Bissau, November 13, 2000

Mr. Horst Köhler
Managing Director
International Monetary Fund
700 19th Street NW
Washington, D.C. 20431
U.S.A.

Dear Mr. Köhler:

1. The attached memorandum describes the policies and reforms that the government of Guinea-Bissau intends to adopt during 2000-03. The main objectives of our medium-term policies are to consolidate peace and reduce poverty in a context of high economic growth and good governance. In support of these policies and reforms, the government of Guinea-Bissau requests a three-year arrangement supported by the Poverty Reduction and Growth Facility (PRGF) in the amount of SDR 14.2 million (100 percent of quota), including an amount equivalent to 25 percent of quota for replacement of purchases under the post-conflict emergency assistance.

2. In consultation with the representatives of civil society, the private sector, and development partners, the government of Guinea-Bissau has prepared an Interim Poverty Reduction Strategy Paper (I-PRSP) which it has submitted to the Fund and the World Bank. The government aims to develop a full-fledged PRSP by end-2001 with the full participation of all major interest groups.

3. Guinea-Bissau's performance under the program supported by the Fund's post-conflict emergency assistance was satisfactory, with most performance indicators and many of the structural benchmarks having been met. The government of Guinea-Bissau believes that this progress provides a good basis both for a PRGF and for external debt relief under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative.

4. The first program review will be completed by May 31, 2001; the review will examine the demobilization program, civil service reform, domestic arrears repayment, debt relief granted by multilateral and bilateral creditors, the implementation of the action plan for the Banco Internacional da Guiné-Bissau (BIGB), budget execution (including in the social sectors), the structure of domestic petroleum prices, and progress in the preparation of the full PRSP. Subsequent reviews will follow the standard semiannual pattern; specifically, the second review of the first-year program will be completed by November 30, 2001. The government of Guinea-Bissau will provide all information that the Fund requests in connection with Guinea-Bissau's progress in implementing the economic and financial policies.

5. The government will consult with the Fund regarding the implementation of major policy initiatives not considered during the PRGF discussions.

6. The government of Guinea-Bissau believes that the policies set forth in the attached memorandum of economic and financial policies (MEFP) are adequate to achieve the objectives of the program. During the arrangement period, the government of Guinea-Bissau stands ready to take additional measures that may become appropriate to ensure the achievement of the program's goals.

Very truly yours,

Dr. Caetano Intchama			Dr. Purna Bia
Prime Minister			Minister of Finance

Memorandum of Economic and Financial Policies for 2000-2001

I. Introduction

1. Following a year-long military conflict that ended in May 1999, the government of Guinea-Bissau embarked on a program of political consolidation and economic reconstruction and rehabilitation. This program was supported by the International Monetary Fund under the guidelines for assistance to post-conflict countries, approved in two tranches on September 14, 1999 and January 7, 2000, respectively, for a total amount of SDR 3.55 million.

2. The government that took office following presidential and legislative elections in November 1999 and January 2000 has developed its national Interim Poverty Reduction Strategy Paper (I-PRSP)¹ in a broadly-based participatory manner. The program aims at reducing poverty in the context of a high-growth strategy, financial stability, and enhanced governance. To implement this program, for which Guinea-Bissau will continue to require sustained international support, the government intends to pursue its policies under a three-year arrangement supported by the Fund's Poverty Reduction and Growth Facility (PRGF). The government also seeks external debt relief in the context of the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. This memorandum briefly describes the results achieved under the program supported by the emergency post-conflict assistance, establishes the objectives of the PRGF, and sets out the policies and measures that the government of Guinea-Bissau intends to pursue in the first year of the program.

II. Performance under the Emergency Post-Conflict Assistance
and Poverty Conditions

3. Performance under the economic program supported by the Fund's emergency post-conflict assistance was satisfactory, and most of the objectives for December 1999-June 2000 were met (Table 1). Following a decline of 28 percent in 1998 as a result of the war, real GDP grew by almost 8 percent in 1999; cashew nut production and reconstruction-related investment were the main engines of growth. The average annual change of consumer prices turned to a negative 2 percent in 1999, reflecting improved food supplies and tight credit policies.

4. Fiscal performance in 1999 was broadly satisfactory. The current primary fiscal balance,² on a commitment basis, improved to a surplus of 3.2 percent of GDP from a deficit of 6½ percent of GDP in 1998, thanks to strong fiscal revenue and despite current primary expenditure higher than projected, in part because of military spending related to the increased number of soldiers. However, since capital expenditure also exceeded projections, owing to rehabilitation-related outlays, the overall fiscal deficit (on a commitment basis and including grants), equivalent to 9.9 percent of GDP (and 14.4 percent of GDP excluding grants), was higher than envisaged; the deficit was financed by a larger-than-projected accumulation of external and domestic arrears.

5. External sector developments during 1999 were mixed. There was a very strong recovery of exports (owing to higher volume and better prices) and official transfers (mainly fishing license fees, for which basically no payments had been received in 1998). However, since imports of goods and services increased rapidly after the end of the conflict, the current account deficit (including official transfers) improved less than expected, to 12½ percent of GDP (23 percent of GDP excluding official transfers). In addition, the private capital account (including errors and omissions) recorded a very large deficit, owing to capital outflow during the conflict and under recording of imports (as customs were not operational for part of the year). Despite a further accumulation of external arrears, net official reserves decreased by CFAF 1½ billion.

6. The fiscal stance deteriorated in the first quarter of 2000, reflecting large repayments of domestic arrears, and net bank credit to the government expanded rapidly. This situation was reversed in the second quarter of the year, as revenue collection improved strongly and outlays on account of the 1999 budget almost stopped. External arrears continued to accumulate during this period.

7. Reflecting the rapid expansion of net credit to the government and the seasonal nature of the cashew crop, broad money increased by over 16 percent in the first quarter of 2000. The excess liquidity, exacerbated by serious power shortages, contributed to a rise in consumer prices of over 20 percent during this period. Since then, however, monthly inflation rates have come down to less than one percent, largely reflecting the fiscal adjustment during the second quarter of 2000.

8. Progress has been made in the reconstruction and rehabilitation of the economy. By early 2000, most of the displaced persons had returned, 60 percent of damaged houses were restored, de-mining had started, and roads were being re-opened. Also, the government adopted a new fishing law, submitted a draft law on electricity to parliament, and promulgated the decree establishing the institutional framework for the demobilization and reinsertion of military personnel. However, reconstruction of social infrastructure and resumption of basic social services, as well as electricity and water supply, have been slow, mainly owing to limited available financing.

9. Poverty remains severe; some 88 percent of the population are estimated to live on an income of less than US$1 a day, while access to basic social services and water and sanitation remains limited. The incidence of poverty is highest in rural areas, among large households, particularly where the breadwinner has no formal education, and among women.

III. The Main Challenges Ahead and the Medium-Term Strategy

10. The main challenges that lie ahead for the people of Guinea-Bissau are to consolidate peace, complete the reconstruction effort and lay the foundation for sustainable high growth and significant poverty reduction. The consolidation of durable peace requires permanent demobilization and reinsertion of part of the armed forces, ex-combatants, and police (whose combined size had swollen from an estimated pre-conflict level of 15,000 to about 26,000 by end-December 1999) as well as the development and strengthening of democratic institutions. Laying the foundations for sustained growth and poverty reduction requires maintaining macroeconomic stability by implementing prudent demand management policies in the context of the West African Economic and Monetary Union (WAEMU) zone, accelerating structural reforms, and introducing specific policy measures aimed at reducing poverty.

11. Guinea-Bissau's post-conflict situation requires special sequencing for the next three years. The first year of the program will be a transition period, preparing the ground for major reforms in the years to follow. An increase in spending related to the regularization of conscripts into the army at end-1999 and essential spending in reconstruction and the social areas will result in a temporary worsening of the fiscal balance in 2000 and 2001. Meanwhile, structural reforms will focus on areas critical for economic revival, including in the fiscal, banking, and energy sectors. During later years, the fiscal balance will be strengthened, even as social expenditures continue to increase, reflecting improved revenue collection and savings made on account of the demobilization-reinsertion program and a civil service reform. Other structural reforms will be implemented, including privatization of remaining state-owned enterprises. In addition, the government will press ahead with further improvements in key health and education services and other poverty-reduction programs.

12. In terms of quantitative targets, the government's program for 2000-03 aims at (i) achieving GDP growth of 8-9 percent a year; (ii) reducing average annual inflation from a projected 10 percent in 2000 to 3 percent in 2003; and (iii) contributing to the further build-up of the international reserves of the Central Bank of West African States (BCEAO). Gross domestic investment is expected to expand strongly to reach 23½ percent of GDP by 2001, above the pre-conflict level, and to increase basically in line with GDP in 2002-03. Gross domestic dissaving will temporarily increase to 4½ percent of GDP in 2000 but should improve thereafter with the gradual return of confidence, and reach a positive level by 2002. Foreign savings will increase from 17 percent of GDP in 1999 to 21½ percent of GDP in 2000 and 25 percent in 2001, reflecting intensified donor assistance with the consolidation of peace and democracy, and the implementation of structural reforms; it will decline afterwards to about 21 percent of GDP.

13. The poverty reduction strategy of the government in 2000-03 also will be based on (i) increased access to basic health services and primary education (including of girls) through substantial increases in budget allocations and improved efficiency; (ii) policy measures specifically targeted at the poor; and (iii) improved access to employment opportunities. Achievement of durable peace also will greatly benefit the poor, who have the least opportunities for avoiding violence and hedging against war-related losses. In this regard, an important role will be played by the government's demobilization and reinsertion program and post-conflict consensus-building among interest groups in the context of the participatory process used during the preparation of the PRSP.

IV. Economic Program for 2000-01

A. Macroeconomic Policies

14. In line with the medium-term objectives outlined in paragraphs 10-13, the program for 2000-01 (starting in November 2000) projects an increase in GDP growth from 7.8 percent in 1999 to over 8½ percent in 2000 and 2001, and aims at (i) reducing the average inflation rate from 10 percent in 2000 to 4 percent in 2001 (almost meeting the WAEMU objective of 3 percent); and (ii) containing the external current account deficit .

Fiscal policy

15. The government is committed to pursuing a prudent fiscal policy in both 2000 and 2001. However, because of the expected temporary rise in spending (see paragraph 11) and a transitory decline in the ratio of revenue collection to GDP (related to significant collection of tax arrears in 1999), the program envisages a temporary worsening in the current primary fiscal balance from 3.2 percent of GDP in 1999 to about 1 percent of GDP in 2000 and in 2001. The government is determined to implement steadfastly the demobilization program and to further strengthen revenue collection (see paragraph 16), so as to provide appropriate resources to reinforce social sector expenditure. Total expenditure on health, education, targeted poverty programs and investment in infrastructure and rural development are programmed to increase from 13.3 percent of GDP in 2000 to 16.6 percent of GDP in 2001. The overall fiscal deficit (on a commitment basis and including grants) is projected to decline from about 10 percent of GDP in 1999 to 7½ percent of GDP in 2000 and to widen to 13½ percent of GDP in 2001. The latter is on account of a strong increase in restructuring programs and capital expenditure (mainly foreign financed), including demobilization, civil service reform, and reconstruction-related and social infrastructure investment. The 2001 budget was endorsed by the Cabinet in early-November and will be submitted to parliament for its approval before the end of the year.

16. The government is committed to implementing revenue-enhancing measures aimed at ensuring that budgetary revenues will rise in 2001, to the equivalent of 16.4 percent of GDP. The main measures include (i) an increase in domestic prices of petroleum products (paragraph 42); (ii) the progressive computerization of the customs database (SYDONIA) and the streamlining of customs procedures; (iii) an increase in the VAT rate from 10 percent to 15 percent and improvements in VAT administration (with Fund technical assistance); and (iv) improvements in tax administration in general (including the implementation of a taxpayers identification system and the creation of a fiscal tribunal).

17. In 2000, current primary expenditures, as a percent of GDP, will expand slightly, reflecting mainly an increase in the wage bill and food aid-related transfers. The wage bill will rise from CFAF 6.9 billion (5.1 percent of GDP) to CFAF 9.8 billion (6.1 percent of GDP, or about 68 percent of tax revenue), owing to (i) an increase in army personnel (paragraph 11); and (ii) starting July 1, an increase (of between CFAF 1,000 to CFAF 2,000) for public servants in the non-management wage grids (A to Z), including soldiers. In addition, transfers will increase owing to the distribution of food aid in the form of 50 kilograms of rice per month to a maximum of 15,120 public servants in categories C to Z, including soldiers who do not receive food in the barracks. The government has ensured full donor financing for the distribution of the latter during 2000, and intends to discontinue this program in 2001. Capital expenditures, financed mainly by foreign resources, will rise from 11.1 percent of GDP in 1999 to 13.1percent of GDP in 2000, boosted by spending on, inter alia, the priority social sectors.

18. In 2001, current primary expenditures will increase by about 1 percent of GDP, as a decline in military spending in wages and food distributed in the barracks (excluding the cost of demobilization) will be more than offset by a rise in social spending. The government will set nominal wage increases in the civil service in the context of the civil service reform (paragraph 21). With implementation of the demobilization program, the ratio of the overall wage bill to GDP will decline despite the recruitment of new teachers and health personnel. Capital expenditures will continue to rise, to over 14 percent of GDP, with most of the spending being directed to reconstruction of social and physical infrastructure.

19. With a view to revitalize the economy, the government is committed to gradually repay its domestic arrears. To this end, it will (i) prepare, by end-November 2000, a manual of procedures that is acceptable to donors; (ii) pre-audit a subset of claims by end-November 2000, with a view to initiate a first phase of payments before the end of the year, and perform a complete post-audit at a later date to be agreed with foreign donors; and (iii) pre-audit, with the assistance of the European Union, all remaining claims by end-March 2001 so that they can be financed fully by donor contributions. Table 2 indicates the program's repayment schedule of domestic arrears in 2000-01.

20. The government will implement a number of poverty-reducing measures in its program for 2000 and 2001 (described in paragraphs 32-37), to achieve the following social targets: (i) total spending on health is programmed to double to 2.4 percent of GDP in 2000, and increase further to 2.8 percent of GDP in 2001; (ii) total spending on education will double in 2000 to reach over 3½ percent of GDP and increase further to 4½ percent of GDP in 2001; (iii) spending on targeted poverty reducing programs will reach 6 percent of GDP on average. Given the pressing nature of social needs, in the event that resources from privatization and debt relief exceed those envisaged in the program, one-half of the additional resources will be used to finance additional projects in the social and basic infrastructure areas, to be identified in collaboration with the World Bank.

21. A civil service reform will be implemented in 2001-02, with expected donor assistance. The reform will mainly aim at (i) reducing the size of the civil service by about 2,800 workers in lower wage categories in 2001-02, in tandem with contracting out selected services to the private sector; (ii) retiring an estimated 300 workers over the compulsory retirement age; and (iii) eliminating "ghost" workers and double jobs. In addition, recruitment procedures will be made more transparent and competitive, and promotion will be based on merit. The civil service reform and the demobilization program will contribute to progress in meeting the WAEMU convergence criterion limiting the wage bill to no more than 35 percent of government tax revenue (this ratio is expected to fall to under 44 percent in 2003). The government also intends to reform the pension system and is in the process of identifying an appropriate source of technical assistance.

22. The government is aware of the need to ensure that the support received from the international financial community under the framework of the enhanced HIPC Initiative helps to promote pro-poor public spending and is committed to increasing the share of poverty-reducing expenditures in the budget accordingly. In this regard, the government is committed to take substantial action to improve accounting and audit systems and to develop monitoring and reporting mechanisms. Specifically, the government will (i) improve the budget classification system to identify expenditures by economic function and program categories; (ii) improve the treasury system with technical assistance from FAD; (iii) introduce the legal and institutional framework for the reform of the public procurement system by June 2001, with a pilot system fully operational by December 2001 in five ministries; (iv)  carry out public expenditure reviews, with technical assistance from the World Bank; (v) strengthen budget execution by implementing the WAEMU manual of regulations on supporting budget documentation; (vi) prepare detailed quarterly budget execution reports; and (vii) reinforce the independent office of the Comptroller General. Additional actions to further enhance the government's ability to monitor and assess social sector expenditures will be developed in the context of the full PRSP.

23. In view of its strong commitment to poverty-reducing macroeconomic and structural reforms and the post-conflict situation, the government is requesting exceptional treatment from its multilateral and bilateral creditors to help cover the projected budgetary financing requirements for 2000, amounting to CFAF 178 billion (about US$255 million). The government seeks external debt relief on concessional terms with the Paris Club and other bilateral creditors and assistance under the enhanced HIPC Initiative, for which Guinea-Bissau was declared eligible by the Executive Boards of the Fund and the World Bank in April 1998.

Monetary policy

24. Monetary policy and banking supervision are set within the context of the WAEMU. The inflation and net official reserve targets are consistent with the general objectives for the region. Broad money is projected to increase by 16½ percent in 2000 and 15 percent in 2001. The expected decline of net credit to the government after the first quarter of 2000 and the tight fiscal stance for 2001 will ensure that sufficient credit will be available to the private sector. Net foreign assets are projected to increase by about US$ 6 million in 2001, to reach the equivalent of 3¼ months of imports of goods and services.

External sector policies

25. The external current account deficit (excluding official current transfers) is expected to widen to 26½ percent of GDP in 2000 and to 29½ percent of GDP in 2001, mainly on account of strong imports related to donor-financed investment projects and the recovery of the economy. Export volumes are projected to rise by about 8½ percent in 2001, boosted primarily by good cashew production. The higher trade deficit is expected to be more than covered by an increase in official transfers and concessional loans. An accumulation of net official reserves is anticipated in both 2000 and 2001. As indicated in paragraph 23, Guinea-Bissau will seek concessional external debt relief to regularize its external arrears and cover its financing gap in 2000-01.

26. The residual financing gap—after projected official transfers and loans, possible debt relief from Paris Club creditors, other bilateral creditors and multilateral creditors—is projected at about a total of US$11 million during 2000-01. The gap is expected to be fully covered by budgetary support from the International Development Association (IDA), the African Development Bank, the European Union, and bilateral donors. Given Guinea-Bissau's very limited debt-servicing capacity, the government will continue to pursue a prudent external debt policy and will not contract or guarantee any external loans on nonconcessional terms. The ministry of finance will continue to have the sole authority over the contracting or guaranteeing of all public external borrowing.

27. Guinea-Bissau's external debt situation is likely to remain very difficult in the medium-term. The updated debt sustainability analysis, prepared in consultation with Fund and World Bank staffs, indicates that even under buoyant export projections, Guinea-Bissau's net present value (NPV) of debt-to-exports ratio, after application of traditional debt relief mechanisms, was about 1,000 percent at end-1999 and is projected to remain substantially above the debt sustainability threshold under the enhanced HIPC Initiative in the medium term. The government will, therefore, seek assistance under the enhanced HIPC Initiative, based on its track record under Fund- and IDA-supported programs.

28. In August 2000, the government started to implement the harmonization of external tariffs within the WAEMU zone, to be completed by end-2000. Under the common external tariff (CET) system, the number of tariff rates will be cut from five to four; the maximum tariff rate will be reduced from 30 percent to 20 percent. The government also will examine the possibility of gradually reducing the current 10 percent export tax on cashew starting in 2002.

29. During the period of implementation of the PRGF, the government of Guinea-Bissau will not, without Fund approval, introduce new or intensify existing exchange restrictions, introduce or modify any multiple currency practices, impose or intensify import restrictions for balance of payments reasons, or conclude bilateral payments agreements that are inconsistent with Article VIII.

B. Demobilization

30. The government believes that a precondition for economic and social development is durable peace. Therefore, it accords high priority to a comprehensive and transparent demobilization of a substantial part of the armed forces, ex-combatants, and police. With technical and financial assistance from the World Bank and other donors, the government is in the process of finalizing the preparation of a Demobilization, Reinsertion, and Reintegration Program (DRRP), to be launched before the end of 2000 and implemented in the following three years. The main objective of the program is to reduce the size of the armed forces by some 12,000 soldiers and ex-combatants and provide them with skills and financial means to be reintegrated into civilian life. Following the government's approval of the DRRP, the decrees on the eligibility criteria for demobilization and for DRRP assistance were promulgated in October 2000, and the government has undertaken a census of the armed forces (including police and veterans of war), to be completed and results made available by December 2000. Also, based on a manual of procedures, to be approved by December 2000, a pilot project of demobilizing 500 ex-combatants will be completed by January 2001; an additional 3,500 soldiers and ex-combatants will be demobilized by end-June 2001; and another group of 1,000 by end-December 2001. The remaining 7,000 soldiers and ex-combatants will be demobilized prior to reaching the HIPC completion point, and no later than by end-2003.

31. The total cost of the DRRP is expected to be fully financed with the assistance of the international community. Part of this financing has already been obtained through counterpart funds generated in the context of the World Bank's Economic Rehabilitation and Recovery Credit approved in May 2000. The government is in the process of mobilizing the required additional financing to ensure the timely and successful completion of the DRRP. Upon completion, the projected annual savings related to the reduction of personnel will be equivalent to about 1 percent of GDP.

C. Poverty Reduction Policies

32. In line with the government's poverty strategy, the program for 2000-01 aims at establishing durable peace and increasing access to primary health care and basic education; implementing specific poverty alleviation measures; and improving the opportunities for employment. A reflection of the government's commitment to fighting poverty is the creation of a ministry in charge of designing and coordinating the policies of various government agencies to combat poverty. In the paragraphs below, the main policy objectives are described; targets to measure progress toward achieving these objectives are discussed in detail in the government's I-PRSP that has been prepared for submission to the Executive Boards of the Fund and the World Bank.

33. In the area of health care, for 2000 the primary objectives are to restore a minimum level of basic service so as to avert the outbreak of epidemics of tuberculosis and meningitis and to increase vaccination from the presently dangerously low levels. The main policy objectives for 2001 are to (i) increase access to health services by building and rehabilitating health centers lost during the conflict; (ii) increase the proportion of health centers that are fully operational by ensuring adequate staffing; (iii) improve the supply of essential drugs; (iv) increase utilization rates in local health centers; (v) strengthen child vaccination programs; (vi) provide more medical assistance to women during pregnancy and child birth; and (vii) conduct outreach programs in the areas of illness prevention.

34. In the area of primary education, the government's priorities are to (i) rehabilitate classrooms damaged during the conflict; (ii) recover the pre-conflict level of gross enrollment; (iii) promote girls' education; (iv) improve the quality and efficiency of primary education; and (v) correct serious regional imbalances in primary education. In addition, the government intends to take measures to restore vocational training.

35. The government intends to provide targeted poverty-alleviation programs. First, it will alleviate food shortages in the wake of the post-conflict situation, in part by promoting rice cultivation for domestic consumption. Second, the government will complete the rehabilitation of 3,000 dwellings for low-income households, damaged during the conflict. Finally, the government also will complete the removal of the remaining 18,000 mines with expected donor assistance.

36. The government intends to improve access to income-generating activities for the poor through the following channels: (i) investing in human development (health and education); (ii) creating the conditions for durable growth through structural reforms; (iii) promoting small-scale business, including establishing a framework for microfinance (as described below); and (iv) introducing high-labor intensive infrastructure work projects with the multiple objectives of employment creation, enhancing infrastructure, and reducing regional inequities.

37. The government attaches high priority to reducing the gender gap in various areas, as discussed above: education of girls will be promoted with a view to catch up with that of boys later in the decade.

D. Structural Reforms

38. In addition to structural measures described in the above paragraphs concerning reforms in taxation and expenditure management, civil service, pension system, demobilization, and settlement of domestic arrears, the government is committed to implementing structural policies in key sectors of the economy, including banking and energy, and will pursue forcefully a privatization program.

39. The government is fully committed to ensuring rigorous banking supervision in coordination with the Banking Commission of the WAEMU and to address the serious problems affecting the largest commercial bank (BIGB). Regarding the BIGB, on the basis of recommendations by the Banking Commission of the WAEMU, a definitive action plan will be drawn by December 31, 2000. The formulation of this action plan will pay due regard to related budgetary costs; the authorities will discuss with the Fund how to face any financial cost for the government associated with the proposed solution for the BIGB. If the BIGB is to remain in operation, it must be adequately capitalized and should meet all prudential regulations; in addition, a serious effort is needed to recover bad assets (in connection with the plan to settle domestic arrears). In the meantime, and as recommended by the BCEAO, a provisional administrator for BIGB was named in October 2000 to ensure that the capital of the bank is not further eroded and to elaborate the aforementioned plan of action. The government will keep its deposits at the BCEAO and it also commits not to provide any financial aid to the BIGB before a definitive plan of action is adopted and that it will not provide operational advantages to any bank operating in the country.

40. The government is aware that the benefits deriving from the development of a modern banking system may still take some time to reach lower-income groups. Against this background, with the support of its development partners, the government will also promote the development of a suitable framework for microfinance activities. This framework will take into account the particular financing needs of lower-income groups and not involve subsidized lending.

41. The government will implement, with assistance from the World Bank and the West African Development Bank (BOAD), a program of rehabilitation of the energy sector. The government submitted in October 2000 an electricity law to parliament, reforming the institutional framework of the sector. In addition, to deepen structural reform in the sector, the government will (i) open financial bids for a long-term leasing contract (contrat d'affermage) of the power and water utility (EAGB) by November 15, 2000; and (ii) create an independent regulatory agency by end-January 2001. Meanwhile, the EAGB will accelerate the recovery of its claims on major enterprises, helped in part by the domestic arrears settlement program. In the water sector, a master plan will be approved before end-2000 with a view to expand rural and urban supply coverage.

42. The government is committed to maintaining prices of domestic petroleum products in line with those prevailing in world markets, and will review with the Fund actions in this regard during the scheduled program reviews. On August 15, 2000, the prices of petroleum products were increased by between 15-18 percent; by December 15, 2000, the government will increase prices by an additional 8 percent. Moreover, the government supports the harmonization of taxation of petroleum products within the WAEMU, which is expected to be carried out as soon as it has been approved at the level of the zone.

43. The government will implement its updated privatization program in 2000-01, adopted by the Cabinet of Ministers in October 2000. By July 2001, two hotels and a ceramic factory will be brought to the point of sale and the liquidation of five identified enterprises completed. Overall, the government is committed to privatize the remaining 34 major enterprises by end-2003, with assistance from the World Bank. Privatization will be carried out in a transparent manner, using public bidding procedures; the government will reestablish the centralization of privatization by creating a Central Privatization Unit in the context of its updated program. Finally, the government will adopt an action plan for the port and telecommunications by June 2001.

44. The government will revise the April 6, 2000 decree-law on cashew nut marketing and exports by November 15, 2000, with a view to eliminate the sections discriminating against nonresidents, and permanently remove the section on compulsory domestic processing along the lines suggested by an independent study.

45. The government will make the necessary efforts to reestablish a fully operational statistical system with the assistance of its development partners. To this end, it will take measures to improve the timely compilation of national accounts, and to ensure the prompt harmonization of the consumer price index according to WAEMU guidelines. Also, the government will ensure the timely production of fiscal, monetary and balance of payments data to ensure adequate program monitoring. Finally, the government will introduce statistical procedures for monitoring the program's poverty and social indicators.

E. Good Governance

46. Promoting good governance, a cornerstone of government policies, will be achieved through (i) the reform of the procurement system; (ii) the enhancement of fiscal accountability by reinforcing, with donor assistance, the independent Court of Accounts, that will perform the audit of budget execution, including military outlays (there will be also special independent audits of the demobilization program); (iii) fiscal decentralization with a view to improve fiscal efficiency and involve the local community; and (iv) the publication twice a year of reports on budget execution.

47. The government has established a high-level committee presided by the Vice-Prime Minister to ensure full and timely implementation of the program supported by the PRGF. This committee will be assisted by a technical committee chaired by the Secretary of State of the Treasury and includes the representatives of various key ministries, the BCEAO, and the Fund Resident Representative to Guinea-Bissau.

INTERNATIONAL MONETARY FUND

GUINEA-BISSAU

Technical Memorandum of Understanding

(November 13, 2000)

This memorandum provides the definitions of the quantitative performance criteria and benchmarks for the three-year program supported by the Fund under the Poverty Reduction and Growth Facility (PRGF). These definitions may need to be re-visited during the program reviews, so as to ensure that this memorandum continues to reflect best understanding between the government of Guinea-Bissau and Fund staff. This memorandum also sets out the data-reporting requirements for monitoring the program.

I. Quantitative Performance Criteria and Benchmarks³

A. Government Finances

1. For program purposes, total government revenue is defined as the sum of all tax and nontax revenues, cumulative since the start of the calendar year, excluding tax exemptions (isenções aduaneiras) on imports by government and donors, privatization proceeds, and grants.

2. The primary current budgetary balance is defined as the difference between total government revenue and current primary expenditures on a commitment basis, which equals government expenditures less payments made on external and domestic debt, capital expenditures, and foreign-financed demobilization expenditures and public administration reforms.

3. Pre-2000 domestic budgetary arrears are defined as budgetary payment obligations, committed until December 31, 1999, but not yet settled by the government of Guinea-Bissau for goods and services rendered by individuals and enterprises operating in Guinea-Bissau. In 2000, the expected reduction of CFAF 7.2 billion includes: (i) payments made between January 1 and June 30 (CFAF 6.1 billion);⁴ and (ii) repayments of verified domestic budgetary arrears to be made between in the last quarter of 2000, as programmed in the MEFP in the context of the Domestic Arrears Settlement Plan (CFAF 1.1 billion).

4. The avoidance of new budgetary arrears constitutes a benchmark under the program. New budgetary arrears are defined as arrears accumulated during the fiscal year on wages, goods and services, and transfers. Payment on salaries, wages and pensions are deemed in arrears when they remain unpaid more than 30 days beyond the due payment date. Payments to suppliers are deemed to be in arrears if they have not been made within the normal grace period of 90 days or such other period as has been contractually agreed after the verified delivery of the concerned goods or services, unless the amount or the timing of the payment is subject to good faith negotiations between the government and the creditor.

5. Under the program, a continuous performance criterion of no accumulation of new external arrears will apply. External arrears are defined as total obligations of the government that have not been paid by the time they are due, excluding arrears on external debt service pending the conclusion of debt rescheduling agreements.

Reporting requirements: Data on the implementation of the budget compiled by the State Secretary's Office of Planing and the Budget in the Ministry of Finance, together with a summary text concerning central government operations, will be provided on a quarterly basis, to be submitted not later than a month following the end of each quarter. On a monthly basis, the following indicators will be provided with a maximum delay of four weeks: (i) government revenue, total and main components; and (ii) primary current expenditure, on a commitment basis and on a cash basis, total and main components, including for the ministries of health and education. Detailed data on repayment of domestic arrears and information on the remaining stock of arrears carried over from previous years will be provided once the audit of domestic debt arrears has been finalized and transmitted on a monthly basis, within four weeks of the end of each month. Monthly data on the public sector's scheduled external debt service and actual payments on current maturities and on arrears, detailed by creditor, compiled by the State Secretary's Office of Planing and the Budget will be transmitted on a quarterly basis within six weeks of the end of each quarter.

B. Net Credit to the Government from the Banking System

6. The ceiling on the cumulative change, from the beginning of the calendar year, in net credit to the government from the banking system constitutes a performance criterion. Net credit to the government from the banking system is defined as all government liabilities minus all assets held by the government at the central bank and commercial banks. Government liabilities to the banking system include, inter alia, (i) advances from the BCEAO under Article XVI; (ii) consolidated loans from the BCEAO; and (iii) obligations to the IMF. Government assets towards the banking system include inter alia: (i) the government current account at the BCEAO; (ii) deposits for funds received from the European Union; (iii) the multilateral debt fund; (iv) deposits set up to for the financing of the demobilization program; (iv) any other deposits at the BCEAO; and (v) all deposits at commercial banks.

7. The ceiling on net bank credit to government will be adjusted downward by any shortfall in the actual net reduction of domestic payment arrears relative to the programmed amount of CFAF 7.2 billion at end-December 2000, up to an amount of CFAF 1.1 billion.

8. If proceeds from privatization differ from the amount programmed (CFAF 2.5 billion in the period between September 2000 and December 2001), the ceiling on net credit to government will be adjusted by one-half of the difference. In the case of an upward adjustment to the ceiling, the additional resources will be spent on social and infrastructure projects identified in collaboration with the World Bank.

9. In case the debt relief from multilateral and bilateral creditors exceeds (falls short of) the programmed amount of CFAF 130.6 billion in December 2000, and CFAF 21.3 billion in December 2001, the ceiling on net bank credit to the government will be revised downward (upward) by one half of the difference between the actual and programmed amounts. In case of an upward adjustment to the ceiling, the additional resources will be spent on social and infrastructure projects identified in collaboration with the World Bank.

10. The ceiling on net bank credit to government will be adjusted downward (upward) by one-half of any excess (shortfall) in non-project-related budgetary external assistance cumulative since the beginning of the calendar year (excluding IMF financing, food aid, and HIPC debt relief) relative to the programmed amount of CFAF 24.4 billion at end-December 2000, and CFAF 16½ billion at end-December 2001. There will be no adjustment for project-related external financial assistance. Underlying the calculations are a program exchange rate of CFAF 697.7 per U.S. dollar for December 2000 and CFAF 707.6 per U.S. dollar in 2001. Cross rates vis-à-vis other currencies are defined by the performance criteria table in footnote 7.

11. Once a decision is taken regarding the future of the BIGB, the authorities and the Fund will discuss ways in which the government can finance its obligations as partial owner of the bank.

12. For the period September 2000-December 2001, the maximum cumulative combined upward adjustment to net bank credit to the government from adjustors in paragraphs 7-10 should not exceed CFAF 5 billion.

Reporting requirements: The preliminary monthly balance sheet of the BCEAO-Bissau will be transmitted on a monthly basis, with a maximum delay of six weeks. In addition, the preliminary table on net credit to government (position nette du gouvernement, PNG) calculated by the Ministry of Finance will be submitted on a monthly basis within four weeks of the end of each month. The government will ensure that the BCEAO receives all necessary information in this regard, including with respect to its operations with commercial banks. The definitive version of the monthly balance sheet of the BCEAO-Bissau and the PNG will be provided as soon as they are available.

C. Nonconcessional External Borrowing

13. Under the program, nonconcessional external borrowing constitutes a continuous performance criterion. Nonconcessional external debt is defined as contracting or guaranteeing by the government of loans with a grant element of less than 50 percent, calculated by using currency-specific commercial interest reference rates. For loans with a maturity of at least 15 years, the 10-year average "Commercial Interest Reference Rate" (CIRR), published by the Development Assistance Committee of the Organization for Economic Cooperation and Development (OECD), should be used to calculate the level of concessionality. For loans with shorter maturities, the 6-month average CIRR should be used. For purposes of the program through December 31, 2000, the 6-month and 10-year CIRRs published by the OECD in June 2000 will be used, and of the program through September 2001, the CIRRs published in November 2000 will be used. To both the 10-year and 6-month averages, the following margins for differing repayment periods should be added: 0.75 percent for repayment periods of less than 15 years; 1 percent for 15-19 years; 1.15 percent for 20-29 years; and 1.25 percent for 30 years or more. Debt rescheduling and debt reorganization are excluded from the limits on nonconcessional borrowing. There will be no new nonconcessional debt contracted or guaranteed by the central government, local governments, or the BCEAO (excluding borrowing from the Fund) throughout 2000-01. In addition, the government will also not guarantee any external debt contracted by state enterprises, and maintain the policy of not guaranteeing private sector external debt.

Reporting requirements: The government of Guinea-Bissau will consult with Fund staff before assuming any liabilities in circumstances where they are uncertain whether the instrument in question falls under the performance criterion. Details of all new external debt, including government guarantees, indicating terms of loans and creditors, will be provided on a monthly basis within four weeks of the end of each month.

D. Short-Term External Debt

Short-term external debt is defined as debt contracted or guaranteed by the government with contractual maturity of one year or less, excluding normal import-related credits. There will be no new short-term external debt throughout 2000/01.

Reporting requirements: Data on all new short-term borrowing and guarantees, including terms of loans and creditors, will be transmitted, with detailed description, on a monthly basis, within four weeks of the end of each month.

E. Structural Benchmarks and Performance Indicators

14. For program purposes, the wage bill is defined as the sum of the wage bill for regular employees and contractual employees (including civil servants and armed forces), and embassy personnel, as well as all personnel subsidies, gratification, and representation allowances.

Reporting requirements: Data on the wage bill compiled by State Secretary's Office of Planning and the Budget will be provided on a monthly basis, with a delay of four weeks.

II. OTHER DATA REQUIREMENTS FOR PROGRAM MONITORING PURPOSES

15. Data on exports and imports, including volumes and prices, compiled by the National Institute of Statistics and Census (INEC) will be transmitted on a quarterly basis within six weeks of the end of each quarter.

16. Monthly disaggregated consumer price index for Bissau, compiled by the INEC will be transmitted monthly within four weeks of the end of each month.

17. The new price structure of petroleum goods will be submitted within five days of any decision to revise petroleum prices. Revised estimates on the yearly consumption for each petroleum product will be included.

18. Documentation of all measures taken by the government, will be transmitted within five working days after the day of implementation. In particular, the Fund will be permanently informed of all measures taken to deal with the BIGB.

III. PROGRAM REVIEW

19. Before May 2001, the Fund will review economic and financial development and reassess the program targets. The review will examine (i) the demobilization program; (ii) the civil service reform; (iii) domestic arrears repayment; (iv) debt relief granted by multilateral and bilateral creditors; (v) the implementation of action plan for the BIGB; (vi) budget execution, including in the social sectors; (vii) the structure of domestic petroleum prices; and (viii) progress made in the preparation of the full PRSP.