Document of The World Bank

Public Disclosure Authorized FOR OFFICIAL USE ONLY

Report No. 48466 - GW

INTERNATIONAL DEVELOPMENT ASSOCIATION

Public Disclosure Authorized INTERIM STRATEGY NOTE

FOR

THE REPUBLIC OF GUINEA-BISSAU

FOR THE PERIOD FY09-FY10

May 20,2009 Public Disclosure Authorized

Country Department for Guinea-Bissau (AFCF1) Africa Region Public Disclosure Authorized This document has a restricted distribution and may be used by recipients only in the performance of their official Duties. Its contents may not otherwise be disclosed without World Bank authorization. The previous Country Assistance Strategy for Guinea-Bissau (Report No. 16568) was discussed by the Board of Directors on May 12,1997

CURRENCY EQUIVALENTS (Exchange Rate as of May 14,2009)

Currency Unit = CFA Francs (CFAF) CFAF 1,000 = US$2.02 CFAF 655.96 = € 1.00 (Peg) US$ 1.00 = CFAF481.60 SDR 1.00 = US$ 1.52

FISCAL YEAR January 1 - December 3 1

ACRONYMS AND ABBREVIATIONS

EAGB Empresa Publica de Energia e Agua da Guink-Bissau (Energy and Water Administracgo dos Porto da Guinea Public Company of Guinea-Bissau) Bissau (Port Administration of Guinea ECOWAS Economic Community of West African Bissau) States ASYCUDA I Automated System for Customs Data EDF European Development Fund BCEAO I Banque Centrale des Etats de I'Afi.ique EFA-FTI Education for All - Fast Track Initiative de I'Ouest (Central Bank ofWest African States) Extractive Industries Transparency CAIA Celula de Avaliqgo de Impacte Initiative Ambiental (Environmental Impact Evaluation Unit) Economic and Sector Work CAS Country Assistance Strategy I Euronean Union I CBMP Coastal and Biodiversity Managemen I EUR I Euro I Prniect FAD Fonds apicain de dheloppement CBO Community Based Organization (African Development Fund) CD Capacity Development FA0 Food and Agriculture Organization of CDD Community-Driven Development the United Nations CEM Country Economic Memorandum FIAL Local Initiatives Fund CFAF Franc de la Communaute'financi2re FPCR Food Price Crisis Response d'Afi.ique (Franc ofthe Financial GAVI Global Alliance for Vaccines and Communitv ofAfi-ica) Immunizations CPPR Country Portfolio Performance Review GDP Gross Domestic Product DENARP Documento de Estratkgia Nacional par6 GEF Global Environmental Facility a RedupTo da Pobreza (Nationa. GNI Gross National Income Povertv Reduction Stratew Paner) HDT I Human DeveloDment Index I I DPO I Develonment Policv Oneration HIPC Heavily Indebted Poor Countries Demobilization, Reinsertion and HIV/AIDS Human Immunodeficiency Virus / ID- Reinteaation Promam I DSA I Debt Sustainabilitv Analvsis HR I Human Resources ~DTIS ' I Diagnostic Trade Integration Study IBRD I International Bank for Reconstruction I and Develonment I .. 11 FOR OFFICIAL USE ONLY

PAIGC Partido Afficano du Independgnciu du I I Commission I Guine‘ e Cab0 Verde (African Party for UNICEF 1 United Nations Children’s Fund the Independence of Guinea and Cape UNOGBlS I United Nations Peace Building- Support__ Verde) 1 Office in Guinea-Bissau PARAP Programa de Apoio a Reforma da WAEMU IWest Afkican Economic and Monetary Administrap70 Publica (Program to Union Support Public Administration Reform) WFP World Food Programme PCU Project Coordination Unit WHO World Health Organization

The World Bank Group greatly appreciates the close and fruitful collaboration with the govemment of Guinea-Bissau in the preparation ofthis Interim Strategy Note.

The preparation of this ISN was a team effort by the World Bank Group’s Guinea-Bissau Country Team. Many team members made substantial contributions to drafting and editing the document, participating in review meetings, and providing comments and advice. Special thanks go to Ronnie Hammad, Senior Operations Officer, for his very constructive strategic advice and inputs during a critical phase of the document preparation; Alain d’Hoore, Lead Economist, particularly for taking charge of the macro-economic analysis, amongst many other contributions; and to Ana Paula Lopes, Senior Operations Officer, and Carmen Pereira, Liaison Officer in Bissau, for jointly carrying out comprehensive consultations with various stakeholder groups. Special thanks also go to McDonald Benjamin, Country Program Coordinator, for his tremendous support to the finalization of the document; and to Harifera Raobelison and Danette Metcalfe, who skillfully mastered the processing of the document through the internal review steps.

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. iv THE REPUBLIC OF GUINEA-BISSAU INTERIM STRATEGY NOTE

TABLE OF CONTENTS .. EXECUTIVE SUMMARY ...... vi1 I. COUNTRY CONTEXT ...... 1 A . Geographic, Historical and Political Context ...... 1 B. Poverty and Social Conditions ...... 2 C . Recent Economic Developments ...... 5 D. Macroeconomic Prospects in the Context of the Global Economic Crisis ...... 7 I1. COUNTRY DEVELOPMENT PROGRAM AND ISSUES ...... 8 A . Country Priorities and Agenda ...... 8 1. PRSP Objectives ...... 8 2 . The Current Government’s Program ...... 9 3 . Country Stakeholders’ Perspectives ...... 9 B. Key Development Challenges and Cross-Cutting Issues...... 9 1. Key Development Challenges ...... 9 (a) The Immediate Challenge of Fiscal Stabilization ...... 9 (a) Fostering Accountability and Transparencyfor Good Governance...... 10 (c) Accelerating Growth: Improving Productivity in Agriculture ...... 13 (4 Accelerating Growth: Addressing the Collapse of Basic Infrastructure Services ...... 14 (e) Accelerating Growth: Developing Extractive Industries ...... 15 @ Addressing Human Development Constraints: Improving Basic Social Services ...... 15 2 . Cross-Cutting Issues ...... 16 (a) Weak individual, Organizational and Institutional Capacity ...... 16 (6) Gender ...... 16 (c) Environment ...... 16 I11. THE BANK’S INTERIM ASSISTANCE STRATEGY ...... 17 A . Implementation ofthe Previous CAS ...... 17 1. Portfolio Management ...... 17 2 . Lessons from ICRs and IEG Evaluations ...... 17 B. The Current IDA and Trust Fund Portfolio...... 18 C . Proposed Interim Assistance Strategy - IDA and Trust Fund Resources...... 19 Pillar I: Strengthening Economic Management and Laying the Foundations for Improvements in the Productive Sectors ...... 19 (a) Financing Activities ...... 19 (a) Non-Financing Activities ...... 20 (c) Key ISN Outcomes for Pillar I ...... 20 Pillar 11: Increasing Access to Basic Services, Especially in Rural Areas ...... 20 (a) Financing Activities ...... 20 (a) Non-Financing Activities ...... 21 (c) Key ISN Outcomes for Pillar 11 ...... 21 Cross-Cutting Theme: Support for Capacity Development ...... 21 D. Proposed Interim Assistance Strategy - IFC and MIGA Activities ...... 22 E. Next Steps: Towards a High Impact Program ...... 24 1. Agricultural Development ...... 24 2 . Transport Infrastructure ...... 25 3 . Electricity...... 26 F. Partnerships and Donor Coordination ...... 26 G. Monitoring and Evaluation ...... 27

V IV. MANAGING RISKS...... 28 A . Political Risks ...... 28 B. Macroeconomic Risks ...... 29 C . Governance Risks ...... 29 D. Program and Project Implementation Risks ...... '...... 30 E. Fiduciary Risks ...... 30 .

List of Tables Table 1: Guinea-Bissau is Unlikely to Achieve the Millennium Development Goals ...... 4 Table 2: Guinea-Bissau .. Key Macroeconomic Indicators. 2004-2011 ...... 6 Table 3: Planned Interim Strategy Assistance to Guinea-Bissau in FY09-FY10 ...... 23

List ofBoxes Box 1: The EU Public Administration Reform Assistance Project ...... 12

List ofAnnexes Annex A1: Guinea-Bissau ISNResults Matrix ...... 31 Annex A2: Country at a Glance ...... 33 Annex B2: Selected Indicators of Bank Portfolio Performance and Management ...... 35 Annex B3 : IDA Program Summary ...... 36 Annex B3 : IFC/MIGA Program Summary ...... 37 Annex B4: Summary ofNon-lending Services ...... 38 Annex B6: Key Economic Indicators ...... 39 Annex B7: Key Exposure Indicators...... 41 Annex B8: Operations Portfolio: IBRDODA and Grants ...... 42 Annex B8: IFC Committed and Disbursed Outstanding Investment Portfolio ...... 43

Map (IBRD 33415) ...... 44

vi EXECUTIVE SUMMARY

1. This Interim Strategy Note (ISN) presents the proposed Bank Group assistance to Guinea- Bissau through December 2010. It aims at addressing selected, critical challenges within the confines of IDA’S limited resource envelope for Guinea-Bissau, and at supporting the Government in its efforts to implement a basic transitional program in a challenging environment. At the same time, the ISN highlights the low level equilibrium trap in which Guinea-Bissau has been mired this past decade and underscores the limits of an approach that is too exclusively focused on crisis containment, which has produced the “muddling-throughYy results of the last decade. It advocates for a stronger, more ambitious approach in the medium term, requiring a sustained critical mass of resources from external partners, including the World Bank Group. These resources are essential to break the interlocking vicious circles of economic and political instability in which Guinea-Bissau has been trapped for the last ten years since the 1998-99 civil war. .. 11. Guinea-Bissau, with a population of 1.7 million, is a fragile state that is politically unstable and highly vulnerable to internal and external risks. Macroeconomic conditions remain challenging with continued large domestic primary deficits and domestic debt accumulation in spite of recent progress. In the ten years since the 1998-99 internal conflict, economic growth has barely exceeded population growth and income per capita is still one sixth below pre-conflict rates. The country’s power system is operating less than 2 MW of generation capacity. The port of Bissau is in need of major rehabilitation, and the agricultural sector, which has tremendous potential for growth and poverty reduction, remains largely underdeveloped. The mining sector, which is potential a major source of growth, public revenues and export earnings, remains poorly exploited and inadequately regulated. Together, political instability, low growth, limited public resources, and weak institutional capacity have constrained public service delivery, making the achievement of most MDGs out of reach. The country has, in recent years, also become vulnerable to drug-traficking, with the potential for a major impact on the social, economic, and security structures ofthe country and the sub-region. ... 111. While a democratic drive has begun to take root, including adherence to free and fair electoral processes, political and institutional development remain fragile. In the past five years, three national elections were conducted and widely considered transparent and fair, with high participation rates-the legislative election ofNovember 2008 being the most recent. In the wake of the assassinations of the President and of the Army Chief of Staff in March 2009, the population remained calm and constitutional procedures were respected. Little more than three weeks after these tragic events, the National Assembly passed both the new Government Program and the new budget with a clear majority. Nonetheless there remains a high level of political uncertainty in the run-up to the Presidential elections, scheduled for June 28,2009. iv. At the heart of the country’s disappointing performance is a series of vicious circles at the political, economic and sector levels that are locking the country in a low-equilibrium trap of instability and low growth. Political instability and governance issues have damaged institutions, contributed to high turnover in senior positions and to the exodus of qualified public sector managers, and undermined law and order as well as the provision of essential public services. This has rendered more difficult the environment for public investment and for both foreign and domestic private sector investment. Political instability has also increased vulnerability to macroeconomic shocks, limited external aid, and blocked exit from high levels ofdebt. v. As much as political instability and governance issues have undermined the basis for growth and development, the lack of economic growth has in turn undermined political normalization. Low growth has translated into a lack of buoyancy in state revenues and complicated

vii fiscal adjustment, resulting in a frequent inability to pay public suppliers and employees. Lingering arrears to domestic suppliers and recurrent episodes of arrears on wages and pensions have fostered deep discontent among the military, civil service and private sector. Low growth has also enhanced the relative attractiveness of rent-seeking from public revenues or natural resources. These conditions have turned Guinea-Bissau into fertile ground for drug-trafficking, which could ultimately result in huge costs to the country, the sub-region and to Guinea-Bissau’s international partners. vi. The last CAS (Report No. 16568) was presented to the Board in May 1997. Since then, the Bank has completed 8 projects amounting to US$99 million, mostly in infrastructure, economic management, health and education, with generally mixed results. Attempts at macroeconomic stabilization faltered early in the decade. Early in 2008 the Government embarked on an economic program supported by the IMF’s Emergency Post-Conflict Assistance (EPCA), which is continuing in 2009 and could pave the way to a medium-term program under the IMF’s Poverty Reduction and Growth Facility (PRGF) in late 2009. vii. The program proposed under this ISN focuses on assisting the Government in implementing a core transitional program that is commensurate with the limited IDA allocation for Guinea-Bissau. Guinea-Bissau’s allocation stands at SDRl2 million (approximately US$19 million) over 3 years, which requires that the strategy be highly focused and leveraged. Since Guinea-Bissau is in a situation of debt distress, IDA resources are provided on grant terms, per the stipulations of the grant allocation system agreed with IDA donors for the IDA-15 period (FY09-FY11). The proposed strategy aims to support the Government in carrying out a core transitional program, ahead of Guinea-Bissau reaching the Completion Point under the HTPC Initiative. This transitional program is articulated around two pillars: (i)strengthening economic management and laying the foundations for improvements in the productive sectors, and (ii)increasing access to basic social services, especially in rural areas. Capacity development is a cross cutting theme. These goals are aligned with the 2006 poverty reduction strategy, the PRSP (Guinea-Bissau’s DENARP), and the Government Program. Frontloading support to Guinea- Bissau during this transitional period will be critical since achievement of the HIPC Completion Point will allow the country to reduce the impact of a significant debt overhang on growth and free desperately needed resources. ... vm. The ISN financing is being front-loaded. It proposes a programmatic series of two development policy operations, IDA and trust fund financing of investments notably in rural areas, and TA for improved economic management. In addition, ongoing multi-sector infrastructure financing, coastal and biodiversity support and new financing through the State and Peace-building Fund (for economic management, participatory rural development and health), will continue to support efforts to increase access to public services. Furthermore, support for an expansion of quality primary education under the Education-for-Al Wast-Track-Initiative is under preparation.

ix. Beyond the short span of the ISN, the Bank, together with donor partners, can play a critical role in helping Guinea-Bissau to break out of the low equilibrium trap of instability, weak governance and low growth. This could be achieved through leveraging IDA’S convening power, its platform for broader donor support, its technical expertise and the quality of its policy advice for the mobilization of resources behind a High Impact Program of assistance. The program would be designed to achieve transformative change in key sectors of the economy (including agriculture, energy and transport infrastructure), so as to break the vicious circles in these key areas in which the country is trapped. Continued budget support and technical assistance will also be needed to support complementary economic reforms and institutional development. Such a High Impact Program would require significantly higher resources than are available in the current ISN envelope and in other donors’ current levels of support. The development of this program at the sectoral level and its costing would be undertaken during the ISN period in collaboration with other partners and would thus inform the ... Vlll subsequent CAS and ultimately a donor Consultative Group meeting. Moreover, this program can only succeed if there is a strong commitment from the Government and the other key national stakeholders to changing the “rules of the game” so as to promote favorable conditions for the success of a major donor engagement. It would therefore require and draw on broad consultations by the Government of Guinea- Bissau after the Presidential elections along with key national stakeholders and with donor partners. x. There are significant risks to the Bank’s engagement in Guinea-Bissau. These include high political and macroeconomic risks as well as substantial governance, progradproject implementation and fiduciary risks. Guinea-Bissau’s high political instability and frequent instances of military unrest and interventions in the political sphere are compounded by high macro-economic risks associated with its weak fiscal position and narrow domestic revenue base, its heavy indebtedness, and high vulnerability to external shocks. The country’s governance challenges include weak institutions and rule of law and vulnerability to corruption, while high turnover in political and senior technocratic leadership as well as insufficiently trained and poorly motivated civil servants slow the implementation of reforms and projects, and compound procurement and financial management risks. Following the incidents of early March, multilateral bodies (like the Community of Portuguese Speaking Countries, ECOWAS and WAEMU) have stepped up their engagement by closely monitoring the situation, providing platforms for dialogue between key stakeholders, and supporting and advising the government. In order to mitigate risks to the Bank’s program, the ISN is incorporating capacity development as a cross-cutting theme aimed at ensuring adequate TA to strengthen public institutions. The Bank has strengthened its emphasis on demand-led community-driven development approaches. Further the Bank will improve strategic communication and dialogue with country stakeholders and donor partners, and will include thorough political economy analysis in the preparation of future operations. Macro-economic risks will be mitigated through close economic monitoring, budget support and interim debt relief, in close coordination with the IMF. A strong program of procurement and financial management reforms will be supported which will also serve to mitigate governance-related risks. Residual risk after mitigation remains substantial, although the Bank is convinced that the potential rewards from accompanying Guinea-Bissau through the transition to a higher impact program that breaks the country’s vicious circles and lifts it out ofits low level equilibrium considerably outweigh the risks.

ix X I. COUNTRY CONTEXT

A. GEOGRAPHIC,HISTORICAL AND POLITICAL CONTEXT

1. Guinea-Bissau is a small country at the West African coast located between Senegal to the North, the Atlantic Ocean to the West, and Guinea-Conakry to the East and South. The country has an estimated 1.7 million inhabitants and a GNI per capita of US$200 (in 2007 per the Bank’s Atlas methodology). It comprises numerous ethnic groups, including the Manjacos and Pepel, concentrated in the North of the country, the Fula and Mandinga, predominant in the East, and the Balanta, concentrated in the central Oyo province. Roughly half the population is Muslim, while the other half follows animist and Christian traditions. Guinea-Bissau has close economic, cultural and historical ties with countries in the sub-region such as Senegal, Guinea (Conakry), The Gambia, and Cape Verde-with which it shares language ties and a joint history of struggle for independence.

2. Guinea-Bissau is endowed with good soils, high rainfall and significant mineral endowments. It is located in the Guinean agro-ecological zone where annual precipitation rates exceed 1,100 mm. The country has abundant water and a low-lying topography with a tropical interior, drier savannah and swampy coastal areas, as well as an archipelago of islands off its shores. Guinea-Bissau is interlaced by a network of rivers, and river transport has been important throughout its history. Road transport is more difficult due to the paving ofjust one-third ofthe country‘s 4,380 km road network, and large parts of the country are cut off during the rainy season, even though the primary road network has been upgraded significantly with EU support. Subsistence food crop production-comprising rice (the country’s main staple), sorghum, maize, plantains and cassava-accounts for about 46% of the country’s GDP and employs over 80% of the local workforce. Nonetheless, Guinea-Bissau’s principal crop is cashew, which accounts for over 90 percent of exports and 17 percent of Government revenues. Fishing is an underdeveloped sector, but with great potential as a growing source of export and domestic revenues (i.e., from sale of fishing rights). The country also has as yet untapped phosphate, bauxite and petroleum potential.

3. The short post-independence history of Guinea-Bissau has been marked by deep political instability. While most neighboring countries had become independent in 1960, it took a long and fierce guerilla struggle for Guinea-Bissau to achieve independence in 1974, with few structures for effective governance in place. JoZo Bernard0 Vieira, who seized power in 1980, ruled the country for almost 20 years until he was ousted after the internal conflict of 1998-99. Further strife ensued in 2003 with the ouster of President Kumba Yala. Since then, three elections have taken place-two legislative in 2004 and 2008, and a presidential election in 2005 that led to Vieira’s return to the Presidency. All elections were deemed reasonably free and fair and the National Assembly is a vibrant albeit highly polarized legislative chamber. Even with the conduct of broadly successful elections, instability has continued. Since 2000, eight Prime Ministers have been appointed for eight different governments-an average time- in-office ofonly about one year.

4. Sustained political instability, conflict and weak institutions make for a complex socio- political landscape and a precarious governance structure. The high turnover among senior policy makers, senior civil servants and public enterprise managers has undermined the state’s performance. Short-lived governments have focused on day-to-day business, with limited ability to develop, let alone implement, long term strategies. For example, the preparation ofthe first PRSP, was initiated in 2001 but repeatedly delayed and only completed in 2006. Recurrent delays in meeting salary, pension and other contractual obligations are fostering deep discontent among the civil service and domestic suppliers, and contributing to the exodus of qualified human resources.

1 5. The continuous intervention of the military in the political arena adds another level of complexity to a difficult governance situation. The military has historically intervened in civilian politics on countless occasions. Pension and salary payment backlogs, very poor living conditions in the barracks and insufficient sustenance have increased the military’s discontent with civilian authorities and weakened their ability and resolve to address one of Guinea-Bissau’s most serious sources of insecurity, namely drug-trafficking. In October 2008, the ECOWAS Ministerial Conference on Drug Trafficking, held in Cape Verde, approved an Action Plan to address drug trafficking in the sub-region. A Round Table on the restructuring and modernization of Guinea-Bissau’s defense and security sector was also held in Cape Verde, on April 20-21,2009. It is hoped that the latest Round Table and its results will help to accelerate the dynamics of the long overdue defense and security sector reforms in the country, with the support ofthe international community.

6. Notwithstanding these challenges, a fragile democratic drive has begun to take root. In last November’s legislative electionsthe third of three broadly free and fair elections held during the last five years-the historic independence party, PAIGC, won a clear majority with 67 out of 100 seats in the National Assembly. Shortly after the elections, an attempt to kill the President of the Republic in his residence failed and just over three months later, on the night of March 1-2,2009, both the Army Chief of Staff and the President were killed in succession. The population remained calm following these disturbing events, and as provided by the Constitution, the Speaker of the National Assembly was sworn in as Interim President on March 3, 2009. Presidential elections, which according to the Constitution are supposed to take place within 60 days, are now scheduled to take place on June 28, 2009.’ Little more than three weeks after the tragic events, the National Assembly passed both the new Government Program and the budget with a clear majority. Nonetheless, political violence on the part of military factions continues to threaten the fragile consensus that emerged in the aftermath of the tragic incidents of early March, and shifting alliances between segments ofthe military and political actors make it more difficult to anticipate the role of the military in the political transition. Two prominent, outspoken critics of the governance situation were recently arbitrarily arrested and tortured, contributing to political unease in the run-up to the Presidential elections. Nevertheless, civil society is increasingly vibrant and vocal, demonstrating for peace following the November 2008 attack on the President’s residence, and calling for increased efficiency, transparency and accountability of state institutions. There is an overwhelming feeling that Guinea-Bissau needs to put its past behind and initiate a new cycle of stability and improved governance, and a hope that the Presidential elections, following on the election of a clear majority in the legislature last November, will open a window of opportunity for stability over the next few years.

B. POVERTY AND SOCIAL CONDITIONS

7. Guinea-Bissau raqks 171 out of 179 countries on the 2008 UNDP Development Index and two-thirds of its population lives in poverty. Poverty is widespread-according to the 2006 National Poverty Reduction Strategy (known by its Portuguese acronym as DENARP), 66 percent of households are living below the poverty line, 22 percent of which live in extreme poverty. The incidence of poverty is uneven across age groups (with particular vulnerability for children and youth), and is highest for those who have less education, work on agriculture or live in rural areas, where almost 80 percent of the poor live. The absolute poverty rate (excluding Bissau) of 69 percent masks large regional differences- ranging from 80 percent in Oyo to 64 percent in Cacheu and 52 percent in Bissau, the capital city. Due to its high concentration of households, Bissau has the largest share of the poor in the country, 21 percent, followed by Oyo at 18 percent with other, less populated provinces accounting for between 12 and 14 percent ofthe poor.

’ The Presidential elections will be filly funded by donor contributions, since there is no fiscal space for additional expenses to this end.

2 8. Gender is an important factor in the incidence of poverty, vulnerability and protection of rights. A breakdown by gender and age group reveals that the incidence of poverty is slightly higher for women below 31 years of age and above age 65 than for men in those age groups (up to 3 percentage points of difference in the poverty headcount measures). By contrast, women tend to be better off than men within the 31-65 age cohort (by 2 to 10 percentage points). This may be attributable to the fact that women traders dominate the informal market while men mostly seek salaried employment, which is hard to find given the bleak situation of a large part of the private sector. Analysis undertaken for the IPSA2 indicated that in rural areas, female heads of households were 23 percent more likely to meet the food needs for the household than male heads of household. Additionally, female-headed households in rural areas were found to have consumption levels 20 percent higher on average than households headed by males. At the same time, discriminatory social practices imply significantly lower consumption levels (in the range of 15-19 percent in rural areas) for households headed by divorced or widowed women. Women are also highly vulnerable to HIV, as there is a very low level ofknowledge about prevention.

9. Increasing poverty and vulnerability in urban areas is taking on added urgency. Arrears in salary payment to civil servants severely strain urban households. According to the 2005 IPSA survey, over 90 percent of urban families are engaged in the informal sector, or a mix of informal and formal, mostly public service. With scant opportunities for steady income and the recent surge in prices for food and energy, an increasing number of households slipped into deep poverty, living for part of the year on one meal a day-a phenomenon referred to as urn tiro-the “one shot.”

10. Largely as a consequence of political instability, achieving most of the MDGs already appears out of range. The country is not likely to reach any of the MDGs by 2015, and it may fall dramatically short without a substantial infusion of donor support and significant investment in key sectors in the short run (see Table 1).

11. As an example, despite progress in recent years, the country is not on track to meet its MDG target regarding universal primary education. The recent expansion of primary education coverage was not accompanied by improvements in internal efficiency and quality. Today, there are twice as many students in primary education as there were ten years ago, but only six out of 10 children who enter the first grade complete the full cycle. Many who do complete primary education remain functionally illiterate due to the poor quality. The gender gap at the primary level has been narrowing, but a bias remains between socio-economic groups. The continuing expansion of primary education will also maintain the pressure on secondary school enrollment. Tertiary education is weak: technical and vocational training are not meeting the needs of the labor market in spite of significant investment in the opening of two universities. Guinea-Bissau could become eligible for funding under the Education-For- All - Fast Track Initiative (EFA-FTI). An Education Sector Plan is being developed and costed-the Bank is providing analytical support in this area under a Public Expenditure Management and Financial Accountability Review (PEMFAR).

*World Bank (AFTP4): Integrated Poverty and Social Assessment, (IPSA) Vol. 11, Conflict, Livelihoods and Poverty in Guinea-Bis,sau; May 2006.

3 Table 1: Guinea-Bissau is Unlikely to Achieve the Millennium Development Goals

0 bj ec tive Indicator 1990 2000 2004 Target 2015

1. Reduce extreme and Rate of absolute poverty (%) 49 64,7 (I) 683 24,5 absolute poverty Rate of extreme poverty (%) 26 21,o (1) 22 13

2. Universal Primary Rate of school enrollment (%) 23 45,3 56.9 100 Education Completion

3. Gender Equality Gender Parity in Primary 56 67 83 100 Education (percent girlshoys)

4. Reduction of Infant Under 5 Mortality Rate (per 240 239"' 205,2 80 Mortality 1000 live births) (3) Infant Mortality Rate (per 142 122(3) 47,3 1000 live births)

5. Improve maternal Maternal Mortality Rate (per 914 822 229 health 100,000 live births)

6. Combat HIV/AIDS, HIV/AIDS Prevalence Rate 5.9 7.8 5.9 malaria and other diseases 7. Ensure environmental Percentage ofpopulation 79 sustainability without sustainable access to

safe drinkingY water (I)Data of 2002. ("Data of 1999. (3) Data of 2005 Source : u Rapport sur les objectifs du millenaire pour le d6veloppement 2004 B, and data used for the elaboration of the UNDP u National Human Development Report 2006 for Guinea-Bissau,.

12. The majority of people have limited access to quality health care, which largely explains poor health outcomes. Access is particularly limited for the poor. The national health care system faces multiple constraints. Inadequate monitoring and evaluation and low data reliability prevent appropriate strategic decision making. Moreover, supervision of health facilities, which is essential to manage and maintain the performance of the health network, is irregular due to a lack of funds and inadequate coordination. Equipment shortages and poor infrastructure coupled with weak management capacity compromise program implementation.

13. Over the last years, mixed results were achieved in child immunization and malaria. There are signs that effective interventions have not been sustained in terms of child immunization, with large fluctuations in coverage in recent years. Even with recent signs of exemplary 30 percent reductions in the incidence of new cases, malaria remains the number one public health issue in Guinea-Bissau. The successes to date with regard to malaria reflect, in part, the increased availability and extensive use of insecticide-impregnated bed nets, particularly by vulnerable groups. On the curative side, only 46 percent of children with fever received appropriate treatment in 2006, mainly because the shift towards artemesinin-based combination therapies (ACT) has been slow and drug shortages are recurrent.

14. There is mounting concern that the HW/AIDS pandemic is spreading rapidly. Different estimates place the HIV prevalence rate among adults between 3 and 8 percent, significantly higher than in neighboring Senegal or Guinea-Conakry. Access to HIV/AIDS treatment is very limited. Despite the availability of generic anti-retrovirals (ARV) from Brazil and funding from the Global Fund to Fight

4 AIDS, Tuberculosis and Malaria (GFATM), only 496 people received treatment in the first quarter of 2007. Challenges in this regard include the poor status of the health facilities and the poor capacity for supply-chain management. Stock-outs of pediatric ARVs and oftesting supplies occurred in 2007 and in early 2008. Misconceptions about W/AIDS transmission remain widespread, causing serious stigmas among persons living with HIV/AIDS.

15. The vast majority of people do not benefit from any formal social protection. Formal social protection arrangements, such as health insurance and pension schemes, are affordable to only a small segment of the population. Government transfer programs have limited scope and impact. Because of these limitations, various segments of the population rely on informal risk management strategies, including social networks, community mutual faith-based support and saving schemes.

16. Guinea-Bissau faces challenging conditions with regard to social development. In particular, as noted above, Guinea-Bissau faces important challenges in the areas of social inclusion and social cohesion. While Guinea-Bissau has not suffered the same level of inter-ethnic strife as have other countries in Africa, there is a potential for tension along ethnic lines. Opportunities are unequal across geographic, gender and other parameters, and vulnerability to drug-related crime and social conflict is high. At the same time, with regard to social accountability, Guinea-Bissau’s increasingly lively civil society has engaged in a series of dialogues at the grass-roots level around the country over the past two years, both around the national poverty reduction strategy and around the way forward for promoting peace, the latter facilitated by an NGO called Interpeace. These efforts represent valuable steps towards strengthening governance through social accountability.

C. RECENTECONOMIC DEVELOPMENTS

17. Despite a difficult international environment and continued challenges on the political and macroeconomic policy fronts, economic performance improved slightly during 2007-08. Economic growth accelerated from 0.6 percent in 2006 to 2.7 percent in 2007 and 3.3 percent in 2008, thanks in part to increased agricultural production-agriculture accounts for close to 55 percent of GDP. This reflected a return of normal rains and a response to rising prices for cashew nuts, the primary export, which more than offset the negative aggregate impact of higher fuel and food prices. Growing agriculture in turn drove commerce and transportation, while the small industrial sector continued to contract with the near collapse of the power company. Modem services-e.g. banking and telecommunications-have also continued to expand.

18. Inflation accelerated to 4.6 percent in 2007, and over 10 percent in 2008, driven mainly by the surge in food and oil prices given the country’s heavy reliance on food and fuel imports? Since 1997, Guinea-Bissau has been a member of the regional West African Economic and Monetary Union (WAEMU), with a common currency pegged to the Euro and a monetary policy managed by the Central Bank of West African States (BCEAO). Inflation has generally been low, with variations driven mainly by large domestic or external shocks. Surging oil and food prices in 2007-08 brought inflation well above its previous average of about 2 percent since 2000. As a result also, the external current account deficit (excluding official transfers) widened to almost 14 percent of GDP in 2008 from 8.6 percent of GDP in 2007, financed by official grants and a small drawdown of foreign reserves. Guinea-Bissau’s share in the regional pool ofreserves ofthe BCEAO has averaged over 8 months ofimports of goods (See Table 2).

Rice constitutes about 16 percent of total imports and other food imports add another 18 percent, despite the country’s large share of agriculture in GDP. Fuel imports represent about 25 percent of total imports. Total-imports stood at a third of GDP in 2008.

5 Table 2: Guinea-Bissau -- Key Macroeconomic Indicators, 2004-2011

2004 2005 2006 2007 2008 2009 2010 2011 2.2 3.5 0.6 2.7 3.3 Real GDP -uowth 1.9 3.1 3.8 0.8 5.6 -0.1 4.6 10.4 3.6 2.5 2.8 Inflation (annual average %) 44.0 20.6 5.0 25.9 20.7 8.5 6.8 6.9 Broad money growth (annual %) -14.2 -11.9 -9.4 -10.2 -5.8 -7.0 Fiscal bal. commitment basis (% GDP, incl. grants) -7.4 -6.9 -7.2 -6.9 -7.3 -10.5 -6.1 -7.4 -5.4 -4.6 Domestic primary balance (YOGDP) Current acc. bal. ('YOGDP, incl. official transfers) 6.2 -0.6 -11.3 10.1 -1.9 -3.6 -5.7 -4.8 Current acc. bal. (% GDP, excl. official transfers) -4.9 -8.2 -24.4 -8.6 -13.8 -15.6 -12.8 -1 1.6 Off foreign reserves' (months of import) 7.6 8.9 7.2 10.9 9.1 10.0 11.9 13.0 Nominal stock of External debt (% GDP) 461.6 439.6 423.2 362.3 333.3 312.2 183.0 152.2 Domestic debt' (% GDP) 29.3 28.2 27.0 25.3 23.1 19.6 17.3 -

Note: Data for 2004-2007 are actual values; data for 2008 are estimated and data for 2009-201 1 are projections. 1/ represents the net foreign assets in the Central Bank BCEAO in months of imports of goods 2/includes debt to the banking system (BCEAO and commercial banks), debt to the private sector, arrears on salaries, and contribution to the regional organizations.

19. In early 2008, the government started a one-year program under the ZMF Emergency Post- Conflict Assistance. The program aimed to restore fiscal stability, targeting a reduction in the domestic primary deficit to just above 4 percent of GDP and a strict policy of no new accumulation of domestic arrears. The program had a strong structural plank in the revenue and expenditure management areas on which there was broadly satisfactory implementation progress throughout the year, underscoring Government commitment to reform public financial management. Fiscal performance under the EPCA program was satisfactory until mid-year but weakened under the weight of external and political shocks. The surge in fuel and food prices prompted the Authorities to adopt some limited measures to soften the impact on the p~pulation.~While wage spending came out above original targets, mainly owing to recruitments of contractuals in the education sector, some wage bill compression was achieved in relation to GDP, reflecting a reduction in real wages due to the lack of adjustment of nominal wages to high inflation. Overall, spending envelopes remained broadly within program targets. However, with the brief bouts of political uncertainty related to the dismissal of the Parliament and Government in August and the failed coup attempt in late November, domestic revenues losses late in the year led to a higher domestic primary fiscal deficit than envisaged, estimated at close to 6percent of GDP versus a target of about 5 percent ofGDP. In turn, lower revenues, together with a shortfall in budget aid, led to the accumulation ofnew arrears, mainly on wages, equivalent to about 4 months.

20. The financial sector has recovered in recent years, but remains underdeveloped. With the opening of three new banks in recent years (all foreign and privately owned), bank deposits and credit have increased. The fairly high rate of growth of money over 2004-08 reflects mainly a continued process of re-monetization. Nonetheless, financial intermediation remains embryonic-total domestic credit at end-2008 is equal to only 6.5 percent of GDP, the lowest in the WAEMU region. Political and macroeconomic instability, a large informal sector and lack of proper financial accounting in most firms, difficulty in securing collateral, and the limited geographic reach of banks remain key obstacles to expanding bank lending. By the same token, the local banking sector is largely insulated from the global financial crisis, though difficulties at the head offices of (mostly regional) foreign banks could undermine the confidence of depositors.

All rice imports were temporarily exempted from import taxes and customs duties were reduced on diesel imports.

6 D. MACROECONOMIC PROSPECTS IN THE CONTEXT OF THE GLOBAL ECONOMICCRISIS

21. Real GDP growth in 2009 is expected to slow to about 2 percent under the current global economic context, assuming no further major political disturbances. Growth will be supported by an expansion of food crops and some gains in services as Government payments to employees and suppliers normalize. The global slowdown is expected to negatively impact Guinea-Bissau mainly through export values and remittances. A third channel-a potential decline in donor commitments-is difficult to quantify at this time. Prices for cashew nuts, the main export crop, are expected to be almost 30 percent lower than last year. Remittances, which are currently equivalent to about 7 percent ofGDP, are expected to decline by more than 10 percent. These developments will constrain real GDP growth-growth projections for 2009 were revised down from 3.6 percent earlier this year-and negatively impact the poor in rural areas, as well as put pressure on the budget and current account. Partially offsetting this development, sharply lower food and fuel prices should provide a boost and contribute to lower inflation of about 3.5 percent, against an earlier projection for 2009 of close to 7 percent.

22. In this difficult environment, fiscal policy will be even more challenging. In early 2009, the new Government immediately reaffirmed its commitment to sound macroeconomic management, and requested further support under the IMF’s EPCA. Under the program, the domestic primary fiscal deficit is expected to widen to some 7.4 percent of GDP, from an estimated 5.8 percent in 2008 as tax revenues, hard hit by the expected decline in cashew nuts prices and lower imports values, are expected to decline by about 3 percentage points of GDP. The wage bill is expected to be frozen again in nominal terms, yielding a small decline in relation to GDP. Tighter budgetary controls and new surrender rules for administrative revenues collected and partially retained by the originating administrations should allow for a small decline in non-wage spending and its reorientation towards priority sectors, such as education and health. Overall, the ability of the Authorities to sustain a fiscal stance within the bounds of their fiscal program will again require tight control of spending envelopes, which they are set to deliver, as well as timely budget support.

23. Looking forward, the medium-term macroeconomic outlook is moderately favorable, assuming that the negative impacts of the global crisis do not markedly intensify. Under the baseline medium-term scenario-a scenario that does not assume the High Impact Program in energy, transport and agriculture sectors that is being developed for the next CAS-GDP growth in 2010-12 could accelerate to between 3.5-4 percent per year, assuming that political stability gains traction, that fiscal stabilization proceeds, and that donors continue to support the budget in line with recent experience. There is, however, considerable uncertainty over other factors that can affect economic performance, and even this unambitious growth outlook will be highly contingent on the global recession not deepening, fiscal stabilization being sustained and further donor support materializing at a steady pace. Stabilization of cashew nuts prices and continued high prices for rice above recent trend levels, along with further efforts to improve food security, could support continued growth in agriculture. If political and fiscal stabilization take hold, even gradual gains in investor and donor confidence could translate into moderate momentum in private and public investment. Modest improvement in the electricity sector could support higher growth, in view of the low starting point. As Guinea-Bissau is a member of the regional West African Economic and Monetary Union, medium-term inflation rates should return to the regional average of about 3 percent per year by 20 1 1, provided food and energy price increases do not re-emerge.

24. A deepening of the global slowdown could also negatively affect Guinea-Bissau’s economy, especially as its fragile stabilization relies heavily on high sustained donor support. On current assumptions, trade and private financial channels are unlikely to transmit a significant shock to the local economy, given its structure and the nature of these linkages. Still, a deeper-than-expected drop in the world price for cashew nut, Guinea-Bissau’s sole commodity export, could stifle the nascent recovery in agriculture. Lower food and fuel prices could partly offset these effects on the economy at large-the

7 inflationary impact of recent price increases was particularly high in Guinea-Bissau, compared to other CFA zone countries. A deeper than expected fall in remittances would also weigh heavily on the economy. The most significant risk for Guinea-Bissau, however, would be a severe drying up of foreign aid over the medium term.

25. Guinea-Bissau is debt distressed. At end-2008, Guinea-Bissau’s stock of external debt amounted to US$1.4 billion, of which US$392 million were arrears. The external debt to GDP ratio has fallen over the last five years from 475 percent in 2003 to about 330 percent in 2008, reflecting mainly a low rate of new debt accumulation against nominal GDP growth and favorable currency movements related to the FCFA’s peg to the euro. The cash flow impact of the large debt on the budget has been softened by the interim relief from the IMF, IDA and the African Development Bank (AfDB), but the country has continued to accumulate external arrears on its bilateral debt. The huge debt overhang remains a large risk on the path to fiscal stabilization and it clouds prospects for a resumption of private investment; by contrast, a resolution of the debt problem would enhance the credibility ofthe Authorities’ economic management. The latest Debt Sustainability Analysis (DSA)’ points to a situation of debt distress that could only deepen with borrowing on non-concessional terms, exchange rate depreciation and slower growth of exports.

26. Chances of a more permanent solution to debt distress would be boosted by the country reaching the HIPC Completion Point. Since reaching the Decision Point under the HIPC initiative in December 2000, the Authorities have made good progress on reaching Completion Point triggers and, with the approval of the EPCA program, have committed to maintaining a satisfactory macroeconomic performance. A good performance under the EPCA program would place the Authorities in a position to request support under the IMF’s PRGF, which, if performance is again satisfactory, would pave the way for reaching the Completion Point in 2010.

11. COUNTRY DEVELOPMENT PROGRAM AND ISSUES

A. COUNTRY PRIORITIES AND AGENDA

1. PRSP OBJECTIVES 27. Guinea-Bissau adopted a National Poverty Reduction Strategy Paper (Documento de Estratkgia Nacionalpara a Redu@o da PobrezeDENARP) in September 2006. The preparation ofthe first PRSP was initiated in 2001, but its completion was repeatedly delayed due to instability and frequent changes of governments. While the implementation of the PRSP was initially designed to cover the period 2006-2008, it will now cover the period 2007-2010. The DENARP is based on the 2025 Vision, known as “Djitu ten”, developed through a participatory process and offering a national long-term perspective. The PRSP was presented to development partners at the November 2006 Geneva Round-table. The long-term vision adopted in the strategy is “...to make Guinea-Bissau: (i)a well governed country with institutions for balance and control of powers, a decentralized administration that values merit; (ii)a country with an environment favorable to sustainable economic growth, good distribution of income and integrated into the sub region; (iii)a country with well-trained human resources adapted to its needs; (iv) a country with self-sufficiency in food and an exporter of grains in the sub region; (v) a country with rational management of its natural resources and greater environmental awareness among its citizens; (vi) a peaceful country with diversity, that values its cultural patrimony and ensures equality of opportunities between sexes; (vii) a strong country, economically independent, with

Joint Debt Sustainability Analysis, August 2007. An update is in preparation.

8 good infrastructures; (viii) a country with a democratic system that stimulates participation by its citizens in basic decisions and achievement of the rule of law.” The DENARP covers four pillars: (i) strengthening governance, modernizing the public administration and ensuring macro-economic stability, (ii)promoting economic growth and job creation, (iii)increasing access to basic social services and social infrastructure, and (iv) improving the living condition ofvulnerable groups.

28. The implementation of the PRSP has faced multiple challenges to date. These include frequent Government turnover, weak governance and low economic growth. The weakness of the National Statistics Office has also made effective monitoring of PRSP implementation more challenging. The Government is currently finalizing its first implementation progress report.

2. THE CURRENT GOVERNMENT’SPROGRAM 29. The new Government Program of February 2009, adopted by the National Assembly in March 2009, is ambitious. The program is consistent with the PRSP and aims to accelerate reforms around five major objectives, namely:

a) Promoting good governance, consolidating democracy and the rule of law; b) Ensuring political stability and social cohesion; c) Reforming and modernizing the state apparatus; d) Ensuring quick and sustainable economic growth, and e) Restoring a positive internal and external reputation for the State.

30. These objectives are grouped under two programmatic axes: (i)good governance, competent and transparent management, and the fight against impunity and corruption; (ii)economy and development. Each of these axes identifies a list of principal areas for attention and priority actions in each area. The Program also outlines the guiding principles of accountability and responsibility, merit-based promotions, sound use of public funds and sanctions for corruption and crime. Social services, including education, health and social solidarity are identified as important priorities.

3. COUNTRYSTAKEHOLDERS’ PERSPECTIVES 3 1. Revitalizing the agricultural sector and helping improve the education system are seen by various stakeholder groups as top priorities. The Bank and the international community are highly encouraged to provide support in these areas. These views were strongly expressed during consultations with stakeholders, whether during village-level visits in January 2009 or formal ISN consultations in April 2009. Concrete measures to reduce poverty and to improve people’s lives are seen as essential to avoid social conflict. The private sector is seen as vital for creating economic opportunities and improving livelihoods, and civil society organizations stressed the need to foster social accountability in order to increase the effectiveness of public institutions.

B. KEY DEVELOPMENTCHALLENGES AND CROSS-CUTTING ISSUES

1. KEYDEVELOPMENT CHALLENGES

(a) The Immediate Challenge of Fiscal Stabilization 32. Progress towards macro-economic stabilization has been uneven since the 1998-99 conflict, complicated by a difficult domestic and international context. Since 1997, Guinea-Bissau has been part of the regional West African Economic and Monetary Union, with a common currency and a peg to the euro that have delivered monetary and exchange rate stability over the last decade. Thus, the main macroeconomic policy instrument is fiscal policy, and, accordingly, difficulties in achieving fiscal stabilization have been central to macroeconomic instability in Guinea-Bissau, along with domestic

9 political developments and external economic shocks. Attempts at stabilization in the early years of the decade faltered in the wake of political disturbances and weaknesses in fiscal management.

33. Since early 2007, however, successive governments have reaffirmed the importance of bringing the budget under control to foster stability and improve the functioning of the State. Efforts have been made to mobilize revenues, seek additional donor assistance, and control spending, along with structural reforms in public financial management, in the areas of expenditure control, cash management, revenue collection, and administrative capacity in the Ministry ofFinance. The Authorities’ commitment to their program under the EPCA augurs well for an eventual transition towards a Fund- supported PRGF.

34. A lasting solution to Guinea-Bissau’s fiscal problems will require decisive progress on a number of challenging fronts, including control of the wage bill. The public sector wage bill stood at 11 percent of GDP and 65 percent of domestic revenues in 2008 (down from 82 percent in 2007). The large size of the wage bill limits fiscal space to finance critical non-wage expenditures and to absorb revenue shocks. Shortfalls in domestic revenues or donor support have led to episodes of accumulation of wage arrears, threatening social peace. Efforts are being made to improve control of the wage bill, including by freezing wages-a strategy that is not sustainable in the medium term-and by auditing the payroll, as well as more ambitious plans for public administration reforms supported by the European Union. The Government has expressed its commitment to these actions.

35. A large share of the wage bill goes to security forces, but achieving a downsizing of the security forces will require difficult internal agreements. The UN and EU have helped the Authorities to develop a security sector reform program and the EU is ready with financing for retrenchment and restructuring of the security forces. There is a broad consensus among observers that, unless the issue is addressed, the security sector will remain a critical source of political instability. However, the ability of individual governments to act will remain constrained until an internal agreement can be reached with the military and other forces on the need for reform. As another illustration of the country’s entrapment in a low equilibrium, security sector reform itself will be difficult to initiate, bring to completion and sustain in an environment of low growth.

(3) Fostering Accountability and Transparencyfor Good Governance 36. Country stakeholders see improving governance as a sine qua non for addressing the development needs of the population. This was a clear finding of the ISN consultations held in April 2009 and was true of governance in relation to all three branches of Government (executive, legislature and judiciary). The reform of the public administration, anti-corruption measures, improving the capacity of institutions and strengthening the rule of law were mentioned as fundamental reforms to promote poverty reduction. Further, the reform ofthe security sector is seen as a prerequisite for political stability and therefore for prosperity in the country. There is uncertainty about the willingness of the military and other security forces to reform and the unclear role ofthe military in society-in particular since March- is seen as undermining the functioning of institutions because of the incidents of violence perpetrated by different armed groups, and structurally because of the opportunity costs of the vast fiscal resources allocated to the military.

37. Guinea-Bissau’s governance profile is mixed. On the one hand, international governance indicators point to a weak institutional system with a poor quality ofpublic administration, and with high indices of perception of corruption in cross-country surveys. On the other hand, prospects for some success in improving governance appear better than they have been in years. Data on “voice and accountability” and “political stability and absence of violence” in 1998, 2003 and 2007 surveys have

10 trended upward since the advent of democracy, notwithstanding the recurrent bouts of instability and violence. Some improvements, though less resounding, were also noted in “government effectiveness.” 38. Reforming the public financial management system remains a priority to foster accountability and transparency in the use of public resources. Guinea-Bissau’s PFM system is weak. According to a recent draft PEFA report based on 2006-07 data, Guinea-Bissau rates-on scales of A (strong) to D (weak)-at a D level on all but two of 25 applicable standard indicators of public financial management performance, indicating deep-seated and broad weaknesses in budget credibility, comprehensiveness, preparation, execution, reporting, accounting, control, and transparency. Conflict and political instability have taken a heavy toll on the critical investments in the human and physical resources needed to operate the budget system and implement the kind ofpermanent reform agenda that is needed for a sustained improvement in budget performance and accountability. The Government has expressed its commitment to advancing on the PFM agenda.

39. There has been progress over 2007-08 in improving public financial management. Following a comprehensive audit of all revenue sources, sectoral ministries’ administrative revenues are now accounted in the general budget and sectoral ministries’ revenue accounts in commercial banks have been closed. Significant efforts have been made to move towards a single treasury account at the Central Bank by closing or transferring all sectoral ministries’ non-project spending accounts at the BCEAO. Treasury management has been strengthened through the establishment of an independent treasury committee. The Treasury is now in a position to produce a monthly ledger, while the Economic Forecasting department produces a monthly synthetic government financial operations table. The recourse to simplified and emergency (extra-budgetary) spending procedures was tightened, and the Ministry of Finance has ensured that remaining instances were regularized within a two-day period. Progress has also been made in implementing the action plan to reform the public procurement system in six ministries (education, health, agriculture, infrastructure, finance and defense).

40. One of the main issues is that Guinea-Bissau is still transitioning from the PFM system inherited from colonial times toward the WAEMU compact to which the country committed itself upon joining the Union in 1997. This compact is a legal, institutional, administrative, and policy agenda that will require significant efforts to put in law and practice. The legal framework remains to be fully formalized into national law, a framework that includes WAEMU-mandated budget classification, planning and execution procedures, accounting norms and procedures, reporting mechanisms, as well as internal and external controls. In order to be fully established in law and practice, the implementation of this framework requires the adoption of Organic Laws, the adoption of implementing rules and regulations (decrees) specifying procedures and the legal roles and obligations of budget managers and accountants, the development of operational tools and procedures manuals, and intensive training programs.

41. The government has also opted for a more systematic approach to deal with the various shortcomings in its PFM system. The strategy is based on the introduction of an integrated ublic financial management system upon which operational and procedural reforms can be tagged.‘ The implementation strategy for this system would allow Guinea-Bissau to leapfrog on a significant package of reforms to: (i)develop and integrate budget preparation and execution computer systems; (ii)make operational the WAEMU-mandated budget classification standards that were recently adopted; (iii) develop consistent reporting tools for monitoring budget execution and, at a subsequent stage, treasury operations; and (iv) effect procedural reforms for budget managers that ensure compliance with legal and PFM regulation standards.

6The system chosen by the authorities is based on the integrated financial management system software developed in CBte d’Ivoire.

11 42. During 2009, the government intends to continue to improve revenue collection and expenditure management and develop a new comprehensive medium-term reform agenda for PFM reforms. Implementation of the Automated System for Customs Data (ASYCUDA) and the launch of pre-shipment inspection will help improve customs control and valuation. The taxpayer database is being updated. A new payroll and human resources management system will allow improved controls over wage costs. Revision of the legal framework to adjust entitlement rates is also expected to be enacted. Other activities include the publication and dissemination of quarterly budget reports to Parliament, civil society and donors. In addition, a recently launched PEMFAR, will provide: (i)a updated diagnostic analysis of strengths and weaknesses in the country’s public financial management system and practices; (ii)inputs for the design and preparation ofthe next phase of the PFM reform strategy; and (iii)a rating of all key components of the PFM system against international benchmarks, which can be used to judge future progress on PFM reforms.

Box 1. The EU Public Administration Reform Assistance Project The PARAP is a €6.5 million project that is expected to last three years. The EU has indicated its interest in expanding its support beyond this period for at least an additional three years. The project presents two major axes of activities. The first is to support public administration reform in the short term to identify the necessary fiscal space to address shortcomings in the area of individual pay scales. The second aspect is to begin the process of administrative reform more broadly, through the targeted restructuring of the two key ministries: Finance and Public Administration and Labor, which are responsible for public resource management. With regard to the first objective, the program is dedicated to the effective development of the private sector to accommodate and absorb excess public employees. With regard to the second aspect of the reform-the restructuring of public administration, and the design and adoption of a code of conduct for public administration-the support will go towards a legislative review aimed at unifying and modernizing the legal and regulatory framework regulating the civil service and public administration in general; undertaking pay reform; designing and implementing a redundancy scheme for the public sector; developing the training function within the public sector; simplifying regulation and procedures; and mainstreaming gender in the public sector. The program will also support the demand side of public administration reform, by supporting civil society; working towards the development of a well functioning safety net system that is able to replace the use of the civil service for this purpose; and addressing other key issues in the area of governance reform, such as developing an alternative dispute resolution scheme, strengthening the external audit function, and drafting laws to support people with handicaps.

43. The public sector exhibits many of the problems of low income, fragile states, and reforming it is a long-term agenda. Overall, public service is ineffective. Absenteeism is widespread and employee motivation is weak. The civil service has low pay and low skills (pay rates at the middle and senior levels are low compared to the private sector); there are not enough professional and managerial posts; and too many resources are expended on lower grade staff. Political interference in the civil service is widespread and cronyism is often the basis for hiring and promotion. Little progress has been so far made to address the public sector’s complex human resource challenge. Reforming the public sector is a long-term agenda. International experience shows that public sector reforms take years, and the results appear with a significant time lag. The EU, together with the AfDB, UN and bilateral donor^,^ are making considerable efforts to reforming the public administration. The EU Program to support

UNDP, UNOGBIS, UNPBC, Portugal, France and Brazil

12 Public Administration Reform (PARAP) is piloting a variety of activities in two Ministries. Bank support to the PARAP team will include analytical and advisory support under the recently launched PEMFAR.

44. Guinea-Bissau’s role in global drug trafficking has emerged as one of the most disturbing developments in recent years.’ The country has reportedly become a major transit point for cocaine from South America to European markets. The United Nations Office on Drugs and Crime (UNODC) estimates that at least 50 tons of cocaine (a European street value of US$2 billion) from the Andean countries transit through West Africa every year: the drug is shipped from South America to various entry platforms in West Africa, notably Guinea-Bissau and Ghana. Economic impacts include pervasive money laundering, and increased economic and political risks in the eyes of potential investors, hampering the development of key sectors such as tourism. The traffic can lead to higher corruption, corrosion of the rule of law and political destabilization as a result of competition for access to illicit revenues. If left unchecked, drug trafficking could ultimately result in a gradual slide to a narco-state with huge costs to the country and the potential for significant spill-over effects on the sub-region and to Guinea-Bissau’s international partners.

45. The government has started to take action with UNODC support. The government is working in close cooperation with the Economic Community of West African States (ECOWAS), the European Union, South Africa, Brazil and US enforcement agencies. Implementation of ECOWAS’s Regional Action Plan to Address the Growing Problem of Illicit Drug Trafficking, Organized Crime and Drug Abuse-adopted in October 2008 in Praia-is considered a priority. A UNODC-led project is supporting efforts to strengthen law enforcement capacity through the judiciary police with logistical and training assistance, and to build up a team of special prosecutors to work in the counter-narcotics area.

(e) Accelerating Growth: Improving Productivity in Agriculture 46. While Guinea-Bissau is blessed with fertile soil and high rainfall, agriculture is severely handicapped. Agriculture accounts for about 56 percent of GDP, 82 percent of which is subsistence food production which employs over 80 percent of the workforce. The sector suffers from weak institutional capacity, low productivity, and weak research and extension support. Connecting production to export markets is further constrained by inadequate rural roads and a barely functioning port. These constraints undermine the country’s capacity to tap the sector’s large potential to promote more growth, exports, food security, and poverty reduction.

47. Cashew production accounts for 98 percent of export revenue and 17 percent of government revenues, and is used by small producers to purchase rice. Cashew is grown mostly by smallholders, with 80 percent of the crop produced on small farms. Other export cash crops include peanuts and coconuts. The shift in investment to cash crops has paid off, with profits being used to purchase rice and other consumption goods. Consumption needs for rice have also been filled by barter transactions between rice and raw cashew nuts since about 1984. Today between 50 percent and 70 percent of all imported rice is likely to be used for bartering purposes. While there are upsides to the bartering system, since it helps address the primary needs of households particularly in the early parts of the cashew harvest season, it often means that money is not entering the value chain at this level, and small farmers do not get to benefit from the full value of the cashew they produce. In addition, as many traditional rice fields (bolanhas) had been abandoned in recent years in favor of cashew production, rice fields in good condition have become scarce. Food .crops such as rice, sorghum, maize, plantains and cassava remain largely subsistence farming. Rice is the main staple food, accounting for 37 percent of consumption value and 40 percent of daily caloric intake of the average household. It is grown both in

For more extensive details, see: UNODC: Cocaine Trafficking in West Africa: The threat to stability and development (with special reference to Guinea-Bissau), December 2007.

13 the swampy coastal areas and in savannah areas, mostly without irrigation. The fishing sector is underdeveloped, but has great potential as a source of export and domestic revenues, largely from the sale offishing rights.

48. The government’s 2008 food crisis response, contained in an Emergency Plan for 2008-10 agricultural seasons, should help Guinea-Bissau mitigate the impact of higher food prices and lower cashew nuts prices. Though cashew nuts and cereals prices are falling, the latter remain elevated, albeit at a much lower level than 2008. The challenge is also an opportunity for Guinea-Bissau, which could expand its production of rice and other food crops. The Emergency Plan aims at increasing domestic production of staple food and ensuring its immediate availability, access and stability to ensure food security in the country. The Plan includes provision of seeds, production tools, purchase of pesticides stocks, provision of fertilizers, re-launching of seed production, introduction of an early warning system, and support to improved monitoring and evaluation systems. The government has been successful in mobilizing donor funding for this plan, including a US$5 million grant from the World Bank under the Global Food Crisis Response Program, and other initiatives supported by the FAO, AfDB, EU, IFAD, and WFP.

(4 Accelerating Growth: Addressing the Collapse of Basic Infiastructure Services 49. Electricity production and distribution has virtually collapsed since 2000. Only around 20 percent of the population has access to public electricity, primarily in Bissau, and only 70 percent of the time. Bissau has generation capacity of 5.5 MW, down from 25 MWin 2000, but is currently operating only 1.5 MW. The electricity and water utility, EAGB, is caught in a vicious circle whereby widespread power cuts and poor management have led to high levels of energy losses, theft, and low collection. As a result, EAGB does not have sufficient cash to pay for a minimum volume of fuel, let alone maintenance of its existing generation and distribution infrastructure. Only one of the five available generators is operational, leading to more power cuts and dwindling revenue. One major medium-term goal for the substantial improvement of the situation is the expected connection of Guinea-Bissau to the regional grid powered by hydro-generation capacity from the OMVG electric power development program by 2014.

50. The other most pressing infrastructure challenge is the port of Bissau. The Bissau port is the only major functioning port in the country and the gateway for 85 percent ofall exports and 90 percent of all imports. If fully effective and better connected to regional road infrastructure, it could serve as a trading hub and entry-point for the sub-region. An attempt to concession it to a private operator Tertir in 1991 was unsuccessful and in 1999 it reverted to the AdministraqZo dos Portos da Guink-Bissau (APGB). Originally constructed to move 5,000 containers, it is now moving 20,000 with considerable delays. Its operations suffer from a lack of capacity, insufficient depth of port and approaches, lack of navigation instruments, and obsolete and inadequate container equipment. This has constrained activity and revenues, which in turn has led to less maintenance. The costs of this vicious cycle on other sectors of the economy are substantial-for example, a study of the cashew sector pointed out that the high direct and indirect costs of port operations act as the largest tax on the prices farmers obtain for their products. It has also increased the cost of basic imports, especially fuel, which have to be transported from the port of Dakar.

51. Other infrastructure needs to be addressed include water, roads and telecoms. There is a major need for water provision in urban areas. While the primary road network is in relatively good shape, most secondary dirt roads are unusable during rainy season, hampering transport of agricultural production and economic activity, and linkages to sub-regional networks need to be strengthened. While telecommunications has experienced the greatest growth in recent years, the main challenge is to consolidate an enabling regulatory framework for further growth and competition.

14 52. In order to strengthen private investment in these and other areas, it will be important to strengthen the business climate, reduce red tape and strengthen contract enforcement. Guinea- Bissau ranked 179 out of 18 1 countries, ahead only of the Central African Republic and the Democratic Republic of Congo, in the 2009 Doing Business report. Some progress, however, has been registered over the past few years under the impetus of the IDA Private Sector Rehabilitation and Development Project. Positive outcomes include success in telecoms reform (with access up by a factor of about 50), privatization, legal reform, and the rehabilitation of 13 private enterprises on a cost-sharing basis. Nonetheless important issues remain to be solved. In particular, new laws and regulations are needed to improve the business climate along with a rationalization of predatory administrative practices.

(e) Accelerating Growth: Developing Extractive Industries 53. Significant deposits of bauxite and phosphates were discovered in Guinea-Bissau in the 1970s and more recently there have been offshore discoveries of heavy crude These resources were never fully exploited due to the poor quality of the infrastructure, low international prices, and political instability. More recently, long-term exploration leases have been granted in bauxite and phosphate areas. The government is in the process of making a decision on the development a phosphate mine, expected to be the largest investment in the history of Guinea-Bissau. Development of these mines could be a significant source of growth, tax revenue and export earnings. In the case of petroleum, while economically exploitable deposits have yet to be confirmed, several companies are currently active in the field. In October 2008, the Government requested technical assistance from the Bank in support of setting up an appropriate legal framework for mining and oil, with special training for civil servants on the effective implementation ofthe Extractive Industries Transparency Initiative (EITI).

54. Improving the legal and regulatory framework for extractive industries is a major challenge for the Government. The main Petroleum Law was introduced in 1982, with only minor revisions in 1985 and 2006. A Mining Law introduced in 2000 suffers from a number of shortcomings, namely with respect to royalties and local community development. An Environmental Law is now before the National Assembly, and a new law and regulations based on an Environmental Impact Assessment (EIA) were recently passed. A new institution in charge of implementing EMS,Celula de AvaliqZo de Impacte Ambiental (CAIA), has been set up with IDA support and has issued its first terms of reference to the potential developer of the phosphate mine.

&IAddressing Human Development Constraints: Improving Basic Social Services 55. Guinea-Bissau ranks 171 out of 179 countries on the 2008 UNDP Development Index, and is not likely to reach any of the MDGs by 2015 without significant donor support. In education, primary enrollment ratios have been increasing but remain well below the average for low-income countries. Moreover, access is uneven across geographical areas and socio-economic groups, while quality is weak, with low completion rates and high rates of functional illiteracy. In health, life expectancy at birth is 46 years, which is 11 years below the average for low-income countries, largely due to high infant and child mortality rates. Immunization rates have fluctuated in recent years, and while strong progress has been made in fighting malaria, this remains the main cause of mortality and morbidity. At the same time, Guinea-Bissau has not been able to prevent an increase in HIV prevalence to rates that greatly exceed those of neighboring countries. While Guinea-Bissau can access vertical programs to address these issues, it will also need to strengthen its health system management in line with the Second National Health Development Plan, and improve health sector information management, financial management and human resource management, while upgrading monitoring ofhealth centers so as to be able to deliver basic health packages. Strengthening Guinea-Bissau’s human resource base

Extensive details on these areas will become available in the forthcoming 2009 Diagnostic Trade Integration Study.

15 therefore constitutes a key challenge and is a top priority in the DENARP and the new Government Program.

2. CROSS-CUTTINGISSUES

(a) Weak individual, Organizational and Institutional Capacity 56. Capacity constraints, at the individual, organizational and institutional levels, are seriously hampering public management, government service delivery and economic activities in general. Three factors aggravate these constraints: (i)a weak education system that fails to graduate qualified personnel in sufficient numbers; (ii)the large number of qualified persons migrating to Europe or neighboring countries; and (iii)an internal brain-drain in which the most capable public sector staff leave for more attractive conditions, especially with international agencies operating in the country. In most cases, there is little, if any, technical transfer and build up oflocal capacity from such arrangements.

(22, Gender 57. Women in Guinea-Bissau are still in disadvantage as compared to men, in many areas. Women are in risk of severe health and other problems, including HIV/AIDS due to harmful traditional practices. The incidence of poverty is even across gender but the decomposition by age group varies. Widows and divorced women are particularly prone to poverty. According to the 2006 Guinea-Bissau Integrated Poverty and Social Assessment (IPSA)," the overall poverty rate of 66 percent masks significant differences in the distribution of poverty by gender and age group: Whereas women below 3 1 and above 65 years are poorer compared to men in the same age range, women between 3 1 and 65 tend to be better off, due to their activity in the informal sector, including the processing of cashew nuts, with at times more reliable incomes than the male-dominated public sector. Looking ahead, it will be important to support increased participation by women in voice and accountability issues and equitable access to basic services and opportunities.

(c) Environment 58. Guinea-Bissau is highly dependent on its natural resources for survival and economic development, yet these resources are increasingly threatened. Agriculture, forestry, and fisheries are the key source of current and future economic growth, but are endangered by deforestation, soil degradation, and fisheries depletion. Forest cover is estimated to have declined by 30,000-60,000 hectares per year over the last 10 years. Water quality is deteriorating due to the loss of forest catchments, increased salination in coastal areas, and overfishing. If adequate safeguards are not in place and respected, mining could potentially have devastating effects on the environment. The country has not yet been exposed to any measurable effects of climate change or to natural disasters in the past decades. Nonetheless, looking ahead, it will be important to ensure that environmental impacts are duly considered on major investments, such as in mining, as well as in areas with potential cumulative impacts such as extending the area under agricultural production. IDA resources permitting, it will also be important to strengthen the management offish resources.

loWorld Bank (AFTP4): Integrated Poverty and Social Assessment. Transition from Post-conflict to Long-Term Development: Policy Considerations for Reducing Poverty. (Vol. 1 Main Report), May 2006.

16 111. THE BANK’S INTERIM ASSISTANCE STRATEGY

A. IMPLEMENTATION OF THE PREVIOUS CAS

59. The last CAS for Guinea-Bissau was approved in May 1997. The 1997 CAS focused on three pillars: (1) Sustainable macroeconomic growth; (2) Private sector development; and (3) Poverty alleviation and social development. One year after its preparation, violent internal conflict shook the country and rendered the proposed strategy inapplicable. Most projects foreseen under the CAS were not realized as planned, or were implemented with significant delays. In light of the context of violence and subsequent political instability, no CAS Progress Report, CAS Completion Report or IEG Country Assistance Evaluation was prepared. Moreover, the rapidly changing post-conflict environment and repeated changes in Government, as well as repeated delays in the preparation of the PRSP, complicated the development of subsequent strategic documents. For the same reasons, a formal client survey has not been carried out for Guinea-Bissau in recent years, although such a survey is planned as part of the preparation of a full CAS for Guinea-Bissau in 18 months’ time. This Interim Strategy Note therefore represents the Bank’s first strategic framework document for Guinea-Bissau-not including the Joint Staff Assessment of Guinea-Bissau’s PRSP-since 1997.

60. The post-conflict context hampered implementation, yet four of the last seven‘ projects evaluated by the Internal Evaluation Group (IEG) were rated Satisfactory or Moderately Satisfactory. These included Economic Management Technical Assistance (TA), Basic Education, Infrastructure Rehabilitation, and Energy projects. In spite of these ratings, the latter three were considered unlikely or uncertain to be sustainable, though Institutional Development was deemed substantial. Support for Transport and Urban Infrastructure, Economic Rehabilitation and Recovery, and National Health Development were rated moderately or highly unsatisfactory, with sustainability rated unlikely and negligible institutional development or M&E. Overall, Bank and Borrower performance mirrored the Development Objective rating. Three of the seven projects had a net disconnect relative to the Implementation Completion Report (ICR) rating.

1. PORTFOLIOMANAGEMENT 61. As of March 31, 2009, 29 IDA credits and grants with a total commitment of US$324.9 million have been approved for Guinea-Bissau. The most important sectors in terms of financing are: TransportiInfrastructure/Energy (7 operations for US$113.8 million); Budget support (3 operations for US$63.4 million); the Social sectors including Health and Education (7 operations for US$60.3 million); Private Sector Development (3 operations for US$4 1 million); and Economic Management TA operations (3 operations for US$33.7 million). Rural Development, including extractive industries, agriculture and natural resources management benefited from US$26.6 million in two operations.

2. LESSONSFROM IcRS AND IEG EVALUATIONS 62. ICRs and IEG evaluations of the seven projects completed since 1997 indicate mixed results with regard to project outcomes. They provide some usehl lessons of experience to guide new operations under the ISN:

> Project design was often too complex and not appropriate to country circumstances. IEG recommends simpler and more modest projects better adapted to country/sector context; > Changes in the political and institutional environment were not sufficiently reflected in project design. The supervision team and management should consider more frequent re-assessment and restructuring when necessary;

17 > Risk assessments and mitigation measures were often inadequate. For example, the inability of the government to fulfill its counterpart funding commitments hampered project progress. IEG recommends that more systematic risk assessments and appropriate risk mitigation measures be ’ taken, related to donor and/or government commitment. > The involvement of NGOs in the education sector was a success. Teams should explore their potential involvement in other sectors; and > Capacity gains for Project Implementation Unit (PW) staff are lost if no provisions are taken to transfer them into local institutions.

B. THE CURRENT IDA AND TRUSTFUND PORTFOLIO

63. The current IDA Portfolio comprises four operations representing total commitments of US54 million. The undisbursed balance was US$13.8 million as of March 31, 2009. This includes the Private Sector Rehabilitation Project (US$26 million); the Emergency Public Service Delivery Project (US$10 million), the Coastal and Biodiversity Management Project (US$3 million) and the Multi-Sector Infrastructure Rehabilitation Project (US$15 million). The IDA portfolio includes one actual problem project, and two potential problem projects-which is not unexpected taking into consideration the difficult country circumstances.”

64. The portfolio also benefits from a number of Trust Funds that complement the limited IDA- 15 allocation. The Emergency Food Security Support Project with US$5 million from the Food Price Crisis Response Trust Fund (FPCR TF) supports agricultural production and school feedingfood-for- work initiatives, in collaboration with the World Food Programme and the Food and Agriculture Organization of the UN. During FY09, the State and Peace Building Fund (SPF) approved TA for Economic Governance and PFM, support to the Second National Health Development Plan, and support for Participatory Rural Development. The Global Environment Facility (GEF) has been co-financing the Coastal and Biodiversity Management Project since 2005 with US$4.8 million.

65. IDA is also providing interim debt relief to Guinea-Bissau as part of the Initiative for the Heavily Indebted Poor Countries (HIPC). In January 2008, the Board of Directors approved the extension of interim debt relief under the HIPC in an amount equivalent to 50 percent (in NPV terms) of total IDA debt relief agreed for Guinea-Bissau. The extended interim debt relief will free up more than $7 million in government resources annually from debt servicing through June 201 1.

66. In addition to the lending program, the Bank is undertaking significant analytical work. A 2008 Social Sector Review provides an inventory and analysis of the key challenges in the social sectors, while a PER Update in 2007 examined options for improving the fiscal outlook through downsizing the civil service. An Investment Climate Assessment and a Diagnostic Integrated Trade Study are under way and will facilitate strategic decision-making on priorities to help boost economic growth. An Education Country Status Report is also under way and will inform an EFA-FTI funding proposal. Finally, a PEMFAR (FY 10) under preparation will help to define priorities in economic governance, including for proposed budget support in FY 10.

The Bank considers a project to be an “actual problem project”, if either Implementation Performance (IP) or progress towards a project’s Development Objectives (DO) is rated less than moderately satisfactory. Projects are considered “potential problem projects” (PPP), when three or more risk flags are triggered. In the case of Guinea-Bissau, all projects already carry two country- risk flags, which are not based on individual project performance. Any other “risk flag” on top of these will hence make the project a “potential problem project”. In the case of the two PPP in the Guinea-Bissau portfolio, these flags are related in one case to an effectiveness delay, and the other case to procurement issues. Nonetheless progress with respect to IP and DO ratings remain moderately satisfactory for both PPP.

18 c. PROPOSED INTERIM ASSISTANCE STRATEGY - IDA AND TRUSTFUND RESOURCES

67. The indicative IDA-15 envelope for Guinea-Bissau of SDRlZ million (approximately US$19 million) over FY09-FY11 does not allow for a program that is commensurate with the needs of the country. Guinea-Bissau’s IDA-15 allocation is 16 percent lower than its IDA-14 envelope, reflecting relatively weak country performance. The IDA-15 envelope comprises a firm SDR4 million for FY09 and an indicative total of SDR8 million over FY10-11, depending inter alia on Guinea-Bissau’s performance relative to other IDA countries over the next two years. The FY09 IDA allocation, which is equivalent to slightly over US$6 million, has been supplemented this fiscal year by US$13.7m in trust funds, notably from the SPF and the FPCR TF. A US$4 million proposal from the EU and a US$10 million proposal from the Education For All-Fast Track Initiative (EFA-FTI) Transition Funds, are still in the pipeline. Even with these important additional resources, the program lacks the resources for the transformative changes that are needed for Guinea-Bissau to escape its low level equilibrium trap.

68. The objective of the ISN is therefore to carry out a core transitional program as the country works towards HIPC completion, while laying the foundations for a High Impact Program in the medium term. To this end, the Bank program will focus on two strategic pillars during the ISNperiod: 1) Strengthening Economic Management and Laying the Foundations for Improvements in the Productive Sectors, and 2) Increasing Access to Basic Services, Especially in Rural Areas. A cross-cutting theme will be to strengthen institutional capacity for more effective governance (leadership, management of public financial resources and public dialogue, EITI++) and project implementation. In advancing this program, the Bank will seek to build stronger partnerships with other traditional and non-traditional donor partners in Guinea-Bissau. During the ISN period, the team will also develop a “High Impact Program” designed to help the country break out of the dynamic of vicious circles and escape its low equilibrium trap. This alternative scenario will be developed through a focused approach in key sectors and serve as the foundation for the next CAS. The preparation ofsuch a High Impact Program (see below) will include leveraging the Bank’s convening power in order to build partnerships, and mobilizing resources for such an approach will be an important non-financing activity during the ISN period. The Interim Strategy covers the 24 months from January 2009 through December 2010.

69. The Bank’s support under the ISN will help the country progress towards achieving the HIPC Completion Point, although other donors will play a critical role in this regard. In particular, various outstanding HIPC Completion Point triggers relate to progress under the IMF program. Nevertheless, the Bank’s contribution will be important, particularly with respect to triggers related to governance and some ofthe MDGs.

PILLAR 1: STRENGTHENING ECONOMICMANAGEMENT AND LAYINGTHE FOUNDATIONSFOR IMPROVEMENTS IN THE PRODUCTIVE SECTORS

(a) Financing Activities 70. The Bank program will provide a mix of financing to assist the Government in strengthening economic management and laying the foundations for improvements in the productive sectors. In particular, the program will help to strengthen economic management via a programmatic series of two IDA-financed Economic Governance Reform Grants (two DPOs of US$8 million equivalent in FY09 and US$4 million equivalent in FY 10, respectively) and an ongoing SPF grant for TA in Economic Management (US$1.7 million). In addition, the program will help to lay the foundations for improvements in the productive sectors via the ongoing IDA-funded Multi-Sector Infrastructure RehabiZitation Project (MIRP, US$15 million), which could receive US$2 million equivalent in additional financing in FY 11 to continue addressing the most critical infrastructure needs in Bissau and paving the way for Guinea-Bissau to benefit from the OMVG regional electricity generation scheme and related interconnections to the regional grid, by around 2014. Moreover, the Food Price

19 Crisis Response Trust Funded and EU-funded Emergency Food Security Support Project includes US$3.5 million to improve rural feeder roads and lay the foundations for increased rice production through the rehabilitation of rice fields and the distribution of agricultural inputs. The ongoing Coastal and Biodiversity Management Project (CBMP) aims to strengthen management of the fishery sector and strengthen natural resource management. This includes helping to establishing institutional structures, standards and procedures for mandatory environmental and social impact assessments in the mining sector, amongst others. If a strengthening of the country’s performance results in additional IDA funds becoming available, Guinea-Bissau will also be included in the West Africa Regional Fisheries Project.

(a) Non-Financing Activities 71. The Bank’s financing to support Pillar 1 will be complemented by a range of analytical work and technical assistance. In particular, the Bank is completing a Diagnostic Trade Integration Study that will provide an in-depth analysis of potential sources of export revenue. Follow-up steps include the establishment, from DTIS trust fund resources, of an organizational entity which will be tasked with implementing the recommendations of the study, and will serve as a platform of dialogue and follow-up of activities with country stakeholders and donors. An ongoing Investment Climate Policy Note and Regional Multi-sector Regulatory Study (that analyzes ways to strengthen the telecommunication sector from a regional perspective) will inform future strategies to create an enabling environment for economic growth. A Public Expenditure Management and Financial Accountability Review (PEMFAR) is under way to provide the analytical underpinnings for the government’s medium- term PFM reform agenda and its public administration. In FY 10, preparations will begin for an FY 11 Country Economic Memorandum on a Multi-Sector High Impact Program. This core study will focus on Guinea-Bissau’s economic potential, challenges and risks in key sectors in a coordinated way so as to set the stage for a High Impact Program that can transform the country and help it to break out of its low level equilibrium, with substantive support from IDA-16 resources. The key sectors that are foreseen include agriculture, transport (roads and the port) and energy (including regional dimensions). In addition, the Bank will support the Government in initiating EITI++ in the mining sector, with possible support from a Global Expert Team. Related trust funds will finance technical assistance to support the Authorities in managing extractive industry revenues, ensuring adequate environmental and social safeguards and strengthening transparency in the sector.

(c) Key ISN Outcomes for Pillar I 72. The above activities are designed to achieve key ISN outcomes. The key outcomes to which this ISN will contribute in the area of economic management are: 1) to set up a modern and stable legal and accounting f/.amework for public financial management; 2) to strengthen human resources management in public administration, and 3) to achieve Government commitment to EITI principles and the beginning of their application in the mining sector. Key outcomes to be achieved with regard to laying the foundations for improvements in the productive sectors are: 4) To ensure sustainable provision of at least 5 MW of electricity over the ISNperiod; 5) to rehabilitate main roads in Bissau; 6) to extend Bissau’s water network; and 7) to increase production ofpaddy rice.

PILLAR 11: INCREASING ACCESSTO BASIC SERVICES, ESPECIALLYIN RURALAREAS

(a) Financing Activities 73. The strategic objectives under the second pillar of the ISN will be achieved primarily through IDA and Trust Funded activities. The Bank will deliver a Participatory Rural Development Project (US$5 million SPF) beginning in FY09 in Oyo, the poorest and most marginalized region of the country, that will be expanded in FYI0 with IDA resources for a Community-Driven Development operation (US$5 million IDA) to finance social infrastructure services on the basis of community-driven development plans. The Emergency Food Security Support Project includes US$1.5 million for school

20 meals distributed by WFP to children and for food-for-work programs in the poorest regions. In the health sector, a SPF grant of US$2.4 million has been approved to support the Second National Health Development Plan. The plan is designed to improve service delivery in selected regions through human resources and supply chain management. The Bank will also help Guinea-Bissau prepare an important funding proposal for an Education Sector Project, to be elaborated in close collaboration with other donors. The country expects to mobilize about US$IO million from the EFA-FTI Transition Fund for 2009/10, and additional resources thereafter from the Catalytic Fund to strengthen education services through school rehabilitation and construction, curriculum development, and teachers training.

(b) Non-Financing Activities 74. In terms of analytical support, the Bank will deliver a Social Service Sector Review and an Education Country Status Report in FY09 to inform the EFA-FTI Transition Fund and Catalytic Fund proposals. The PEMFAR will include a detailed public expenditure review of the education sector, in support of the government’s Education Sector Plan.

(c) Key ISN Outcomes for Pillar 11 75. The financing and non-financing activities under Pillar I1 are expected to contribute to three key outcomes. These are: 8) to increase enrollment in primary level education (notably for girls); 9) to improve the ability of health facilities to provide the basic health package at the district level in three targeted regions, and IO) to ensure that (male and female) direct beneJiciaries of Bank-supported rural developmentprojects are satisJied with the quality of services and goods delivered.

CROSS-CUTTING THEME: SUPPORT FOR CAPACITY DEVELOPMENT 76. The multitude of Guinea-Bissau’s current challenges underscores the need for major capacity development efforts and for a capacity development action plan. The Country Team, with support from a Global Expert Team, will develop a CD action plan-together with local stakeholders’ including Government officials, NGOs, civil society organizations, and donor partners. This is important in order to enhance individual skills and strengthen key public organizations and institutions that are critical for effective economic management and provision of basic services. This country action plan would be included in the next CAS. The action plan will identify and prioritize areas for capacity development, as well as principles and activities for the country program. One idea that will be discussed. specifically is to establish CD criteria, in the sense of a filter, for all new projects. The key outcome of the work in this area will be: II) to have the Capacity Development Action Plan launched by the end of the ISN period.

77. In parallel to the elaboration of the CD action plan, the country’s immediate CD needs will be strengthened through operational support and self-standing CD activities with a focus on leadership and public dialogue. Capacity development would be mainstreamed in new operations, including the Community-Driven Development Project and the three SPF-funded activities for economic governance, health and participatory rural development. The SPF for economic governance would be particularly important in building skills for transparent management of public finances, public procurement and strengthened fiscal oversight. In addition, the proposed EFA-FTI project would address weaknesses in the education system and lay the foundation for quality education of the next generation of citizens. The principal self-standing CD activities would be led by the World Bank Institute (WBI), and would include CD for strengthening leadership and demand-side governance. The key outcomes of the work in this area will be: 12) to have demand-side governance and leadership activities launched for increased accountability ofpublic entities. An important aim will be to ensure strong participation in this area by women.

21 D. PROPOSED INTERIM ASSISTANCESTRATEGY - IFC AND MIGA ACTIVITIES

78. IFC’s strategy for Guinea-Bissau will focus on improving the investment climate. In addition, it would seek opportunities to support the development of SMEs and pursue a proactive involvement in the infrastructure, financial and agribusiness (cashew nut) sectors. At present, IFC does not have a committed portfolio in Guinea-Bissau.

79. MIGA’s portfolio in Guinea-Bissau consists of two active projects in support of the country’s telecommunications and tourism sectors. The telecommunications project, Orange Bissau S.A., is a US$29 million investment by Sonatel (of Senegal) and is the most recent mobile license in the country. The US$1 million tourism project is to upgrade and expand one of the largest hotels in Bissau. MIGA is also currently reviewing possible guarantee support for a major investment in the water sector with the water utility.

80. Table 3 below provides the currently planned overall financing and non-financing support from the Bank, IFC and MIGA during the ISNperiod.

22 Table 3: Planned Interim Strategy Assistance to Guinea-Bissau in FY09-FY10 (Ongoing Activities I New Activities) Pillar 1: Strengthening Economic Management and Laying the Foundations for Improvements in the Productive Sectors -IDA Trust Funds & Other Funding Sources Economic Management: Economic Management: Financing: Financing: - Programmatic series of 2 DPOs: - SPF Economic Governance & Public Financial Economic Governance Reform Grant I Management TA (FY09: US$l.7m) (FY09, US$8m) Economic Governance Reform Grant I1 (FY10, US$4 m) - Emergency Public Sector Service Delivery Project (FY08: US$lOm) AAAESW: - PEMFAR (FYIO)

Foundations for Productive Sectors: Foundations for Productive Sectors: Financing: Financing: - Multi-sector Inffastructure Rehabilitation - FPCR Emergency-~ Food Security_-. Proiect (FY09: US$Sm; Project (FY06: US$lSm; Additional Financing EU Co-financing: US$4m) FY 11 : US$2m) - GEF Coastal and Biodiversity Rehabilitation GEF - Coastal and Biodiversity Rehabilitation (FYOS: (FYOS: US$4.8m) US$3m) AAAJTA: - West Africa Regional Fishery Project (FY11: - Trust Fund Support for EITI++ US$1-2m, contingent on more IDA funds) - Global Expert Team: dialogue on extractive industries value chain (OPCFC) AAAESW: - Global Expert Team: benchmarks on electricity - Investment Climate Policy Note (FY09) sector reform in other fragile states (OPCFC) - Diagnostic Trade Integration Study (FY 10) - Trust Fund Support for follow-up on implementation - Country Economic Memorandum Multi-Sector of DTIS recommendations High Impact Program (FYI 1) MIGA Guarantees: - Telecoms, Tourism, Water Pillar 11: Increasing Access to Basic Social Services, Especially in Rural Areas -IDA Trust Funds & Other Funding Sources Financing: Financing: - Coastal and Biodiversity Rehabilitation (FYOS: - GEF Coastal and Biodiversity Rehab. Project/FIAL US$3m) comp. (FYOS: US$4.8m) - Community-Driven Development Project (FY 10: - SPF Participatory Rural Development Project (FY09: US$Sm) US$Sm) AAAfEsw: - SPF 2"d National Health Devt. Plan (FY09: US$2m) - Social Sector Review (FY09) - EFA/FTI Transition Fund - Education (FYIO: - Education Country Status Rtport (FY09) US$1 Om)

Cross-Cutting Theme: Support for Capacity Development (CD) AAAITA: - Leadership program @!BO - Demand-side governance support FBI) - Global Expert Teams for CD and E1TI-H- dialogue (OPCFC) Strategic tasks: Preparation of High Impact Program (HIP) and Mobilization of partnerships and resources for the HIP.

23 E. NEXTSTEPS: TOWARDSA HIGH IMPACT PROGRAM

8 1. The Bank, together with donor partners, can play a critical role in helping to break Guinea- Bissau’s equilibrium trap of instability, weak governance and low growth. This can be done through leveraging IDA’S convening power, its ability to act as a platform for a broader pool of resources, its technical expertise and the quality of its policy advice to mobilize additional resources for a High Impact Program of assistance. Such a program would be designed to achieve transformative change in key sectors of the economy so as to break the low level equilibrium in which the country is trapped. Examples of interventions under such a High Impact Program include the areas of agriculture, electricity provision and transport infrastructure. Such interventions would be designed to transform the respective sectors by financing investment, operations and maintenance, capacity building and policy reform, with a medium-term commitment to provide financial and technical assistance over a sufficiently long period so that improved performance becomes self-sustaining. The program would consider regional dimensions of the key sectors and the scope for further integration. Continued budget support and technical assistance will also be needed to support complementary macroeconomic reforms and institutional development.

82. A High Impact Program that begins to address the economic root causes of political instability and weak governance can only succeed if there is a strong commitment from national stakeholders. A firm commitment to changing the “rules of the game” is required in particular on the part ofthe Government in order to promote favorable conditions for increased donor engagement. At the same time, such a compact to promote stability and transparency must also engage key stakeholders, including for example in the security sector, for there to be a critical step-up in development to a higher level equilibrium. The design of such a program would therefore need to draw on broad consultations by the Government ofGuinea-Bissau following the Presidential elections with key national stakeholders and with donor partners.

83. Guinea-Bissau must moreover think regionally while formulating its future development plans on the national level. Given the small size of the country, its geographic proximity to the Gambia River basin, its proximity to sub-regional hotspots and its close cultural and historic ties with Cape Verde, there will be no transition to more stable economic development without regional integration. The Bank will help to identify potential synergies from regional integration as part of the dialogue with country stakeholders on a future High Impact Program.

84. The Bank would need significantly higher resources than are available in its current envelope to be able to play a catalytic role in breaking the low level equilibria in key sectors in a sustainable way. The Government and donor partners look to the Bank to play a leading role in supporting structural reforms and key sectoral investments, as well as developing analytical and advisory assistance to underpin reforms and strengthen institutions. To this end, a medium-term program, including costing, would be developed during the ISN period in order to inform the subsequent CAS. The Bank would analyze options in particular in three key areas described below, namely agriculture, transport infrastructure and energy. Both the Government and non-governmental stakeholders have confirmed that these are priority areas. They have also emphasized that collaboration with both the private sector and civil society will be essential for the effectiveness of future operations in these areas, and that these should be complemented by targeted interventions to improve governance and accountability.

1. AGRICULTURAL DEVELOPMENT 85. Approximately 13,000 tons of rice are required annually to meet production shortfalls based on consumption trends. These shortfalls make the country highly vulnerable to imported food price inflation. Bringing agricultural production up to pre-independence levels would require

24 rehabilitation of rice fields, the introduction of high-yielding varieties of seeds, access to finance, extension services, and rural infrastructure. The Emergency Food Security Support project, with funding from FPCR TF and EU, begins to respond to these requirements, but more is needed.

86. Key elements of a recovery program for the agricultural sector will most likely focus on agricultural technology to improve productivity and processing, implementation of sustainable land management, and improving access to rural finance. The strategy would likely aim to increase agricultural production, in particular rice, by extending the area under exploitation through the recovery of previously farmed but now abandoned rice fields and by increasing productivity through improved technologies. It would also aim to increase value added from cashew production and exports by supporting private sector initiatives in this respect.

87. The main beneficiaries of a high impact approach for the agricultural sector will be the rural population and SMEs linked to the sector. There will also be positive impacts on the government’s fiscal position due to increased tax revenue.

2. TRANSPORTINFRASTRUCTURE 88. Poor rural infrastructure and the limited interconnection of local, national and sub-regional markets undermine the country’s capacity to attain food security and boost economic benefits from the agricultural sector. Guinea-Bissau’s ability to increase exports will depend largely on efficient access to the port via the 4,380 km of roads, two-thirds of which are unpaved.’* An integral component of improving rural infrastructure will be to reestablish the primary and secondary road system linking agriculture areas in the interior to the cities and port, as well as to reconstruct and extend tertiary roads to ensure better quality of agricultural produce-ther essential rural investments include upgrading storage and post harvest facilities. The government has defined a “priority network” of primary and secondary roads for intensive maintenance.

89. The Port of Bissau, which is the only major functioning international port in the country, is the other critical transport bottleneck for economic growth. The objective would be to develop the currently dilapidated Port of Bissau into a commercially viable entry point into the sub-region - supported in the medium-term by regional road infrastructure connectivity. Key elements of a port recovery plan include 1) rehabilitation of the internal ring road (main access); 2) clearing ship-wrecks; 3) dredging the channel; 4) purchasing new equipment; and 5) retrenching redundant staff. The settlement of outstanding financial issues related to an earlier, unsuccessful privatization with a private company, Tertir, need to be resolved before any contracting of port services, public-private partnership or re-privatization of operations. Preliminary estimates for a successful turnaround of the port performance suggest it may take four years, but the functioning of the port has to be assured as quickly as possible due to upcoming competition from other regional ports, which will become more accessible in light of improvements in the road connection to Senegal and The Gambia when the Sao Vicente Bridge is completed in 2009.

90. The main beneficiaries of a high impact approach for the rural infrastructure will be the rural population, in terms of better opportunities for the marketing their produce and better access to social services. The private sector, in particular traders and processing enterprises, will benefit as well from better rural infrastructure, in terms of more timely and less cost-intensive supplies. Exporters, importers and consumers will benefit from improved port infrastructure. The government’s benefit will mainly be in increased tax income. However, there will be stakeholders who might consider they are losing competitive advantages and bargaining power once rural areas become more accessible and competition increased, as well as opportunities for rent seeking from a currently overstretched port with its cumbersome procedures.

’*African Development Bank - Estudo Integrado do Setor dos Transportes em Quatro Paises Lus6fonos, May 2007

25 . 3. ELECTRICITY 91. The World Bank and the European Union are working together to help Guinea-Bissau put in place sustainable arrangements for ele~tricity.’~The aim is for generation capacity to reach 23 MW within the next three years, for connections and metering to return the customer base to around 20,000, and for collections to be sufficient to pay for fuel, a management fee and rent on the generating equipment. This arrangement would hold until the country is able to benefit from less expensive hydro- power and connections to the regional grid through the OMVG regional cooperation program. This could be realized by 2014 and provide 35MW in generation capacity.

92. Implementing this strategy requires significant additional resources. These are needed to extend the lease on existing equipment, purchase operating fuel and extending the rental contract for the equipment, and purchasing an additional 5 MW heavy fuel oil generator.14 Further a management contract with an external firm to manage the energy utility is considered necessary for an estimated four- year period in order to consolidate reforms. An existing TA grant is supporting improvements in institutional capacity to prepare the public utility for a management contract and a self-financing PPA for 15MW.

93. The main beneficiaries of a significantly more efficient electricity sector will be those elements of the population and private sector who need reliable services, and are able to pay the electricity tariffs. Losers will be all those who are benefitting from failings under the current situation, including those who have power provided to their houses and institutions, when it is available, and don’t pay tariffs; those who divert fuel destined for the EAGB power generators; those who divert EAGB revenues without proper controls; and private providers who will lose customers once electricity will become publicly available in a reliable manner for a lower price. There will be an important segment of the population that will only benefit indirectly from better electricity provision, since they will not be able to afford connecting their own dwellings to the power grid, although they will benefit from powered social infrastructure, street lights, and businesses working after dark, etc.

F. PARTNERSHIPS AND DONORCOORDINATION

94. Implementation of the Bank-supported program requires close coordination with strategic partners. These include the IMF, the European Union, the AfDB, the UN System, and bilateral donor partners such as Spain, Portugal and Brazil. The Government’s economic program agreed with the IMF under the on-going EPCA establishes an overall framework of macroeconomic targets and policy reforms. Provided performance is solid under the program, it is expected that the IMF will continue its technical and financial support to Guinea-Bissau beyond the current EPCA, most likely via a proposed Poverty Reduction and Growth Facility in 2009. The European Union is by far the most important donor, providing €100 million over the 2008-2013. Its key priorities are: (i)conflict prevention; (ii) administrative and security sector reform; (iii)water and energy (in close collaboration with the Bank, and with a strong focus on regional cooperation with the Gambia River Development Organization, OMVG); and (iv) budget support for fiscal stabilization. Other important donors, apart from the World Bank, are China (building construction), Portugal (budget support, social sectors, governance incl. SSR), Spain (budget support, infrastructure: health, bridges; agriculture), the AfDB (agriculture, fishery, economic governance), and Brazil (South-South know-how transfer). Guinea-Bissau is a priority country for Brazil and it chairs the Guinea-Bissau Configuration of the UN Peace Building Commission

l3The assistance of the EU has gone into repairing the distribution network. In the future EU assistance will focus on building a ring around the city to prepare connection with the regional grid. l4The World Bank is supporting the electricity sector through the Multi-Sector Infrastructure Rehabilitation Project. In doing so, it has already reprogrammed the project to make more resources available to electricity. In the process, financing for urban road rehabilitation and youth employment are no longer available.

26 (UNPBC), which is also providing US$6 million through the UN Peace Building Funds. The International Organization for Migration (IOM) is planning several programs for Return Assistance to Migrants and Governments.

95. It will be important to reverse the decline in donor support after the internal conflict of 1997/98. Prior to the 1998-99 conflict, Guinea-Bissau benefited from significant donor support both in value and in the number of partners. Since then, several development partners have suspended their aid programs to the country, and the country has come to be regarded as a ‘donor orphan’. The challenge ahead is therefore to encourage a resumption of increased aid to close financing gaps and support longer term development in Guinea-Bissau. In this context the Bank can play a key catalytic role, together with various donor partners, in organizing a donor round table to bring donor support together behind a high impact program underpinned by a substantive and credible reform agenda advanced by the Government and reflected in agreements with the IMF and the Bank. A high impact donor partnership for the country’s medium-term development could complement the Round Table on security sector reform.

96. Donor coordination needs to be improved in line with the Paris Declaration. Government Ministries are not yet leading donor coordination and priorities for aid are often still defined by donors rather than by the authorities, resulting in inefficiencies in the use of limited aid resources. However, there are positive signs of better coordination among key actors: seven thematic group^'^ have been established to strengthen coordination between the Government, donors and other stakeholders. The Bank is coordinating the infrastructure group and participating in the thematic group on economic governance and private sector development.

97. There are a range of donor coordination initiatives in support of the DENARP objectives. The Inter-Agencies Coordination Committee on Immunization and Surveillance received an award of US$135,000 last year from GAVI for its good performance. The Multi-Sectoral Coordination Committee for the Global Fund, which comprises 16 representatives from different organizations, including Government, civil society, NGOs and faith-based organizations, the private sector, academia, and People Living with HIV/AIDS, meets frequently to discuss relevant issues and propose solutions. Most recently, a three-year agreement was signed between the Ministry of Finance, the Delegation of the European Union, France, Spain, Portugal, and the Bretton Wood institutions to create a joint donor framework for coordination of budget support interventions (Cadre Conjoint de Concertation pour 1’Appui Budgbtaire). The Cadre Conjoint provides for information sharing by the MoF and donor coordination of budget support.

98. Coordination with other donors allows the Bank to be more selective in its support. For example, the Bank will not be able to have a direct impact on the drug trafficking problem, security sector reforms, or civil service reforms in Guinea-Bissau’s context are closely intertwined with security sector reforms. The EU has been especially supportive in these areas. With regard to political governance and justice, donor partners such as the UNDP and Portugal have played key roles. At the same time, there is scope for partnerships, e.g. with FAO, the World Food Programme and the EU on the Food Price Crisis Response or with various partners on the energy sector.

G. MONITORINGAND EVALUATION

99. Monitoring and evaluation of progress under the Interim Strategy will be regular and tied into portfolio reviews. The ISN outcomes will be measured through data collected through ISRs during

l5 The groups are: 1. Human Development, 2. Food Security, 3. Infrastructure, 4. Defense and Security Sector Reform, 5. Administrative Reform, 6. Political and Juridical Governance, 7. Economy and Private Sector Governance. See Annex G for membership details, which indicate donor priorities.

27 the ISN period as well as through an assessment to be prepared at the end of the ISN period and in preparation of a full CAS during FY 10. In addition, the Bank will monitor the standard Bank input indicators related to its portfolio on a regular basis, and with Government as part of the CPPR process. The Bank will also consult regularly with strategic partners and stakeholders in civil society as part of the monitoring and evaluation of its portfolio. The results framework matrix proposes key benchmark indicators to measure the proposed outcomes (see Annex Al).

IV. MANAGINGRISKS

100. The risks associated with the Interim Strategy cannot be underestimated and led to the decision to pursue an ISN at this time rather than a full CAS. Even with a range of mitigation measures in partnership with donor partners, it will be challenging to manage the political, macroeconomic, governance, progradproject implementation and fiduciary risks described below, and the overall risk after mitigation remains substantial. Nevertheless, the Bank considers that the rewards of engagement are potentially very high in a low-income fragile state like Guinea-Bissau and outweigh the risks. Moreover, the ISN represents a prudent but significant step forward towards engaging in a high impact program in the medium term.

A. POLITICAL RISKS

101. The country remains vulnerable to significant political instability. The key internal risks are political instability and the closely related risk of military mutinies or attempts to seize power. It is not yet self-evident that power struggles will be resolved in non-violent fora such as the National Assembly or the judiciary, and politicization of issues along ethnic lines remains a latent risk.16 Political instability could flare up again in the period leading to the Presidential elections or in their immediate aftermath. Looking beyond the elections, there could be stiff resistance from the military or from public servants to essential security sector and civil service reforms, which could derail this agenda and place considerable pressure on other parts of the budget. More generally, political and social pressures could lead to a weakening of fiscal discipline, which would undermine the program agreed with the IMF, notwithstanding the express commitment ofthe current Government to fiscal stabilization and to reforms (as expressed for example during the World Bank Spring Meetings 2009). Political pressures could also affect such areas as the development of the country’s mining potential. In the medium-term, there may also be a risk of social tension due to the large proportion of unemployed or under employed young people in the population, which the Bank should observe closely.

102. The Bank cannot mitigate these risks alone. In order to mitigate the overall political risks, the UN (in particular, UNOBGIS) and other multilateral bodies (like the Community ofPortuguese Speaking Countries, ECOWAS, WAEMU), the Government of Cape Verde, and several donors are supporting and advising the country in its political transition to Presidential elections, and with respect to SSR. A recent Round Table involving the above-mentioned parties and the Government of Guinea-Bissau instilled hope that it will be possible to make more rapid progress in the coming months. The Bank has selected its proposed operations carefully in that they are considered both technically feasible (having benefitted from extensive analytical work) and politically achievable (having benefitted from numerous internal governmental discussions and consultations with stakeholders). Moreover, the Bank has strengthened its emphasis on demand-led community-driven development approaches so as to encourage broad

l6The most dangerous risk for escalation of a conflict along ethnic lines derives from the fact that the security sector is highly dominated by one ethnic group, the Balante - and any attempts to drastically cut down numbers of security sector personnel will affect this ethnic group, which is predominantly based in the poorest region of the country, Oyo, in particular (see Annex 5).

28 participation and clearly respond to community priorities. In addition, an essential risk mitigation measure will be a continuous and profound analysis of the political economy context of the respective sectors of intervention, and intensive strategic communication based on such analysis. The World Bank will increase and improve its efforts in this area. Consultations on the ISN have taken place on various levels and with a diverse range of stakeholder groups. These consultations have basically confirmed the approach proposed by the Bank for the ISNand the major areas of engagement envisaged under the High Impact Program. Nonetheless, the residual risk remains high.

B. MACROECONOMIC RISKS

103. Guinea-Bissau is highly vulnerable to exogenous shocks, including commodity price volatility and the impact of the global economic slowdown. Exports and government revenues depend significantly on the cashew production, which is also subject to climatic risks. The 2008 food and fuel and fertilizer price shocks illustrate the potential for external (terms of trade) shocks to have significant impacts both in terms of attaining macro-fiscal targets and more importantly in terms of poverty reduction. The ongoing global financial crisis presents considerable risks for Guinea-Bissau, not so much directly via the health of the banking system in Bissau as via secondary effects of the economic down- turn on commodity prices and exports (with follow-on effects on fiscal receipts), reduced inflows from remittances, and more restricted access to finance for both the public and private sectors. Guinea-Bissau is not well placed to mitigate these risks via countercyclical fiscal policy in light of its large budget and current account deficits. A deeper than expected global slowdown could undermine the country’s already challenging stabilization efforts which rely heavily on high and sustained donor support and remittances. A failure of the PRGF-supported program to materialize (itself the result of possible reform backsliding) is a further risk. 104. Given the vulnerability to exogenous shocks and the volatile global environment, the IMF and IDA will continue to closely monitor the government’s macroeconomic performance. The PFM reforms supported by the DPO series and SPF support will also help enhance controls in the execution of overall and sectoral budget envelopes. In January 2008, the Board of the World Bank approved an exceptional increase in the ceiling for HIPC interim debt relief from 30 percent to 50 percent, which helped to reduce the debt service to be paid by the country. Performance under the IMF EPCA program has been mixed-mainly due to exogenous and political shocks-however the Fund remains engaged under an EPCA program and expects to initiate discussions towards a PRGF arrangement later in 2009. The Bank also plans to continue to provide interim debt relief under the HIPC during the ISN period, and once the HlpC Completion Point is reached, HIPC and Multilateral Debt Relief Initiative debt relief would significantly reduce the external debt burden and ease the fiscal situation. Increased donor engagement in future, in the context of the Fund-supported EPCA and a possible successor PRGF arrangement, would help to support reformers’ efforts to sustain fiscal consolidation, a pre-requisite for a broader normalization of public sector performance. Nevertheless, the residual risk remains high.

c. GOVERNANCERISKS

105. The risks of poor governance in implementation are high and anti-corruption instruments are in their infancy. Weak institutions and difficult economic circumstances contribute to generating an environment that is highly susceptible to corruption and political interference, while cash from drug trafficking jeopardizes the rule of law and security, and the corruption of public authorities by drug traffickers could lead to a gradual slide into a narco-state. Another dimension is the inadequate decentralization framework as well as weak institutions, capacity and governance, which increase risks to project impacts at the local level.

106. The Bank would mitigate these risks by providing financing and technical assistance to stabilize and strengthen key public institutions critical to rule of law and basic services. Addressing

29 the risks associated with drug trafficking will require strong support from donor partners on vigilance and enforcement, strengthening of security sector reforms and support for viable alternative livelihoods for vulnerable populations. The Bank will contribute to strengthening public financial management, demand- side governance and transparency initiatives, including for the EITI. IDA and trust-funded operations in Guinea-Bissau will draw on implementation mechanisms that contain frnancial management and procurement frameworks which have been tested and are under constant monitoring, and will expand the use of participatory processes by supporting community-driven development. The introduction of capacity development as a cross-cutting theme for the ISN will, with effectively designed support via all project interventions and complementary WBI activities, serve to strengthen governance and leadership development at the country-level as well. However, the residual risk will remain substantial.

D. PROGRAM AND PROJECT IMPLEMENTATION RISKS

107. Institutional weaknesses pose a risk to project management and the achievement of the envisaged results. Adherence to reform programs has at times slipped in the face of fiscal difficulties, political instability and frequent turnover at senior government and administrative levels. The tight fiscal situation makes it challenging to meet debt service requirements on a regular basis, and in consequence, IDA has come close to suspending disbursements on a number of occasions. Ifthe Bank and other donor partners are to engage in a High Impact Program with satisfactory prospects for success, strong commitment from all national stakeholders will be indispensable. This is especially true for the Government which will need to promote conditions that are conducive to increased donor support via its commitment to clear “rules ofthe game”.

108. The implementation risks will be mitigated via intensive supervision from the Washington and Dakar Offices. Bank supervision will complement a range of capacity building activities foreseen under the ISN as a cross-cutting theme with a view to ensuring substantial TA is provided to strengthen public institutions. In addition, the Bank will strengthen its strategic communication with counterparts in the country, including both Government and key non-governmental stakeholders and other donors. Nonetheless, the residual risk remains substantial.

E. FIDUCIARYRISKS

109. There are important fiduciary risks to operations in Guinea-Bissau. A 2006-07 PEFA analysis rated Guinea-Bissau at a D level on all but two of 25 applicable standard indicators of public financial management performance, indicating deep-seated and broad weaknesses in budget credibility, comprehensiveness, preparation, execution, reporting, accounting, control, and transparency, although some progress has been made since then with SPF support. The current procurement code is not updated in line with WAEMU’s directives, institutions for regulation and control remain deficient and there is weak procurement capacity in most public institutions.

110. The risks will be mitigated at both the country and project level with Bank support. At current, the Bank supports only limited activities with respect to the mitigation of procurement risks outside the context of individual projects, however support for strengthening public financial management is contained in the DPO series and the economic governance SPF will provide additional support to strengthen procurement and financial management systems. At the project level, a fiduciary hub, staffed with experienced members of current PIUs, is in the process of being established. The hub will be in charge of financial management and procurement for several IDA-funded projects by shared arrangements for project coordination. Nevertheless, the residual risks remain substantial.

30 W f

3 ma .em N m Annex A2: Country at a Glance

Sub- Key Development Indicators Guinea- Saharan LOW Age distribution, 2007 Bissau Africa income (2008) I Male Female Population, mid-year (millions) 1.7 800 1,296 75-79 Surface area (thousand sq. km) 36 24,242 21,846 Population growth (%) 3.0 2.4 2.1 6064 Urban population (% of total population) 30 36 32 45-48

GNI (Atlas method, US$ billions) 0.3 762 749 30-24 GNI per capita (Atlas method, US$) 200 952 578 15-19 GNI per capita (PPP, international $) 470 1,870 1,500 M

GDP growth (%) 3.3 6.2 6.5 30 20 10 0 10 20 30 GDP per capita growth (%) 0.3 3.7 4.3 percent

(rnosi recent estimate, 2003-2008)

Poverty headcount ratio at $1.25 a day (PPP, %) 50 Under-5 mortality rate (per 1,000) Poverty headcount ratio at $2.00 a day (PPP, %) 66 72 Life expectancy et birth (years) 46 50 57 Infant mortality (per 1,000 live births) 119 94 85 300 Child malnutrition (% of children under 5) 25 27 29 I 250 200 Adult literacy, male (% of ages 15 and older) 69 72 Adult literacy, female (% of ages 15 and older) 50 50 150 Gross primary enrollment, male (%of age group) 84 99 100 100 Gross pnmary enrollment, female (% of age group) 56 88 89 50

Access to an improved water source (% of population) 57 58 68 0 Access to improved sanitation facilities (% of population) 33 31 39 I 1990 1995 2000 2008

I Net Aid Flows I980 1990 2000 2008

(US%mi//ions) Net ODA and official aid 58 126 80 82 Growth of GDP and GDP per capita (%) Top 3 donors (in 2006): European Commission 11 5 17 33 12000 Portugal 13 15 15 10000 Francs 3 9 7 10 8000 6WO Aid (% of GNI) 55.5 54.2 40.4 26.7 4000 Aid per capita (US$) 73 124 59 50 2w0 0 Long-Term Economic Trends -2000 95 05 Consumer prices (annual % change) 33.0 8.6 10.4 GDP implicit deflatw (annual % change) 11.5 30.2 3.2 8.9 +GOP -GOP per Cwta Exchange rate (annual average, local per US$) 0.8 33.6 709.9 478.6 Terms of trade index (20420 = 100) 105 1W 96 1980-90 1990-2000 2000-08 (average annual growth %) Population, mid-year (millions) 0.8 1.0 1.4 1.7 2.5 3.0 3.0 GDP (US$ millions) 111 244 216 430 4.0 46.5 0.6 (% of GDP) Agnculture 44.3 60.8 58.8 55.5 4.7 52 2 0.8 Industry 19.7 18.6 12.3 12.9 2.2 41.8 0.9 Manufacturing 8.4 10.0 10.2 41.9 0.7 Services 36.1 20.6 28.9 31.6 35 44.1 0.8

Household final consumption expenditure 73.3 86.9 102.3 81.3 -1.2 58.5 -5.6 General gov't final consumption expenditure 27.6 10.3 14.0 13.9 7.2 50.1 3.3 Gross capital formation 28.2 29.9 11.6 24.9 12.9 -7.0

Exports of goods and services 12.7 9.9 44.6 29.8 -1.7 68.2 0.4 Imports of goods and services 41.8 37.0 72.5 49.8 0.3 43.8 -4.3 Gross savings -13.6 15.3 3.7 22.9

Note: Figures in italics are for years other than those specified. 2008 data are preliminary. .. indicates data are not available. a. Aid data are for 2006.

Development Economics, Development Data Group (DECDG).

33 Guinea-Bissau

Balance of Payments and Trade 2000 2008 Governance indlcators, 2000 and 2007 (US$ millionsj I Total merchandise exports (fob) 87 91 Total merchandise imports (~8) 117 162 Voice and accountability Net trade in goods and services -50 -68 PoliticBlstability Current account balance -17 -8 as a % of GDP -7.9 -1.9 Regulatory quality

Rule of law Workers' remittances and compensation of employees (receipts) 2 29 Control of mrmption Reserves,including gold 47 1oa o 25 50 75 im

Central Government Finance urn7 Country's percentile rank (0-100) Dxxa hm%r values 8mpY Mermt1w (96 of GDP) Current revenue (includinggrants) 26.7 24.8 Sovrce KautmannXmay-Martruul. World Bank Tax revenue 10.7 10.2 Current expenditure 33.8 24.3 Technology and Infrastructure 2WO 2007 Overall surplusldeficit -17.7 -12.8 Paved Dads (%of total) 10.3 Highest marginal tax rate (%) Fixed line and mobile phone Individual subscribers (per 1W people) 1 18 Corporate High technology exports (% of manufactured exports) External Debt and Resource Flows Environment (US$ millions) Total d%bt outstandingand disbursed 904 1,432 Agnulltural land (%of land area) 58 58 Total debt service 20 32 Forest area (% of land area) 75.4 73.7 Debt relief (HIPC. MDRI) 546 Nationally protected areas (%of land area) .. 0.0

Total debt (% of GDP) 418 4 333.3 Freshwater resources per capita (w. meters) .. 10.019 Total debt service (%of exports) 18.7 23.0 Freshwater withdrawal (% of internal resources) 1.1

Foreign direct investment(net inflows) 0 0 C02 emissions per capita (rnt) 0.18 0.17 Portfolio equity (net inflows) 0 0 GDP per unit of energy use (2005 PPP $ per kg of oil equivalent) Composition of total external debt, 2007 Energy use per capita (kg of oil equivalent)

(Us% millions)

IBRD Total debt outstanding and disbursed 0 0 Disbursements 0 0 Pnnupal repayments 0 0 Interest payments 0 0

US$ rrllions IDA Total debt outstandingand disbursed 228 315 Disbursements 14 11 Private Sector Development 2000 2W8 Total debt serviee 4 8

Time requiredto start a business (days) - 233 IFC (fiscal yea0 Cost to start a business (% of GNI per capita) - 257.7 Total disbursed and outstanding portfolio 1 0 Time requiredto register property (days) - 211 of which IFC own account 1 0 Disbursements for IFC own accwnt 0 0 Ranked as a major wnstraint to business 2000 2007 Portfolio sales, prepayments and (% of managers surveyed who agreed) repayments for IFC own accwnt 0 0 EleMcity .. 41.4 Access tolwst of financing .. 19.6 MlGA Gmss exposure - 27 Stock market capitalizetion(% of GDP) New guarantees - 27 Bank capital to asset ratio (%)

Note Figures in italics are for years other than those speufied 2008 data are preliminary 4/6/09 indicates data are not available -indicates observabn is not applicable

Development Economics. Development Data Gmup (DECDG)

34 Annex B2: Selected Indicators of Bank Portfolio Performance and Management (As of 5/6/2009)

Indicator 2006 2007 2008 2009 Portfolio Assessment Number of Projects Under Implementation a 5 5 6 5 Average Implementation Period (years) 3.7 4.9 4.0 4.0 Percent of Problem Projects by Number a,c 0.0 20.0 0.0 20.0 Percent of Problem Projects by Amount as 0.0 9.8 0.0 15.7 Percent of Projects at Risk by Number a,d 40.0 60.0 60.0 60.0 Percent of Projects at Risk by Amount 20.7 41.7 45.3 51.4 Disbursement Ratio (%) e 25.0 28.7 49.2 50.6 Pottfoiio Management CPPR during the year (yesho) No No No No Supervision Resources (total US$) 397 524 464 315 Average Supervision (US$/project) 79 105 77 63

Memorandum item Since FY 80 Last Five FYs Proj Eva1 by IEG by Number 22 2 Proj Eva1 by IEG by Amt (US$ millions) 278.9 30.4 % of IEG Projects Rated U or HU by Number 36.4 50.0 % of IEG Projects Rated U or HU by Amt 39.2 53.2 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year.

35 Annex B3: IDA Program Summary (As of 5/6/2009)

Proposed IDA Base-Case Lending Program a

Fiscal year Project ID US$(M) Strategic Rewards lmplementation (Hrnk) Risks (H/M/L)

2009 GW-Economic Governance DPL 8.0 H H

2010 GW-Community-Driven Dev 5.0 H M

2010 GW-Second Economic Governance 4.0 H M

2011 GW- AF Multi-Sector Infrastructure 2.0 H H Rehabilitation Project

Overall Result 19.0

36 Annex B3: IFCMIGA Program Summary (As of 5/6/09)

IFC 2006 2007 2008 2009*

Commitments IUS$m) Gross Net**

Net Commitments bv Sector (%)

Net Commitments bv Investment Instrument (%)

* As of March 31, 2009 ** IFC's Own Account only

MIGA Outstanding Exposure (Gross Exposure, US$ millions)

As of end of fiscal year FY2003 FY2004 FY2OOS FY2006 FY2007 FY2008 FY2009*

# of Projects Guaranteed for Investments in Guinea-Bissau .o.o 0.0 0.0 0.0 0.6 29.5 21.8

# ofProjects Guaranteed to Investors fiom Guinea-Bissau VenGing Abroad 0.0 0.0 0.0 0.0 0.0 0.0 0.0

* As ofMarch 31,2009

37 Annex B4: Summary of Non-lending Services (As of 5/6/09)

Completion FY Cost ' Product Audience Objective FY (US$OOO)

Planned in FY09 CPPR annual 25 Bank, Government Problem solving, strategic planning Country Program Support annual 29 Bank, Government Problem solving, strategic planning Gen. Economic PRSP / HIPC annUal 109 Bank, Government, Donors Knowledge generation, problem solving, Monitoring strategic planning ISN 2009 63 Bank, Government, Donors, Knowledge generation, public debate, Public Dissemination problem solving, strategic planning Social Sector Review Note 2008 63 Bank, Government, Donors, Knowledge generation, public debate, (dissemination) Public Dissemination problem solving Education Country Status Report 2009 63 Bank, Government, Donors, Knowledge generation, public debate, Public Dissemination problem solving Diagnostic Trade Integration 2009 47 Bank, Government, Donors, Knowledge generation, public debate, Study Public Dissemination problem solving Investment Climate Policy Note 2010 63 Bank, Government, Donors, Knowledge generation, public debate, Public Dissemination problem solving Public Expenditure 2010 125 Bank, Government, Donors, Knowledge generation, public debate, ReviewPEMFAR Public Dissemination problem solving

Planned in FYlO

CPPR annual 25 Bank, Government Problem solving, strategic planning Country Program Support annual 29 Bank, Government Problem solving, strategic planning Gen. Economic PRSP / HIPC annual 109 Bank, Government, Donors Knowledge generation, problem solving, Monitoring strategic planning CAS 2010 63 Bank, Government, Donors, Knowledge generation, public debate, Public Dissemination problem solving, strategic planning Diagnostic Trade Integration 2009 31 Bank, Government, Donors, Knowledge generation, public debate, Study (dissemination) Public Dissemination problem solving Public Expenditure 2010 63 Bank, Government Knowledge generation, public debate, ReviewPEMFAR problem solving Investment Climate Policy Note 2010 20 Bank, Government, Donors, Knowledge generation, public debate, Public Dissemination problem solving EITI Capacity Building 2010 50 Bank, Government, Donors Knowledge generation, public debate, problem solving CEM - Multi-sector High Impact 201 1 240 Bank, Government, Donors, Knowledge generation, public debate, Program Public Dissemination problem solving, strategic planning

Planned in FYll

CPPR annual 25 Bank, Government Problem solving, strategic planning Country Program Support annual 29 Bank, Government Problem solving, strategic planning Gen. Economic PRSP / HIPC annual 109 Bank, Government Knowledge generation, problem solving, Monitoring strategic planning CAS 201 1 3 1 Bank, Government, Donors, Knowledge generation, public debate, Public Dissemination problem solving, strategic planning EITI Capacity Building 2010 50 Bank, Government, Donors Knowledge generation, public debate, problem solving CEM - Multi-sector High Impact 201 1 60 Bank, Government Knowledge generation, problem solving, Program strategic planning

38 Annex B6: Key Economic Indicators (As of 5/6/2009)

Acliutl tsililratf Projected lndicrttor 2005 2006 2007 ZtnB 'W 3010 201 I

National accounts (as % of GDP) Gross domestic product" 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Agriculture 54.9 54.7 53.1 55.5 55.3 55.0 54.4 Industry 14.3 14.0 13.1 12.9 13.0 13.2 13.7 Services 30.8 31.3 33.8 31.6 31.6 31.8 31.9

Total Consumption 88.5 103.9 92.3 95.1 98.5 97.0 95.0 Gross domestic fixed investment 26.5 22.8 25.7 23.8 23.9 24.2 24.5 Government investment 14.5 11.9 13.3 13.2 13.7 13.9 14.2 Private investment 12.1 11.0 12.4 10.6 10.2 10.3 10.4

EXPORS (GNFS)~ 31.3 18.7 28.0 29.8 29.3 26.3 27.4 Imports (GNFS) 45.2 46.7 44.6 49.8 51.3 47.1 47.0

Gross domestic savings 11.5 -3.9 7.7 4.9 1.5 3.0 5.0 Gross national savings' 24.8 12.8 34.4 22.9 19.8 18.1 19.8

Memorandum items Gross domestic product 302.3 317.4 382.0 429.6 476.1 448.2 476.2 (US$ million at current prices) GNl per capita (US$, Atlas method) 180 190 200 220 240 250 250

Real annual growth rates (%, calculated 60m 86 prices) Gross domestic product at market prices 35 0.6 2.7 3.3 1.9 3.1 3.8 Gross Domestic Income -10.3 27.3 9.0 4.9 0.4 0.1 0.9

Real annual per capita growth rates (%e, calculated from 86 prices) Gross domestic product at market prices 0.4 -2.4 -0.3 0.3 -1.1 0.I 0.8 Total consumption 7.0 27.7 -18.8 6.0 5.2 -2.4 -2.7 Private consumption -2.1 45.8 -22.6 13.3 7.8 -2.2 -3.4

Balance of Payments (million US$ ) EXPOIS (GNFS)~ 94.6 59.3 106.8 128.1 139.6 117.7 130.6 Merchandise FOB 89.4 55.9 73.3 90.7 85.3 73.2 83.2 Imports (GNFS)~ 136.7 148.4 170.3 214.0 244.3 211.1 223.7 Merchandise FOB 95.0 108.7 102.0 141.9 146.5 129.5 139.3 Resource balance -42.2 -89.0 -63.5 -85.9 -104.8 -93.4 -93.1 Net current transfers 52.5 62.4 109.9 85.0 96.0 75.8 78.4 Current account balance -1.7 -36.0 38.4 -8.4 -17.3 -25.5 -22.8

Net private foreign direct investment 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Long-term loans (net) -39.4 -35.5 -57.6 -58.8 -60.8 -43.9 -46.2 Official -2.6 -8.0 -1.1 Private -36.9 -27.4 -56.6 Other capital (net, mcl. crrnrs & ommissLnns) 60.7 65.7 41.2 82.2 84.8 75.8 75.8 Change in reservesd -19.6 5.8 -22.0 -15.0 -6.7 -6.4 -6.9

Memorandum items Resource balance (% ofGDP) -13.9 -28.0 -16.6 -20.0 -22.0 -20.8 -19.6 Real annual growth rates ( YR86 prices) Merchandise exports (FOB) -9.7 -41.9 -7.6 -0.5 13.7 4.5 13.7 Primary Manufactures Merchandise imports (CIF) -1.1 -9.1 -13.6 13.3 19.4 -10.5 30

39 Annex B6: Key Economic Indicators (Continued)

Public finance (as % of GDP at market prices)' Current revenues (revenue incl current grant) 20.8 25.1 23.9 24.8 22.9 20.7 21.0 Current expenditures 27.7 28.1 26.3 24.3 23.4 21.9 21.6 Current account surplus (+)or deficit (-) -6.9 -3.0 -2.4 0.5 -0.5 -1.1 -0.6 Capital expenditure 14.5 11.9 13.3 13.2 13.7 13.9 14.2 Foreign financing (excl arrears and debt relief, incl capital grant) 2.1 2.6 5.2 6.9 7.1 -50.2 9.0

Monetary indicators M2/GDP 32.9 33.2 37.9 40.6 42.7 43.3 43.8 Growth ofM2 (%) 20.6 5.0 25.9 20.7 8.5 6.8 6.9 Private sector credit growth / 28.8 106.1 136.2 32.9 -64.7 -36.6 219.9 total credit growth ("A)

Price indices( YR86 =loo) Merchandise export price index 103.2 111.0 157.6 195.9 162.0 133.1 133.2 Merchandise import price index 198.6 219.4 238.0 292.3 252.9 249.7 260.8 Merchandise terms oftrade index 52.0 50.6 66.2 67.0 64.1 53.3 51.1 Real exchange rate (US$ILCU)' 106.9 108.1 111.4 119.2 123.2 125.3 127.3

Real interest rates Consumer price index (% change) 5.6 -0.1 4.6 10.4 3.6 2.5 2.8 GDP deflator (% change) 2.2 3.5 7.4 8.9 1.3 2.2 1.8

a. GDP at b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers excluding official capital grants. d. Includes use ofIMF resources. e. Consolidated central government. f. "LCU" denotes "local currency units.'' An increase in US$/LCU denotes appreciation.

40 Annex B7: Key Exposure Indicators (As of 5/6/2009)

tZcItial Estimated Projected Indiwior 2005 2006 2007 2tWX 2009 2010 201 1

Total debt outstanding and 1329 1343 1384 1432 1486 820 725 disbursed (TDO) (US$m)'

Net disbursements (US$m)" 14 8 -6 8 9 6 2

Total debt service (TDS) 12 12 34 13 12 12 12 (US$m)"

Debt and debt service indicators ("A) TDOKGS~ 1119.8 1780.8 989.9 900.4 872.8 562.1 452.9 TDO/GDP 439.6 423.2 362.3 333.3 3 12.2 183.0 152.2 TDS/XGS 9.9 16.4 24.3 7.9 7.2 8.1 7.2 Concessional/TDO 94.0 95.0 96.0 96.0 97.0 97.0 97.0

IBRD exposure indicators (%) IBRD DS/public DS 0.0 0.0 0.0 Preferred creditor DS/public 20.8 51.5 55.0 DS (%)' IBRD DS/XGS 0.0 0.0 0.0 IBRD TDO (US$m)d 0 0 0 Of which present value of guarantees (US$m) Share ofIBRD portfolio (%) 0 0 0 IDA TDO (US$mld 284 297 315

IFC (US$m) Loans Equity and quasi-equity /c

MIGA MIGA guarantees (US$rnj

a. Includes public and publicly guaranteed debt, private nonguaranteed, use ofIMF credits and net short- term capital. b. "XGS" denotes exports ofgoods and services, including workers' remittances. c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks; the IMF, and the Bank for International Settlements. d. Includes present value ofguarantees. e. Includes equity and quasi-equity types ofboth loan and equity instruments.

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mel BIOMBO

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OCEAN BISSAU GUINEA-

ATLANTIC 12 ° N

DECEMBER 2004