Press Release No. 99/43

Press Release: IMF Approves US$3 Million in Post-Conflict Emergency Assistance for Guinea-Bissau

September 14, 1999

The International Monetary Fund (IMF) today approved SDR 2.13 million (about US$3 million) in post-conflict emergency assistance for Guinea-Bissau to support the government's reconstruction and economic recovery program in the aftermath of the 1998 armed conflict. The amount will be available immediately.

In commenting on the Executive Board's discussion of the request by Guinea-Bissau, Stanley Fischer, First Deputy Managing Director of the IMF, made the following statement:

"Directors regretted that the 1998-99 civil conflict in Guinea-Bissau, had inflicted grave suffering on the population and had caused severe damage to the economy and infrastructure. They were encouraged by the determination shown by the government in seeking to redress the disruptions caused by the conflict, restore basic services, and rehabilitate the administrative structures, including the budget and tax offices. They expressed the hope that the institutional situation would consolidate rapidly, and that the scheduled elections would be held in an orderly manner in order to give confidence to the international community and help create an environment conducive to economic development.

"Directors welcomed the adoption by the government of a program to be supported by the Fund under its guidelines on emergency assistance to post-conflict countries. This program appropriately focuses on the essential reconstruction need, the demobilization of combatants, the restoration of key social and administrative services, and the strengthening of private sector operations. Directors stressed the importance of ensuring a prompt restoration of a functioning tax and customs administration and implementing rigorous controls in the expenditure process. They also urged that a plan of settlement of arrears to the private sector be speedily finalized and implemented with external financial assistance so as to help revitalize this sector, which had suffered severe losses during the conflict.

"Directors urged the authorities to finalize rapidly and implement with determination a plan of demobilization of combatants, which is essential in order to contain budgetary expenditures in this area and provide room for priority expenditures in the social sectors. They also stressed the need to resume the restructuring and privatization of public enterprises, and to strengthen the banking sector through the recapitalization of the main bank accompanied by the government's divestiture of its minority participation.

"Directors considered that the satisfactory implementation of this Fund-supported program could pave the way to the preparation of a program that could be supported by a new ESAF arrangement; they hoped that, at the time of Board agreement on such a program, the country could be in a position to reach the decision point under the HIPC Initiative, which is essential in order to reduce the extremely heavy debt-service burden," Fischer said.

ANNEX

Program Summary

Following the intense warfare in mid-1998, the government is tackling the most urgent problems in the economic, humanitarian, and political areas. With elections set for November 28, 1999, preparations have to start without delay to ensure a peaceful and democratic vote. In the energy sector, electricity and water production and distribution have to be brought back to satisfactory levels. Occupants of homes destroyed or damaged during the conflict need assistance, and food provisions to certain parts of the country have to be ensured.

In addition to alleviating the immediate effects of the conflicts on the population, the priorities of the government's emergency program also include the rehabilitation of the social sector, providing support for the private sector, making repayments of arrears, and establishing law and order. The government has initiated private sector funding at highly concessional rates to foster renewed enterprise activity, has committed to settling its arrears at mid-1998, and is planning accelerated reimbursements of obligations for goods and services used during the time of the conflict, including for electricity and petroleum. By the end of July 1999, the government was current on its wage and pension payments for the first six months of the year.

Overall, GDP could increase by 7% this year, and stronger GDP growth can be expected in 2000. The external current account deficit excluding grants, other than fishing licenses, is projected to widen in 1999 as a result of the sharp recovery of imports to about 32.5% of GDP. Imports of goods and services are expected to increase by about 51% in value as a result of the recovery of investment and reconstruction activities. However, exports are also expected to rise sharply by about 52% in value. Backed by a strong rise in cashew exports.

On fiscal matters, the finance ministry has taken measures to reactivate the key budget and revenues services, notably the budget and treasury directorates, customs, and domestic taxation office. Technical assistance for that has been requested from the IMF and other organizations. There is an urgent need to restore the computerized taxpayers' database and begin the assessment of medium-scale taxpayers. The external debt office also needs assistance in resuming orderly operations. For the 1999 budget, tax revenue will mainly come from customs tariffs and indirect taxes, as the yield from profit taxes will remain very low because of business losses suffered in 1998. The primary 1999 budget deficit is targeted at 4.2% of GDP, the same level as in 1997.

Monetary policy, conducted at the regional level by the Central Bank of West African States (BCEAO), will continue to aim at strengthening the foreign reserves of the West African Economic and Monetary Union (WAEMU) and containing inflation at levels consistent with the exchange rate peg with the euro. Credit to the economy is projected to remain broadly stable, while bank credit to the government is expected to increase. Money supply is seen expanding by 10.5% in 1999, compared with a decline of 7.5% in 1998.

The government is determined to resume the structural reform program, including rapidly strengthening the banking system and ensuring its full compliance with the central bank's prudential criteria. Furthermore, it is proceeding with the privatization of the water and electricity company and is planning to conclude the privatization of the ceramics, timber, shipyard, and semi-industrial fisheries industries in the coming months.

Social indicators in Guinea-Bissau remain weak. The conflict severely disrupted social services despite a strong increase in social spending in the previous years. However, the authorities are keen to restore social services. This requires rapid rehabilitation of schools and health centers, and the return of personnel who left the country during the conflict. The authorities are committed to significantly strengthening resources devoted to the social sector, to improving the quality of services, to implementing a comprehensive reform of the military and civil service, and to increasing efficiency and the number of qualified personnel.

Guinea-Bissau joined the IMF on March, 1977 and its quota¹ is SDR 14,2 million (about US$ 19 million). Its outstanding use of IMF financing currently totals SDR 11 millions (about US$ 14 million).