of 2000–07 arrears. - Box 2: Arrears problem key facts (end-2009): - Domestic arrears were about 23 percent of GDP (about CFAF 93 billion). - Components: - Wage arrears: unpaid civil servant wages for 2008. - Commercial bank arrears: Treasury bills that have matured since 2006, unpaid interest on them, and other commercial bank loans—including capitalized interest payments. These carry interest rates of 6 to 13 percent. - Arrears to the BCEAO: unpaid amounts from previous reschedulings with the BCEAO in 2009, payments to the IMF by the BCEAO on behalf of the Guinea-Bissau government in 2008 and 2009, and commissions to the WAEMU. - Arrears to the private sector based on the results of the 1974–99 and 2000–07 audits. The government has already paid some of the arrears identified in the 1974–99 audit, leaving some CFAF 17 billion outstanding. The 2000–07 audit is still preliminary, and the government plans to complete it. - In January 2010, the government settled about CFAF 20 billion arrears to commercial banks, the BCEAO, and the remaining wage arrears of 2008 using donor support, domestic currency loans from the BCEAO representing a local currency counterpart to the SDR allocation, and rescheduling. - Arrears strategy features: - Similarities with peers: varying approaches by creditor class; audited and verified arrears before settlement; offsetting arrears against tax arrears; payment to small private suppliers; long-term rescheduling consistent with available financing. - Differences from peers: no use of financial market instruments to settle arrears due to difficult fiscal position and unsustainable debt; requirement to address costly arrears to domestic banks, a prominent feature. ### Modernizing the Public Administration: Civil Service and Security Sector Reforms - Rationale: - Wage bill accounts for close to 60 percent of fiscal revenues compared to 20 percent pre-civil conflict, well above WAEMU convergence criteria. - At about 20,000 employees (including civil servants, paramilitary, and military), Guinea-Bissau has the highest proportion of public servants to population (about 13: 1,000) in the WAEMU (WAEMU average 6-7: 1,000). - Civil service and security sector reforms are crucial to ensure medium-term fiscal sustainability, contain the wage bill, and create space for priority spending. - Civil service reform measures: - Prepare a medium-term schedule to remove from the payroll into retirement all employees who exceed the mandatory retirement age; address “redundant workers” for reinsertion into the private sector; dismiss workers who account for overstaffing. Seek donor support and use savings to cover severance costs. - Implement stricter payroll controls and establish a more comprehensive payroll database to allow regular updating and verification of civil service employment. Initial efforts in 2010 will focus on verifying data from the biometric census of civil servants to identify “ghost” workers (structural benchmark, June 2010) and cross check and update the Ministry of Finance database with census data. - Introduce effective management and increase productivity by providing performance incentives, restructuring the job grading system, and enhancing training, including through a new school of public administration with donor help. - Security sector reform measures: - Reduce military forces gradually from 4,500 soldiers to 3,500, of which only 1,500 (about 30 percent) will be permanent once mandatory national service is introduced. - To reach the ultimate goal: about 2,200 soldiers will be retired and about 800 will be demobilized by being formally discharged from the armed forces, without the possibility of re-enlisting. - Rationalize security forces with the National Guard incorporating several existing police forces. - Create a pension fund, seeking donor support equivalent to the additional pension outlays for the period 2011–2015 (about € 30 million). *Source: _cr10117 - 7. Policy discussions focused on the authorities’ medium-term program and fiscal* ### 20. The potential medium-term impact of the envisaged civil service and security ### 20. The potential medium-term impact of the envisaged civil service and security sector reforms ### Illustrative medium-term fiscal impact of civil service and security sector reforms - Objective: Quantify potential fiscal impact, timing of costs and savings, and donor financing needs; scenarios are illustrative because some reform parameters remain to be defined by the authorities. - Baseline civil service reform: mandatory retirement and removal of already identified redundant workers to achieve a leaner, more efficient civil service. - Combined reforms (civil service + security sector), assuming interim donor financing, could generate savings of about 1.1 percent of GDP, annually, between 2011 and 2015. - Authorities committed to partly use these savings to cover costs of funding pensions in the future. - Key illustrative parameters and assumptions (verbatim as presented): - 2011—15 2016—20 - C urrent expenditure- 0.3- 0.4 - Additional financing - 4 - 0.80.1 - Fiscal space1.10.6 - C a p ita l e xp e nd iture0 . 50 . 6 - Capitalization of Pension Fund0.50.0 - Specific operational assumptions: - Assumes unchanged revenues, budget support, and financing gap for all scenarios. - Assumes interim financing of about €30 million from donors for the Pension Fund during 2011—15 for the security sector. - Civil service reform assumes about 600 civil servants to retire in 2010—15 and 2,200 excess employees move to the private sector over a four year period. - Security sector reform assumes about 3,000 security forces (military and paramilitary) to retire in 2011—15 and about 800 to be demobilized over a four year period. ### Implications for fiscal space and spending - Expected annual savings of about 1.1 percent of GDP (2011–2015) could: - Increase space for priority spending. - Finance part of future pension obligations (capitalization and/or pension fund costs as per authorities’ commitment). ### Removing impediments to private sector development - Major government actions required to boost growth: - Improve the business environment. - Reform the judicial system. - Restore and develop basic infrastructure: power, transportation, and communication. - Specific measures and progress: - Speed up National Commission on the Simplification of Administrative Procedures. - Progress toward establishing a one-stop shop for business (structural benchmark, June 2010). - Prepare regulations to implement the new Investment Code for a level playing field for private investors. - Procurement reforms, EU-supported judicial improvements, and plans for a dedicated commercial tribunal to facilitate dispute resolution. - Prepare telecommunications regulations and draft a law to govern the expanding telecommunications sector. - Make the financial intelligence unit (CENTIF) operational and enact legislation to combat the financing of terrorism. - Infrastructure priorities and constraints: - Installed power capacity is about half of what it was a decade ago and low by regional standards. - Roads, railways, and ports inadequate to tap unexploited mineral resources (bauxite and phosphate). - Government will: (i) improve capacity building and coordination with donors for faster infrastructure funding; (ii) increase fiscal space to cofinance investment projects; (iii) review public-private partnership opportunities. - Access to credit: - Minimal access to credit; limited banking services and low financial intermediation (ratio of M2 to GDP). - Structural constraints: low population density, limited purchasing power, lack of financial data on potential borrowers, underdeveloped microfinance sector. - Recent settlement of government arrears to domestic banks improves liquidity and funds available for domestic credit operations. - Government seeking donor assistance to expand SME credit. - Some increase in non-performing loans associated with financing of cashew exports. ### Improving access to social services, agriculture policy, and poverty reduction - Core objective: progress toward reducing high poverty rates consistent with the Poverty Reduction Strategy. - Fiscal commitment: - In 2010–2012, government committed to using at least 50 percent of tax revenues for current and domestically financed capital spending in health, education, agriculture, and infrastructure (quantitative indicator). - Agricultural development priorities: - Cashews main rural income source and labor intensive. - Diversify agriculture, reduce need for rice-for-cashew operation, increase cashew sector value-added via local processing. - Pursue donor-coordinated investment projects for land recovery and equipment. - Agricultural plan envisages gradual self-sufficiency in rice production. ### Achieving external sector sustainability - Preliminary findings: - Current account deficit has been generally stable despite gradual deterioration of the real effective exchange rate over the last decade. - Standard CGER methodology produces estimates of the equilibrium exchange rate around its current level. - Structural weaknesses (notably weak non-traditional exports) likely more important than the exchange rate in explaining low productivity and growth. - Exchange rate and competitiveness: - Real effective exchange rate gradually deteriorated over the last decade; standard CGER (ES and MB approaches) indicates equilibrium broadly in line with current level. - Within WAEMU, Guinea-Bissau ranks at the bottom on World Bank Doing Business Indicators; need reforms to boost productivity, diversify production, and attract private investment. - Debt and arrears context: - Guinea-Bissau is in debt distress; debt ratios well in excess of sustainability thresholds. - Reached HIPC decision point in December 2000 but macro instability prevented completion point. - Creditors pledged 85 percent cancellation in NPV terms at decision point; interim debt relief from Fund and Paris Club stopped after 2001. - AfDB interim debt relief expires at the end of 2010 and IDA interim relief expires in early 2011. - Guinea-Bissau has not repaid any creditor that did not provide interim relief since 2001, except the IMF. - End-2008 arrears to external creditors stood at $388.6 million—almost 40 percent of official external debt. - Program assumes continuation of interim relief from World Bank and AfDB until expiry in early 2011, and resumption of interim relief from the IMF as requested by authorities. - Almost 90 percent of arrears are owed to bilateral official creditors and are in the process of being rescheduled through the Paris Club on Cologne terms; comparable treatment assumed for non-Paris Club creditors. - Remaining arrears (about 10 percent) are to multilateral institutions other than IMF, World Bank, and AfDB; authorities committed to clearing these arrears during the ECF program period in a manner consistent with payment capacity. - Given high debt burden even after HIPC/MDRI, feasible arrears clearance may require longer-term rescheduling and minimal debt service over the program duration. ### Program design and financing (2010–12) - Total financing requirements for 2010–12: CFAF 548 billion (US$ 1.2 billion); about two-thirds reflects HIPC/MDRI completion point debt relief. - Composition and shares: - About 9 percent projected for program support to fill projected budget gaps. - Large part expected from traditional donors (E.U., World Bank, AfDB, regional partners); remainder from several bilateral donors (e.g., France and Spain). - 2010 specifics: - Authorities identified budget support of CFAF 13 billion, leaving a residual financing gap of CFAF 13.4 billion. - Residual expected to be filled by European Commission Vulnerability-Flex grant resources under the 2010 exercise (up to CFAF 9.8 billion) and the ECF (CFAF 3.6 billion). - Authorities committed to raising more revenues or reducing spending to cover financing shortfalls. - Text Table 3 excerpt (verbatim summary of figures provided): - 2010 2011 2012 2010—12 - Total budget financing needs427.259.261.9548.3 - Budget financing needs427.259.261.9548.3 - Domestic primary deficit16.316.616.649.6 - Donor-financed projects35.437.740.2113.2 - Scheduled external interest debt service5.41.51.58.4 - Amortization (scheduled)362.41.92.2366.5 - Bank domestic financing-0.20.00.0-0.2 - Payment of previous years arrears7.91.51.510.9 - Total external financing sources427.259.261.9548.3 - Project grants and loans35.437.740.2113.2 - Program support13.018.018.249.2 - HIPC completion point debt relief358.50.00.0358.5 - Change in external arrears2.60.00.02.6 - External interest arrears4.30.00.04.3 - Gross Financing Gap13.43.53.520.5 - IMF (120 percent of quota)3.63.53.510.6 - Additional Financing - 1 - 9.80.00.09.8 - Sources: Guinea-Bissau authorities and IMF staff estimates and projections. - 1 - Assumed to be covered with EU V-Flex. - ECF access and phasing: - Proposed total ECF access: 157.5 percent of quota. - Net access is 120 percent of quota (reflecting re-financing of earlier EPCA-supported program disbursements on more concessional terms). - ECF expected to be catalytic, accounting for about 15 percent of envisaged donor support at the proposed access level. - Access phased in equal installments across the three-year arrangement reviews. - A net amount equivalent to 18 percent of quota available after Board approval; balance made available in equal tranches of 17 percent of quota after each of the six ECF reviews. - Program conditionality and risks: - Program includes quantitative indicators and structural benchmarks focusing on fiscal management. - Main risks: political instability, vulnerability to external shocks, possibility of inadequate donor support or delays in disbursements. - Continued technical assistance vital to reinforce implementation capacity. - Risks to Fund resources mitigated by BCEAO role as fiscal agent and its track record of making payments to the Fund even without reimbursement by Guinea-Bissau. *Source: IMF staff report text as provided in the content unit.* ### 36. Guinea-Bissau has made great progress on national account statistics. In the ### Guinea-Bissau has made great progress on national account statistics ### National accounts and statistical reforms - The government will publish revised national account data for 2003–08 in the second quarter of 2010, based on the System of National Accounts (SNA93). - The new data have broader coverage of all sectors of the economy, and the result has been a doubling of GDP. - The government plans soon to start producing national account statistics based on SNA08, with technical assistance from international and regional institutions. - Repurchase obligations of the outstanding EPCA disbursements would begin in April 2011 in the absence of early repayment of outstanding EPCA credit. ### Capacity building and technical assistance priorities - Capacity building is needed to complement fiscal reforms and ensure their effectiveness and sustainability. - Several partners, including the IMF, are providing technical assistance in PFM and macroeconomic statistics. - Highest priorities for assistance: Customs, Treasury, Budget, and Tax departments. ### Staff appraisal: reform stance and risks - Guinea-Bissau is at a critical juncture; relative political stability and government determination to pursue a medium-term program of economic reforms are welcome developments. - Economic performance under the EPCA has been quite satisfactory despite delays in donor support during 2009; authorities restricted spending and exercised fiscal discipline while pursuing structural reforms. - Continued adherence to fiscal targets and implementation of the medium-term program will improve fiscal and debt sustainability. - Key reform emphases: strengthening public finances, modernizing public administration, removing impediments to private sector development, improving revenue collection, better controlling budget execution, and improving public financial management (PFM). - Civil service reform and modernization of the defense and security sector are important to curb the wage bill and create fiscal space for priority spending; sustained donor support and concessional financing remain necessary, especially for progress toward the MDGs. - The government’s initial steps to address domestic arrears injected liquidity and restored policy credibility; the government should carefully verify claims and monitor budget execution when addressing arrears. - Satisfactory performance on the new ECF should help pave the way to the HIPC/MDRI completion point in late 2010; reaching the completion point before World Bank and AfDB interim debt relief expires is important. - Authorities need to regularize relations with all external creditors, meet completion point triggers, and fill financial needs exclusively with grant support and concessional financing to move toward a sustainable debt path. - Donor and creditor support for debt relief and program/project financing is critical for implementing reforms and financing the 2010–12 program; donor assistance should be highly concessional, preferably grants. - Staff supports the authorities’ request for a three-year ECF arrangement based on EPCA performance and the strength and commitment to the medium-term program. - The next Article IV consultation will take place on a 24 month consultation cycle. ### Selected macroeconomic highlights and projections (as presented) - Real GDP at market prices: 3.5; 3.0; 3.5; 4.3; 4.5 - Real GDP per capita: 1.3; 0.8; 0.5; 1.3; 1.5 - GDP deflator: 10.6; 1.1; 2.4; 2.1; 2.0 - Consumer price index (annual average): 10.4; -1.7; 2.5; 2.5; 2.5 - Exports, f.o.b. (based on US$ values): 61.7; -9.6; 13.6; 7.5; 10.6 - Imports, f.o.b. (based on US$ values): 38.1; -2.7; 9.2; 9.2; 6.3 - Export volume: 17.0; 25.9; 4.3; 5.0; 5.1 - Import volume: 5.6; 17.4; 3.3; 7.7; 5.0 - Terms of trade (deterioration = -): 2.3; -12.7; 5.6; 1.1; -1.0 - Nominal stock of public debt, including arrears: 172.8; 161.0; 54.1; 45.0; 40.2 - Of which: external debt, including arrears: 134.8; 126.4; 28.4; 21.6; 20.7 - Of which: arrears: 49.3; 47.0; 10.3; 9.8; 9.2 - Net present value of external debt/exports of goods and nonfactor services (percent): 515.0; 528.2; 111.1; 104.9; 95.8 - Nominal GDP at market prices (CFAF billions): 379.4; 395.1; 418.8; 446.1; 475.5 - Nominal stock of external arrears, end of period: 388.6; 399.8; 92.8; 92.8; 92.8 ### Fiscal and balance of payments highlights from tables - Current account balance (including official current transfers) (US$ millions): 20.0; 13.0; -11.4; -2.3; 0.6 - Overall balance of payments (US$ millions): -16.9; -25.3; -806.6; 0.6; 1.2 - Current transfers (net) as percent of GDP: 40.7; 45.3; 34.1; 38.1; 39.0 - Official: 24.3; 31.5; 19.5; 22.9; 23.1 - Private: 16.4; 13.8; 14.6; 15.2; 15.8 - Exports, f.o.b. (percent of GDP): 52.9; 51.2; 56.7; 61.3; 68.3 - Of which: cashew nuts: 51.3; 49.1; 54.5; 58.6; 65.0 - Imports, f.o.b. (percent of GDP): -62.7; -65.3; -69.6; -76.3; -81.8 - Of which: food products: -21.0; -25.9; -25.4; -27.6; -28.9 - Of which: petroleum products: -15.8; -15.6; -18.4; -20.9; -22.7 - Scheduled debt service: percent of exports and service credits: 19.4; 12.8; 10.6; 3.1; 3.1 ### Public finance program indicators and implementation status (selected) - Government revenues (2009 actual): 19,053 (Met); 2010 program 22,442 (Met) - Tax revenues (2009 actual): 12,755 - Nontax revenues (2009 actual): 6,297 - Domestic primary balance (commitment basis) (2009 actual): -3,526 (Met) - New domestic arrears (end-2009): 0 (Met) - Payment of previous years arrears: 2,985 (Not met) - Structural measures implemented or in progress include: - Launch of the biometric census of civil servants; develop civil service reform strategy — End-May 2009 (Met) - Enactment of the new Investment Code — End-September 2009 (Met) - Start operations of pre-shipment inspection with an international firm — End-September 2009 (Met) - Full implementation of ASYCUDA++ software — End-October 2009 (In progress) - Approval of action plan for public financial management coordinated with World Bank, EU and AfDB — End-September 2009 (Met) - Full implementation of a unified payment system with technical support from Portugal — End-October 2009 (In progress) *Source: IMF staff report content provided in the supplied source unit.* ### 2009. A successor PRSP is now being prepared for ### _cr10117 - 2009. A successor PRSP is now being prepared for ### Macroeconomic stability - Objective: “Continued maintenance of macroeconomic stability as evidenced by satisfactory implementation of the ECF-supported program.” - History: - A PRGF–supported program was adopted in early 2000 but went off track by the end of that same year. - Two staff-monitored programs in 2005 and 2006 with mixed results. - EPCA supported programs for 2008 and 2009; satisfactory performance under the EPCA in 2009 paved the way to prepare a medium-term program to be supported by an ECF arrangement in 2010-2012. ### Governance and public financial management - Objectives and progress statements from source: - “Satisfactory progress in strengthening public expenditure management assessed by the release to the Parliament and the public, twice a year starting in 2001, of comprehensive budget execution reports. These reports also will allow monitoring of basic education, primary health care and military expenditures.” - “The action plan to reform the public procurement system has been implemented and the new system has been installed in all ministries.” - “The findings of the external audit to the 1997-99 budgets outturns have been submitted to Parliament and an action plan of corrective measures has been adopted” - Implementation status and facts: - Comprehensive budget execution reports were produced in 2002; effort abandoned in 2003 due to political and institutional instability. - Government began implementing action plan to deepen PFM reforms; quarterly budget execution reports will be produced during the 2010 budget calendar. - Public procurement reform implemented in five Ministries: Education, Health, Finance, Agriculture, and Infrastructure; extended to the ministry of Defense through the World Bank LICUS grant; efforts underway to extend to Commerce and Industry; Economy; Fisheries; Transports and Telecommunication. - External audit of the 1997-99 budgets out-turns (financed by the Netherlands) completed in 2003; findings and recommendations yet to be approved by Parliament and implemented by the executive. ### Education Sector - Policy statements: - “Elimination of fees for school books for all primary education students (grades 1–4) implemented in public schools.” - “Satisfactory implementation of the basic education action plan, measured by an increase in the gross primary school enrollment ratio to 61 percent”. - Implementation facts: - In 2002, free primary education introduced in public schools under Education For All (EFA): tuition and book fees eliminated. - Gross enrollment ratio: 53 percent in 1995; 60 percent in 1999; 102 percent in 2005. - Net enrollment rate in primary education is only 45 percent. - Source observation: gross and net enrollment rates are highly divergent because of widespread delayed enrollment. ### Health Sector - Policy targets: - “Satisfactory implementation of the National Health Development Program, measured by an increase to at least 40 percent the proportion of children under one year fully vaccinated.” - “Adoption of an action plan for malaria and its satisfactory implementation measured by an increase to 15 percent in the use of insecticide impregnated bed-nets by pregnant women.” - Outcomes: - 62 percent of children under one year were fully vaccinated by end-2007. - Malaria action plan adopted in 2002 increased use of insecticide impregnated bed-nets by vulnerable groups. - 81 percent of children under 5 and 72 percent of pregnant women were sleeping under insecticide treated bed net by end-2007. - Source statement: Guinea-Bissau is considered as a regional benchmark on malaria prevention. ### HIV/AIDS - Target: “Adoption of a strategic framework to fight against HIV/AIDS. At least 50 percent of the population at increased risk (age 14–29) made aware of transmission and prevention methods.” - Outcome: Eighty-seven percent of 15- to 24-year-olds indicated that they knew how HIV is transmitted (2006 survey). ### Demobilization Program - Target and outcome: - “Demobilization has been successfully completed and discharged combatants are being reinserted into civilian life as established in the DRRP.” - DRRP successfully completed in 2006. - Program demobilized about 4,000 ex-combatants by September 2003. - Final phase of reintegration completed in 2006 and involved about 7,500 ex-combatants. ### ECF Arrangement: Reviews and Disbursements (2010–13) — Table 10 figures - Board approval: - Late March 2010 — Board approval — 55.5 percent of quota — SDR millions 7.881 - Note 1: For the amount approved at Board approval, 37.5 percent of quota, or SDR 5.325 million, would be approved for the purpose of immediately repurchasing previously provided EPCA credit. - Reviews and disbursements: - Late November 2010 — End-June 2010 — First review — 17 percent of quota — SDR millions 2.414 - Late May 2011 — End-December 2010 — Second review — 17 percent — SDR millions 2.414 - Late November 2011 — End-June 2011 — Third review — 17 percent — SDR millions 2.414 - Late May 2012 — End-December 2011 — Fourth review — 17 percent — SDR millions 2.414 - Late November 2012 — End-June 2012 — Fifth review — 17 percent — SDR millions 2.414 - Late March 2013 — End-December 2012 — Sixth review — 17 percent — SDR millions 2.414 - Total: 157.5 percent of quota — SDR millions 22.365 - Source: IMF estimates. ### Quantitative targets and performance criteria (selected figures from Tables 11) - Performance Criteria (cumulative from January 1; all PC are ceilings and PC 3 and 4 apply continuously): - 1. Domestic financing of the budget: 7,165 -1,411 3,430 231 - 2. New domestic arrears: 0 0 0 0 - 3. External nonconcessional public borrowing, maturity > 1 year: 0 0 0 0 - 4. External short term public borrowing: 0 0 0 0 - Indicative Targets (cumulative, CFAF millions): - 5. Government tax revenues: 5,420 15,148 24,218 30,101 - 6. Domestic primary balance (commitment basis): -7,789 -6,779 -11,030 -16,333 - 7. Nonregularized expenditures (DNTs): 200 200 200 200 - 8. Social and priority spending: 4,062 8,123 12,185 16,246 - Note: The definition of the aggregates and adjustors is provided in the Technical Memorandum of Understanding (TMU). ### Structural Benchmarks under the ECF (January 1, 2010–December 31, 2010) — Table 12 (selected items) - First Review (dates and ministries in source): - Fiscal Management: - 1. Prepare quarterly and monthly Treasury plans and make operational the Treasury committee within the Ministry of Finance. (¶21) — June 2010 — MoF - 2. Implement norms tightening the recourse to simplified spending procedures. (¶21) — May 2010 — MoF - 3. Make operational the accounting system at the Treasury under the SIGFIP. (¶21) — July 2010 — MoF - Tax Reform & Strengthening Revenue Collection: - 4. Put into operation the Automated System for Customs Data (ASYCUDA ++) in three customs posts (Bissau, airport, and Safim). (¶19) — July 2010 — MoF - Expenditure Reforms: - 5. Publish the verified data of the biometric census of the public administration employees (civil servants and paramilitary). (¶24) — June 2010 — MinLaPS - Business Environment: - 6. The Council of Ministers will approve a legal framework for the “one-stop” shop streamlining procedures and reducing cost for licensing and registration of new businesses. (¶28) — June 2010 — MinEcon - Second Review: - Fiscal Management: - 7. Establish an operational link from budget/Treasury under the SIGFIP to the customs and tax administration. (¶21) — Dec 2010 — MoF - Expenditure Reforms: - 8. Submit to the Council of Ministers an action plan for the public administration reform, with a medium-term schedule to downsize the civil service through retirement and removing redundant workers beginning in 2011. (¶23) — Jan 2011 — MoF/MinLaPS - 9. Start using the unified payroll and personnel management system, and pilot it into the Ministry of Finance and the Ministry of Labor and Public Services. (¶24) — Jan 2011 — MoF ### Indicators of Capacity to Repay the Fund (selected figures from Table 13) - Assumption noted in source: Assumes a new ECF arrangement of 157.5 percent of quota (SDR 22.365 million) would be approved in March 2010, of which 37.5 percent of quota (SDR 5.325 million) will be used for early repurchase of outstanding EPCA credit. - Fund obligations based on existing credit (SDR millions) — selected years: - 2008 Principal 1.3; Charges and interest 0.1 - 2009 Principal 1.0; Charges and interest 0.1 - 2010 Principal 1.0; Charges and interest 0.0 - Fund obligations based on existing and prospective credit (SDR millions) — selected years: - 2008 Principal 1.3; Charges and interest 0.1 - 2009 Principal 1.0; Charges and interest 0.1 - 2010 Principal 6.3; Charges and interest 0.0 - 2014 Principal 2.3; 2015 Principal 3.3; 2016 Principal 4.2 - Total obligations based on existing and prospective credit (SDR millions) — selected years: - 2008 1.4; 2009 1.1; 2010 6.4; 2011 0.1; 2012 0.1; 2013 0.1; 2014 0.1; 2015 0.9; 2016 2.4; 2017 3.4; 2018 4.3 - Outstanding Fund credit (SDR millions) — selected years: - 2008 5.6; 2009 6.3; 2010 10.3; 2011 15.1; 2012 20.0; 2013 22.4; 2014 22.4; 2015 21.6; 2016 19.3; 2017 16.0; 2018 11.8 - Outstanding Fund credit as percent of quota — selected years: - 2008 39.3; 2009 44.6; 2010 72.5; 2011 106.5; 2012 140.5; 2013 157.5; 2014 157.5; 2015 152.0; 2016 135.8; 2017 112.7; 2018 83.0 - Memorandum items: - Nominal GDP (CFAF billions): 379.4 395.1 418.8 446.1 475.5 507.9 542.2 578.7 616.8 657.5 700.8 - Exports of goods and services (CFAF billions): 52.9 51.2 56.7 61.3 68.3 72.5 76.6 79.9 87.4 94.0 101.2 - Government revenue (CFAF billions): 34.6 35.4 43.0 44.4 47.7 51.7 56.0 60.7 65.7 71.1 76.9 ### Letter of Intent and Program request (excerpted facts) - Letter of Intent date and signatory in source: - Bissau, March 11, 2010 — signed by José Mario Vaz, Minister of Finance. - Program request details: - Government requests assistance from the IMF under an Extended Credit Facility (ECF) arrangement in the amount of SDR 22.365 million (157.5 percent of quota), to be disbursed in three years. - Government requests disbursement of SDR 7.881 million upon approval of the arrangement, part of which will allow early repurchase of outstanding EPCA credits of SDR 5.325 million. - Government also requests the second tranche of interim HIPC assistance in the amount of SDR 1.016 million to cover PRGF repayment obligations falling due in 2010. - Government commitments: - Government believes MEFP policies are adequate to achieve objectives of the ECF-supported program and will adopt additional measures if necessary and consult with the Fund before adopting such measures. - Government authorizes publication of the letter of intent, the attached MEFP and TMU, and the staff report and DSA relating to the request. ### Memorandum of Economic and Financial Policies (MEFP) — introduction and recent developments (select points) - MEFP aims and context: - Government committed to a medium-term economic program for 2010–12 to move toward fiscal and debt sustainability, reviving economic growth, and progress toward poverty alleviation and the MDGs. - Program focuses: strengthening public finances; modernizing public administration and rebuilding technical and policy implementation capacity; increasing access to social services and basic infrastructure; developing the private sector. - Program consistent with the country’s PRSP and intended to pave the way to HIPC/MDRI completion point if performance is satisfactory. - Recent economic developments (2009): - Real GDP growth in 2009 estimated at about 3 percent. - Current account deficit (excluding grants) deteriorated to 6½ percent of GDP (preliminary data). - Export prices down nearly 30 percent; export volumes up 22 percent over 2008 for cashews. - Remittances represented about 4 percent of GDP in 2008 and declined in 2009. - General price level came down in 2009; domestic inflation subdued. - Private sector credit decelerated sharply; banking system liquidity tight due to large stock of public sector arrears. - Fiscal situation difficult: low tax base and high expenditures as a percent of domestic revenues; financing relies heavily on external budget support. - Fiscal performance: tax revenues overperformed by about 2 percentage points of GDP; donor support year-end exceeded program levels (WAEMU, EU, France); government contained spending and kept domestic arrears within target. *Source: World Bank, IMF staff and authorities; IMF staff estimates and projections as presented in the provided content.* ### 8. All but two EPCA quantitative assessment criteria were met through December. The ### _cr10117 - 8. All but two EPCA quantitative assessment criteria were met through December. ### EPCA quantitative assessment and structural reform progress - All but two EPCA quantitative assessment criteria were met through December. - Breaches and temporary issues: - The ceiling on repayment of previous years’ arrears was breached when the government decided to pay off 2008 wage arrears. - Non-regularized expenditures temporarily grew because of the mid-year elections; these have since been classified into the budget and the government is working to tighten norms to curb them. - Structural reform progress and missed targets: - Completed: biometric survey for civil servants; approved the annual progress report on the PRSP; drawn up the action plan for public financial management; enacted the new investment code. - Not implemented/decided against or delayed: decision not to sign a contract with a pre-shipment customs inspection company; delays on two other measures. - Implementation timetable: Automated System for Customs Data (ASYCUDA ++) will be put into operation in three customs posts (Bissau, the airport, and Safim) by July 2010. The unified payroll and payment system will be operational in two pilot ministries (Ministry of Finance and Ministry of Labor and Public Services) by January 2011. ### Policy priorities and main objectives of the medium-term macroeconomic program - Overarching aim: - Provide the basis for Guinea-Bissau to achieve fiscal and debt sustainability, stronger economic growth, and poverty alleviation. - Key macroeconomic objectives: - Raise real GDP growth to 4.5 percent by program end. - Contain annual inflation below 3 percent, in line with the WAEMU norm. - Achieve a gradual narrowing of the external current account deficit (excluding official transfers). - Growth drivers over the medium-term: - Sustained cashew production; expanded and diversified agriculture (including rice); increased activity in cashew nut processing and industrial fishing; steady rebuilding of public infrastructure (roads, electricity, water). - Inflation outlook: - Supported by the exchange rate peg, inflation is expected to remain subdued, in line with global food and fuel prices. ### Medium-term fiscal program and 2010 budget - Fiscal strategy: - Strengthen revenues (Guinea-Bissau’s revenue collection is low by regional standards) and make space for priority spending while keeping current year spending within available resources and starting to address domestic arrears. - Reduce the domestic primary deficit gradually to 3½ percent of GDP by 2012. - Combined with HIPC/MDRI debt relief, this will improve fiscal and debt sustainability while limiting reliance on external budget support. - 2010 budget measures and targets: - Introduces strong revenue measures (elimination of custom duty suspensions on certain products). - Keeps current year spending within available resources and protects priority spending. - Targets a domestic primary budget deficit of 4 percent of GDP. - Total revenues expected to increase by 1¼ percent of GDP (due to elimination of custom duty suspensions on certain products and one-off increases in fishing compensation from the EU). - Domestic primary spending projected to rise by 2¼ percent of GDP, reflecting higher capital outlays on infrastructure projects (about 1½ percent of GDP) and targeted increases in education, health, and agriculture. - EU fishing compensation: footnote notes EU fishing compensation will rise by 0.7 percent of GDP in 2010 to compensate for lower disbursements in 2009. - Higher current spending also takes into account the costs of local elections later in the year. - Expected budget support and financing gap: - Budget support of CFAF 13 billion is expected mostly from the EU, the AfDB, the World Bank, and bilateral donors. - Residual financing gap of CFAF 13.4 billion expected to be filled by European Commission Vulnerability-Flex grant resources under the 2010 exercise (up to CFAF 9.8 billion) and the ECF (CFAF 3.6 billion). - General budget reserve allocation for contingencies: CFAF 0.5 billion. - Government committed to further efforts to reduce spending or recover additional revenues to cover financing shortfalls. ### Domestic arrears strategy - Stock and composition: - Identified stock of domestic arrears accounts for about 23 percent of GDP at end-2009. - Includes wage arrears, arrears to domestic banks, the BCEAO, and commercial arrears to the private sector. - Two-step plan: - Step 1: Address well-identified and verified arrears and the most costly to the budget (arrears to commercial banks and the BCEAO and wage arrears of 2008). These have been settled with cash payments using available financing consisting of donor support, domestic currency loans from the BCEAO representing a local currency counterpart to the SDR allocation, and rescheduling. - Step 2: Start addressing arrears to the private sector incurred up to 1999 and complete the audit of 2000–07 arrears. - 2010 operational plan: - Carefully monitor budget execution and available resources before paying individual claims of up to about CFAF 30 million, for a total of CFAF 3.5 billion, and reschedule the remainder. ### HIPC/MDRI outlook - Guinea-Bissau status and objectives: - Reached the decision point under the HIPC Initiative in 2000, remains in debt distress, and has been in arrears to external creditors that have not provided interim debt relief. - Authorities committed to satisfying remaining requirements to reach the HIPC completion point, including regularizing relations with all external creditors and meeting the HIPC completion point triggers. - Importance of reaching completion point before World Bank and African Development Bank interim debt relief expire. ### Economic reforms: strengthening public finances - Reform focus: - Strengthen public finances; modernize public administration; create space for priority spending and raise quality of public services; remove impediments for private sector development. A. Strengthening Revenue Collection - Context: - A major element of persistent fiscal imbalances is the low level of revenue compared with other sub-Saharan African countries, including WAEMU area countries. Revenues depend heavily on customs (export and import duties, and sales tax on imports). - Customs modernization and enforcement (government plans): - Improve customs control and valuation by upgrading and putting into operation the Automated System for Customs Data (ASYCUDA ++) in all the main customs posts until June. - Introduce seals on alcoholic beverages and tobacco to combat smuggling. - Strengthen controls on warehouses and movements out of the port. - Obtain better equipment for custom enforcement. - Tax administration measures (government plans): - Strengthen controls of the sales tax by better monitoring of customs points of entry. - Reinforce the large taxpayer unit in the Ministry of Finance to ensure compliance with tax declarations. - Enforce the requirement that enterprises have a proper accounting system (SYSCOA). - Better monitor small business taxpayers through rigorous cross checks with import data. - Policy changes to enhance revenues and broaden the tax base: - Elimination of custom duty suspension on certain products (rice, wheat, sugar, cement, and other construction materials) effective since January 2010. - Plans to: (i) conduct a comprehensive review of all custom exemptions to broaden the customs revenue base; (ii) raise the reference price for cashew exports to US$ 750 per ton; (iii) increase the tax rate on the advance payment of the profit tax collected at customs (anticipation of industrial contribution) from 3 to 5 percent; and (iv) start preparing for a transition from the general sales tax to the VAT in line with other WAEMU countries. - The move to the VAT will eventually contribute to broadening the tax base by levying on all imported goods and services. - Government will request technical assistance from the IMF on tax policy, possibly through a resident advisor. B. Improving Public Expenditure and Financial Management - Objectives: - Raise revenue collection and improve public financial management to achieve fiscal discipline, greater efficiency in public spending, more effective accountability, and better ability to mobilize and absorb resources. - Implement PFM action plan approved by the Council of Ministers at end-2009 with measures on better collection of tax payments, predictability of funds, payroll controls and management, procurement controls, dissemination of annual financial statements, and multi-year fiscal planning. - Better budget planning: - All administrative revenues now collected by the Treasury, but revenue sharing agreements (“restitutions”) have resulted in de facto earmarking. Government will review the legal framework regulating restitutions by March 2011 to increase the share of nonearmarked revenues in the budget. - Government will prepare in 2010 a medium-term expenditure plan in line with the poverty reduction strategy. - Greater predictability and control in budget execution: - Implement norms tightening recourse to simplified spending procedures, with goal that emergency spending is regularized within five days. - Strengthen the Treasury committee in the Ministry of Finance to prepare and control a quarterly and monthly Treasury plan; Treasury plan for the 2010 budget will be finalized by June 2010. - Ensure proper functioning of the single Treasury account. - Make SIGFIP fully operational: budget preparation module (administrative account) already operational; accounting system at the Treasury operational by July; connections to customs and tax administration with full accounting of commitments and payment orders operational by December 2010. - Strengthening accounting, recording, and reporting: - Strengthen unit of public debt management to improve debt monitoring through full use of SYGADE. - New public finance law approved by the Council of Ministers and expected to be approved by Parliament in June 2010. - Continue to produce quarterly budget execution reports, strengthen their preparation using SIGFIP, and publish and send them to the National Assembly. - Reinforcing internal and external controls: - Financial control unit (FCU) put directly under the Minister of Finance; government will approve a new organizational chart for the FCU by June and assign delegates to line ministries. - Modify the organic law for the Audit Court to harmonize with WAEMU directives; submit budgetary execution accounts timely to the Court of Accounts for approval and submission to the National Assembly. - Update the procurement code to harmonize with WAEMU standards and establish a procurement regulatory body with representatives from public and private sectors and civil society. C. Modernizing the Public Administration and Raising the Quality of Public Services - Wage bill and civil service context: - Wage bill accounts for close to 60 percent of fiscal revenues (compared to 20 percent a decade ago). - At about 20,000 public sector employees (including civil servants, paramilitary, and military, preliminary figures), the proportion of public servants is about 13 public employees/thousand inhabitants (compared to 6-7 for the region). - Civil service reform program: - Aim to significantly reduce the size of the civil service and increase efficiency by upgrading qualifications and working conditions. - Minister of Public Service and Labor to submit a plan of action to the Council of Ministers by end-2010, including a medium-term schedule with annual targets to downsize the civil service through mandatory retirement and removing redundant workers beginning in 2011. - Objectives include removing from the payroll all employees who exceed mandatory retirement age; reinserting excess pool workers into the private sector (in context of EU PARAP); dismissing workers who account for overstaffing. - Government will seek donor support for civil service reform and use wage bill savings to cover severance payments. - Payroll controls and personnel management: - By end-June: publish verified data of the biometric census of civil servants and start paying the highest salaries through the banking system. - By end-2010: cross check and update the Ministry of Finance database with census data. - By January 2011: start using the computerized and unified payroll and personnel management system, pilot in the ministries of Finance and Public Service; extend to most ministries by March 2011. - Improving public service quality: - Focus on effective management and control of public personnel expenditures; increase productivity via performance incentives, restructuring job grading, and enhancing training and management in coordination with donors. - Establish a new school of public administration with help from the AfDB. *IMF staff report content as provided in the source document.* ### 26. The government is also committed to modernizing the defense and security sector and ### _cr10117 - 26. The government is also committed to modernizing the defense and security sector and ### Defense and security sector reform - Objective: modernize and restructure defense and security forces, including demobilizing excess troops. - Current cost: defense and security forces are about 1/3 of the wage bill. - Force reduction target: reduce military forces from 4500 soldiers to 3500 soldiers. - Of the 3500, only 1500 (about 30 percent) will be permanent with mandatory national service. - Mechanisms: - Retirement: about 2200 personnel. - Demobilization for reinsertion into the private sector: about 800 participants, formally discharged without possibility of re-enlistment. - Security forces rationalization: National Guard to incorporate several existing police forces. - Pensions: create a pension fund with donor assistance; government committed to partly using annual savings from retirement and demobilization to strengthen the pension fund. - Donor coordination: broad donor coordination effort underway to mobilize financing. ### Improving the environment for private sector development - Four main objectives: - (i) improving the business environment; - (ii) reforming the judicial system; - (iii) restoring and developing basic infrastructure (power, transportation, communication); - (iv) improving access to credit. - Business environment measures: - Adopt implementing regulations of the new Investment Code to remove multiplicity of investment regimes, eliminate discretionary incentives under the old law, and provide a level playing field. - Speed up National Commission on the Simplification of Administrative Procedures; commission to present measures by June 2010 to the Council of Ministers identifying and removing impediments to private sector development and improving ease of doing business. - Establish a one-stop shop for business (World Bank support): approval by Council of Ministers by June 2010; operational by end of the year to simplify licensing and registration procedures. - Governance and regulatory reform: - Pursue procurement reforms and judicial system improvements under an EU support program. - Establish a commercial tribunal to facilitate settling commercial disputes. - Prepare and put in place a telecommunications law to provide legal framework for sector expansion. - Infrastructure and PPPs: - Investment focus: power, roads, and the port; projects to reduce costs of existing operations (e.g., poor capacity of the port of Bissau) and to tap unexploited mineral resources (bauxite and phosphate), including possible need for a deep water port and railways. - Ministry of Economy to conduct studies to inform the public investment program. - Fiscal space measures: contain non-priority discretionary spending to sustain domestically financed capital spending and co-financing operations; reinforce inter-ministerial information coordination to monitor execution of the Public Investment Program. - Use legal framework for public-private partnerships (PPP) put in place last year with World Bank support, focusing on ports, railway transportation, and energy. - Caution: ensure rebuilding/new infrastructure align with capacity to pay for maintenance and operations and do not create undue fiscal risks. ### Improving access to social services, agriculture policy, and poverty reduction - Overarching aim: reduce high rates of poverty consistent with the Poverty Reduction Strategy (PRS); successor three-year PRS to be completed in 2010. - Social sector priorities: - Investments in health and education and delivery of basic services; address low quality due to lack of and weak management of resources. - Commitment to gradually increase and sustain spending on social sectors to enhance capacities of the poor and lower vulnerability. - Cooperation with donors, including the World Bank, to expand resources. - Fiscal commitment: in 2010–2012, government committed to using at least 50 percent of tax revenues for current and domestically financed capital spending in health, education, agriculture, and infrastructure. - Agriculture: - Agriculture is the economic basis of the country; cashew nuts are main source of rural income and labor-intensive. - Priorities: diversify agriculture, reduce rice-for-cashew operations, add value to cashew sector through greater local processing. - With donors, pursue investment projects supporting land recovery and equipment. - Agricultural plan envisages gradual self-sufficiency in rice production. ### Financial sector and monetary policies - Monetary policy: pursued within WAEMU framework, enabling containment of inflation and maintenance of a stable exchange rate. - Access to credit: still low; settlement of government arrears to domestic banks improves liquidity and available funds for domestic credit. - Donor assistance: government seeking donor help to improve credit availability for small and medium enterprises. - Anti-money laundering and counter-terrorism financing: - Present law to combat the financing of terrorism to the Council of Ministers in June 2010. - Better equip the National Center for the Treatment of Financial Information (CENTIF). ### External debt management - Status: Guinea-Bissau in debt distress for many years with sizable external arrears. - Government commitments: - Act in good faith to regularize relations with external creditors and improve debt management capacity and organization. - Maintain communication with creditors to reach agreements consistent with debt service capacity. - Borrowing strategy for program duration: - For the full duration of the three year program, government will not contract or guarantee any nonconcessional or short-term external debt, as defined in the Technical Memorandum of Understanding (TMU). - Government will refrain from all external borrowing on non-concessional terms. - Any government or government-guaranteed borrowing (external or domestic) will be subject to prior approval by the Finance Minister. - HIPC and MDRI: - Achieving HIPC and MDRI debt relief is critical for medium-term external sustainability. - Background: Guinea-Bissau reached HIPC decision point in 2000; creditors pledged 85 percent cancellation in NPV terms. - Interim debt relief by Fund and Paris Club creditors stopped after 2001; AfDB and IDA continue interim relief, expiring end-2010 and early 2011, respectively. - Since 2001, Guinea-Bissau has not repaid creditors that did not provide interim relief, except the IMF. - Urgency: crucial to reach HIPC completion point by the end of 2010 before interim relief expiry. - Government will assist IMF and World Bank efforts to update HIPC completion point triggers. ### Statistics - National accounts: - Government will publish revised national account data for 2003–08, based on the SNA93, in the second quarter of 2010. - New data have broader coverage of all sectors and led to a doubling of the GDP level. - Plans to start producing national account statistics based on SNA08 with technical assistance from international and regional institutions. ### Capacity building and technical assistance - Capacity building seen as key complement to fiscal reforms for effectiveness and sustainability. - Partners providing technical assistance in public financial management and macroeconomic statistics. - Highest priorities: Customs, Treasury, Budget, and Tax departments. - IMF support: technical assistance from West AFRITAC and AFRISTAT in public financial management and national accounts statistics. ### Program monitoring, targets, and structural measures (highlights) - Program period: first year covers January 1, 2010 to December 31, 2010. - Monitoring: quarterly quantitative indicators and structural benchmarks; semi-annual reviews and quantitative performance criteria in Tables 1 and 2; structural measures listed in Table 3; definitions provided in TMU. - Review timetable: - First review expected by November 2010. - Second review expected by May 2011. - Selected quantitative targets (Cumulative, CFAF millions): - Government tax revenues: 5,420 (End-March), 15,148 (End-June), 24,218 (End-Sept.), 30,101 (End-Dec.). - Domestic primary balance (commitment basis): -7,789 (End-March), -6,779 (End-June), -11,030 (End-Sept.), -16,333 (End-Dec.). - Nonregularized expenditures (DNTs): 200 at each quarter. - Social and priority spending: 4,062 (End-March), 8,123 (End-June), 12,185 (End-Sept.), 16,246 (End-Dec.). - Selected structural benchmarks and delivery dates (high-level): - Prepare quarterly and monthly Treasury plans and make operational the Treasury committee within the Ministry of Finance. — June 2010. - Implement norms tightening recourse to simplified spending procedures. — May 2010. - Make operational the accounting system at the Treasury under the SIGFIP. — July 2010. - Put into operation ASYCUDA ++ in three customs posts (Bissau, airport, Safim). — July 2010. - Publish verified data of biometric census of public administration employees. — June 2010. - Council of Ministers to approve legal framework for one-stop shop. — June 2010. - Establish operational link from budget/Treasury under SIGFIP to customs and tax administration. — Dec 2010. - Submit action plan for public administration reform to downsize civil service beginning in 2011. — Jan 2011. - Selected structural measures (Table 3 highlights and delivery timing): - Tax measures: introduce seals on alcoholic beverages and tobacco; raise reference price for cashew exports to US$ 750 per ton; increase tax rate on advance payment of profit tax collected at customs from 3 to 5 percent; start transition from general sales tax to VAT. — 2010 (some measures Mar 2011). - Fiscal management measures: prepare medium-term expenditure plan in line with PRS; ensure proper functioning of the single Treasury account; strengthen public debt management unit and use SYGADE. — 2010 and specific dates (May 2010, Jun 2010, Dec 2010). - Civil service reform measures: start paying highest salaries through banking system (2010); start using unified payroll and personnel management system pilot in Ministry of Finance and Ministry of Labor and Public Services (Jan 2011); extend to other ministries by Mar 2011. - Defense and security measures: create a pension fund with donor help (2010); prepare plan to rationalize security forces with National Guard incorporation (2010). - Social and PRS measures: prepare a new PRS (2010); keep at least 50 percent of tax revenues for health, education, agriculture, and domestically financed capital spending (2010-12); pursue investment projects in land recovery and equipment (2010). *Source: _cr10117 - 26. The government is also committed to modernizing the defense and security sector and (PDF chapter).* ### APPENDIX III ### APPENDIX III ### Quantitative indicators (overview) - The quantitative indicators are: - Cumulative floors on government tax revenue. - Cumulative ceilings on the domestic primary fiscal deficit (on a commitment basis). - Cumulative ceiling on the amount of nonregularized expenditures (DNTs). - Cumulative floor on social and other priority spending. - Cumulative ceilings on the change in net domestic financing of the budget. - Cumulative ceiling on new domestic arrears of the government, including wage arrears. - Cumulative ceilings on new nonconcessional external debt contracted or guaranteed by the government. - Cumulative ceiling on new external short term debt. - Quantitative indicators are set for end-March, end-June, end-September, and end-December. - Quantitative performance criteria are proposed for end-June and end-December 2010 for indicators (e) through (h). - Indicators for new nonconcessional external debt, and new external short term debt are continuous. ### Definitions and computation (government and aggregates) - Government: the central government of Guinea-Bissau; excludes public entities whose budget is not included in the central government budget. - Targeted floor on government tax revenues includes direct and indirect taxes, recovery of tax arrears, and additional revenue efforts. - Quarterly Floors for Government Tax Revenues, 2010 (Cumulative, CFAF millions): - March Prog. 5,420 - June Prog. 15,148 - Sept. Prog. 24,218 - Dec. Prog. 30,101 - Domestic primary fiscal deficit (commitment basis): - Calculated as: government revenue minus domestic primary expenditure on a commitment basis. - Government revenue: all tax and nontax receipts; excludes external grants. - Domestic primary expenditure: current expenditure plus domestically financed capital expenditure; excludes all interest payments. - Government commitments include: expenditure with commitment vouchers approved by the Ministry of Finance; automatic expenditure (wages and salaries, pensions, utilities, other centralized payments); and expenditure by offsetting operations. - Quarterly Domestic Primary Balance, New Domestic Arrears, and Nonregularized Expenditures, 2010 (Cumulative, CFAF millions): - Total domestic primary deficit: - March Prog. -7,789 - June Prog. -6,779 - Sept. Prog. -11,030 - Dec. Prog. -16,333 - Revenue: - March Prog. 6,972 - June Prog. 22,890 - Sept. Prog. 33,526 - Dec. Prog. 42,993 - Domestic primary expenditure: - March Prog. 14,761 - June Prog. 29,670 - Sept. Prog. 44,556 - Dec. Prog. 59,327 - New domestic arrears: - March Prog. 0 - June Prog. 0 - Sept. Prog. 0 - Dec. Prog. 0 - Nonregularized expenditures (DNTs): - March Prog. 200 - June Prog. 200 - Sept. Prog. 200 - Dec. Prog. 200 - New domestic arrears definition: - Accounts payable (rest-a-payer) accumulated during the year, still outstanding one month after the quarter for wages and salaries (including pensions), and three months after for goods and services and transfers, at end-March, end-June, end-September, and end-December 2010. - Nonregularized expenditures: any Treasury outlay not classified in the expenditure tables presented by the National Budget Directorate. ### Net domestic financing (composition and quarterly program) - Net domestic financing consists of bank and nonbank financing. - Bank financing: - Net changes in balances of the Treasury accounts at the BCEAO (excluding net disbursement from the IMF) and commercial banks (excluding balances not available for budget financing, such as accounts under double signature arrangements with donors). - Outstanding amounts of loans, including T-bills, from the BCEAO and commercial banks, local and regional. - Nonbank financing: - Privatization receipts and any other financial debt held outside the banking system other than new domestic arrears. - Domestic Financing by Quarter, 2010 (Cumulative, CFAF millions): - Domestic financing: - March Prog. 7,165 - June Prog. -1,411 - Sept. Prog. 3,430 - Dec. Prog. 231 - Bank financing: - March Prog. 7,165 - June Prog. -1,411 - Sept. Prog. 3,430 - Dec. Prog. 231 - BCEAO: - March Prog. 18,130 - June Prog. 9,554 - Sept. Prog. 14,395 - Dec. Prog. 11,196 - Commercial banks (including regional): - March Prog. -4,225 - June Prog. -4,225 - Sept. Prog. -4,225 - Dec. Prog. -4,225 - Regional commercial banks and Treasury bills: - March Prog. -6,740 - June Prog. -6,740 - Sept. Prog. -6,740 - Dec. Prog. -6,740 - Nonbank financing: - March Prog. 0 - June Prog. 0 - Sept. Prog. 0 - Dec. Prog. 0 ### External debt indicators and definitions - Indicators: cumulative ceilings on new nonconcessional external debt contracted or guaranteed by the government. - External debt defined as debt held by creditors outside the WAEMU region. - For ECF purposes: - Debt definition: a current liability, not contingent, created under a contractual arrangement through provision of assets (including currency) or services that requires the obligor to make future payments in assets or services; includes loans, suppliers’ credits, leases (PV of lease payments at inception), arrears, penalties, judicially awarded damages arising from failure to make payment on contractual obligations that constitute debt. - Exclusions: failure to make payment on an obligation not considered debt (e.g., payment on delivery) will not give rise to debt; arrangements to pay over time obligations arising from judicial awards to external creditors do not constitute nonconcessional external borrowing for monitoring the ECF. - Loan concessionality: - A debt is concessional if it includes a grant element of at least 50 percent. - Grant element = (nominal value - present value) / nominal value, expressed as a percentage of nominal value. - Present value (PV) is calculated by discounting the future stream of debt-service payments using currency specific commercial interest reference rates (CIRRs) published by OECD. - For maturity at least 15 years: use ten-year-average CIRR; for maturity less than 15 years: use six-month average CIRR. - Margins for differing repayment periods to be added to the averages: 0.75 percent for repayment periods of less than 15 years; 1 percent for 15 to 19 years; 1.15 percent for 20 to 29 years; 1.25 percent for 30 years or more. - Ceiling on short-term external debt newly contracted or guaranteed by the government: - Short-term external debt: contractual term of less than one year. - Exclusions: debt-relief operations and treasury bills issued in CFA francs on the WAEMU regional market. - The government and public enterprises will not contract or guarantee short-term external debt. This performance criterion is monitored continuously. - Government (for external debt indicators): broader than central government; includes administrative public institutions; public enterprises authorized to contract, guarantee, or accommodate nonconcessional borrowing; scientific and technical public institutions; professional public institutions; industrial and/or commercial public institutions; and local governments. ### Social and other priority spending (definition and program) - Defined as total current expenditures in education, health, and agricultural sectors, and domestically financed capital spending. - Social and Priority Spending by Quarter, 2010 (Cumulative, CFAF millions): - Social and other priority spending: - March Prog. 4,062 - June Prog. 8,123 - Sept. Prog. 12,185 - Dec. Prog. 16,246 - Education: - March Prog. 1,788 - June Prog. 3,575 - Sept. Prog. 5,363 - Dec. Prog. 7,151 - Health: - March Prog. 1,012 - June Prog. 2,023 - Sept. Prog. 3,035 - Dec. Prog. 4,047 - Agriculture: - March Prog. 555 - June Prog. 1,111 - Sept. Prog. 1,666 - Dec. Prog. 2,221 - Infrastructure (current and domestically financed capital spending): - March Prog. 707 - June Prog. 1,414 - Sept. Prog. 2,121 - Dec. Prog. 2,828 ### Adjustors - Adjustors in effect: - a. Ceiling on the domestic primary deficit (commitment basis) will be increased in case of lower than programmed disbursement of EU fishing compensation, by the amount of the shortfall up to a maximum of CFAF 3 billion. - Program assumes cumulative EU fishing compensation from January 1, 2010: - by end-March zero - by end-June CFAF 4.59 billion - by end-September CFAF 4.59 billion - by end-December CFAF 6.2 billion - Note: For the purposes of the TMU, the CFAF/Euro exchange rate is 655.956 and the CFAF/US$ exchange rate was updated to 450. - b. Ceiling on domestic financing will be increased for any shortfall in external budget support, and EU V-Flex and fishing compensation, by the amount of the shortfall up to a maximum of CFAF 12 billion. - Program assumes cumulative external budget support, and EU V-Flex and fishing compensation from January 1, 2010: - by end-March CFAF 5.3 billion - by end-June CFAF 16.2 billion - by end-September CFAF 16.2 billion - by end-December CFAF 28.9 billion - c. Ceiling on domestic financing for March, June, and September will be increased for payment of previous years arrears in excess of programmed amounts up to a maximum of CFAF 3.5 billion. - Program assumes cumulative arrears payments from previous years from January 1, 2010: - by end-March CFAF 4.1 billion - by end-June CFAF 4.1 billion - by end-September CFAF 4.1 billion - by end-December CFAF 7.9 billion ### Program monitoring: data reporting requirements and periodicity - The Ministry of Finance will regularly report the following to IMF staff: - a. Detailed reports on revenue and expenditure by budget line and a completed summary table on central government operations (TOFE) — monthly, two weeks after the end of the month. - b. Data on any extra budgetary expenditure, including (i) incentives to tax collectors; (ii) restitutions to collecting agencies; and (iii) any other retentions operated by collecting agencies (DGA, DGCI, Fishing Ministry, etc.) — monthly, two weeks after the end of the month. - c. Tables on nonregularized expenditures — monthly, two weeks after the end of the month. - d. Table on accounts payable broken down by budget category (wages, goods and services, transfers, other) — monthly, two weeks after the end of the month. - e. Previous years’ domestic arrears (including 2009): stock and clearance, broken down by budget category (wages, goods and services, transfers, other) — monthly, two weeks after the end of the month. - f. The monetary survey, the balance sheet of the central bank, and the balance sheet of commercial banks — monthly, within six weeks after the end of the month. - g. A table with data on Treasury/central government outstanding loans (including short-term advances) from and deposits in local and regional commercial banks and T-bills — monthly, two weeks after the end of the month. - h. The 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. - i. A monthly table on disbursements of budget support (grants and loans) by donors — two weeks after the end of the month. - j. Indicators to assess overall economic trends, such as the household consumer price index and exports of cashew nuts — immediately when such information becomes available. - k. A table with a description of the status of implementation of the structural indicators in Table 2 of the MEFP — within two weeks after the end of the month. - l. Information on any type of financial assistance received and not programmed — reported on a continuous basis. - m. Any other information that the Ministry or the staff of the IMF deem necessary for program-monitoring purposes. ### Debt sustainability: background and key statistics (excerpt) - At end-2008: - Total public debt = US$1,361 million or 173 percent of GDP in nominal terms (144 percent of GDP in PV terms). - Public and publicly guaranteed (PPG) external debt = US$1,061.8 million (135 percent of GDP), of which US$388.6 million are in arrears. - Composition of PPG external debt: - Multilateral debt = 47.5 percent of total PPG external debt: - IDA = 27.6 percent of total PPG external debt. - AfDB/AfDF = 13.7 percent. - IMF = 0.8 percent. - Bilateral creditors = 52.4 percent (38.4 percent of total PPG are Paris Club creditors). - Public domestic debt at end-2008: - CFAF 144.1 billion (38 percent of 2008 GDP) — up from CFAF 125.1 billion in 2006 and CFAF 91.1 billion in 2000. - Nearly half of the domestic debt stock represents a required capital contribution of CFAF 70 billion (21 percent of 2008 GDP) to join WAEMU in 1998; agreed to be paid over 25 years starting in 2005, of which CFAF 58.8 billion were left to be paid off at end-2008. - Accumulated obligations to the central bank (BCEAO) from irregular payments: CFAF 9.5 billion. - Unsettled budgetary payments arrears to the BCEAO: CFAF 6.2 billion. - Domestic arrears to the non-bank private sector by end-2009: CFAF 71.8 billion. - Commercial debt outstanding to WAEMU banks: CFAF 11.8 billion (of which CFAF 7.6 billion were Treasury bills issued in August 2006 at a face value of CFAF 6.7 billion). - Obligation to the regional development bank (BOAD): CFAF 1.7 billion. - Public sector debt PV rose to 144 percent of GDP (up from 40 in 2006); ratio to revenue and grants rose to 842 percent (up from 251 in 2006). - Box: Impact of revisions to national accounts - Revised national accounts for 2003-08 (SNA93) broaden coverage, notably non-cashew agricultural sector, approximately doubling the level of GDP. - As an approximation, the isolated impact of the revision will be to reduce GDP ratios by approximately half. - Export ratios are less affected because revisions to export data were much smaller than for domestic sectors. *Source: APPENDIX III — Technical Memorandum of Understanding (Bissau March 11, 2010) and Joint IMF/IDA Debt Sustainability Analysis (March 24, 2010).* ### 4. Although Guinea-Bissau already reached the decision point under the HIPC ### 4. Although Guinea-Bissau already reached the decision point under the HIPC Initiative in 2000, it has failed to reach the completion point since. ### HIPC status and historical context - Reached HIPC decision point in 2000 but did not reach completion point since then. - Entered a PRGF program in 2000; the PRGF-supported program went off track early due to failure to maintain macroeconomic stability. - Subsequent engagement: - Two Staff-Monitored Programs (SMPs) in 2005 and 2006. - Three disbursements under the IMF’s Emergency Post-Conflict Assistance (EPCA) policy in 2008–09. - Satisfactory performance in 2009 led staff to recommend an Extended Credit Facility (ECF) arrangement; satisfactory performance in the first half of 2010 would provide the track record to reach the HIPC completion point in the fourth quarter of 2010. - PRSP developments: - Full Poverty Reduction Strategy Paper (PRSP) finalized in 2006. - Annual Progress Report on PRS implementation prepared in December 2009. - A new PRSP is under preparation. ### Impact of not reaching completion point: debt and arrears - At the 2000 decision point, creditors representing 80 percent of external debt pledged HIPC relief amounting to US$415 million in PV terms (currently estimated at about US$579.9 million in nominal terms). - Additional US$71 million in PV terms (currently estimated at about US$133.3 million in nominal terms) expected from other bilateral creditors. - Since failing to reach the completion point, the country has had to service a large share of external debt in full since 2001; many creditor agreements were not implemented because the country failed to remain current on debt service. - Only China and Cuba have cancelled all outstanding claims since 2000. - External arrears: - Stock of external arrears increased from US$141.7 million before decision point in December 2000 to US$382.8 million at end-2008. - Interim relief commitments: - AfDB and IDA committed to provide interim relief up to early 2011. - AfDB: statutory ceiling for interim relief reached January 2007; extended 100 percent debt service relief to January 2011 after raising interim relief ceiling from 40 percent to 50 percent. - IDA: interim relief details include 100 percent of debt service falling due between December 2000 and October 2003 on debt disbursed before end-1999; from November 2003 annual nominal reduction to IDA was 90 percent; IDA increased its limit on interim relief from 1/3 to 1/2 of the PV of debt relief, with the interim limit of 50 percent expected to be reached by March 2011. ### Macroeconomic framework and DSA assumptions - DSA macroeconomic framework premised on sound macroeconomic and structural policies plus external financing mainly through grants and highly concessional loans. - Growth projections: - Growth projections average about 4.5 percent over 2009 to 2029. - Box 2 specifics (2008–2029 assumptions): - Real GDP growth: drop from 3.5 percent in 2008 to about 3.0 percent in 2009, then gradually recover to 4.5 percent over the long term. - Cashew production: average growth about 4.5 percent over 2015–2029 supports overall growth. - Inflation/GDP deflator: projected to return to historical level of 2½ percent over the long term. - Noninterest current account surplus (including grants): decline from about 1½ percent in 2009 to about ½ percent in 2015; real export volumes projected to grow at around 6 percent per year over the longer term to 2030, widening the surplus to about 4 percent of GDP by 2030. - Domestic primary fiscal deficit: assumed to decrease from 3 percent of GDP in 2009 to about 2.5 percent from 2019 on. - Net aid flows and grants: budget support grants projected to decline from 7 percent of GDP in 2009 to about 4 percent over the medium term; grant element in new disbursements assumed to remain above 50 percent. - Nonconcessional borrowing expected to remain negligible; fiscal financing gaps to be filled through grants or highly concessional loans. - Current arrears to regional central bank and domestic commercial banks assumed repaid using externally-provided grants in 2010. - IMF arrangement assumptions: - Assumes Guinea-Bissau receives financial assistance equal to 157.5 percent of quota (SDR 22.4 million), of which 37.5 percent of quota is used to immediately repay previous EPCA credit. - Disbursements approximately equally phased from early 2010 to early 2013. - SDR allocation assumptions: - SDR allocation of SDR 12.4 million or 4.3 percent of GDP. - BCEAO to lend domestic currency equivalent to general portion of SDR allocation to clear domestic arrears; BCEAO loans treated as domestic borrowing with a 3-year grace period, interest rate of 3 percent and repayment period of 10 years. - The DSA does not assume any change in external debt service obligations resulting from the SDR allocation because BCEAO continues to hold the SDRs. ### Baseline external DSA findings (Interim Relief) - Baseline presumes full delivery of traditional debt relief as well as interim HIPC assistance and long-term real GDP growth averaging almost 5 percent per annum. - Key PV/external debt statistics under baseline: - PV external debt: US$855.5 million or 103 percent of GDP and 528 percent of exports. - Text Table 1 summary (selected indicators and thresholds): - Indicative thresholds and observed values: - PV of debt-to-GDP threshold: 30; 2009 value: 103; 2019: 56; 2029: 19; Average: 61. - PV of debt-to-exports threshold: 100; 2009 value: 528; 2019: 281; 2029: 93; Average: 308. - PV of debt-to-revenues threshold: 200; 2009 value: 1155; 2019: 530; 2029: 175; Average: 601. - Debt service-to-exports threshold: 15; 2009 value: 14; 2019: 14; 2029: 6; Average: 12. - Debt service-to-revenue threshold: 25; 2009 value: 31; 2019: 27; 2029: 11; Average: 22. - Despite concessional debt, debt burden indicators far exceed policy-dependent thresholds; downward trend driven by assumption of only highly concessional new borrowing. ### Alternative scenarios and stress tests (external) - HIPC completion point scenario (Scenario A3): - Assuming HIPC completion point in 2010 with full delivery of HIPC, MDRI, and Paris Club “beyond HIPC” assistance significantly alleviates debt burden; some indicators remain at or above high-risk thresholds. - Over the longer run, stronger export growth and continued highly concessional financing expected to lead to gradual decline in debt ratios below sustainability thresholds by end of projection. - Stress tests: - One-time 30 percent devaluation in nominal exchange rate in 2010 (Scenario B6) increases the PV of debt by 39 percentage points of GDP in that year. - Devaluation is the most extreme shock in terms of PV/GDP, debt/revenue, and debt service/revenue. - Realization risk limited by CFA franc membership and peg to the euro, though euro movements relative to other debt currencies could still significantly affect debt burdens. ### Public DSA (domestic + external) findings - Baseline public DSA: - Domestic debt indicators remain elevated though total public debt (domestic and external) as percent of GDP declines steadily through projection. - PV of total public debt-to-GDP ratio shows similar downward pattern. - Debt service-to-revenue ratio rises in the second half of the next decade partly due to repayment of BCEAO domestic credit linked to SDR allocation. - HIPC/MDRI completion point and full relief (Scenario A4): - PV of public debt would fall to 50 percent of GDP in 2010—an immediate debt reduction of 77 percentage points of GDP in PV terms relative to the baseline. - Despite this reduction, PV of public debt to GDP would still remain high. - Alternative historic-average scenario (Scenario A1): - Assuming GDP growth and primary balance move to historical averages modestly worsens debt ratios; by end of projection PV of debt-to-GDP elevated by about 43 percent of GDP. - Public stress tests: - One-time 30 percent depreciation (Scenario B4) is the largest shock; debt-to-revenues ratio rises by 42 percentage points (relative to baseline) in the first year of the shock. ### Conclusion and policy implications - Without HIPC and MDRI debt relief, Guinea-Bissau is expected to remain in debt distress, despite modest medium-term improvements from government reforms and fiscal adjustment. - HIPC and MDRI debt relief, alongside comprehensive Paris Club and bilateral relief if the completion point is reached in 2010, would: - Significantly alleviate the debt burden. - Bring most debt indicators below policy-dependent thresholds after the completion point. - Over the longer run, stronger export growth from reforms and continued reliance on highly concessional financing expected to gradually reduce debt ratios below indicative thresholds by the end of the projection period. - Inclusion of domestic public debt reinforces conclusions from the external DSA: debt vulnerabilities remain significant and sensitive to exchange rate and growth shocks. *Source: IMF staff analysis as presented in the provided content unit.* ### 19. Prudent macro policies are highly crucial for reining in debt ratios and for ### 19. Prudent macro policies are highly crucial for reining in debt ratios and for ### Fiscal policy stance and macro priorities - The government’s economic program should focus on strengthening its fiscal stance. - Key fiscal priorities: - Containing the wage bill. - Avoiding off-budget expenditures. - Avoiding nonconcessional debt and securing foreign aid on highly concessional terms. - Improving the political and business environment is emphasized to: - Encourage additional investment. - Promote a more stable inflow of external aid than in the past. ### Debt relief and program context - The requested Bank and Fund support is necessary to reach the HIPC/MDRI completion point. - Prudent macro policies are described as highly crucial for reining in debt ratios and for performing under a potential new ECF, which is necessary to reach the HIPC/MDRI completion point. ### IMF arrangements and financial position (selected figures as presented) - Quota: 14.20100.00 (SDR Million; appears in tabular formatting). - Fund holdings of currency: 19.43136.86. - Reserve Tranche Position: 0.090.66. - Net cumulative SDR allocation: 13.60100.00 (SDR Million). - Holdings (SDR): 12.4091.15. - Outstanding purchases and loans (SDR Million; %Quota): - Post-Conflict Emergency Assistance: 5.3337.50. - ECF Arrangements: 1.027.15. - Latest ECF approvals and draws (SDR Million): - ECF (Dec 15, 2000–Dec 14, 2003): Amount Approved 14.20; Amount Drawn 5.08. - ECF (Jan 18, 1995–Jul 24, 1998): Amount Approved 10.50; Amount Drawn 10.50. - SAF (Oct 14, 1987–Oct 13, 1990): Amount Approved 5.25; Amount Drawn 3.75. - Projected payments to the Fund (SDR Million; based on existing use of resources and present holdings of SDRs): - 2010 Principal 1.02 Charges/Interest 0.07 Total 1.09 - 2011 Principal 0.89 Charges/Interest 0.07 Total 0.96 - 2012 Principal 2.22 Charges/Interest 0.05 Total 2.27 - 2013 Principal 1.78 Charges/Interest 0.02 Total 1.80 - 2014 Principal 0.44 Charges/Interest 0.01 Total 0.45 ### HIPC and MDRI implementation (selected figures) - Commitment of HIPC assistance (Enhanced Framework): - Assistance committed by all creditors ($ million): 416.00. - Of which: IMF assistance ($ million) 11.91 (SDR equivalent in millions) 9.20. - Decision point date: Dec 2000. - Completion point date: Floating. - Disbursement of IMF assistance (SDR million): - Assistance disbursed to the member: 0.54. - Interim assistance: 0.54. - Completion point balance: --. - Total disbursements: 0.54. - Implementation of MDRI Assistance: Not Applicable. ### Safeguards and exchange system - The Central Bank of West African States (BCEAO) is the common central bank for WAEMU, which includes Guinea-Bissau. - Most recent safeguards assessment of the BCEAO completed on November 4, 2005, indicated progress since 2002. - BCEAO actions noted: - Publishes a full set of audited financial statements. - Improvements toward IFRS. - Internal audit charter in place; strengthened follow-up on audit recommendations. - Exchange system: - Guinea-Bissau accepted obligations of Article VIII, Sections 2, 3, and 4 effective January 1, 1997. - Joined WAEMU in 1997; no separate legal tender. - Since January 1, 1999, the CFA franc pegged to the Euro at a fixed rate of €1 = CFAF 655.95. - On April 30, 2007, the rate of the CFA franc in terms of the SDR was CFAF 733.8 = SDR 1. - Effective January 1, 2007, WAEMU exchange arrangement reclassified to conventional pegged arrangement. ### Relations with the Fund and program engagement - Article IV consultations: - Guinea-Bissau is on the standard 12-month consultation cycle. - Last Article IV consultation discussions held in Bissau March 16–30, 2006; staff report discussed by the Executive Board on July 31, 2006. - Resident representation: - Resident Representative in Senegal covered Guinea-Bissau from September 1997 through July 2007. - No longer a Resident Representative for Guinea-Bissau; local office remains open and staffed by a local economist. ### Technical assistance and capacity building (selected missions and topics) - MAE, FAD, STA, and WEST AFRITAC provided technical assistance across many areas and years. Topics included: - Banking supervision, monetary policy, bank accounting. - Tax administration and tax policy; import tariff reform and GST design/implementation. - Public expenditure management; budget preparation and execution. - Public debt management; customs administration; microfinance supervision. - Government finance statistics, national accounts, balance of payments, real sector statistics. - Representative timeline entries (as presented): - MAE Expert March 20–July 23, 1994: Assisting in banking supervision. - FAD Staff September 8–24, 1996: Advising on tax administration and tax policy. - WEST AFRITAC Resident Advisor November 2003: Public expenditure management. - WEST AFRITAC Short-term expert June 2009: Bank Supervision. - STA Expert June 2008: Balance of Payment Statistics. - WEST AFRITAC Long-term expert June 2009: National Accounts. ### Relations with the World Bank Group (selected facts and figures) - As of February 28, 2010, IDA had approved 29 credits and grants for Guinea-Bissau for total commitments of US$347.9 million equivalent. - Sectoral commitments (selected totals): - Transport/Infrastructure/Energy: seven operations, total commitments: US$ 108.8 million. - Structural Adjustment/Development Policy Operations: total commitments: US$81.4 million. - Social Sectors (Health and Education): eight operations, total commitments: US$ 67.2 million. - Private sector development: overall commitment: US$ 41 million. - Technical assistance for economic management: overall commitment: US$ 22.9 million. - Extractive industries: 2 operations, over commitments of US$ 19.9 million. - Agriculture/natural resources management: 2 operations, over commitments of US$ 6.7 million. - Budget support operations: - IDA discontinued budget support in early 2000s due to political instability; resumed in 2008 with an emergency economic rehabilitation operation to pay primary teachers’ salaries. - Programmatic Development Policy Grants: - First grant US$8 million approved June 2009 and disbursed in early September. - Second grant US$6 million under preparation for approval in mid-2010. - Active IDA portfolio (as of February 28, 2010): - Three operations with total commitment of US$23 million, including: - Coastal and Biodiversity Management Project (CBMP), US$3 million. - Multi-Sector Infrastructure Rehabilitation Project, US$15 million. - Rural Community-Driven Development Project. - IDA undisbursed balance: US$13.7 million. - Additional donor mobilization and trust funds: - Approximately US$10 million mobilized from the Bank and EU under the Food Price Crisis Response Trust Fund (FY09-10) for agriculture and school feeding/food-for-work programs. - Participatory Rural Development operation of US$5 million funded from the State and Peace Building (SPF) Trust Fund. - IDA Community-Driven Development operation complemented by SPF funding and GEF co-financing for CBMP. - IDA continues interim HIPC assistance: on January 29, 2008, IDA Board approved extension of HIPC interim debt relief up to 50 percent (in NPV terms) of total IDA debt relief expected to be granted to Guinea-Bissau; extended interim debt relief expected to have freed up about $7 million in government resources annually. *International Monetary Fund. Staff Report for the 2010 Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility and for Additional Interim Assistance Under the Enhanced Heavily Indebted Poor Countries Initiative—Informational Annex (March 24, 2010).* ### 7. In FY09, the Bank completed an Education Country Status Report (in preparation of ### FY09–10 Development Partner Engagement and Institutional Relations ### World Bank Group activities (FY09–FY10) - World Bank: completed an Education Country Status Report (in preparation of the EFA/FTI funding proposal) and an Investment Climate Assessment in FY09. - World Bank: disseminated a Diagnostic Trade Integration Study in FY10. - World Bank: carried out a Debt Management Performance Assessment in September 2009. - World Bank: finalized a Public Expenditure Management and Financial Accountability Review (PEMFAR) in December 2009 (drawing in part on a EU-funded PEFA diagnostic and covering public financial management and procurement performance and a review of public expenditure in education); a dissemination workshop was held on February 22-25. - World Bank Institute (WBI): started activities in Guinea-Bissau with a workshop on sustaining natural capital; envisaged to launch more activities in the coming fiscal year, including inputs and capacity development in leadership and governance (demand-side governance) and possibly contributing to establishment of a Global Development Learning Center in Bissau. - IFC: As of February 28, 2010, IFC has no committed portfolio in Guinea-Bissau. - MIGA: portfolio consists of two projects, sponsored by Senegalese and Malian investors, with combined gross exposure of $24.1 million; MIGA is working with British and French investors to provide coverage of three projects in the infrastructure (water) and tourism sectors. ### African Development Bank (AfDB) relations (as of March 1, 2010) - Total approvals: AfDB had approved 35 operations for Guinea-Bissau, excluding multinational projects. - Composition: twenty six projects, four studies and 5 institutional supports. - Net commitment: 197.3 Unit of Account (UA). - Sector shares: 32% social sector, 21% transport and infrastructure, 15% multisector. - Disbursement: UA 145.6 million representing 77.7% have been disbursed. - Active portfolio (as of March 2010): six ongoing projects representing a total net amount of UA 44.48 million and a disbursed amount of UA 15.6 million. Lending and grants (January 2008–March 2010) - Structural adjustment approvals: AfDB approved a total of UA 13 million for structural adjustment operations (two SACs, one supplementary SAC, one ERRC). - Approvals during January2008-March 2010 include: - interim HIPC debt release (US dollar 17.48 million) - Fragile State Facility grant (UA2 million) - fish sector support grant (UA2 million) - health sector grant (UA6 million) - emergency support grant to cholera (UA0.33 million) - capacity building grant to public administration (UA7.86 million) - emergency budget support to budgetary reforms (UA5.7 scheduled for March 24, 2010) Nonlending program and reviews - Bank prepared a portfolio review in 2008 and a mid-term review of the Country Strategy Paper in 2009. - Bank participated in a Public Expenditure Management and Financial Accountability Review (PEMFAR) in 2009 in collaboration with the World Bank and the European Commission. ### Statistical Issues, Data Quality, and Dissemination ### Assessment of data adequacy for surveillance - General: Data provision has serious shortcomings that significantly hamper surveillance; data compilation impaired during the 1998–99 civil conflict; authorities have improved data compilation in recent years with technical assistance. - GDDS participation: country participates in the General Data Dissemination System (GDDS) since November 2001; metadata for all data categories and plans for improvement need updating. National accounts - Progress in 2009: INEC will publish in the second quarter of 2010 revised national account data for 2003–08, based on the SNA93. - Coverage and impact: new data have a broader coverage of all sectors of the economy, and as a result the GDP level has doubled. - Outputs: the new data cover GDP in both constant and current prices, and GDP deflators. - Future plans: government plans soon to start producing national account statistics based on SNA08, with technical assistance from international and regional institutions. Price statistics - Since July 2002, a harmonized CPI compiled on same structure as other WAEMU countries. - Limitation: price data are collected only for the capital Bissau. Government finance statistics (GFS) - Improvements: missions contributed to training, implementation of a budgetary data collection program, and setting up a source database and a worksheet Table of State Financial Operations (TOFE). - Regular compilation: since 2007, the monthly TOFE is compiled on a regular basis and used as a basic tool in monitoring the program with the IMF. - Technical assistance: a GFS expert from West AFRITAC is scheduled to visit Bissau during the 2nd quarter of 2010 to provide technical assistance to compile and disseminate GFS and implement an action plan to improve GFS data dissemination. Monetary statistics - Institutional arrangements: Guinea-Bissau has adopted the BCEAO’s accounting and reporting procedures; BCEAO compiles and reports monetary data for Guinea-Bissau to STA. - Data quality issue: accuracy of monetary statistics is affected by large cross-border movements of currency among BCEAO member countries and delays of up to two years in recording such movements can occur. Balance of payments (BOP) and external sector - Reporting: trade data reported to AFR for operational purposes using customs; BOP and international investment position statistics reported to STA on an annual basis, albeit with considerable delays. - Weaknesses: BOP data are weak due to substantial unregistered trade and inconsistencies between net foreign assets reported by BCEAO and other economic indicators. - STA TA mission (April 2008): assessed methodology and compilation procedures for BOP and provided training to BCEAO staff. - Structural constraints: large number of small-scale operators, a large informal sector, and institutional weaknesses (only some 20 percent of businesses file tax returns) hamper data collection. - Debt reporting: while no external debt data are published by the Ministry of Finance, stock and flow data are regularly produced and transmitted to the BCEAO. - Outstanding stock: comprises only about 200 active loans. ### Data standards and reporting - GDDS participation: country participates in the GDDS since November 2001. - Data ROSC: No data ROSC is available. - Reporting to STA: no monthly, quarterly or annual government finance data submitted for reporting in the International Financial Statistics (IFS) or the Government Finance Statistics Yearbook. - Monetary statistics: monthly data on monetary statistics are reported on a regular basis for publication in IFS, albeit with some delays. ### Common indicators (as of March 1, 2010) — selected entries - Exchange rates: Date of latest observation Nov. 2009; Date received Jan 2010; Frequency of data M; Frequency of reporting M; Frequency of publication M. - International reserve assets and reserve liabilities of the monetary authorities: Nov. 2009 / Jan 2010 / M / M / M. - Reserve/base money: Nov. 2009 / Jan 2010 / M / M / M. - Broad money: Nov. 2009 / Jan 2010 / M / M / M. - Central bank balance sheet: Nov. 2009 / Jan 2010 / M / M / M. - Consolidated balance sheet of the banking system: Nov. 2009 / Jan 2010 / M / M / M. - Interest rates: Nov. 2009 / Jan 2010 / M / M / M. - Consumer price index: Nov. 2009 / Jan 2010 / M / M / M. - External current account balance: 2008 / January 2010 / A / I / I. - Exports and imports of goods and services: 2008 / January 2010 / A / I / I. - GDP/GNP: 2008 / Forthcoming / A / I / I. ### IMF Staff Representative Statement on Recent Developments (May 4, 2010) ### Political incident and program implications - April 1, 2010: soldiers briefly detained the Prime Minister and arrested the Chief of the Armed Forces. - As a result, Management decided to postpone consideration of the authorities’ request for an ECF-supported program, which the Executive Board was to discuss on April 2, 2010, pending clarification of the situation. ### Staff visit and authorities’ position - Staff team visit: April 15-18, 2010, to review status of economic reform program and consult with international community and donors. - Authorities’ reports: President, Prime Minister, and Minister of Finance stated the military incident was being resolved and had not affected the civilian government; reported that all government ministries, institutions and Parliament were operating normally. - Authorities’ commitment: reiterated commitment to the reform program and renewed request for IMF support under the ECF. - Prime Minister: sent a letter to the Managing Director stressing political stability and the importance of the ECF program for Guinea-Bissau. ### Economic performance and program implementation - Performance: economic performance was satisfactory under the EPCA in 2009 and continued to be good in the first quarter of 2010. - Quantitative targets: except for the indicative target on social spending (data not yet available), all quantitative targets for end-March were met. - Fiscal outcomes: fiscal revenues were 6 percent higher than programmed; with expenditures well-contained, the target for domestic budget financing was met with a margin. - Structural reforms and benchmarks (progress toward mid-2010 benchmarks): - Treasury committee became operational on March 22. - Norms to tighten the simplified spending procedure were approved by the Minister of Finance on April 22. - Council of Ministers approved the legal framework for the one-stop shop to streamline licensing of new businesses. *Statement by the IMF Staff Representative on Guinea-Bissau, May 4, 2010.* ### 4. The staff’s discussions with key donors in mid-April indicated that their ### 4. The staff’s discussions with key donors in mid-April indicated that their ### Donor commitments and contingent financing - Commitments for both budget support and project financing remained in line with program assumptions. - African Development Bank (AfDB) approved on March 24 an operation of US$8.7 million, as envisaged under the program, with plans to disburse shortly after the ECF request is presented to the IMF Board. - World Bank fielded an overlapping mission to Bissau in April to finalize a budget support operation expected to be considered for approval by the end of May. - Indications in late April that the EU considered Guinea-Bissau eligible for support under the V-Flex in 2010. - The authorities reiterated their commitment to take all necessary steps should a shortfall in financing materialize. - IMF staff will discuss contingency measures in more detail during the next staff visit to Bissau in June. ### IMF approvals, objectives, and Executive Board statement (May 7, 2010) - IMF Executive Board approved a three-year Extended Credit Facility (ECF) arrangement equivalent to SDR 22.365 million (US$33.3 million). - Executive Board also approved the second tranche of interim HIPC assistance of SDR 1.016 million (US$1.5 million). - Program aims: - Help move the country toward fiscal and debt sustainability, stronger economic growth, and poverty alleviation. - Reinforce public finances, modernize public administration, and raise quality of public services. - Promote job creation by removing impediments to private sector development and enhancing provision of financial services. - Satisfactory performance could pave the way for debt relief by the end of the year through enhanced HIPC and Multilateral Debt Relief Initiatives (MDRI). - Statement highlights: - Economic growth has been resilient and macroeconomic performance improved in recent years. - Political stability, effective governance, and strong commitment to reform are essential to program success and donor engagement. - 2010 budget introduces strong revenue measures, reallocates expenditure toward priority areas including social spending, and addresses domestic arrears accumulation. ### Recent economic developments (2009) — main findings - Real GDP growth estimated at 3 percent, supported by a favorable cashew harvest and a pick-up in construction. - Tax revenues exceeded previsions by about 2 percentage points of GDP, reflecting good cashew harvest and stepped-up collection efforts. - Donor support at year-end exceeded programmed levels; government contained spending and kept domestic arrears within target. - External current account deficit (excluding grants) widened to 6½ percent of GDP, largely financed by an increase in grants. - Lower food and fuel prices slowed inflation; domestic inflationary pressures remained subdued due to the CFAF peg to the euro. ### Program summary — macroeconomic objectives and policy priorities - Macroeconomic objectives: - Raise real GDP growth to 4½ percent by program end. - Contain inflation below 3 percent per year, in line with WAEMU targets. - Keep the primary budget deficit below 4 percent of GDP annually through 2012. - Gradually narrow the external current account deficit (excluding official transfers). - Policy priorities: - Strengthen public finances, in PFM and other areas, to contain the fiscal deficit and support macro stability. - Normalize government relations with domestic banks and the private sector by addressing large stock of domestic arrears. - Modernize public administration via medium-term civil service reform and security sector reform program. - Promote good governance and increasing and transparency. - Promote job creation by removing impediments to private sector development and strengthen the provision of financial services. - Improve access to social services and step up poverty alleviation via investments in infrastructure for power, roads, and the port. - Move toward debt sustainability, particularly by helping the country achieve the HIPC/MDRI completion point. ### Executive Board and Directors’ assessment and recommendations - Directors commended authorities for implementing the 2009 economic program and welcomed the medium-term reform program. - Emphasized importance of political stability, effective governance, and strong commitment to reform for donor engagement. - Recommended rigorous implementation of the 2010 budget, protecting priority spending while keeping expenditure within available resources. - Prioritized improvements in public financial management to strengthen fiscal controls and ensure proper budget implementation. - Urged tax administration reform to broaden the tax base and civil service reform to modernize administration and raise public service quality. - Stressed preventing accumulation of domestic government arrears; welcomed plans to clear arrears in the medium term and encouraged liquidity management practices aligned with revenue and external assistance evolution. - Noted efforts to remove barriers to investment, improve credit access, and strengthen the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) framework. - Observed that the exchange rate peg has provided a solid anchor and that standard methods do not indicate significant misalignment; stressed structural reforms to improve competitiveness. - Noted that delivery of debt relief under enhanced HIPC and MDRI, plus additional bilateral relief, will significantly alleviate debt burden and help move toward external and fiscal sustainability; successful program implementation would help pave the way for HIPC completion point in late 2010. ### Selected key economic and financial indicators (highlights from 2008–12) - Real GDP at market prices: 2008: 3.5; 2009: 3.0; 2010: 3.5; 2011: 4.3; 2012: 4.5 (annual percentage change). - Consumer price index (annual average): 2008: 10.4; 2009: -1.7; 2010: 2.5; 2011: 2.5; 2012: 2.5. - Exports, f.o.b. (US$ values): 2008: 61.7; 2009: -9.6; 2010: 13.6; 2011: 7.5; 2012: 10.6 (percent change). - Imports, f.o.b. (US$ values): 2008: 38.1; 2009: -2.7; 2010: 9.2; 2011: 9.2; 2012: 6.3 (percent change). - External current account (excluding official transfers): 2008: -4.1; 2009: -6.4; 2010: -5.9; 2011: -5.4; 2012: -4.8 (percent of GDP). - Domestic revenue (excluding grants): 2008: 30.0; 2009: 2.3; 2010: 21.5; 2011: 3.3; 2012: 7.4 (percent of GDP entries as presented). - Overall balance (commitment basis) including grants: 2008: -3.8; 2009: 1.8; 2010: -3.2; 2011: -1.2; 2012: -1.1 (percent of GDP). - Net present value of external debt/exports of goods and nonfactor services (percent): 2008: 515.0; 2009: 528.2; 2010: 111.1; 2011: 104.9; 2012: 95.8. - Nominal stock of public debt, including arrears (percent of GDP): 2008: 172.8; 2009: 161.0; 2010: 54.1; 2011: 45.0; 2012: 40.2. - Nominal GDP at market prices (CFAF billions): 2008: 379.4; 2009: 395.1; 2010: 418.8; 2011: 446.1; 2012: 475.5. - Current account balance (including official current transfers) (US$ millions): 2008: 20.0; 2009: 13.0; 2010: -11.4; 2011: -2.3; 2012: 0.6. *Source: IMF staff report and related documents dated May 7–11, 2010.* ### 1. Today’s Article IV Consultation with Guinea-Bissau and Board consideration of the ### 1. Today’s Article IV Consultation with Guinea-Bissau and Board consideration of the ### Overview - Authorities value the Fund’s advice and technical assistance in support of macroeconomic stability and poverty reduction. - Guinea-Bissau is experiencing a new era of political and macroeconomic stability, enabling embedding of an ambitious policy and reform agenda into a medium-term framework. - Authorities aim to achieve HIPC and MDRI completion during the course of this year and secure fiscal and debt sustainability afterwards. - Sustained technical and financial assistance from development partners, particularly the Fund, is considered critical to program success. ### Program performance under the 2009 EPCA-supported program - Overall assessment: performance was broadly satisfactory. - Quantitative performance: - Most targets were met. - Strengthened tax administration pushed revenues significantly above targeted program levels. - Public expenditures were kept within available resources; strict control over public spending maintained. - Prudent debt management avoided contracting nonconcessional external debt and accumulating new domestic arrears at end-December 2009. - Ceiling on repayment of previous years’ arrears was breached due to steps to reduce the stock of domestic arrears (notably 2008 wage arrears). - Nonregularized expenditures exceeded the program ceiling during the run-up to the mid-year elections but were since accounted for in the budget. - Authorities are determined to limit recourse to simplified spending procedures going forward. - Structural reforms implemented: - Biometric census of civil servants. - Enactment of a new Investment Code. - Cabinet approval of an action plan for public financial management. ### Policy and reform agenda for 2010 onwards - Satisfactory 2009 performance augurs well for a strong performance under the requested ECF-supported program. - Authorities have an ambitious policy and reform agenda centered on fiscal sustainability, public financial management, civil service and security-sector reform, private sector development, and financial-sector reforms. ### Fiscal and public financial management reforms - Revenue mobilization and administration: - Continue fiscal reform efforts that contributed to revenues overshooting 2009 targets. - Revenue-enhancing measures: comprehensive review of existing customs exemptions; improved customs administration; introduction of the ASYCUDA automated system in main customs posts (Bissau, airport and Safim). - Elimination of suspensions of customs duty on certain products such as rice, wheat, sugar, cement, and other construction materials expected to benefit revenue mobilization. - Strengthening tax administration through broadening of the tax base and capacity building at the large taxpayer unit. - Authorities have requested technical assistance in tax and customs administration; expectation that the Fund will consider this promptly and favorably. - Expenditure policy: - Public spending constrained by available resources. - Intention to allocate at least 50 percent of tax revenues to current and domestically financed capital expenditures in education, health, agriculture, and infrastructure. - Public financial management (PFM) reforms: - Pursue action plan approved by the Cabinet to improve budget planning, execution and monitoring. - Prepare a medium-term expenditure plan consistent with the poverty reduction strategy during the course of this year. - Finalize installation of the financial management system: operationalize the Treasury accounting system; facilitate information-sharing between tax and customs administrations. - With World Bank assistance, implement public procurement reform action plans in a number of key ministries. ### Civil service, defense and security sector reforms - Civil service reform objectives and measures: - Improve efficiency of public administration given the large size of the public sector relative to the population. - Expected outcomes if fully implemented: significant downsizing of the public sector by separating staff above mandatory retirement age, addressing overstaffing, and facilitating mobility of “redundant” civil servants to the private sector. - Stricter controls over the civil service payroll; elimination of “ghost” workers from the payroll database. - Publication planned of verified biometric census data to update the finance ministry database later this year. - Gradual use of a computerized and unified payroll and personnel management system in the Ministry of Finance and the Ministry of Labor and Public Services, and then in most other ministries. - Defense and security sector reform: - Entails significant reduction in military personnel and rationalization of security forces. - Expected to have a positive impact on fiscal sustainability because the sector claims a significant fraction of the wage bill. - Progress contingent on mobilizing necessary financing with partners’ assistance. - Steps already taken: implementation of the public procurement reform action plan in several ministries, including the Ministry of Defense. ### Private sector and financial sector measures - Improve business environment: - Planned Cabinet approval of a legal framework for the “one-stop” shop to streamline licensing and registration costs and procedures for new businesses. - Financial sector priorities: - Overcome impediments to adequate credit access. - Strengthen the AML/CFT framework. ### Debt sustainability - Domestic arrears clearance: - Implementation of a medium-term plan for domestic arrears clearance will facilitate prospects for debt sustainability. - Execution has begun with clearance of costly and verified arrears to the BCEAO and commercial banks made possible by the SDR allocation and donor assistance. - Authorities plan to settle pre-1999 arrears to the private sector and to finalize the audit of 2000-07 arrears to the private sector; resource permitting, settlement of these arrears will begin this year. - Public debt management improvements: - Capacity building at the debt management unit. - Systematic use of the debt management system (SYGADE). - HIPC progress: - Authorities strongly committed to meeting requirements for achieving the HIPC completion point. - Efforts translated into satisfactory implementation of the 2009 EPCA-supported program, improved public expenditure management and procurement system, notable achievements in social sectors, and steps to regularize relations with external multilateral and bilateral creditors. - Authorities request the second tranche of interim HIPC assistance to cover PRGF repayment obligations falling due in 2010. ### Conclusion and request - Authorities made significant strides under the 2009 EPCA-supported program, reflecting strong ownership and attachment to sound program implementation. - Recognize continued substantial efforts are required to achieve fiscal and debt sustainability, strong growth, and poverty reduction. - Fund involvement via an ECF arrangement is considered critical to securing steady progress. - Authorities request consideration of a three-year arrangement under the ECF; Directors are called upon to consider this request favorably. *IMF staff summary of authorities’ views and program request contained in CR/10/117.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10117.pdf_