Press Release No. 97/34

Press Release: IMF Approves Extension and Augmentation of ESAF for Guinea-Bissau

July 25, 1997

The International Monetary Fund (IMF) today approved a request by the government of Guinea-Bissau to extend the period of the three-year arrangement under the Enhanced Structural Adjustment Facility (ESAF)¹ to end-March 1998, and to augment the amount available by SDR 1.05 million (about US$1.4 million). This will provide SDR 4.725 million (about US$6.5 million) to support the government’s economic program for 1997-98. The IMF had approved a three-year ESAF loan for Guinea-Bissau equivalent to SDR 9.45 million (about US$13 million) on January 18, 1995 (see 95/3).

Background

Economic performance was mixed in 1996 under the program supported by the second annual ESAF arrangement. Real GDP growth is estimated at 5 percent, compared to 4.4 percent in 1995, and the external current account deficit improved. However, inflation remained a source of concern, at 51 percent on an average annual basis. The high levels were fueled by monetary expansion in the first half of the year and a sharp depreciation of the peso in the third quarter associated with uncertainties regarding Guinea-Bissau’s entry into the West African Economic and Monetary Union (WAEMU). Following significant monetary tightening late in 1996, monthly inflation leveled off to 1 percent during the first quarter of 1997, down from an average of 5.5 percent in 1996. Fiscal developments in 1996 were somewhat disappointing, with revenue lower and current expenditure higher than planned. Progress in structural reforms was largely on track. At end-December 1996, agreement was reached with the Central Bank of West African States (BCEAO), and the WAEMU countries on Guinea-Bissau’s entry into the WAEMU and the implementation of the currency conversion from the peso to the CFA franc on May 2, 1997.

The Medium-term Strategy and the 1997-98 Program

The basic economic objectives for 1997-99 are to maintain annual economic growth of about 5 percent; to lower the average annual rate of inflation to about 6 percent in 1999 from 51 percent in 1996; and to reduce the external current account deficit (excluding grants) by about 5 percentage points to 16 percent of GDP by 1999. The program aims to maintain the level of investment at 22 percent of GDP, while enhancing its efficiency, through a projected rise in gross domestic saving to 4 percent of GDP in 1999 from 1 percent of GDP in 1996.

Within this medium-term framework, the 1997-98 program, supported by the third annual ESAF loan, seeks annual real GDP growth of about 5 percent; to contain annual inflation (on an end-period basis) at about 10 percent in 1997 and 7 percent in 1998; and to reduce the externalcurrent account deficit (excluding grants) to 18 percent of GDP in 1997 and to 16.4 percent of GDP in 1998.

To achieve these aims, fiscal policy will be the key focus of the authorities’ economic policy, with a twofold objective of further raising the current primary surplus through an increase in the revenue/GDP ratio, and overhauling the tax system. The program seeks a reduction in the central government deficit to 12.3 percent of GDP in 1997 from 18 percent of GDP in 1996. On the revenue side, a general sales tax and a major reform of external tariffs will be introduced, export taxes will be reduced, and excise taxes will be revised, particularly on petroleum. On the expenditure side, the program focuses on containing nonessential outlays and on further streamlining the civil service in order to provide room for raising the salaries of skilled personnel, in particular teachers. A major strengthening of budgetary procedures is being introduced in 1997; prior authorization of the Ministry of Finance Budget Directorate will be required for all expenditure commitments. In the monetary field, domestic credit policy will remain tight in order to quell inflationary expectations.

Structural Reforms

Progress in structural reforms will continue to focus on accelerating the process of public enterprise privatization; increasing efficiency in the energy sector; enhancing the role of the private sector in agriculture, fisheries, and forestry; improving social services; and reforming the civil service.

Addressing Social Needs

The economic growth strategy continues to rely on a broad-based and export-led development of the agricultural sector, and on important contributions from the fisheries and forestry sector. To make progress in poverty alleviation, the program relies on rural-centered and labor-intensive growth; and on securing access to primary health, education, and sanitation services, especially in the rural areas.

The Challenge Ahead

Guinea-Bissau’s external debt situation remains extremely burdensome, and the debt indicators are significantly above the thresholds of sustainability. However, the external financing requirement for 1997 is expected to be filled with bilateral and multilateral assistance, including debt relief, under negotiation, from non-Paris Club creditors.

Guinea-Bissau joined the IMF on March 24, 1977, and its quota [ A member ’s quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.] is SDR 10.5 million (about US$14 million). Its outstanding use of IMF financing currently totals SDR 7 million (about US$10 million).