Press Release No. 10/185

Press Release: IMF Executive Board Approves US$33.3 Million Arrangement Under the Extended Credit Facility and Additional US$1.5 Million in Interim HIPC Assistance for Guinea-Bissau

May 7, 2010

The Executive Board of the International Monetary Fund (IMF) today approved a three-year Extended Credit Facility (ECF) arrangement in an amount equivalent SDR 22.365 million (US$33.3 million) to support Guinea Bissau’s medium-term economic program. The Executive Board also approved the second tranche of interim assistance under the Heavily Indebted Poor Countries (HIPC) Initiative of SDR 1.016 million (US$1.5 million).

The authorities’ economic program aims at helping the country move towards fiscal and debt sustainability, as well as achieving stronger economic growth and poverty alleviation. The program focuses on reinforcing public finances, modernizing public administration, and raising the quality of public services. It also seeks to promote job creation by removing impediments to private sector development and enhancing the provision of financial services. Satisfactory performance could pave the way for Guinea-Bissau to benefit from debt relief by the end of the year through the enhanced HIPC and Multilateral Debt Relief Initiatives (MDRI).

Following the Executive Board's discussion on Guinea Bissau, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, issued the following statement:

“Despite difficult external and domestic circumstances, economic growth has been resilient in Guinea-Bissau and macroeconomic performance has improved in recent years. The authorities achieved most targets of their 2009 economic program, and implemented important structural reforms. The Fund supported these efforts through a disbursement under the Emergency Post-Conflict Assistance.

“To build on these achievements and provide the basis for stronger economic growth and poverty alleviation, the government has defined a medium-term macroeconomic and structural reform program for 2010–2012. This program aims at raising economic growth, keeping low inflation, reducing the fiscal deficit, and gradually narrowing the external current account imbalance. Political stability, effective governance, and strong commitment to reform are essential to the success of the program and the full engagement of donors.

“The 2010 budget is an important first step in the medium-term macroeconomic program that would help move Guinea-Bissau toward sustainable fiscal and external positions. In order to achieve that objective, the budget introduces strong revenue measures, reallocates expenditure in favor of priority areas, including social spending, and addresses more decisively the accumulation of domestic arrears.

“The government’s program of economic reforms appropriately emphasizes enhancing public financial management, strengthening fiscal controls, broadening the tax base, modernizing tax administration, and raising the quality of public services. It also seeks to remove impediments to private sector development, improve the provision of financial services, step up access to social services, and alleviate poverty.

“Satisfactory performance on the medium-term economic program will help pave the way for Guinea-Bissau to reach the Highly Indebted Poor Countries (HIPC) Initiative completion point in late 2010. Debt relief under the Highly Indebted Poor Countries Initiative and Multilateral Debt Relief Initiative (MDRI), together with additional debt relief from bilateral creditors, will significantly alleviate the debt burden and help Guinea-Bissau advance toward external and fiscal sustainability,” added Mr. Portugal.

ANNEX

Recent Economic Developments

In 2009 Guinea-Bissau made progress stabilizing its economy. Economic growth was resilient; inflation slowed; and budgetary stability was regained:

• Guinea Bissau was affected by the impact of the global financial crisis in 2009. Lower prices for cashews—the predominant export—and falling remittances exacerbated fiscal and balance of payments pressures. Still, thanks to a favorable cashew harvest and a pick-up in construction, real GDP growth is estimated to have reached 3 percent.

• Fiscal performance was satisfactory. Tax revenues exceeded previsions by about 2 percentage points of GDP, reflecting the good cashew harvest and stepped-up collection efforts. At year-end donor support exceeded programmed levels. Meanwhile, the government contained spending and kept domestic arrears within target.

• The external current account deficit (excluding grants) widened to 6½ percent of GDP. The higher deficit reflects a combination of lower cashew prices, a surge in imports of oil and construction material, and a decline in remittances. It was largely financed by an increase in grants, so the overall external balance deteriorated only moderately.

• Lower food and fuel prices slowed inflation, and domestic inflationary pressures remained subdued due to the CFAF peg to the euro.

Program Summary

The government’s medium-term macroeconomic program supported by the ECF aims to raise economic growth and reduce poverty. The program is designed to reinforce public finances, modernize public administration, and raise the quality of public services. The program also focuses on removing impediments to private sector development; improving access to social services, agriculture policy, and poverty reduction and achieving external sector sustainability.

The macroeconomic objectives of the government program are to:

• Raise real GDP growth to 4½ percent by program end;

• Contain inflation below 3 percent per year, in line with WAEMU targets;

• Keep the primary budget deficit below 4 percent of GDP annually through 2012;

• Gradually narrow the external current account deficit (excluding official transfers).

To achieve these objectives, the government program sets out the following policy priorities:

• Strengthen public finances, in PFM and other areas, with a view to containing the fiscal deficit and supporting macro stability;

• Normalize the government’s relations with domestic banks and the private sector by addressing the large stock of domestic arrears;

• Modernize the public administration to create space for priority spending and raise the quality of public services through a medium-term civil service reform and security sector reform program;

• Promote good governance and increasing and transparency.

• Promote job creation by removing impediments to private sector development and strengthen the provision of financial services;

• Improve access to social services and step up efforts to alleviate poverty via government investments in infrastructure for power, roads, and the port;

Move toward debt sustainability, particularly by helping the country achieve the HIPC/MDRI completion point.