Document of The World Bank

Public Disclosure Authorized

Report No. 58533 - GW

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT

FOR A Public Disclosure Authorized PROPOSED THIRD ECONOMIC GOVERNANCE REFORM GRANT

IN THE AMOUNT OF SDR 4 MILLION

(US$6.4 MILLION EQUIVALENT)

TO THE

REPUBLIC OF GUINEA-BISSAU

Public Disclosure Authorized May 17, 2011

Poverty Reduction and Economic Management 4 Country Department AFCF1

Public Disclosure Authorized Africa Region

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.

CURRENCY EQUIVALENT Currency unit = CFA Franc (CFAF) Exchange rate as of 05/05/11 US$1 = 445.6 CFAF

FISCAL YEAR January 1 – December 31

ABBREVIATIONS AND ACRONYMS

AfDB African Development Bank AIDS Acquired Immune Deficiency Syndrome ANP National People’s Assembly APR Annual Progress Report ASECNA Agency for Aerial Navigation Safety in Africa and Madagascar ASYCUDA Automated System for Custom Data BCEAO Central Bank of West African States BOAD West Africa Development Bank CAS Country Assistance Strategy CAIA Center of Evaluation of Environmental Impacts CCAB Joint Framework for Budget Support Coordination CCIA Chamber of Commerce, Industry and Agriculture of Guinea-Bissau CEM Country Economic Memorandum CENFA National Center for Training in Administration CFE Center for Business Registration CFAA Country Financial Accountability Assessment CFAF African Financial Community Franc CoM Council of Ministers CPAR Country Procurement Assessment Review CPLP Community of Portuguese- Speaking Countries CPU Central Procurement Unit CRW Crisis Response Window DB Doing Business DAF Financial Control Office DFC Financial Control Directorate DGO Budget General Directorate (Direcção Geral de Orçamento) DGTCP Budget Office, and Treasury and Accounting DSA Debt Sustainability Analysis DRRP Demobilization, Reinsertion and Reintegration Program DTIS Diagnostic Trade Integration Study EAGB Electricity and Water Company of Guinea-Bissau ECOWAS Economic Community of West African States EFA Education for All ECF Extended Credit Facility EGRG Economic Governance Reform Grant EPCA Emergency and Post-Conflict Assistance EU European Union FIAS Foreign Investment Advisory Services

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FSF Fragile State Facility FY Fiscal Year GDP Gross Domestic Product GNI Gross National Income HIP High Impact Program HIPC Heavily Indebted Poor Countries HIV Human Immunodeficiency Virus IDA International Development Association IFAD International Fund for Agricultural Development IFC International Finance Corporation IFRS International Financial Reporting Standards IGF General Finance Inspectorate ILAP Inquérito Ligeiro de Avaliação da Pobreza IMF International Monetary Fund INE National Institute of Statistics INEP National Institute for Studies and Research IPMSPA Integrated Personnel Management System of the Public Administration IPSA Integrated Poverty and Social Assessment ISN Interim Strategy Note JSAN Joint IDA-IMF Staff Advisory Note LDP Letter of Development Policy LICUS Low Income Countries Under Stress MDG Millennium Development Goal MDRI Multilateral Debt Relief Initiative MICS Multiple Indicators Cluster Survey MoF Ministry of Finance MoPA Minister of Public Administration MW Megawatts NGO Non-Governmental Organization OHADA Organization for the Harmonization of Business Law in Africa OPCS Operations Policy and Country Services PDO Public Debt Office PAIGC African Party for the Independence of Guinea-Bissau and Cape Verde PARAP Public Administration Reform Assistance Project PEFA Public Expenditure and Financial Accountability PEMFAR Public Expenditure Management and Financial Accountability Review PFM Public Financial Management PLACON Platform for Consultation in Guinea-Bissau PPIAF Public-Private Infrastructure Advisory Facility PPGD Public Procurement General Directorate PPP Public-Private Partnership PRA Procurement Regulatory Authority PRGF Poverty Reduction and Growth Facility PRSP Poverty Reduction Strategy Paper PSD Private Sector Development PSRDP Private Sector Rehabilitation and Development Project PV Present Value RDSS Reform of the Defense and Security Sector SDR Special Drawing Rights SIGFIP Integrated Public Financial Management System

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SIGRHAP Integrated System for Human Resource Management in the Public Administration SMP Staff-Monitored Program SNA National Accounts System SOE State-Owned Enterprise SSR Security Sector Reform SPF State- and Peace-Building Fund SYGADE Debt Management Analysis System TFSCB Trust Fund for Statistical Capacity Building UN United Nations UNCTAD United Nations Conference on Trade and Development UNODC United Nations Office on Drugs and Crime WFP World Food Program

Vice President: Obiageli K. Ezekwesili (AFRVP) Acting Country Director: McDonald Benjamin (AFCF1) Sector Director: Marcelo Giugale (AFTPM) Sector Manager: Miria Pigato (AFTP4) Task Team Leader: Fernando Blanco (AFTP4)

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REPUBLIC OF GUINEA-BISSAU

THIRD ECONOMIC GOVERNANCE REFORM GRANT

TABLE OF CONTENTS

GRANT AND PROGRAM SUMMARY ...... vii 1. INTRODUCTION...... 1 2. COUNTRY CONTEXT ...... 2 A. BACKGROUND AND RECENT POLITICAL DEVELOPMENTS ...... 2 B. RECENT ECONOMIC DEVELOPMENTS...... 4 C. MACROECONOMIC OUTLOOK IN 2011 AND DEBT SUSTAINABILITY ...... 8 3. THE GOVERNMENT’S NPRSP ...... 12 A. THE CHALLENGE OF PERVASIVE POVERTY ...... 12 B. OVERVIEW OF THE NATIONAL POVERTY REDUCTION STRATEGY ...... 12 C. PROGRESS WITH POVERTY REDUCTION POLICIES AND PROGRAMS ...... 13 4. BANK SUPPORT TO THE GOVERNMENT’S CORE REFORM PROGRAM ...... 16 A. LINKS TO THE INTERIM STRATEGY NOTE ...... 16 B. COLLABORATION WITH THE IMF AND OTHER DONORS ...... 16 C. RELATIONSHIP TO OTHER BANK OPERATIONS AND ANALYTICAL UNDERPINNINGS ...... 18 D. LESSONS LEARNED ...... 19 5. THE PROPOSED OPERATION ...... 20 A. OPERATION DESCRIPTION ...... 20 B. POLICY AREAS ...... 21 C. PRIOR ACTIONS UNDER THE PROPOSED EGRG III...... 22 D. MONITORING FRAMEWORK ...... 32 6. OPERATION IMPLEMENTATION ...... 33 A. POVERTY AND SOCIAL IMPACTS ...... 33 B. ENVIRONMENTAL ASPECTS ...... 34 C. IMPLEMENTATION, MONITORING AND EVALUATION ...... 34 D. FIDUCIARY ASPECTS...... 35 E. DISBURSEMENT AND AUDITING ...... 35 F. RISKS AND RISK MITIGATION ...... 36

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List of Tables:

TABLE 2.1: KEY MACROECONOMIC INDICATORS, 2006-10 ...... 5 TABLE 2.2: CENTRAL GOVERNMENT OPERATIONS, 2006–12 (AS A PERCENTAGE OF GDP) ...... 6 TABLE 2.3: BUDGET SUPPORT FLOWS, 2008-2011 (IN BILLION CFAF) ...... 7 TABLE 4.1: DEVELOPMENT PARTNERS –AREAS OF SUPPORT ...... 18 TABLE 5.1: PRIOR ACTIONS FOR THE PROPOSED EGRG III...... 31

List of Boxes:

BOX 2.1: RECENT DEVELOPMENTS IN THE DEFENSE AND SECURITY SECTOR REFORM ...... 4 BOX 5.1: GOOD PRACTICE PRINCIPLES ON CONDITIONALITY ...... 32

List of Annexes:

ANNEX 1: TIMETABLE OF KEY PROCESS EVENTS ...... 38 ANNEX 2: LETTER OF DEVELOPMENT POLICY ...... 39 ANNEX 3: EGRG III POLICY MATRIX...... 46 ANNEX 4: IMF RELATIONSHIP NOTE ...... 49 ANNEX 5: COUNTRY AT A GLANCE ...... 50 ANNEX 6: MAP OF GUINEA-BISSAU, IBRD 33415 ...... 53

The Third Economic Governance Reform Grant was prepared by a team led by Fernando Blanco (Senior Economist, AFTP4) under the guidance of Alain D’Hoore (Lead Economist, AFTP4) and Miria Pigato (Sector Manager, AFTP4). The core team included Maimouna Mbow (AFTFM), Charles Coste (consultant), Leonardo Iacovone (AFTFP), Zenaida Hernandez Uriz (IFC), Ricardo Varsano (consultant), Tullio Morganti (consultant), Sean Lothrop (consultant), Fallou Dieye (consultant), Adelaida Almeida (consultant), Vicente Blute (consultant), Daniela Junqueira (LEGAF), Wolfgang Chadab (CTRFC), and Judite Fernandes (Program Assistant, AFTP4).

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REPUBLIC OF GUINEA-BISSAU

PROPOSED THIRD ECONOMIC GOVERNANCE REFORM GRANT

GRANT AND PROGRAM SUMMARY

Borrower: Republic of Guinea-Bissau. Implementing Agency: Ministry of Finance. Financing Data: IDA Grant SDR 4 million (US$6.4 million equivalent). Operation Type: Single Tranche Operation of SDR 4 million (US$6.4 million equivalent). Stand-alone development policy operation. Main Policy Areas: Support the implementation of the government’s reform agenda in the following areas: (i) public financial management; (ii) human resource management; (iii) state reform; (iv) debt management; and (v) private sector development. Key Outcome Indicators: PFM Indicators: Baseline Target Stock of arrears to the private sector (million of 93,170 < 50,000 CFAF)

Stock of arrears annually paid (million of CFAF) 23,500 20,000 Percentage of personnel expenditures not included 46 % 0% in the unified payroll system

Number of years to submit the General Accounts of 2 < 1 the State to the Court of Accounts

Doing Business Indicators: 15 Number of procedures required to register a firm 17 216 50 Number of days to register a firm 100 Cost of registering a firm (% income per capita) 183.3

Number of firms registered through the one-stop- shop in one year. 0 300 Program Development The main development objectives of the proposed grant are to: (i) promote Objective and efficiency, transparency and accountability in the use of public resources Contribution to Country through improved public financial management (PFM); and (ii) improve Partnership Strategy: specific aspects of the investment climate, including streamlined procedures for business registration and licensing, enhanced legal and taxation frameworks to foster private investment and new regulation to support environmental sustainability in public and private investment projects. The development objectives are consistent with pillars 1 (good governance, macroeconomic stability, public administration reform), and 2 (private sector-led growth) of the government’s national development program outlined in its poverty reduction strategy paper (PRSP). A more immediate objective is to protect basic service delivery, which is threatened by the budgetary support shortfall currently facing the

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government.

Benefits: Expected benefits of the measures supported by the EGRG III include: (i) greater efficiency and transparency in public financial management; (ii) strengthened control and administrative rationalization of the government’s human resources; (iii) more appropriate debt policies backed by stronger debt-management systems; and (iv) an improved business climate and environmental regulations to foster sustainable private sector development.

Risks and Risk (a) Shortfalls in external budget support flows. The 2010 shortfall, Mitigation: about CFAF20 billion compared with 2009 (or 4.9 percent of GDP), prompted a dramatic adjustment in government investment and purchases of goods and services. Further tightening would put the provision of key social services at risk and could potentially undermine progress in public financial management observed over the last two years. The proposed grant will partially fill the financing gap and obviate further budget cuts. (b) Other external shocks. The economy, being poorly diversified, is susceptible to external shocks. In particular, recent increases in food prices could have serious impacts on domestic inflation, government accounts and external balances. The scope for fiscal mitigation of external shocks from internal resources alone is sharply limited, and would require donor support. In addition, despite the significant improvement in the debt profile produced by Guinea-Bissau’s achievement of the HIPC completion point, the risk of external debt distress is still high and shocks to exports or GDP could lead debt ratios to breach threshold levels. The grant supports reforms in public financial management, debt management and related areas, that would help strengthen the country’s ability to attract external support to help cope with shocks. (c) Political risks. Political instability remains a persistent risk, particularly if tangible benefits from the reform program do not swiftly become apparent to the population, or if the costs of reform to influential constituencies become too high. To mitigate these risks continued support from the international community to the government’s economic reform agenda will remain critical. (d) Implementation capacity. Guinea-Bissau’s technical and institutional capacity to implement the reforms supported by the EGRG III is low. To address this risk in the short term the Bank and other partners have made available a combination of capacity building and technical support.

Operation ID: P123685

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REPUBLIC OF GUINEA-BISSAU

THIRD ECONOMIC GOVERNANCE REFORM GRANT

1. INTRODUCTION

1.1 This Program Document proposes a Third Economic Governance Reform Grant (EGRG III), in the amount of SDR 4 million (US$6.4 million equivalent) to the Republic of Guinea-Bissau, following on a previous programmatic series of two development policy operations, EGRG I and II, implemented over 2009-10. As envisaged in the Interim Strategy Note (ISN), the two previous EGRG operations were stepping stones on the country’s path to the Heavily Indebted Poor Countries (HIPC) completion point, which it reached in December 2010. The proposed EGRG III would be a stand-alone operation designed to sustain momentum in the implementation of the reform agenda supported by EGRG I (approved in June 2009) and EGRG II (approved in June 2010) and would consolidate recent policy achievements in the wake of G uinea- Bissau reaching the HIPC Completion Point.

1.2 The proposed EGRG III is intended to serve as a bridge operation while the NPRSP II is finalized and the Bank’s Country Assistance Strategy (CAS) in support of the NPRSP II is developed. With recent cuts in budget assistance by several development partners, related to internal political developments, financial assistance for the 2011 budget under the proposed EGRG III would be critical, limiting the need for further downward fiscal adjustments, preventing an economically costly compression of the public investment program, and allowing policymakers to focus their attention on finalizing and launching their new medium-term agenda.

1.3 The proposed operation is designed to assist the Government of Guinea-Bissau in completing the first steps in a long term process of financial and management reform that was initiated in 2009. Recognizing the challenges posed by a difficult economic and political context and a fragile institutional environment, the project will support the completion of significant reforms in key areas of public administration and private sector development. While modest in their development objectives, such improvements will be instrumental in enabling the government to meet the larger objectives of reducing poverty and achieving levels of economic growth comparable to those of other countries in the region.

1.4 The proposed EGRG III supports the implementation of reform policies aligned with Guinea-Bissau’s first National Poverty Reduction Strategy Paper (NPRSP). The proposed EGRG III, like the previous DPOs, focuses on two of the four pillars of the NPRSP. The first of these pillars—strengthening governance, improving the efficiency of public administration and establishing macroeconomic stability—aims at consolidating the development and implementation of a modern legal and organizational framework for public financial management (PFM) that is consistent with West African Economic and Monetary Union (WAEMU) standards. The second pillar—promoting economic growth and job creation—focuses on improving the business climate to foster more robust private sector development (PSD). The authorities are finalizing the preparation of the NPRSP II, which they have tentatively scheduled to complete in the spring of 2011 and present at a donors’ roundtable later in the year. The proposed grant is also grounded in the International Development Agency (IDA) assistance strategy described in the Interim Strategy Note (ISN) for Guinea-Bissau discussed by the Board on June 15, 2009.

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1.5 Guinea-Bissau has made considerable progress in realigning its macroeconomic policy with its long-term development goals by implementing a focused agenda of complementary reforms supported by the two previous EGRGs. The government has considerably strengthened macroeconomic management in recent years, and in May 2010 the International Monetary Fund (IMF) approved a 3-year arrangement under the Extended Credit Facility (ECF) for 2010-2013. The first review of the ECF-supported program was approved by the IMF Board in December 2010. Moreover, in spite of the difficult political climate the authorities have made progress in the PFM and PSD areas. The implementation of reforms in these areas and the overall design of the reform program have built on analytical work and capacity-building activities supported by other IDA-funding instruments. These include the Low Income Countries Under Stress (LICUS) and State and Peace-building Fund (SPF) grant-funded operations and the IDA Private Sector Rehabilitation and Development Project (PSRDP). The operation also complements support provided by the African Development Bank (AfDB), the International Monetary Fund (IMF), and other donors.

1.6 Despite encouraging progress in recent years on the economic and institutional fronts, Guinea-Bissau continues to face extraordinary short- and medium-term development challenges typical of a fragile state. As highlighted in the ISN, recent progress towards macroeconomic stabilization notwithstanding the country remains locked in a low-equilibrium trap of continued political instability, weak governance and disappointing economic performance. The 2009 ISN also argues that donors, including the Bank, will have to move toward a more forceful engagement strategy capable of effectively supporting large-scale systemic change in Guinea- Bissau. The proposed operation represents a transition to a more ambitious and integrated Bank program to be described in detail in the next CAS aimed at assisting Guinea Bissau to implement the upcoming NPRSP II and to break the cycle of low economic growth and persistent instability. 1.7 The proposed EGRG III is also consistent with the orientations for Bank engagement in fragile states that are outlined in the 2011 World Development Report on Conflict, Security and Development and the new Africa Strategy. While modest in their objectives, the EGRG I and II and this stand alone operation promote incremental institutional development. In this regard, the definition of the areas supported by the proposed operation reflects a high degree of selectivity with focus on a small number of reforms that are feasible given the complex political situation weak institutional and technical capacity. In addition, the delivery of budget support through this proposed operation enables the predictability of inflows of financial support and enhances the Government fiscal management. Finally, following the new Africa Strategy recommendations, the proposed EGRG III have benefitted from technical cooperation with other agencies such as the European Union, the IMF and the AfDB, taking advantage of the comparative advantages of these partners in specific policy areas at the national, regional and global levels.

2. COUNTRY CONTEXT

A. BACKGROUND AND RECENT POLITICAL DEVELOPMENTS

2.1 Guinea-Bissau is one of the smallest and poorest countries in Sub-Saharan Africa. With an estimated 1.54 million inhabitants, the population is young—about 42 percent is under 14 years of age—and is now growing at an average rate of 2.2 percent per year. Annual Gross Domestic Product (GDP) per capita is estimated at US$550. The economy is highly vulnerable to weather fluctuations: agriculture represented about 50 percent of GDP in 2009 and remains the

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main source of employment in rural areas. Cashew is the main cash crop (representing 98 percent of exports) and is strongly linked to other sectors, such as labor-intensive cashew processing, trade and transportation.

2.2 Guinea-Bissau is a country with significant, but largely unfulfilled development potential. The country has good agricultural, mining and even tourism potential, but political instability following the brief civil war in 1998 has proven to be a severe barrier to economic development. Macroeconomic management over the last decade was highly uneven and growth was anemic. Attempts at stabilization in the early 2000s faltered in the wake of ongoing political instability and severe structural weaknesses in fiscal management. Average GDP growth over the period 1999-2007 stood at only about 1 percent per year.

2.3 Protracted political instability has plagued the country since the late 1990s. President João Bernardo Vieira, who came into power after a coup d’état in 1980, was ousted in 1999 after a brief civil war that began in June 1998. Since 1999, political instability has continued to be high with 14 successive governments during 1999-2009 and a bloodless coup in 2003. Presidential elections in June 2005 brought Vieira back from exile and returned him to the presidency. While the president is constitutionally independent from the legislature and former administrations have been marked by an extreme concentration of power in the office of the president, the government is constitutionally subject to parliamentary confidence, and in recent years an increasingly assertive legislature has fostered tensions between the offices of the president and prime minister. Parliamentary elections in November 2008, deemed fair and transparent by international observers, restored to power the historically dominant African Party for the Independence of Guinea-Bissau and Cape Verde (PAIGC), which won more than two thirds of the National Assembly’s 100 seats. Following the back-to-back assassinations of former President Vieira and the army chief of staff in March 2009, Malam Bacai Sanha of the PAIGC won the presidency by a decisive margin in the runoff election held at the end of July 2009.

2.4 Despite recent progress, significant challenges remain. The peaceful presidential election of 2009 seemed to have alleviated tensions and facilitated the consolidation of the PAIGC administration. Nevertheless, as indicated in the 2009 ISN, due to the persistent political instability, weak governance and poor economic performance, sources of tensions remain. A definitive break from this cycle will take time and it should be expected to be punctuated by recurring political volatility. This was well illustrated in early April 2010, when the Army’s second-in-command arrested the Prime Minister and the Chief of Staff of the Army. After strong public demonstrations in favor of the democratically elected government the Prime Minister was quickly released; however, as a compromise solution to the events in April, the former Chief of Staff of the Army was officially replaced by one of the leaders of the military insurgency (the former second-in-command). Moreover, another military figure, the former head of the Navy, was reinstated in his post, even after having been listed by the US authorities as involved in the global drug traffic. These events, combined with a general lack of progress on the government’s security sector reform agenda, have led to the interruption of aid flows from the European Union and key bilateral donors. Following negotiations, in April 2011, under Article 96 of the Cotonou Accord, the government has since undertaken to adopt and implement a roadmap toward addressing the concerns raised by the EU, which in turn has announced a partial and conditional resumption of its aid program, albeit without budget support. More broadly, the episodes in April 2010 and further developments have only reaffirmed the urgent need for, and the complexity of, reforming Guinea- Bissau’s security sector in order to reorganize the armed forces and reduce their size.

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Box 2.1: Recent Developments in the Defense and Security Sector Reform

In spite of the political disruptions that affected the implementation of actions concerned with the defense and security sector and led to the suspension of the European Union mission in support to the defense sector reform (EU SSR Guinea-Bissau) and budget support operations, Government and other partners’ actions to reform the sector were not interrupted during this period. In January 2010, the Government adopted the Reform of the Defense and Security Sector (RDSS) program adopted. The RDSS aims at downsizing the Army with a new and clearly defined structure. It also aims at modernizing and restructuring the police force from nine to four bodies with better defined competences and plans to build capacity in the judiciary.

In April and May of 2010 the legal framework for the defense and security forces’ new mission and mandate was revised. The People’s National Assembly approved over a dozen legal texts to reorganize and restructure the defense and security sector such as the Law on National Defense and the Armed Forces, the Basic Organic Law of the Organization of the Armed Forces, the Statutory Regime of the Armed Forces, the Code of Military Justice, the Organic Law of the Ministry of Public Security and Homeland Affairs and the Organic Law of the Police Force for Public Order. In August 2010, the Committee of the Economic Community of West African States (ECOWAS) Chiefs of Defense Staff and a restricted Group of Chiefs of Defense Staff of the Community of Portuguese- Speaking Countries (CPLP) recommended the approval of an action plan to assist Guinea Bissau in overcoming the security challenges presently facing the country. The action plan includes the creation of a financing mechanism for the efficient implementation of the reform of the Armed Forces through the establishment of a pension fund, the redeployment of military personnel, the restructuring, training and improvement of the living and working conditions of the Armed Forces.

In November 2010, ECOWAS approved a road map for the Reform of the Defense and Security Sectors and pledged financial and technical support to the Reform. Up to May 2011, the Government of Guinea- Bissau has not yet officially adopted this road map. Nonetheless, the initial actions of the plan such as technical support missions from ECOWAS partners are being implemented. In March 2011, the Government of Angola initiated its SSR technical support mission in Guinea-Bissau (MISSANG). The mission was set up to initiate the implementation of reforms within Bissau-Guinean defense and police forces, namely rehabilitation of military and police infrastructures and training. In March 2011, under Article 96 of the Cotonou Agreement, consultations between the Guinea-Bissau authorities and EU representatives took place in Brussels. Aid is expected to be partially restored, conditional on the government undertaking judiciary investigations and proceedings on the events of April 1, 2010 and the definition of a timetable for the implementation of the defense and security reform.

B. RECENT ECONOMIC DEVELOPMENTS

2.5 Despite continued challenges on the political front and adverse external shocks during 2008-2010, economic performance improved somewhat. Economic growth has been resilient, with real GDP slipping only slightly from 3.2 percent in 2008 to 3.0 percent in 2009 and recovering to 3.5 percent in 2010 driven by good cashew crops, moderate expansion of food crops, an uptick in construction activity and a gradual normalization of the fiscal situation. With the continued rise in food and energy prices in the first half of 2008, inflation peaked at an average annual rate of 10.5 percent—one of the highest rates in WAEMU—before dropping to a negative 1.6 percent in 2009 as food and fuel prices fell back towards levels closer to historical trends and eventually stabilized at 2.5 percent in 2010, below the WAEMU inflation band. Despite strong cashew exports the external current account deficit, excluding official transfers, widened to about 10.5 percent and 12 percent of GDP in 2008 and 2009, respectively. The 2008 outcome was affected by a sharp increase in the import costs of food and fuel. In 2009, declining export prices for cashew nuts, which fell by almost 30 percent from 2008, led to a 13 percent decrease in the

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terms of trade, with the total value of exports plummeting by 10 percent. Moreover, remittances also declined from 4 percent of GDP in 2008 to 2.7 percent of GDP in 2009. In 2010, however, as a result of the recovery of cashew prices the external current account deficit is expected to narrow to 9.3 percent of GDP.

Table 2.1: Key Macroeconomic Indicators, 2008-14

2008 2009 2010 2011 2012 2013 2014 Prog. 1 Est. Prog. 2 Proj. Proj. Proj. Proj.

(Annual percentage change, unless otherwise indicated) National accounts and prices Real GDP at market prices 3.2 3.0 3.5 3.5 4.3 4.3 4.5 4.7 4.7 Real GDP per capita 1.0 0.8 0.5 1.2 2.1 2.1 2.3 2.5 2.4 GDP deflator 10.5 1.1 2.4 1.7 2.1 3.8 1.8 2.2 1.9 Consumer price index (annual average) 10.4 -1.6 2.5 1.1 2.5 4.0 2.0 2.0 2.0

External sector Exports, f.o.b. (based on US$ values) 13.1 -3.6 13.6 2.1 11.2 16.4 0.6 2.9 2.8 Imports, f.o.b. (based on US$ values) 18.8 1.5 9.2 -2.9 6.0 19.9 2.7 0.5 0.9 Export volume 3.4 12.9 4.3 -10.6 7.4 3.6 5.7 4.8 4.7 Import volume -8.5 18.6 3.3 -5.5 5.1 2.6 3.9 2.5 1.9 Terms of trade (deterioration = -) 3.3 -22.2 5.6 11.6 2.7 -4.5 -3.6 0.2 -0.9 Real effective exchange rate (depreciation = -) 7.0 -1.8 1.4 -0.5 1.2 2.1 0.4 0.4 0.2 Nominal exchange rate (CFAF per US$; average) 445.7 471.0 450.0 494.4 501.7 479.2 481.6 485.3 489.4

Government finances Domestic revenue (excluding grants) 30.0 2.3 21.5 26.1 10.4 11.8 9.0 8.7 7.6 Total expenditure 26.2 -6.7 16.0 -0.9 6.9 14.4 10.1 8.5 6.7 Current expenditure 7.0 -4.0 13.1 -2.0 7.7 12.3 6.4 9.6 6.6 Capital expenditure 64.7 -10.1 20.2 0.7 5.8 17.4 14.9 7.1 6.7

Money and credit Net domestic assets 3 19.7 -10.9 2.0 15.9 1.6 5.4 2.1 0.4 0.5 Credit to government (net) 8.4 -10.5 0.2 7.0 0.0 0.0 0.0 -1.7 -1.7 Credit to the economy 10.1 4.3 0.8 8.0 1.6 2.1 2.1 2.1 2.2 Velocity (GDP/broad money) 4.1 3.8 3.8 3.6 3.2 3.6 3.6 3.8 3.9

(Percent of GDP, unless otherwise indicated) 3 Investments and savings Gross investment 8.7 10.1 16.3 9.8 14.9 10.9 11.2 11.2 11.2 Of which: government investment 4.2 5.1 10.0 4.8 8.6 5.2 5.5 5.5 5.5 Gross domestic savings -5.3 -6.6 3.7 -4.0 1.1 -4.0 -3.8 -2.8 -2.2 Of which: government savings -11.1 -7.9 -8.3 -5.1 -4.1 -5.5 -5.7 -5.8 -5.7 Gross national savings 3.9 3.7 10.7 3.1 8.9 3.6 3.8 4.3 4.9

Government finances Budgetary revenue 9.2 9.0 10.3 10.8 10.7 11.1 11.4 11.6 11.7 Total domestic primary expenditure 12.4 11.9 14.2 12.0 12.5 13.8 14.6 14.5 14.6 Domestic primary balance -3.2 -2.9 -3.9 -1.2 -1.7 -2.7 -3.2 -3.0 -2.9 Overall balance (commitment basis) Including grants -0.8 2.9 -3.2 -0.2 -2.3 -2.0 -1.3 -1.4 -1.3 Excluding grants -15.3 -12.9 -13.6 -9.9 -9.8 -10.7 -11.2 -11.3 -11.2

External current account (including official current transfers) -4.9 -6.4 -1.3 -6.7 -6.0 -7.3 -7.4 -6.9 -6.3 Excluding official transfers -11.3 -14.4 -5.9 -10.2 -8.8 -11.4 -11.5 -11.0 -10.3 Net present value of external debt/exports of goods and nonfactor services (percent) 364.8 419.4 111.1 93.8 134.6 91.7 99.3 99.8 94.3 Nominal stock of public debt, including arrears 4, 5 167.5 157.9 54.1 50.0 62.0 47.6 46.2 43.7 40.5 Of which: external debt, including arrears 132.7 121.9 28.4 20.1 34.3 20.7 21.3 21.1 19.9 Of which: arrears 4 49.6 48.9 10.3 0.0 0.0 0.0 0.0 0.0 0.0

(US$ millions, unless otherwise indicated) Memorandum items: Current account balance (including official current transfers) -41.1 -53.1 -11.4 -56.0 -51.9 -68.3 -73.1 -72.6 -69.8 Overall balance of payments -16.9 -11.6 -806.6 -918.4 1.0 -0.1 0.1 -8.5 -15.5 Nominal GDP at market prices (CFAF billions) 377.5 393.1 418.8 413.7 443.9 447.9 476.9 510.5 544.8 Nominal stock of external arrears, end of period 4 388.6 427.5 92.8 0.0 0.0 0.0 0.0 0.0 0.0

Sources: Guinea-Bissau authorities; and IMF staff estimates and projections.

2.6 Fiscal policy was strengthened in 2009, contributing to a satisfactory performance under the IMF’s Emergency and Post-Conflict Assistance (EPCA) initiative. The EPCA- supported program focused on meeting current-year expenditures with available resources and

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avoiding the accumulation of new budgetary arrears. Despite the sharply reduced cashew prices (taxes on cashew account for some 25 percent of tax revenues), the 2009 domestic primary deficit closed to 2.9 percent of GDP, well below the previously projected 4.5 percent, reflecting improved revenue administration and stronger expenditure controls. Domestic primary expenditures fell by 0.5 percent of GDP due mainly to the wage bill being frozen in nominal terms and the imposition of stricter budgetary controls over spending on goods and services made possible by the new budget execution system. The wage-bill-to-domestic-revenue ratio fell from 103 percent in 2008 to 66 percent in 2010. Progress was also satisfactory on the implementation of the structural agenda, with important steps taken in the areas of public financial management, civil service reform and private sector development.

Table 2.2: Central Government Operations, 2008–14 (as a percentage of GDP)

2008 2009 2010 2011 2012 2013 2014 Prog. Est. Prog. Proj.

Revenue and grants 23.7 24.8 20.7 20.4 18.1 19.8 21.3 21.4 21.5 Revenue 9.2 9.0 10.3 10.8 10.6 11.1 11.4 11.6 11.7 Tax revenue 5.5 6.8 7.2 8.0 8.0 8.5 8.8 9.0 9.1 Nontax revenue 3.6 2.2 3.1 2.8 2.7 2.7 2.6 2.6 2.6 Grants 14.5 15.8 10.4 9.7 7.4 8.7 9.9 9.9 9.9 Budget support 4.3 7.3 3.1 2.3 1.7 3.0 3.0 3.0 3.0 Project grants 10.2 8.5 7.3 7.4 5.7 5.7 6.8 6.8 6.8

Total expenditure 24.5 21.9 23.9 20.7 20.4 21.8 22.6 22.9 22.9 Current expenditure 13.9 12.8 13.6 11.9 11.8 12.4 12.3 12.6 12.6 Wages and salaries 5.4 5.2 5.0 5.0 5.0 5.3 5.3 5.3 5.3 Goods and services 2.1 1.6 2.4 2.1 1.8 2.0 2.0 2.0 2.0 Transfers 2.9 2.8 3.0 2.6 2.8 2.8 2.8 2.8 2.9 Other current expenditures 1.5 1.9 1.9 2.1 2.0 2.0 2.0 2.0 2.0 Scheduled interest 1.9 1.2 1.3 0.2 0.2 0.2 0.2 0.5 0.4 Domestic interest 0.3 0.0 0.2 0.1 0.1 0.1 0.1 0.1 0.1 External interest 1.6 1.2 1.1 0.1 0.1 0.0 0.0 0.4 0.3

Capital expenditure and net lending 10.6 9.2 10.3 8.8 8.6 9.5 10.3 10.3 10.3 Public investment program 10.5 9.1 10.0 8.7 8.4 9.4 9.9 9.9 9.9 Domestically financed 0.3 0.3 1.6 0.1 0.6 1.5 2.1 2.1 2.1 Foreign financed 10.2 8.8 8.4 8.5 7.8 7.8 7.9 7.9 7.9 Other capital expenditure 0.1 0.1 0.3 0.1 0.1 0.1 0.3 0.3 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Overall balance, including grants (commitment) -0.8 2.9 -3.2 -0.2 -2.3 -2.0 -1.3 -1.4 -1.3 Overall balance, excluding grants (commitment) -15.3 -12.9 -13.6 -9.9 -9.7 -10.7 -11.2 -11.3 -11.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net domestic arrears 1.3 -1.2 -1.9 -1.9 -0.4 -0.8 -0.3 -0.3 -0.3 External interest arrears current year 1.4 1.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Float and statistical discrepancies -0.1 0.0 0.0 -0.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Overall balance, including grants (cash) 1.7 2.7 -5.1 -2.5 -2.7 -2.8 -1.6 -1.7 -1.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Financing -1.7 -2.7 5.1 2.5 2.7 2.8 1.6 1.7 1.6 Domestic financing -1.2 -2.7 0.1 1.8 0.0 0.0 0.0 -0.4 -0.4 Bank financing -1.2 -2.7 0.1 1.8 0.0 0.0 0.0 -0.4 -0.4 Nonbank financing 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Foreign financing (net) -0.5 -0.1 1.9 0.8 2.0 2.0 0.9 0.7 0.0 Disbursements 0.0 0.3 1.1 1.1 2.1 2.1 1.0 1.0 1.0 Amortization (scheduled and arrears) -3.4 -2.7 -86.5 -109.1 -0.1 -0.1 -0.1 -0.3 -1.0 External arrears 1.6 1.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Debt relief 1.3 1.4 87.3 108.8 0.0 0.0 0.0 0.0 0.0

Gross financing gap (+ = financing need) 0.0 0.0 3.2 0.0 0.8 0.8 0.7 1.5 2.0 Residual financing gap1 0.0 0.0 0.9 0.0 0.8 0.8 0.7 1.5 2.0 Sources: Guinea-Bissau authorities; and IMF staff estimates and projections. 1 Assumed to be covered with IMF resources.

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2.7 Prudent fiscal policies and a return to sound macroeconomic fundamentals have allowed Guinea-Bissau to weather the adverse impacts of the global financial crisis relatively well. In 2009, fiscal and external deficits were kept under control and inflation dropped to single digits. Progress in shoring-up its key macroeconomic indicators while rebuilding the government’s technical and administrative capacity established the basis for renewed donor support, which allowed public investment to rise from 6.5 percent to 9 percent of GDP. The negative impact of the global recession was transmitted mainly through export values and remittances, both cutting into domestic demand at a time when room for fiscal stimulus was sharply limited. The fiscal impact of the global financial crisis was significant— slower economic activity and low cashew prices negatively affected tax revenues—but it also prompted a solid response from the authorities to begin to strengthen institutional efficiency, leading the government to accelerate tax collection efforts, tighten spending, and improving expenditure controls.

Table 2.3: Budget Support Flows, 2008-2011 (in billion CFAF) Donor 2008 2009 2010 2011

AfDB - - 4.46 3.85 Angola - - - 5.76 BOAD - 4.85 0.90 - ECOWAS - 1.75 - - EU 3.6 13.74 - - France 1.3 1.97 - - Japan 1.1 1.78 - - Portugal 1.3 - - - Spain - - 0.98 - WAEMU 1.8 - - WB 3.2 3.8 3.03 3.64 Others 3.2 0.62 - -

Total 16.5 28.51 9.37 13.25

2.8 On the strength of the government’s efforts towards macroeconomic stabilization, in May 2010 the IMF approved a three-year program under the Extended Credit Facility (ECF) for the period 2010-13. Implementation of the program has been broadly satisfactory; the first review was completed in December 2010 and the second review is expected to be completed at the end of May, 2011.1 Nonetheless, following the political disruptions of April 2010, Guinea- Bissau has faced a significant shortfall in anticipated donor support that has complicated its fiscal management efforts. Budget support operations by the European Union (EU) and key bilateral donors have been interrupted and only IDA and AfDB budget support operation remained. As a result, budget support grants fell from 7.3percent of GDP in 2009 to 2.3 percent in 2010. A slight recovery of budget support flows is expected in 2011 due to the budget support operation (already disbursed) from the Government of Angola. Despite this setback, the authorities have stayed the course in terms of the reform agenda, achieving an impressive improvement in domestic revenue

1 An IMF mission visited Bissau between March 10 and 23, 2011 to perform the Second Review under the ECF. The Statement at the conclusion of the mission indicates that the government’s performance continues to be satisfactory, and all the structural criteria as of end- December were met. All quantitative targets were also met. The IMF’s Executive Board is scheduled to consider the Second Review of Guinea-Bissau’s economic performance under the ECF in May, when the second disbursement of US$3.6 million becomes available.

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performance, enforcing tighter controls over current spending and, somewhat more problematically for growth prospects, postponing planned public investments. As a result, the domestic primary fiscal deficit, initially projected at 4 percent of GDP, is now estimated to have come out at only 1.4 percent for 2010.

2.9 The authorities also launched the implementation of their medium-term arrears- clearance plan. Domestic arrears are sizable, and while estimates vary, the stock that has been identified amounts to about 24 percent of GDP. These include wage arrears, arrears to domestic banks, the Central Bank of West African States (BCEAO), and the West African Development Bank (BOAD), and commercial arrears to the private sector. The authorities’ plan has two stages. During the first stage arrears were identified and verified. These include arrears owed to commercial banks and the BCEAO, which entail high financial costs to the government, as well as public-sector wage arrears from 2008, and pre-civil war arrears to the private sector. At the beginning of 2010, the arrears to the commercial banks were cleared. In June 2010, an additional CFAF 3.5 billion (about 0.8 percent of GDP) of arrears to the private sector were also cleared. In the second stage the government intends to complete the audit of post-civil war arrears and address them after they have been fully accounted and verified. Given the current and anticipated shortfalls in budget support, in 2011 the government and the IMF agreed to slowing down the pace of arrears’ reduction.

2.10 Successful completion of the first and second reviews of the IMF-supported ECF program coupled with progress on structural reforms allowed Guinea-Bissau to reach the HIPC Completion Point in December 2010. Sustained policy reform implementation allowed Guinea-Bissau to receive comprehensive debt relief under the HIPC program and the Multilateral Debt Relief Initiative (MDRI). Debt relief has produced a significant improvement in the country’s public and external debt trajectory, and should help reinforce the economy’s resilience to macroeconomic shocks. The normalization of relations with creditors and the restoration of donor support flows are expected to provide further fiscal space for the resumption of vital public spending—particularly capital investments in priority infrastructure projects—needed to improve the country’s structural growth potential. The gradual recovery of global economic conditions should also support an increase in private investment.

C. MACROECONOMIC OUTLOOK IN 2011 AND DEBT SUSTAINABILITY

2.11 On the fiscal front, despite the shortfall in budget support flows the government has maintained its commitment to fiscal discipline. Based on the enhancement of domestic revenue mobilization and tightening of controls on personnel and operating expenses in 2011, the government is keeping the overall deficit below 3 percent of GDP. The adoption of stronger tax collection oversight and the use of electronic devices in customs administration with the gradual introduction of the ASYCUDA ++ system have allowed the government to increase domestic revenues by more than 2 percent of GDP between 2009 and 2010. Preliminary figures for 2011 indicate that this increasing trend in domestic revenue could continue over the long term to levels observed in the West African Region (about 15 percent of GDP). Moreover, the increase in cashew export volumes, as well as higher international prices, is expected to have a positive impact on government revenues in 2011. Finally, bilateral budget support from Angola is partially offsetting the interruption in budget support operations by Guinea-Bissau’s traditional European partners.

2.12 On the expenditure side the government has pursued the strict control of recurrent expenses. The government maintained the salary freeze begun in 2010, completed the revision and

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unification of the payroll bill, and began to regulate the recruitment and appointment of staff in the education and health sectors. As a result, the personnel-expenses-to-domestic-revenue ratio is expected to fall to less than 65 percent in 2011. Due to increasing energy and food prices and the impossibility of continuing to subsidize these goods, the government decided to allow an increase in domestic fuel prices and to review its subsidies on rice and wheat. Finally, faced with the shortfall in external budget support, the government has slowed down the process of arrears’ clearance. In this context of fiscal tightening, the resumption of budget support flows could be used either to finance public investment or to speed up the payment of arrears to the private sector.

2.13 On the external front, the trade and current-account balances are expected to remain at levels similar to those observed in 2010. Changes in commodity prices are expected to counteract one another. Cashew exports and oil and food imports are projected to increase without a clear net effect on the current account. As a result, the external current account deficit (excluding official transfers) is expected to stabilize around 10 percent of GDP in 2011, and is expected to gradually decline to 7 percent over the medium term. While the increase in commodity prices seems to have had a moderate effect on the external balances, this increase and the government decision to reduce subsidies, will have some effect on domestic inflation, which is expected to rise to 4.5 percent in 2011.

2.14 In the context of high cashew export prices and tight budget constraints, the government has very recently reinstated a levy on cashew exports, earmarked to support the cashew sector. The levy, at FCAF50 per kilo (about US$110 per ton, or 7 percent of current world prices for Guinea-Bissau’s high-premium cashew), will finance a Fund for the Industrialization of Agriculture Products (FUNPI) for developing cashew agriculture and processing activities, managed under a public-private partnership with the local Chamber of Commerce Industry and Agriculture (CCIA). Coming at the tail end of the harvest season in a context of unusually high world cashew prices, the levy is not expected to affect current crop volumes, farm incomes, and gross export earnings to a large degree, so the critical issues for impact assessment are forward- looking, entailing the effects on future cashew output, farm incomes, and export revenues if the levy is maintained, especially if world prices fall from their current high level. Moreover, the potential yield of the levy is high—close to US$16 million this year—and it could thus constitute a significant source of funding for much needed investments in the cashew sector that could benefit a large spectrum of stakeholders, if funds and activities are well managed.2

2.15 The fiscal scenario through 2012 (see Table 2.2) assumes a continuation of recent trends. Revenues would recover some lost ground, and current spending would be contained through a combination of improved expenditure controls, a modest decrease from 2009 in the weight of civil service wages in relation to GDP, and significant cuts in the interest costs of domestic and foreign debt. However, even this fiscal consolidation scenario assumes the continued engagement of donors at a high level. Grants, including direct budget support, and loans averaging the equivalent of almost 11 percent of GDP would be required to finance a minimal level of capital expenditures in 2012 and increase priority spending on social sectors, infrastructure, and capacity building to the levels envisaged in the government’s second NPRSP.

2 In a previous experience, in 2005, the government had also introduced a discriminatory application of the levy across exporters and bundled its introduction with new restrictions on entry into cashew processing, two features that are no longer applied. Nonetheless, given the measure’s potentially significant impacts, the Bank team intends to support the government in an assessment of the effects of this levy on the incomes of the poor and the economy at large, and, if needed, in the identification of more suitable instruments to achieve government objectives.

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2.16 Under the joint Bank-IMF Debt Sustainability Analysis (DSA) prepared in December 2010, Guinea-Bissau’s medium and long-term debt sustainability and growth outlook is positive. Under the baseline scenario that anchored the recent HIPC debt relief operation, GDP growth could accelerate to 4.5 percent in 2012 and remain at that level over the long term. This exceeds the historical average by roughly one percentage point, reflecting a past marked by great political instability and inappropriate macroeconomic policies, conditions which are expected to improve in the period ahead. Growth is also expected to be supported by the diversification of agriculture, the rebuilding of infrastructure—especially roads, ports, electricity capacity, and water systems—and by average growth in cashew production of 4.5 percent over the 2015-2030 period.3

2.17 Guinea-Bissau’s external public debt and external-debt indicators improved considerably due to the full delivery of HIPC assistance, additional bilateral assistance beyond HIPC, topping-up assistance4, and Multilateral Debt Relief Initiative (MDRI) assistance approved in December 2010. At end-2010, Guinea-Bissau’s stock of external debt amounted to US$1,066.7 million, of which US$427.5 million were arrears. As a result of comprehensive debt relief the present value (PV) of Guinea-Bissau’s debt-to-exports ratio at end- 2010 sharply dropped to 88.4 percent (from 680 percent) and is projected to further decline to 69.1 percent by 2030. Similarly, the PV of the debt-to-GDP and debt-to-revenue ratios also declined, falling from 22.6 percent and 225.6 percent on average in 200919 to 11.2 percent and 97.5 percent in 2020–30, respectively.

2.18 The government is firmly committed to maintaining debt sustainability. In this regard, following achievement of the HIPC completion point, the authorities have decided to rely exclusively on grants and concessional borrowing to meet the government’s financing needs for the foreseeable future. The authorities are also aware that lasting debt sustainability will depend on strengthening the administration’s debt-management capacity and mobilizing domestic revenue to reduce reliance on external financing. In this regard, the government has adopted decisive measures in both areas that are supported by the proposed operation.

Macroeconomic Risks in the Short Run

2.19 Rising inflation is becoming the most important source of macroeconomic risks in 2011. Increasing food and fuel prices, which spurred inflation to over 10 percent in 2008, again pose a risk to macroeconomic stability and present a crucial challenge for fiscal policy. To limit the transmission of global price increases to the domestic market the government subsidizes imported food and fuel, but these subsidies have now reached the limit of their usefulness, and expanding them to offset further price increases would be neither fiscally feasible nor economically effective. Rising import prices have already pushed annualized inflation to 5 percent in December 2010, and average inflation is projected to reach 4.5 percent in 2011. Nevertheless, with Guinea-Bissau’s participation in the regional monetary union, WAEMU, medium-term inflation rates are assumed to return to the regional average in 2012—about 2.5 percent per year.

3 IDA has been actively supporting the energy sector. The Multi-sector Infrastructure Rehabilitation project (MIRP) was restructured in 2010 reallocating resources to increase the energy supply in Bissau and to provide technical assistance to improve the performance of the utility company (EAGB). The Emergency Electricity and Water Rehabilitation Project (EEWRP) was approved in FY11 and it is focused in the expansion of the electricity generation capacity. 4 Topping-up assistance was approved by IDA Board on March 21, 2011. Creditors of the Club of Paris approved their topping-up assistance on May 11, 2011.

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2.20 A deeper shortfall in budget support flows is unlikely. As reflected above, the interruption of budget support operations by the EU and key donors led to an overall shortfall in budget support of about CFAF 20 billion or 4 percent of GDP in 2010. The shortfall prompted a dramatic adjustment in government investments and goods and service purchases. In 2011, the fiscal program supported by the IMF’s ECF anticipates a modest recovery in budget support flows of about CFAF 4 billion compared to 2010 levels, with contribution from the African Development Bank, the government of Angola—whose budget support has already been disbursed—and the proposed EGRG-III operation.

2.21 Difficulties to control the personnel expenditures in the education sector represent an important source of fiscal risk in the expenditure side. While the government has been able to control overall personnel expenditures, irregular recruitment of teachers make unpredictable the wage bill of the education sector and result in arrears that could jeopardize the government fiscal adjustment efforts.

2.22 The main downside risks to the macroeconomic outlook remain primarily political. Political instability could flare up again and the government’s commitment to fiscal stabilization and to furthering reforms, as illustrated in the recent past, could come under pressure either from within or outside the government’s political base, especially if tangible benefits of reforms do not become apparent to the population, or if the costs of reform to narrow constituencies become too high. The positive growth scenario described above assumes that domestic political stability will gain further traction. While there is reason to be cautiously optimistic, the reform of the defense and security sector will test the country’s civilian and military leaderships’ willingness to accept the changes necessary to move to a new development path.

2.23 On the upside, medium- to long-term growth, investment and exports could be significantly and positively affected by possible mining ventures to exploit the country’s bauxite and phosphate resources. Phosphate mining offers serious prospects for expansion of the mining sector, but would require equally large investments in dedicated infrastructure. The current growth scenario does not include these possible ventures, given the limited information on the scope of these projects, their large infrastructure prerequisites and, and the difficult global context. Though mining is an opportunity, mining is also fraught with risks to sustainable development prospects in Guinea-Bissau, and there will remain a need to identify and implement structural and institutional reforms to ensure that the development benefits of mining projects are maximized and potential downsides are mitigated.

2.24 In summary, the policy framework underlying the government’s macroeconomic management provides an adequate basis for the proposed operation. The government is handling the current shortfall in external budget support remarkably well through its maintenance of a tight fiscal policy and refusal to access unsustainably expensive private credit. However, in order for the government to reach its modest goals and guarantee the sustainability of the positive results observed in the last three years, policy implementation must continue to improve. This will require a sustained commitment to the goals of fiscal stabilization and reforms, as well as efforts toward continued capacity building.

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3. THE GOVERNMENT’S NPRSP

A. THE CHALLENGE OF PERVASIVE POVERTY

3.1 The impact of the 1998-99 conflict, subsequent political instability and poor economic performance through most of the last decade has contributed to high and persistent rates of poverty. Guinea-Bissau is one of the world’s poorest countries. It ranked 164th out of 169 countries on the 2010 United Nations Development Programme (UNDP) Human Development Index and poverty is widespread, with a higher incidence in rural areas. In July 2010, the government’s Statistical Institute undertook a new poverty survey (Inquérito Ligeiro de Avaliação da Pobreza, ILAP II). Results show that close to 67 percent of the population was living in poverty in 2010, with 32percent living in extreme poverty, an increase from 2002. About 80 percent of the poor live in rural areas and practice subsistence agriculture. The country is not likely to reach any of the Millennium Development Goals (MDGs) by 2015, given current trends and without significantly donor support. 3.2 The poor in Guinea-Bissau are also affected by the poor quality of, and limited access to, basic social services. Life expectancy is estimated at 48.6 years in 20105, down from 55 years in 1995. However, encouraging developments in the social sector have emerged from a recent survey on access to social services. After an observed decline in social indicators until 2006, data from the 2010 Multiple Indicators Cluster Survey (MICS) shows strong progress on most indicators related to education, gender equality, health and HIV/AIDS.

B. OVERVIEW OF THE NATIONAL POVERTY REDUCTION STRATEGY

3.3 In 2007 Guinea-Bissau finalized its first National Poverty Reduction Strategy Paper (NPRSP). According the Joint IDA-IMF Staff Advisory Note (JSAN) of the NPRSP prepared in 2007, the government strategy was built on grassroots consultations at the National level involving all segments of the society. The consultative process included three levels of participation: (i) a political and institutional level engaging the Government and its development partners; (ii) a technical level, engaging national public and private sector leaders as well as civil society leaders; and (iii)a popular and community level based on consultations with stakeholders in rural and urban areas

3.4 Until 2009 progress was largely unobservable, as a number of the most crucial reforms were slow to produce measurable results and monitoring capacity was limited. The first Annual Progress Report (APR) presented by the government at the end of 2009 provides a candid assessment of developments during this period and recognizing the modest progress obtained under the NPRSP’s four structural pillars: (i) strengthening governance, modernizing the public administration and establishing greater macroeconomic stability; (ii) enhancing economic growth and job creation; (iii) increasing access to social services and basic infrastructure; and (iv) improving the living conditions of vulnerable groups.

3.5 Since 2009, however, impressive advances have been recorded under each of the NPRSP’s pillars. As reported in the recent 2010 JSAN6 on the Second APR, prepared in August 2010, much of the progress achieved since 2009 has been under the first two pillars. In particular,

5 UN DESA (2009): World Population Prospects – The 2008 Revision. 6 IDA-IMF JSAN on the Second Annual Progress Report on the Implementation of the N-PRSP (November, 2010).

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several successful measures to improve public financial management and the business climate were initiated or accelerated during 2009-2010. Much of the substantive progress on major NPRSP policy areas was achieved during a period of relative peace, stability and security.

C. PROGRESS WITH POVERTY REDUCTION POLICIES AND PROGRAMS

Policies to strengthen governance, improve public administration, and ensure macroeconomic stability

3.6 The government has been making satisfactory progress on the macroeconomic stabilization front. Solid performance under the IMF 2009 EPCA program paved the way for the approval, in May 2010, of a three-year Extended Credit Facility (ECF). Guinea-Bissau’s completion of the first ECF review in December 2010 was, in turn, crucial to meeting one of the long overdue HIPC completion point requirements. The country’s improved fiscal performance has been key to the success of its macroeconomic stabilization efforts.

3.7 Satisfactory progress has been achieved in implementing PFM reforms. The legal and institutional framework for public financial management has been strengthened with the adoption by the Council of Minister and the National Assembly of a number of key laws aimed at bringing the legislation in the area of public finances in conformity with the 1997 WAEMU directives. The budgetary preparation and execution is supported since late 2008 by the entry into effect of the budgetary software system SIGFIP, and the adoption of a budgetary nomenclature in line with WAEMU standards. To improve transparency and oversight in the use of public finances, the government began publishing comprehensive quarterly budget execution reports in 2010. More significantly, for the first time since independence the government’s fiscal year (FY) 2009 and 2010 Annual Statement of Accounts was submitted to the Court of Accounts in September 2010 and May 2011, respectively.

3.8 Wide-ranging and well-focused public procurement reforms were adopted by the authorities in mid-2010. The new Public Procurement Law was passed in June 2010, which harmonizes procedures with WAEMU standards and internationally recognized good practices. The new Law establishes a Public Procurement Regulatory Authority with policy formulation and external oversight responsibilities, as well as a Central Procurement Unit that should replace individual procurement units for line ministries.

3.9 Initial progress has also been made in implementing reforms to modernize the public administration. In 2009 the government launched a comprehensive administrative reform program supported by an EU-funded project Public Administration Reform Assistance Project (PARAP) which aims at reforming the government’s administrative structure, strengthening control over the wage bill, reducing the size of the public service, and rationalizing the management of human resources. During the first half of 2010 the government completed the verification process and on-site controls for the 2009 biometric census of all public sector staff. The census helped to identify ―double dippers‖ (officials holding multiple posts) and ―ghost workers‖ (individuals receiving unearned salaries), which together represent about 18 percent of employees (almost 4,000 out of the 22, 236) covered by the census.

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Policies to promote economic growth and job creation

3.10 Limited progress has been achieved in the expansion and rehabilitation of economic infrastructure. The poverty reduction strategy has included infrastructure development as one of its top priorities. However, the performance of the energy, seaport and road transportation sectors continues to seriously constrain economic growth and poverty reduction.

3.11 The government recognizes the importance of improving the environment for private sector development. Guinea-Bissau ranks 176th out of 183 countries covered by the World Bank’s 2011 Doing Business report. In two out of the nine issues covered by the survey, the ease of starting and closing a business, the country ranks in last place; and in an additional area, registering property, it ranks 175th. In April 2010 a decree simplifying procedures for business registration and significantly reducing the number of administrative steps required for these processes, was adopted by the government. Another decree was passed formally mandating the establishment of a one-stop shop for business registration.

3.12 In addition, the government has made strong progress on the institutional and fiscal treatment of investment with the adoption of a new Investment Code in December 2009. The Investment Code of 1991 was rife with the potential for abuse and discretionary preferential treatment. The new Code ensures that incentives are considered automatic, removing the discretion that could be exercised by government officials under the old law; it also guarantees that there is no discrimination among projects on the basis of size, and that the multiplicity of investment regimes is eliminated to remove confusion and reduce fraud and evasion.

3.13 Finally, the National Assembly recently approved a new Telecommunications Law. Last year’s EGRG pointed out that in this sector the main challenge is to consolidate an enabling regulatory framework to allow for further growth and competition. The new law for telecommunications ensures a level playing field for private investors in a sector that has expanded rapidly in recent years.

Policies to increase access to social services and basic infrastructures

3.14 Broader access to social services contributed to the strong improvement in education and health indicators in recent years. This has been well illustrated by the results of the July 2010 Multiple Indicators Cluster Survey (MICS), which show strong progress on most indicators related to education, gender equality, health and HIV/AIDS. The 2010 MICS follows similar surveys conducted in 2000 and 2006. 3.15 In the education sector, school enrolment and gender equality in education improved considerably during the last ten years. The MICS surveys show that school enrolment rates increased from 42 percent in 2000 to 65 percent in 2010 after falling to 45 percent in 2006. There was an equally rapid improvement in gender equality in education, with converging school enrollment rates: the ratio of girls’ to boys’ enrollment grew from 0.67 in 2002 to 0.83 in 2006 and to 0.94 in 2010. Also remarkable is the reduction in illiteracy rates among young women (15 to 24 years) from 83 percent in 2000 to 72 percent in 2006 and to 61 percent in 2010. 3.16 In the health sector, promising developments have also taken place after 2006. Under- five child mortality, after increasing from 203 deaths per 1000 births in 2000 to 223 in 2006, fell to 155 in 2010. Infant mortality followed the same pattern, increasing from 124 deaths per 1000 births in 2000 to 138 in 2006 and declining to 104 in 2010. Moreover, in 2009, the government

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completed the construction of four new health centers, as well as rehabilitated and re-equipped two hospitals, expanded the national hospital in Bissau, and renovated the Motor Bra rehabilitation clinic and appointed new management.

Policies to improve the living conditions of vulnerable groups

3.17 Vulnerable groups are numerous and diverse in Guinea-Bissau, including women, youth, orphaned children, handicapped, people living with HIV/AIDS, and survivors of armed conflict. The NPRSP had emphasized the need to improve the lives of vulnerable groups and prescribed actions to ensure that these groups are effectively able to benefit from economic opportunities and access social services. The broad strategy in this area is to (i) increase and improve access to basic social services; and (ii) develop programs to promote the development of income-generating activities and the economic integration of the most vulnerable populations, mainly through micro lending and community development.

3.18 This NPRSP pillar has received insufficient attention from successive Bissau-Guinean governments over the recent past. Government actions targeted to improve the welfare of vulnerable groups have been concentrated on gender and youth areas. In addition to efforts to improve girls’ school enrollment rates, key actions undertaken in 2009 and 2010 towards promoting gender equality centered on drafting proposed legal texts on reproductive health, violence against women and girls; and trafficking in persons.

The Second National Poverty Reduction Strategy Paper (NPRSP II)

3.19 The implementation of the first NPRSP provides a foundation for the preparation of the second NPRSP, which is expected to be adopted by the Council of Ministers by mid-2011. The government has demonstrated an impressive and laudable commitment to learning from the experience of the first NPRSP and to using those lessons to inform future development planning. The first and second Annual Progress Reports are being used by the government to strengthen their strategy, including by focusing on a few specific policy objectives, providing guidance on budgetary prioritization, relying on realistic macroeconomic assumptions, devoting more emphasis on economic growth, strengthening the results framework and corresponding mechanisms for monitoring and evaluation, and ensuring overall consistency in government actions.

3.20 The main objectives of the government strategy are to achieve a significant and lasting reduction in poverty and to make progress toward the achievement of the MDGs. To that end, the pace of economic growth will need to be stepped up, particularly in those sectors that provide employment for the poor, and the economy will need to diversify. Particular attention has to be given to private sector development, an area where the NPRSP is expected to draw from the recommendations of the recent Diagnostic Trade Integration Study (DTIS) and Country Economic Memorandum (CEM). Efforts must be pursued to improve macroeconomic management and consolidate administrative reforms to ensure the quality provision of basic public services (education, healthcare, and water and sanitation). Environmental management will be dealt with more consistently in the next NPRSP.

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4. BANK SUPPORT TO THE GOVERNMENT’S CORE REFORM PROGRAM

A. LINKS TO THE INTERIM STRATEGY NOTE

4.1 The Interim Strategy Note (ISN) discussed by the Board in June 2009 sets out the Bank Group’s support to the government’s reform program for the period FY10-11. The ISN aims at helping the government to address select and immediate challenges within the confines of IDA’s limited resource envelope for the country by supporting the government in its efforts to implement a basic transitional program in a challenging environment. As noted above, its goals are aligned with the 2008 National Poverty Reduction Strategy Paper (NPRSP) and articulated around three of its pillars: (i) strengthening economic management and (ii) laying the foundations for growth in existing productive sectors, and (iii) increasing access to and quality of basic services. Capacity development will be a cross cutting theme, and building partnerships a guiding principle. The ISN foresees the use of development policy operations, investment projects and trust fund resources, and the undertaking of analytical and advisory activities.

4.2 By supporting the first three pillars of the NPRSP, the proposed operation is an integral part of the Bank’s strategy and is seen as an important step in helping stabilize the economic situation in Guinea-Bissau, support economic recovery and prepare the ground for the post HIPC completion point period. In particular, the EGRG supports the core objectives and expected outcomes of the ISN, strengthening economic management with its focus on improving governance, transparency and efficiency in public expenditure management, laying foundations for improvements in productive sectors by advancing legal and administrative reforms aimed at fostering private sector development, and improving service delivery in education through the strengthening the human resource management in the sector.

B. COLLABORATION WITH THE IMF AND OTHER DONORS

4.3 The staffs of the IDA and the IMF collaborate closely on Guinea-Bissau. The preparation of the Joint Staff Advisory Note on the Second Annual progress Report on the NPRSP and the HIPC Completion Point Document and the Joint Debt Sustainability Analysis prepared by the staffs has demanded a high level of cooperation between both institutions in 2010. Regularly IDA typically takes the lead on sectoral issues, including public sector management, private sector development and infrastructure provision. The IMF takes the lead on macroeconomic policies. Both institutions support structural reforms in public finance, procurement, debt management and private sector development. Staffs collaborate in identifying and supporting reforms in budget systems, accounting and treasury that are part of the IDA budget support operations and the IMF ECF program with the country. In a number of areas where the ECF and this operation overlap the work is being carefully coordinated to ensure that consistent advice is provided to the authorities and that triggers and structural benchmarks are complementary.7

4.4 In particular, the staffs have closely collaborated on the preparation of the structural agenda that is supported by the proposed EGRG III and the Fund’s ECF approved in May 2010. The specific PFM reforms supported by the proposed operation are

7 IFC has recently reengaged in Guinea Bissau and it is collaborating with IDA in the investment climate and the energy areas. IFC is also developing a short-term finance project for exporting cashew nuts.

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fully consistent with IMF policy and technical advice. Moreover, efforts are made to ensure complementarities between Fund and Bank supported reforms: first, the Fund takes the lead in tax policy and administration, while reforms under the proposed operation focus on expenditure management; second, Fund-led reforms aim at addressing structural issues critical to improving fiscal policy outcomes, while Bank-led reforms aim at addressing foundational and systems issues that underpin the authorities’ capacity to implement their NPRSP.

4.5 As recommended by the 2001 WDR, the proposed operation has benefitted from the cooperation with other partners. As indicated above, the EU is funding a technical assistance project for the reform of the public administration. The EU is supporting the authorities in designing a comprehensive multi-year reform action plan to reform and modernize the public administration and reduce its size. A project unit was put in place in 2008 and it is expected to be completed in mid 2011. With regard to downsizing, the authorities have selected three ministries to pilot the reforms – the Ministry of Finance, the Ministry of Civil Service and the Ministry of Public Administration Reform. The project also has financed the bio-metric census of the civil service, functional reviews of departments, and activities aimed at easing the reintegration of retrenched workers in the private sector.

4.6 Engagement from donors is only slowly evolving towards a more harmonized approach. The NPRSP has not been a key point of reference for government actions and coordination of donors’ support. Guinea-Bissau still benefits from financial support from a range of aid agencies with different, often uncoordinated instruments, given the complex political environment and uneven macroeconomic performance. In 2009, seven budget support providers including the AfDB, EU, France, IDA, IMF, Portugal and Spain established the Joint Framework for Budget Support Coordination (Quadro Conjunto de Concertação para Apoio Orçamentário, CCAB). The objectives of this mechanism are modest as it aims at enhancing exchange information and coordination. The nature of this mechanism is primarily consultative and does not create obligations to its members. An enhanced harmonization of donor support and a more predictable flow of resources remain necessary conditions for a better implementation of the NPRSP, notwithstanding an enhanced coordination role by the Ministry of Economy, Planning and Regional Integration that, since mid-2009, has yielded some results.

4.7 The NPRSP has been supported through investment and budget support. In addition to the EU, project specific and budget support has been provided by UN organizations, regional economic organizations (WAEMU, the BCEAO), development banks (African Development Bank, West African Development Bank) and bilateral donors, including Portugal, Brazil and Spain. A framework agreement among donors, the Bank and IMF providing budget support has been set up in 2009 to ensure better coordination and information sharing. The recently completed PEMFAR, a joint undertaking with the African Development Bank and the EU office in Bissau, has also provided an important opportunity for enhancing collaboration with other donors aligning donor technical assistance on the country’s key PFM and public administration reform priorities.

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Table 4.1: Development Partners –Areas of Support AfDB EU IDA IMF UN

Macro-Fiscal

Public Financial Management

Human Resource Management

Procurement

State Modernization

Private Sector Development

Security and Defense

C. RELATIONSHIP TO OTHER BANK OPERATIONS AND ANALYTICAL UNDERPINNINGS

4.8 The proposed EGRG III grant builds on the previous EGRG I and II and complements other Bank capacity building and investment operations. The PSD plank of the proposed operation builds in its entirety on a multi-year program of analytical, policy and technical assistance supported under the IDA Private Sector Rehabilitation and Development Project (PSRDP); this project has been instrumental in advancing far-reaching legal and policy reforms including the preparation of business laws consistent with the OHADA Acts, the Investment Code and the proposed Law on PPP, privatization, and initiatives to improve the business climate based on project-supported analytical work (including a 2007 update of a 2001 FIAS ―road map‖ study of administrative procedures for opening a business). The PFM policy plank of the proposed operation complements capacity building activities funded under a past US$1.2 million LICUS grant which closed in December 2008 and an ongoing US$1.7 million SPF grant approved in December 2008. The operation also complements, in its development objectives, a multi-sector infrastructure project, funding the restoration of a minimum of critical investment requirements in transport and energy infrastructure. The proposed DPO focuses on reforms that would leverage actions supported through technical and financial assistance provided by these other instruments.

4.9 While the proposed operation does not provide direct support to the government efforts in lessening infrastructure bottlenecks, it complements other Bank investment lending operations supporting infrastructure sectors. In particular, improvements in government budget predictability, expenditure management and procurement systems would favor, in the medium term, a better execution of government infrastructure investment and maintenance. In addition, it is expected that a more effective control of the payroll would generate savings that could free up space to finance government infrastructure and social sector investments. In this regard, the recent approval of the Emergency Electricity and Water Rehabilitation Project (EEWRP) and its additional finance could be benefitted from the enhanced predictability of government resources. The selection of the PSD plank actions, focused on administrative and legal procedures and regulatory frameworks to foster private sector activities,

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has taken into account the fact that the Bank is already preparing an additional financing proposal under the Multi-Sector Rehabilitation Project (P097975) aimed at addressing the crucial electricity generation shortfall.

4.10 A number of analytical studies provide the basis for the design of the proposed operation. They include core diagnostic assessments by the World Bank in collaboration with the government and other donors as well as various studies conducted by the government with donor support. The studies include: (i) a Public Expenditure Management and Financial Accountability review (PEMFAR) completed in 2010, and drawing on an early 2009 EU - supported Public Expenditure Financial Accountability (PEFA) Diagnostic Assessment which provides an updated diagnostic analysis of the current strengths and weaknesses in the country’s public financial management system and practices, including public procurement and a considerable range of inputs for the design and preparation of the next phase of the PFM and public procurement reform strategy; (ii) various FIAS studies and project documents and aide- memoire of the IDA-financed private sector PSRD Project, which have provided analytical background and specific recommendations on business environment reforms, the investment code and other PSD reforms; (iii) a Diagnostic Trade Integration Study (DTIS) that also highlighted red tape and related petty corruption as a barrier to private activity and investment. In addition and (v) a recent Country Economic Memorandum (CEM) that provides the analytical underpinnings for a stepped-up program that would be supported by the Bank, called as High Impact Program (HIP), designed to achieve transformative change in key sectors of the economy and a related institutional agenda focused on PFM and PSD reforms.

D. LESSONS LEARNED

4.11 The design of the proposed operation has benefited from a number of lessons drawn from the recent JSAN and HIPC Completion Point Document and the implementation of a LICUS grant on PFM reforms, the PSRD project, the Economic Rehabilitation and Recovery Credit, a quick disbursing credit of US$25 million that supported the implementation of Guinea- Bissau’s National Reconciliation and Reconstruction Program and the EGRG I and II. Key lessons are highlighted below:

 Focus and realism. There is a need for a realistic program design to avoid overloading the very limited institutional and implementation capacity of Guinea-Bissau. Thus, selectivity in objectives that are mutually enhancing and realism in targeted outcomes are important to keep the program focused on fundamentals of the reform agenda;8  Implementation. Fragile states may require more detailed implementation programs than usually seen in other development policy operations, particularly during periods of political transition. Detailed action planning and monitoring may be needed to help the government and program partners track progress, address bottlenecks and adjust to delays in program implementation.  Follow up on government reforms and complementarities with other projects. Experience with the EGRG I and II indicates that after government or legislative adoption of laws and regulations, additional assistance is required to guarantee a full implementation of government policy reforms. On the positive side, the implementation of the PFM reforms has

8 Implementation Completion Report for the Economic Rehabilitation and Recovery Credit, Report No. 31015, December 27, 2004.

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been successful due to the support provided by the SPF Economic Governance Support Grant. Similar conclusions can be found in regard to the state and civil service reforms where the EU PARAP project has provided resources to the implementation of reforms in this area. On the negative side, only limited support has been provided on private sector development plank since 2009 (when the PSRDP closed); and  Technical Assistance. Related to the previous point, financing for policy reforms should not rely on the policy support alone to catalyze and implement reforms. Technical assistance and capacity building resources should accompany policy operations in order to ensure: (i) the strengthening of capacity of domestic counterparts; and (ii) support to specific reforms via specialized analytical work or reform-specific capacity building. Achieving the results targeted by the EGRG requires strengthening counterpart capacity, and IDA will remain closely involved in capacity building through technical advice.

5. THE PROPOSED OPERATION

A. OPERATION DESCRIPTION

5.1 The proposed operation, in the amount of SDR 4 million (US$6.4 million equivalent) is a single-tranche development policy operation. The proposed EGRG III is designed to sustain momentum in the implementation of the focused reform agenda supported by EGRG I (approved in June 2009) and EGRG II (approved in June 2010). Accordingly, the operation focuses on two of the four pillars of the NPRSP (i) strengthening governance, enhancing the efficiency of public administration, and guaranteeing macroeconomic stability with focus on public financial management (PFM) and state reorganization; and (ii) promoting economic growth and job creation to foster more robust private sector development (PSD). The first of these pillars—the agenda for governance, public administration, and macroeconomic stability— aims at completing and consolidating the development and implementation of a modern legal and organizational framework for PFM that is consistent with WAEMU standards, reorganizing the government structure and strengthening human resource management. The second of these pillars—promoting economic growth and job creation—focuses on improving the business climate, adjusting previous regulatory reforms supported by the earlier EGRGs series, and creating an environmental impact regulatory framework for investment.

5.2 The specific objectives of the reforms supported by the proposed grant are to: (i) promote efficiency, transparency and accountability in the use of public resources through improved budget and public financial management; and (ii) improve specific aspects of the investment climate, including streamlining procedures for business registration and licensing and reforms of the existing legal framework for investment. The development objectives are consistent with pillars 1 (good governance, macroeconomic stability, public administration reform) and 2 (private sector-led growth) of the government’s national development program outlined in its NPRSP.

5.3 The proposed EGRG III supports follow-up reform measures designed to consolidate the improvements in PFM and PSD that have been obtained since 2008 and that were supported by the first and second EGRGs. In addition, the proposed DPO will support government actions in PFM, state reform, the rationalization of the government’s human

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resource management, and improved debt management, actions that are essential for the successful implementation of fiscal adjustment.

5.4 Several principles underpin the design of the operation and the specific choice of policy areas and measures that it supports:

 Drawing on Bank lessons for engagement in fragile states, the design of the policy program reflects first and foremost a high degree of selectivity, with a focus on a small number of measures that are technically ready, and feasible given the complex political context and the weak institutional capacity. In particular, the operation focuses on a select number of concrete reforms that (i) are backed by extensive analytical work; (ii) have been subject to repeated consultations with stakeholders; (iii) have benefitted from technical assistance; and/or (iv) are leveraging reforms supported by other Bank and donors instruments (such as the CFAA-CPAR and PEMFAR diagnostic reports, a SPF Economic Governance Support Grant, and the Private Sector Rehabilitation and Development Project).  To avoid placing an excessive burden on the government’s limited capacity for policy formulation and implementation, while still ensuring that its overall program has no critical gaps, reforms supported by the operation are consistent and complementary with undertakings under the IMF Extended Credit Facility (ECF) program and with activities funded under the SPF Economic Governance Support Grant and the EU-supported Public Administration Reform Program (PARAP).

 The operation focuses on PFM, state organization and human resource management, and business law reforms that reflect the implementation of fundamental commitments towards regional integration that successive governments of Guinea-Bissau have made in the past decade. While the pace of implementation has been and may continue to be delayed by political instability their general direction has long been a matter of established policy and enjoys broad political support. PFM reforms follow this principle, as Guinea-Bissau has only recently started to implement its legal, economic and institutional commitments under WAEMU. Similarly, business law reforms rest on the country’s commitments under OHADA.

B. POLICY AREAS

5.5 As described above, the proposed operation would support essential policy reforms and institutional strengthening actions in two government NPRSP pillars: (i) strengthening governance, enhancing efficiency in public administration, and securing macroeconomic stability; and (ii) promoting economic growth and job creation. It encompasses five components within these two pillars: public financial management, human resource management, debt management, measures to improve the investment climate, and environmental regulations.

5.6 The results of the first and second EGRGs have been broadly satisfactory. The most notable achievements of the EGRGs under the first pillar were the resumption of the process of harmonizing public financial management with WAEMU rules through the approval of the new institutional framework, the improvement in budgetary and financial management through the introduction and development of a computerized system of Financial, Budget, and Accounting Management (SIGFIP), the re-establishment of the single treasury account, the completion of the

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biometric census of the civil service staff, and the implementation of remedial measures to eliminate the irregularities found by the census and the adoption of a institutional framework for procurement. Major achievements under the second pillar included the approval of the new investment code, the approval of a set of measures to streamline business regulations, the establishment up of a ―one-stop shop‖ (guichet único) for business registration, and the approval of the Law on Information and Communications Technology, which sets out a new regulatory framework for the country’s telecommunications system.

C. PRIOR ACTIONS UNDER THE PROPOSED EGRG III

Pillar 1: Strengthening governance, reforming public administration, and fostering macroeconomic stability

a) Public Finance Management

5.7 Actions supported by the proposed EGRG III under the PFM component aim at consolidating recent progress in: (i) extending the coverage of the SIGFIP to the accounting management phase; and (ii) enhancing the transparency of the budget through more comprehensive, timely and regular reporting. 5.8 The previous EGRG I and II supported the adoption of the legal framework for PFM, which represented a very significant shift that has required sweeping change in the organization of departments and administrative procedures, namely the Financial Control Office (DAF), the Budget Office, and Treasury and Accounting (DGTCP). In addition, the EGRGs supported the installation of the Integrated Public Financial Management System (SIGFIP). In particular, the EGRG I and II supported the installation and functioning of the budget preparation and execution modules. 5.9 Despite these encouraging measures to strengthen the country’s legal, institutional, and administrative framework and to build its capacity for public financial management, considerable progress remains to be made. The government’s recent efforts have been directed at ensuring that all consolidated expenditures are processed through the computerized financial management system and relate to specific approved budget appropriations. The lack of computer equipment and applications for accounting management reduces auditing opportunities for the departments receiving the appropriations, makes it impossible to obtain accounting information quickly, results in the duplication of certain tasks, and makes it difficult to prepare management accounts and the general account of the state, thereby preventing external and independent auditing of compliance with budget authorization by the National People’s Assembly. 5.10 This current situation facilitates various lapses, such as exceeding planned appropriations for advances, extremely long timeframes for the preparation of statements of accounts, the inability to track expenditures, the lack of frequent, prompt, and reliable reporting, and the limited scope for conducting ex-post audits. Delays persist in the consolidation of budgetary information, the production of comprehensive and regular in-year budget execution reports and the preparation of financial statements. 5.11 Recognizing these limitations, in October 2010 the government completed the implementation of SIGFIP, computerizing the accounting management process with a view of ensuring adequate communication between the budget preparation and execution modules to guarantee the accuracy of the reports. The installation and integration of the SIGFIP

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computerized accounting system is a prior action for the proposed EGRG III. As mentioned above, this action complements the implementation of the SIGFIP budget preparation and execution modules, which had been supported in the two preceding EGRGs (the 2009 budget was presented using SIGFIP and the SIGFIP procedures manual) and completes the computerization and integration of the budget cycle. 5.12 It is expected that future budgets will be prepared and presented using the SIGFIP budget system, providing the following functionalities: it will ultimately integrate into a single application (SIGFIP) all areas of public finance (budget execution and budget preparation, treasury and accounting, etc.); it produces the budget documents required for drafting budgetary laws; it produces the various accounts (budget and accounting), expenditures and revenues for both the state general budget and the Treasury’s special accounts; it reflects outstanding payments to be made or outstanding sums to be collected; and it facilitates the preparation of all end-of-fiscal year documents, linking the various agents handling expenditure and revenue operations for both the state general budget and the Treasury’s special accounts. 5.13 Currently, the public has extremely limited access to budget information. There is limited dissemination of the structure and execution of the state budget. However, with the clarification of the budgetary and accounting framework, the computerization of the budget system via SIGFIP and the creation of a website for the Ministry of Finance, the government is undertaking important steps towards improving budget transparency. The 2010 Budget Law and the budget laws for the three previous years are now available on the Ministry of Finance’s website. In addition, the government has presented to Parliament and made available to the general public the four quarterly budget execution reports for 2010 and the first quarter of 2011. Furthermore, from the first time since independence the government’s general administrative accounts for 2009 were submitted to the Court of Accounts in October 2010 (before the end of the following year). The government also submitted the general administrative accounts for 2010 to the Court of Accounts in May, 2011. The submission to the Court of Accounts of the government’s general accounts for 2009 and 2010 is the prior action for the proposed EGRG III. 5.14 The proposed prior actions under this component would include: (i) The Recipient’s Minister of Finance has completed the computerization and integration of the Recipient’s budget cycle with the installation of the SIGFIP accounting module, as evidenced by a letter from the Recipient’s Minister of Finance dated May 4, 2011; and (ii) The Recipient’s Minister of Finance has submitted to the Recipient’s Court of Accounts the Recipient’s state general accounts for the Recipient’s Fiscal Years of 2009 and 2010, as evidenced by the Recipient’s Minister of Finance’s letters to the Recipient’s Court of Accounts, dated September 27, 2010 and April 21, 2011.

b) Debt Management

5.15 Poor debt management has been another factor explaining the uncontrolled growth of indebtedness experienced by the country in the past two decades. The lack of reliable debt information, uncoordinated borrowing policies and the absence of debt strategies have exacerbated the debt, contractual or not, generated by chronic fiscal disequilibria. Up to now there has been no systematic electronic record of debt data. The Public Debt Office (PDO) staff relies on billing from creditors to plan repayments in the short term. The software program for debt management installed at the PDO is still not operational. Related to these problems, debt reporting is irregular, and there is no official publication addressing debt issues.

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5.16 In 2009, with the support of UNCTAD, the Integrated Debt Management System (SIGADE) was installed. The operation of this system will guarantee reliable debt information and will reduce risks related with the manual introduction of debt information into non- integrated electronic spreadsheets. Debt information provided by creditors (e.g. billing information and debt reports sent by creditors at their own initiative or upon request from MoF) must be kept in electronic format –written documentation must be digitalized. Nevertheless, the lack of technical capacity has thus far prevented the operation of the system. 5.17 Further efforts remain needed to strengthen capacity in debt management. In 2010, the debt reconciliation exercises undertaken as part of the HIPC completion point process proved to be difficult and made evident the precarious debt management system and the need for improvements in this area. With the support of UNCTAD, UNDP and the Bank, the government is taking important actions to strengthen the Public Debt Office (PDO). The EGRG III includes as a prior action the adoption of the action plan for further reinforcing the PDO to improve debt management, through the enhanced use of SIGADE. Among the key actions identified in the action plan is the publication of SIGADE’s procedural manual, training activities, improvements in the working conditions of the PDO and the full operation of the SIGADE system. 5.18 The prior action under this component would be: (iii) The Recipient’s Minister of Finance has adopted an action plan for the strengthening of its Public Debt Office, as evidenced by letter from the Recipient’s Minister of Finance, dated May 4, 2011.

c) Human Resource Management and State Reorganization

5.19 As mentioned above, the government has undertaken important steps toward controlling personnel expenses and enhancing its human resource management. The government’s strategy consists in two sequential sets of actions. The first is the improvement of the currently unreliable information systems regulating staffing, individual remuneration and overall payroll. More effective control over the management of government employees is recognized as the most critical component for strengthening and improving PFM. The second set of actions involves the strengthening of human resource management through the adoption of a new civil service framework law and clear secondary regulations for recruitment, promotion, deployment and dismissals, and HR functions such as workforce planning, career development and training.

5.20 An additional factor related to the government’s human resource management is the institutional structure of each ministry and agency. Currently, the haphazard organization of government entities, the lack of clear definitions of their mandates and the services they provide, the allocation of functions, overlapping task, roles and responsibilities all seriously affect the effectiveness of the civil service. This is reflected in an excessive number of civil servants, many with inadequate qualifications, the absence of proper management or oversight, and the lack of clear and precise descriptions of professional duties.

5.21 In 2009 the government initiated a bold reform program for its human resource management system. The completion of a biometric census of the civil service provided an accurate count of public sector employees and identified a large number of ―double dippers‖ (officials holding multiple posts) and ―ghost workers‖ (individuals receiving unearned salaries). The next step in this area was the installation of the human resource management IT system, the Integrated System for the Human Resource Management of the Public Administration (SIGRHAP) that will provide payroll processing security for active employees, pensioners and

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survivors. In June 2010, the EGRG II supported the government’s decision to transfer to the Minister of Public Administration (MoPA) the management of the payroll system and civil service database to be included in the SIGRHAP and the selection of the IT platform for SIGHRAP.

5.22 The authorities need to accelerate progress in this area. The government has faced difficulties in transferring payroll system management to the MoPA, consolidating of the database generated by the biometric census of civil servants and the database used by the MoF to unify the payroll bill. In February 2011 the civil service’ payroll system was effectively transferred from the Budget Department of the Ministry of Finance to the MoPA. Technical difficulties in consolidating the databases and political resistance initially delayed the unification of the payroll bill, but the technical problems have been overcome and the MoPA has been processing the payroll bill since March 2011. The main challenge to the development of a fully unified payroll is resistance by the Ministries of Defense and the Interior to integrate their staff into the new payroll system. Therefore, the MoPA is currently processing a provisional payroll system. Delays have been also experienced in the installation of the SIGRHAP. As a result, the integration of the unified payroll system and the database generated by the biometric census in the SIGRHAP is expected to be completed by August 2011.

5.23 A further challenge to the development of the unified payroll is the large number of temporary teachers currently employed by the Ministry of Education and the irregular procedures for their recruitment. One of the major issues confronting the education sector is the recruitment and management of teachers. A large number of teachers have been hired at the regional level but have not been integrated into the formal civil service system. This practice has led to the frequent generation of salary arrears in the sector and abuse of the payroll system by regional directions of the Ministry of Education. Recognizing that the irregular recruitment of teachers not only prevents the consolidation of the civil service database and unification of the payroll, but also undermines the efforts in controlling the payroll bill, the government decided in March to forbid the regional directors from any further recruiting or the singing of employment contracts without Ministry authorization. The EGRG III includes as a prior action the enactment of the Prime Minister resolution forbidding the recruitment of teachers by regional directors without the prior authorization of such Ministry. More broadly, in response to the pressing need to ensure appropriate mechanisms for good governance concerning the human resources of the public administration the government, with the assistance of the EU-funded project PARAP, has drafted a number of secondary regulations as executive acts of the civil service law for recruitment, job re-classification, careers, disciplinary measures, conflicts of interests, professional status, and the career tracks of senior civil service staff, all of which are expected to be approved by the end of the year.

5.24 Greater progress has been made in the reorganization of the government structure. In line with the objective of streamlining the public administration for viable, cost-effective, client-oriented and transparent service delivery and management, the MoPA has initiated a process of administrative rationalization and has submitted to the Council of Ministers the Organic Law of the Government. The Organic Law of the Government is consolidating the functions of the ministries according to thematic areas as a measure to increase efficiency and contain public expenditures. The EGRG III supports the adoption by the Council of Ministers of the Organic Law of the Government. A follow-up action in this area is the adoption of organic laws for all the ministries and their staff charts, which is expected to be completed by the end of the year.

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5.25 The proposed prior actions under this component would include:

(iv) The Recipient’s Prime Minister has issued a resolution (Despacho) dated May 3, 2011, regulating the recruitment and contracting of temporary teachers; and

(v) The Recipient’s Council of Ministries has adopted the Government’s Organic Law (―Lei Orgânica do Governo‖), consolidating the functions of the Recipient’s ministries.

Pillar 2: Promoting economic growth and job creation

5.26 Despite recent reforms Guinea-Bissau scores very low on internationally recognized measure of the ease of doing business. Based on the Doing Business report for 2011, Guinea- Bissau is second from the bottom in the West Africa region and among the ten lowest (176th out of 183 countries) in the world. At the broadest level, political instability and fiscal fragility have undermined the rule of law. Coupled with the deep infrastructure deficits – energy, seaport facilities and roads – and severe weaknesses in public administration capacity, private companies face a very challenging environment in Guinea-Bissau.

5.27 At the micro-level, the legal and administrative environment for business remains weak and unstable. Guinea-Bissau still needs to complete its transition from the legal and institutional framework inherited from colonial times towards one that is both more adequate to its current economic challenges and consistent with its regional commitments to integration. Guinea-Bissau needs to promote investment, both domestic and international, and attract foreign investors that will bring entrepreneurial skills and knowledge to domestic markets. Guinea- Bissau is a small economy, with limited entrepreneurial capacities, a skeletal financial system, and weak linkages with foreign markets. In this context it is especially important to be able to attract foreign investors who possess these scarce skills and capitals.

5.28 Completing the legal transformation to a market-friendly regulatory environment is expected to be a multi-year undertaking, going well beyond the timeframe of the proposed operation. The transition to a modern and efficient legal and institutional regime will require not only the adoption of the relevant legislation, but also the development of more regular, predictable administrative and judicial structures and practices, as well as the routine and widespread publication of information about legal reforms.

5.29 In addition to damage caused by protracted political instability and increasingly dilapidated infrastructure, red tape remains another important impediment to private- sector investment and growth. In a context of weak administrative capacity complex regulations and opaque procedures, create opportunities for corruption, which in turn weakens incentives to simplify the regulatory environment. The problems related to a poor investment climate are not unique to Guinea-Bissau; however, these are particularly acute in an environment where extremely limited institutional capacity enables poor governance and corruption as coping mechanisms, which then reinforce the incentives to maintain the status quo.

5.30 This unnecessary administrative complexity and general lack of information generate obstacles that are particularly adverse for international investors. A fundamental obstacle for investors interested in exploring business opportunities is the near-total absence of reliable information on investment and startup procedures. Compounding this lack of

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information is the multiplicity of administrative processes and requirements based on ex-ante control, a concept that generates onerous bureaucratic procedures.

5.31 The government views the improvement of the investment climate as a critical prerequisite to boost economic growth and reduce poverty through private sector development. Its private-sector growth agenda is reflected in the NPRSP and has been developed over several years on the basis of diagnostic studies and consultations with stakeholders, benefitting from technical support under the IDA-funded Private Sector Rehabilitation and Development Project.

5.32 Important progress has been achieved since 2008 with the adoption by the Council of Ministers of draft laws based on the OHADA Acts, while a Commercial Tribunal has also been established and judges been trained in commercial law procedures. The commitment of the government to these reforms has been confirmed by the adoption by the Council of Ministers in March 2010 of a decree simplifying registration procedures and establishing a one-stop-shop for business registration, called Center for Firm Registration (CFE) or Guichet-Unique. Finally, the Telecom Law has been approved by Parliament and enacted by the president in May 2010, formalizing the regulatory framework for telecommunications in support of a rapidly expanding and employment-generating sector.

5.33 Substantial progress in developing a new legal and regulatory framework for investment has been observed with the adoption of a new Investment Code in 2009. Developed with the support of the Foreign Investment Advisory Service (FIAS), this Investment Code was signed into law by the president on December 31, 2009. This code ensures that investment incentives are automatic, removing the discretion that could be exercised by government officials under the old law; there is no discrimination among projects on the basis of size; the multiplicity of investment regimes is eliminated to remove confusion and reduce fraud and evasion; and the opacity of rules regarding sanctions and the uncertainty with which they were previously applied are ended. Fiscal risks related to tax incentives would also be mitigated with the consolidation of incentives in an automatic and transparent system. Nonetheless, administrative weaknesses and the lack of secondary regulatory framework have prevented the implementation of the new investment code.

5.34 Since 2009, the EGRG I and II supported actions judged critical to advancing reforms in private sector development, namely: (i) the adoption by the Council of Ministers of nine OHADA acts on business law; (ii) the adoption by the Council of Ministers of the new investment code; (iii) the adoption by the Council of Ministers, and more recently its promulgation by the president, of the draft Law on Public-Private Partnerships, thus sending a much-needed signal of the government’s commitment to fostering private sector-led growth; (iv) the adoption by the Council of Ministers of a decree simplifying procedures for business registration to promote formalization and provide a further indication of the government’s commitment to simplifying administrative procedures for doing business; (v) the adoption by the Council of Ministers of a decree establishing the formal constitution of a one-stop-shop for business registration, reinforcing the ongoing legal reforms related to the investment climate; (vi) and the enactment by the president of the Telecommunications Law.

5.35 The government’s reform efforts aimed at fostering the development of the private sector have been maintained through early 2011. With the support of UNDP and the EU, the CFE is expected to be inaugurated in mid May 2011. The government has also created a bulletin to publish the registration of new businesses at the CFE that should contribute to increasing the

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transparency of business information. This improvement is aligned with the ongoing effort to concentrate the procedures for starting a business at the CFE in order to simplify administrative processes and reduce bureaucratic costs. The decree to simplify procedures to start a business, issued in March 2010, already authorized the publication of new company registrations in newspapers as permitted by Art. 257 of the OHADA Companies Law. That decree eliminated the publication rights monopoly of the official gazette, but costs of publication in local newspapers remain high (around CFAF 40,000) and are prohibitive for small companies. As a result, many companies opt not to publish, undermining access to information about new companies. The proposed action will authorize the one-stop shop to publish legal announcements in line with OHADA and following the precedent of countries like Senegal and Burkina Faso. The notice of publication can be done at the website of the one-stop shop at no cost. Due to limited connectivity in Guinea-Bissau, the one-stop shop will also produce a printed version of the bulletin. A minimum fee will be charged to cover the cost of printing the bulletin. The EGRG III includes as prior action the Prime Minister resolution creating the bulletin for business registration.

5.36 Solid progress has been also achieved in the simplification of license procedures. Streamlining business licenses is necessary to meet the government’s goal of promoting formalization, expanding the fiscal base and creating new job opportunities. Until now all new - businesses required ex-ante authorization by the Ministry of Commerce, Industry and Tourism. Commerce, industry and tourism licenses are regulated by several decrees, some of which date back to the colonial era (e.g. the Decree on Industrial Activities approved in 1950) and which are clearly obsolete and no longer applied in practice. In addition, the licensing requirements mandated in these decrees often do not meet a clear regulatory purpose, but rather serve as tools to generate revenue. Good regulatory practices suggest using ex-ante authorizations, such as licenses, only for those activities that pose a risk to public safety, health, the environment or national security, or as means of safeguarding the public interest and regulating the access to scarce resources (e.g. such as fossil fuels, forestry, etc.).

5.37 In this context the government has adopted a simplification decree that would apply the principle that low risk activities do not require a license, which would be replaced by a sworn declaration by the entrepreneur. The declaration would serve to notify the relevant authorities, including the Ministry of Commerce, Industry, and Tourism, of the company’s intention to undertake a certain activity. The compliance of the company with relevant laws would be monitored through ex-post inspections. Another key principle in the simplification is the non-duplication of information. One agency should not require entrepreneurs to provide information that has already been sent to another. For example, information required for the registration of companies at the Commercial Registry should not be part of the requirements to request a license. The implementation of this principle will contribute to reducing costs for entrepreneurs.

5.38 The decree would be one of the steps in a reform strategy to rationalize business regulations and improve regulatory enforcement in Guinea-Bissau. In the medium term, related reforms will include strengthening tax administration and expanding the tax base, establishing a single classification system for business activities consistent with international practice, modifying and updating regulations in key strategic sectors such as tourism, as well as in sensitive areas such as food handling or the importation of medicines, and establishing bet ter coordination and information-sharing between government agencies. The EGRG III includes as a prior action the adoption of the decree simplifying the licensing of businesses.

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5.39 Implementation difficulties in reforming the legal and regulatory framework have prevented the development of a level playing field for private investors. While the Investment Code was promulgated at the end of 2009, the implementation process and the set of reforms to transform and modernize the Investment Promotion Directorate of the Ministry of Economy have not yet been initiated, leaving investors without a clear set of rules to follow. The lack of capacity to manage a tax credit system, the lack of secondary regulation and the non- exemption of customs rates and of the General Sales Tax (IGV) on imported capital goods continue to impede new private capital investment in the country.

5.40 In this context, the government has decided to take advantage of the redefinition of the implementing regulations for the investment code to make additional revisions. The Council of Ministers created a special commission to review the investment code and propose adjustments to it. With the support of the Bank, the special commission drafted a revised investment code law that was adopted by the Council in May 2010.

5.41 The structure of the new draft code is similar to that of the current Investment Code but several important changes were introduced. The revised Investment Code maintains the principles of transparency, simplicity and non-discrimination enshrined in the 2009 Investment Code and addresses three limitations that prevented its successful implementation. First, it explicitly lists all possible fiscal incentives and duty concessions available for potential investors. It eliminates the possibility of granting new incentives by other laws, which Art. 9.7 of the 2009 investment code left open, which enhances transparency eliminates the possibility of granting discriminatory fiscal benefits. Second, in line with other countries in the region it reintroduces duty concessions and general sales tax exemptions for capital goods. Finally, given Guinea-Bissau’s weak tax administration capacities the revised code introduces a set of incentives that are easier to manage than the tax credit mechanism in the 2009 Investment Code. Specifically, it introduces a gradually declining scale of deductions in the corporate income tax (Industrial Contribution) for the first five years of the investment which are aligned with the draft of the WAEMU investment code that is expected to be adopted by 2012. Furthermore, the revised code re-introduces an incentive to encourage training and skill formation, a particularly important issue for improving firm productivity.9 On the negative side, the new code restores the role of the Investment Promotion Directorate of the Ministry of Economy in the process of approval for projects, which is granted with the power to allocate tax incentives, but the new Code also limits the Investment Promotion Directorate’s discretion and preserves the non discrimination rules for investments by size, sector and region. In addition, the Investment Promotion Directorate must decide in favor or against granting the incentives within 30 days from the date the request is received. The decision must depend exclusively on verification whether the requirements of the Code are satisfied. Economic unfeasibility of the proposal cannot be alleged to refuse the request. Finally, the revised investment code also defines more clearly the role of the Ministries of Economy and Finance in the administration of tax incentives. The EGRG III supports the adoption of the revised investment code described above by the Council of Ministers.

5.42 Finally, the government has made strong progress in improving environmental regulations. In the second part of 2010 the government adopted the Law on the Environment

9 This point is particularly important as the recent investment climate report found that Guinea-Bissau companies are the ones that invest the least and less often in training – which obviously have important implications for productivity

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(Lei Base de Ambiente), the Law on Protected Areas (Lei Quadro das Areas Protegidas) and the Law on Environmental Impacts (Lei de Avaliação Ambiental). In September 2010, the Council of Ministers adopted the Law on the Environment. This law provides the procedural framework for the concession of environmental licenses and establishes the requirements for private and public projects that use natural resources or activities that generate environmental externalities to submit an assessment of environmental impacts, mitigation measures and compensation mechanisms (if applicable). In addition, the law set out the criteria for projects that require environmental assessment as well as defining the role of the Center of Evaluation of Environmental Impacts (CAIA) in the approval of the terms of reference of the environmental studies and the final reports. Finally, the law establishes the fees to be collected by CAIA. The EGRG III includes as prior action the adoption by the National Assembly of the Law on Environmental Impacts for private and public investment projects.

5.43 The proposed EGRG III would support the continuation of this agenda through: (vi) The Recipient’s Prime Minster has issued a resolution authorizing the creation of a bulletin to be published by the Center of Business Registration (Centro de Formalizaçao de Empresas, CFE), to publish the notifications of new companies registration at minimum cost; (vii) The Recipient’s Council of Ministers has adopted a law decree streamlining business licensing by eliminating redundant and unnecessary licenses, simplifying requirements and reducing costs; (viii) The Recipient’s Council of Ministers has approved ad referendum and submitted to the Recipient’s National Assembly a bill on the Recipient’s revised investment code, covering the key non-discrimination principles and promoting transparency and simplicity in its implementation, in accordance to WAEMU best practices; and (ix) The Recipient’s National Assembly has adopted a law establishing the Recipient’s environmental impact assessment procedures.

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Table 5.1: Prior Actions for the Proposed EGRG III

Status of implementation / Actions Supporting Documentation (i) The Recipient’s Minister of Finance has completed the Completed. The SIGFIP computerization and integration of the Recipient’s budget cycle accounting module is installed with the installation of the SIGFIP accounting module, as evidenced and operating since October by a letter from the Recipient’s Minister of Finance dated May 4, 2010. Letter from the Minister of 2011. Finance to the Bank dated May 4, 2011. (ii) The Recipient’s Minister of Finance has submitted to the Completed. The State’s General Recipient’s Court of Accounts the Recipient’s state general Accounts of 2009 and 2010 were accounts for the Recipient’s Fiscal Years of 2009 and 2010, as submitted to the Court of evidenced by the Recipient’s Minister of Finance’s letters to the Accounts on September 27 and Recipient’s Court of Accounts, dated September 27, 2010 and April April 21, 2011. Letters from the 21, 2011. Minister of Finance to the Court of Accounts. (iii) The Recipient’s Minister of Finance has adopted an action plan for Completed. The Action Plan was the strengthening of its Public Debt Office, as evidenced by letter formally adopted by the Minister from the Recipient’s Minister of Finance, dated May 4, 2011. of Finance on May 4, 2011. (iv) The Recipient’s Prime Minister has issued a resolution (Despacho) Completed. Resolution issued dated May 3, 2011, regulating the recruitment and contracting of May 3, 2011. temporary teachers. (v) The Recipient’s Council of Ministers has adopted the Government’s Completed. Approved the Decree Organic Law (―Lei Orgânica do Governo‖), consolidating the 20/11 by the Council of functions of the Recipient’s ministries. Ministries in April 29, 2011 and published in the Official Gazette on May 3, 2011. (vi) The Recipient’s Prime Minster has issued a resolution authorizing Completed. Resolution issued on the creation of a bulletin to be published by the Center of Business May 4, 2011. Registration (Centro de Formalizaçao de Empresas, CFE), to publish the notifications of new companies registration at minimum cost. (vii) The Recipient’s Council of Ministers has adopted a law decree Completed. Adopted the Decree- streamlining business licensing by eliminating redundant and Law 8/20111 by the Council of unnecessary licenses, simplifying requirements and reducing costs. Ministries on May 3, 2011 and published in the Official Gazette on May 10, 2011. (viii) The Recipient’s Council of Ministers has approved ad referendum Completed. Approved by the and submitted to the Recipient’s National Assembly a bill on the Council of Ministries on May 3, Recipient’s revised investment code, covering the key non- 2011 and submitted to the discrimination principles and promoting transparency and National Assembly on May 5 as simplicity in its implementation, in accordance to WAEMU best per Letter from the Council of practices. Ministries to the National Assembly dated May 5, 2011. (ix) The Recipient’s National Assembly has adopted a law establishing Completed. Law Nr.10 adopted the Recipient’s environmental impact assessment procedures. by the National Assembly on July 7, 2010, promulgated by the President of the Republic in September 17, 2010 and published in the Official Gazette Law on September 24, 2010.

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D. MONITORING FRAMEWORK

5.44 The government’s program matrix in Annex 3 contains baseline (2010) and target values (expected to be reached in 2012) for performance monitoring indicators for the EGRG III supported prior actions. There are 5 indicators on public financial management, and 3 on private sector development, for a total of 8 indicators. The indicators on public financial management consist mainly of measures of improved performance in budget execution, reduction of arrears and reporting. In particular, the program will monitor progress in compliance with defined calendars for budget formulation, approval, and reporting and the stock of arrears. Improvements in budget execution that have been supported by the previous EGRGs and the proposed EGRG III should reduce the probability of contingent liabilities and progressively reduce the stock of arrears. In turn, the installation of the accounting module that will complete the SIGFIP should enhance the reporting of fiscal accounts that now can be timely published. The action plan to enhance the debt management office should pave the fully operation of the SIGADE and guarantee a more effective debt management. Finally, the actions supported by the EGRGs on the area of human resource management should allow a better control of personnel expenditures with the unification of the payroll system and the elimination of irregular contracts in the Education sector.

Box 5.1: Good Practice Principles on Conditionality Principle 1: Reinforce ownership The reform agenda underpinning the proposed operation is rooted in both the fundamental commitments of successive governments towards regional integration (under the West African Economic and Monetary Union and the Organization for the Harmonization of Business Laws in Africa) and on the country’s own PRSP which was prepared through a highly participatory and consultative process. For the latter, stakeholder consultative workshops and focus group discussions were held with representatives of the public and private sectors and civil society, down to the level of local communities. The government is completing its second PRSP at the end of May, 2011. A series of public consultations with major stakeholders and regions have been already scheduled to discuss it previous to its adoption by the Council of Ministries.

Principle 2: Agree up front with the government and other financial partners on a coordinated accountability framework There are only a limited number of financial partners involved in providing budget support, facilitating joint understanding of areas of common and special interest (see paras. 5.3-5.5). A framework agreement among donors providing budget support has been set up to ensure better coordination and information sharing. The recently completed PEMFAR will also provide an important opportunity for enhancing collaboration with other donors aligning donor technical assistance on the country’s key PFM reform priorities.

Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances The policy matrix was developed in close coordination with the government, thus ensuring that it reflects the government’s expressed policy intentions and the country circumstances – including weak capacity for policy formulation and implementation. The design of policy reforms has been backed by analytical work and technical assistance in place. Most of the reforms are longstanding and ongoing government initiatives which were prioritized in the PRSP. Donor coordination on the budget support has reduced transaction costs and the expected timing of the IDA disbursement is aligned with the government’s domestic budgeting process.

Principle 4: Choose only actions critical for achieving results as conditions for disbursement Prior actions for the proposed grant focus on a selected number of measures that are critical to achieving the objectives of the government’s reform program as detailed in this Section.

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Principle 5: Conduct transparent progress reviews conducive to predictable and performance-based financial support The existing institutional structure for the PRSP process will be used to implement and monitor the policy reforms supported by the proposed development policy operation. The limited number of active development partners providing budget support allows for easy coordination and monitoring of actions and progress reviews of the implementation of the policy matrix. After the disbursement of its single tranche, IDA plans to continue working with the government and other participating development partners to monitor implementation and help determine whether adjustments to the policy matrix need to be made to take into account the latest country developments, stakeholder support and alternative options for realizing the intended development goals. The disbursement of the proposed IDA grant is targeted towards mid CY11, in line with the domestic budgeting process which is based on the calendar year. The disbursed funds are expected to be used in filling the CY11 budget financing gap provoked by the interruption of the budget support by the European Union.

5.45 The indicators on private sector development are measures of the depth of administrative barriers to private investment, including the number of days, procedures and costs to start a business and obtain business licenses, which would be easily monitored through reviews of government procedures and surveys of business climate (as the Doing Business),. In particular, the publication of new companies’ registration by the CFE is expected to reduce the registrations costs calculated by the DB while the simplification of business licenses should be reflected in the improvement of the dealing with construction permits indicators. Finally, the number of environmental impact studies assessed by CAI will measure the effect of the environmental regulations supported by the proposed EGRG III.

6. OPERATION IMPLEMENTATION

A. POVERTY AND SOCIAL IMPACTS

6.1 Quantitative measurement of the poverty impact of government interventions is currently limited by the government’s weak statistical capacity, which prevents effective monitoring and evaluation of government policies. Consequently, any assessment of trends in poverty remains sharply limited by the lack of data. Since the first poverty assessment survey (Inquêrito Ligeiro de Avaliação da Pobreza, ILAP I) in 2002, no new income or expenditure data on poverty has been produced. The government’s Statistical Institute undertook a new poverty survey (ILAP II) in July 2010, the results of which were issued as a draft by the end of 2010, and the final version of which should be published in the first half of 2011. The Bank will support a priority statistical program focused on the country’s most urgent data needs, namely economic data, poverty statistics and social indicators—including a household survey program— designed to strengthen the country’s statistical development, with funding likely provided by the Bank’s Trust Fund for Statistical Capacity Building (TFSCB). This program would allow for the monitoring of poverty and other socioeconomic indicators as well as quantitative measurement of government policies and reforms supported by the Bank.

6.2 From a funding perspective, the proposed operation is expected to have positive direct impacts on poverty and social indicators. Given the shortfall in budget support flows, the proposed operation would obviate the need for spending cuts that could place the provision of basic social services at risk, and such cuts would disproportionately affect the poor, who frequently depend on these services to a disproportionate degree. The measures supported by the proposed EGRG II are also expected to have a positive indirect impact on poverty reduction,

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mainly through increased overall growth and rising employment, though these growth effects may be strongly tempered by the evolving sovereign debt problems in the Euro zone.

6.3 From a policy perspective, the indirect poverty and social impact of the reforms supported by the operation are also expected to be positive. To the extent that these initiatives will favor the broadening of the fiscal space for increasing public investment, as well as enhancing efficiency in the use of public resources, the operation should have a positive indirect impact on the government’s ability to increase the quality and accessibility of public infrastructure and social services. The support to the human resource management in the education sector has not only a fiscal effect (reduction of arrears to teachers) but also an effect on the own organization of the education sector. Incidence analysis shows that low-income groups have lower rates of access to educational, health, energy, water and sanitation services, yet low - income groups are the primary users of these services. Improvements in the coverage and quality of public services would therefore disproportionately benefit the poor.

6.4 In the medium term, reducing poverty and improving income distribution consistently will require raising the country’s economic performance and expanding the coverage and quality of education and health services. To the extent that the policy reforms supported by the proposed operation will enable Guinea-Bissau to resume fiscal sustainability and improve its growth prospects, this operation is expected to have a positive impact on poverty. The government’s ability to expand access to quality social and economic infrastructure, along with more direct effects on growth and poverty reduction, will depend on its maintenance of strong fiscal and macroeconomic fundamentals.

B. ENVIRONMENTAL ASPECTS

6.5 The specific actions supported under the proposed EGRG III are likely to have positive effects on the country's environment, forests, fisheries or other natural resources. The first plank of this operation, governance, is not expected to have a meaningful effect on Guinea-Bissau’s environment due to the primarily administrative nature of the reform program, (public financial management, civil service reform and decentralization, monitoring and evaluation systems, improved health care and social protection). The reforms under the second plank, private sector development, expected to have positive effects on the environment. In particular, the Law on Environmental Impact Evaluation in public and private investment projects is a fundamental step in strengthening the country environmental regulations. Furthermore, the recent adoption of the laws on environment (Lei de Base do Ambiente) and on protected areas (Lei Quadro das Areas Protegidas) represent important improvements and their implementation should guarantee a more effective government environmental protection.

C. IMPLEMENTATION, MONITORING AND EVALUATION

6.6 Since the preparation of the EGRG I, the IDA team has worked in close collaboration with the government and its budget support partners to ensure adequate monitoring and evaluation of the program as well as a high level of accountability for the success of each of the previous DPOs. The government and the Budget Support Group have agreed on a matrix of indicators that is reviewed biannually to assess progress in the different policy areas.

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6.7 The existing institutional structure for the NPRSP process will be used to implement and monitor the policy reforms supported by the proposed development policy operation. The Ministry of Finance and the Ministry of Economy will assume overall responsibility for coordinating the implementation, monitoring and evaluation of the policy matrix. They will be ultimately responsible for reporting progress and coordinating actions among other concerned Ministries and agencies. The Council of Ministers will provide overall guidance for the budget support program. Periodic stakeholder consultations included in the implementation of the ISN will serve to provide additional feedback on the impact of the proposed operation.

6.8 The limited number of cooperating partners currently providing budget support will allow for easy coordination and monitoring of actions and for regular progress reviews of the implementation of the policy matrix. After the disbursement of its single tranche, IDA plans to continue working with the government and other cooperating partners to monitor implementation and help determine whether adjustments to the policy matrix need to be made in order to take into account the latest political and economic developments, stakeholder perspectives, and alternative options for realizing the intended development goals.

D. FIDUCIARY ASPECTS

6.9 While some important progress has been achieved in public financial management over the last two years, and some key reforms are close to be implemented, the internal control environment in Guinea-Bissau remains weak. Improving fiduciary standards is a central objective of the public financial management component of the proposed operation. The 2006 CFAA and 2008 PEFA were key inputs in the preparation of the government’s PFM reform program. Implementation of key reforms is closely monitored and included in the ongoing dialogue between the government, the IMF, the Bank and other donors, with further technical assistance provided by the cooperating partners. Lessons drawn from past diagnostics and ongoing implementation experience are provided in the form of recommendations, and will be incorporated in a revised multi-year reform agenda that the government is disseminating as part of the recently completed PEMFAR in 2009.

6.10 The Central Bank of West African States (BCEAO) is the common central bank of francophone West African countries, including Guinea Bissau. The updated safeguards assessment of BCEAO issued by the IMF in March 2010 revealed that the institution continues to have controls in place at operational level. However, the IMF noted that the overall governance framework should nonetheless be strengthened by the addition of an audit committee to ensure that the Board of Directors exercises appropriate oversight over the control structure, including the audit mechanism and financial statement. The upcoming implementation of the institutional reform of the West African Monetary Union (WAMU) and the BCEAO should help correct that situation. In addition, efforts to fully implement International Financial Reporting Standards (IFRS) should be pursued as adopted internationally by other central banks.

E. DISBURSEMENT AND AUDITING

6.11 The proposed operation would consist of a single tranche grant of SDR 4 million (US$6.4 million equivalent) to be available upon effectiveness and disbursed on the basis of a withdrawal application. The grant will follow the Bank’s disbursement procedures for development policy lending. Once the grant becomes effective, the Government of Guinea- Bissau (Recipient) will submit a withdrawal application to IDA requesting that the grant

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proceeds be deposited in the BCEAO into a dedicated account that forms part of the country’s official foreign exchange reserves. The Recipient shall ensure that upon the deposit of the grant into said account an equivalent amount in CFAF is credited in the Recipient’s budget management system in a manner acceptable to IDA. The Recipient will report to the World Bank the amounts deposited in the foreign currency dedicated account and credited to the budget management system. Disbursement would not be linked to specific purchases. If the grant proceeds are used for the ineligible purposes, as defined in the Financing Agreement, IDA will require the Recipient to refund an amount equal to the amount of said payment to IDA promptly upon notice from IDA. Amounts refunded to the Bank upon request shall be cancelled.

6.12 Through the Ministry of Finance, the Recipient will: (i) report, within one week from the date of receipt, the exact sum received into the dedicated account; (ii) ensure that all withdrawals from the dedicated account are for budgeted public expenditures, excepting military expenditures or other items on IDA’s proscribed list; and (iii) provide IDA with evidence that the CFAF equivalent of the Credit proceeds were credited to the Consolidated Fund account and that disbursements from that account were for budgeted public expenditures. Although an audit of the deposit account will not be required, IDA reserves the right to require audits at any time.

F. RISKS AND RISK MITIGATION

6.13 The proposed operation presents significant risks, but as in the recent past, an active engagement in Guinea-Bissau is a high-risk and potentially high-gain enterprise. The specific risks that could jeopardize the expected outcomes and benefits of the proposed grant relate to political instability, macroeconomic policy performance, support from donors, and capacity constraints. The greatest countervailing risk, however, remains the potential failure to support the stabilization and recovery process, missing a window of opportunity for helping to stabilize a fragile country in a challenging transition.

6.14 The following risks and risk mitigation strategies have been identified:

(a) Shortfalls in budget support flows. Due in part to concerns over recent political developments, a significant overall shortfall in budget support and financial assistance of about CFAF 20 billion or 4 percent of GDP was observed in 2010. The shortfall prompted a dramatic adjustment in government investments and goods and service purchases. Further shortfalls would put the provision of key social services at risk and potentially cause the accumulation of arrears in the wage bill, which could interrupt the progress observed in the areas over the last two years. In 2011, the fiscal program supported by the IMF’s ECF anticipates a modest recovery in budget support flows of about CFAF 4 billion compared to 2010 levels and a residual financing gap of 1.5 percent of GDP, which is expected to be filled by the first round of ECF disbursement in early 2011. (b) Other External shocks. The economy, being poorly diversified, is susceptible to external shocks. In particular, recent increases in food prices could have serious impacts on domestic inflation, government accounts and external balances. The scope for fiscal mitigation of external shocks from internal resources alone is sharply limited, and would require donor support. In addition, despite the significant improvement in the debt profile produced by Guinea-Bissau’s achievement of the HIPC completion point, the risk of external debt distress is still considerable and shocks to exports or

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GDP could make debt to breach threshold levels. The grant supports reforms in public financial management, debt management and related areas, that would help strengthen the country’s ability to attract external support to help cope with shocks.

(c) Political risks. Heightened political instability remains a persistent risk, particularly if tangible benefits from the reform program do not become apparent to the population, or if the costs of reform to influential constituencies become too high. To mitigate these risks continued support from the international community to the economic reform agenda will remain critical. The specific reforms supported by the proposed operation have been carefully selected from the government’s own NPRSP; they include measures that are technically ready (benefitting from extensive analytical work and supported by technical assistance) and politically achievable (produced through numerous consultations with stakeholders and internal governmental discussions). Most of these measures build on the government’s longstanding commitment towards regional integration in the context of WAEMU and OHADA, which mitigates the risk of reversibility. (d) Implementation capacity. Guinea-Bissau’s technical and institutional capacity to implement the reforms supported by the EGRG III is low. To address this risk in the short term the Bank and other partners have made available a combination of capacity building and technical support. Coordination with other development partners, especially UNDP and the AfDB, on the provision of technical assistance will further alleviate implementation risks.

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Annex 1: Timetable of Key Process Events

Concept Review January 21, 2011 ROC Meeting: May 2, 2011 Authorization to Negotiate: May 6, 2011 Negotiation: May 11, 2011 Board Presentation: June 16, 2011 Effectiveness: July 5, 2011 Closing Date: December 31, 2011

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Annex 2: Letter of Development Policy

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Annex 3: EGRG III Policy Matrix Component EGRG II – Prior Actions EGRG III - Prior Actions Results Indicators Base 2011 Target (2010) (2012)

Pillar 1: Strengthening governance, public administration and guaranteeing macroeconomic stability

Public (i) Submission to Recipient’s (i) The Recipient’s Minister of Finance has completed Stock of arrears to 93,170 70.000 <50,000 Finance Parliament of the draft the computerization and integration of the Recipient’s the private sector

Management Organic Law for Budget budget cycle with the installation of the SIGFIP (million of CFAF) Framework. accounting module, as evidenced by a letter from the

Recipient’s Minister of Finance dated May 4, 2011. (ii) Adoption by the Council of Stock of arrears Ministries of: (i) a decree (ii) The Recipient’s Minister of Finance has submitted to cleared (million of 23.500 20,000 20,000 defining the organization, the Recipient’s Court of Accounts the Recipient’s CFAF) attributions and functioning state general accounts for the Recipient’s Fiscal Years of the Recipient’s Financial of 2009 and 2010, as evidenced by the Recipient’s Controller; and (ii) a decree Minister of Finance’s letters to the Recipient’s Court Number of years to reorganizing the of Accounts, dated September 27, 2010 and April 21, 2 1 1 Recipient’s Budget General 2011. submit the General Directorate and redefining Accounts of the State to the Court of its attributions. Accounts (iii) Adoption by the Council of Ministries of a decree: (i) defining the role of credit Number of Quarterly managers in all of its Budget Execution 4 4 4 ministries and public Reports in a year entities; and ii) defining the role of public accountants in accordance with the Public Accounting Decree dated on April 28, 2010. (iv) Issuance by the Ministry of Finance of a manual of procedures for budget execution for the use of all Recipient’s ministries. Adoption by the Council of Ministers of: (i) a decree

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Component EGRG II – Prior Actions EGRG III - Prior Actions Results Indicators Base 2011 Target (2010) (2012) approving the new procurement code defining the regulatory and control functions thereof in line with WAEMU’s procurement directives; and (ii) a decree establishing the Recipient’s central procurement unit. Debt (iii) The Recipient’s Minister of Finance has adopted an SIGADE fully N Y Y Management action plan for the strengthening of its Public Debt operational

Office, as evidenced by letter from the Recipient’s

Minister of Finance, dated May 4, 2011. Number of Quarterly 0 3 4 Debt Reports in a year Human (v) Jointly decision by the (iv) The Recipient’s Prime Minister has issued a resolution Percentage of 46% 30% 0 Resource Recipient’s Ministers of (Despacho) dated May 3, 2011, regulating the personnel

Management Finance and Public recruitment and contracting of temporary teachers. expenditures not and State Administration Reform on included in the (v) The Recipient’s Council of Ministers has adopted the Reform the selection of an unified payroll Government’s Organic Law (―Lei Orgânica do appropriate payroll IT system Governo‖), consolidating the functions of the system to be acquired, Recipient’s ministries. Y Y installed and integrated with SIGFIP and formal SIGRHAP fully N submission of their operational recommendation to the Recipient Council of Ministers. Number of Ministries with Organic 0 13 15 Structure Approved Number of Ministries 0 13 15 with Staffing Charts

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Component EGRG II – Prior Actions EGRG III - Prior Actions Results Indicators Base 2011 Target (2010) (2012)

Pillar 2: Promoting economic growth and job creation

Business (vi) Adoption by the Council of (vi) The Recipient’s Prime Minster has issued a resolution Number of 17 15 Climate Ministers of a decree authorizing the creation of a bulletin to be published procedures required

simplifying procedures for by the Center of Business Registration (Centro de to register a firm business registration. Formalizaçao de Empresas, CFE), to publish the

notifications of new companies registration at (vii) Adoption by the Council of minimum cost. Number of days to Ministers of a decree register a firm establishing the formal (vii) The Recipient’s Council of Ministers has adopted a 216 120 50 constitution of a one-stop law decree streamlining business licensing by shop for business eliminating redundant and unnecessary licenses, registration. simplifying requirements and reducing costs. Cost of registering a firm (% income per (viii) Enactment by the President (viii) The Recipient’s Council of Ministers has approved ad capita) 183.3 150 100 of the Republic of the referendum and submitted to the Recipient’s National Telecommunications Law Assembly a bill on the Recipient’s revised investment adopted by the Recipient’s code, covering the key non-discrimination principles One-Stop-Shop fully Parliament on March 9, and promoting transparency and simplicity in its operational N Y Y 2010. implementation, in accordance to WAEMU best practices. (ix) The Recipient’s National Assembly has adopted a law Number of firms registered through the establishing the Recipient’s environmental impact 0 50 300 assessment procedures. one-stop-shop in one year

Number of days to 167 150 50 obtain a license

Number of environmental impact 0 0 10 studies assessed by CAIA

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Annex 4: IMF Relationship Note

IMF Executive Board Completes First Review Under Extended Credit Facility for Guinea-Bissau and Approves US$3.71 Million Disbursement Press Release No. 10/492 December 14, 2010 The Executive Board of the International Monetary Fund (IMF) has completed the first review of Guinea-Bissau’s economic performance under its program supported by the Extended Credit Facility (ECF) arrangement. Completion of the review, on December 13, 2010, enables the immediate disbursement of SDR 2.414 million (about US$3.71 million), bringing total disbursements under the arrangement to SDR 10.295 million (about US$15.83 million). The Executive Board approved a three-year, SDR 22.365 million (about US$33.4 million) ECF arrangement for Guinea-Bissau on May 7, 2010 (see Press Release No. 10/185). Guinea-Bissau became a member of the IMF on March 24, 1977 and has a Fund quota of SDR 14.2 million. The Executive Board also agreed, in principle, that Guinea-Bissau has taken the steps necessary to reach its completion point under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative. This decision on the HIPC completion point is contingent upon the Executive Board of the World Bank’s International Development Association (IDA) reaching a similar decision at a meeting scheduled for December 16, 2010, after which a joint press release will be issued. Following the Executive Board’s discussion of Guinea-Bissau, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, said: “The authorities’ commitment to sound policies has been crucial in maintaining macroeconomic stability in Guinea-Bissau amid challenging political and financial circumstances. Performance under the ECF-supported program has been satisfactory and substantial progress with structural reforms has been achieved. Benefitting from a rebound in the price of cashew, g rowth is expected to accelerate slightly in 2010, while inflation is projected to be within the West African Economic and Monetary Union (WAEMU) target. “The government had to adjust its 2010 fiscal plans to make up for a shortfall in budget support. The 2011 fiscal framework is realistic and consistent with available financing. The budget contains strong revenue increasing and spending control measures. Continued discipline on budget execution will be critical to achieving the authorities’ fiscal objectives. “Fiscal reforms in 2011 will aim at mobilizing more revenues and strengthening public financial management, including debt management. These reforms should help create more fiscal space for priority spending to support economic growth and poverty reduction. To make decisive progress toward the Millennium Developments Goals, further concerted efforts will be needed to secure sufficient concessional financing in the coming years, including budget support from development partners. “Guinea-Bissau has qualified for debt relief, including topping up assistance, but its debt ratios remain high, and the authorities are committed to meeting their external financing needs through grants and highly concessional loans. Going forward, the authorities intend to build on their recent efforts to normalize relations with all external creditors and to maintain their commitment to the successful implementation of economic reforms.”

49

IMF Executive Board Completes Second Review Under the ECF Arrangement with Guinea-Bissau and Approves US$3.85 Million Disbursement

Press Release No. 11/193 May 24, 2011

The Executive Board of the International Monetary Fund (IMF) has completed the second review of Guinea-Bissau’s economic performance under a three-year Extended Credit Facility (ECF) arrangement.1 The Board's decision, which was taken on a lapse-of-time basis,2 enables the authorities to draw an additional SDR 2.414 million (about US$3.85 million), bringing total disbursements under the arrangement to an amount equivalent to SDR 12.709 million (about US$20.27 million).

Satisfactory policy implementation continues in the Fund-supported program under challenging conditions. The authorities have met all performance criteria through end-December 2010 and all structural reforms for the second review.

Sound macroeconomic policies, strengthened institutions, and debt relief have stabilized the economy and supported confidence building. While medium-term growth prospects are bright, huge developmental challenges remain. It is critical that the government maintain the reform momentum and continue to build on the satisfactory performance under the ECF.

The three-year ECF arrangement for Guinea-Bissau was approved on May 7, 2010 (see Press Release No. 10/185) in an amount equivalent to SDR 22.365 million (about US$33.3 million, or 157.5 percent of the country’s quota in the Fund). On December 16, 2010 the Executive Boards of the IMF and the World Bank’s International Development Association decided to support US$1.2 billion in debt relief for Guinea-Bissau under the Heavily Indebted Poor Countries (HIPC) Enhanced Initiative and the Multilateral Debt Relief Initiative (MDRI—see Press Release No. 10/498).

1 The Extended Credit Facility (ECF) has replaced the Poverty Reduction and Growth Facility (PRGF) as the Fund’s main tool for medium-term financial support to low-income countries by providing a higher level of access to financing, more concessional terms, enhanced flexibility in program design features, and more focused streamlined conditionality. Financing under the ECF carries a zero interest rate, with a grace period of 5½ years, and a final maturity of 10 years (http://www.imf.org/external/np/exr/facts/ecf.htm). The Fund reviews the level of interest rates for all concessional facilities every two years.

2 The Executive Board takes decisions under its lapse-of-time procedure when it is agreed by the Board that a proposal can be considered without convening formal discussions.

Annex 5: Country at a Glance

Guinea-Bissau at a glance 4/19/11

Sub- Key Development Indicators Guinea- Saharan Low Bissau Africa income Age distribution, 2009 (2009) Male Female

Population, mid-year (millions) 1.6 819 828 75-79 Surface area (thousand sq. km) 36 24,242 17,838 60-64 Population growth (%) 2.2 2.5 2.2 Urban population (% of total population) 30 36 28 45-49 30-34 GNI (Atlas method, US$ billions) 0.89 897 389 15-19 GNI per capita (Atlas method, US$) 540 1,095 470 GNI per capita (PPP, international $) 533 1,981 1,131 0-4

10 5 0 5 10 GDP growth (%) 3.5 5.2 6.2 percent of total population GDP per capita growth (%) 1.2 2.7 3.9

(most recent estimate, 2003–2009)

Poverty headcount ratio at $1.25 a day (PPP, %) 49 51 .. Under-5 mortality rate (per 1,000) Poverty headcount ratio at $2.00 a day (PPP, %) 78 73 .. Life expectancy at birth (years) 48 52 57 Infant mortality (per 1,000 live births) 115 83 77 300 Child malnutrition (% of children under 5) 17 25 28 250 200 Adult literacy, male (% of ages 15 and older) 66 72 73 Adult literacy, female (% of ages 15 and older) 37 54 59 150 Gross primary enrollment, male (% of age group) .. 105 107 100

Gross primary enrollment, female (% of age group) .. 95 100 50

Access to an improved water source (% of population) 61 60 64 0 Access to improved sanitation facilities (% of population) 21 31 35 1990 1995 2000 2008

Guinea-Bissau Sub-Saharan Africa

Net Aid Flows 1980 1990 2000 2009 a

(US$ millions) Net ODA and official aid 58 126 81 132 Growth of GDP and GDP per capita (%) Top 3 donors (in 2008): European Commission 11 5 17 48 15 Portugal .. 13 15 18 10 5 Spain 0 0 1 16 0 -5 Aid (% of GNI) 55.5 54.2 12.7 10.2 -10 -15 Aid per capita (US$) 69 124 33.9 54 -20 -25 -30 Long-Term Economic Trends -35 95 05 Consumer prices (annual % change) .. 33.0 8.6 1.1 GDP implicit deflator (annual % change) 11.5 30.2 3.3 1.7 GDP GDP per capita

Exchange rate (annual average, local per US$) 0.8 33.6 712.0 471.0 Terms of trade index (2000 = 100) .. 105 100 52 1980–90 1990–2000 2000–09 (average annual growth %) Population, mid-year (millions) 0.8 1.0 1.3 1.6 2.0 2.4 2.3 GDP (US$ millions) 111 244 361.9 878.5 4.0 1.2 0.9 (% of GDP) Agriculture 44.3 60.8 56.4 55.3 4.7 3.9 4.4 Industry 19.7 18.6 13.0 13.0 2.2 -3.1 3.8 Manufacturing .. 8.4 10.5 10.3 .. -2.0 3.8 Services 36.1 20.6 30.6 31.6 3.5 -0.6 1.3 Household final consumption expenditure 73.3 86.9 79.6 87.8 -1.2 2.0 -1.5 General gov't final consumption expenditure 27.6 10.3 17.2 13.3 7.2 1.9 -1.9 Gross capital formation 28.2 29.9 21.8 85.3 12.9 -6.5 3.8

Exports of goods and services 12.7 9.9 38.1 138.5 -1.7 15.4 2.6 Imports of goods and services 41.8 37.0 96.5 260.1 0.3 -0.4 0.5 Gross savings ......

Note: Figures in italics are for years other than those specified. 2009 data are preliminary. .. indicates data are not available. a. Aid data are for 2008. Development Economics, Development Data Group (DECDG).

50

Guinea-Bissau

Balance of Payments and Trade 2000 2009 Governance indicators, 2000 and 2009 (US$ millions) Total merchandise exports (fob) 62.1 126.4 Total merchandise imports (cif) 49.1 206.6 Voice and accountability Net trade in goods and services -9.2 -121.6 Political stability Current account balance 31.9 -58.8 as a % of GDP 8.8 -6.7 Regulatory quality

Rule of law Workers' remittances and

compensation of employees (receipts) 8 25.8 Control of corruption

Reserves, including gold 87 55.3 0 25 50 75 100 2009 Central Government Finance Country's percentile rank (0-100) 2000 higher values imply better ratings (% of GDP) Current revenue (including grants) 22.3 20.4 Source: Kaufmann-Kraay-Mastruzzi, World Bank Tax revenue 6.4 8.0 Current expenditure 20.1 11.9 Technology and Infrastructure 2000 2008 Overall surplus/deficit -4.1 -0.2 Paved roads (% of total) 10.3 .. Highest marginal tax rate (%) Fixed line and mobile phone Individual .. .. subscribers (per 100 people) 1 32 Corporate .. .. High technology exports (% of manufactured exports) .. 3.9 External Debt and Resource Flows Environment (US$ millions) Total debt outstanding and disbursed 825.2 517.3 Agricultural land (% of land area) 58 58 Total debt service 28.0 3.7 Forest area (% of land area) 75.4 73.0 Debt relief (HIPC, MDRI) 189 956 Terrestrial protected areas (% of surface area) .. 18.2

Total debt (% of GDP) 228.1 58.9 Freshwater resources per capita (cu. meters) 11,691 10,156 Total debt service (% of exports) 45.1 2.9 Freshwater withdrawal (billion cubic meters) 0.2 ..

Foreign direct investment (net inflows) 1 8 CO2 emissions per capita (mt) 0.15 0.19 Portfolio equity (net inflows) 0 0 GDP per unit of energy use (2005 PPP $ per kg of oil equivalent) .. .. Composition of total external debt, 2008 Energy use per capita (kg of oil equivalent) .. .. IBRD, 0 Short-term, 144 Private, 0 IDA, 309 World Bank Group portfolio 2000 2009

(US$ millions)

IMF, 9 IBRD

Bilateral, 423 Total debt outstanding and disbursed – – Other multi- Disbursements – – lateral, 199 Principal repayments – – Interest payments – –

US$ millions IDA Total debt outstanding and disbursed 228 304 Disbursements 14 1 Private Sector Development 2000 2009 Total debt service 4 4

Time required to start a business (days) – 216 IFC (fiscal year) Cost to start a business (% of GNI per capita) – 181.5 Total disbursed and outstanding portfolio 1 0 Time required to register property (days) – 211 of which IFC own account 1 0 Disbursements for IFC own account 0 0 Ranked as a major constraint to business 2000 2009 Portfolio sales, prepayments and (% of managers surveyed who agreed) repayments for IFC own account 0 0 Electricity .. 41.4 Access to/cost of financing .. 19.6 MIGA Gross exposure 0 20 Stock market capitalization (% of GDP) .. .. New guarantees 0 0 Bank capital to asset ratio (%) .. ..

Note: Figures in italics are for years other than those specified. 2009 data are preliminary. 4/19/11 .. indicates data are not available. – indicates observation is not applicable.

Development Economics, Development Data Group (DECDG). 51

Millennium Development Goals Guinea-Bissau

With selected targets to achieve between 1990 and 2015 (estimate closest to date shown, +/- 2 years) Guinea-Bissau

Goal 1: halve the rates for extreme poverty and malnutrition 1990 1995 2000 2008 Poverty headcount ratio at $1.25 a day (PPP, % of population) 41.3 52.1 48.8 .. Poverty headcount ratio at national poverty line (% of population) .. .. 65.7 .. Share of income or consumption to the poorest qunitile (%) 2.1 5.2 7.2 .. Prevalence of malnutrition (% of children under 5) .. .. 21.9 17.4

Goal 2: ensure that children are able to complete primary schooling Primary school enrollment (net, %) 40 .. 52 .. Primary completion rate (% of relevant age group) .. .. 31 .. Secondary school enrollment (gross, %) 6 .. 20 36 Youth literacy rate (% of people ages 15-24) .. .. 59 70

Goal 3: eliminate gender disparity in education and empower women Ratio of girls to boys in primary and secondary education (%) .. .. 65 .. Women employed in the nonagricultural sector (% of nonagricultural employment) 11 ...... Proportion of seats held by women in national parliament (%) 20 10 8 14

Goal 4: reduce under-5 mortality by two-thirds Under-5 mortality rate (per 1,000) 240 233 218 195 Infant mortality rate (per 1,000 live births) 142 138 129 117 Measles immunization (proportion of one-year olds immunized, %) 53 45 71 76

Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio (modeled estimate, per 100,000 live births) 1,200 1,100 1,100 1,000 Births attended by skilled health staff (% of total) .. 25 35 39 Contraceptive prevalence (% of women ages 15-49) .. .. 8 10

Goal 6: halt and begin to reverse the spread of HIV/AIDS and other major diseases Prevalence of HIV (% of population ages 15-49) 0.2 0.8 1.7 1.8 Incidence of tuberculosis (per 100,000 people) 160 170 190 220 Tuberculosis case detection rate (%, all forms) 72 80 51 68

Goal 7: halve the proportion of people without sustainable access to basic needs Access to an improved water source (% of population) .. 52 55 61 Access to improved sanitation facilities (% of population) .. 16 18 21 Forest area (% of total land area) 78.8 77.1 75.4 73.0 Terrestrial protected areas (% of surface area) ...... 18.2 CO2 emissions (metric tons per capita) 0.2 0.2 0.2 0.2 GDP per unit of energy use (constant 2005 PPP $ per kg of oil equivalent) ......

Goal 8: develop a global partnership for development Telephone mainlines (per 100 people) 0.6 0.6 0.9 0.3 Mobile phone subscribers (per 100 people) 0.0 0.0 0.0 31.7 Internet users (per 100 people) 0.0 0.0 0.2 2.4 Personal computers (per 100 people) .. .. 0.2 0.2

Education indicators (%) Measles immunization (% of 1-year ICT indicators (per 100 people) olds) 75 100 40

50 75 30

50 20 25

25 10 0

2000 2002 2004 2006 2008 0 0

1990 1995 2000 2008 2000 2002 2004 2006 2008 Primary net enrollment ratio

Ratio of girls to boys in primary & secondary Guinea-Bissau Sub-Saharan Africa Fixed + mobile subscribers Internet users education

Note: Figures in italics are for years other than those specified. .. indicates data are not available. 4/19/11

Development Economics, Development Data Group (DECDG).

52

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