Documentof TheWorld Bank ReportNo. 46899-GW INTERNATIONALDEVELOPMENTASSOCIATION PROGRAMDOCUMENT FOR THE FIRST ECONOMICGOVERNANCE REFORMGRANT INTHE AMOUNT OFSDR5.4 MILLION (US$8 MILLIONEQUIVALENT) TO THE REPUBLICOF GUINEA-BISSAU May 18,2009 PovertyReductionandEconomicManagement4 CountryDepartmentAFCFl Africa Region This documenthas arestricteddistributionand may be usedby recipientsonly inthe performanceoftheir official duties. Its contents may not otherwise be disclosedwithout World Bank authorization. CURRENCY EQUIVALENT Currency unit=CFA Franc(CFAF) Exchangerateas of 5/6/09 US$1=490.9 CFAF FISCAL YEAR January 1-December31 ABBREVIATIONSAND ACRONYMS AfDB AfricanDevelopmentBank AIDS Acquired ImmuneDeficiency Syndrome CoM Councilof Ministers DFC Directorate ofFinancialControl DGO DirectorateofBudget DRRP Demobilization, ReinsertionandReintegrationProgram EAGB ElectricityandWater Company ofGuinea-Bissau EU EuropeanUnion EFA EducationFor All EGRG(s) Economic Governance ReformGrant(s) EPCA EmergencyandPost-ConflictAssistance GNI GrossNationalIncome GDP Gross DomesticProduct HIPC HeavilyIndebtPoor Countries IDA InternationalDevelopmentAssociation IFAD InternationalFundfor Agriculture Development IGF GeneralFinanceInspectorate IMF InternationalMonetaryFund ISN InterimStrategyNote LICUS Low IncomeCountriesUnder Stress MDG(s) MillenniumDevelopmentGoal(s) MOF Ministryof Finance OHADA Organizationfor the Harmonizationof BusinessLaw inAfrica PAIGC AfricanPartyfor the Independenceof GuineaandCapeVerde PARAP PublicAdministration ReformSupport Project PFM Public FinancialManagement PPIAF Public-PrivateInfrastructureAdvisoryFacility PRGF PovertyReductionandGrowthFacility PRSP PovertyReductionStrategyPaper PSD Private Sector Development PSRDP Private Sector RehabilitationandDevelopmentProject SIGFIP IntegratedPublic FinancialManagementSystem SMP Staff-MonitoredProgram SPF State- andPeace-BuildingFund UNODC UnitedNations OfficeonDrugs andCrime WAEMU West-AfiicanEconomic andMonetaryUnion WFP WorldFoodProgram Vice President: Obiageli K.Ezekwesili Country Director: Habib M.Fetini SectorDirector: Sudhir Shetty Sector Manager: Antonella Bassani Task Team Leaders: Alain D'Hoore andJulien Bandiaky .. 11 FOROFFICIAL USE ONLY REPUBLIC OF GUINEA-BISSAU FIRST ECONOMIC GOVERNANCEREFORMGRANT TABLE OF CONTENTS GRANTAND PROGRAMSUMMARY .................................................................................................................. V 1 1 2 .. INTRODUCTION ............................................................................................................................................. COUNTRYCONTEXT ..................................................................................................................................... 2 A 2 B 3 C.. . BACKGROUND ................................................................................................................................................. RECENTPOLITICAL DEVELOPMENTS ............................................................................................................... RECENTECONOMIC DEVELOPMENTS ............................................................................................................... 4 D. MACROECONOMIC OUTLOOKAND DEBT SUSTAINABILITY .............................................................................. 7 3 . THE GOVERNMENT'SPROGRAM ........................................................................................................... 11 A. THECHALLENGEOFPERVASIVEPOVERTY .......................................................................................................... .................................................................................................... 11 B. THEPOVERTYREDUCTIONSTRATEGY 12 4 . BANKSUPPORTTO THE GOVERNMENT'SPROGRAM .................................................................... 16 A. LINKS THEINTERIM TO STRATEGY NOTE . ....................................................................................................... 16 B c. COLLABORATIONWITH THE IMFAND OTHERDONORS ................................................................................. 16 RELATIONSHIPTO OTHERBANKOPERATIONSAND ANALYTICAL UNDERPINNINGS D. ...................................... 17 LESSONS LEARNED ........................................................................................................................................ 18 5 . THE PROPOSEDOPERATION ................................................................................................................... 19 A. THEREFORMAGENDA ................................................................................................................................... 19 ImprovingPublic Financial Management................................................................................................. 19 Prior actions under theproposed EGRG andfollow-up reforms .............................................................. 22 Fostering Private Sector Development...................................................................................................... 23 Prior actions under theproposed EGRG andfollow-up reforms .............................................................. 25 B OPERATION DESCR~PTION .............................................................................................................................. 25 27 6 . C.. TRIGGERS FORTHE EGRGI1......................................................................................................................... OPERATIONIMPLEMENTATION ............................................................................................................ 30 A. COUNTRYO~ERSHIP................................................................................................................................... 30 B. POVERTY IMPACT ...................................................................................................................... 30 C. AND SOCIAL ENVIRONMENTALASPECTS ........................................................................................................................... 30 D 31 E.. IMPLEMENTATION, MONITORING EVALUATION AND FIDUCIARY ASPECTS ...................................................................................................................................... ..................................................................................... 31 F. GRANT ADMINISTRATION, G. DISBURSEMENT AUDITING ........................................................................... AND 32 RISKSAND RISKMITIGATION ........................................................................................................................ 33 This document has a restricted distribution and may be used by recipients only in the performance of their official duties.Its contents may not be otherwise disclosed without World Bank authorization. ... 111 ListofTables: TABLE2.1: GUINEA-BISSAU KEYMACROECONOMIC .. INDICATORS. 2004-2011 .......................................................... 4 TABLE2.2: GUINEA-BISSAU CENTRALGOVERNMENTOPERATIONS. 2004-1 1(INPERCENTOF GDP) .......................... TABLE5.1: PRIORACTIONSFORTHEPROPOSEDGRANT.............................................................................................. 6 27 TABLE5.2: TRIGGERSFORTHEEGRG11 ..................................................................................................................... 28 ListofBoxes: BOX 5.1: GOODPRACTICEPRINCIPLESONCONDITIONALITIES .................................................................................... 29 Annexes: ANNEX 1:TIMETABLEOF KEY PROCESSINGEVENTS .............................................................................................................. ................................................................................................... 35 ANNEX2: LETTEROFDEVELOPMENT POLICY 36 ANNEX3: GOVERNMENT'S POLICY MATRIX ................................................................................................................ 45 ANNEX 4: IMFRELATIONSNOTE (MAY 19, 2009) ...................................................................................................... 52 ANNEX 5: COUNTRY AT A GLANCE 55 ANNEX6 STATUS OFHIPCCOMPLETIONPOINTTRIGGERSIMPLEMENTATION . .............................................................................................................................. ............................................................................................ ........................................................... 58 ANNEX7: GUINEA-BISSAU KEY ECONOMICINDICATORS 60 ANNEX8: GUINEA-BISSAU SOCIAL INDICATORS ......................................................................................................... 62 ANNEX 9: GUINEA-BISSAUMAPNUMBER 33415 ........................................................................................................ 63 The Economic GovernanceReformGrantwas preparedby ateam ledbyAlain D'Hoore(Lead Economist. AFTP4) andJulienBandiaky(Economist. AFTP4) under the guidanceofAntonella Bassani (Sector Manager. AFTP4) andHabibM Fetini(CountryDirector.AFCF1) The core . . team includedAlain D'Hoore (TTL. AFTP4). JulienBandiaky(co.TTL. AFTP4). Charles (LEGAF). WolfgangChadab(LOAFC). Teresade Jesus S.McCue(LOADM). Zafar Farooq Coste(AFTFM). Sherri Archondo (AFTFP). LuzMeza-Bartrina andDariaGoldstein andMarinaBadrich(TACT) andGlauciaReisFerreira(ProgramAssistant. AFTP4).Peer reviewers were: IradjAlikhani (Sector Manager. AFTFP) andMariinVerhoeven(Lead Economist. PRMPS). iv REPUBLICOF GUINEA-BISSAU FIRST ECONOMIC GOVERNANCEREFORMGRANT GRANTAND PROGRAMSUMMARY Recipient: Governmentof Guinea-Bissau ImplementingAgency: Ministry of Finance FinancingData: IDA Grant SDR 5.4 million (US$8 million equivalent) OperationType: Programmatic development policy grant (lst of 2), single tranche to be disbursedupongrant effectiveness. Main policy areas: Support the implementation of the government's reform agenda in the following areas: (i)improving public financial management; and (ii) fosteringprivate sector development. Key OutcomeIndicators 2009 0 PEFA indicator on orderlinessand participation inthe annual budget process C+ PEFA indicator on classification ofthe budget C 0 Number of quarterlybudget reportsper year 2 0 PEFA indicator on effectiveness of payroll controls D+ National business laws consistent with regional WAEMU standards Yes Existence of statutory provisions that authorize case by case negotiations on grantingprivate investmentincentives No ProgramDevelopment The main developmentobjectives of the proposed grant are to: (i) promote Objectives and efficiency, transparency and accountability in the use of public resources Contributionto CAS through improved public financial management (PFM); and (ii)foster private sector development mainly through the development of a modern legal framework for private investment and improvements in the business environment. The development objectives are consistent with pillars 1 (good governance, macroeconomicstability, public administration reform), and 2 (private sector-led growth) of the government's national developmentprogramoutlined in its PRSP. Related Bankprojects: SPF Economic GovernanceSupport Grant Private Sector Rehabilitation and DevelopmentProject Development partners: IMF: EPCA program EU:PARAP EU/UN: Security SectorReformProjects V Risks and risk In the current environment of the country emerging from conflict, the mitigation proposed operation presents significant country and fiduciary risks. The Bank's active engagement in Guinea-Bissau duringthis period of recovery i s a high-riskand potentially high-gain enterprise. The specific risks that couldjeopardize the expected outcomes and benefits of the proposed grant relate to political and policy backsliding, macroeconomic performance (notably the possible impact of a deepening of the global slowdown), capacity constraints and fiduciary risks. The greatest risk, however, is failing to support the stabilization and recovery process and missing a window of opportunity for helping to stabilize a fragile country in an unstable region. The proposed operation seeks to mitigate the above risks inseveralways: 0 Reforms supported by the proposed operation have been chosen carefully in the government's own PRSP, among measures that were technically ready (having benefittedfrom extensive analytical work and proven technical assistance) and politically achievable (having benefitted from numerous consultations with stakeholders and internal governmental discussions). Most measures also built on government's longstanding commitments towards regional integration in the context o f WAEMU and OHADA, which mitigates risksof reversibility. Inaddition to public financial management reforms, the operation supports efforts to support the development o f the private sector to rekindle economic growth and achieve visible results for the population. 0 The track record of the successive governments in the last 18 months shows that policy makers are committed to restore and sustain fiscal discipline. Performance under the IMF EPCA program has been mixed, owing mainly to exogenous and political shocks; however, the Fund remains engaged under an EPCA program, and expects to initiate discussions towards a PRGF later in 2009. The government is also committed to a rapid attainment o f the HIPC completion point and to adjust the macroeconomic program to address possible exogenous shocks. Given the vulnerability to exogenous shocks and the volatile global environment, the IMFand IDA will continue to closely monitor the government's macroeconomic performance. 0 Continued hture donor engagement, in the context of the Fund- supported EPCA and a possible successor PRGF arrangement, would help support reformers' efforts to sustain fiscal consolidation, a pre-requisite for a broader normalization o f public sector performance. The operation has a focused coverage interms o f policy areas and number of reform measures, and it emphasizes building on ongoing initiatives as opposed to introducing new ones. Finally, it relies extensively on Bank and other donors instruments for vi alleviating capacity constraints. 0 The focus of the proposed grant on the improvement in fiduciary standards and continuedIDA andother donors' assistance inpublic financial management and public administration would help to improve budgetexecutionprocesses over time. OperationID: P107493 vii REPUBLICOF GUINEA-BISSAU ECONOMICGOVERNANCE REFORMGRANT 1. INTRODUCTION 1.1 This program document proposesthe first of a series of two Economic Governance Reform Grants (EGRGs) for the Republic of Guinea-Bissau. The series aims to support the government's efforts to implement the country's Poverty Reduction Strategy Paper. Specifically, the proposed one-tranche development policy grant (EGRG I) the amount of SDR5.4 million in (US$8 million equivalent) focuses on reforms that would help promote efficiency, transparency and accountability in the use of public resources (a Public Financial Management, PFM, plank), and foster private sector development by reducing the up-front costs and uncertainties of business creation and promoting a level playing field for private investors (a Private Sector Development, PSD, plank). These two planks are critical components o f PRSP pillars one (good governance, macroeconomic stability, public administration reform) and two (private sector-led growth). The grant is thus an integral part of IDA'SInterimStrategy Note (ISN) for Guinea-Bissau for FY09/10 plannedto bepresentedto the Boardtogether with this operation. 1.2 The scope of the proposedoperation is deliberately selective, covering two reform domains, in view of Guinea-Bissau's capacity constraints and political fragility. The PFM plank aims at consolidating the setting up of a modem legal framework for public financial management that is consistent with the West-African Economic and Monetary Union (WAEMU) standards, and promoting compliance with this legal framework through systems, controls and operational reforms. The PSD plank aims at consolidating the setting up of a modem legal framework for private investment-the regional harmonized texts for Business Law, a Telecommunications Law, an Investment Code, and a Public-Private Partnership Law-and improving the administrative environment for business. Both PFM and PSD reforms are needed jointly to restore confidence inpublic policy and institutions and support macroeconomic stability. These reforms would also lay the ground for accelerating growth, improving the effective use of public resources for basic service delivery and increasing the country's absorption capacity for external resources. The design of the reformprogram builds on analytical work inthese two areas and leverages activities supported by other IDA-fundedinstruments, including LICUS and SPF grant-funded operations and the IDA Private Sector Rehabilitation and Development Project (PSRDP). The operation also complements support provided by the EU, the IMF, and other donors inrelated critical areas. 1.3 Consistent with the ISN for Guinea-Bissau, the operation would provide financial support to the government whose annual debt service to the World Bank will remain considerable until attainment of the HIPC completion point. Guinea-Bissau's external debt burdenremains excessive, at about 320 percent of GDP (2008), underscoring the importance of debt relief to alleviate the debt overhang. Guinea-Bissau has made progress inmeeting the HIPC completion point triggers laid out in the HIPC decision point document (the country reached the decision point in December 2000), but, until recently, the country has been unable to sustain a satisfactory macroeconomic framework under a PRGF-supported program (see Annex 6 detailing ' The PRSP and accompanying Joint Staff Advisory Note (JSAN) were discussed by the World Bank Board of Executive Directorson May 3,2007. This was the country's first PRSP; aProgressReportis inpreparation. the status of implementation of the HIPC triggers). Good performance under a PRGF-supported program would advance the country towards the HIPC completion point. Inthis context, the I S N proposestwo development policy operations as stepping stones on the path towards the completion point (a proposed successor operation would be preparedby Fall 2009). The two operations would focus on a limited platform of critical reforms in PFM and PSD, with the second operation building on progress achieved under the first one. Since Guinea-Bissau i s in a situation of debt distress, IDA resources are provided on grant terms, per the stipulations of the grant allocation systemagreedwith IDA donors for the IDA 15 period (FY09-FY11). 2. COUNTRY CONTEXT A. BACKGROUND 2.1 Guinea-Bissau is a small country in West Africa with an estimated 1.7 million inhabitants and a GNI per capita of US$200 (in 2007 as per the Bank's Atlas methodology). The population is young-about 42 percent i s under 14 years of age-and has been growing fast, at an average rate of 2.2 percent in recent years. The large share of the young and the high population growth rate present a set of considerable challenges. Every year, the already weak education sector must accommodate an increasing number of new students, while growing cohorts o f working age fuel high unemployment rates: unemployment was estimated at 12%percent nationwide in2006, with a rate o f about 19%percent inthe capital city of Bissau. 2.2 Despite the growing urbanization rate, the economy remains largely dependent on the agriculturalsector and is vulnerableto weather fluctuations.Agriculture representedabout 56 percent of GDP in2007 andvirtually all exports, and itremains the main source of employment inrural areas. Cashewis the main cashcrop (representing98 percent of exports), with linkages to other sectors, such as labor intensive cashewprocessing, trade andtransportation. 2.3 Economic growth has been anemic since the end of the civil war in 1999. Real per capita GDP in2007 was still about one sixthbelow its 1999 level. Average total GDP growth over the period 1999-2007stood at only about 1percent per year, but this masks a highvariability, with short periods of recovery followed by sharp drops (-7 percent in 2002). Growth appears to have stabilized over the last four years, with an average real GDP growth rate around 2% percent. 2.4 Progress towards macro-economic stabilization has been uneven since the war, complicated by a difficult domestic politicalcontext, and more recently, by externalshocks. Since 1997, Guinea-Bissau has been part of the regional West African Economic and Monetary Union. A common currency and a peg to the Euro have delivered monetary and exchange rate stability over the last decade. Thus, the main macroeconomic policy instrument is fiscal. Attempts at stabilization in the early years of the decade faltered in the wake of political disturbances and weaknesses in fiscal management. Since early 2007, however, successive governments have reaffirmed the importance of bringing the budget under control to foster stability and improve the functioning of the state. Efforts have been made to mobilize revenues, seek additional donor assistance, and control spending, along with structural reforms in public financial management, notably in the areas of expenditure control, cash management, revenue collection, and administrative capacity inthe Ministryof Finance. - 2 - B. RECENT POLITICAL DEVELOPMENTS 2.5 Guinea-Bissau is a fragile state barely emerging from conflict. A brief civil war, starting inJune 1998, ended with the ouster, inMay 1999, o f President Joilo Bernard0 Vieira, who had ruledthe country for 20 years. Since then, political instability has continued to be high. There were frequent changes ingovernment inthe aftermath of the conflict, a bloodless coup in2003 and legislative elections in March 2004. Presidential elections in June 2005 brought back Mr. Vieira from exile. The government was dismissed in 2006, but the successor government was itself replaced in April 2007 by a coalition government under Prime Minister Cabi. Parliamentary elections were scheduled for April 2008 but subsequentlypostponedto November 16,2008. There was another change in government in August 2008 when President Vieira dissolved the Parliament, after the Supreme Court deemed unconstitutional the extension of the mandate of the standing Parliament untilthe upcoming elections. 2.6 Hopes that the November elections would mark a significant milestone towards stability gave way to disappointment following a failed coup attempt in late November2008, and the deaths of the army chief of staff and President Vieira in early March 2009. The parliamentary elections that took place on November 16 were deemed fair and transparent by international observers, notwithstanding complaints from former President Yalla, with a large turnout and participation from all political parties. The historic PAIGC party won with a convincing margin, garnering 67 of the Assembly's 100 seats and just under 50 percent of the popular vote. A failed coup attempt against the President from a fringe army group, just a week after the elections, was rapidly overshadowed by the formation of a new government in January 2009. However, in early March 2009, the army chief of staff died in a bomb explosion, and President Vieira was killed a few hours later. Despite these developments, constitutional procedures were respected. As provided by the Constitution, an interim President was sworn in soon thereafter, and presidential elections were announced for end-June 2008. Inthe meantime, the civilian government of Prime Minister Carlos Gomes nonetheless continues to govern and submittedits program and a draft budget to Parliament which approved it inits March-April2009 session. 2.7 Beyondthe frequent changes in government and coups lay a set of deeper problems that affect prospects for a return to politicalstability. One is the greater prominence given to ethnic questions inthe political debate and a second relates to the possible continued interference of the military in politics, both fueled in part by grievances about the deteriorating economic conditions. The recent demobilization and reinsertion program has provided a framework for dealing with some of the grievances of the military. Going forward, the authorities recognize the need for a more ambitious reformof the security sector (army, police and other bodies). Starting in 2006, UNagencies and the EUhave initiated support to a Security Sector Reformthat aims to (a) reduce the size of the military and paramilitary, from about 5,000, to about 3,000, including reducing the commander/rank-and-file ratio; (b) achieve a more socially representative composition in the military; and (c) improve housing, sanitary, and health facilities in military barracks. A successful reform of security forces may not only yield a muchneededfiscal dividend, but it may also improve prospects for dealing with the emerging role of Guinea-Bissau in the global drug traffic, whose development has reportedly beenlinkedto the country's security sector. - 3 - C. RECENT ECONOMICDEVELOPMENTS 2.8 Despitea difficultinternationalenvironmentand continuedchallenges on the political and macroeconomicpolicy fronts, economic performanceimprovedsomewhat over 2007-08. After slowing to 0.6 percent in2006, GDP growth recovered in2007 to 2% percent. A returnof normal rains led to an increase in agricultural production, in turn boosting commerce and transportation. Industrial output, which accounts for only a small share of total output, continued to fall, reflecting the direct and indirect impacts of the near collapse o f power generation capacity. Inflation accelerated to 4% percent, driven mainly by the surge ininternational food and oil prices. With the strong cashew crop and a drawdown from previous year's stocks, high export growth (about 20 percent invalue) allowed the external current account deficit (excluding official current transfers) to narrowto 8% percent of GDP in2007, from 24 percent in2006. 2.9 GDP growthis estimatedto haveacceleratedfurther in 2008, to 3.3 percent, driven by a good cashew crop and, until August 2008, a gradual normalization of the fiscal situation, allowing public sector wages to be paid at a better pace and government spending for supplies and investment to increase. With the continued rise in food and energy prices inthe first half of the year, inflation reached an average annual rate o f 10%percent for the year as a whole-one of the highest rates inthe regional monetary union. Despite strong cashew exports involume and value, a sharp increase in the import costs o f food and fuel led to a widening o f the external current account deficit to about 14percent of GDP (US$64 million), financed by official transfers and loans, and some drawdown on external reserves. Table 2.1: Guinea-Bissau Key MacroeconomicIndicators,2004-2011 -- 2004 2005 2006 2007 2008 2009 2010 2011 RealGDP growth 2.2 3.5 0.6 2.7 3.3 1.9 3.1 3.8 Inflation (annual YO) 0.8 5.6 -0.1 4.6 10.4 3.6 2.5 2.8 Broadmoneygrowth (annual %) 44.0 20.6 5.0 25.9 20.7 8.5 6.8 6.9 Fiscalbal. commitmentbasis(%GDP, incl.grants) -14.2 -11.9 -9.4 -10.2 -5.8 -7.0 -7.4 -6.9 Domesticprimary balance(% GDP) -7.2 -6.9 -7.3 -10.5 -6.1 -7.4 -5.4 -4.6 Currentacc. bal. (% GDP, incl. official transfers) 6.2 -0.6 -11.3 10.1 -1.9 -3.6 -5.7 -4.8 Currentacc. bal. (%GDP, excl. official transfers) -4.9 -8.2 -24.4 -8.6 -13.8 -15.6 -12.8 -11.6 Off foreign reserves' (months import) 7.6 8.9 7.2 10.9 9.1 10.0 11.9 13.0 Nominal stock of Externaldebt (YOGDP) 461.6 439.6 423.2 362.3 333.3 312.2 183.0 152.2 Domesticdeb? (%GDP) 29.3 28.2 27.0 25.3 23.1 19.6 17.3 Source: Ih4FandWorld Bankstaff estimates. 1/ representsthe net foreignassets in the CentralBank BCEAO inmonthsof importsof goods 2/includes debt to the bankingsystem(BCEAO andcommercialbanks), debt to the private sector, arrears on salaries, and contributionto the regionalorganizations 2.10 Fiscal performance in 2007 was mixed. Following the dismissal of the previous government, the incoming government adopted, in April, an emergency fiscal program to help contain the 2007 fiscal stance. Measures were introduced to keep spending under control, boost revenue collection and monitor government cash flow. Nonetheless, expenditures undertaken under non-regular procedures came out higher than expected, while revenues fell to about 14.6 percent of GDP (from about 19percent the previous year) due to a fall infishing license (non- tax) revenues. As a result, the domestic primary deficit widened to 10.5 percent of GDP, from - 4 - 7% percent in2006. Despite a resumption inbudget support, most o f the commercial debt coming due in 2007 had to be rescheduled, and about CFAF 4 billion (2% o f GDP) o f new (net) domestic arrears accumulated. 2.11 In early 2008, the governmentstarted a one-yearprogramunderthe IMFEmergency Post-ConflictAssistance. The program aimed to restore fiscal stability, targeting a reduction in the domestic primary deficit to just above 4percent o f GDP and a strict policy of no new accumulation o f domestic arrears. The program had a strong structural plank in the revenue and expenditure management areas on which there was broadly satisfactory implementation progress throughout the year, underlining government commitment to reforming public financial management. Revenue-enhancing measures already enacted include (i) limiting tax exemptions; (ii) improving customs collection; (iii) increasing taxes on 14 products; and (iv) enforcing the collection o f the stamp tax. Initial expenditure control measures already implemented include: (i) processing all payment orders through the Budget Directorate; (ii)restricting extra-budgetary expenditures only to emergency situations and regularizing them within 48 hours; (iii) normalizing budget execution procedures; and (iv) requiring Treasury approval for the settlement o f any purchase o f goods and services by line ministries, in line with the new WAEMU-based organic finance law. 2.12 Fiscal performance under the EPCA program was broadly satisfactory until mid- year, but weakened in the latter part of the year in the face of external and politicalshocks. At the outset, the authorities committed themselves to maintain a nominal freeze o f the wage bill for 2008, and to stay current on wage payments. However, with the sharp increase in food and energy import prices, the government took steps, in March 2008, to mitigate their impact on the population.2 The impact of these measures was not expected to be large, and the authorities took corrective actions on the spending side to ensure that fiscal targets could be met. While wage spending came out above original targets, mainly owing to recruitments o f contractuals in the education sector, some wage bill compression was achieved in relation to GDP, with a 1.2 percentage point decrease reflecting a reduction in real wages due to the lack o f adjustment o f nominal wages to high inflation. Efforts were also made to cushion the impact of the higher costs o f borrowing made necessary by delays in donor disbursements, and an upward revision in the costs o f the November elections. Overall, despite some slippage, spending envelopes remained within program targets. However, with the brief bouts of political uncertainty related to the dismissal of the Parliament and government in August and the failed coup attempt in late November, domestic revenues losses late in the year could not be offset by expenditure cuts and thus led to a higher domestic primary fiscal deficit than envisaged, estimated at about 6 percent o f GDP fiom a target o f about 5 percent o f GDP. Inturn, lower revenues than expected, together with a shortfall inbudget aid, ledto the accumulation of new arrears, mainly on wages, equivalent to about 4 monthsa3 All rice importswere temporarily exemptedfrom import taxes (except for a small 2.5 percent duty basedon a reference price for rice well belowactual marketprices) andcustomsdutieswere reducedon diesel imports. As a result, EPCAprogramtargets were missedon revenue, the primary fiscal balance, paymentsof previousyear's arrears, and new arrears accumulation. Table2.2: Guinea-Bissau CentralGovernmentOperations,2004-1 1(inpercentof GDP) 2008 2009 2010 2011 2004 2005 2006 2007 (Est) (Proj.) (Proj) (Proj) Revenue and grants 32.6 30.3 30.5 29.4 31.8 30.2 28.3 28.9 Revenue 163 17.6 19.0 14.6 168 14.0 14.9 15.5 Tax revenue 7.9 11.5 11.1 10.3 10.2 8.9 9.0 9.1 Nontax revenue 8.4 6.1 7.8 4.3 6.7 5.1 5.9 6.4 Grants I 6 3 12.7 11.5 14.9 14.9 162 13.4 13.4 Ofwhich: Budget support 1/ 8.0 3.2 6.2 9.3 8.0 8.9 5.8 5.5 Project grants 8.3 9.5 5.4 5.5 7.0 1.3 7.6 1.9 Total expenditure 46.7 42.1 40.0 39.6 37.6 37.2 35.8 35.8 Current expenditure 27.9 27.7 28.1 26.3 24.3 23.4 21.9 21.6 Wages and salaries 10.7 13.4 12.4 12.0 10.8 10.4 10.2 9.9 Goods and services 3.0 4.8 4.8 3.4 3.0 3.7 3.4 3.1 Transfers 3.3 3.8 5.0 5.2 5.3 5.1 4.4 4.3 Other currentexpenditures 5.1 1.5 2.9 3.3 2.8 1.9 2.0 1.9 Scheduledinterest 5.8 4.2 3.0 2.5 2.4 2.3 1.9 1.8 Capital expenditure and net lending 18.8 14.5 11.9 13.3 13.2 13.7 13.9 14.2 Publicinvestmentprogram 10.5 14.1 10.5 12.8 12.0 12.2. 12.6 12.9 Domesticallyfinanced 0.3 0.7 0.2 0.7 0.6 0.4 0.4 0.4 Foreignfinanced 10.2 13.4 10.3 12.1 11.4 11.8 12.3 12.6 Other capitalexpenditure 8.3 0.4 1.4 0.5 1.2 1.6 1.3 1.2 Net lending 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Overall balance, including grants (commitment) -14.2 -11.9 -21.o -9.4 -10.2 -5.8 -7.0 -7.4 -6.9 Overall balance, excludinggrants (commitment) -30.5 -24.6 -25.0 -20.7 -23.1 -20.8 -20.2 Domestic primarybalance -7.2 -6.9 -7.3 -10.5 -6.1 -7.4 -5.4 -4.6 Net domesticarrears 1.o -0.1 3.3 2.3 -2.9 -0.7 0.0 0.0 Externalinterestarrears currentyear 3.0 2.4 1.9 1.5 1.4 1.5 0.0 0.0 Float and statistical discrepancies 1.3 -0.7 -0.4 -0.6 0.1 0.0 0.0 0.0 Overall balance, including grants (cash) -8.8 -10.2 -4.5 -7.0 -7.2 -6.2 -7.4 -6.9 Financing 8.8 10.2 4.5 7.0 7.2 6.2 7.4 6.9 Domesticfinancing -1.1 5.2 -0.8 4.8 2.6 -1.1 -1.0 -0.9 Bank financing -0.8 5.1 0.0 5.4 2.6 -1.1 -1.0 -0.9 Nonbank financing -0.3 0.1 -0.8 -0.6 0.0 0.0 0.0 0.0 Foreignfinancing (net) 9.9 4.3 5.6 5.9 4.6 5.I 6.8 7.4 Disbursements 9.1 3.9 5.3 6.4 5.5 5.5 5.5 5.5 Amortization (scheduled) -12.5 -11.3 -8.1 -6.1 -5.6 -5.7 -63.3 -4.4 External arrears 10.3 8.4 5.2 4.2 3.9 3.9 0.0 0.0 Debtrelief 3.0 3.3 3.2 2.0 0.7 1.4 64.5 6.3 Grossfinancinggap (+ =financingneeds) 0.0 0.0 0.0 0.0 0.0 2.2 1.7 0.3 Additional financing 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Residualfinancinggap 0.0 0.0 0.0 0.0 0.0 2.2 1.7 0.3 Source: IMF andWorld Bank staff estimates. - 6 - 2.13 Besides domestic arrears accumulation,the deficit was financed by a combinationof budget support, interim debt relief, arrears on external debt service and the roll-over of domestic debt obligations. Guinea-Bissau currently benefits fiom interim debt relief under the HIPC initiative from IDA and the AfDB (about % percent of GDP), but it continues to accumulate new external debt arrears (of about US$20 million in2008, or 3%percent of GDP) towards other, mainly bilateral creditors. Total budget support, originally projected for 2008 at about 17 percent of GDP, came out at 8 per~ent.~ 2.14 The financialsector has recoveredinrecentyears, but remainsunderdeveloped. With the opening of three new banks(all foreign private) inrecent years, bank deposits and credit have increased. The fairly high rate of growth o f money over 2004-08 reflects mainly a continued process of remonetization. Nonetheless, financial intermediation remains embryonic-total domestic credit at end-2008 i s equal to only 6%percent of GDP, the lowest in the WAEMU region. A large informal sector, lack of proper financial accounting in most firms, limited collateral, and banks only located in the capital Bissau are key obstacles to expanding bank lending. By the same token, the local banking sector i s largely insulated from the global financial crisis, though difficulties at the head offices (mostly regional) of foreign banks could undermine confidence of depositors. D. MACROECONOMIC OUTLOOKAND DEBT SUSTAINABILITY 2.15 Real GDP growth in 2009 is expected to slow to about 2 percent under the current global economic context, assuming no further major politicaldisturbances? Growth will be supported by an expansion of food crops and some gains in services as government wage and supplier payments normalize. The global slowdown is expected to negatively impact Guinea- Bissau mainly through export values and remittances. A third channel-a potential decline in donor commitments-is difficult to quantify at this time. Export prices for cashew nuts, the main export crop, are expected to be almost 30 percent lower than in 2008. Remittances, which are currently equivalent to about 7 percent of GDP, are expectedto decline by more than 10 percent. These developments will constrain real GDP growth-growth projections for 2009 were revised fiom 3.6 percent-and negatively impact the poor in rural areas, as well as put pressure on the budget and current account. Partially offsetting these developments, sharply lower food and fuel prices should provide a boost and contribute to lower inflation (about 3% percent). As a result also, the external current account deficit (excluding official transfers) is expected to widen only marginally. 2.16 Under this difficult environment, fiscal policy will be even more challenging but the authoritieshave reaffirmedtheir commitmentto bringthe budgetunder controland pursue reforms in public financial management. In early 2009, the new government immediately reaffirmed its commitment to sound macroeconomic management and requested further support Projecteddonor disbursements included funds from the EU, the AtDB, WAEMU, South Africa, Spain, Portugal, and France; debt relief by IDA and the IMF's EPCA and a possible IMF External Shock Facility disbursement. An IDA budget support operationwas initially slated for 2008, but the authorities consideredthat the catalytic effects of IDA support would be enhanced inthe context of aPRGF-supportedprogram. 5 It is difficult to assess the extent of the economic fallout from the early March2009 events. Internationalobservers in Bissau do not believe that it should be large if the process of political normalization, including presidentialelections, continues its course. - 7 - under the IMF's EPCAa6 The EPCA-supported economic program focuses on meeting current year expenditures with available resources and avoiding new budgetary arrears. The domestic primary fiscal deficit is expected to widen to 7.4percent of GDP, from 6percent in 2008. Revenues, hardhit by the sharp expected decline incashew nuts prices and lower imports values, are expected to decline by about 3 percentage points of GDP, even after accounting for the authorities' plans to expand the tax base of current taxes, strengthen customs administration and improve the administration of fishing licenses. The wage bill will be frozen again in nominal terms, which together with continued efforts to control wage payments, should yield a small decline in relation to GDP. Tighter budgetary controls, made possible with the use of the new budget execution system (see below) and new surrender rules of "restitutions" (administrative revenues collected and partially retained by the originating administrations), should allow for a small decline in non-wage spending and its reorientation towards priority sectors, such as education and health. While the budget aims at avoiding the accumulation o f new domestic arrears, there are no resources in the budget to cover outstanding arrears, whose repayment will need to be handled on a medium-term schedule depending on available funding, including from donors. The cash position i s thus expected to remain tight, and the ability o f the authorities to sustain a fiscal stance within the bounds of their fiscal program will again require tight control of spending envelopes, which they are set to deliver, as well as timely budget support. 2.17 Going forward, the medium-term macroeconomic outlook is moderately favorable, assumingthat the negative impactsof the global crisis do not markedly intensify. Under the baseline medium-termscenario, GDP growth over 2010-12 could accelerateto the range o f 3% to 4percent per year under the fiscal and external support profile of the last two years and the assumption that domestic political stability gains traction. Political stabilization remains the pre- eminent factor behind evolving growth prospects for the foreseeable future. There is, however, considerable uncertainty over other factors likely to affect economic performance, and even this unambitious growth outlook will be highly contingent on the global recession having not deepened, fiscal stabilization being sustained and further donor support materializing at a steady pace. A stabilization of cashew nuts prices and continued high prices for rice above their recent trend levels, along with recent efforts to improve food security, would support continued growth in agriculture. Ifpolitical and fiscal stabilization take hold, even gradual gains ininvestor and donor confidence could translate into some moderate momentum inprivate and public investmentwhich could drive agriculture diversification, some agro-industrial rebound and construction. Modest improvement in performance inthe electricity and port sector, for example, could support higher growth, in view o f the low starting point. With Guinea-Bissau's participation in the regional monetary union, medium-term inflation rates should return to the regional average-about 3 percent per year by 2011-, provided large food andenergy price increases do not re-emerge. 2.18 The baseline medium-term fiscal scenario assumes conservatively a continuation of recent trends. Revenues would recover some lost ground, and current spending would be contained, with a combination of improved controls, a modest decrease in the weight of civil service wages inGDP, and cuts inthe interest costs of domestic and foreign debt. Eventhis fiscal consolidation scenario assumes continued engagement of donors at ahigh level. Project grants and loans equivalent to about 13 percent of GDP (about US$55 million for 2009) would be requiredto finance a minimal level of capital expenditures. Additional grant resources would be needed to The requestfor a disbursementof aboutUS$2.6millionunderthe EPCA will be submittedto the IMFBoardon a timetablethat runsinparallelto the proposedIDA operation. - 8 - increase priority spending on social sectors, infrastructure,, and capacity building to the levels envisaged inthe government's PRSP. Budget support would need to remain at a level of at least 5 percent of GDP over the next 3 years to cover the domestic primary deficit. With sustained policy reform implementation, Guinea-Bissau could also receive comprehensive debt relief under the HIPC initiative andMDRI. 2.19 In summary, Guinea-Bissau's macroeconomicframework, which forms the basis for its EPCA support from the IMF, provides an adequate basis for the proposed operation. However, criticalto reaching even its modest goals, policy implementation will needto continue to improve. This will require sustained commitment to the goals of fiscal stabilization and reforms, as well as efforts toward continued capacity building. Revenueenhancing efforts underthe current fiscal stabilization program include measures to strengthen customs controls and valuation (with the installation of the ASYCUDA++ customs system and the recruitment of a pre-shipment inspection agent), a tax arrears collection drive, and stepped-up enforcement actions on fishing license revenues. Measures plannedby the authorities on the expendituremanagement fronts are detailed insection 5 below and inthe government's policy matrix inAnnex 3. 2.20 There is scope for faster progresson the fiscal front over the medium-term,but itwill require difficult internal agreements on public administration reform and downsizing the security forces. A lasting solution to Guinea-Bissau's fiscal problems will require decisive, sustained progress on containment of the wage bill. The public sector wage bill stood at 11percent of GDP and 65 percent o f domestic revenues in2008 (down from 82 percent in2007). The large size of the wage bill limits fiscal space to finance critical non-wage expenditures and to absorb revenue shocks. Shortfalls in domestic revenues or donor support may lead to episodes of accumulation of wage arrears, threatening social peace. 2.21 A critical component of the authorities' medium-termreform agenda is their public administrationreformprogram. Though the authorities are well aware that the size and cost of their civil service are neither financially sustainable nor conducive to the development of an efficient public administration, reforms in this area had stalled in recent years in the face of political and macroeconomic instability. The authorities intend to revive this agenda. Their dual objective is to modernize the public administration and reduce its size, though specific objectives andmodalities remainto be developed. Inthe authorities' preliminary thinking, staffing reduction could be achieved by different means, including strict enforcement of retirement rules, voluntary departures supported by cash packages and retrainingheinsertion programs, well targeted involuntary separations, privatizationof functions and services, and attrition. However, given the country's fragile political and social environment, the authorities do not believe that this objective will be achievable, and politically or socially acceptable, without financial support from donors to their retrenchment program and a gradual implementation schedule. At the same time, they are aware that donor support will require a coherent strategy and determined implementation backed by full political support. One of the goals of the design of a public administration strategy will be to develop an internal consensus, as well as an articulated action plan, as a basis for further progress. The EU, together with the UN, AfDB and bilateral donors are making considerable efforts to assist the government in reforming the public administration. The EU Program to support Public Administration Reform (PARAP) has been assigned the task of mapping a multi- year strategy that would address performance and incentive issues, as well as supporting interventions such as training. Initial Bank support to the PARAP team will includeanalytical and - 9 - advisory support under the recently launched Public Expenditure Management and Financial Accountability Review. 2.22 Moreover, the 2007 PER Update' also noted that nearly half the public sector wage bill goes to the security sector (military, gendarmerie and police), heightening the political sensitivity of fiscal tensions.* There is a broad consensus among observersthat, unless the issue is addressed, the security sector will remain a critical source of political instability. However, the ability of individual governments to act will remain constraineduntil an internal agreement can be reachedwith the military and other forces on the needfor reform. The authorities and donors have started to implement some actions in support of the security sector and peace building in the country. In particular, a census of the armed forces was conducted in 2008 which has already allowed the identification of savings on the military payroll. On February 12, 2008, the EU announced the establishment of a permanent mission in support of security sector reform in Guinea-Bissau. The overall objective of this initiative is to provide advice and assistance to the authorities on reform of the security sector, and help implementthe reforms, in close cooperation withEUmembers, andother international andbilateral actors. A key specific objective is to make operational the national security strategy by assisting in downsizing and restructuring the armed forces and security forces. There is about Euro 6 million available to fundthe mission. Inaddition, the EUis providing about Euro 8 million to fund demobilization. Parallel to the EUinitiative, the UN Peace-Building Commission has created a commission for Guinea-Bissau headed by the BrazilianAmbassador to the UN. A first mission visited the country inApril 2008 to explore areas for quick-win activities and medium-term peace-building activities to be financed through the Peace-Building Fund. 2.23 Downside risks to the macroeconomicoutlook are primarily political and economic. Political instability could flare up again and commitment to fiscal stabilization and to reforms, which has been demonstrated in the recent past, could come under pressureeither from within or from outside the government's political base, especially if tangible benefits of reforms do not become apparentto the population, or ifcosts of reformto narrow constituenciesbecometoo high. 2.24 A deepening of the global slowdown would also negatively affect Guinea-Bissau's economy, especiallyas its fragile stabilization relies heavilyon highsustained donor support. Specifically, a deeper-than-expected drop inthe world price for cashew nut, Guinea-Bissau's sole commodity export, could stifle the nascent recovery in agriculture. Lower food and fuel prices could partly offset these effects on the economy at large-the inflationary impact of recent price increases was particularly high in Guinea-Bissau, compared to other CFA zone countries. A deeper than expected fall in remittances would also weigh heavily on the economy. The most significant risk for Guinea-Bissau, however, would be a severe drying up of foreign aid over the mediumterm. 2.25 On the upside, medium- to long-termgrowth, investment and exports could receivea significantboost from possible miningventures to exploit the country's bauxite and phosphate resources. Angola Bauxite was reported to be considering an investment of close to 'World Bank (AFTP4): Guinea-BissauPublic ExpenditureUpdate. EnhancingGrowth and FinancialAdjustmentthrough Civil *ServiceReform.Maypolitical 2007. While a number of andsocialfactors may be at play, economic factors affectingthe troops appearto havebeenamajor source of discontent despite the relatively large proportionof the security sector in the public sector wage bill. Issues include unresolved pension payments and other compensations for military personnel (especially those who are retired); and squalid living conditionsfacing presentmembers ofthe armed forces. - 10- US$300 million in developing bauxite deposits in Guinea-Bissau, which would require the development of a deepwater port and a railway line linking the mineto the port. Phosphatemining also offers serious prospects for expansion of the mining sector, but requires equally large infrastructure de~elopment.~The current scenario does not include these possible ventures, given the limited information on the scope for these projects to go forward, the large infrastructure prerequisites, and the difficult global context. Evenwhen conditions improve, there will remain a need to identify and implement structural and institutional reforms to ensure that the development benefits ofmining projects are maximized. 2.26 Guinea-Bissau is currently in a situation of debt distress. At end-2008, Guinea- Bissau's stock of external debt amountedto US$1.4 billion, of which US$392 million were arrears. The external debt to GDP ratio has decreased over the last five years from 475 percent in2003 to about 330 percent in2008, reflecting mainly a low rate of new debt accumulation against nominal GDP growth. The latest Debt Sustainability Analysis (DSA)" points to a situation of continued debt distress that could only deepen with borrowing on non-concessional terms, exchange rate depreciation and lower growth of exports. Overall, there has been no significant qualitative change in this severe external debt distress situation since 2007, while domestic debt ratios have been deteriorating owing to the accumulation of new domestic arrears and increased borrowing from regional financial institutions. The cash flow impact of the large external debt on the budget has been limited, as Guinea-Bissau benefits from interim relief from IDA and the African Development Bank, and has continued to accumulate external arrears on its bilateral debt. The huge debt overhang remains a severe obstacle on the path to fiscal normalization and clouds prospects for an acceleration of external private investment. Finally, a resolution of the debt problem would enhance the external and domestic credibility of the authorities' economic management. 2.27 Chances of a permanent solution to debt distress will be enhanced by the country reaching the HIPC Completion Point. Since reaching the Decision Point under the HIPC initiative in December 2000, the authorities have made good progress in reaching Completion Point triggers (see Annex 6) and, with the approval of the EPCA program, have committed to maintaining a satisfactory macroeconomic performance. The authorities have requested support underthe IMF's PRGF, which, ifperformance is satisfactory, would pave the way for reaching the Completion Point, possibly by 2010. Failing this, Guinea-Bissau would be expected to remain in the current situation o f debt distress for the mediumterm. 3. THE GOVERNMENT'S PROGRAM A. THECHALLENGEOFPERVASIVEPOVERTY 3.1 The impactof the 1998-99 conflict,subsequentpoliticalinstability and poor economic performanceover the lastfew years have contributedto high rates of poverty. Guinea-Bissau i s one of the world's poorest countries. It ranked 171st out of 179 countries on the 2008 UNDP HumanDevelopment Index and poverty is widespread, with a higher incidence inrural areas. At the household level, 66 percent of the population was living in poverty in 2006, with 22 percent The government recently cancelled a concession agreement with Guinea-Bissau Phosphate Mining, affiliate of a Swiss company, for the exploitationofthe Farimphosphatedeposit, claimingnumerousbreachesof contract. lo Guinea-Bissau,Joint IMF-WorldBank Debt SustainabilityAnalysis, June 2009. - 11- living in extreme poverty."12 About 80 percent of the poor live in rural areas and practice subsistence agriculture. Poverty remains lower in urban than in rural areas, but urban households are becoming more vulnerable to particular shocks, such as the recent food and energy price increases, because, unlike rural populations, they cannot survive on subsistence agriculture. Many urbanhouseholds live for partsofthe year on only one meal per day -aphenomenonreferredto in Guinea-Bissau as urn tivo (the "one shot"). According to results from the 2005 IPSA survey, more than 90 percent ofurbanfamilies live essentially from activities inthe informalsector, or of amix of informal and formal, mainly public sector, activities. 3.2 The country is not likely to reach any of the MDGs by 2015 at current trends and without significant donor support. Poverty in Guinea-Bissau is characterized by poor quality and access to health services. Life expectancy was estimated at 47 years in 2007 (down from 55 years in 1995) with the decrease being attributed to higher infant mortality and the toll of HIV/AIDS. Households headedby older people, the urbanunemployed, and farmers ingeneral are particularly vulnerable. Social groups such as street children, beggars, widows, the handicapped, ex-combatants and people living with HIV/AIDS often survive in a calamitous situation. Nearly 88 percent of the heads of poor households have not completed primary education and the gross primary enrollment of children inpoor households is less thanthe national averages (85 percent for males and 45 percent for females). The illiteracy rate of women is higher than that of men (at 85 percent compared to 56 percent for men). Social indicators, especially child and maternal mortality, are worse inrural than urbanareas. B. THEPOVERTY REDUCTIONSTRATEGY 3.3 The preparationof the PRSP,initiatedin2001 but repeatedlydelayed due to political instability and weak technical capacity, was completed in September 2006. Following parliamentary elections in 2003, a first full draft of the PRSP was prepared in 2004 under a transition government. The draft PRSP was subsequently revised in 2005 and finalized in 2006. While the implementation of the PRSP was initially designed to cover the period 2006-2008, political events and changes in government have led the implementation period to be extendedto 2010. 3.4 The PRSP was prepared within a participatory process and built on grassroots consultations at the national level that involved all segments of society. The consultative process included three levels of participation: (i) a political and institutional level, engaging the government and its development partners; (ii) technical level, engaging national public and a private sector leaders as well as civil society leaders; and (iii) popular and community level a based on consultation with stakeholders inrural and urbanareas. 3.5 The PRSP reflects the government's long-term vision "Djitu Ten"13 which aims at: (i)increasing per capita income; (ii) gradually reducing the incidence o f poverty; (iii) improving access to basic education by increasing gross enrollment rates to nearly 100 percent by 2015; and (iv) reducing infant mortality rates to less than 80 deaths per thousand by 2015 (from about 120 in I'World Bank: Integrated Poverty and Social Assessment (IPSA), Vol. 11, Conflict, Livelihoods and Poverty in Guinea-Bissau; May 2006. I'The incidence of poverty was measuredby the headcount poverty index. The poor represent the share of the populationwith levels ofconsumptionper equivalent adult below apurchasingpower parity adjustedat US$2per day. l3"Djitu ten" is a National Long-term Perspective Study prepared by Government and stakeholders with the support of the UnitedNations' African Futures Program in 1996. - 12- 2005). The strategy has four pillars: (i)strengthening governance, modernizing the public administration and ensuring macroeconomic stability; (ii) enhancing economic growth and job creation; (iii) increasing access to social services and basic infrastructure; and (iv) improving the livingconditions ofvulnerable groups. 3.6 The first pillar emphasizes the continued implementationof sound economic policies to attain macroeconomic stability and foster institutional development through good governance and the participation of all stakeholders in the fight against poverty. Inthis area, the PRSP focuses on improving efficiency inthe public administration and punishingmisconduct and graft. Key measures include improved public financial management, increased citizen participation in public affairs, and the reform o f the civil service. A stable macro-economy will also underpin the sectoral and other more specific interventions. In order to foster local development, a legal framework for decentralization will be created. Similarly, improving political and institutional stability will require establishing a framework conducive to enhanced rule o f law. This will involve the practice of good governance and the submission of all national stakeholders, particularly the armed forces, to the Constitution and the laws governing the functioning of the State. In this context, the PRSP highlights the importance of reform of the security andjustice sectors. 3.7 The second pillar aims at accelerating economic growth and job creation. The key elements in the government's program under this pillar include four broad objectives: (i) improving the business environment; (ii)reforming the judicial system; (iii)promoting the productive sectors; and (iv) basic infrastructure development, particularly in the area of transportation and communication. These are to be achieved through: (i) support to the agricultural sector, through the provision of inputs, machinery, extension services and training; (ii)investments in infrastructure for power, roads and the port; (iii) improvements in the investment climate including through the reform of the legal framework and better access to credit and micro-finance programs; and (iv) divestiture ofpublic enterprises. 3.8 The thirdpillar underscores the pointthat povertyreductionmust beunderpinnedby investment in human resources and equitable access to basic services. Investments in the health and education o f the population and the delivery o f basic services will provide the basis for sustained poverty reduction by enhancing the capacities of the poor and reducing their vulnerability. 3.9 The fourth pillar aims at improving the living conditions of vulnerable groups, reducing the disparities betweenthe sexes and fostering social equality. The key elements of the government's program in this pillar include: (i)breaking the poverty circle by assisting the most vulnerable segments of society through direct transfers; (ii) assisting people with AIDS, AIDS orphans, persons suffering from disabilities andthe elderly; and (iii)focus on issuesthat limit the a full participation of women in economic development, notably illiteracy, lack of professional training, early marriage and limited access to reproductive health care. Finally, the PRSP highlights the need to pursue the removal of landmines, particularly in land and fishing zones where the poorest populations engageintheir primary subsistenceactivities. -13 - 3.10 The Joint StaffAdvisory Note of the PRSPI4notedthat the strategy is an encouraging first step toward addressing Guinea-Bissau's medium-term development challenges. The JSAN, taking stock of developments as of mid-2007, noted the long delays in finalizing the PRSP itself, and hence the limited scope for its effective implementation. Nonetheless, it noted that the authorities made progress in updating and strengthening their poverty reduction strategy since the I-PRSP was prepared in 2000. Key achievements include: (1) an update of the poverty profile; (2) good progress on divestiture of public enterprises; (3) the adoption and implementation of a strategic framework to fight HIV/AIDS; (4) the Strengthening of treasury management, public procurement and monitoring of public expenditures; and (5) improvements in the costing, monitoringandthe participatory approachof the poverty reduction strategy. 3.11 The JSAN also identifiedthe needfor the authoritiesto better prioritizeactivitiesand programsplannedunder each strategic pillar to ensure adequate sequencing andconsistency with available resources. Other priority areas for the authorities to strengthenthe implementation of the PRSP are: (i)clearly identifying constraints to growth, while defining specific policies and programs to address them; (ii)developing a detailed and sequenced strategy to improve governance, including in the emerging mining activities; (iii) strengthening the monitoring and evaluation framework, including by developing poverty statistics that are comparable over time and strengthening the capacity to collect and analyze data. A full assessment of performance under the first full year of implementation (2008) is currently being conducted by the authorities andthe first ProgressReport is expected to becompleted inmid-2009. 3.12 In February 2009, the new Government developed an ambitious Program together with the 2009 Budget which were approved by the Parliament in its March-April 2009 session. The program, which is consistent with the PRSP, aims to accelerate reforms around two programmatic axes, namely: (a) good governance, competent and transparent management, andthe fight against impunity and corruption; and (b) economy and development. A number o f strategic priorities have emerged, in addition to the pursuit of reforms of the public administration and security sector outlined above (and further detailed in the ISN) and the PFM and PSD reforms detailed in Section 5 below, and they include infrastructure-especially energy and the port-, agriculture, and social sectors. 3-13 Already underdevelopedbeforethe conflict, infrastructureis in a dire situation. Prior to the conflict, Guinea-Bissau's infrastructure was already one o f the least developed in Africa. The conflict caused its further deterioration (half the telephone lines were damaged). Poor management and lack of maintenancehave further eroded available capacity. The port of Bissau offers a striking example. The number of boats that can unload is limitedby silt, and sunken boats prevent the access of ships to the port, other than during high tide. The ensuing cost on other sectors of the economy are substantial-for example, a study of the cashew sector pointed out that the high direct and indirect costs of port operations act as the largest tax on the prices farmers get for their products. Installed electricity capacity has been brought back to 6 MW, but this i s only about half of the estimated capacity needed to service demandinBissau alone, of which only half i s operating, because of EAGB's inabilityto finance fuel. Donors would need to play an important role in funding infrastructure rehabilitation and expansion and supporting improvements in capacity building. In some specific areas such as electricity or port infrastructure and management, the government's options include public-private partnerships, which could bring l4 Joint Staff Advisory Note, Report No. 37926-GUB, April 17,2007. - 14- finding along with technical and managerial expertise. The main challenge with this approach will be to meet three conditions: (i)give confidence to, andthus attract, potential private partners, (ii)mitigate quasi-fiscal risks on the government and ensure that the restoration o f infrastructure is in line with its capacity to pay for maintenance and operations, and (iii) attuned to the limited be regulatory capacity that could realistically be built ina short time inthe country. 3.14 Despite serious challenges, agriculture has remained the most resilient among the economic sectors. Agriculture has been, with transport and communication, one o f the few sectors that have not experienced an overall contraction over the entire post-conflict period. As a result, the economy i s now even more predominantly agricultural than it was in the past. This said, agriculture productivity remains low, with a prevalence o f low-yield techniques, the lack o f small farm equipment, and a poorly functioning supply system for seeds, fertilizer and pesticides. Markets are poorly integrated. Public agricultural institutions (e.g. agricultural research and extension) are weak, while in several sub-sectors, such as rice, there is a lack of a well-defined policy.l5 These constraints, along with infiastructure deficits, hinder growth for the economic sector that employs or feeds the largest number o f poor people. 3.15 Consistent with the low poverty indicators, access to, and quality of, basic social services in Guinea-Bissau remain low. Recent developments in education and health paint a picture of limited achievements, severe resource shortages, and poor management. In education, Guinea-Bissau has substantially expanded the coverage o f its primary education system but high repetition and drop out rates and low quality o f education have resulted in low completion rates. At the same time, coverage and quality inthe secondary andtechnical training have not kept pace, resulting in limited gains inthe average skill level of the labor force. Inhealth, access to quality health care is limited and inequitable-on average, close to two thirds o f the population does not have access to health care. Fightingmalaria-the key public health problem in Guinea-Bissau- and vaccinating children and are among the most important actions likely to improve health outcomes. The government's malaria action plan has shown good results, but vaccination results have been mixed, with considerable fluctuations in coverage over recent years. Poor results in social service delivery in Guinea-Bissau reflect in large part public resource shortages and weak management. Resources shortages themselves emanate fiom a combination o f aggregate fiscal tightness, insufficient allocations to the sectors, and weak execution.16 New wage arrears in2008 have resulted in numerous strikes from teachers, reducing the number o f effective days o f instruction well below appropriate norms. Overall, a necessary condition for tangible progress in health and education outcomes remains an expansion o f government and donor resources, and sharp improvement in their management, including by the development o f effective monitoring andevaluationsystems. Moreover, some policy experiments, such as public intervention in cashew marketing and pricing in 2006, have hurt sector performance, which has improvedwhen poor policy choices were reversedin2007. l6 Currentpublic spendinginsocial sectors--education, health, social services, andpensions-in 2007 representedonly about 26 percentoftotal government current spending, with donors contributingan equivalent amount. -1 5 - 4. BANK SUPPORTTO THE GOVERNMENT'S PROGRAM A. LINKS THEINTERIMSTRATEGYNOTE TO 4.1 The InterimStrategyNote(ISN), presentedto the Boardtogetherwith this operation, sets out the Bank Group's support to the government's reform program for the period FY09-10. The ISN aims at helping the Government 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. Its goals are aligned with the 2006 poverty reduction strategy, the DENARP, and the Government Program, and articulated around two pillars: (i) strengthening economic management and laying the foundations for growth in existing productive sectors, and (ii)increasing access to and quality of basic services. Capacity development will be a cross cutting theme, and building partnershipsa guiding principle. The I S N foresees the use o f this and the follow-on development policy operation, investment projects and trust fund resources, and the undertaking of analytical and advisory activities. 4.2 By contributingdirectly or indirectlyto the first two pillarsof the PRSP,the proposed operation is an integralpart of the Bank Group's strategy and is seen as an important step in helping stabilize the economic situation inGuinea-Bissau, support economic recovery and pavethe way for achieving the HIPC completion point. In particular, the EGRG supports the core objectives of the I S N o f strengthening economic management with its focus on improving governance, transparency and efficiency in public expenditure management, and that of laying foundations for improvements inproductive sector by advancing legal and administrative reforms aimed at fostering private sector development. B. COLLABORATION WITH THE IMFAND OTHER DONORS 4.3 The staffs of the IDA andthe IMFcollaborateclosely on Guinea-Bissau. IDAtypically takes the lead on sectoral issues, including private sector development, while the IMF takes the lead on macroeconomic policies. Both institutions support structural reforms in public finance, and staffs collaborate in identifying and supporting reforms in budget systems, accounting and treasury. The specific PFM reforms supported by the proposed operation are fully consistent with IMFpolicy andtechnical advice. Moreover, efforts are madeto ensure complementarities between Fund and Bank supported reforms: first, the Fundtakes the lead intax 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 implementtheir PRSP. The staffs also intendto closely collaborate on the preparation of a structural agenda that could be supported by both institutions in the context of a three-year program under the Fund's PRGF, and inthe preparation ofthe HIPC Completion Point and DSA. 4.4 As indicated above, the EU is supporting the implementationof the security sector reform and is funding a technical assistance project for the reform of the public administration. On the former, the EUis funding the establishment of a permanentmission and army downsizing. The UN-Peace Building Commission i s providing complementary support. Also, the EU is supporting the authorities in designing a comprehensive multi-year reform action planto reform andmodernize the public administration andreduce its size. A project unitwas put - 16- inplace in2008. With regardto downsizing, the authorities have selectedthree ministriesto pilot the reforms - the Ministry of Finance, the Ministry of Civil Service and the Ministry of Public Administration Reform. The project will also fund a bio-metric census of the civil service, functional reviews o f departments, and activities aimed at easing the reintegration of retrenched workers inthe private sector. 4.5 Engagement from other donors is evolving towards a more harmonized approach. 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 addition to the EU, project or budget support has beenprovided by UNorganizations, regional economic organizations (WAEMU, the BCEAO) and development banks (African Development Bank, West African Development Bank) and bilateral donors, includingPortugal, Spain andFrance. All donors currently aligntheir budget support on the policy platform and performance assessments of the EPCA-supported program. A framework agreement among donors providing budget support has been set up to ensure better coordination and information sharing. The recently launched PEMFAR, a joint undertaking with the African Development Bank, will also provide an important opportunity for enhancing collaboration with other donors aligning donor technical assistance on the country's key PFM and public administration reformpriorities. c. RELATIONSHIP TO OTHERBANKOPERATIONSAND ANALYTICALUNDERPINNINGS 4.6 The proposed development policy grant builds on and complements other Bank capacitybuildingand investmentoperations. 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; 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$1.2 million LICUS grant which closed inDecember 2008 and an ongoing US$l.7 million SPF grant approved inDecember 2008. The operation also complements, in its development objectives, a multi-sector infrastructure project, funding the restoration of a minimumo f critical investment requirements intransport and energy infrastructure. The proposed DPO focuses on reforms that would leverage actions supported through technical and financial assistance provided by these other instruments and reinforce commitment to the reform agenda. 4.7 A number of analytical studies provide the basis for the design of the proposed operation. They include core diagnostic assessments by the World Bank incollaboration with the government and other donors as well as various studies conducted by the government with donor support. The studies include(i) Public Expenditure Reviews(2005 and 2006) and the 2006 CFAA- CPAR which document fiscal policy issues as well as the numerous weaknesses in PFM, and provide a range of recommendations on the legal framework and operational approaches for reforms, on which the proposed operation has drawn extensively, including the adoption of WAEMU directives on PFM innational law and the installation of an integrated PFM system; and (ii)various FIAS studies and project documents and aide-memoire o f the IDA-financed private - 17- sector PSRD Project, which have provided analytical background and specific recommendations on business environment reforms, the investment code and other PSD reforms. Project-related studies, as well as early input from a plannedInvestment Climate Assessment, have all confirmed the crucial roles of political and macroeconomic instability, business environment and infrastructure deficits as impedimentsto private investment. A Diagnostic Trade Integration Study also highlighted red tape and related petty corruption as a barrier to private activity and investment. In addition, a recent EU-supported PEFA and the Public Expenditure Management and Financial Accountability Review, recently launched, will provide: (i) updated diagnostic an analysis of the current strengths and weaknesses in the country's public financial management system and practices, includingpublic procurement; (ii) input for the design andpreparation ofthe next phase of the PFM and public procurement reform strategy; and (iii)a rating of all key components of the PFM system against international benchmarks which can be used to judge future progress of PFM reforms. D. LESSONSLEARNED 4.8 The design of the proposed operation has benefitedfrom a number of lessons drawn from guidance from Operations Policy and Country Services (OPCS) and the implementation of a LICUS grant on PFM reforms, the PSRD project and the Economic Rehabilitation and Recovery Credit, a quick disbursing credit o f US$25 million that supported the implementation of Guinea- Bissau's National Reconciliation and Reconstruction Program and which closed in June 2004. Key lessonsare highlighted below: Experience has shown that the potential benefits of development policy operations during fragile transitions often justify the risks of engagementI7(OPCS, 2005). In some cases, the international community reaches a consensus that the benefits o f stabilizing a fragile transition are worth the risks and looks to the Bank to play a key role inhelping to coordinate and channel financial support in these countries, in close coordination with other active donors; There is a need for a realistic program design to avoid overloading the limited institutional and implementation capacity of Guinea-Bissau. Thus, selectivity in objectives that are mutually enhancing is important to keep the program focused on fundamentals of the reform agenda;'* Fragile states may require more detailed implementation programs thanusually seen inother development policy operations, particularly during periods o f political transition. Detailed action planning and monitoring may be neededto help the government and program partners track progress, address bottlenecks and adjust to delays inprogram implementation; and Financing for policy reforms should not rely on conditionality alone to catalyze and implement reforms. To be fully effective, the policy dialogue must be supported by other instruments that identify institutional weaknesses and help build country capacity step by step (OPCS, 2001). As indicated above, the proposedoperation is complemented by support andtechnical assistanceprovidedby other ongoing Bank instruments (see par.4.6-4.7). ~~ "GoodPracticeNoteforDevelopmentPolicyLending,DevelopmentPolicyOperationsandProgramConditionalityinFragile States, June 2005. ImplementationCompletionReport for the Economic Rehabilitationand Recovery Credit, Report No. 31015, December 27, 2004. -18- 5. THE PROPOSEDOPERATION A. THEREFORMAGENDA 5.1 While the PRSP is the reference strategy framework for the medium term, its immediatepolicy relevancewas quickly hijackedby growingfiscal imbalancesthat emerged in 2006 and 2007. In this context, the new government installed in April 2007 launched a "minimum economic reform program" to stabilize the macroeconomic situation and reactivate economic growth. This program was in turn followed by a program under the IMF EPCA whose main goal is to restore macroeconomic stability by placing fiscal policy on a sustainable track and pursuing fiscal structural reforms to improve revenue and expenditure management. 5.2 At the currentjuncture, macroeconomicstabilizationand growthare complementary Government'sobjectives, stabilization being needed for growth not to stall, and, inturn, even a modicum of economic growth being needed to ease or reinforce the achievement of fiscal targets and buildsupport for reforms. Inthis context, beyond the specific objectives of the fiscal program to achieve fiscal and debt sustainability, and as critical pre-requisites to boost economic growth and reduce widespread poverty in the country, the authorities intend to focus their efforts on: (i) promoting efficiency, transparency and accountability inthe use of public resourcesthrough public financial management reforms; and (ii) improving the investmentclimate by reducing the up-front costs and uncertainties of business creation and promoting a level playing field for private investors. 5.3 The focus on PFM and investment climate reforms is critical to help break the current vicious circle of political instability, weak governance, low economic growth and fragile finances. Improvements in public financial management are needed to restore macroeconomic stability, improve governance and secure basic service delivery (notably through regular wage payments). Improvements inthe investment climate, together with political stability, would support economic recovery and employment creation. Increased private employment options in turn would create a more favorable environment for public administration and security sector reforms. Economic recovery would also translate into buoyancy in state revenues, thus facilitating fiscal adjustment and reducing vulnerability to macroeconomic shocks. The proposed operation thus focuses on selected PFM and investment climate reforms which are mutually reinforcingto break the current vicious circle inwhich the country currently finds itself. ImprovingPublicFinancialManagement 5.4 The publicfinancialmanagementsystem in Guinea-Bissauremainsweak. Conflict and political instability have taken a heavy toll on the critical investments in the human and physical resources needed to operate the budget system and implement the kind of permanent reform agenda that is requiredto improve budget performance and accountability on an ongoing basis. 5.5 Despite the small size of government operations, weaknesses in PFM are pervasive, affecting virtually all the system's components. There have been years where budgets were prepared and adopted with long delays (for example, the 2007 budget was formally adopted in November of that year). Budget planning is essentially means-orientedrather than results-oriented, Standardbudget execution procedures have often given way to non-standardor "simplified" ones to execute significant portions ofthe budget of a non-emergencynature. Supporting documentation - 19- i s not systematically provided to Treasury officers charged with effecting payments, so that a crucial link between budget and treasury functions and their associated controls is routinely severed. Until recently, there had been a proliferation of bank accounts operated by sectoral Ministries for collecting revenues and making payments. Control agencies (Finance Inspectorate and Auditor General) exist but cannotperform their role for lack of humanand financial resources, and a supporting legal and informational environment. Overall, the weak monitoring, execution and control apparatus compounds policy slippage in fiscal conduct, hampering the achievement and maintenance of fiscal discipline, allocative efficiency in public spending, effective accountability, and mobilizationand absorption of external resources. 5.6 The legal framework for public financial management remains incomplete. At issue, besides the deleterious effects of protracted political instability, i s an incomplete transition from the PFM system inherited from colonial times toward the legal, institutional, administrative and policy compact to which Guinea-Bissau committed itself upon joining the WAEMU in 1997. Guinea-Bissau is only starting to implementthis compact in the PFM area. The legal framework remains to be fully formalized into national law, a framework that includes WAEMU-mandated budget classification, planning and execution procedures, accounting norms and procedures, reporting mechanisms, as well as internal and external controls. The implementation of this framework requires, to be fully established inlaw and practice, the adoption of Organic Laws, the adoption of implementing regulations (decrees) specifying procedures and the legal roles and obligations of budget managers and accountants, the development o f operational tools and proceduresmanuals, andtraining programs. 5.7 The authorities made progress over 2007-08 in improving public financial management: 0 Following a comprehensive audit of all revenue sources, including sectoral ministries' administrative revenues and receipts of public agencies (such as the civil aviation authority), all public revenues are now accounted in the general budget. Sectoral Ministries' revenue accounts in commercial banks have been closed and administrative revenues are now collected by the Treasury (however, sharing rules remain inplace); 0 Significant efforts have been made to move towards a single treasury account at the central bank (BCEAO) by closing or transferring all sectoral ministries non-project spending accounts at the BCEAO (one account remains open ina commercial bank and is expectedto close inthe near future); 0 Treasury managementhas beenstrengthenedthrough the establishmentof an independent treasury committee which i s incharge of controlling revenue collection and ensuring that expenditure commitments are consistentwith financial resources; l9 The Treasury is now in a position to produce a monthly ledger, while the Economic Forecasting department produces a monthly synthetic government financial operations table; ~ ~ To improve governance and public confidence, representatives o f civil society, the armed forces, the Ministry o f Interior, ex- combatants and the donor community were at first invited to participate in the Committee as observers. This practice has since been discontinued, and the new Treasury Committee consists solely o f Ministry o fFinance and central bank officials. - 20 - Starting in early 2008, the recourse to simplified and emergency (extra-budgetary) spending procedures was tightened, and the Ministry of Finance has ensured that remaining instanceswere regularized withinatwo-day period; The Council of Ministers approved in May 2008 a new budget classification system in line with WAEMU directives; Progress has been made in implementing the action plan to reform the public procurement system in six ministries (education, health, agriculture, infrastructure, finance and defense); A draft Organic Law for Budget and Public Accounting Laws have beenprepared. The implementation of the provisions of the Organic Budget Law would require all Ministries' Financial Directorates to provide authorizing documentation to Treasury with payment orders, thereby putting inpractice the clear separationo f responsibility between budget executors and payment officers that is at the core of the WAEMU public financial management model. 5.8 The government has opted for a more systematic approach to deal with the various shortcomings in its PFM system. The strategy is based on the introduction of an integrated financial management system upon which operational and procedural reforms can be tagged.20 The implementation strategy for this system would allow Guinea-Bissau to leapfrog on a significant package of reforms to: (i)develop and integrate budget preparation and execution computer systems; (ii) make operational the WAEMU-mandated budget classification standards recently adopted; (iii) develop consistent reporting tools for monitoringbudget execution and, at a subsequent stage, treasury operations; and (iv) effect procedural reforms for budget managers that ensure compliance with legal and PFMregulation standards. 5.9 The platform is also expected to interconnectwith revenue monitoring and accounting systems at the Customs and Tax department; with a SIGFIP accounting module; and with a unified payroll and personnel management system to be implemented with assistance from Portugal. In addition, the authorities are making efforts to strengthen controls of the wage bill through systematic control missions o f pay and employment rolls in ministries, ahead of a PARAP- supportedbiometric census of the civil service and the implementation o f a unifiedpayroll system and the launch of a medium-termpublic administration reform program. The authorities also plan to install a computerized debt management system (SYGADE). The implementation of an integrated financial management system i s advancing well. An I T department was created in the Ministry of Finance early in 2008, and technical assistance was provided by financial partners (EU, France, IMF and World Bank) in IT, budgeting and accounting. A procedures manual for SIGFIP has been drafted and training sessions for budget managers have taken place. With the implementation of SIGFIP, the authorities would be able to produce monthly budget execution reports reflecting status o f budget execution at each ofthe four main stages of standardprocedures. In all, with these undertakings, significant gains in transparency and controllability of budget execution canbe achieved ina fairly short time. 5.10 Further progress is also needed on public procurement. A first procurement reform action plan was prepared in 2006, and has formed the basis for a preliminary set of reforms that have started to be implemented. Pilot reforms were targeted at a few important ministries, and *'Thesystem chosenby the authoritiesis basedonthe SIGFIP software developedinC6te d'Ivoire. -21 - included the training o f staff and the preparation o f a procurement guide. Beyond continued capacity building efforts, there is a need to update the existing procurement code with a view to harmonizing it with WAEMU standards, and to strengthen enforcement o f the code and monitoring o f procurement transactions. WAEMU directives also envisage the establishment o f a procurement regulatory body that comprises representatives from public and private sectors and the civil society, independent procurement audit, and the development o f an appropriate appeal mechanism for dealing with complaints fkom bidders. The authorities have agreed to conduct, in the context o f the proposed PEMFAR, an in-depth review o f the overall country procurement system, including an overview o f the legislative, regulatory and institutional frameworks, procurement operations and capacity management, market performance, and integrity and transparency o f the procurement system, with a view to incorporating critical priority recommendations inthe PFMreform agenda. Prior actions under the proposed EGRGand follow-up reforms 5.11 The proposed EGRG would support four policy actions critical to consolidate recent progress in developing the legal framework and achieve concrete, operationally meaningful progress in improving PFM. These are: (i) the adoption by the Council o f Ministers o f the draft Organic Decree-Law for Budget and Public Accounting Decree; (ii) the installation o f the budget elaboration and execution modules o f the SIGFIP system in the budget units o f the central administration to improve efficiency and transparency in budget execution; (iii) the preparation o f the draft 2009 Budget under the new WAEMU-based budget classification to improve and make more transparent the presentation o f budget allocations; and (iv) the conduct by the General Finance Inspectorate o f control missions for the payment o f civil service wages over sectoral Ministries' personnel data for at least halfo f all Ministries.21 5.12 The follow-on operation would support the continuation of this agenda by focusing on critical actions needed to operationalize the legal and institutional changes supported by the proposed EGRG and further strengthen controls o f the wage bill. This selection is based on the analytical work and Government's commitment already available through the PARAP and PEMFAR (see Section 4). Measures would include: (i) adoption o f a decree to specify the role the o f credit managers, financial controllers, the Directorate o f Budget, and accountants consistent with the Organic Law for Budget and Public Accounting Decree; (ii) adoption o f a manual o f the procedures for budget execution; (iii) the completion o f the planned biometric survey o f the civil service and substantial progress made in the implementation o f the new payroll system, as evidenced by the installation o f the system andthe inclusion inits database o f personnel data for at least 75 percent o f civil servants; (iv) the submission to Parliament o f the draft Organic Law for Budget; and (v) the submission to Parliament o f the draft Law for the "Tribunal de Contas" (Supreme Audit Institution) consistent with the WAEMU directive. 5.13 Ongoing dialogue between the authorities, the Bank and other donors will also seek to broaden the PFM reform agenda to the extent that capacity constraints allow. As indicated in Section 4, the diagnostics based on the recently launched Public Expenditure Management and Financial Accountability Review (PEMFAR) will explore the need and scope for progress inother areas, including measures to strengthen internal and external controls on the budget process and This is a stop-gap measure to strengthen controls of the wage bill, by helping prune the payroll database from obvious inconsistenciesbetweenentereddata and actual physicalpresence of employees, ahead of a PARAP-supportedbiometric census ofthe civil service, andthe implementationof aunifiedpayroll systedpersonnelmanagement system. - 22 - public accounts, initial steps towards developing a medium-term expenditure framework (in part by exploiting existing program-budgeting functionalities of SIGFIP that remain to be made operational inGuinea-Bissau), andthe adoption of fiscal transparency legislation. 5.14 Expectedresults. The specific measures supportedby the proposed grant and the follow- on operation will contribute to (i)the adoption of a modern and stable legal and accounting framework for public financial managementthat i s consistent with good international practices, (ii) the operation of an integrated financial management system that enhances budget execution, monitoring and reporting, and (iii) the strengthening of some actionable control instruments on wage and non-wage spending. With the legal framework largely in place, and initial progress in operating SIGFIP, observable outcomes should include increasedreadability inbudget data owing to the reliance on an improved budget classification system, stricter compliance with budget proceduresandrelated improvements inbudget execution, higher effectivenessininternal controls, more frequent disclosure of budget execution and debt data, and faster turnaround time to prepare annual accounts to the external control of the Tribunal de Contas. Specific outcomes for the proposed grant and the follow-on operation are detailed inAnnex 3. FosteringPrivateSectorDevelopment 5.15 Guinea-Bissau scores very low on internationally recognized measures of ease of doing business, being the lowest of any country in WAEMU and third from the bottom in the world overall. At the broadest level, political instability and fiscal fragility have underminedthe rule of law and security of property; have aggravated the huge infrastructure deficits - roads, the port, and energy; have fostered a policy environment markedby reversals and uncertainty, and the blurring of political accountability; and have contributed to exacerbate severe capacity shortcomings inthe public administration. 5.16 At a more narrow level, the legal and administrative environment for business remains weak and unstable. Here too, Guinea-Bissau still needs to complete its transition from the legal and institutional framework inherited from colonial times towards one reflecting its regional commitments toward integration. Important progress was already achieved in 2008 with the adoption by the Council of Ministers of draft Laws enacting into national law nine OHADA Acts, while a Commercial Tribunal has also been established and judges have been trained.22 There was strong progress in developing a new legal and regulatory framework for the telecommunications sector, for which only the final steps need to be taken-steps that are critical to seal progress in one o f the authorities' most successful reform efforts and would send a much needed signal of government commitment to fostering private sector-led growth under a good practice regulatory framework and securing an open and even playing field and anns-lengthpublic sector involvement for a rapidly expanding and employment generating sector. The authorities have prepared legislation for Public-Private Partnerships (PPP), drawing on support from the Bank's PPIAF. In a country with deep infrastructure deficits, precarious finances, and limited internal managerial capacity, PPPs are viewed as potentially critical instruments to attract finance, technology and management skills in sectors such as the port, airport, railway transportation, and energy. '*Theofficesof the Tribunal have been opened and the new judges have been formally integratedas civil servants, but their investiture is under the purview ofthe Supreme Court ofGuinea-Bissau. -23 - 5.17 Incomplete reforms in the legal and regulatory framework have also prevented the development of a level playingfield for privateinvestors. The Investment Code of 1991, itself an improvement over a previous law, was rife with potential for abuse and discretionary preferential treatment. It i s now regarded by government and private partners as obsolete, and a revised Code has been developed with FIAS assistance. The new Code would ensure that incentives are considered automatic, removing the discretion that could be exercised by government officials under the old law; that there is no discrimination among projects on the basis of size; that the multiplicity of investment regimes is eliminated to remove confusion and reduce fraud and evasion; andthat the opacity of rules regarding sanctions and the uncertainty with which they were applied are ended. Fiscal risks related to tax incentives would also be mitigated with the consolidation of incentives and taxes in an automatic and transparent manner. Once the Investment Code is adopted into law, the authorities will adopt its implementing regulations, and initiate a reform action plan to transform and modernize the Investment Promotion directorate of the MinistryofEconomy. 5.18 Completing the legal transition is expected to be a multi-year undertaking, going beyond the timeframe of the proposed operation. The transition will require not only the adoption of relevant legal texts, but the development ofjudicial and administrative structures and practicesthat allow the laws to become operational-some of which was supportedunder the IDA- financed Private Sector Rehabilitation and Development Project-and it will also require that legal informationbecome accessibleto the population. 5.19 Notwithstanding the preeminent roles of political instability and dilapidated infrastructure,red tape is also an impedimentto privatesector investment and growth. The series of procedures that must be followed to open and run a businesstakes a very long time, and the costs and delays involved contribute to discouraging private sector activity, domestic or foreign. Red tape, especially complex tax payment procedures, also foster informality: a large percentage o f micro firms in Guinea-Bissau (defined as firms with less than 5 employees) cite the administrative burden linked to the payment of taxes and the financial costs of registration as reasons for not registering. Outside the capital city, there is a complete absence of such services as notaries that are requiredto register a business. Proceduresare basedon a statist approachtowards control and regulation of the private sector, relying on ex ante controls requiring onerous bureaucratic procedures with little or no capacity for regulatory follow up. Moreover, the large gap between requirementsand enforcement capacity creates incentives on firms to avoid the legal requirements, and incentives on officials to seek compensation for turning a blind eye. Simplifying legal requirements would go a long way towards bridging the gap with enforcement capacity, and improving governance in the public sector by removing opportunities for rent seeking. 5.20 The government views the improvement of the business environment as a critical prerequisiteto boost economic growth and reduce widespread poverty in the country. Its private sector development agenda is reflected in the PRSP, has been built over several years on the basis of successive diagnostic studies and consultations withstakeholders (including ina 2007 Public-Private Forum meeting) and has benefitted from technical support under the IDA-funded Private Sector Rehabilitation and Development Project. Policy actions include (1) the adoption and implementation of: (i) nine OHADA Acts of BusinessLaws (adopted inFebruary 2008); (ii) an Investment Code consistent with good international practices; (iii)a draft Public-Private Partnership Law; (iv) the preparation of recommendations of the Commission on the - 24 - Simplification of Administrative Procedures; (v) a decree liberalizing the notary profession; and (vi) the launch of a study on options for public-private partnership for the Port of Bissau. The authorities are also planning dissemination events with the private sector on the above initiatives. Prior actionsunderthe proposedEGRGandfollow-up reforms 5.21 The proposed EGRG would support three policy actions judged to be critical to advance reforms in private sector development, namely: (i) adoption by the Council of the Ministers of nine OHADA acts of business law; (ii) adoption by the Council of Ministers of a the draft InvestmentCode consistent with good international practices to promote a level-playing field among private investors and remove discretion in the granting o f fiscal privileges for investment; and (iii) adoption by the Council of Ministers of the draft Law on Public-Private Partnerships, the thus sending a much needed signal of Government commitment to fostering private sector-led growth. 5.22 The follow-onoperationwould support the continuationof this agendathrough: (i) the adoption by the Council of Ministers and initiation of an action plan to simplify administrative procedures, (ii)the adoption of legal texts allowing the formal constitution of a one-stop shop ("guichet unique") for business registration; and (iii)the submission to Parliament of the Telecommunication Law. The first two measures aim to reduce the costs and delays in business regulations, thus reinforcingthe impact ofthe legal reforms to the investment climate supportedby the proposed EGRG. The third measure would help cast into law the authorities' regulatory framework for telecommunications, thus supporting a rapidly expanding and employment generatingsector. 5.23 Expected Results. The reform measures are expected to lay the foundations for a more stable, simple and transparent legal and policy environment for private investment, for reduced transactions costs for payingtaxes and creating new firms, for progresstoward a levelplaying field for all (domestic and foreign) private investors, and, to some extent as well, for the mitigation of fiscal risks on the budget associated with the granting of fiscal privileges-discretionary or statutory-to private investors. The modernization and alignment on regional norms of business laws, InvestmentCode and Public-Private Partnership laws and the expected reduction inredtape are two critical building blocks toward the gradual improvement inthe environment for business in Guinea-Bissau, both complementary to progress on the political and macroeconomic stability fronts and on infrastructure rehabilitation. Specific.outcomes for the proposed grant and the follow-on operation are detailed inAnnex 3. B. OPERATIONDESCRIPTION 5.24 The proposed operation of SDR5.4 million (US%8million equivalent) is the first of a series of two Economic Governance Reform Grants (EGRGs) for the Republic of Guinea- Bissau. This one-tranche development policy IDA grant is equivalent to about 2percent of projected GDP and about 5 percent of total government expenditures in2009. 5.25 The main development objectivesof the proposedgrant are to: (i) promote efficiency, transparency and accountability in the use of public resources through improved public financial management (PFM); and (ii) foster private sector development mainly through the development of a modern legal framework for private investment and improvements inthe business environment. - 25 - 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 inits PRSP. 5.26 The proposed EGRG would support selected reform measures in the government's programdescribedin Section5 and in its Letter of DevelopmentPolicy(LDP) (Annex 2) that are deemed essential for its successful implementation. The rationale for their selection has been discussed in the previous sections, namely their importance to the program and expressed government's commitment and feasibility. Several principlesunderpinthe design of the operation andthe specific choice of policy areas andmeasuresthat it supports: 0 Drawing on Bank lessons for engagement in fragile states, the design of conditionality reflects first and foremost a high degree of selectivity, with a focus on a small number of measures that are technically ready, and politically achievable even in a political context in flux. Inparticular, 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 benefittedfrom technical assistanceand/or (iv) are leveraging reforms supported by other Bank and donors instruments (such as the CFAA-CPAR diagnostic report, a SPF Economic Governance Support Grant, and the Private Sector Rehabilitation andDevelopment Project); 0 To avoid placing an excessive burden on the government's thin capacity for policy formulation and implementation, yet ensure that its overall program has no critical gaps, reforms supported by the operation are consistent and complementary with undertakings under the IMF Emergency Post-Conflict Assistance program and with activities funded underthe EUsupportedPublic Administration Reformprogram. 0 The operation focuses on PFM and business law reforms that constitute the implementation of fundamental commitments towards regional integration that successive governments of Guinea-Bissau have made inthe past decade. While the pace of implementation of these commitments has been and may continue to be impeded by political instability and even suffer from occasional backtracking, their general direction has not been questioned by successive governments and enjoys broad political support. PFM reforms follow this principle, as Guinea-Bissau has only recently started to implementits legal, economic and institutional commitments under WAEMU. Similarly, business law reforms rest on the country's commitments under OHADA. 0 As indicated inpara. 5.3, the proposedoperationfocuses on selectedPFMand investment climate reforms which are mutually reinforcingto help break the current vicious circle of political instability, weak governance, low economic growth and fragile finances. - 26 - Prior Actions Current Status 1. Adoptionby the Councilof Ministers of Completed.The Laws, drawingonWAEMU directives, the draft Organic Law for Budget and Public havebeendraftedwith technicalassistance, and reviewedat AccountingDecree. technical levels.The Organic Law hasbeenapprovedby the Councilof Ministers on April 2,2009, and the Public AccountingDecreewas approvedby the Council of Ministerson May 8,2009. 2. Installationofthe elaboration and Completed.The elaborationand executionmoduleshave executionmodulesofthe SIGFIP inthe budget beeninstalledinthe centraladministrationby the MOF's unitsofthe central administrationto improve budgetdepartment.Training programs for budgetmanagers efficiency andtransparency inbudgetexecution. and accountants havetaken placeandpilottests are ongoing. The 2009 Budget hasbeenelaboratedandwill beexecuted .-__--------------------------------------------------------------------------------------- throughSIGFIP. 3. Preparationofthe draft 2009 Budget under Completed.The new budgetclassificationwas approvedby the new WAEMU-basedbudgetclassificationto the CouncilofMinistersinMay 2008; anew classification improveand make moretransparentthe and proceduresmanualhasbeen preparedwith technical presentationofbudget allocations among assistance; trainingprograms for budgetmanagersare sectors, administrativeunits, andpublic ongoing. The draft 2009 Budget usingthe new WAEMU- functions. basedclassificationwas submittedto and approvedby ................................................................................. ParliamentinApril 2009. 4. The GeneralFinanceInspectorateofthe Completed. A Decree was approvedby the Councilof Ministry ofFinancehas undertakencontrol Ministersto authorizethe controls. The 2006 civil service missions for the payment of civil service wages census provides the statisticalbackbonefor controls. The over sectoral ministries' personneldatafor at GeneralFinanceInspectoratehas undertakencontrol least halfof all the Recipient'sministries. missionsfor the paymentsof civil servicewages inJanuary 2009 for halfof all Ministries and hasissuedareportdated March27,2009 with the results ofthese controls. FosteringPrivate Sector Development 5. Adoptionby the Council o fMinisters Completed. The nineActs ofBusinessLaw were adopted ofnine OHADA acts ofbusiness law. by the CouncilofMinisterson Februay 14,2008. 6. Adoptionbythe Council of Ministersof a Completed.The Council of Ministersadoptedon September draft InvestmentCodeconsistent with good 18,2008, the InvestmentCode, which reflects FIAS' advice. internationalpracticesto promote alevel- playingfield amongprivateinvestors and removediscretioninthe grantingoffiscal .I? forinvestment. rivilses ___---- 7. Adoptionby the CouncilofMinistersof Completed. A draft Law hasbeenpreparedwith assistance the draft Public-PrivatePartnershipsLaw from PPIAF andwas approvedby the Council ofMinisters preparedwith assistance from PPIAF. on April 3,2009. C. TRIGGERS FORTHE EGRGI1 5.27 The Bank's decision to proceedwith the second and final operation in the proposed series will be informed by the degree o f progress towards, or completion of, the indicative triggers listed below and the program matrix in Annex 3. As per any development policy framework, an adequate macroeconomic framework will have to be maintained duringthe program period. 5.28 As mentionedabove, the choiceof the triggers for EGRGI1representsa continuation of the programmaticframework set out in the proposedEGRG, modified where necessary on the basis o f lessons learned and evolving conditions. These triggers were chosen according to a number o f criteria: their criticality in the achievement of the development objectives o f the - 27 - government's reform program detailed in Section 5 and the Bank's comparative advantage in the selected policy areas. Table 5.2: Triggers for the EGRGI1 L ImprovingPublicFinancialManagement 1. Adoption of a decree to specify the role of credit managers, financial controllers, the Directorate of Budget, and accountantsconsistentwith the Organic Law for Budget andPublic Accounting Decree. 2. Adoption of a manualofproceduresfor budgetexecution. 3. Completion of the planned biometric survey of the civil service and substantial progress made in the implementation ofthe new payroll system as evidencedbythe installation ofthe system and the inclusion inits database of personneldata for at least 75 percentof civil servants. 4. Submissionto Parliamentofthe draft Organic Law for Budget. 5. Submission to Parliament of the draft Law for the "Tribunal de Contas" (Supreme Audit Institution) consistentwith WAEMU directive. 11. FosteringPrivate Sector Development 6. Adoption by the Council of Ministers and initiation of an action plan to simplify administrative procedures. 7. Adoption of legal texts allowing the formal constitution of a one-stop shop ("guichet unique") for business registration. 8. Submissionto Parliamentof the TelecommunicationLaw. 5.29 The government's program matrix in Annex 3 contains baseline and target values for performance monitoring indicators for the two policy areas. There are 11indicators on public financial management, and 6 on private sector development, for a total o f 17 indicators. The indicators on public financial management consist mainly o f measures o f improved performance in budget execution, compliance with new procedures, and reporting, several drawing on a recent PEFA assessment, which will be updated inthe course o fthe proposed PEMFARand followed up in2010 by a full update ofthe PEFA. The indicators on private sector development are measures of the quality o f the legal framework for business, and measures of the depth o f administrative barriers to private investment, including the number o f days to start a business, which would be monitored through reviews o f government procedures and surveys o f business. 5.30 Good practice principles of conditionality have been applied to the proposed operation (see Box 5.1). - 28 - Box 5.1:GoodPracticePrinciples on Conditionalities 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 o f Business Laws inAfrica) 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 o f the public and private sectors and civil society, down to the level of local communities. There has also been extensive analytical work which has informed policy formulation, and further consultation exercises, such as a 2007 Public-Private Forum. Principle 2: Agree up front with the government and other financial partners on a coordinated accountabilityframework 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. 4.3-4.5). A framework agreement among donors providing budget support has been set up to ensure better coordination and information sharing. The recently launched 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 ensuringthat it reflects the government's expressed policy intentions and the country circumstances - including weak capacity for policy formulation and implementation. The design o f 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 i s aligned with the government's domestic budgetingprocess. Principle 4: Choose only actions criticalfor achievingresults as conditionsfor disbursement Prior actions for the proposed grant focus on a selected number o f measures that are critical to achieving the objectives ofthe government's reformprogramas detailed inSection 5 (see details inpara. 5.26). Principle 5: Conduct transparent progress reviews conducive to predictable and performance-based financial support The existinginstitutional structure for the PRSPprocesswill beusedto 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 o f 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 CY09, in line with the domestic budgetingprocess which is basedon the calendar year. The disbursed funds are expectedto be used infilling the CY09 budget financing gap. - 29 - 6. OPERATIONIMPLEMENTATION A. COUNTRYOWNERSHIP 6.1 The proposed operation is fully owned by the authorities. Extensive discussions were held with key government stakeholders in developing the reform agenda o f the operation. The specific reforms supported by the operation and detailed in the government's Letter o f Development Policy (see Annex 2) are critical elements o f its national development strategy as outlined in the country's PRSP. The PRSP was the result o f an extensive participatory and consultative process. Stakeholder workshops and focus group discussions were held with representatives o f the public and private stakeholders and civil society, reaching down to the level o f communities. B. POVERTYAND SOCIAL IMPACT 6.2 The reform measures supported by the proposed EGRG are expected to have a positivedirectimpact on poverty reduction. The EGRGbuilds on the findings o fthe May 2006 World Bank report "Integrated Poverty and Social Assessment (IPSA), Vol. 11, Conflict, Livelihoods and Poverty in Guinea-Bissau" that found that poverty is widespread (66 percent o f the population in 2006), with a higher incidence in rural areas, and that more than 90 percent o f urban families live essentially from activities inthe informal sector, or o f a mix o f informal and formal, mainly public sector, activities. 6.3 There are likely positive distributional effects from the improved public financial management and private sector development reforms which the proposed operation supports. Specifically, efforts to improve the capacity o f the State to implement its budget priorities and strengthen public financial management would help restore fiscal stability, enhance efficiency, transparency and accountability in public resource use, and increase the country's absorption capacity for external resources. Inturn, fiscal stabilization will allow, inthe short run, for the regular payment o f civil servants' wages and domestic suppliers, and in the medium term for improvements inpublic services delivery and will remove a critical impediment to investment and growth. The measures targeted by the operation to foster private sector development--largely o f a regulatory and institutional nature--would contribute to boost investment and business creation, and increase labor demand. The grant would also help fund the provision o f basic public services with a beneficial impact on the poor. The proposed operation does not support specifically the government's public administration strategy, which i s still at an initiation stage, and therefore has not envisaged measures negatively affecting employment and legitimate earnings prospects o f civil servants. C. ENVIRONMENTAL ASPECTS 6.4 The specific reformssupported by the proposeddevelopmentpolicy operation,which are mainly regulatoryand institutional,are not likely to have significantpositiveor negative impacts on the country's environment, forests and other natural resources. The priority environment issues in the country include depletion o f fish resources and risks associated with potential future mining development projects. The PFM and PSD reforms supported by the - 30 - proposed operation are unlikely to either exacerbate these problems significantly or contribute to their remediation. D. IMPLEMENTATION,MONITORINGEVALUATIONAND 6.5 The existing institutionalstructure for the PRSP 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, jointly with the Project Implementation Unit of the PSRDP, 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 government's policy matrix presented in Annex 3 identifies ministerial departments for each policy reform and benchmark outcome indicators. The Council of Ministers provides overall guidance for the budget support program. Periodic stakeholders consultations contemplated inthe implementation of the Bank ISN will serve to provide additional feedback on the impact of the proposedoperation. 6.6 The limitednumber of active developmentpartnersprovidingbudget support allows for easy coordination and monitoringof actions and progressreviewsof the implementation of the policy matrix. After the disbursement of its single tranche, IDA plansto 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. E. FIDUCIARY ASPECTS 6.7 The public financial management system in Guinea-Bissau remains weak. As indicated in Section 5, conflict and political instability have taken a heavy toll on the critical investments inthe human and physical resources neededto operate the budget system and conduct the kind of permanent reform agenda that is required to improve budget performance and accountability on an ongoing basis. The improvement in fiduciary standards is a central objective of the public financial management component of the proposed operation and the government has made encouraging progress inthese reforms. These measures are drawn from the 2006 CFAA and other analytical inputs provided through technical assistance, ongoing IDA and other donors' interventions for PFM capacity building (see Section 4). Their implementation is closely monitored under this technical assistance and under the ongoing dialogue betweenthe government, the IMF, the Bank and other donors. Lessons drawn from past diagnostics and ongoing implementation feed back in recommendations, and will be incorporated in a revised multi-year reform agendathat is beingdevelopedas part of the recently launched PEMFAR. 6.8 In 2005, the IMF staff carried out an on-site safeguards assessment of the Central Bank of the West African States (BCEAO), the common central bank of the West African Economic and Monetary Union, which includes Guinea-Bissau. The assessment found that progress had been made in strengthening the BCEAO's safeguards framework since 2002 when the last safeguard assessment was undertaken. The BCEAO now publishes a full set of audited financial statements and improvements have been made to move financial reporting closer to International Financial Reporting Standards (IFRS). IMF staff noted that the BCEAO has -31 - improved the explanatory notes to the financial statements and further changes are scheduled for the next fiscal year, with a view toward a gradual alignment with International Accounting Standard, as adopted internationally by other central banks. Furthermore, an internal audit charter has been put inplace, mechanisms for improving risk management and risk prevention have been established and follow-up on internal and external audit recommendations has been strengthened. The assessment identified a number o f areas where further steps would help solidify the progress made in recent years. The main recommendations relate to: (i) improving the external audit process by adopting a formal rotation policy and further enhancing the transparency o f the financial statements by adopting IFRS in full; and (ii) enhancing the effectiveness o f the internal audit function by further strengthening the reporting to management o f the BCEAO. The status report o f the implementation o f recommendations, received from the Bank in March 2007, indicates that some progress was achieved. F. GRANTADMINISTRATION, DISBURSEMENT AUDITING AND 6.9 Disbursementand accounting. The proposed operation would consist o f a single tranche grant o f SDR5.4 million (US$8 million equivalent) to be available upon effectiveness and disbursed on the basis o f a withdrawal application. The proposed operation will follow IDA's disbursement procedures for development policy operations. Upon approval o f the Grant and effectiveness of the Financing Agreement, the proceeds o f the Grant would be disbursed by IDA into a dedicated account o f the Government for budget support. The proceeds o f the Grant would not be used to finance expenditures excluded under the Agreement. The Recipient shall ensure that upon the deposit o f the Grant into said account, an equivalent amount i s credited in the Recipient's budget management system, in a manner acceptable to IDA. Based on previous experience, the execution o f such transaction from the Central Bank to the Treasury (Ministry o f Finance) does not require more than four days. The Recipient will report to IDA on the amounts deposited inthe foreign currency account and credited inlocal currency to the budget management system. Assuming that the withdrawal request is in Foreign Exchange, the equivalent amount in CFAF reported inthe budgetary system will be based on the market rate at the date o f the transfer. The Recipient will promptly notify IDA by fax or email that such transfer has taken place, and that proceeds have been credited ina manner satisfactory to IDA. 6.10 Auditing. Through the Ministry of Finance, the Recipient will (a) report the exact sum received into the deposit account; (b) ensure that all withdrawals from the deposit account are for budgeted public expenditures, except for purposes such as military expenditures or for other items on IDA's negative list; (c) provide to IDA evidence that the CFA franc equivalent o f the grant proceeds was credited to the Treasury account and disbursements from that account were for budgeted public expenditures. IDA reserves the right to request an audit o f the account into which the grant will be disbursed and o f the recording o f the transfer o f grant proceeds inthe Recipient's budget management system. If,after being deposited inthis account, the proceeds o f the grant are used for ineligible purposes as defined inthe Financing Agreement, IDA will require the recipient to either: (a) apply the corresponding amount to eligible purposes, or (b) refund the amount directly to IDA. The Tribunal de Contas (Supreme Audit Institution) will provide IDA with its annual report on the public accounts to the Parliament by the end o f the year following the execution o f the budget. The expected closing date o fthe Grant i s December 31,2009. - 3 2 - G. RISKS AND RISK MITIGATION 6.11 In the current environment of the country emerging from conflict, the proposed operation presents significant country and fiduciary risks. The Bank's active engagement in Guinea-Bissau during this period of recovery is a high-risk and potentially high-gain enterprise. The specific risks that couldjeopardize the expected outcomes and benefits of the proposed grant relate to political and policy backsliding, macroeconomic performance, capacity constraints and fiduciary risks. The greatest risk, however, is failing to support the stabilization and recovery process and missing a window of opportunity for helping to stabilize a fragile country in a challenging transition and inan unstableregion. 6.12 Political risks and policy backsliding. Political instability could flare up again and commitment to fiscal stabilization and to reforms, which has been demonstratedinthe recent past, could come under pressure either from within or from outside the winning political party, especially if tangible benefits of reforms do not become apparent to the population, or if costs of reform to narrow constituencies become too high. To mitigate these risks, the UN and several donors are supporting the country inits politicaltransition to Presidential elections (see the I S Nfor a more in depth discussion of this risk). Also, reforms supported by the proposed operation have been chosen carefully in the government's own PRSP, among measures that were technically ready (having benefitted from extensive analytical work and proven technical assistance) and politically achievable (having benefitted from numerous consultations with stakeholders and internal governmental discussions). Most measures build on government's longstanding commitments towards regional integration in the context of WAEMU and OHADA, which mitigates risks of reversibility. Also, and in addition to public.financial management reforms, the operation supports efforts to prop up the development of the private sector to rekindle economic growth and achieve visible results for the population. 6.13 Macroeconomic risk. A deeper than expected global slowdown could undermine the country's already challenging stabilization efforts which rely heavily on high and sustained donor support. Inthis context, the government's sustained commitment to fiscal stabilization remains a potential risk, as the cash position of the government remains extraordinarily tight. The proposed operation's financial support is itself a crucial element in enabling the government to meet its financial obligations and execute its budget. This said, given the vulnerability to exogenous shocks and the volatile global environment, the IMFand IDA staff will continue to closely monitor the economic environment and macroeconomic performance, and assist the authorities, if needed, to adjust the macroeconomic program. Additional risks are a failure o f the PRGF-supported program to materialize (itself the result of possible reform backsliding) or a lack of supply response from the private sector. The track record of the successive governments in the last 18 months shows that policy makers are committed to restore and sustain fiscal discipline and a growth response is possible. Performance under the IMF EPCA program has beenmixed, owing mainly to exogenous and political shocks; the Fundremains engagedunder anEPCA program, and expects to initiate discussions towards a PRGF arrangement later in 2009. The government is committed to a rapid attainment o f the HIPC completion point. Furthermore, continued future donor engagement, in the context o f the Fund-supported EPCA and a possible successor PRGF arrangement, would help to support reformers' efforts to sustain fiscal consolidation, a pre- requisite for a broader normalization of public sector performance. The PFM reforms supportedby the proposed operation and follow-up actions will also help enhance controls inthe execution of overall and sectoral budget envelopes. - 33 - 6.14 Capacity constraints. Public sector capacity constraints are considerable in Guinea- Bissau and constitute a major challenge to successful implementation of the reform program. The proposed operation seeks to mitigate this risk in several ways: first, the operation has a focused coverage interms of policy areas and number of reform measures; second, it emphasizes building on ongoing initiatives as opposedto introducing new ones; and third, it relies extensively on Bank and other donors instruments for alleviating capacity constraints, including a recently approved SPF grant. The recent track record with both PFM and PSD reforms indicate that progress on capacity building is possible but requires a long term donor engagement and sustained government's politicalcommitment. 6.15 Fiduciary risk. The financial management assessment has concluded that fiduciary risks are substantial mainly because of political instability and governance issues. This risk i s mitigated by the focus of the proposed grant on the improvement infiduciary standards and continued IDA and other donors' assistance in public financial management and public administration reforms which will help to improve budget execution processes over time. Inthis respect, the recentPEFA and ongoing PEMFAR provide benchmarks against which to measure progress and will identify additional areas inneed of remedial actions and technical and financial assistance provided under the abovementioned SPF grant is expectedto facilitate the amelioration offiduciary standards. 6.16 In IDA's assessment, the potential benefits of the proposed operation outweigh the residual risks and warrant IDA's assistance for implementing critical reforms and policy actions in a coordinated fashion with other donors, while supporting risk mitigation actions to maximize the sustainability ofthereformagenda. - 34 - Annex 1: Timetable of Key ProcessingEvents ConceptReview: January 8,2009 ROC Meeting: April 14,2009 Authorization to Negotiate: May 8,2009 Negotiation: May 12,2009 BoardPresentation: June 16,2009 Effectiveness: June 30,2009 Closing Date: December 31,2009 - 35 - Annex 2: Letter of DevelopmentPolicy Biirourclyy@m, 1 -36- Dr.HelenaNosoliniEinbalo Dr. arioJ.Vaz B x! I i k --+-=-I &~~*.=-- If Minister f Economy,Planand Regional Integration iij I Ministry ofEconomy, PlanandRegional i Integration Bissau, Guinea-Bissau 2 - 37 - GUINEA-BISSAU REFORMPROGRAMSUPPORTEDBYTHE ECONOMICGOVERNANCE REFORMGRANT 1. COUNTRYCONTEXT I. Guinea-Bissauis asmallcountry inWest Africawithanestimated 1.5 million inhabitants and a GNI per capita of US%214.The large share of the young and the high population growth ralc present a set of considerable challenges. The prcvalence of poverty is widespread. Moreover, poverty in urban areas is higher cornpared to other countries. As prcsented in the Poverty Reduction Strategy Paper, thc poverty profile shows that in 2002, at the household level, 64.7 percent of the population lived in poverty, with 20.8 percent living in extreme poverty. At the na!ional level, the unemployment rate among population over 15 years of age was 12.4 percent in 2002, with thc rdte at 19.3 percent in Bissau and 10.2 percent in other regions. Most of these unemployedpeopleare also classifiedasbeingpoor. 2. The short post-indcpendencehistory of Guinea-Bissauhas been marked by deep al instability. More reoently, shortly aftcr the legislative elections of November 2008 which werc consideredfree and fair andha9 a high voter turnout, an atkmpt to kill the President in his residence failed. However, a tragic event occurred in March 2009 with the killing of both the Chief Staff of Army and the President of the Republic. As provided by the constitution, the Speaker of the National Assembly was sworn in as lnlcrim President. Presidential elections, which according to the constitution arc supposed to take place within 60 days, were meanwhilepostponedto June, 2009. Little more than threeweeks after the tragic events, the National Assemblypassedboththe new Government Programandthe government's 2009 budgetwith aclear majority. 3 The economy remains largely dependent on the apcultural sector and is wlnerable to weather fluctuations. Agriculture representedmore than half of GDP and virtually all our exports, and it remains the main source of cmploymenl in rurdl areas. Cashew is the niain cash crop and mprewnts almost all ow exports; the cashew sector is also importantfor thetranspoitntionsector, the urbaneconomy and for public finances. 4. Economic growth has been very low over the last 10 years, since the end of our civil war in 1998-99. Real per capita GDP is still below the level before 1998. Economic growth was estimated at 3.3 percent in 2008, but we expect that the global economic crisis will affect our economy in a negative way. Our cashew cxports will suffer and remittances from Bissau-Guineans abroad may also decline. The lower oil and food pricescomparedto 2008 will havea positiveeffect. 3 - 38 - 2. REFOKMSIMPLEMENTEDIN2008 5. During the year 2008, the governmenthastakenconcretemeasuresin the areas of fiscal policy andpublic finance, business environment, public administrationrcform, and secuntysector reformto improvethe socioeconomicandpoliticalcontext. PublicFhanCidManQgement 6. In early 2008, the government reached agrcement with the IMF on a one-year program under the Fund's EmergencyPost-Conflict Assistance. The programaimed to restore fiscal stability, andtargeted a reductionin the domestic primary deficit to about 4 percentofGDP. Despitestrongefforts on our part to improvefissal pwformnnceunder the EPCAprogram, we were faccdwith severalshocksthat affectedour public rwources, includingpoliticalevents, the highoil and food prices, andsomc delaysindonor support. We managedto keep our public spending control, and achieved progressin 2008 andthe first halfof2009towards improvin c financialmanagement. 7. To improve our legal basis for public financial management, the Council of Ministcrs has approved a new budget classification system in line with WAEMU directives, an Organic Law for Budget and htblic Accounting Laws. The 2009 Budget hasbeenelaboratedunderthe new WAEMU-basedbudgetclassification. 8. The government has introduced an integrated financial management system (SIGFIP). The implcmentationofthis systemhas advancedwell with the elaboration and executionmodulesbothbeingopcrational. We intendto install the accounting module in 2009. With these achievements, the authorities are now ablc to producemonthlybudget executionreportsreflectingstatus of budget executionat each ofthe four mainstages of our standard budget execution procedures which repments a significant gain in transparency and controllability of budget execution. The system allows us to use the WAEMU-mandated budget classification standards that we recently adoptedwhich will alsoimprove the presentationandfacilitatecontmlofthe budget. 9. Starting in early 2008, we have tightened the rccourse to simplified and emergency (extra-budgetary) spending procedures, and the Ministry of Finance has ensuredthat remaininginstances were regulatizcdwithin a two-day period. Followinga comprehensiveaudit of all revenuesources, includingsectoral ministries' administrative revenues and receiptsof public agencies (such as the civil aviation authority), all public rcvenucsarc now accountedinthe generalbudget. Sectoral Ministries' revenueaccounts in commercial bankshave becnclosed and administrativerevenuesare now collectedby the Treasurywhile sharingrulesremaininplace. IO. Significant efforts have been made to move towards a single treasury account at the central bank (BCEAO) by closing or transferringall sectoral ministries non-projcct spendingaccounts at the BCEAO (one account remainsopen ina commercial bank andis expected to close in the near future). The Tnasury is now in a position to produce a 4 -39- monthly ledger, while the Economic Forecasting department produces a monthly synthetic governmentfinancialoperationstable. II.Progress has beenmade in implementingthe actionplan to reform the public procurement system in six ministries (education, health, agriculture, infrastructurc, finance and defense). We are aware that this is only a first phase and intendto continue effortsMmodwnislxiourpublicprocurementsystemandmakeit moretransparent. 12.We are makingefforts to strengthencontrolsof the wage bill throughsystematic controlmissions inministries. These efforts have already allowed some modest savings on wage spending. We mend to moveto amoreambitious approachto controlling wage spending by conducting a biometric survey of our civil service, as we did for security forces, then by implementinga unified systemlptrsonnelmanagement system. We will also endeavor to improve ow debt management and have also requested assistance to install acomputerizeddebt managesncntsystem. Private Sector Development 13. The authonties recognize the needto foster privatesector development inorder to achieve equitable economic growth and to encouragejob creation. During the past yea, the government has initiatedaseries of actionsto improvethe business climate.Progress in the Government's privatizationprogramhas been positive: 31 out of 44 small and medium State Owned Enterprises (SOEs) have been privatizedfliquidated and the necessary environmental assessments have been completed and distributed to the new owncrs. 14.Important progress was also achieved with the adoption by the Council of Ministers of the nine OHADA Acts, the establishment of a Commercial Tribunal, the adoption of a draf? Public-Private Partnerships Law prepared with assistance from PPIAF, andthe adoptionofa new InvestmentCodedevelopedwitb FIASassistance. 15. The new InvestmentCode wouldensurethat incentives are consideredautomatic, removing the discretion that could be exercised by governmmt officials under the old law; that there is no discrimination among projects on the basis of size; that the niultiplicity of investmentregimes is eliminated to remove confusion and reduce fraud and evasion; and that the opacity of rules regarding sanctions and the uncertaintywith which they were appliedwouldbe ended. Fiscal I+& relatedto tax incentives would also be mitigated with the consolidation of incentives and taxes in an automatic and transparentmanner. 5 -40- I PublicAdministration Reform ~ 16.The government has launched recently an administration reform program supportedby an EU-fundedproject (PARAP), underthejoint leadershipof the ministries of Finance, and of Civil Service and Public AdministrationReform. The government is aware that spending on wages in not fmncially sustainable and that our public administrationneeds to be made more efficient and effective. The dual objective of our Public Administrationprogram is to reducethe size of the civil service, and modernize the puhlicadministration.This couldhelpreduce the ratio of the wage bill to GDP From his current level of 11 percent in 2008 to the West African Economic and Monetary Unionaverage(currentlyat about6 percent) inthe mediumterm. Security SectorReform 17. Over the past three decades, conflictandpolitical instabilityhaverepresentedthe main obstacle to good governance. poverty reduction and growth in Guinea-Bissau. Starting in 2006, UN agencies and the EU have initiated support to a Security Sector Reformthat aimsto (a) reduce the size of the militaryfor the establishmentof a smaller, professionalarmy, and a reductionof the military expenditureson wages; (b) achieve a e military; and (c) improve housing, 18.The government has startedimplementingthe SecuritySector Reformin2008. In particular,a census of the armed forces was conductedduringthe year, and has nlready allowed the identificationof savings on the militarypayroll. On February 12,2008, the EU announced lhe establishment of a permanent mimion in support of security scctor reformin Guinea-Bissau. Inaddition,the EUisprovidingabout EUR8.0 millioni to fund demobilization. Parallel to thc EU Council initiative, thc UN Peace-B Commission has created a commission for Guinea-Bissau headed by the Brazilian Ambassadorto the UN.A first missionvisitedthe country inApril 2008 to exploreareas for quick-win activities and medium-term peace-huilding activities to he financed throughthe Peace-BuildingFund. 3. GOVERNMENT'SPROGRAMIN 2009 19.The government's 2001, program has been adopted by the parliament in April 2009. It rcflccts the priorities described in the PRSP. The PRSP program aims at (i) improvingper capita income; (ii)graduallyreducingthe incidenceofpovertyto less than 60 percent by 2015; (iii) improving access to basic education by incnasing gross enrollmentratesto nearly 100petcentby 2015; and (iv) reducinginfantmortalityratesto less than 80 deathsper thousand by 2015. Beyondthe specific objectivesto achicvcfiscal and debt sustainability, and as critical pre-requisites to boost economic growth and reduce widespreadpoverty in tbe country, the gowmmentintends to focushis c&farts on: (i) promotiiigefficiency, transparency and accountabilityin the use of puhlic resources throughpublic financialmanagement rcforms;and (ii)improvingthe investmentclimate 6 -41 - by reducing thc up-front costs and uncertainties of business creation and promotinga levelplayingfieldfor privateinvestors. PublicFinancial Management first20.Our public fumnce reform agenda is designed to mch the goals defined in the pillar of the PRSP which BT(: strengtheninggovernance, modernizing the public administrationand ensuringmacroeconomicstability. Measuresunder the current fiscal stabilization program aim at increasing revenues, restraining expenditures, avoiding arrears accumulation, and improving transparency. We are pursuing efforts to increase revenues, and took several measures already in the last two years including(i) limiting tax exemptions; (ii)improvingcustoms collection; (iii)increasingtaxes on 14 products; and (iv) cnforcing the collection of the stamp tax. We will install a new computerized customsmanagemmtsystem, and havesigneda contractwithnpre-shipmentcompanyto improve controls on valuations. On the expenditure side, we have increased controls, including: (i) processing all payment orders through the Budget Directornte; (ii) restrictingextra-budgetary expenditures only to emergency situationsand regularizing them within 48 hours; (iii)normalizingbudget execution and(iv) requiring Treasury approval for any purchaseofgwds and services istries.inline with the new OrganicLaw for Budgetthat we haveadopted.. 21. The government is committed to implement the structural measures on public finances reforms agreedwith the WorldBank in hisbudgetsupport. These mearureswill permit to (i)pursue our integrationinthe Economic and Monetary Union, and adopt WAEMU's modem legal an framework for public financial manngement, (ii) use and continue t GFP. an integrated financial managementsystem that enhances our budget execution, monitoringand reportingand will makeour budget rq#nh'ng moretransparent, and(iii)strengthen the controlof wage paymentsandnon-wagespending. 22. We intend to pursue and accelerate reforms in the area of public financing management. A recent Public Expenditure and Financial Accountability diagnosis prepared with the support of the European Union (EU) has identified numerous weaknesses in our public financial manrgement systcm that we intcnd to address. The World Bank hasrespundectpositivelyto our requestto elaborateanactionplanfor Public Finance reforms through a "Public Expenditurc Managmcnt and Financial Accountability Rcview (PEMFAR). The exercise has already started and is conducted jointly with the World Bank, the AFrican DevelopmentBank (AEDB) and the EU, and alsobenefitsfromsupport for Portugal. PrivnteSector Development 23. The developmentof our private sector is stifledby persistentpoliticalinstability, our frequent publicfinance difficulties,the enormousdeficitsin infra..hucture, especially in energy and the port of Bissau. as well aa othcr barriers. We are committedto seck to gain on all these fronts, though improvements in infrastructure will require very large 7 -42- support from donors and will take time. In the short run, we are determined to adopt reforms that can already help improve the envimnment for private investors. Policy actions for 2009 will include(i) the adoptionof legaltexts andsimplifiedadministrative proceduresthat will allow a one-stop shoprguichet unique") for business registrationto beput in place; (ii) simplificationof administrative the bwinesses, based on an actionplan that was preparedonthe basis ofstud the context of the World Bank Private Sector Rehabilitation and Development Credit, and (iii)the submission to Parliament for adoption of the Telecommunication Law, so that our regulatoryframework inthis strategic sectorcanbemodernized. 24. Thereformmeasuresnreexpectedto lay the foundations for amorestable, simple and transparent legal otnestic and foreign investment, for reduced transactions for progress toward a level playing field for all privatein well, for the mitigation of fiscalrisks ontho budgetassociatedwith the grantingof fmal privileges discretionaryor statutory - - to privateinvestors. Muchmorewill beneededandwe are committedto pursuing strongprivatesectordcvelopmentpolicieswithout whichour economy will not develop. PublicAdministration Reform 25. The goals of our pubic administrationreforms would not be achievable without and incentive issues, as well as supporting interventions such as training. We welcome efforts from all donors to support to the PARAP program, including support hthe World Bank under the Public Expenditure Management and Financial Accountability Review that we rccentlylaunched. Security Sector Reform 26.The government is committed to continue the implementationof the security sector strategy with broad participation of all political pa forces. We are nware that a successfW r e f m of security forces is financial and governancereasons. 27.The government of Guinea-Bissau expresses its full commitment to the implementationof the described above along with the PRSP which it was derived. However, its ul wess dependsoncontinualdonorssupport.Thecountry is not likely to reachany of the MDGs by 2015 at curtent trends and without significant donor support. Additional grant resources wouldbe neededto increasepriority spending on social sectors, infrastructure, capacity building to the levels envisaged in the government's PRSP,andto paysalarieson time. Budgetsupportwouldneedto remainat a level of at least 3 percent of GDP over the next 5 years to cover the domestic primary deficit. Chancesof apermanent solutionto debt distresswill be enhancedby the country 8 -43 - rcrchingthe HIPC CompletionPoint. The government has requested support under thc IMF'sPRGF,which, ifperfonnanceis satisfactory,wouldpavethe way for reachingthe CompletionPoint by endMarch2010. 9 -44- m U .-0.0 c .-2 d 2 i-) c) 0 vl f2 n .3 .-* 2 d 2 c1 U a .-0.0 2* .-2 2 Y 0 I I I d b I I 00 d I I 0 In I Annex 4: IMFRelationsNote (May 19,2009) INTERNAT I0NA L MONETA RY FUND WASHINGTON. D.C. 20431 Facsimile Number 1-202-623-4661 Guinea-Bissau-Assessment Notefor the WorldBank The Fundapprovedtwo purchasesofEmergency Post-Conflict Assistance (EPCA) for Guinea-Bissauin2008 to support the government's 2008 macroeconomic framework. Performanceunder the 2008 EPCA-supported program was mixed. A staff mission visited Guinea-Bissauduring February 17-March 2 to discuss a macroeconomic program for 2009 that could be supportedby a thirdEPCA purchase; the discussions were concluded at headquartersduring April 20-26,2009. The EPCA request is scheduledto be discussedby the IMFBoard inearly June. The political and security situation has remained stable following the assassinations of President Jog0 Bernard0Vieira and the Army Chiefof Staff. An interimpresidenthas beenappointed andnewpresidential elections are scheduledfor June 28. This note provides the IMFstaff assessment ofrecentmacroeconomic developmentsin Guinea-Bissau, performance under the 2008 EPCA-supported program, and the objectives for the 2009 EPCA-supportedprogram. Performanceunderthe 2008EPCA-supportedprogram Performanceunder the 2008 EPCA-supported program was mixed. The authorities made progress implementing important revenueand expenditure managementreforms. They also made strong efforts to keep spendingbroadly withinbudgetedlevels. The fiscal situation, however, remained very difficult.Revenue shortfalls, inparticular, ledto a worse-than- expecteddomestic primary deficit. Lower revenuesreflected tax exemptions on food and fuel imports, inthe face of the global surge inprices, but also disruptions inrevenue administration inthe midst o f growing politicaluncertainties surrounding the November 2008 legislative elections. Donor budget support also fell short o fprogrammedamounts, and ledto sizeable accumulation ofarrears, includinggovernment wages. Four out of seven EPCA quantitative indicators were missedat end-December. Most structural benchmarks underthe 2008 EPCA were met. Real GDP growth pickedup in2008, thanks inpartto increasedagricultural production as normal rains returned. Inflation rose to 10.4 percent (period average), from 4.6 percent in2007. The external current account deficit (excluding - 52 - official transfers) worsened to about 13.8 percent o f GDP in2008, from 8.5 percent o f GDP in2007, as buoyantcashew exports were outweighedbyhigher import costs. Outlookandpoliciesfor 2009 Real GDP growth in2009 and the medium-term is likely to be severely affected by global economic developments. Staff expects lower export prices for cashew nuts to constrain real GDP growth and affect the poor inrural areas, as well as putpressure on the budget and external current account. Remittances are also expected to be lower, with further negative impact on real incomes and the current account. Real GDP growth o f between 1-2 percent is now expected for 2009, sharply lower thanin2008. The external current account i s also projected to further worsen. Lower food and fuel prices, on the other hand, will contribute to lower inflation. Provisional projections indicate a slight pick-up ineconomic activity over the medium-term, while inflation should return to trend levels. The 2009 fiscal situation will remain difficult as the domestic primarydeficit is projectedto deteriorate to some 8 percent o f GDP, from an estimated 6 percent in2008. Revenues, in particular, will be adversely affected by the sharp forecasted decline ininternational prices for cashew nuts and the projected drop inimports. Total revenues are expected to decline by about 2.7 percent o f GDP, with tax revenues lower by 1.3 percent o f GDP. Current primary expenditures are expected to decline by about 0.8 percent o f GDP in2009, reflecting a nominal freeze o f current expenditures, including the wage bill. The authorities are nonetheless determined to stabilize public finances and avoidnew domestic arrears. Intheir fiscal framework for 2009, the authorities agreed to (i)limitthe use o f 2009 budget resources, domestic and external, to the payment of current-year expenditures; (ii) postpone payment o f domestic arrears and commercial debt; and (iii) speed up efforts to further strengthen revenue collection andexpenditure controls. The authorities have already secured a significant amount o f donor financial and technical assistance for 2009. They are requesting a third EPCA purchase to support the 2009 program. Structuralreformsand debt sustainability The authorities agreed to a number o f measures for 2009 to further improve administrative capacity and strengthen fiscal performance. Importantly, the authorities will prepare a medium-term action plan for Public Financial Management (PFM), inconsultation with the World Bank andEUand drawing on the outcome o f the recent EU-financed study on Public Expenditure and Financial Accountability (PEFA). Other measures include strengthening customs administrationby fully implementing ASYCUDA++, and improving control o f territorial waters. The authorities also intendto enact a new investment code which will eliminate exemptions for investmentprojects andreplace them with tax credits, inline with established best-practices. The authorities also intendto prepare a medium-term planfor clearing the large stock o f outstanding domestic arrears. Satisfactory performance under the 2009 EPCA-supported program could pavethe way to move to a newPRGF arrangementlater this year. Moving to aPRGF arrangement is essentialto shift focus to criticalmedium-termgrowth anddevelopment needs, ensure continued donor support, andmove to the HIPC completion point. Guinea-Bissauremains ina situation of debt distress. Reachingthe completion point under the Heavily IndebtedPoor Countries (HIPC) debt reliefinitiativewould significantly reduce the stock of outstanding debt. However, Guinea-Bissauwould remain at high risk of external debt distress evenafter possible HIPC andMDRIdebtrelief, while additional donor support i s neededto reduce the outstanding domestic debt burden.The authorities have made progress satisfying the remaining requirementsto reachthe HIPC Completion Point, includingregularizing relations with all external creditors and have met most of the HIPC Completion Point triggers. The other remaining requirementis establishing a satisfactory PRGF track record. Reaching the completion point is currently assumed for 2010, before World Bank and African Development Bank interimdebt reliefexpire. Staff believe that the 2009 EPCA-supported program will provide a soundmacroeconomic framework to guide reform efforts and ensure that the authorities are preparedto move to a PRGF arrangement. Staff will continue to monitor performance closely and maintain close coordination with donors. Sincerely yours, Antoinette M.Sayeh Director African Department cc: Mr.L.Rutayisire ,Executive Director Annex 5: Countryat a Glance Guinea-Bissau at a glance 5/16/09 I Sub- Key Development Indicators Guinea. Saharan LOW Bissau Africa Income Age dlstrlbutlon, 2007 WW Male Female Population,mid-year (millions) 1.7 800 1,296 7b78 Su~acearea (thousandsq. km) 36 24,242 21.846 Populationgrowlh(96) 2.9 2.4 2.1 e w Urbanpopulation(% of total population) 30 38 32 4 Y B GNI (Atlas method. US$billions) 0.3 762 749 3 0 3 GNI per capita(Atlasmethod. US$) 200 952 578 GNI per capita(PPP. lntematlonal$) 16-10 470 1,870 1,500 w GDP growth(%) 3.3 6.2 6.5 GDP per capitagrowlh (%) 0.4 3.7 4.3 I 3o 2o 'O percent lo 2o O 30 (most recentestimate, 2002-2008) IIml Povertyhaadcount ratio at $1.25 a day (PPP. %) 50 Povertyheadcount ratioat $2.00 a day (PPP. %) 72 Under-5 mortality rate (per1,000) Life expectancy at birth (years) 45 50 57 Infant mortality(per 1,000live births) 124 94 85 Child malnutrition(% of children under 5) 27 29 250 Adult literacy,male (% of ages 15and older) 89 72 200 Adult literacy,female(% of ages 15 and older) 50 50 150 Grossprimaryenrollment, male (% of age group) 93 100 1w Grossprimaryenrollment,female (% of age group) ea 89 50 Access to an improvedwater source (% of population) 59 58 68 0 Access to improvedsanitationfacilities(% of population) 35 31 39 I 1QW lS95 20W iUC6 Net Aid Flow5 1980 1990 2000 2008 ' (US$ m'ilions) Net ODA and officialaid 58 126 80 82 Growthof GDPand GDPper capita (%) Top3 donors(in 2006): EuropeanCommission 11 5 17 33 10 Portugal 13 15 15 8 Franca 3 9 7 10 E Aid (%of GNI) 55.5 8.3 40.4 26.7 420 Aid par capita (US$) 73 124 59 50 42 4 4 Long-Term EconomlcTrends -10 05 Consumerprices (annual% change) 33.0 8.6 10.4 GDP implicitdefiator (annual% change) 11.5 0.4 3.2 8.9 +GDP -GDPprcaplta Exchangerate(annualaverage, local per US$) 0.8 33.6 709.9 476.6 Terms of trade index (2wO 100) 105 100 B6 198WO 1990-2000 200048 (averdge annual gmwM %) Population,mid-year (millions) 0.8 1.o 1.4 1.7 2.5 3.0 3.0 GDP (US$ millions) 111 244 218 430 4.0 7.4 0.6 (% of GDP) Agriwltura 44.3 46.2 58.8 55.5 2.1 2.9 4.2 Industry 19.7 19.1 12.3 12.9 1.1 2.7 0.9 Manufacturing 14.7 10.0 10.2 4.0 0.7 Services 36.1 34.7 28.9 31.6 4.3 4.2 0.8 Householdfinal consumptionexpenditure 73.3 66.9 102.3 81.3 4.3 -1.3 -6.6 Generalgov't final consumptionexpenditure 27.6 10.3 14.0 13.9 3.3 1.0 3.3 Gross capitalformation 26.2 29.9 11.6 24.9 9.0 -6.1 Exportsof goods and services 12.7 9.9 44.8 29.8 -1.7 5.1 -0.4 Importsof gocdsand services 41.8 37.0 72.5 49.8 0.3 0.4 -4.3 Gross savings -13.6 15.3 3.7 22.9 Note: Figures in italicsare for years other than those specified.2008 data are preliminary...Indicatesdataare not available. a. Aid data are for 2006. DevelopmentEconomics,DevelopmentData Group (DECDG). - 55 - Guinea-Bissau Balance of Payments and Trade 2000 2008 (US$ millions) Governance indicators, 2000 and 2007 Total merchandiseexports (fob) 87 91 Total merchandiseimports(cfi 117 162 voice and accountability Net trade in goods and sewices -60 -86 PoiniCsialsbllty Currentaccount balance -17 -e as a % of GDP -7.9 -1 9 Regulatoryquainy Workers' remlttancee and Ruleoflaw compensationof employees (receipts) 2 29 Controlof corruption Reserves,including goid 47 108 0 25 50 75 100 Central Government Finance I2007 Country'speffienlllerank (0.100) 132000 higher YIIYW ~mplybelferrntmpr (% of GDPJ Currentrevenue (includinggrants) 26.7 24 8 S o u m K.~lmann-KTaay-Ma~h~m, WorldBank Tax revenue 10.7 102 Currentexpenditure 33.8 24 3 Technolopyand Infrastructure 2000 2007 Overallsurpius/deficit -17.7 -12 8 Pavedroads (% of total) 10.3 Highestmarginaltax rate (U) Fixedlineand mobilephone Individual subscribers (per 100 people) 1 18 Corporate Hightechnologyexports (% of manufacturedexports) External Debt and ResourceFlows Environment (US%millions) Total debtoutstandingand disbursed 804 742 Agriculturalland (% of land area) 58 58 Total debtservice 20 32 Forestarea (% of land area) 75.4 73.7 Debt relief(HIPC,MDRi) 546 Nationallyprotectedareas (% of landarea) .. 0.0 Total debt(% of GDP) 372.2 1943 Freshwaterresourcesper capita(a.meters) .. 10,0f9 Total debtservice(% of exports) 18.7 23 0 Freshwaterwithdrawal(% of internalresources) 1.1 Foreigndirect investment(net inflows) 1 42 C02 emissions percapita (mt) 0.18 0.17 Portfolioequity (net inflows) 0 0 GDP per unit of energy use Compositionof total external debt, 2007 (2005 PPP t per kg of oil equivalent) Energyuse per capita (kg of oilequivalent) %?&&IDRD o IBRD Totaldebt outstandingand disbursed 0 0 Disbursements 0 0 Principalrepayments 0 0 interestpayments 0 0 US$miiliona IDA Totaldebt outstandingand disbursed 228 315 Disbursements 14 11 Private Sector Development 2000 2008 Totaldebt service 4 8 Time requiredto start a business (days) 233 IFC (fiscal year) Cost to start a business(% of GNIper capita) - -- 257.7 Totaldisbursedandoutstandingportfoiio 1 0 Time requiredto registerproperly (days) 211 of which iFC own account 1 0 Disbursementsfor IFC own account 0 0 Rankedas a major constraintto business 2000 2007 Portfoliosales,prepaymentsand (% of managerssurveyedwho agreed) repaymentsfor IFC own account 0 0 Eiectricky .. 41.4 Access tolcostof financing .. 19.6 MlGA Grossexposure - 27 Stock market capitalization(% of GDP) Newguarantees - 27 Bank capitalto asset ratio (%) I Note:Figures in italicsere for years other than those specified 2008 data are preliminary. 4/1/OS indicatesdata are not available. -indicates observationis not applicable. DevelopmentEconomics, DevelopmentData Group (DECDG). - 56 - Millennium Development Goals Guinea-Bissau Wifhselecfed fargets to achieve between 1990and 2015 (estimatedosesf to date shown, +/- 2 years) Goal 1:halvethe ntesfor extreme povertyand malnutrition lea0 1996 2000 2007 Povertyheadcountratio at $1.25 a day(PPP, % of population) Povertyheadcountratio at nationalpovertyline (% of population) 65.7 Share of incomeor consumptionto the poorestqunitile(%) 5.2 Prevalenceof malnutrition(% of childrenunder5) 21.9 Goal 2: ensurematchildren are able to completeprimaryschooling Primaryschool enrollment(net, %) 38 45 45 Primarycompletionrate (% of relevantage group) 27 Secondaryschoolenrollment(gross,%) 18 Youth literacyPate(% of peopleages 15-24) 44 51 58 65 Goal 3: eliminategenderdisparityineducationand empowerwomen Ratioof girls to boysinprimaryand secondaryeducation(%! 65 Women employedinthe nonagriculturalsedor(% of nonagnwlturalemployment) 11 Pmportionof seats heldbywomen in nationalparliament(%) 20 10 6 14 Goal 4: reduce under5 mortalitybytwo-thirds Under-5moltalityrate (per 1,000) 240 233 218 200 Infantmortalityrete(per 1,000 live births) 142 138 129 119 MeaslesimmunlzaUon(proportionofone-yearolds immunized,%) 53 45 59 60 Goal 5: reducematernal mortailtyby three-fourths Maternalmortaiityratio(modeledestimate,per 100,000live births) 1,100 Birthsattendedby skilledhealthstaff (% oftotal) 25 35 39 Contraceptiveprevalence(% of womenages 15-49) 8 10 Goal 6: haltand beginto reversethe spreadof HIVIAIDSand othermajor diseases Prevalenceof HIV (% of populationages 15-49) 1.8 1.8 lnadenceof tuberculosis(per 100,000people) 158 173 193 219 Tuberculosiscases detectedunderDOTS (%) 45 64 Goal 7: halvethe proportionof peoplewithoutsustainableaccessto basic needs Access to an improvedwater source(% of population) 58 58 57 Access to improvedsanitationfacilities(% of population) 29 30 33 Forestarea (% of total landarea) 78.8 75.4 73.7 Nationallyprotectedareas (%of total landarea) 0.0 C02 emissions(metrictons per capita) 0.2 0.2 0.2 0.2 GDP per unitof energyuse (constant2005 PPP $ per kg of oil equivalent) Goal 8: developa global partnershipfor development Telephonemainlines(per 100people) 0.6 0.6 0.8 0.3 Mobilephonesubscribers(per 100people) 0.0 0.0 0.0 17.5 Internetusers(per 100 people) 0.0 0.0 0.2 2.2 Personalcomputers(per 100 people) 0.2 0.2 Education lndlcatore (%) Measleslmmunlzatlon(Oh of 1-year olds) ICT Indicators (per 100 people) 75 'On 1 20 1 ':L 2000 2002 2004 II 2o08 2000 2000 2002 2004 2006 -PPdrnlrynetcnroum*ntrauo 1000 1645 2008 -0- RatioofgirlsIoboysinprimaryLsecondary 0Fb;ed + mobile sub8crlben mlnternetu~era edUCaUon Note: Figuresin italicsare for years otherthanthose specifled. indicatesdata are not available. .. 4/1/09 DevelopmentEconomics,DevelopmentData Group (DECDG). - 57 - Annex 6. StatusofHIPC CompletionPointTriggersImplementation HIPC Completion Point Triggers Status of Implementation Poverty Reduction Strategy Paper "A full PRSPhasbeenpreparedthroughaparticipatory The DENARP (Guinea-Bissau's PRSP) finalizedin2006, processand satisfactorilyimplementedfor one year, coveringthe period 2006-2008, was preparedina as evidencedby thejoint staff assessmentofthe participatoryprocess, and builds on grassroots country's annualprogressreport." consultations at the nationallevelthat involvedall segments of society (government, private sector, civil society, local communities, anddevelopment partners). The PRSP was discussedby the Boardon May 10,2007. The PRSP is currentlybeing implemented. The first annualprogressreport ofthe Macroeconomic stability PRSP is expectedin2009. "Continued maintenanceofmacroeconomic stability as evidencedby satisfactoryimplementationofthe A PRGF-supported programwas adoptedinearly 2000 PRGF-supportedprogram." but went offtrack by the end ofthat same year. Since then the government has had two Staff Monitored Programs(SMPs, in2005 and2006)with mixedresults. Following the appointment of anew government inApril 2007, and the launchingof a minimum economic reformprogramto stabilizethe macroeconomic situationand reactivateeconomic growth, the Fundagreedon an EPCA supported programfor 2008, which was approvedby the IMF BoardinJanuary 2008. Fiscalperformanceunder the EPCAprogramwas broadly satisfactory untilmid- year but weakenedinthe latterpart ofthe year inthe face of externalandpoliticalshocks. Inearly 2009, the new government immediatelyreaffirmedits commitmentto soundmacroeconomic management andrequestedMher support under the I h W s EPCA. The request for adisbursementof aboutUS$2.8 millionunder the EPCA is expectedto be submitted to the IMFBoardon atimetablethat runs inparallel to the proposedIDA operation. Governance The governmentproducedcomprehensivebudget "Satisfactory progress instrengtheningpublic expenditure executionreportstwice ayear in2002; however, this managementassessedby the releaseto the Parliament effort was abandonedsince 2003 due to continued andthe public,twice ayear startingin2001, of politicalandinstitutional instability. As part of an comprehensivebudget executionreports.These effort to strengthen public expenditure management reports also will allow monitoring ofbasic education, inavolatile institutionalcontext,thegovernment primaryhealthcare and military expenditures." establishedan independenttreasury committee to implementacash flow managementsystem. The SIGFIP elaborationandexecutionmoduleshavebeen installedinthe centraladministrationby the MOF's budget departmentwith technical assistance and financial support ofthe EuropeanUnion. Training programs for budget managersandaccountantshave takenplace andpilot tests are ongoing.Monthly budget executionreportswill beproducedduringthe 2009 budget calendar. I"The actionplanto reform the public procurementsystem The action~ l ato reform the tmblic Drocurementsvstem n - 58 - has beenimplementedandthe new systemhas been has beenimplementedinfive Ministries (Education, installedinall ministries." Health, Finance, Agriculture, and Infrastructure),and extendedto one additionalministry (defense) through the World Bank LICUS grant. Efforts are underway to extend it to four additionalministries(Commerce andIndustry;Economy; Fisheries; Transports and Telecommunication)throughthe SPF Economic GovernanceSupport Grant. "The findings ofthe externalauditto the 1997-99budgets The externalaudit ofthe 1997-99budgetsoutturns outturnshavebeen submittedto Parliamentand an financedby the Netherlands was completed in2003; actionplanof corrective measures has beenadopted." however, its findings andrecommendationsare yet to be approvedby Parliament, and implementedby the Education Sector executive. "Elimination of fees for schoolbooks for all primary education students(grades 14) implementedin Since 2002, free primary educationwas introducedin public schools." public schools as part ofthe government's broader EducationFor All (EFA) program:tuition and school book fees havebeeneliminated. "Satisfactory implementationofthe basic educationaction plan, measuredby an increase inthe gross primary The gross enrollmentratio increasedfrom 53 percent in schoolenrollmentratio to 61 percent". 1995,60 percent in 1999to 102percent in2005. However,the net enrollmentrate inprimary education is at 45 percent. Gross and net enrollment ratesare highly divergentbecause ofwidespread delayed enrollment. Health Sector "Satisfactory implementationofthe National Health DevelopmentProgram, measuredby an increaseto at 62 percent of childrenunder one year were fully least40 percentthe proportionof childrenunder one vaccinated by end-2007. year fully vaccinated." "Adoption of an actionplan for malariaandits Guinea-Bissauis consideredas a regionalbenchmark on satisfactoryimplementationmeasuredby an increase malariaprevention.The malariaactionplanwas to 15 percent inthe use of insecticideimpregnated adoptedin2002. The implementationallowed bed-nets by pregnant women." increasingthe use of insecticideimpregnatedbed- nets by vulnerablegroups such as childrenunder five years andpregnantwoman. 81percentof children under 5 and72 percentofpregnantwomen were sleepingunder insecticidetreatedbednet inprevious HIV/AIDS night of survey by end-2007. "Adoption of astrategic framework to fight against HIV/AIDS. At least 50 percent ofthe populationat Eighty-sevenpercent of 15to 24 year olds indicatedthat increasedrisk (age 14-29) made aware of they knew how HIV is transmitted(2006 survey) transmission andpreventionmethods." Demobilization Program The government's Demobilization,Reinsertionand "Demobilization has beensuccessfully completed and ReintegrationProgram(DRRP) was successfully dischargedcombatants are beingreinsertedinto completed in2006. The programallowed civilianlife as establishedinthe DRRP." demobilizing about 4,000 ex-combatantsby September 2003 The fmal phase ofreintegrationwas I completed in2006 and involved about 7,500 ex- combatants. - 59 - Annex 7: Guinea-Bissau KeyEconomic Indicators Actual esumnte Pm]ettat Indicator 2005 2006 2007 2008 m 2010 201I National accounts (as % of GDP) Gross domesticproducta 100.0 1000 100.0 100.0 100.0 1000 1000 Agriculture 54.9 54.7 53.1 55.5 55.3 55.0 54.4 Industry I 4 3 14.0 13.1 12.9 13.0 13.2 13.7 Services 30.8 31.3 33.8 31.6 31.6 31.8 31.9 Total Consumption 88.5 103.9 92.3 95.1 98.5 97.0 95.0 Gross domestic fixed investment 26.5 22.8 25.7 23.8 23.9 24.2 24.5 Government investment 14.5 11.9 13.3 13.2 13.7 13.9 14.2 Private investment 12.1 11.0 12.4 10.6 10.2 10.3 10.4 Exports (GNFS)b 31.3 18.7 28.0 29.8 29.3 26.3 27.4 Imports (GNFS) 45.2 46.7 44.6 49.8 51.3 47.1 47.0 Grossdomestic savings 11.5 -3.9 7.7 4.9 1 . 5 3 0 5 0 Grossnational savings" 24.8 12.8 34.4 22.9 19.8 18.1 19.8 Memorandum items Gross domestic product 302.3 317.4 382.0 429.6 476.1 448.2 476.2 (US$ million at current prices) GNI per capita (US$, Atlas method) 180 190 200 220 240 250 250 Real annual growth rates ("A,calculated from 86 prices) Grossdomestic product at marketprices 3.5 0.6 2.7 3.3 1.9 3.1 3.8 GrossDomestic Income -10.3 27.3 9.0 4.9 0.4 0.1 0.9 Real annual per capita growth rates(%, calculatedfrom 86 prices) Gross domestic product at marketprices 0 4 -2.4 -0.3 0.3 -1.1 0.1 0.8 Total consumption 7.0 27.7 -18.8 6.0 5.2 -2.4 -2.7 Private consumption -2.1 45.8 -22.6 13.3 7.8 -2.2 -3.4 Balance of Payments (million US%) Exports (GNFS)b 94.6 59.3 106.8 128.1 139.6 117.7 130.6 MerchandiseFOB 89.4 55 9 73.3 90.7 85.3 73.2 83.2 Imports (GNFS)~ 136.7 148.4 170.3 214.0 244.3 211.1 223.7 MerchandiseFOB 95.0 108.7 102.0 141.9 146 5 129.5 139.3 Resourcebalance -42.2 -89.0 -63.5 -85.9 -104.8 -93.4 -93.1 Net current transfers 52 5 62.4 109.9 85.0 96.0 75.8 78.4 Current accountbalance -1.7 -36.0 38.4 -8.4 -17.3 -25.5 -22.8 Net private foreign direct investment 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Long-term loans(net) -39.4 -35.5 -57.6 -58.8 -60.8 -43.9 -46.2 Official -2.6 -8.0 -1.1 Private -36.9 -27.4 -56.6 Other capital (net, incl errors & ommissions) 60.7 65.7 41 2 82 2 84.8 75.8 75.8 Changein reservesd -19.6 5.8 -22.0 -15.0 -6.7 -6.4 -6.9 Memorandum items Resource balance (% of GDP) -13.9 -28.0 -16.6 -20.0 -22.0 -20.8 -19.6 Real annualgrowth rates ( YR86 prices) Merchandiseexports (FOB) -9.7 -41.9 -7.6 -0.5 13.7 4.5 13.7 Primary Manufactures Merchandise imports (CIF) -1.1 -9.1 -13.6 13 3 19.4 -10.5 3.0 - 60 - continued A d stimwe Pro;ected Indicator 200s 2006 2007 20118 2 m 2010 201 I Indruuor Public finance (as % of GDP at market prices)' Current revenues(revenue incl current grant) 20.8 25.1 23.9 24.8 22.9 20.7 21.0 Current expenditures 27.7 28.1 26.3 24.3 23.4 21.9 21.6 Current accountsurplus(+) or deficit (-) -6.9 -3.0 -2.4 0.5 -0.5 -1.1 -0.6 Capital expenditure 14.5 11.9 13 3 132 13.7 13.9 14.2 Foreignfinancing (excl arrearsanddebtrelief, incl capital grant) 2.1 2.6 5.2 6 9 7.1 -50.2 9.0 Monetary indicators M2IGDP 32.9 33.2 37.9 40.6 42.7 43.3 43.8 Growthof M 2 ("A) 20.6 5.0 25.9 20.7 8.5 6.8 6.9 Private sector credit growth1 28.8 106.1 136.2 32.9 -64.7 -36.6 219.9 total credit growth (%) Price indices( YR86 =loo) Merchandiseexport price index 103.2 111.0 157.6 195.9 162.0 133.1 133.2 Merchandiseimport price index 198.6 219.4 238.0 292.3 252.9 249.7 260.8 Merchandiseterms of trade index 52.0 50.6 66.2 67.0 64.1 53.3 51.1 Realexchange rate (US$ILCU)' 106.9 108.1 111.4 119.2 123.2 125.3 127.3 Realinterest rates Consumer pnce index (?Achange) 5.6 -0.1 4.6 10.4 3.6 2.5 2.8 GDP deflator (% change) 2.2 3.5 7.4 8.9 1.3 2.2 1.8 a. GDP at h "GNFS" denotes "goodsandnonfactor services." c. Includesnet unrequitedtransfers excluding official capital grants. d. Includes use of IMFresources. e. Consolidatedcentral government. f, "LCU" denotes "local currencyunits."An increaseinUS$LCUdenotes appreciation -61 - Annex 8: Guinea-BissauSocial Indicators Latestsingle year Same regionlincome group Sub- Saharan LOW- 1980-85 1990-95 200208 Africa income POPULATION Total population,mid-year (millions) 0.9 1.2 1.7 799.8 1,295.7 Growth rate (% annualaverage for period) 2.4 3.2 3.0 2.5 2.2 Urban population(% ofpopulation) 22.4 29.8 29.8 35.9 31.7 Total fertility rate (bifths perwoman) 7.1 7.1 7.1 5.2 4.3 POVERTY (% of population) Nationalheadcount index 65.7 Urban headcount index Rural headcount index INCOME GNI per capita (US$) 190 200 220 952 578 Consumer priceindex (2000=100) 0 37 133 137 150 Food price index (2000=100) INCOMElCONSUMPTlONDISTRIBUTION Gini index 47.0 Lowest quintile (% ofincome or consumption) 5.2 Highest quintile (% of income or consumption) 53.4 SOCIAL INDICATORS Public expenditure Health (?Aof GDPj 1.7 2.8 1.5 Education(% of GN/) 4.2 Net prlmary school enrollmentrate (% of age group) Total 38 45 70 73 Male 49 72 78 Female 27 87 69 Access to an Improved water source (% ofpopulation) Total 58 57 58 68 Urban 78 82 81 84 Rural 50 47 46 60 Immunization rate (% of childrenages 12-23months) Measles 35 45 60 72 76 DPT 18 45 77 73 77 Child malnutrition(% under5years) 25 27 29 Life expectancy at blrth (years) Total 40 44 48 51 57 Male 39 43 45 50 58 Female 42 46 48 52 58 Mortality Infant(per 1,000 live births) 147 138 119 94 85 Under 5 (per 1,000) 248 233 200 157 135 Adult (15-59) Male (per 1,000population) 535 544 447 421 310 Female (per 1,000population) 517 533 398 391 272 Maternal (per 100.000live births) 1,100 900 780 Births attended by skilledhealthstaff (%) 25 39 45 41 CAS Annex B5. This table was producedfrom the CMU LDB system. 04/08/09 Note: 0 or 0.0 meanszero or less than half the unit shown. Net enmllmentrate: break in series between1997and 1998due to change from ISCED78 to ISCED97. Immunization: refersto children ages 12-23 months who receivedvaccinations before one year of age or at any time beforethe survey. - 62 - 16°W 15°W 14°W To S E N E G A L To Kounkané Sédhiou To Kolda To Kolda To Sédhiou Cuntima Cambaju Sare Bácar Bácar Pirada (300 m) Dungal Bajocunda Jumbembem Canhâmina Canhâmina To Canquelifá Canquelifá Ziguinchor To Diiattakounda Farim Cambaju Buruntuma To To Oussouye Kabrousse Ignoré Ignoré Canjambari Contuboel Camajábá Camajábá São Domingos São Barro Cacheu To Youkounkoun Olossato Mansaina Mansabá Mansabá Pitchie Varela Susana Gabu Olossato Mansabá Mansabá Cacheu Cacheu Gêba Gamamudo Jolmete Bissorã Bissorã To O I O Youkounkoun Gêba Gêba Uacaba C A C H E U Bafatá Bafatá G A B Ú Bula Calequisse Binar Encheia B A FAT Á Canchungo Mansôa Mansôa Cabuca 12°N Bambadinca 12°N Safim Nhacra Galomaro Caió Xime Porto Gole Corubal Quinhámel Quinhámel BISSAU Gêba Ganquecuta Ché Ché Ché Ché Jabedá Jabedá Garfanhapa Béli Béli ATLANTIC MansôaB I O M B O Dulombi Prábis Prábis BISSAU Enxud Enxudéé Corubal Vendu Iljante Fulacunda Boé Boé Leidi OCEAN Tite Ondame Xitole Q U I N A R A Guilege CanaldoGêba To Buba Koumbia To Ilha de São João São João Féfiné Caravela lha de Ilha de Ilha de Bolama BubaEmpada Quebo Saafa Caravela Carache Formosa Bolama To Abu I. das Bénnsané Galhinas Rio Grandede Arquipélago Gandembel G U I N E A dos Bijagós I. de Soga I. Madina de de Baixo B O L A M A Rubane Bubaque Tombali Bedanda Catió Catió T O M B A L I To Ilha de Tombali I. de Ilha de Boké 14°W Uno Uno Canogo Bubaque Ilha de Cachamba Balanta Songonha Eticoga Roxa Ilha de Ilha de Orangozinho Cacine To GUINEA-BISSAU Orango CacinCampeane e Boké I. de IIlha Meneque Joao Vieira 11°N Ilhéu SELECTED CITIES AND TOWNS do Meio REGION CAPITALS GUINEA- NATIONAL CAPITAL BISSAU 0 10 20 30 40 Kilometers RIVERS MAIN ROADS 0 10 20 30 40 Miles DECEMBER RAILROADS IBRD This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information REGION BOUNDARIES shown on this map do not imply, on the part of The World Bank 33415 Group, any judgment on the legal status of any territory, or any 2004 INTERNATIONAL BOUNDARIES endorsement or acceptance of such boundaries. 16°W 15°W