## _cr14318 ## Source details **Canonical URL:** [_cr14318](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14318.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14318.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14318.pdf.json) --- ### Background and recent shocks - Political transition and donor support: - Democratically-elected government took office in early July after a transition following the April 2012 coup d’état. - International support for organizing elections included around US$20 million (1.9 percent of GPD) from Nigeria, Timor-Leste, the EU, ECOWAS, among others. - Cashew sector and social impact: - Cashew export prices fell by about 20 percent per year between 2011 and 2013. - Cashew producer prices fell by 60 percent between 2011 and 2013. - Cashew sector accounts for about a quarter of total loans in the banking system. - Barter prices between rice and cashew collapsed from 1:1 in 2011 to 1:3 in 2013. - More than 70 percent of the population is estimated to live below US$2 per day. - World Food Program survey: rural population facing severe food insecurity increased from 20 percent in 2011 to 40 percent in 2013. - Macroeconomic shocks and fiscal governance: - Current account deficit (excluding official transfers) doubled from -3.3 percent in 2011 to -6.6 in 2012 and remained high at -4.9 percent in 2013. - Suspension of donor support after the coup financed by drawdown of government deposits with the BCEAO. - Fall in revenues, increased reliance on despesas não tituladas, accumulation of wage and external arrears. - Banking sector distress and real economy: - Non-performing loans (NPLs) rose from 11.6 percent at end-2013 to 26 percent by June 2014. - Real GDP fell by 2 percent over 2012–13. - Government accrued domestic arrears (mainly salaries) of about 1.9 percent of GDP in 2013 alone. - Stock of domestic arrears predating last government estimated at about 10 percent of GDP; remaining balance of 14 billion CFAF from payments up to 2011. - Preliminary audit estimated 2000–07 arrears at 86 billion CFAF (not yet recognized by Government). ### Recent developments and fiscal liquidity - Wage arrears and liquidity operations: - Seasonal recovery in domestic revenue and placement of Treasury bills allowed elimination of almost all wage arrears accrued over the last year. - Placement of CFAF15 billion in one-year Treasury bills (3 percent of GDP) aided liquidity. - World Bank assistance paid salaries of teachers and health workers for first six months of 2014 and may continue in 2015. - Remaining non-wage arrears from 2013 total around CFAF 3 billion (0.6 percent of GDP). - External arrears (including 2014 external debt service) are about 0.6 percent of GDP. - Government plans to eliminate all remaining arrears accumulated in 2013 and 2014 by end-2014. - Donor commitments affecting outlook: - EU pledged to resume support contingent on sound economic policies and approval of the 2014 budget. - World Bank commitments amount to US$81.3 million, of which US$46.5 are yet to be disbursed. - ECOWAS committed to contribute US$64 million (6.1 percent of GDP) to security sector reform. ### Medium-term outlook, projections, and risks - Near-term projection and assumptions: - Resumed budget support and fishing compensation from the EU, along with higher cashew export and producer prices, expected to lead to an increase in real GDP of about 2.5 percent in 2014. - Inflation expected to reach 2.1 percent by the end of 2014. - Over medium-term, real GDP growth estimated to stabilize at close to 4 percent per year assuming continued external support, political stability, and recovery in agriculture, mining, and fishing. - Inflation should converge towards 2.5 percent per year. - Overall balance of payments should gradually improve; current account expected to deteriorate initially as foreign investment-related imports increase. - Debt distress assessment: - Guinea-Bissau remains at moderate risk of debt distress. - External and public debt indicators improved after HIPC and MDRI and remain below indicative thresholds throughout the projection period. - A large and protracted breach of the present value of debt to exports threshold appears in an exports shock scenario due to narrow export base. - Assessment depends on reestablishing prudent fiscal and debt management, implementing structural reforms, and continued reliance on concessional borrowing. - Medium-term projections (IMF staff estimates — values preserved verbatim): - Real GDP growth (%): 2013: 0.3; 2014: 2.5; 2015: 4.0; 2016: 3.7; 2017: 3.7; 2018: 3.7; 2019: 3.7 - Real per capita income growth (%): 2013: -1.9; 2014: 0.3; 2015: 1.7; 2016: 1.4; 2017: 1.4; 2018: 1.4; 2019: 1.4 - Consumer price inflation (%, annual average): 2013: 0.8; 2014: -0.8; 2015: 3.3; 2016: 2.3; 2017: 2.5; 2018: 2.5; 2019: 2.5 - Grant and external loan financing (% of GDP): 2013: 3.7; 2014: 8.1; 2015: 5.2; 2016: 5.2; 2017: 5.2; 2018: 5.2; 2019: 5.1 - Fiscal revenue (% of GDP): 2013: 8.7; 2014: 11.4; 2015: 10.6; 2016: 11.0; 2017: 11.2; 2018: 11.4; 2019: 11.7 - Overall fiscal balance (incl. grants, cash basis, % of GDP): 2013: -2.0; 2014: -4.1; 2015: -3.9; 2016: -3.4; 2017: -3.4; 2018: -3.0; 2019: -2.7 - External current account (% of GDP): 2013: -4.1; 2014: -0.4; 2015: -3.9; 2016: -4.5; 2017: -5.0; 2018: -5.5; 2019: -5.8 ### Restoring macroeconomic stability — fiscal discipline and operations - Cash and treasury controls: - Monthly cash flow plan prepared to prioritize spending, prepare access to short-term bank financing, and minimize emergency spending procedures. - Plan to create a high-level Treasury committee (in addition to conventional Treasury committee) with representatives from the Presidency, Prime Minister’s office, Ministry of Economy and Finance, BCEAO, IMF and donors; objectives include setting spending priorities, setting limits for non-regularized expenditures, assessing exceptions, and reconciling payment orders with bank statements monthly. Both committees expected to be operational by mid-October. - 2014 budget and financing: - Authorities presented a prudent 2014 budget based on realistic fiscal revenue and donor financing estimates; approval and publication is a prior action for RCF disbursement. - 2014 budget includes a spike in recurrent expenditures due to resumption of basic supplies, election-related spending, and higher wage bill from inclusion of health workers and teachers previously not included. - Assistance under the RCF expected to help close residual 2014 financing gap and catalyze donor budget support. - 2015 budget preparations: - Authorities aim to have the 2015 budget in place and published by early next year with fiscal targets aligned to expected resources; preliminary estimates indicate a still large residual financing gap in 2015. ### Structural fiscal reforms and priorities - Short-run priorities: - Introduce high-level committee to enhance fiscal controls and reduce fiduciary risk for donors. - Streamline tax exemptions on fuel imports. - Expand the customs IT system to the border post Safim (see Structural Benchmarks). - Revenue administration (Box 1 — key reforms recommended): - Improve DGCI basic infrastructure, including suitable furbished offices with computers. - Implement a human resources policy, including a new professional audit career and a trained core staff with clear-cut responsibilities. - Draft manuals and define work procedures for tax collection, auditing and enforcement to shield tax officers from political interference. - Define work program focusing initially on large contributors. - Implement a new IT system for tax administration. - Customs collection recommendations: - Increase operational efficiency of Bissau’s port and other customs posts; roll out SYDONIA++ to main posts including Safim, São Domingos, Bafatá and Gabú. - Install scanners at Bissau’s port and borders. - Reduce under-invoicing through improved valuation and exchange of information and international price database. - Clear arrears with Oracle to ensure continued customs IT service. - Prevent fraud by resuming coloring of customs duty exempt fuel; develop post-clearance audits and enhance intelligence to detect fraud. - Payroll and debt management: - Complete administrative module of SIGRHAP and integrate with financial module; extend SIGRHAP and salary payments through banking to military personnel and Ministry of the Interior. - Complete external debt assessment; clear external arrears currently estimated at 0.6 percent of GDP; resume rescheduling agreements with non-Paris Club creditors pending after HIPC Completion Point. - Ministry plans quarterly publication of public debt (external and domestic) and training to improve debt unit capacities. ### Tax exemptions and immediate fiscal measures - Exemption monitoring and estimates: - Government created committee to assess all tax exemptions on a weekly basis. - Fuel consumption by ministries aligned to estimated needs. - Fuel subsidies currently estimated at 0.9 percent of GDP. - Below-market reference prices for imported goods and cashew exports add another 0.3 percent of GDP. - Authorities aim to drastically reduce tax exemptions and consider aligning reference prices to market prices. ### Cashew sector policy and FUNPI - FUNPI design and impact: - FUNPI introduced as surcharge tax to develop local cashew transformation but failed; resources diverted and producer prices fell. - World Bank estimate: elimination of FUNPI would reduce national poverty rate by 2 percentage points and extreme poverty by 3 percentage points. - 65,000 tons of raw cashew left country through smuggling in 2013 implying foregone government revenues of CFAF3 billion and foregone port charges of CFAF300 million. - FUNPI revenues estimated at some US$30 million have partly been used by the transitional government. - FUNPI created with surcharge of 50 CFAF per kg (approximately USD 100 per ton) on exports of raw cashew nuts; surcharge came on top of other export taxes amounting to 11 percent of the reference price; FUNPI surcharge amounts to about 12 percent of the reference price. - Result: FUNPI tax reduces farmgate prices by 20 percent and producers’ consumption by 11 percent; at least 80 percent of the tax is passed on to farmers. - Government actions and alternatives: - Integrated FUNPI resources into the budget and decided comprehensive audit of FUNPI’s past activities. - Exploring more efficient and pro-poor alternatives including attracting FDI and using development partner support. - Recently signed agreement with FUNDEI to finance processing projects using FUNPI funds. - If elimination is politically difficult, authorities commit to reduce FUNPI surcharge from CFAF40 to CFAF10 per kilogram. ### Banking sector, financial stability, and development (Appendix I) - Sector overview and shocks: - Bank credit to the economy is about 14 percent of GDP. - Only about 1 percent of households have access to banking services. - Bank credit contracted by 20 percent between mid-2012 and end 2013; some recovery in H1 2014. - Asset quality and indicators: - NPLs increased from 6.4 percent of total loans in 2012 to 25.7 percent in June 2014. - Bulk of NPLs concentrated in two banks with significant exposure to cashew sector. - Financial deepening and reform needs: - Reactivate microfinance activities with approved regulatory system and training. - Complementary reforms: improve judiciary for contract enforcement; strengthen accounting industry; provide training to create bankable projects; improve credit reference system; improve payments and settlement systems. - Key banking indicators (selected series, percent where indicated): - Tier 1 capital to risk-weighted assets: 27.3, 23.4, 24.9, 28.5, 22.3, 22.3, 23.1, 21.4 - Capital to total assets: 10.6, 10.6, 10.5, 15.3, 11.8, 13.2, 13.5, 11.0 - Non-performing loans to total loans: 6.6, 7.2, 8.5, 9.8, 6.5, 6.4, 11.6, 25.7 - Provisions to gross loans: 10.4, 8.0, 23.9, 16.3, 13.0, 10.7, 11.6, 19.0 - Liquid assets to short term liabilities: 32.1, 48.0, 56.8, 33.0, 42.2, 49.0, 49.5, 60.1 - Deposit rate: 1.9, 4.3, 4.0, 3.6, 3.8, 4.7, 4.7, 4.7 - Lending rate: 10.9, 1.8, 10.9, 10.6, 10.6, 10.2, 9.2, 9.2 ### Request for Rapid Credit Facility (RCF) and 2014 financing needs - RCF request and purpose: - Authorities requested financial assistance under the RCF equivalent to SDR 3.55 million (25 percent of quota) to close the fiscal financing gap and meet urgent balance of payments needs. - IMF Executive Board approved emergency financial assistance under the RCF equivalent to SDR3.55 million (about US$5.24 million); full amount made immediately available; zero interest (until end 2014), grace period of 5.5 years, final maturity of 10 years. - Catalytic effect and conditional donor support: - RCF disbursement expected to be catalytic; prospect of RCF led to expected CFA11 billion in budget support from the European Union and East Timor. - Resumption of EU fishing compensation (CFA 6.5 billion) contingent on RCF disbursement. - 2014 financing needs and gap (Text Table 2 — figures as presented): - Financing Needs (A) 438.5 CFAF billion - Domestic fiscal deficit (commitment basis) 265.2 - Repayment of domestic arrears 101.9 - Amortizations and external arrears 10.2 - Accumulation of deposits 61.2 - Financing Sources (B) 295.7 - Treasury bills 153.0 - Budget support 142.7 (o/w Elections 91.8) - Financing Gap (C=A-B) 142.8 - Conditional Budget Support (D) 102.1 - European Union 71.3 - East Timor 40.8 - Residual Financing Gap (E=C-D) 40.7 - Fiscal risks and capacity to repay: - Capacity to repay adequate but subject to risks: large volatility in cashew prices (cashew exports represent more than 90 percent of total exports and around 10–12 percent of fiscal revenue); potential resistance to security sector reform; pension/gratuity costs for military demobilization; delays in rainy season; potential spread of Ebola; strong reliance on donor support. ### Debt sustainability, DSA findings, and policy implications - DSA classification and findings: - Guinea-Bissau remains at moderate risk of debt distress. - External and public debt indicators improved significantly following HIPC and MDRI assistance; PPG external debt fell from a peak of 113 percent of GDP at end-2009 to 28 percent of GDP at end-2013. - Baseline: all debt burden indicators remain below thresholds for projection period. - Stress/most extreme shock: PV of debt-to-exports breaches benchmark for extended period; PV of debt-to-exports would increase from about 53 percent in 2014 to 165 percent in 2019 under that scenario. - Debt composition and trends: - Debt in technical arrears (memorandum): 8.0 / 9.2 / 9.2 / 32.9 (includes $48.2 million to Taiwan, $32.8 million to Angola, $3.7 million to Libya, $3 million to Pakistan, $0.3 million to Abu Dhabi, $0.3 million to a commercial bank based on preliminary findings). - Public domestic debt increased due to limited access to external financing and reclassification of BOAD loans as internal debt; government placed CFAF10 billion and CFAF15 billion in treasury bonds in 2013 and 2014. - Government domestic debt ratio expected around 37 percent at end-2014, increasing to 47 percent in 2017 before decreasing. - Policy guidance: - Pursue prudent fiscal and debt management policies. - Implement structural reforms (export diversification, higher tax collection). - Continue reliance on concessional borrowing; accept only concessional financing. - Enhance debt management and carry out borrowing with caution. ### Authorities' stance, IMF support, and recommended priorities - Authorities broadly agree with staff conclusions and policy recommendations; concur that debt sustainability depends on access to concessional financing, improvements in potential growth, and sound macroeconomic and debt management. - IMF and staff recommendations — prioritized "quick wins": - Bring on-line key customs posts and expand SYDONIA++ to Safim, São Domingos, Bafatá and Gabú. - Introduce scanners and mark fuel to reduce fraud. - Limit tax exemptions for fuels in particular; Exemption Committee to quantify and rationalize exemptions. - Audit FUNPI and consider immediate abolition (staff view) or alternative pro-poor instruments. - Reinstate treasury committee, implement cash management plans, avoid extra-budgetary expenditures. - Recover tax and customs revenues; implement DGCI and DGA capacity-building and IT systems. - With IMF technical assistance, evaluate options to recapitalize banking system to limit contingent fiscal costs. - Contingency and sectoral priorities: - Security sector reform necessary for durable stability; pension and gratuity system financing contingent on donor support. - Short-run infrastructure priorities: electricity provision and port operations. - Ebola preparedness: contingency program estimated at US$5 million; World Bank US$500,000 available for emergency measures. *Italic: Source: IMF staff report text and MEFP material in the chapter "1. Reforming Tax Administration in Guinea-Bissau" and associated appendices contained in the provided content unit.* ### 1. Reforming Tax Administration in Guinea-Bissau _______________________________________________ 10 ### 1. Reforming Tax Administration in Guinea-Bissau ### Background and recent shocks - A democratically-elected government took office in early July after a transition following the April 2012 coup d’état. - International support for organizing elections included around US$20 million (1.9 percent of GPD) from Nigeria, Timor-Leste, the EU, ECOWAS, among others. - Cashew sector and macro impacts: - Cashew export prices fell by about 20 percent per year between 2011 and 2013. - Cashew producer prices fell by 60 percent between 2011 and 2013. - The cashew sector accounts for about a quarter of total loans in the banking system. - Barter prices between rice and cashew collapsed from 1:1 in 2011 to 1:3 in 2013. - More than 70 percent of the population is estimated to live below US$2 per day. - A World Food Program food security survey found the percentage of rural population facing severe food insecurity increased from 20 percent in 2011 to 40 percent in 2013. - Balance of payments and fiscal effects: - Current account deficit (excluding official transfers) doubled from -3.3 percent in 2011 to -6.6 in 2012 and remained high at -4.9 percent in 2013. - Suspension of donor support after the coup contributed to large balance of payments deficits in 2012 financed by a drawdown of government deposits with the BCEAO. - Fiscal governance deterioration: fall in revenues, increased reliance on simplified spending procedures (despesas não tituladas), accumulation of wage and external arrears. - Banking sector distress: - Non-performing loans (NPLs) rose from 11.6 percent at end-2013 to 26 percent by June 2014. - Banks have reportedly been provisioning against NPLs; government examining recapitalization options with Fund technical assistance. - Real economy and inflation: - Overall, real GDP fell by 2 percent over 2012–13. - Inflation remained muted due to contraction in domestic demand and collapse in public investment. - Government accrued domestic arrears (mainly salaries) of about 1.9 percent of GDP in 2013 alone. - Legacy domestic arrears: - Stock of domestic arrears predating the last government estimated at about 10 percent of GDP; remaining balance of 14 billion CFAF from payments up to 2011. - A preliminary audit estimated 2000–07 arrears at 86 billion CFAF, which the Government has not yet recognized. ### Recent developments and fiscal liquidity - Resolution of wage arrears and financing operations: - Seasonal recovery in domestic revenue and placement of Treasury bills in regional capital market allowed elimination of almost all wage arrears accrued over the last year. - Placement of CFAF15 billion in one-year Treasury bills (3 percent of GDP) aided liquidity. - World Bank financial assistance contributed to salary payments. - Remaining non-wage arrears from 2013 total around CFAF 3 billion (0.6 percent of GDP). - External arrears (including 2014 external debt service) are about 0.6 percent of GDP. - Government plans to eliminate all remaining arrears accumulated in 2013 and 2014 by end-2014. - Donor and partner commitments affecting outlook: - EU pledged to resume support contingent on sound economic policies and approval of the 2014 budget. - World Bank commitments amount to US$81.3 million, of which US$46.5 are yet to be disbursed; World Bank paid salaries of teachers and health workers for the first six months of 2014 and may continue in 2015. - African Development Bank actively considering resumption of budget support in 2015. - ECOWAS committed to contribute US$64 million (6.1 percent of GDP) to security sector reform. ### Medium-term outlook and risks - Near-term projection and assumptions: - Resumed budget support and fishing compensation from the EU, along with higher cashew export and producer prices, expected to lead to an increase in real GDP of about 2.5 percent in 2014. - Inflation expected to reach 2.1 percent by the end of 2014. - Over the medium-term, real GDP growth estimated to stabilize at close to 4 percent per year assuming continued external financial support, political stability, and recovery in agriculture, mining, and fishing. - Inflation should converge towards 2.5 percent per year. - Overall balance of payments should gradually improve, supported by some increase in FDI and donor support, though the current account is expected to deteriorate initially as foreign investment-related imports increase during the investment phase. - Debt distress assessment: - Guinea-Bissau remains at moderate risk of debt distress. - External and public debt indicators improved after HIPC and MDRI assistance and remain below indicative thresholds throughout the projection period. - DSA shows lower debt indicators due to revisions to the debt stock and GDP and exclusion of debts in technical arrears. - A large and protracted breach of the present value of debt to exports threshold appears in an exports shock scenario due to narrow export base. - Assessment depends on reestablishing prudent fiscal and debt management, implementing structural reforms, and continued reliance on concessional borrowing. - Medium-term projections (IMF staff estimates — values preserved verbatim) - Real GDP growth (%): 2013: 0.3; 2014: 2.5; 2015: 4.0; 2016: 3.7; 2017: 3.7; 2018: 3.7; 2019: 3.7 - Real per capita income growth (%): 2013: -1.9; 2014: 0.3; 2015: 1.7; 2016: 1.4; 2017: 1.4; 2018: 1.4; 2019: 1.4 - Consumer price inflation (%, annual average): 2013: 0.8; 2014: -0.8; 2015: 3.3; 2016: 2.3; 2017: 2.5; 2018: 2.5; 2019: 2.5 - Grant and external loan financing (% of GDP): 2013: 3.7; 2014: 8.1; 2015: 5.2; 2016: 5.2; 2017: 5.2; 2018: 5.2; 2019: 5.1 - Fiscal revenue (% of GDP): 2013: 8.7; 2014: 11.4; 2015: 10.6; 2016: 11.0; 2017: 11.2; 2018: 11.4; 2019: 11.7 - Overall fiscal balance (incl. grants, cash basis, % of GDP): 2013: -2.0; 2014: -4.1; 2015: -3.9; 2016: -3.4; 2017: -3.4; 2018: -3.0; 2019: -2.7 - External current account (% of GDP): 2013: -4.1; 2014: -0.4; 2015: -3.9; 2016: -4.5; 2017: -5.0; 2018: -5.5; 2019: -5.8 ### Restoring macroeconomic stability — fiscal discipline and operations - Cash and treasury controls: - Authorities prepared a monthly cash flow plan to prioritize spending, prepare access to short-term bank financing when needed, and minimize emergency spending procedures. - Plan to create a high-level Treasury committee (in addition to conventional Treasury committee) with representatives from the Presidency, Prime Minister’s office, Ministry of Economy and Finance, BCEAO, IMF and donors. - High-level Treasury committee objectives: set spending priorities, set limits for non-regularized expenditures, assess requests to exceed limits on an exceptional basis, reconcile payment orders with bank statements monthly. - Both committees expected to be operational by mid-October. - 2014 budget and financing: - Authorities presented a prudent 2014 budget based on realistic fiscal revenue and donor financing estimates; approval and publication is a prior action for RCF disbursement. - 2014 budget includes a spike in recurrent expenditures due to resumption of spending on basic supplies, election-related spending, and a higher wage bill from inclusion of health workers and teachers previously not included. - Assistance under the RCF expected to help close the residual financing gap for 2014 and has a catalytic effect to resume donor budget support. - Timing mismatch between expected expenditures and budget support requires a prudent fiscal policy and careful liquidity management. - 2015 budget preparations: - Authorities aim to have the 2015 budget in place and published by early next year with fiscal targets aligned to expected available resources. - Preliminary estimates indicate a still large residual financing gap in 2015. - Authorities plan expenditures within a conservative budget envelope while intensifying efforts to secure additional budget support, including at a round table tentatively scheduled for early 2015. ### Structural fiscal reforms and priorities - Recent slowdown and prioritization: - Pace of structural fiscal reforms slowed substantially since 2012; reforms largely halted except for payroll banking integration (excluding army and police) and approval of an organizational structure for tax administration on a functional basis. - Authorities will prioritize reforms in light of limited institutional capacity. - Short-run reform priorities: - Introduce a high-level committee to enhance fiscal controls and reduce fiduciary risk for donors. - Streamline tax exemptions on fuel imports. - Expand the customs IT system to the border post Safim (see Structural Benchmarks in Table 2 of the MEFP). - These measures target improved cash management and recovery of fiscal revenues lost over the last two years. - Medium-term revenue and reform goals: - Aim to increase revenue collection much beyond the relatively low levels observed before the military coup. - Structural reform agenda under the 2010 ECF focused on public financial and payroll management, tax and customs administrations, and debt management. - Capacity building, including from the Fund, is crucial to regain momentum. - Payroll and debt management reforms: - Government intends to resume reforms of payroll management (MEFP, §23, c): complete the administrative module of SIGRHAP and integrate with the financial module to integrate ministries and extend SIGRHAP and salary payments through banking to military personnel and Ministry of the Interior. - Strengthen debt management (MEFP, §23, b): complete external debt assessment, clear external arrears currently estimated at 0.6 percent of GDP, accurately schedule future payments to avoid new arrears, resume rescheduling agreements with non-Paris Club creditors pending after HIPC Completion Point. - Ministry of Economy and Finance plans to compile and publish information on public debt (external and domestic) on a quarterly basis and seek training to improve debt unit capacities. *Source: IMF staff estimates and MEFP material in the chapter "1. Reforming Tax Administration in Guinea-Bissau."* ### 17. The government has started to closely monitor and streamline tax exemptions ### _cr14318 - 17. The government has started to closely monitor and streamline tax exemptions ### Monitoring and immediate fiscal measures - The government created a committee to assess all tax exemptions on a weekly basis. - Fuel consumption by ministries, including the ministry of defense, has been aligned to their estimated needs. - Fuel subsidies are currently estimated at 0.9 percent of GDP. - Below-market reference prices for imported goods and cashew exports add another 0.3 percent of GDP. - The authorities aim at drastically reducing tax exemptions and are considering aligning reference prices to market prices. ### Tax administration: diagnostics and recommended reforms (Box 1) - Context and problem: - Guinea-Bissau’s tax revenue to GDP ratio is one of the lowest in Africa. - In 2013, tax revenue amounted to 7.4 percent of GDP, down from 8.0 percent in 2010. - Contributing factors: non-diversified largely informal economy; poorly structured tax system; institutional weaknesses; chronic economic and political instability; capacity constraints; rent seeking, corruption, and political pressures on tax administration. - Key recommendations to increase tax collection over the medium term: - (i) Improve the tax department’s (DGCI) basic infrastructure, including suitable furbished offices with computers. - (ii) Implement a human resources policy, including a new professional audit career and a trained core staff with clear-cut responsibilities. - (iii) Draft manuals and define work procedures for tax collection, auditing and enforcement of tax liabilities to help shield tax officers from political interference. - (iv) Define a work program that focuses initially on large contributors. - (v) Implement a new IT system for tax administration. - Key recommendations to boost customs collection: - (i) Increase the operational efficiency of Bissau’s port and other customs posts; roll out the IT software SYDONIA++ to all main customs posts, including Safim, São Domingos, Bafatá and Gabú. - (ii) Install scanners at Bissau’s port and borders to increase control. - (iii) Reduce under-invoicing through improved valuation of goods via improved exchange of information with customs administrations of the main exporting countries and setting up a database with international prices of traded goods. - (iv) Clear arrears with internet provider (Oracle) to ensure continued service of the custom’s IT system. - (v) Prevent fraud by resuming the coloring of customs duty exempt fuel. - (vi) Develop audits of post-clearance and of duty exemptions and enhance intelligence to detect fraud. - Cross-cutting need: - Structural reforms must be complemented with capacity building; the Fund and development partners play a key role in providing training and technical assistance and have started to coordinate in the areas of public financial management and revenue administration. ### Strengthening Public Financial Management (PFM) (Box 2 and paragraph 18) - Current weaknesses: - Absence of a PFM reform strategy and action plan formally adopted by authorities. - Lack of an institutional framework to pilot and coordinate needed reforms full time, plus capacity constraints. - Institutional weaknesses in budget preparation and execution; deficient accounting and fiscal reporting. - Late approval of the annual budget, lengthy and complex budget execution procedures, non-transparent and redundant controls, and abusive use of exceptional procedures (DNT) often bypassing SIGFIP contributing to domestic arrears. - Recent progress: - Adoption in 2010 of a decree transcribing the 1998 WAEMU directive on accounting regulation. - Separation of “Contrôle Financier” from the budget directorate; strengthened institutional framework of the procurement directorate. - Priority measures to restore fiscal discipline and transparency: - (i) Adopt 2015 budget before end of 2014. - (ii) Align budget allocations to commitment plans (forward looking) rather than to the previous year’s budget execution (backward looking). - (iii) Adopt a decree restricting the use of DNT to pre-defined nature of expenditure through SIGFIP. - (iv) Streamline budget execution procedures while observing mandatory steps. - Treasury and cash management: - Short term: reinstate and enhance the treasury committee; prepare, implement and regularly update annual and monthly cash management plans. - Medium term: establish a Treasury Single Account to facilitate cash management and budgetary controls. - Accounting and reporting: - Financial statements from 2009 to 2013 should be issued, audited and approved by the Supreme audit institution (SAI, “Tribunal des comptes”) as soon as possible. - Draft a manual detailing accounting procedures and prepare terms of reference for General Treasurer’s office employees. - Produce, control and approve the trial balance on a monthly basis. - Better use of existing PFM software (SIGFIP): - SIGFIP has needed functionalities but is underused: the accounting module is only partially used, the General Ledger is not complete and trial balances are not produced. - All users should be properly trained and the SIGFIP accounting module fully implemented. ### Structural reforms to support growth, cashew sector policy (paras 19–21, Box 3) - Security sector reform: - A comprehensive security sector reform is a prerequisite for durable economic growth and decisive poverty reduction. - Reform includes a pension and gratuity system; authorities are seeking additional funding for sustainability and full financing. - Cashew sector overhaul and FUNPI issues: - FUNPI was introduced as a surcharge tax to develop local cashew transformation but failed in objectives; resources were diverted and producer prices fell. - World Bank estimate: elimination of FUNPI would reduce the national poverty rate by 2 percentage points and extreme poverty by 3 percentage points. - Estimated impacts of FUNPI and smuggling (2013): - 65,000 tons of raw cashew left the country through smuggling implying foregone government revenues of CFAF3 billion and foregone port charges of CFAF300 million. - FUNPI revenues estimated at some US$30 million have partly been used by the transitional government. - FUNPI design specifics: - Created with a surcharge of 50 CFAF per kg (approximately USD 100 per ton) on exports of raw cashew nuts. - The surcharge came on top of other export taxes amounting to 11 percent of the reference price; the FUNPI surcharge amounts to about 12 percent of the reference price. - As a result, the FUNPI tax reduces farmgate prices by 20 percent and producers’ consumption by 11 percent; at least 80 percent of the tax is passed on to farmers. - Government actions and alternatives: - Integrated FUNPI resources into the budget and decided to conduct a comprehensive audit of FUNPI’s past activities. - Exploring more efficient and pro-poor alternatives to promote the cashew sector, including attracting FDI and using development partner support (lending, guarantee funds, technical assistance). - Recently signed an agreement with FUNDEI to finance processing projects using FUNPI funds. - If elimination of the fund is politically difficult, authorities commit to reduce the FUNPI surcharge from CFAF40 to CFAF10 per kilogram. - Other structural priorities: - Short run: improve provision of electricity and operation of the poorly operated port. - Need to increase efficiency and governance of public companies and adopt tariff policies that generate sufficient resources for maintenance and infrastructure development. - Authorities are discussing with development partners ways to better develop the country’s vast natural resources. - Financial sector: - Over the long run, prepare a strategic plan to strengthen the financial system and increase access to financial services. ### Request for disbursement under the Rapid Credit Facility (RCF) and financing needs (paras 23–25 and Text Table 2) - RCF request: - Authorities requested financial assistance under the RCF equivalent to SDR 3.55 million (25 percent of quota) to close the fiscal financing gap and meet urgent balance of payments needs. - Rationale and expected catalytic effect: - RCF disbursement expected to be catalytic in mobilizing additional balance of payments and budgetary support; prospect of RCF led to expected CFA11 billion in budget support from the European Union and East Timor. - Resumption of the EU’s fishing compensation (CFA 6.5 billion) is contingent on the RCF disbursement. - External and fiscal context: - Current account deficit estimated to remain high in 2014. - External deficit translates into significant fiscal financing needs estimated at 8.5 percent of GDP, of which 5.7 percent is already financed. - Taking into account further expected budget support contingent on the RCF disbursement, a residual financing gap of CFA2.7 billion (0.7 percent of GDP) remains, which could be met by the RCF disbursement (SDR3.55 million, or 25 percent of quota). - Text Table 2: Financing Needs and Potential Financing Sources 2014 (figures as presented) - Financing Needs (A) 438.5 CFAF billion - Domestic fiscal deficit (commitment basis) 265.2 - Repayment of domestic arrears 101.9 - Amortizations and external arrears 10.2 - Accumulation of deposits 61.2 - Financing Sources (B) 295.7 - Treasury bills 153.0 - Budget support 142.7 (o/w Elections 91.8) - Financing Gap (C=A-B) 142.8 - Conditional Budget Support (D) 102.1 - European Union 71.3 - East Timor 40.8 - Residual Financing Gap (E=C-D) 40.7 - Capacity to repay and risks: - Guinea-Bissau’s capacity to repay is adequate but outlook is subject to risks. - Key risks: large volatility in cashew prices (cashew exports represent more than 90 percent of total exports and around 10–12 percent of fiscal revenue); potential resistance to security sector reform; cost of pension and gratuity fund for military demobilization may exceed committed external support by ECOWAS; delays in rainy season affecting crop production and food security; potential spread of Ebola; strong reliance on donor support amid downward revisions to global growth forecasts. - Guinea-Bissau is part of BCEAO; the next safeguards assessment of the BCEAO is scheduled for 2017. *GUINEA-BISSAU — INTERNATIONAL MONETARY FUND* ### 26. The newly-elected government of Guinea-Bissau has inherited very difficult conditions ### _cr14318 - 26. The newly-elected government of Guinea-Bissau has inherited very difficult conditions ### Context and immediate challenges - The government inherited: - Two years of economic disruption, eroded government revenues, a compression in social spending, and accumulated external and domestic arrears. - Breakdown of basic government functions and a marked increase in poverty. - Very poor economic infrastructure (roads, electricity, water). - Operation without a budget during the past two years with expenditures occurring mostly outside normal expenditure procedures. ### Early positive developments and political context - After peaceful elections: - The government benefits from wide public support including from opposition parties and the return of traditional donors. - The government program for 2014–2018 and the 2014 budget were approved by Parliament with unanimity. - The government has cleared almost all wage arrears of 2013 and 2014 and has started to rebuild domestic revenues. - The 2014 August customs revenues were 33 percent above the revenues of a year earlier. ### Fiscal and cash management priorities - Government allocations under the approved 2014 budget and the 2015 budget under preparation aim to balance: - Protecting social expenditures. - Timely payment of wages. - Clearance of remaining government arrears from 2013 and 2014. - Stepped-up public investment. - To avoid reoccurrence of arrears, authorities should: - Avoid the use of extra-budgetary expenditures. - Improve cash management. - Reinstate a treasury committee and prepare annual and monthly cash management plans (authorities’ stated intention). ### Revenue recovery, public financial management, and technical assistance - The government is receiving extensive Fund technical assistance to: - Recover tax and customs revenues. - Improve public financial management. - Staff recommendations to prioritize "quick wins": - Bring on-line key customs posts. - Introduce scanners. - Limit tax exemptions for fuels in particular. - Staff emphasizes speedy elaboration and implementation of action plans to sustain recent fiscal improvements. - Staff notes current domestic revenues are insufficient and budgetary procedures inefficient relative to the country’s developmental needs. ### FUNPI (cashew fund) and banking system - Staff welcomes the government’s decision to audit the mismanaged cashew fund FUNPI and strongly urges elimination of the fund. - Staff states elimination of FUNPI would have an important and immediate impact on reducing poverty and improving the business environment. - Staff encourages development partners and authorities to elaborate more efficient, pro-poor, and better targeted alternatives to support cashew production and transformation. - Staff urges authorities, with the help of Fund technical assistance, to carefully evaluate options to recapitalize the banking system in ways that limit contingent fiscal costs. ### Risks, outlook, and security sector reform - Significant risks to the outlook include: - Dependence on cashew. - History of economic and political instability. - Offsetting factors: - Authorities’ strong commitment to policies supported by the RCF. - Strong domestic and international support. - Staff highlights that comprehensive security sector reform will be essential to make recent stability sustainable. ### Support, financing request, and rationale - Staff supports the authorities’ request for assistance under the RCF because of: - Currently limited capacity to implement an upper credit tranche-quality economic program. - Large and urgent balance of payments needs. - Catalytic effect of IMF support for other external financing. ### Key economic indicators and projections (selected) - Real GDP (annual percent change): 2011 9.0, 2012 -2.2, 2013 0.3, 2014 2.5, 2015 4.0, 2016 3.7. - Real GDP per capita (annual percent change): 2011 6.5, 2012 -4.4, 2013 -1.9, 2014 0.3, 2015 1.7, 2016 1.4. - Consumer price index (annual average): 2011 5.1, 2012 2.1, 2013 0.8, 2014 -0.8, 2015 3.3, 2016 2.3. - Exports, f.o.b. (US$ values, annual percent change): 2011 118.0, 2012 -39.5, 2013 5.1, 2014 14.8, 2015 4.9, 2016 3.3. - Imports, f.o.b. (US$ values, annual percent change): 2011 22.1, 2012 -24.4, 2013 1.2, 2014 26.2, 2015 4.2, 2016 6.1. - Terms of trade (deterioration = -): 2011 47.1, 2012 -29.6, 2013 -20.2, 2014 30.2, 2015 3.0, 2016 0.6. - Budgetary revenue (percent of GDP): 2011 10.1, 2012 9.4, 2013 8.7, 2014 11.4, 2015 10.6, 2016 11.0. - Total expenditure (percent of GDP): 2011 11.3, 2012 12.8, 2013 10.4, 2014 15.3, 2015 18.4, 2016 13.3. - Domestic primary balance (percent of GDP): 2011 -1.2, 2012 -3.4, 2013 -1.7, 2014 -4.8, 2015 -3.3, 2016 -2.9. - Overall balance (including grants, percent of GDP): 2011 -1.4, 2012 -2.3, 2013 -1.9, 2014 -2.1, 2015 -3.9, 2016 -3.4. - Central government operations (2014, CFAF Billions, selected): Revenue and Grants 98.4; Revenue 57.4; Tax revenue 36.0; Nontax revenue 21.4; Grants 41.0; Total expenditure 109.2; Current expenditure 79.8; Capital expenditure and net lending 29.4; Overall balance (commitment) -10.8. - Balance of Payments (2014, CFAF Billions, selected): Current Account Balance including all official transfers -22.8; Excluding official transfers -32.1; Exports, f.o.b. 72.4; Exports cashew nuts 65.3; Imports, f.o.b. -92.8; Current transfers (net) 24.0; Capital and financial balance 30.7; Overall balance -30.4. - Monetary aggregates (2014, CFAF Billions, selected): Money supply (M2) 162.8; Net foreign assets 84.5; Net domestic assets 41.5; Credit to the private sector 64.2. - Indicators of capacity to repay the Fund (2014, selected): Outstanding Fund credit SDR millions 10.8; Percent government revenue 16.5; Percent exports of goods and services 9.5; Percent quota 76.0. _Italic: Source: IMF staff report text and tables contained in the provided content unit._ ### Appendix I Financial Stability and Development in ### Appendix I Financial Stability and Development in Guinea-Bissau ### Banking sector overview and shock impact - The small banking sector was affected by exogenous shocks in 2012, including a military coup and a 30 percent decline in cashew prices. - Despite rapid credit growth in 2009–12, bank credit to the economy is equivalent to only about 14 percent of GDP. - Only about 1 percent of households have access to banking services. - Rapid credit growth in 2009–12 was drastically reversed in 2012 after the coup and cashew price decline; bank credit to the economy contracted by 20 percent between mid-2012 and end 2013, with some recovery in the first half of 2014 due to continuous credit growth from non-affected banks. - The military coup restricted public services and investments and led to suspension of donor activities, affecting creditors across many sectors. ### Financial soundness indicators and asset quality - Financial Soundness Indicators gradually deteriorated since 2012. - Liquidity ratios remain high, but non-performing loans (NPLs) increased from 6.4 percent of total loans in 2012 to 25.7 percent in June 2014. - The bulk of NPLs are concentrated in two banks with significant exposure to the cashew sector. ### Cashew sector exposure and risk concentration - The banking sector has been increasingly financing the cashew sector, which was traditionally pre-financed by foreign cashew importers. - The trend reflects the highly lucrative nature of the sector and limited growth opportunities in other sectors. - Some banks are excessively exposed to the cashew sector and will need to seek better diversification or larger capital buffers. ### Financial deepening, access, and structural reforms needed - Credit remains concentrated mainly on large companies and public enterprises. - Only about 1 percent of households have access to banking services; broadening financial intermediation is necessary. - Reactivating microfinance activities based on an action plan and implementing a recently approved regulatory system, together with adequate training and external financial resources, could be a first step toward financial deepening. - Complementary reforms needed: - Improve the judiciary to facilitate contract enforcement. - Strengthen the accounting industry to provide reliable corporate accounts. - Provide training and coaching to turn business opportunities into bankable projects. - Improve the credit reference system. - Improve the payments and settlement system to increase banking system resilience. ### Key statistics — Guinea-Bissau: Financial Indicators for the Banking Sector, 2007–2014 (in percent unless otherwise indicated) - Capital - Tier 1 capital to risk-weighted assets: 27.3, 23.4, 24.9, 28.5, 22.3, 22.3, 23.1, 21.4 - Capital to total assets: 10.6, 10.6, 10.5, 15.3, 11.8, 13.2, 13.5, 11.0 - Asset quality - Non-performing loans to total loans: 6.6, 7.2, 8.5, 9.8, 6.5, 6.4, 11.6, 25.7 - Provisions to gross loans: 10.4, 8.0, 23.9, 16.3, 13.0, 10.7, 11.6, 19.0 - Earnings and profitability - Net Income to average assets (ROA): 1.1, 2.5, 2.6, 2.9, 2.9 - Net Income to average capital (ROE): -15.1, -3.6, -2.5, 6.2, 17.7, 18.0, 18.0, 17.9, 17.5 - Liquidity - Liquid assets to short term liabilities: 32.1, 48.0, 56.8, 33.0, 42.2, 49.0, 49.5, 60.1 - Memorandum items - Deposit rate: 1.9, 4.3, 4.0, 3.6, 3.8, 4.7, 4.7, 4.7 - Lending rate: 10.9, 1.8, 10.9, 10.6, 10.6, 10.2, 9.2, 9.2 - Source: BCEAO ### Recent economic developments and macro context (selected points) - GDP dropped 2 percent between 2012 and 2013. - The exchange rate between rice and cashew moved from 1 to 1 in 2011, to 1 to 3 in 2013, and to 1 to 1.5 in 2014. - A World Bank study indicates the portion of the population facing severe food insecurity went from 20 percent in 2011 to 40 percent in 2013. - It is estimated that over 70 percent of the population live on less than US$2 a day. - Public investment dropped by 41.1 percent in 2012 and by 15 percent in 2013. - Cashew price movements: rose 62 percent in 2011, dropped 28 percent in 2011, and dropped 21 percent in 2013. - Economic growth: 4.4 percent in 2010, 9.0 percent in 2011, -2.2 percent in 2012, and 0.3 percent in 2013. - Between 2011 and 2013 tax revenue dropped by 12 percent; non-tax revenue dropped 58 percent; customs revenues dropped 12 percent. - Tax to GDP ratio fell from 10.1 percent in 2011 to 8.6 percent in 2013. - At end-2013 the volume of arrears reached 2 percent of GDP; after issuing FCFA 15 billion the stock of arrears fell to 0.6 percent of GDP at the present time. - CPI: 5.7 percent in 2010, 3.4 percent in 2011, 1.6 percent in 2012, -0.1 percent in 2013; twelve months to August shows CPI deflation of -1.1 percent. - Exchange rate appreciation: 0.3 and 0.5 percent in 2011 and 2012, respectively; appreciated by 4.3 percent in 2013. - Formal export volume of cashew: 140 thousand tons in 2013, expected 136 thousand tons in 2014. - Cashew prices increased on average by 27 percent during the 2014 export period. - Expected GDP growth in 2014: 2.5 percent. - Current account deficit reached a peak of 6.5 percent in 2012 and is expected to drop to 0.4 percent of GDP in 2014. - Initial donor support in 2014: US$6 million in grants from East Timor; a further €10 million in budget support from the EU expected by end of year; agreement reached to receive €9.2 million in fishing compensation payments. ### 2014 emergency measures and governance actions (selected measures) - Arrears: FCFA 15 billion in Treasury Bonds issued; along with World Bank budget support helped bring down arrears from FCFA 9.7 billion to FCFA 2. billion; almost all salary arrears have been cleared. - Budget normalization: State Budget for 2014 drafted and being discussed in Parliament; Treasury Plan through end-2014 drafted; budget for 2015 to be drafted by end of year. - Treasury Committee: operational Treasury committee for daily cash flow management and a high-level Treasury Committee (Presidency, Prime Minister’s office, Ministry of Economy and Finance, BCEAO, IMF and donors) to be set up and operational by mid-October. - Foreign financial aid mobilization: US$6 million from East Timor; €10 million EU budget support expected; agreement for resumption of fishing compensation payments of €9.2 million; round-table planned for January 2015 to present development plans to partners. - Exemption Committee: set up to identify, analyze, quantify and rationalize tax exemptions. - Cash-flow risk: concentration of foreign financial aid at year-end may create cash-flow timing mismatches in 2014; government may need to issue short-term Treasury bonds to avoid accumulation of new arrears. *Source: IMF staff report excerpts as provided in the content unit.* ### 16. The government will start drafting its 2015 budget at the beginning of October in order to ### _cr14318 - 16. The government will start drafting its 2015 budget at the beginning of October in order to ### 2015 budget planning and fiscal stance - The government will start drafting its 2015 budget at the beginning of October in order to obtain Parliamentary approval by the end of the year. - As for the 2014 budget, the government strives to include as much revenues and expenditures in the budget, including those that had previously been outside the budget. - 2015 spending will be limited to available domestic resources, foreign aid and concessional loans for foreign investment, without resort to the banking sector. - The government will make conservative projections for the 2015 revenues, with which it intends to: - finance essential social spending (see floor for social expenditure); - pay salaries in line with 2014; - resume public investment; - make some payments to further reduce domestic arrears. - The totally funded budget will allow selected payments and prevent repetition of domestic or foreign arrears. - If government revenue exceeds the conservative projections, priority will be to: - increase public investments; and - further reduce domestic arrears. ### Government program for 2014–1018: Emergency, Contingency, Development - The government program for 2014–1018 distinguishes between current and structural needs: - a) Emergency Program: timely action to deal with emergency issues. Examples: - Payments of salaries in arrears: the high volume of salaries in arrears has already been paid. - Completing the school year: delays in teacher salaries and teacher strikes represent a risk for completion of the school year; with payment of salary arrears and resumption of classes, loss of a school year could be prevented. - Water and energy: chronic lack of clean water and energy imposes a high cost; the government has already taken measures to increase supply. - Cashew campaign: timber exports suspended to improve cash flow given Port of Bissau limitations, permitting increase of cashew exports. - Agriculture: late and irregular rainfall will affect agricultural production; government intends to distribute rice seed to promote production and offset this impact. - b) Contingency Program: all contracts signed by the administration will be analyzed and made public to increase transparency and credibility. Following assessment, structural measures will be taken to improve operational viability and provision of public services by adopting targets, monitoring execution, and increasing management transparency. Assessments will include: - Natural resources: assessment of contracts for prospection and exploitation of natural resources (i.e., phosphate (Farim), bauxite (Boé) and heavy sands (Varela)). - Oil: prospecting contracts and feasibility. - Public Companies: Guinea-Bissau Energy Company, Guiné Tel and Guiné Telecom. - Privatization: audit to privatized companies. - Autonomous funds: audit of autonomous funds with participation of the Administration (e.g., FUNPI, Road Fund, Tourism Fund, Mining Fund, etc.). - c) Development Program: focus on three areas: - infrastructure, to increase production and competitiveness; - industrialization, to diversify the productive structure; - urban development, to improve population well-being. ### Measures to improve public financial management and arrears resolution - Minimize the use of “non-regularized spending” (DNTs). Once the budget process is on track, the Treasure Plan is completed, and IMF technical assistance in public financial management is in place, the government will reduce non-regularized spending. - The High-level Treasury Committee will set ceilings for DNTs; ceilings could only be exceeded with Committee approval. - Foreign arrears: - Government will take all steps necessary to clear foreign arrears as quickly as possible. - Planning to clear foreign arrears to BOAD by the end of the year. - Will start negotiations with remaining foreign creditors as soon as possible. - Will make efforts to reschedule debt with Paris Club and other creditors pending since HIPC: Brazil, Russia and Portugal. - Renegotiation of the Angola debt has a verbal agreement but needs to be signed; government will proceed as quickly as possible. - Government views old debt to the Franco-Portuguese bank as sovereign debt to Portugal and seeks to have it considered under Paris Club terms; will attempt to resume negotiations by the end of the year. - Government will try to contact the governments of Libya, Pakistan and Taiwan to renegotiate debt. - Domestic arrears: - Committed to avoiding accumulation of new budget arrears in 2014 and to paying remaining stock of 2013 arrears as soon as possible. - By the end of this year, the government will have cleared the arrears carried over from 2013. - Committed not to accumulate arrears in 2014; temporary liquidity difficulties may be addressed by issuing short-term government bonds. - Older domestic arrears broken into three parts: - arrears accumulated between 1974 and 1999: audited and part already paid; - arrears between 2000 and 2007: audited but government doubts legitimacy of some debts; authenticity will be assessed through an international audit; - arrears between 2008 and 2012, including government-backed guarantees: yet to be audited and require external audit. - Once audits are concluded, government will design a strategy to clear arrears considering macroeconomic environment and available resources. - Borrowing policy: - Government commits to only seeking concessional loans given tight budget and investment needs. ### Measures to increase tax revenue and strengthen fiscal institutions - Urgent need to increase fiscal revenue and fiscal pressure; tax collection was significantly reduced after the 2012 coup. - Short-term revenue measures: - expand tax base via adoption of tax identification numbers (NIF) to main operators in the informal sector; - enforce payment by chronic tax evaders; - reconcile imports/export volumes with tax payments. - Structural reforms needed in public finance management, payroll management, tax and customs administration (DGCI and DGA), and debt management. - Observations: - The GDP/tax collection ratio in Guinea-Bissau is lower than in most neighboring countries and is one of the lowest in the world. - 33 percent increase in customs duties collection of August 2014 (compared to August 2013) is encouraging. - Planned measures and reforms: - a) Improving public finance management: - devise medium-term strategy to modernize public finance management with IMF and partners; - increase forecasting capacity; - complete implementation of SIGFIP (Integrated System of Public Finance Management). - b) Improve Debt management: - increase use of SYGADE and training of Debt Office staff; - quarterly publication of public debt levels, including disbursements and amortizations; - renegotiating and rescheduling of foreign debt and arrears to international creditors, drafting of a payment plan. - c) Improving Payroll Management: - consolidate payroll reform through SIGRHAP (Integrated System for Human Resource Management in Public Administration); - financial module already operational and all civil servants registered; salaries now paid through bank transfers; - list of military personnel received to be gradually entered into the system starting with higher-ranking officers; - by the end of the year, civil servants under the Ministry of the Interior should be included; - Administrative module (human resources) is still under construction. - d) Improving Customs control and efficiency: - improve operational efficiency of the Port of Bissau and other customs points, including Safim; - drastically reduce tax exemptions; - urgent payment of the Oracle license to avoid service interruption; - extend use of SYDONIA++ to São Domingos, Bafatá and Gabú; the contract should include supply of energy and internet; - by the end of the year, increase controls with marking of fuel and installation of scanners in port and border points. - e) Render tax collection efficient: - improve DGCI infrastructure by allocating necessary budget resources; - introduce a Human Resources Policy in the DGCI, including creation of professional auditor career; - streamline DGCI procedures (Mapping Processes) to lend security and flexibility to taxpayers; - introduce a new computer system to DGCI, including communication network between head office and local/regional tax offices; - rapidly increase control and auditing of large and medium-sized enterprises. ### Other policy measures and sectoral priorities - Banking sector and non-performing loans: - With IMF support, government seeks solution to large volume of non-performing loans. - Two of the four commercial banks have non-performing loan rates that exceed prudential norms. - Despite difficulties, credit to the economy continued to grow in H1 2014. - Government expects technical assistance from IMF MCM to identify optimal solutions. - Tax exemptions transparency: - Government will carry out extensive study to identify all tax exemptions, make them transparent, and assess their true cost and impact on economic costs and social equity; will analyze whether exemptions achieve intended purpose. - Water and electricity public enterprises: - Government intends to increase efficiency so companies become operationally viable and capable of self-financing long-term growth via adequate investment. - Strategies will include management improvements, operational efficiency, waste reduction, and possible tariff realignment compatible with maintenance and amortization costs. - Security sector reform: - Government views security sector reform as sine qua non for political and economic stability. - Replacement of Chief of the Armed Forces already done; second phase requires financing and donor support so pension fund and bonuses are donor-financed. - Business environment and private sector: - Improving business environment is a priority; private sector seen as key partner. - Essential measures include cost reductions, rule of law, and even level playing field to promote investment and growth. - Cashew sector: - Government wishes to develop cashew sector and recognizes negative impact of smuggling on tax revenue and poverty. - Considering alternatives to FUNPI; IMF argues for immediate abolition of FUNPI to promote sector, increase revenue and reduce poverty. - Government decided to conduct external audit of FUNPI since its inception in 2011. - Infrastructure investment and debt sustainability: - Essential to increase infrastructure investment without compromising public debt sustainability. - Medium-term investment plan should align with debt management strategy; public access to foreign financing should be limited to concessional interest rates. - If concessional financing is not possible, IMF and World Bank staff should be consulted before contracting less favorable loans. - Ebola preparedness: - Government prepared should Ebola arrive: contingency program estimated at US$5 million with WHO assistance. - World Bank has made available US$500,000 for emergency measures. - As a precaution, government is warehousing rice to avoid inflationary spikes from supply interruptions. - Financial inclusion: - Government wishes to promote responsible bank coverage; measures to broaden financial access include reforms in infrastructure, education, legal system, measures to improve loan recovery legislation, creation of a credit rating agency, strengthening payment and settlement systems. - Government will request donor assistance to implement the Microfinance Master Plan approved in April 2014. ### Indicative targets and structural benchmarks (as presented) - Structural benchmarks (MeasuresProposed Due Dates): - Prior action: Adopt and publish a prudent budget for 2014, based on conservative estimates of fiscal revenue and donor financing and with no financing gap. - Introduce a high-level treasury committee to enhance fiscal controls and reduce the perception of fiduciary risks by donors — End of October 2014. - Undertake a comprehensive audit of past activities of FUNPI — End of March 2015. - Streamline tax exemptions on fuel imports — End of March 2015. - Expand SYDONIA++ system to the Safim post — End of December 2014. - Sources: The Authorities of Guinea-Bissau and IMF Staff Estimates. - Note: RCF do not have any ex-post conditionalities. The benchmarks reflect the authorities' intended structural reforms. - Indicative Targets (verbatim lines from table): - 1. Accumulation of Treasury deposits at BCEAO3,00000 - 2. Floor of domestic revenues41,0008,75014,750 - 3. New domestic arrears 000 - 4. External nonconcessional public borrowing000 - 5. New external payment arrears000 - 6. Domestic primary balance (commitment basis)-19,400-8,000-8,200 - 7. Social spending12,2003,2007,407 - Sources: The Authorities of Guinea-Bissau and IMF Staff Estimates - Note: 1 Cumulative from January 1. The definition of the aggregates and adjustors is provided in the Technical Memorandum of Understanding (TMU). - Column headings shown in source: End-Dec 2014 End-March 2015 End-June 2015 ### Attachment II — Technical Memorandum of Understanding (selected definitions) - The TMU defines variables used to establish indicative targets for 2014 and 2015 and their calculation; flow variables are measured by accumulation of values since the beginning of 2014 and 2015 respectively unless otherwise indicated. - A. Absence of New Domestic Arrears: - Domestic arrears are defined as accounts payable accumulated over the year, and still unpaid by the month following the quarter for salaries and wages including pensions, and up to three months for goods, services and transfer, evaluated at the end of December 2014, March 2015 and June 2015. - B. Maximum Ceiling for Foreign Arrears: - Foreign arrears are defined as foreign payments due but not paid (i.e., payment of principal and interest) at the date of maturity. If the creditor has granted a grace period after the maturity date in the contract, the foreign payment will be considered in arrears at the end of the grace period. - Within the scope of the program, the government commits not to accumulate arrears on its foreign debt, with the exception of those under renegotiation with creditors, including bilateral creditors outside the Paris Club. This quantitative objective will be permanently monitored. - C. Absence of Non-Concessional Foreign Loans. *Source: Authorities of Guinea-Bissau and IMF staff as presented in the supplied chapter content.* ### 4. For the purpose of this objective, a debt is considered concessional when it includes at least ### 4. For the purpose of this objective, a debt is considered concessional when it includes at least ### Definition of concessional debt and grant element - A debt is considered concessional when it includes at least a 35 percent grant element. - The grant element is the difference between current value of the debt and its nominal value expressed as a percentage of the debt nominal value. - The current value of the debt at contract is calculated by deducting the future flow of debt service payments. - For the purpose of calculation of concessionality, all aspects of the debt agreement should be taken into consideration, namely: term, grace period, repayment period, initial commission and administrative fees. ### Discount rates and reference rates - The discount rates applied to that effect are the commercial interest reference rates for a specific currency (CIRR), as published by the OECD. - For debt in foreign currency, for which no CIRR is calculated by OECD, the grant element shall be based on the composite CIRR (weighted average) of the currencies in the SDR basket. ### D. Ceiling for Domestic Primary Deficit (Commitment Basis) - Calculated as the difference between public revenue and domestic primary expenditure on a commitment basis. - Public revenue includes all tax and non-tax revenue and excludes foreign grants. - Primary domestic expenditure consists of current expenditure plus domestically financed investment excluding all interest payments. - Government commitments include: - all expenditure earmarked and approved by the Ministry of Economy and Finance; - automatic spending (such as wages and salaries, pensions, utilities and other expenses which are paid centrally); - expenses through compensation operations. ### E. Floor for Tax Revenue - Tax revenue includes direct and indirect taxes as well as recovery of tax arrears and additional collection efforts. ### F. Ceiling of Non-Regularized Expenditure - Defined as any payment by Treasury without classification in the table of expenditure submitted by DG Budget. ### G. Floor for Social and Priority Spending - Defined as the total current expenditure in Education and Health. ### Relevant contextual numeric and institutional details (from the same document) - CFA franc pegged to the Euro at a fixed rate of €1 = CFAF 655.957 (since January 1, 1999). - On April 30, 2013, the rate of the CFA franc in terms of the SDR was CFAF 757.217 = SDR 1. - Guinea-Bissau joined the WAEMU in 1997; accepted the obligations of Article VIII, Sections 2, 3, and 4 with effect from January 1, 1997. - Article IV consultation: last discussions held April 29 to May 10, 2013; staff report (SM/13/141) discussed by the Executive Board on June 5, 2013. - HIPC Initiative: Assistance committed by all creditors (US$ Million) 421.70; Of which: IMF assistance (US$ million) 11.91 (SDR equivalent in millions) 9.20; Completion point date Dec 2010. - Disbursement of IMF assistance (SDR Million): Assistance disbursed to the member 9.20; Interim assistance 1.56; Completion point balance 7.64; Additional disbursement of interest income 0.23; Total disbursements 9.43. - MDRI-eligible debt (SDR Million) 0.51; Financed by: MDRI Trust 0.00; Remaining HIPC resources 0.51. - Fund membership: Joined March 24, 1977; Article VIII. - Quota: 14.20 (SDR Million) 100.00 percent. - Fund holdings of currency (Exchange Rate): 13.96 (SDR Million) 98.31 percent. - Reserve Tranche Position: 0.32 (SDR Million) 2.26 percent. - SDR Department net cumulative allocation: 13.60 (SDR Million) 100.00 percent; Holdings 12.39 (SDR Million) 91.02 percent. - Outstanding Purchases and Loans: ECF Arrangements 7.24 (SDR Million) 51.00 percent quota. - Latest financial arrangements listed include: ECF May 07, 2010–May 06, 2013 Amount Approved 22.37 (SDR Million) Amount Drawn 15.12 (SDR Million); earlier ECFs with amounts and dates as listed. - Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs): Forthcoming 2014–2018 principal entries include 0.72, 1.45, 1.45 (preserve these three numbers in sequence as shown); Charges/Interest entries include 0.00, 0.02, 0.02, 0.02, 0.01; Total entries include 0.00, 0.00, 0.02, 0.74, 1.46, 1.46 (preserve sequence and values). - Implementation of Post-Catastrophe Debt Relief (PCDR): Not Applicable. - Safeguards assessment: Most recent assessment of the BCEAO completed on March 1, 2010; update assessment initiated in February 2013. - Technical Assistance (2008–14): Multiple entries by department, type, time of delivery, and purpose (examples include West AFRITAC Short-term expert June 2008 Customs administration; STA Expert June 2008 Balance of Payment Statistics; FAD Staff September 2010 Tax Revenue and Customs Administration; and numerous other dated entries through September 2014). _Italic: Prepared By The African Department (In Consultation with Other Departments); FUND RELATIONS — October 20, 2014._ ### 4. Several new studies have been launched by the AfDB: A gender profile of ### _cr14318 - 4. Several new studies have been launched by the AfDB: A gender profile of ### New studies and analytical work - A gender profile of Guinea-Bissau is being conducted alongside: - a study on transport and regional integration, and - a comprehensive review of infrastructure bottlenecks affecting the agriculture sector. ### Assessment of Data Adequacy for Surveillance (As of October 17, 2014) - General: - Data have serious shortcomings that significantly hamper surveillance. - Shortcomings are most serious in the national accounts and external sector statistics. - Authorities have been improving data compilation in recent years with technical assistance from international and regional institutions. ### National Accounts - Recent developments: - The National Institute of Statistics (INE) received several technical assistance missions from West AFRITAC on real sector statistics, especially national accounts. - INE published revised GDP estimates in current and constant prices (2003) for 2010-2012, based on the System of National Accounts 1993. - The new series has a broader coverage of all sectors. - INE intends to implement the 2008 SNA by 2015 and compile a new base year. - Remaining issues: - Unavailability and/or difficulty in collecting basic data remain a problem. ### Price Statistics - Since July 2002, a harmonized consumer price index (HCPI) has been compiled, based on the WAEMU methodology. - HCPI was updated in 2010 (new base year 2008-2009, improved compilation techniques, extended coverage of products, increased outlets). - Coverage limitation: - HCPI coverage remains only the capital city, Bissau. ### Government Finance Statistics - Since 2007, a monthly worksheet table for State Financial Operations is compiled regularly and used for IMF program monitoring. - March 2010: a GFS mission from West AFRITAC provided technical assistance on compiling and disseminating GFS and implementing action plans to improve GFS data dissemination. - A government finance statistics technical assistance mission under West AFRITAC was planned for November 2014. ### Monetary and Financial Statistics - Compiled and disseminated by BCEAO (regional Central Bank of West African States). - Shortcomings persist despite improvements: - Inconsistencies in source data. - Lack of proper sectorization of the domestic economy to fully adhere to the Monetary and Financial Statistics Manual methodology. - STA missions (2011, 2013, 2014) to BCEAO headquarters in Dakar made recommendations and assisted in developing standardized report forms (SRFs) for central bank accounts and initiated SRF work for Other Depository Corporations (ODCs). ### External Sector Statistics - Trade data reported to AFR for operational purposes, using customs information. - Balance of payments data are weak due to: - Substantial unregistered trade. - Inconsistencies between BCEAO-reported net foreign assets and other economic indicators. - Large informal sector and many small-scale operators. - Institutional weaknesses: only some 20 percent of businesses file tax returns. - External debt data: - No external debt data are published by the Ministry of Finance. - Stock and flow data are regularly produced and transmitted to the BCEAO. ### Data Standards and Quality - Guinea-Bissau participated in the General Data Dissemination System since November 2001. - Metadata for all data categories and plans for improvement need updating. - No data ROSC is available. ### Reporting to STA - Government finance data: - Currently 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 for publication in the IFS with some delays. - Balance of payments and international investment position: - Reported to STA on an annual basis with considerable delays; latest data relate to 2010. ### Financial Sector Surveillance - BCEAO accepted STA’s invitation to begin regular reporting of member countries’ FSIs for dissemination on the IMF website. ### Table of Common Indicators Required for Surveillance (selected entries as presented) - Exchange rates: Date of latest observation — Current; Date received — Current; Frequency of data — D; Frequency of reporting — D; Frequency of publication — D. - International reserve assets and reserve liabilities of the monetary authorities: Date of latest observation — Mar. 2013; Date received — Apr. 2013; Frequency of data — M; Frequency of reporting — M; Frequency of publication — M. - Reserve/base money: Date of latest observation — Jun. 2014; Date received — Sep. 2014; Frequency — M M M. - Broad money: Jun. 2014; Sep. 2014; M M M. - Central bank balance sheet: Jun. 2014; Sep. 2014; M M M. - Consolidated balance sheet of the banking system: Jun. 2014; Sep. 2014; M M M. - Interest rates: Date of latest observation — Aug. 2014; Date received — Sep. 2014; Frequency — M M M. - Consumer price index: Jul. 2014; Aug. 2014; M M M. - Revenue, expenditure, balance and composition of financing – general government: Date of latest observation — Mar. 2013; Date received — Mar. 2013; Frequency of data — M; Frequency of reporting — Q; Frequency of publication — Q. - Stocks of central government and central government-guaranteed debt: Date of latest observation — Dec. 2011; Date received — Apr. 2013; Frequency — A I I. - External current account balance: Feb. 2013; Apr. 2013; A I I. - Exports and imports of goods and services: Feb. 2013; Apr. 2013; A I I. - GDP: 2012; Apr. 2013; A I I. - Gross external debt: 2012; Apr. 2013; A I I. - International Investment Position: 2010; Jan. 2012; A I I. ### Debt Sustainability Analysis (Request for Disbursement under the Rapid Credit Facility — DSA Update) - Classification and overall finding: - Guinea-Bissau remains at moderate risk of debt distress. - External and public debt indicators improved significantly following HIPC and MDRI assistance and remain below indicative thresholds throughout the projection period. - Compared to last year’s assessment, there have been improvements: only one debt-burden indicator (under the most extreme scenario) breaches the associated benchmark. - There is a large and protracted breach of the present value of debt to exports threshold in an exports shock scenario. - Reasons for improvements: - Revisions to the debt stock and GDP. - Reclassification of BOAD debt from external to internal debt. - Exclusion of debts in technical arrears. - Policy implications: - Domestic public debt has increased markedly, reinforcing the need to: - pursue prudent fiscal and debt management policies, - implement structural reforms such as export diversification and higher tax collection, - continue to rely strongly on concessional borrowing. ### Background on recent debt evolution and composition - HIPC/MDRI impact: - Enhanced HIPC implementation in December 2010 and MDRI in May 2011 reduced PPG external debt from a peak of 113 percent of GDP at end-2009 to 28 percent of GDP at end-2013. - Debt composition (Text Table 1, nominal external debt stock, 2011-13 — percent of total debt / percent of GDP): - Total: 24.4 / 28.2 / 28.0 / 100.0 - Multilateral creditors: 12.1 / 14.0 / 13.9 / 49.5 - IMF: 1.0 / 1.2 / 1.2 / 4.1 - IDA: 5.2 / 5.8 / 5.7 / 20.5 - AfDB: 1.6 / 2.0 / 1.9 / 6.8 - Others: 4.4 / 5.1 / 5.1 / 18.1 - Bilateral creditors: 12.3 / 14.0 / 14.1 / 50.4 - Paris Club: 0.0 / 0.0 / 0.0 / 0.0 - Non-Paris Club: 12.3 / 14.0 / 14.1 / 50.4 - Commercial: 0.0 / 0.0 / 0.0 / 0.1 - Memorandum item: Debt in technical arrears: 8.0 / 9.2 / 9.2 / 32.9 - Note: Includes $48.2 million to Taiwan, $32.8 million to Angola, $3.7 million to Libya, $3 million to Pakistan, $0.3 million to Abu Dhabi, and $0.3 million to a commercial bank (based on preliminary findings). - Public domestic debt: - Increased due to limited access to official external financing and reclassification of BOAD loans as internal debt (denominated in domestic currency). - Ratio of domestic debt to GDP remained around 35-36 percent from end-2009 to end-2013. - BOAD debt increased from 1 percent of GDP in 2009 to about 6 percent of GDP in 2013. - Government placed CFAF10 billion and CFAF15 billion in treasury bonds in 2013 and 2014. - Ratio of public domestic debt to GDP expected around 37 percent at end-2014, increasing to 47 percent in 2017 before beginning to decrease. ### Underlying Macroeconomic Assumptions and Projections - Macroeconomic outlook revised for decreased macroeconomic and political uncertainty after the 2012 coup and return to democracy; baseline assumes recovery driven by restoration of traditional development partners’ support and increased investment. - Key baseline adjustments relative to previous DSA: - Medium-term growth: strong recovery relative to very weak years (-2.2 and 0.3 percent); long-term growth at 4 percent per year with stronger fundamentals and international support. - Primary fiscal deficit: projected to converge towards 0.4 percent of GDP in the long term. - Selected numerical comparisons (Text Table 2): - Real GDP growth (percent): - Previous DSA: 2012 -1.5; 2013 3.5; 2014 2.4; Long Term 4.0 - Current DSA: 2012 -2.2; 2013 0.3; 2014 2.5; Long Term 4.0 - Primary fiscal balance (percent of GDP): - Previous DSA: 2012 -2.8; 2013 0.8; 2014 -0.7; Long Term -0.2 - Current DSA: 2012 2.1; 2013 1.7; 2014 -0.4; Long Term 0.4 - Non-interest current account deficit (percent of GDP): - Previous DSA: 2012 6.5; 2013 5.5; 2014 4.5; Long Term 2.4 - Current DSA: 2012 4.6; 2013 4.0; 2014 0.3; Long Term 4.9 - Growth of exports (percent): - Previous DSA: 2012 -44.4; 2013 23.7; 2014 14.7; Long Term 6.3 - Current DSA: 2012 -41.4; 2013 5.4; 2014 13.2; Long Term 6.4 - Box 1: Macroeconomic Assumptions (highlights) - Medium term (2014-19) projections consistent with macro framework under an RCF request. - Long term (2020-2034) assumes enduring political stability and higher investment and revenue collection. - Real GDP growth: projected 2.5 percent in 2014; medium term to 3.7 percent; long run stabilize around 4 percent. - Inflation (CPI): projected 2.1 percent by end-2014; converge to 2.5 percent in medium run and hover around that level long term. - Primary fiscal deficit: from 1.7 percent of GDP in 2013 to 1.8 percent in medium term; long run about 0.4 percent of GDP. - Government domestic debt: projected to increase from 35 percent of GDP in 2013 to 41 percent in 2019; long term expected to decrease to about 7 percent. - Non-interest external current account deficit: from 4.0 percent of GDP in 2013 to 5.7 percent in 2019; long term stabilize at about 5 percent. - Net FDI: projected to pick up in medium and long terms. - Net aid flows: expected to hover around 7 percent of GDP in the medium run, decreasing slightly thereafter. - Concessional loan terms assumed: 0.75 percent interest rate with 40 (IDA) and 50 (AFDB) years maturity and ten-year grace period. - Average grant element of new external disbursements assumed to remain around 50 percent throughout the projection period. ### External Debt Sustainability Analysis — Key Findings - Baseline scenario: - All debt burden indicators expected to remain below their thresholds for the projection period. - No debt burden indicator breaches its respective threshold in the baseline. - Stress/most extreme shock scenario: - The PV of debt-to-exports ratio breaches the benchmark for an extended period. - PV of debt-to-exports would increase from about 53 percent in 2014 to 165 percent of GDP in 2019 and then remain above the threshold during the projection period. - Under this scenario, all other indicators remain well below their associated thresholds during the entire projection period. - Conclusion: - Stress tests indicate vulnerability to a fall in exports. - On this basis, Guinea-Bissau remains classified as a moderate risk country. - Potential upside if exports increase earlier or diversification is larger due to improved road infrastructure and some product diversification. *Prepared by the Staff of the International Monetary Fund (IMF), October 20, 2014.* ### 6. The current assessment presents a better debt outlook than the previous DSA. In the ### 6. The current assessment presents a better debt outlook than the previous DSA. In the ### Comparison with previous DSA - One debt burden indicator breached the threshold under the baseline scenario in the previous DSA, compared to none in the current DSA. - Under the most extreme shock scenario, three debt burden indicators breached their associated thresholds in the previous DSA, compared to just one indicator in the current DSA. - Improvements are attributed to: - revisions to the debt stock and GDP; - the exclusion of debts in technical arrears; - the reclassification of BOAD debt as domestic debt. ### Public Debt Sustainability Analysis — baseline projections and indicators - Total (external and domestic) public debt indicators are projected to decline gradually over time. - Baseline scenario projections: - The PV of debt-to-GDP ratio is expected to decrease from 47 percent in 2014 to 19 percent in 2034, after increasing somewhat in the next three years due to large infrastructure projects in the pipeline. - The PV of debt-to-revenue ratio is projected to decline from 242 percent to 114 percent. - The debt service-to-revenue ratio is expected to stabilize around 6 percent (the value expected for 2014). - Caveat: - The PV of debt-to-GDP ratio should lie above its corresponding threshold for half of the projection period, notwithstanding its marked improvement over last year’s DSA. - Note on thresholds: - Debt sustainability thresholds are determined by the three-year (2010–12) average of the Country Policy and Institutional Assessment (CPIA) rating (2.7), classifying Guinea-Bissau as having low-quality policies and institutional frameworks. - The most extreme shock is calibrated as an export shock in 2015–2016 equal to the historical average (2004–2013) of export growth minus one standard deviation (in the same period), or a one-time, 30-percent nominal currency depreciation. - No threshold on total public debt existed in the previous DSA; applying this new threshold to the previous DSA would have produced a similar result. ### Risks to the baseline scenario - Key risk factors: - High dependence on cashew exports. - Availability of concessional external financing. - New episodes of political instability. - Specific dynamics and vulnerabilities: - Initial increase in the PV of debt is driven by large expected BOAD disbursements in the medium-term tied to infrastructure investment, which is expected to boost GDP afterwards and help decrease vulnerabilities. - Political instability could lead to lower concessional financing and grants, requiring additional issuance of Treasury bills, on top of recent sizable placements totaling 25 billion in 2013 and 2014; in an extreme case even the rolling over of this debt cannot be taken for granted. - A weaker external environment could result in lower-than-expected exports and remittances, translating into downside risks to growth, FDI and the current account dynamics. - Although debt to the BCEAO has been successfully rescheduled, uncertainty remains about the amount of additional old internal arrears that will be certified, since their volume is under dispute. ### Conclusion and policy recommendations - Staff assessment: - Guinea-Bissau faces a moderate risk of debt distress under assumptions of medium-term gradual economic recovery, sound policies, and continued structural reforms. - The assessment has greatly benefited from the HIPC and MDRI initiatives, and efforts should be made to make those gains permanent. - Policy guidance: - Authorities should consider borrowing opportunities carefully and accept only concessional financing. - Debt management should be enhanced and carried out with caution. - Better debt management and sound policies are crucial to sustainable growth. - Domestic debt concerns: - Domestic debt relative to GDP rose from 26 percent in 2011 to 35 percent in 2013. - Inclusion of domestic public debt in the debt sustainability analysis confirms that GNB’s debt position is vulnerable, as the PV of debt-to-GDP ratio surpasses its threshold for the next ten years. *Source: IMF staff assessment excerpt from the provided content unit.* ### 11. The authorities broadly agree with the staff conclusions and policy recommendations. ### _cr14318 - 11. The authorities broadly agree with the staff conclusions and policy recommendations. ### Authorities' overall position - The authorities broadly agree with the staff conclusions and policy recommendations. - They concur that debt sustainability depends critically on: - the ability to access concessional financing, - improvements in potential economic growth, - sound macroeconomic and prudent debt management policies. ### Notes on the Debt Sustainability Analysis (DSA) - The inclusion of remittances in the analysis, accounting on average for 2.8 percent of GDP in the last five years, results in minor changes of debt burden indicators. - The DSA includes: - the already audited and recognized stock of arrears related to the 1974–1999 period, - CFA14 billion related to the 2000–2007 period. - Arrears from the 2008–2012 period, which have neither been audited nor recognized, are not included. - Revenues are defined inclusive of grants in some figures and tests. ### IMF emergency financing and macroeconomic context - IMF Executive Board approved emergency financial assistance under the Rapid Credit Facility (RCF) equivalent to SDR3.55 million (about US$5.24 million) for Guinea-Bissau. - The RCF disbursement equals 25 percent of Guinea-Bissau’s quota in the IMF and the full amount was made immediately available. - The RCF is described as providing immediate financial assistance with limited conditionality, zero interest (until end 2014), a grace period of 5.5 years, and a final maturity of 10 years. ### Recent economic conditions and short-term projection - The newly elected government inherited very difficult conditions after two years of economic disruption: eroded government revenues, compressed social spending, accumulated external and domestic arrears. - Real gross domestic product (GDP) fell by 2 percent and poverty increased markedly (period referenced in text). - Economic activity is projected to gradually recover and grow by 2.5 percent in 2014. ### Policy recommendations and steps emphasized by IMF management - Maintain a prudent fiscal policy that limits spending to available resources and prioritizes spending carefully. - Clear outstanding domestic arrears of 2013 and 2014 and all external arrears by year-end to support the recovery. - Prevent re-emergence of arrears by avoiding extra-budgetary expenditures and improving cash management. - Reinstatement of the treasury committee and preparation of cash management plans are cited as steps in the right direction. - Complement international financial support with efforts to mobilize domestic revenues and strengthen public financial management. - Seek technical assistance from development partners to prioritize fiscal reforms and boost implementation capacity. - Audit the operations of the national cashew fund; abolition of the fund would have an immediate beneficial impact on household consumption. - Authorities need to elaborate more efficient and pro-poor alternatives to support agriculture and the cashew sector. - Address pervasive economic and political vulnerabilities through: - security sector reform, - broad structural reforms to diversify the economy, - improvements in governance and the business environment. ### DSA stress-test and scenario framing (selected methodological points) - The most extreme stress test is defined as the test that yields the highest ratio on or before 2024; specific correspondences to shocks are noted (e.g., one-time depreciation, exports shock). - Sensitivity analysis and bound tests include scenarios such as: - Key variables at their historical averages in 2014-2034, - New public sector loans on less favorable terms in 2014-2034, - Real GDP growth at historical average minus one standard deviation, - Export value growth at historical average minus one standard deviation, - One-time 30 percent nominal depreciation relative to the baseline in 2015. - Assumptions and definitions: - Endogenous debt dynamics formula derived using r, g, and ρ as specified in the DSA. - Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period. - Grant-equivalent financing includes grants directly to the government and through new borrowing (difference between face value and PV of new debt). *Source: IMF staff report and associated press release and statements in the provided PDF content.* ### Introduction ### Introduction ### Context and request for IMF support - Authorities express appreciation for IMF support following legislative and presidential elections held in April and May 2014 marking the return to constitutional order. - President Jose Mário Vaz met with Management early in August on challenges facing Guinea-Bissau and the Fund’s role. - Authorities request Fund support under the Rapid Credit Facility (RCF) to address urgent balance of payments and financing needs for 2014. - RCF support is intended to catalyze the resumption of donors’ assistance and pave the way for a medium-term program under the Extended Credit Facility (ECF). - Authorities plan a Donors’ Roundtable during the first half of 2015 to mobilize external financing for development programs. ### Key short-term objectives stated by authorities - Restore macroeconomic stability. - Put the economy on the road to higher and sustained growth. - Make significant progress in reducing poverty. - Seek technical and financial assistance from the international community, including the IMF. ### Relevant numeric commitments and events - Donors’ Roundtable: scheduled for the first half of 2015. - Requesting support under: Rapid Credit Facility (RCF) for 2014; intention to request Extended Credit Facility (ECF) thereafter. --- ### Recent Economic Developments - The April 2012 coup d’état led to: - Severe disruptions of economic activities and public services. - Sharp decrease in government revenues. - Tight compression in social spending. - Large accumulation of domestic and external arrears. - Economic growth and sectoral shocks: - Economic growth contracted by 2. 2 percentage points in 2012 and stagnated in 2013. - Cashew prices dropped by 21 percent in 2013, contributing to a decline of cashew exports which account for more than two thirds of export earnings and tax revenue. - Fiscal and arrears developments: - Overall fiscal balance, excluding grants, deteriorated from 4.8 percent in 2012 to 5.7 percent of GDP in 2013. - Payment delays reached 2 percent of GDP at end-2013. - Inflation and financial sector stress: - After rising by 1.6 percent in 2012, inflation declined and registered a -1.1 percent last August. - Sharp decline of cashew exports led to a significant increase in the ratio of non-performing loans. --- ### Short-Term Measures Implemented - Budget and cash management measures: - Authorities adopted a prudent budget for 2014. - Established a Treasury Committee for daily cash flow management. - Plan to set up a high–level Treasury Committee including Bissau-Guinean and donor representatives to set spending priorities. - Fiscal containment and exemptions: - Established an Exemption Committee to streamline tax exemptions. - Salary arrears and liquidity measures: - Rapid action to clear salary arrears to stimulate the economy and restore confidence. - Issued Treasury Bills of CFA Francs 15 billion purchased by residents and non-residents. - T-Bills issuance together with World Bank budget support helped clear salary arrears and significantly reduced payment arrears. - Donor re-engagement and sectoral agreements: - Bilateral and multilateral donors resumed financial assistance suspended after April 2012 political crisis. - European Union and authorities reached an agreement for resumption of fishing compensation payments. - Authorities hopeful donors’ roundtable in 2015 will garner full support and request IMF active participation. - Security sector reform: - Progress in security sector reform noted as sine qua non for stability. - Chief of Staff of the Armed Forces replaced last September; plan to mobilize reform financing including pension fund and bonuses with international partners. --- ### Medium-Term Policies and Reforms - Overall approach: - Focus on structural reforms to address protracted fiscal difficulties and create conditions for sustained growth. - Authorities will seek technical assistance from the Fund and other development partners due to heavy capacity constraints. - Fiscal sector reforms: - Aim to increase fiscal revenues through reforms in public finance management, payroll management, tax and customs administration, and debt management. - Exemption committee work expected to enlarge the tax base and raise the GDP/tax collection ratio to peer levels. - Financial sector reforms: - Identify optimal solutions to large volume of non-performing loans; discussions underway with Banque Ouest Africaine de Developpement (BOAD) for securitization of banking loans. - Adopt measures to increase access to banking given low penetration: only 1 percent of households have access to banking services. - Payment of salaries through the banking system to help broaden access. - Additional measures: improve education and legal systems, enact legislation to recover loans, create a credit rating agency, strengthen payment and settlement systems. - Business environment and public enterprises: - Reduce cost of doing business and promote rule of law to attract private investment. - Increase efficiency of public enterprises, notably water and electricity, through management and operational improvements, reduction of waste, and possible tariff realignments. - Cashew sector and diversification: - Conduct external audit of FUNPI to assess functioning, efficacy and use of resources. - Explore more efficient and better targeted initiatives to support cashew production and domestic transformation. - Promote diversification of production and exports; assess contracts for prospection and exploitation of bauxite, phosphates, oil and heavy sands. - Ebola preparedness: - No cases registered in Guinea-Bissau. - Authorities prepared a contingency plan estimated at US$ 5 million. - Precautionary measures include closing borders with affected countries and building up stocks of main imported staples. --- ### Conclusion and Board Observations - Authorities’ assessment: - Economic activity severely affected by political instability and cashew price decline. - Following restoration of constitutional order, authorities are committed to creating conditions for sustained higher growth and request continued IMF and development partner support, including RCF disbursement and an eventual ECF-supported program and scaled up technical assistance. - Statement by Mr. Chodos and Mr. Corvalan Mendoza: - Political transition is advancing; medium-term outlook heavily dependent on reform implementation to maintain debt sustainability. - Country benefited from HIPC and MDRI in 2010 and 2011 which helped reduce public and publicly guaranteed debt to a sustainable path. - Support disbursement under RCF; RCF disbursements together with donor support projected to close government financing needs. - Welcome prudent 2014 budget and preparation of 2015 budget in line with prudent resource expectations; note large residual financing gap for 2015 as a challenge. - Encourage continued structural reforms, improved regulatory framework, adherence to international best practices in regulation and supervision, and strengthened anti-money laundering policies. - Financial sector statistics noted: - Limited exposure of financial institutions to the private sector through loans is 14 percent. - Only 1 percent of households have access to banking services. - Emphasize broadening financial intermediation and transforming savings into private consumer credit or private investment. *Source: IMF staff and Guinea-Bissau authorities statement, Introduction section.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14318.pdf_