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IMF Survey: IMF, World Bank Back $1.2 Billion Debt Relief for Guinea-Bissau

December 17, 2010

  • Debt relief provides opportunity of new beginning for Guinea-Bissau
  • Milestone cuts present value of country's external debt by 87 percent
  • Lasting debt sustainability will depend on further reforms

The IMF and the World Bank decided, on December 13 and 16, respectively, to support $1.2 billion in debt relief for Guinea-Bissau.

IMF, World Bank Back $1.2 Billion Debt Relief for Guinea-Bissau

Workers sort cashew nuts in Quinhamel, Guinea-Bissau, where authorities have acted to improve business environment (photo: Georges Gobet/AFP)

DEBT RELIEF FOR AFRICA

The move will cut the West African country’s external debt by 87 percent.

The Executive Boards of the two institutions agreed that Guinea-Bissau had satisfied the requirements to reach the final stage, or completion point, of the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative and therefore qualified for comprehensive debt relief from its external creditors. Having reached the completion point, Guinea-Bissau also qualifies for debt relief under the Multilateral Debt Relief Initiative (MDRI).

These actions will generate total debt service savings of $1.2 billion, consisting of $703 million in HIPC debt relief, $107.9 million in additional debt relief from the Paris Club group of creditors, $230.3 million in debt relief under topping-up assistance, and $139.2 million in debt relief under the MDRI.

Debt relief from the IMF and the World Bank totals $15 million and $347.2 million, respectively, with the remaining relief expected to come from bilateral, commercial, and other multilateral creditors. As a result, the present value of Guinea-Bissau’s external debt at end-2009 will be reduced by 87 percent (see chart).

“Guinea-Bissau has made significant progress in the last two years in strengthening macroeconomic policies and performance following a prolonged period of political instability,” said Paulo Drummond, IMF mission chief for Guinea-Bissau. “Reaching the HIPC completion point will help Guinea-Bissau further improve relations with its external creditors, move toward debt sustainability, and send a positive signal to donors and potential investors.”

A long road

The road to the HIPC completion point was long and difficult. Guinea-Bissau reached the interim HIPC decision point in 2000. However, political tensions and erratic macroeconomic policies, combined with fragile institutions and limited technical capacity, led to poor outcomes over the next several years.

The IMF helped build capacity with staff-monitored programs in 2006 and 2007 and provided Emergency Post-Conflict Assistance (EPCA) in 2008 and 2009. Solid performance under Guinea-Bissau’s 2009 EPCA-supported economic program helped to stabilize the economy and paved the way for approval, in May 2010, of a three-year Extended Credit Facility arrangement with the IMF. Under the arrangement, the government has maintained sound macroeconomic policies and accelerated reforms.

To reach the HIPC completion point, the government achieved objectives related to the country’s poverty reduction strategy, macroeconomic stability, the education sector, the health sector, HIV/AIDS, and the demobilization of former combatants. Key accomplishments included

• Implementing a poverty reduction strategy prepared in a participatory process involving all segments of society

• Overhauling of the public procurement system in line with West African Economic Monetary Union (WAEMU) guidelines

• Bringing the public expenditure management system in line with WAEMU standards, and resuming quarterly budget execution reports

• Introducing free primary education in public schools, and raising enrollment rates

• Providing vaccination to more than 90 percent of children, and

• Raising awareness of HIV/AIDS: about 91 percent of women aged 15–49 have heard of HIV/AIDS, and 64 percent know that it can be transmitted from mother to child.

Reaching the HIPC completion point marks a significant milestone in Guinea-Bissau’s recovery from the domestic conflict of 1998–99. Despite a fragile political environment, the authorities have maintained their commitment to sound policies and reforms, with positive results. GDP growth has been resilient, inflation is low, fiscal revenues have exceeded the program targets, and spending has been kept under control.

On the structural front, the authorities have taken measures to strengthen budget planning and execution, increase revenue collection, and improve the business environment.

Next steps

Although debt relief will lead to a significant improvement in Guinea-Bissau’s debt outlook, further steps are needed to secure debt sustainability and to sustain growth and poverty reduction. Guinea-Bissau should continue to rely on grants and nonconcessional borrowing to meet its financing needs for the foreseeable future.

Lasting debt sustainability and further progress toward the antipoverty Millennium Development Goals will require political stability and further progress on economic reforms, including security sector reform, diversifying the export base, and mobilizing more domestic revenue.

Andrew Jewell, Santiago Peña, and Wendell Daal contributed to this article.