Guinea-Bissau’s economy has recovered well from the Covid-19 pandemic. Growth is projected to reach 3.8 percent in 2022 supported by a continued strong performance of the cashew sector and a relatively stable political situation; The successful completion of the Staff Monitored Program (SMP) reflects the authorities’ efforts to sustain strong fiscal management and to build a policy track record for an Extended Credit Facility (ECF) arrangement; The authorities recognize that sustained medium-term economic growth would benefit from additional governance reforms and economic diversification. Actions needed include increasing social spending to address human capital needs, improving the regulatory environment, increasing access to financial services, removing infrastructural bottlenecks, and maintaining political stability.

IMF Management approved on May 25, 2022 the completion of the third and final review of Guinea Bissau’s SMP [1] which was approved on July 19, 2021 to support an ambitious program of reforms aimed at stabilizing the economy, improving competitiveness, and strengthening governance.

The completion of the third and final review of the SMP is based on an overall satisfactory performance of the reform program despite the challenges caused by the COVID-19 pandemic and rising commodity prices associated with the war in Ukraine. Most quantitative targets assessed at end-March 2022 and structural benchmarks were met.

The authorities are committed to pursue fiscal consolidation in line with the 2022 budget objectives to continue securing overall debt sustainability. Combined with the successful conclusion of the SMP, this should provide a strong backing to the authorities’ reform program and help catalyzing much-needed donor support. It is also essential to create more room for spending on pro-growth areas such as education, physical infrastructure, and health including vaccination-. The authorities are rightly determined to rein in the wage bill by finalizing the census of the public administration personnel and addressing irregular hiring. It is also necessary to mitigate fiscal risks stemming from state-owned enterprises, which could erode debt sustainability.

Further addressing governance vulnerabilities and reducing corruption risks will strengthen economic policy and business confidence. Ongoing reforms aim at enhancing public finance transparency, accountability and efficiency through enhanced domestic revenue and expenditure management. A critical governance reform of public finances is the gradual establishment of a Treasury Single Account. The implementation of the amended asset declaration regime once approved by Parliament, and the strengthening of resources for the audit court, the financial intelligence unit and the public procurement authority could also be significant factors in enhancing governance oversight.

On June 17, 2022 the Executive Board of the International Monetary Fund (IMF) also concluded the 2022 Article IV consultation [2] with Guinea-Bissau.

After years of political turmoil and delayed reforms, the authorities started implementing in 2021 an ambitious fiscal consolidation and reform program to ensure debt sustainability, create fiscal space to address developmental needs, and strengthen state capacity.

Following a modest GDP growth of 1.5 percent in 2020, growth is estimated to have accelerated to 5 percent in 2021 on the back of record cashew nut production, public investment in infrastructure, the gradual lifting of COVID containment measures, and an improvement in business confidence associated with a more stable political situation. Average inflation accelerated to 3.3 percent in 2021, reflecting pressures on prices of imported goods, especially food and fuel due to disruptions in global supply chain and increase in maritime transportation costs.

A continued strong performance of the cashew sector and a relatively stable political support a moderate economic recovery this year, partially offsetting the effects of the COVID-19 pandemic and surge in energy and food prices associated with the war in Ukraine. Growth is expected to slow down to about 3.8 percent while average inflation is expected to accelerate to 5.5 percent in 2022, reflecting renewed pressures on prices of imported goods, especially food and fuel. The overall macroeconomic outlook is turning somewhat positive, but risks are tilted to the downside, including those stemming from the impact of the ongoing war in Ukraine, and the upcoming parliamentary elections at the national level.

Executive Board Assessment [3]

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities’ implementation of their fiscal consolidation and reform program under the SMP, as well as their successful vaccination campaign, despite challenging conditions. Directors noted the crucial role of the Rapid Credit Facility (RCF) and SDR allocation, underpinned by the SMP, in helping to address the adverse impact of the pandemic, improve spending transparency, and mitigate debt vulnerabilities. They stressed the need to sustain fiscal consolidation and accelerate reforms, including in governance, to promote inclusive growth and diversification. Directors recommended standing ready to implement additional measures should downside risks materialize, including from a protracted pandemic, food inflation, and climate shocks. They welcomed the authorities’ request for an ECF arrangement to continue supporting the government’s reform program and catalyzing much needed donor support.

Noting the country’s debt vulnerabilities, limited fiscal space, and large development needs, Directors stressed the importance of revenue mobilization, non-priority expenditure control, and reliance on grants and highly concessional loans to support social and infrastructure spending. They welcomed in this regard measures to rein in the wage bill and mobilize additional tax revenue, including recent revisions to the general tax code and VAT statute, and the planned removal of distortionary tax exemptions and reform of the income tax regime. Directors encouraged the authorities to continue tax administration and public financial management reforms to underpin the efficient and transparent management of public resources. Strengthening debt management is also important to prevent new arrears accumulation, while improving governance of the utility state-owned enterprise is critical to mitigate fiscal risks.

Directors underlined the importance of fostering financial intermediation to boost growth. To this end, they urged measures to promote financial inclusion and manage banking sector vulnerabilities, including by addressing NPLs and designing a viable disengagement strategy of the large, undercapitalized bank.

Directors called for swift implementation of reforms to enhance the business climate, governance, and transparency. They welcomed the authorities’ commitment to publishing audits of pandemic-related spending and public procurement contracts, and the amendment of the legal procurement framework. Directors encouraged the authorities to implement the new asset declaration regime and increase resources for the audit court, financial intelligence unit, and public procurement authority. They also called for strengthening the AML/CFT framework and general data provision.

It is expected that the next Article IV consultation with Guinea-Bissau will be held on the standard 12-month cycle.