Guinea-Bissau: IMF Executive Board Concludes 2013 Article IV Consultation

On June 21, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Guinea-Bissau.¹

Background

A military coup d’état in April 2012 set back some progress achieved in previous years toward improved macroeconomic policies. The coup led to a sharp drop in cashew nut export volumes and a suspension of traditional donors’ aid that was only partially offset by increased budget support from region. As a result, the economy contracted by 1½ percent in 2012. Despite some upward pressures on prices driven by food and fuel shortages, the impact on headline inflation was muted in light of low domestic demand pressures. Twelve-month inflation was about 2 percent at end-2012. The external current account deficit deteriorated, reflecting also a fall in cashew export prices. The resulting sizeable reduction in fiscal revenues led to a deterioration in spending composition and fiscal control. Some domestic arrears were accumulated in 2012, although the government completely cut domestically-financed capital spending.

Economic growth will recover somewhat in 2013, but overall prospects remain difficult. Assuming a recovery in cashew exports and continued support from regional partners, real gross domestic product (GDP) could increase by about 3½ percent in 2013. But the near-term outlook hinges on a rapid resolution of the current political crisis. Most development partners maintain only limited working relations with the interim government. Until the political situation is normalized and development partners resume their full financial support, the economy will remain highly vulnerable and social conditions would likely deteriorate. Inflationary pressures are projected to remain moderate. The current account deficit is projected to fall relative to 2012, owing to the recovery of cashew export earnings.

The economic outlook is subject to external and domestic risks. The persistent political crisis is likely to continue to compromise external financing flows, which could result in fiscal slippages and a slowdown in economic growth. A delayed cashew export campaign also poses a downside risk. On the other hand, rising unemployment rates in the Euro area can have a negative impact on remittances and domestic demand.

Executive Board Assessment

Executive Directors noted Guinea-Bissau’s fragile economic conditions amid a difficult political situation, weak donor support, and downside risks to the external sector. While the economy is expected to rebound in 2013, re-establishment of macroeconomic stability, normalization of the political situation, restoration of donor and investor confidence, and acceleration of structural reforms will be needed to reduce vulnerabilities and ensure sustainable and inclusive growth.

Directors stressed the importance of timely approval of a prudent 2013 budget based on realistic revenue projections and a tight expenditure envelope. Given limited financing options, strict fiscal controls and contingency planning should help protect social expenditures and avoid a surge in arrears. Directors welcomed the authorities’ intention to improve transparency in the management of the fund to promote the industrialization of agricultural products (FUNPI).

For the medium term, Directors stressed the importance of building fiscal space. Efforts, supported by continued technical assistance, should focus on increasing tax revenues by broadening the tax base and strengthening tax and customs administration and enhancing public financial management. Directors emphasized that prudent fiscal and debt management policies will be critical to maintain debt sustainability.

Directors underscored the importance of structural reforms to boost competitiveness and achieve inclusive and diversified growth, which will also be essential to reduce vulnerability to shocks. Priority should be given to enhancing the business environment and improving physical infrastructure and access to financial services. Directors welcomed the authorities’ plans to improve access to credit for financially neglected groups and to review the labor law to promote employment.