Document of The World Bank Report No. 58533 - GW ... · Number of procedures required to register a firm Number of days to register a firm Cost of registering a firm (% income per

Document of

The World Bank

Report No. 58533 - GW

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT

FOR A

PROPOSED THIRD ECONOMIC GOVERNANCE REFORM GRANT

IN THE AMOUNT OF SDR 4 MILLION

(US$6.4 MILLION EQUIVALENT)

TO THE

REPUBLIC OF GUINEA-BISSAU

May 17, 2011

Poverty Reduction and Economic Management 4

Country Department AFCF1

Africa Region

This document has a restricted distribution and may be used by recipients only in the performance of their

official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENT

Currency unit = CFA Franc (CFAF)

Exchange rate as of 05/05/11

US$1 = 445.6 CFAF

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS

AfDB African Development Bank

AIDS

ANP

APR

ASECNA

ASYCUDA

BCEAO

BOAD

CAS

CAIA

CCAB

CCIA

CEM

CENFA

Acquired Immune Deficiency Syndrome

National People’s Assembly

Annual Progress Report

Agency for Aerial Navigation Safety in Africa and Madagascar

Automated System for Custom Data

Central Bank of West African States

West Africa Development Bank

Country Assistance Strategy

Center of Evaluation of Environmental Impacts

Joint Framework for Budget Support Coordination

Chamber of Commerce, Industry and Agriculture of Guinea-Bissau

Country Economic Memorandum

National Center for Training in Administration

CFE

CFAA

CFAF

CoM

CPAR

CPLP

CPU

Center for Business Registration

Country Financial Accountability Assessment

African Financial Community Franc

Council of Ministers

Country Procurement Assessment Review

Community of Portuguese- Speaking Countries

Central Procurement Unit

CRW

DB

DAF

DFC

Crisis Response Window

Doing Business

Financial Control Office

Financial Control Directorate

DGO Budget General Directorate (Direcção Geral de Orçamento)

DGTCP

DSA

DRRP

Budget Office, and Treasury and Accounting

Debt Sustainability Analysis

Demobilization, Reinsertion and Reintegration Program

DTIS

EAGB

ECOWAS

Diagnostic Trade Integration Study

Electricity and Water Company of Guinea-Bissau

Economic Community of West African States

EFA Education for All

ECF

EGRG

Extended Credit Facility

Economic Governance Reform Grant

EPCA Emergency and Post-Conflict Assistance

EU

FIAS

European Union

Foreign Investment Advisory Services

iii

FSF

FY

GDP

GNI

Fragile State Facility

Fiscal Year

Gross Domestic Product

Gross National Income

HIP High Impact Program

HIPC

HIV

Heavily Indebted Poor Countries

Human Immunodeficiency Virus

IDA International Development Association

IFAD International Fund for Agricultural Development

IFC

IFRS

International Finance Corporation

International Financial Reporting Standards

IGF General Finance Inspectorate

ILAP

IMF

INE

INEP

IPMSPA

Inquérito Ligeiro de Avaliação da Pobreza

International Monetary Fund

National Institute of Statistics

National Institute for Studies and Research

Integrated Personnel Management System of the Public Administration

IPSA

ISN

JSAN

LDP

Integrated Poverty and Social Assessment

Interim Strategy Note

Joint IDA-IMF Staff Advisory Note

Letter of Development Policy

LICUS Low Income Countries Under Stress

MDG

MDRI

Millennium Development Goal

Multilateral Debt Relief Initiative

MICS

MoF

MoPA

MW

Multiple Indicators Cluster Survey

Ministry of Finance

Minister of Public Administration

Megawatts

NGO

OHADA

OPCS

Non-Governmental Organization

Organization for the Harmonization of Business Law in Africa

Operations Policy and Country Services

PDO Public Debt Office

PAIGC African Party for the Independence of Guinea-Bissau and Cape Verde

PARAP Public Administration Reform Assistance Project

PEFA

PEMFAR

PFM

PLACON

Public Expenditure and Financial Accountability

Public Expenditure Management and Financial Accountability Review

Public Financial Management

Platform for Consultation in Guinea-Bissau

PPIAF

PPGD

PPP

PRA

Public-Private Infrastructure Advisory Facility

Public Procurement General Directorate

Public-Private Partnership

Procurement Regulatory Authority

PRGF Poverty Reduction and Growth Facility

PRSP Poverty Reduction Strategy Paper

PSD Private Sector Development

PSRDP Private Sector Rehabilitation and Development Project

PV

RDSS

SDR

SIGFIP

Present Value

Reform of the Defense and Security Sector

Special Drawing Rights

Integrated Public Financial Management System

iv

SIGRHAP Integrated System for Human Resource Management in the Public Administration

SMP

SNA

SOE

Staff-Monitored Program

National Accounts System

State-Owned Enterprise

SSR

SPF

SYGADE

Security Sector Reform

State- and Peace-Building Fund

Debt Management Analysis System

TFSCB

UN

UNCTAD

UNODC

Trust Fund for Statistical Capacity Building

United Nations

United Nations Conference on Trade and Development

United Nations Office on Drugs and Crime

WFP World Food Program

Vice President: Obiageli K. Ezekwesili (AFRVP)

Acting Country Director: McDonald Benjamin (AFCF1)

Sector Director: Marcelo Giugale (AFTPM)

Sector Manager: Miria Pigato (AFTP4)

Task Team Leader: Fernando Blanco (AFTP4)

v


THIRD ECONOMIC GOVERNANCE REFORM GRANT

TABLE OF CONTENTS

GRANT AND PROGRAM SUMMARY ............................................................................................. vii

1. INTRODUCTION.............................................................................................................................. 1

2. COUNTRY CONTEXT ..................................................................................................................... 2

A. BACKGROUND AND RECENT POLITICAL DEVELOPMENTS .............................................................. 2

B. RECENT ECONOMIC DEVELOPMENTS............................................................................................. 4

C. MACROECONOMIC OUTLOOK IN 2011 AND DEBT SUSTAINABILITY .............................................. 8

3. THE GOVERNMENT’S NPRSP .................................................................................................... 12

A. THE CHALLENGE OF PERVASIVE POVERTY .................................................................................. 12

B. OVERVIEW OF THE NATIONAL POVERTY REDUCTION STRATEGY ................................................ 12

C. PROGRESS WITH POVERTY REDUCTION POLICIES AND PROGRAMS ............................................. 13

4. BANK SUPPORT TO THE GOVERNMENT’S CORE REFORM PROGRAM ....................... 16

A. LINKS TO THE INTERIM STRATEGY NOTE .................................................................................... 16

B. COLLABORATION WITH THE IMF AND OTHER DONORS ............................................................... 16

C. RELATIONSHIP TO OTHER BANK OPERATIONS AND ANALYTICAL UNDERPINNINGS .................... 18

D. LESSONS LEARNED ...................................................................................................................... 19

5. THE PROPOSED OPERATION .................................................................................................... 20

A. OPERATION DESCRIPTION ............................................................................................................ 20

B. POLICY AREAS ............................................................................................................................. 21

C. PRIOR ACTIONS UNDER THE PROPOSED EGRG III....................................................................... 22

D. MONITORING FRAMEWORK ......................................................................................................... 32

6. OPERATION IMPLEMENTATION ............................................................................................. 33

A. POVERTY AND SOCIAL IMPACTS .................................................................................................. 33

B. ENVIRONMENTAL ASPECTS ......................................................................................................... 34

C. IMPLEMENTATION, MONITORING AND EVALUATION ................................................................... 34

D. FIDUCIARY ASPECTS.................................................................................................................... 35

E. DISBURSEMENT AND AUDITING ................................................................................................... 35

F. RISKS AND RISK MITIGATION ...................................................................................................... 36

vi

List of Tables:

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

List of Boxes:

BOX 2.1: RECENT DEVELOPMENTS IN THE DEFENSE AND SECURITY SECTOR REFORM ................................................... 4

BOX 5.1: GOOD PRACTICE PRINCIPLES ON CONDITIONALITY ........................................................................................ 32

List of Annexes:

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

The Third Economic Governance Reform Grant was prepared by a team led by Fernando

Blanco (Senior Economist, AFTP4) under the guidance of Alain D’Hoore (Lead Economist,

AFTP4) and Miria Pigato (Sector Manager, AFTP4). The core team included Maimouna Mbow

(AFTFM), Charles Coste (consultant), Leonardo Iacovone (AFTFP), Zenaida Hernandez Uriz

(IFC), Ricardo Varsano (consultant), Tullio Morganti (consultant), Sean Lothrop (consultant),

Fallou Dieye (consultant), Adelaida Almeida (consultant), Vicente Blute (consultant), Daniela

Junqueira (LEGAF), Wolfgang Chadab (CTRFC), and Judite Fernandes (Program Assistant,

AFTP4).

vii


PROPOSED THIRD ECONOMIC GOVERNANCE REFORM GRANT

GRANT AND PROGRAM SUMMARY

Borrower: Republic of Guinea-Bissau.

Implementing Agency: Ministry of Finance.

Financing Data:

IDA Grant

SDR 4 million (US$6.4 million equivalent).

Operation Type:

Single Tranche Operation of SDR 4 million

(US$6.4 million equivalent).

Stand-alone development policy operation.

Main Policy Areas:

Support the implementation of the government’s reform agenda in the

following areas: (i) public financial management; (ii) human resource

management; (iii) state reform; (iv) debt management; and (v) private

sector development.

Key Outcome Indicators: PFM Indicators:

Stock of arrears to the private sector (million of

CFAF)

Stock of arrears annually paid (million of CFAF)

Percentage of personnel expenditures not included

in the unified payroll system

Number of years to submit the General Accounts of

the State to the Court of Accounts

Doing Business Indicators:

Number of procedures required to register a firm

Number of days to register a firm

Cost of registering a firm (% income per capita)

Number of firms registered through the one-stop-

shop in one year.

Baseline

93,170

23,500

46 %

2

17

216

183.3

0

Target

< 50,000

20,000

0%

< 1

15

50

100

300

Program Development

Objective and

Contribution to Country

Partnership Strategy:

The main development objectives of the proposed grant are to: (i) promote

efficiency, transparency and accountability in the use of public resources

through improved public financial management (PFM); and (ii) improve

specific aspects of the investment climate, including streamlined

procedures for business registration and licensing, enhanced legal and

taxation frameworks to foster private investment and new regulation to

support environmental sustainability in public and private investment

projects. The development objectives are consistent with pillars 1 (good

governance, macroeconomic stability, public administration reform), and 2

(private sector-led growth) of the government’s national development

program outlined in its poverty reduction strategy paper (PRSP). A more

immediate objective is to protect basic service delivery, which is

threatened by the budgetary support shortfall currently facing the

viii

government.

Benefits: Expected benefits of the measures supported by the EGRG III include: (i)

greater efficiency and transparency in public financial management; (ii)

strengthened control and administrative rationalization of the government’s

human resources; (iii) more appropriate debt policies backed by stronger

debt-management systems; and (iv) an improved business climate and

environmental regulations to foster sustainable private sector development.

Risks and Risk

Mitigation:

(a) Shortfalls in external budget support flows. The 2010 shortfall,

about CFAF20 billion compared with 2009 (or 4.9 percent of GDP),

prompted a dramatic adjustment in government investment and

purchases of goods and services. Further tightening would put the

provision of key social services at risk and could potentially

undermine progress in public financial management observed over

the last two years. The proposed grant will partially fill the financing

gap and obviate further budget cuts.

(b) Other external shocks. The economy, being poorly diversified, is

susceptible to external shocks. In particular, recent increases in food

prices could have serious impacts on domestic inflation, government

accounts and external balances. The scope for fiscal mitigation of

external shocks from internal resources alone is sharply limited, and

would require donor support. In addition, despite the significant

improvement in the debt profile produced by Guinea-Bissau’s

achievement of the HIPC completion point, the risk of external debt

distress is still high and shocks to exports or GDP could lead debt

ratios to breach threshold levels. The grant supports reforms in public

financial management, debt management and related areas, that

would help strengthen the country’s ability to attract external support

to help cope with shocks.

(c) Political risks. Political instability remains a persistent risk,

particularly if tangible benefits from the reform program do not

swiftly become apparent to the population, or if the costs of reform to

influential constituencies become too high. To mitigate these risks

continued support from the international community to the

government’s economic reform agenda will remain critical.

(d) Implementation capacity. Guinea-Bissau’s technical and

institutional capacity to implement the reforms supported by the

EGRG III is low. To address this risk in the short term the Bank and

other partners have made available a combination of capacity building

and technical support.

Operation ID:

P123685

1


THIRD ECONOMIC GOVERNANCE REFORM GRANT

1. INTRODUCTION

1.1 This Program Document proposes a Third Economic Governance Reform Grant

(EGRG III), in the amount of SDR 4 million (US$6.4 million equivalent) to the Republic of

Guinea-Bissau, following on a previous programmatic series of two development policy

operations, EGRG I and II, implemented over 2009-10. As envisaged in the Interim Strategy

Note (ISN), the two previous EGRG operations were stepping stones on the country’s path to the

Heavily Indebted Poor Countries (HIPC) completion point, which it reached in December 2010.

The proposed EGRG III would be a stand-alone operation designed to sustain momentum in the

implementation of the reform agenda supported by EGRG I (approved in June 2009) and EGRG II

(approved in June 2010) and would consolidate recent policy achievements in the wake of G uinea-

Bissau reaching the HIPC Completion Point.

1.2 The proposed EGRG III is intended to serve as a bridge operation while the NPRSP

II is finalized and the Bank’s Country Assistance Strategy (CAS) in support of the NPRSP II

is developed. With recent cuts in budget assistance by several development partners, related to

internal political developments, financial assistance for the 2011 budget under the proposed EGRG

III would be critical, limiting the need for further downward fiscal adjustments, preventing an

economically costly compression of the public investment program, and allowing policymakers to

focus their attention on finalizing and launching their new medium-term agenda.

1.3 The proposed operation is designed to assist the Government of Guinea-Bissau in

completing the first steps in a long term process of financial and management reform that

was initiated in 2009. Recognizing the challenges posed by a difficult economic and political

context and a fragile institutional environment, the project will support the completion of

significant reforms in key areas of public administration and private sector development. While

modest in their development objectives, such improvements will be instrumental in enabling the

government to meet the larger objectives of reducing poverty and achieving levels of economic

growth comparable to those of other countries in the region.

1.4 The proposed EGRG III supports the implementation of reform policies aligned

with Guinea-Bissau’s first National Poverty Reduction Strategy Paper (NPRSP). The

proposed EGRG III, like the previous DPOs, focuses on two of the four pillars of the NPRSP. The

first of these pillars—strengthening governance, improving the efficiency of public administration

and establishing macroeconomic stability—aims at consolidating the development and

implementation of a modern legal and organizational framework for public financial management

(PFM) that is consistent with West African Economic and Monetary Union (WAEMU) standards.

The second pillar—promoting economic growth and job creation—focuses on improving the

business climate to foster more robust private sector development (PSD). The authorities are

finalizing the preparation of the NPRSP II, which they have tentatively scheduled to complete in

the spring of 2011 and present at a donors’ roundtable later in the year. The proposed grant is also

grounded in the International Development Agency (IDA) assistance strategy described in the

Interim Strategy Note (ISN) for Guinea-Bissau discussed by the Board on June 15, 2009.

2

1.5 Guinea-Bissau has made considerable progress in realigning its macroeconomic

policy with its long-term development goals by implementing a focused agenda of

complementary reforms supported by the two previous EGRGs. The government has

considerably strengthened macroeconomic management in recent years, and in May 2010 the

International Monetary Fund (IMF) approved a 3-year arrangement under the Extended Credit

Facility (ECF) for 2010-2013. The first review of the ECF-supported program was approved by the

IMF Board in December 2010. Moreover, in spite of the difficult political climate the authorities

have made progress in the PFM and PSD areas. The implementation of reforms in these areas and

the overall design of the reform program have built on analytical work and capacity-building

activities supported by other IDA-funding instruments. These include the Low Income Countries

Under Stress (LICUS) and State and Peace-building Fund (SPF) grant-funded operations and the

IDA Private Sector Rehabilitation and Development Project (PSRDP). The operation also

complements support provided by the African Development Bank (AfDB), the International

Monetary Fund (IMF), and other donors.

1.6 Despite encouraging progress in recent years on the economic and institutional

fronts, Guinea-Bissau continues to face extraordinary short- and medium-term development

challenges typical of a fragile state. As highlighted in the ISN, recent progress towards

macroeconomic stabilization notwithstanding the country remains locked in a low-equilibrium trap

of continued political instability, weak governance and disappointing economic performance. The

2009 ISN also argues that donors, including the Bank, will have to move toward a more forceful

engagement strategy capable of effectively supporting large-scale systemic change in Guinea-

Bissau. The proposed operation represents a transition to a more ambitious and integrated Bank

program to be described in detail in the next CAS aimed at assisting Guinea Bissau to implement

the upcoming NPRSP II and to break the cycle of low economic growth and persistent instability.

1.7 The proposed EGRG III is also consistent with the orientations for Bank

engagement in fragile states that are outlined in the 2011 World Development Report on

Conflict, Security and Development and the new Africa Strategy. While modest in their

objectives, the EGRG I and II and this stand alone operation promote incremental institutional

development. In this regard, the definition of the areas supported by the proposed operation reflects

a high degree of selectivity with focus on a small number of reforms that are feasible given the

complex political situation weak institutional and technical capacity. In addition, the delivery of

budget support through this proposed operation enables the predictability of inflows of financial

support and enhances the Government fiscal management. Finally, following the new Africa

Strategy recommendations, the proposed EGRG III have benefitted from technical cooperation

with other agencies such as the European Union, the IMF and the AfDB, taking advantage of the

comparative advantages of these partners in specific policy areas at the national, regional and

global levels.

2. COUNTRY CONTEXT

A. BACKGROUND AND RECENT POLITICAL DEVELOPMENTS

2.1 Guinea-Bissau is one of the smallest and poorest countries in Sub-Saharan Africa.

With an estimated 1.54 million inhabitants, the population is young—about 42 percent is under

14 years of age—and is now growing at an average rate of 2.2 percent per year. Annual Gross

Domestic Product (GDP) per capita is estimated at US$550. The economy is highly vulnerable to

weather fluctuations: agriculture represented about 50 percent of GDP in 2009 and remains the

3

main source of employment in rural areas. Cashew is the main cash crop (representing 98 percent

of exports) and is strongly linked to other sectors, such as labor-intensive cashew processing, trade

and transportation.

2.2 Guinea-Bissau is a country with significant, but largely unfulfilled development

potential. The country has good agricultural, mining and even tourism potential, but political

instability following the brief civil war in 1998 has proven to be a severe barrier to economic

development. Macroeconomic management over the last decade was highly uneven and growth

was anemic. Attempts at stabilization in the early 2000s faltered in the wake of ongoing political

instability and severe structural weaknesses in fiscal management. Average GDP growth over the

period 1999-2007 stood at only about 1 percent per year.

2.3 Protracted political instability has plagued the country since the late 1990s. President

João Bernardo Vieira, who came into power after a coup d’état in 1980, was ousted in 1999 after a

brief civil war that began in June 1998. Since 1999, political instability has continued to be high

with 14 successive governments during 1999-2009 and a bloodless coup in 2003. Presidential

elections in June 2005 brought Vieira back from exile and returned him to the presidency. While

the president is constitutionally independent from the legislature and former administrations have

been marked by an extreme concentration of power in the office of the president, the government

is constitutionally subject to parliamentary confidence, and in recent years an increasingly

assertive legislature has fostered tensions between the offices of the president and prime minister.

Parliamentary elections in November 2008, deemed fair and transparent by international observers,

restored to power the historically dominant African Party for the Independence of Guinea-Bissau

and Cape Verde (PAIGC), which won more than two thirds of the National Assembly’s 100 seats.

Following the back-to-back assassinations of former President Vieira and the army chief of staff in

March 2009, Malam Bacai Sanha of the PAIGC won the presidency by a decisive margin in the

runoff election held at the end of July 2009.

2.4 Despite recent progress, significant challenges remain. The peaceful presidential

election of 2009 seemed to have alleviated tensions and facilitated the consolidation of the PAIGC

administration. Nevertheless, as indicated in the 2009 ISN, due to the persistent political

instability, weak governance and poor economic performance, sources of tensions remain. A

definitive break from this cycle will take time and it should be expected to be punctuated by

recurring political volatility. This was well illustrated in early April 2010, when the Army’s

second-in-command arrested the Prime Minister and the Chief of Staff of the Army. After strong

public demonstrations in favor of the democratically elected government the Prime Minister was

quickly released; however, as a compromise solution to the events in April, the former Chief of

Staff of the Army was officially replaced by one of the leaders of the military insurgency (the

former second-in-command). Moreover, another military figure, the former head of the Navy, was

reinstated in his post, even after having been listed by the US authorities as involved in the global

drug traffic. These events, combined with a general lack of progress on the government ’s security

sector reform agenda, have led to the interruption of aid flows from the European Union and key

bilateral donors. Following negotiations, in April 2011, under Article 96 of the Cotonou Accord,

the government has since undertaken to adopt and implement a roadmap toward addressing the

concerns raised by the EU, which in turn has announced a partial and conditional resumption of its

aid program, albeit without budget support. More broadly, the episodes in April 2010 and further

developments have only reaffirmed the urgent need for, and the complexity of, reforming Guinea-

Bissau’s security sector in order to reorganize the armed forces and reduce their size.

4

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

B. RECENT ECONOMIC DEVELOPMENTS

2.5 Despite continued challenges on the political front and adverse external shocks

during 2008-2010, economic performance improved somewhat. Economic growth has been

resilient, with real GDP slipping only slightly from 3.2 percent in 2008 to 3.0 percent in 2009 and

recovering to 3.5 percent in 2010 driven by good cashew crops, moderate expansion of food crops,

an uptick in construction activity and a gradual normalization of the fiscal situation. With the

continued rise in food and energy prices in the first half of 2008, inflation peaked at an average

annual rate of 10.5 percent—one of the highest rates in WAEMU—before dropping to a negative

1.6 percent in 2009 as food and fuel prices fell back towards levels closer to historical trends and

eventually stabilized at 2.5 percent in 2010, below the WAEMU inflation band. Despite strong

cashew exports the external current account deficit, excluding official transfers, widened to about

10.5 percent and 12 percent of GDP in 2008 and 2009, respectively. The 2008 outcome was

affected by a sharp increase in the import costs of food and fuel. In 2009, declining export prices

for cashew nuts, which fell by almost 30 percent from 2008, led to a 13 percent decrease in the

In spite of the political disruptions that affected the implementation of actions concerned with the defense and

security sector and led to the suspension of the European Union mission in support to the defense sector reform

(EU SSR Guinea-Bissau) and budget support operations, Government and other partners’ actions to reform the

sector were not interrupted during this period.

In January 2010, the Government adopted the Reform of the Defense and Security Sector (RDSS) program

adopted. The RDSS aims at downsizing the Army with a new and clearly defined structure. It also aims at

modernizing and restructuring the police force from nine to four bodies with better defined competences and

plans to build capacity in the judiciary.

In April and May of 2010 the legal framework for the defense and security forces’ new mission and mandate

was revised. The People’s National Assembly approved over a dozen legal texts to reorganize and restructure

the defense and security sector such as the Law on National Defense and the Armed Forces, the Basic Organic

Law of the Organization of the Armed Forces, the Statutory Regime of the Armed Forces, the Code of Military

Justice, the Organic Law of the Ministry of Public Security and Homeland Affairs and the Organic Law of the

Police Force for Public Order.

In August 2010, the Committee of the Economic Community of West African States (ECOWAS) Chiefs of

Defense Staff and a restricted Group of Chiefs of Defense Staff of the Community of Portuguese- Speaking

Countries (CPLP) recommended the approval of an action plan to assist Guinea Bissau in overcoming the

security challenges presently facing the country. The action plan includes the creation of a financing

mechanism for the efficient implementation of the reform of the Armed Forces through the establishment of a

pension fund, the redeployment of military personnel, the restructuring, training and improvement of the living

and working conditions of the Armed Forces.

In November 2010, ECOWAS approved a road map for the Reform of the Defense and Security Sectors and

pledged financial and technical support to the Reform. Up to May 2011, the Government of Guinea- Bissau

has not yet officially adopted this road map. Nonetheless, the initial actions of the plan such as technical

support missions from ECOWAS partners are being implemented.

In March 2011, the Government of Angola initiated its SSR technical support mission in Guinea-Bissau

(MISSANG). The mission was set up to initiate the implementation of reforms within Bissau-Guinean defense

and police forces, namely rehabilitation of military and police infrastructures and training.

In March 2011, under Article 96 of the Cotonou Agreement, consultations between the Guinea-Bissau

authorities and EU representatives took place in Brussels. Aid is expected to be partially restored, conditional

on the government undertaking judiciary investigations and proceedings on the events of April 1, 2010 and the

definition of a timetable for the implementation of the defense and security reform.

5

terms of trade, with the total value of exports plummeting by 10 percent. Moreover, remittances

also declined from 4 percent of GDP in 2008 to 2.7 percent of GDP in 2009. In 2010, however, as

a result of the recovery of cashew prices the external current account deficit is expected to narrow

to 9.3 percent of GDP.

Table 2.1: Key Macroeconomic Indicators, 2008-14

2.6 Fiscal policy was strengthened in 2009, contributing to a satisfactory performance

under the IMF’s Emergency and Post-Conflict Assistance (EPCA) initiative. The EPCA-

supported program focused on meeting current-year expenditures with available resources and

2008 2009 2013 2014

Prog. 1 Est. Prog. 2 Proj. Proj. Proj. Proj.

National accounts and prices

Real GDP at market prices 3.2 3.0 3.5 3.5 4.3 4.3 4.5 4.7 4.7

Real GDP per capita 1.0 0.8 0.5 1.2 2.1 2.1 2.3 2.5 2.4

GDP deflator 10.5 1.1 2.4 1.7 2.1 3.8 1.8 2.2 1.9

Consumer price index (annual average) 10.4 -1.6 2.5 1.1 2.5 4.0 2.0 2.0 2.0

External sector

Exports, f.o.b. (based on US$ values) 13.1 -3.6 13.6 2.1 11.2 16.4 0.6 2.9 2.8

Imports, f.o.b. (based on US$ values) 18.8 1.5 9.2 -2.9 6.0 19.9 2.7 0.5 0.9

Export volume 3.4 12.9 4.3 -10.6 7.4 3.6 5.7 4.8 4.7

Import volume -8.5 18.6 3.3 -5.5 5.1 2.6 3.9 2.5 1.9

Terms of trade (deterioration = -) 3.3 -22.2 5.6 11.6 2.7 -4.5 -3.6 0.2 -0.9

Real effective exchange rate (depreciation = -) 7.0 -1.8 1.4 -0.5 1.2 2.1 0.4 0.4 0.2

Nominal exchange rate (CFAF per US$; average) 445.7 471.0 450.0 494.4 501.7 479.2 481.6 485.3 489.4

Government finances

Domestic revenue (excluding grants) 30.0 2.3 21.5 26.1 10.4 11.8 9.0 8.7 7.6

Total expenditure 26.2 -6.7 16.0 -0.9 6.9 14.4 10.1 8.5 6.7

Current expenditure 7.0 -4.0 13.1 -2.0 7.7 12.3 6.4 9.6 6.6

Capital expenditure 64.7 -10.1 20.2 0.7 5.8 17.4 14.9 7.1 6.7

Money and credit

Net domestic assets 3 19.7 -10.9 2.0 15.9 1.6 5.4 2.1 0.4 0.5

Credit to government (net) 8.4 -10.5 0.2 7.0 0.0 0.0 0.0 -1.7 -1.7

Credit to the economy 10.1 4.3 0.8 8.0 1.6 2.1 2.1 2.1 2.2

Velocity (GDP/broad money) 4.1 3.8 3.8 3.6 3.2 3.6 3.6 3.8 3.9

Investments and savings

Gross investment 8.7 10.1 16.3 9.8 14.9 10.9 11.2 11.2 11.2

Of which: government investment 4.2 5.1 10.0 4.8 8.6 5.2 5.5 5.5 5.5

Gross domestic savings -5.3 -6.6 3.7 -4.0 1.1 -4.0 -3.8 -2.8 -2.2

Of which: government savings -11.1 -7.9 -8.3 -5.1 -4.1 -5.5 -5.7 -5.8 -5.7

Gross national savings 3.9 3.7 10.7 3.1 8.9 3.6 3.8 4.3 4.9

Government finances

Budgetary revenue 9.2 9.0 10.3 10.8 10.7 11.1 11.4 11.6 11.7

Total domestic primary expenditure 12.4 11.9 14.2 12.0 12.5 13.8 14.6 14.5 14.6

Domestic primary balance -3.2 -2.9 -3.9 -1.2 -1.7 -2.7 -3.2 -3.0 -2.9

Overall balance (commitment basis)

Including grants -0.8 2.9 -3.2 -0.2 -2.3 -2.0 -1.3 -1.4 -1.3

Excluding grants -15.3 -12.9 -13.6 -9.9 -9.8 -10.7 -11.2 -11.3 -11.2

External current account (including official current transfers) -4.9 -6.4 -1.3 -6.7 -6.0 -7.3 -7.4 -6.9 -6.3

Excluding official transfers -11.3 -14.4 -5.9 -10.2 -8.8 -11.4 -11.5 -11.0 -10.3

Net present value of external debt/exports of goods and nonfactor

services (percent) 364.8 419.4 111.1 93.8 134.6 91.7 99.3 99.8 94.3

Nominal stock of public debt, including arrears 4, 5 167.5 157.9 54.1 50.0 62.0 47.6 46.2 43.7 40.5

Of which: external debt, including arrears 132.7 121.9 28.4 20.1 34.3 20.7 21.3 21.1 19.9

Of which: arrears 4 49.6 48.9 10.3 0.0 0.0 0.0 0.0 0.0 0.0

Memorandum items:

Current account balance (including official current transfers) -41.1 -53.1 -11.4 -56.0 -51.9 -68.3 -73.1 -72.6 -69.8

Overall balance of payments -16.9 -11.6 -806.6 -918.4 1.0 -0.1 0.1 -8.5 -15.5

Nominal GDP at market prices (CFAF billions) 377.5 393.1 418.8 413.7 443.9 447.9 476.9 510.5 544.8

Nominal stock of external arrears, end of period 4 388.6 427.5 92.8 0.0 0.0 0.0 0.0 0.0 0.0

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

(US$ millions, unless otherwise indicated)

(Annual percentage change, unless otherwise indicated)

(Percent of GDP, unless otherwise indicated) 3

2010 2011 2012

6

avoiding the accumulation of new budgetary arrears. Despite the sharply reduced cashew prices

(taxes on cashew account for some 25 percent of tax revenues), the 2009 domestic primary deficit

closed to 2.9 percent of GDP, well below the previously projected 4.5 percent, reflecting improved

revenue administration and stronger expenditure controls. Domestic primary expenditures fell by

0.5 percent of GDP due mainly to the wage bill being frozen in nominal terms and the imposition

of stricter budgetary controls over spending on goods and services made possible by the new

budget execution system. The wage-bill-to-domestic-revenue ratio fell from 103 percent in 2008 to

66 percent in 2010. Progress was also satisfactory on the implementation of the structural agenda,

with important steps taken in the areas of public financial management, civil service reform and

private sector development.

Table 2.2: Central Government Operations, 2008–14

(as a percentage of GDP)

2009 2012 2013 2014

Prog. Est. Prog. Proj.

Revenue and grants 23.7 24.8 20.7 20.4 18.1 19.8 21.3 21.4 21.5

Revenue 9.2 9.0 10.3 10.8 10.6 11.1 11.4 11.6 11.7

Tax revenue 5.5 6.8 7.2 8.0 8.0 8.5 8.8 9.0 9.1

Nontax revenue 3.6 2.2 3.1 2.8 2.7 2.7 2.6 2.6 2.6

Grants 14.5 15.8 10.4 9.7 7.4 8.7 9.9 9.9 9.9

Budget support 4.3 7.3 3.1 2.3 1.7 3.0 3.0 3.0 3.0

Project grants 10.2 8.5 7.3 7.4 5.7 5.7 6.8 6.8 6.8

Total expenditure 24.5 21.9 23.9 20.7 20.4 21.8 22.6 22.9 22.9

Current expenditure 13.9 12.8 13.6 11.9 11.8 12.4 12.3 12.6 12.6

Wages and salaries 5.4 5.2 5.0 5.0 5.0 5.3 5.3 5.3 5.3

Goods and services 2.1 1.6 2.4 2.1 1.8 2.0 2.0 2.0 2.0

Transfers 2.9 2.8 3.0 2.6 2.8 2.8 2.8 2.8 2.9

Other current expenditures 1.5 1.9 1.9 2.1 2.0 2.0 2.0 2.0 2.0

Scheduled interest 1.9 1.2 1.3 0.2 0.2 0.2 0.2 0.5 0.4

Domestic interest 0.3 0.0 0.2 0.1 0.1 0.1 0.1 0.1 0.1

External interest 1.6 1.2 1.1 0.1 0.1 0.0 0.0 0.4 0.3

Capital expenditure and net lending 10.6 9.2 10.3 8.8 8.6 9.5 10.3 10.3 10.3

Public investment program 10.5 9.1 10.0 8.7 8.4 9.4 9.9 9.9 9.9

Domestically financed 0.3 0.3 1.6 0.1 0.6 1.5 2.1 2.1 2.1

Foreign financed 10.2 8.8 8.4 8.5 7.8 7.8 7.9 7.9 7.9

Other capital expenditure 0.1 0.1 0.3 0.1 0.1 0.1 0.3 0.3 0.3

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Overall balance, including grants (commitment) -0.8 2.9 -3.2 -0.2 -2.3 -2.0 -1.3 -1.4 -1.3

Overall balance, excluding grants (commitment) -15.3 -12.9 -13.6 -9.9 -9.7 -10.7 -11.2 -11.3 -11.2

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net domestic arrears 1.3 -1.2 -1.9 -1.9 -0.4 -0.8 -0.3 -0.3 -0.3

External interest arrears current year 1.4 1.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Float and statistical discrepancies -0.1 0.0 0.0 -0.4 0.0 0.0 0.0 0.0 0.0

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Overall balance, including grants (cash) 1.7 2.7 -5.1 -2.5 -2.7 -2.8 -1.6 -1.7 -1.6

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Financing -1.7 -2.7 5.1 2.5 2.7 2.8 1.6 1.7 1.6

Domestic financing -1.2 -2.7 0.1 1.8 0.0 0.0 0.0 -0.4 -0.4

Bank financing -1.2 -2.7 0.1 1.8 0.0 0.0 0.0 -0.4 -0.4

Nonbank financing 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Foreign financing (net) -0.5 -0.1 1.9 0.8 2.0 2.0 0.9 0.7 0.0

Disbursements 0.0 0.3 1.1 1.1 2.1 2.1 1.0 1.0 1.0

Amortization (scheduled and arrears) -3.4 -2.7 -86.5 -109.1 -0.1 -0.1 -0.1 -0.3 -1.0

External arrears 1.6 1.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Debt relief 1.3 1.4 87.3 108.8 0.0 0.0 0.0 0.0 0.0

Gross financing gap (+ = financing need) 0.0 0.0 3.2 0.0 0.8 0.8 0.7 1.5 2.0

Residual financing gap1 0.0 0.0 0.9 0.0 0.8 0.8 0.7 1.5 2.0

Sources: Guinea-Bissau authorities; and IMF staff estimates and projections.1 Assumed to be covered with IMF resources.

2008 2010 2011

7

2.7 Prudent fiscal policies and a return to sound macroeconomic fundamentals have

allowed Guinea-Bissau to weather the adverse impacts of the global financial crisis relatively

well. In 2009, fiscal and external deficits were kept under control and inflation dropped to single

digits. Progress in shoring-up its key macroeconomic indicators while rebuilding the government’s

technical and administrative capacity established the basis for renewed donor support, which

allowed public investment to rise from 6.5 percent to 9 percent of GDP. The negative impact of the

global recession was transmitted mainly through export values and remittances, both cutting into

domestic demand at a time when room for fiscal stimulus was sharply limited. The fiscal impact of

the global financial crisis was significant— slower economic activity and low cashew prices

negatively affected tax revenues—but it also prompted a solid response from the authorities to

begin to strengthen institutional efficiency, leading the government to accelerate tax collection

efforts, tighten spending, and improving expenditure controls.

Table 2.3: Budget Support Flows, 2008-2011

(in billion CFAF)

Donor 2008 2009 2010 2011

AfDB - - 4.46 3.85

Angola - - - 5.76

BOAD - 4.85 0.90 -

ECOWAS - 1.75 - -

EU 3.6 13.74 - -

France 1.3 1.97 - -

Japan 1.1 1.78 - -

Portugal 1.3 - - -

Spain - - 0.98 -

WAEMU 1.8 - -

WB 3.2 3.8 3.03 3.64

Others 3.2 0.62 - -

Total 16.5 28.51 9.37 13.25

2.8 On the strength of the government’s efforts towards macroeconomic stabilization, in

May 2010 the IMF approved a three-year program under the Extended Credit Facility

(ECF) for the period 2010-13. Implementation of the program has been broadly satisfactory; the

first review was completed in December 2010 and the second review is expected to be completed

at the end of May, 2011.1 Nonetheless, following the political disruptions of April 2010, Guinea-

Bissau has faced a significant shortfall in anticipated donor support that has complicated its fiscal

management efforts. Budget support operations by the European Union (EU) and key bilateral

donors have been interrupted and only IDA and AfDB budget support operation remained. As a

result, budget support grants fell from 7.3percent of GDP in 2009 to 2.3 percent in 2010. A slight

recovery of budget support flows is expected in 2011 due to the budget support operation (already

disbursed) from the Government of Angola. Despite this setback, the authorities have stayed the

course in terms of the reform agenda, achieving an impressive improvement in domestic revenue

1 An IMF mission visited Bissau between March 10 and 23, 2011 to perform the Second Review under the ECF. The

Statement at the conclusion of the mission indicates that the government’s performance continues to be satisfactory,

and all the structural criteria as of end- December were met. All quantitative targets were also met. The IMF’s

Executive Board is scheduled to consider the Second Review of Guinea-Bissau’s economic performance under the

ECF in May, when the second disbursement of US$3.6 million becomes available.

8

performance, enforcing tighter controls over current spending and, somewhat more

problematically for growth prospects, postponing planned public investments. As a result, the

domestic primary fiscal deficit, initially projected at 4 percent of GDP, is now estimated to have

come out at only 1.4 percent for 2010.

2.9 The authorities also launched the implementation of their medium-term arrears-

clearance plan. Domestic arrears are sizable, and while estimates vary, the stock that has been

identified amounts to about 24 percent of GDP. These include wage arrears, arrears to domestic

banks, the Central Bank of West African States (BCEAO), and the West African Development

Bank (BOAD), and commercial arrears to the private sector. The authorities’ plan has two stages.

During the first stage arrears were identified and verified. These include arrears owed to

commercial banks and the BCEAO, which entail high financial costs to the government, as well as

public-sector wage arrears from 2008, and pre-civil war arrears to the private sector. At the

beginning of 2010, the arrears to the commercial banks were cleared. In June 2010, an additional

CFAF 3.5 billion (about 0.8 percent of GDP) of arrears to the private sector were also cleared. In

the second stage the government intends to complete the audit of post-civil war arrears and address

them after they have been fully accounted and verified. Given the current and anticipated shortfalls

in budget support, in 2011 the government and the IMF agreed to slowing down the pace of

arrears’ reduction.

2.10 Successful completion of the first and second reviews of the IMF-supported ECF

program coupled with progress on structural reforms allowed Guinea-Bissau to reach the

HIPC Completion Point in December 2010. Sustained policy reform implementation allowed

Guinea-Bissau to receive comprehensive debt relief under the HIPC program and the Multilateral

Debt Relief Initiative (MDRI). Debt relief has produced a significant improvement in the country’s

public and external debt trajectory, and should help reinforce the economy’s resilience to

macroeconomic shocks. The normalization of relations with creditors and the restoration of donor

support flows are expected to provide further fiscal space for the resumption of vital public

spending—particularly capital investments in priority infrastructure projects—needed to improve

the country’s structural growth potential. The gradual recovery of global economic conditions

should also support an increase in private investment.

C. MACROECONOMIC OUTLOOK IN 2011 AND DEBT SUSTAINABILITY

2.11 On the fiscal front, despite the shortfall in budget support flows the government has

maintained its commitment to fiscal discipline. Based on the enhancement of domestic revenue

mobilization and tightening of controls on personnel and operating expenses in 2011, the

government is keeping the overall deficit below 3 percent of GDP. The adoption of stronger tax

collection oversight and the use of electronic devices in customs administration with the gradual

introduction of the ASYCUDA ++ system have allowed the government to increase domestic

revenues by more than 2 percent of GDP between 2009 and 2010. Preliminary figures for 2011

indicate that this increasing trend in domestic revenue could continue over the long term to levels

observed in the West African Region (about 15 percent of GDP). Moreover, the increase in cashew

export volumes, as well as higher international prices, is expected to have a positive impact on

government revenues in 2011. Finally, bilateral budget support from Angola is partially offsetting

the interruption in budget support operations by Guinea-Bissau’s traditional European partners.

2.12 On the expenditure side the government has pursued the strict control of recurrent

expenses. The government maintained the salary freeze begun in 2010, completed the revision and

9

unification of the payroll bill, and began to regulate the recruitment and appointment of staff in the

education and health sectors. As a result, the personnel-expenses-to-domestic-revenue ratio is

expected to fall to less than 65 percent in 2011. Due to increasing energy and food prices and the

impossibility of continuing to subsidize these goods, the government decided to allow an increase

in domestic fuel prices and to review its subsidies on rice and wheat. Finally, faced with the

shortfall in external budget support, the government has slowed down the process of arrears’

clearance. In this context of fiscal tightening, the resumption of budget support flows could be

used either to finance public investment or to speed up the payment of arrears to the private sector.

2.13 On the external front, the trade and current-account balances are expected to remain

at levels similar to those observed in 2010. Changes in commodity prices are expected to

counteract one another. Cashew exports and oil and food imports are projected to increase without

a clear net effect on the current account. As a result, the external current account deficit (excluding

official transfers) is expected to stabilize around 10 percent of GDP in 2011, and is expected to

gradually decline to 7 percent over the medium term. While the increase in commodity prices

seems to have had a moderate effect on the external balances, this increase and the government

decision to reduce subsidies, will have some effect on domestic inflation, which is expected to rise

to 4.5 percent in 2011.

2.14 In the context of high cashew export prices and tight budget constraints, the

government has very recently reinstated a levy on cashew exports, earmarked to support the

cashew sector. The levy, at FCAF50 per kilo (about US$110 per ton, or 7 percent of current world

prices for Guinea-Bissau’s high-premium cashew), will finance a Fund for the Industrialization of

Agriculture Products (FUNPI) for developing cashew agriculture and processing activities,

managed under a public-private partnership with the local Chamber of Commerce Industry and

Agriculture (CCIA). Coming at the tail end of the harvest season in a context of unusually high

world cashew prices, the levy is not expected to affect current crop volumes, farm incomes, and

gross export earnings to a large degree, so the critical issues for impact assessment are forward-

looking, entailing the effects on future cashew output, farm incomes, and export revenues if the

levy is maintained, especially if world prices fall from their current high level. Moreover, the

potential yield of the levy is high—close to US$16 million this year—and it could thus constitute a

significant source of funding for much needed investments in the cashew sector that could benefit

a large spectrum of stakeholders, if funds and activities are well managed.2

2.15 The fiscal scenario through 2012 (see Table 2.2) assumes a continuation of recent

trends. Revenues would recover some lost ground, and current spending would be contained

through a combination of improved expenditure controls, a modest decrease from 2009 in the

weight of civil service wages in relation to GDP, and significant cuts in the interest costs of

domestic and foreign debt. However, even this fiscal consolidation scenario assumes the continued

engagement of donors at a high level. Grants, including direct budget support, and loans averaging

the equivalent of almost 11 percent of GDP would be required to finance a minimal level of capital

expenditures in 2012 and increase priority spending on social sectors, infrastructure, and capacity

building to the levels envisaged in the government’s second NPRSP.

2 In a previous experience, in 2005, the government had also introduced a discriminatory application of the levy

across exporters and bundled its introduction with new restrictions on entry into cashew processing, two features

that are no longer applied. Nonetheless, given the measure’s potentially significant impacts, the Bank team intends

to support the government in an assessment of the effects of this levy on the incomes of the poor and the economy at

large, and, if needed, in the identification of more suitable instruments to achieve government objectives.

10

2.16 Under the joint Bank-IMF Debt Sustainability Analysis (DSA) prepared in December

2010, Guinea-Bissau’s medium and long-term debt sustainability and growth outlook is

positive. Under the baseline scenario that anchored the recent HIPC debt relief operation, GDP

growth could accelerate to 4.5 percent in 2012 and remain at that level over the long term. This

exceeds the historical average by roughly one percentage point, reflecting a past marked by great

political instability and inappropriate macroeconomic policies, conditions which are expected to

improve in the period ahead. Growth is also expected to be supported by the diversification of

agriculture, the rebuilding of infrastructure—especially roads, ports, electricity capacity, and water

systems—and by average growth in cashew production of 4.5 percent over the 2015-2030 period.3

2.17 Guinea-Bissau’s external public debt and external-debt indicators improved

considerably due to the full delivery of HIPC assistance, additional bilateral assistance

beyond HIPC, topping-up assistance4, and Multilateral Debt Relief Initiative (MDRI)

assistance approved in December 2010. At end-2010, Guinea-Bissau’s stock of external debt

amounted to US$1,066.7 million, of which US$427.5 million were arrears. As a result of

comprehensive debt relief the present value (PV) of Guinea-Bissau’s debt-to-exports ratio at end-

2010 sharply dropped to 88.4 percent (from 680 percent) and is projected to further decline to 69.1

percent by 2030. Similarly, the PV of the debt-to-GDP and debt-to-revenue ratios also declined,

falling from 22.6 percent and 225.6 percent on average in 200919 to 11.2 percent and 97.5

percent in 2020–30, respectively.

2.18 The government is firmly committed to maintaining debt sustainability. In this regard,

following achievement of the HIPC completion point, the authorities have decided to rely

exclusively on grants and concessional borrowing to meet the government’s financing needs for

the foreseeable future. The authorities are also aware that lasting debt sustainability will depend on

strengthening the administration’s debt-management capacity and mobilizing domestic revenue to

reduce reliance on external financing. In this regard, the government has adopted deci sive

measures in both areas that are supported by the proposed operation.

Macroeconomic Risks in the Short Run

2.19 Rising inflation is becoming the most important source of macroeconomic risks in

2011. Increasing food and fuel prices, which spurred inflation to over 10 percent in 2008, again

pose a risk to macroeconomic stability and present a crucial challenge for fiscal policy. To limit

the transmission of global price increases to the domestic market the government subsidizes

imported food and fuel, but these subsidies have now reached the limit of their usefulness, and

expanding them to offset further price increases would be neither fiscally feasible nor

economically effective. Rising import prices have already pushed annualized inflation to 5 percent

in December 2010, and average inflation is projected to reach 4.5 percent in 2011. Nevertheless,

with Guinea-Bissau’s participation in the regional monetary union, WAEMU, medium-term

inflation rates are assumed to return to the regional average in 2012—about 2.5 percent per year.

3 IDA has been actively supporting the energy sector. The Multi-sector Infrastructure Rehabilitation project (MIRP)

was restructured in 2010 reallocating resources to increase the energy supply in Bissau and to provide technical

assistance to improve the performance of the utility company (EAGB). The Emergency Electricity and Water

Rehabilitation Project (EEWRP) was approved in FY11 and it is focused in the expansion of the electricity

generation capacity. 4 Topping-up assistance was approved by IDA Board on March 21, 2011. Creditors of the Club of Paris approved

their topping-up assistance on May 11, 2011.

11

2.20 A deeper shortfall in budget support flows is unlikely. As reflected above, the

interruption of budget support operations by the EU and key donors led to an overall shortfall in

budget support of about CFAF 20 billion or 4 percent of GDP in 2010. The shortfall prompted a

dramatic adjustment in government investments and goods and service purchases. In 2011, the

fiscal program supported by the IMF’s ECF anticipates a modest recovery in budget support flows

of about CFAF 4 billion compared to 2010 levels, with contribution from the African Development

Bank, the government of Angola—whose budget support has already been disbursed—and the

proposed EGRG-III operation.

2.21 Difficulties to control the personnel expenditures in the education sector represent an

important source of fiscal risk in the expenditure side. While the government has been able to

control overall personnel expenditures, irregular recruitment of teachers make unpredictable the

wage bill of the education sector and result in arrears that could jeopardize the government fiscal

adjustment efforts.

2.22 The main downside risks to the macroeconomic outlook remain primarily political.

Political instability could flare up again and the government’s commitment to fiscal stabilization

and to furthering reforms, as illustrated in the recent past, could come under pressure either from

within or outside the government’s political base, especially if tangible benefits of reforms do not

become apparent to the population, or if the costs of reform to narrow constituencies become too

high. The positive growth scenario described above assumes that domestic political stability will

gain further traction. While there is reason to be cautiously optimistic, the reform of the defense

and security sector will test the country’s civilian and military leaderships’ willingness to accept

the changes necessary to move to a new development path.

2.23 On the upside, medium- to long-term growth, investment and exports could be

significantly and positively affected by possible mining ventures to exploit the country’s

bauxite and phosphate resources. Phosphate mining offers serious prospects for expansion of the

mining sector, but would require equally large investments in dedicated infrastructure. The current

growth scenario does not include these possible ventures, given the limited information on the

scope of these projects, their large infrastructure prerequisites and, and the difficult global context.

Though mining is an opportunity, mining is also fraught with risks to sustainable development

prospects in Guinea-Bissau, and there will remain a need to identify and implement structural and

institutional reforms to ensure that the development benefits of mining projects are maximized and

potential downsides are mitigated.

2.24 In summary, the policy framework underlying the government’s macroeconomic

management provides an adequate basis for the proposed operation. The government is

handling the current shortfall in external budget support remarkably well through its maintenance

of a tight fiscal policy and refusal to access unsustainably expensive private credit . However, in

order for the government to reach its modest goals and guarantee the sustainability of the positive

results observed in the last three years, policy implementation must continue to improve. This will

require a sustained commitment to the goals of fiscal stabilization and reforms, as well as efforts

toward continued capacity building.

12

3. THE GOVERNMENT’S NPRSP

A. THE CHALLENGE OF PERVASIVE POVERTY

3.1 The impact of the 1998-99 conflict, subsequent political instability and poor economic

performance through most of the last decade has contributed to high and persistent rates of

poverty. Guinea-Bissau is one of the world’s poorest countries. It ranked 164th out of 169

countries on the 2010 United Nations Development Programme (UNDP) Human Development

Index and poverty is widespread, with a higher incidence in rural areas. In July 2010, the

government’s Statistical Institute undertook a new poverty survey (Inquérito Ligeiro de Avaliação

da Pobreza, ILAP II). Results show that close to 67 percent of the population was living in poverty

in 2010, with 32percent living in extreme poverty, an increase from 2002. About 80 percent of the

poor live in rural areas and practice subsistence agriculture. The country is not likely to reach any

of the Millennium Development Goals (MDGs) by 2015, given current trends and without

significantly donor support.

3.2 The poor in Guinea-Bissau are also affected by the poor quality of, and limited access

to, basic social services. Life expectancy is estimated at 48.6 years in 20105, down from 55 years

in 1995. However, encouraging developments in the social sector have emerged from a recent

survey on access to social services. After an observed decline in social indicators until 2006, data

from the 2010 Multiple Indicators Cluster Survey (MICS) shows strong progress on most

indicators related to education, gender equality, health and HIV/AIDS.

B. OVERVIEW OF THE NATIONAL POVERTY REDUCTION STRATEGY

3.3 In 2007 Guinea-Bissau finalized its first National Poverty Reduction Strategy Paper

(NPRSP). According the Joint IDA-IMF Staff Advisory Note (JSAN) of the NPRSP prepared in

2007, the government strategy was built on grassroots consultations at the National level involving

all segments of the society. The consultative process included three levels of participation: (i) a

political and institutional level engaging the Government and its development partners; (ii) a

technical level, engaging national public and private sector leaders as well as civil society leaders;

and (iii)a popular and community level based on consultations with stakeholders in rural and urban

areas

3.4 Until 2009 progress was largely unobservable, as a number of the most crucial

reforms were slow to produce measurable results and monitoring capacity was limited . The

first Annual Progress Report (APR) presented by the government at the end of 2009 provides a

candid assessment of developments during this period and recognizing the modest progress

obtained under the NPRSP’s four structural pillars: (i) strengthening governance, modernizing the

public administration and establishing greater macroeconomic stability; (ii) enhancing economic

growth and job creation; (iii) increasing access to social services and basic infrastructure; and (iv)

improving the living conditions of vulnerable groups.

3.5 Since 2009, however, impressive advances have been recorded under each of the

NPRSP’s pillars. As reported in the recent 2010 JSAN6 on the Second APR, prepared in August

2010, much of the progress achieved since 2009 has been under the first two pillars. In particular,

5 UN DESA (2009): World Population Prospects – The 2008 Revision.

6 IDA-IMF JSAN on the Second Annual Progress Report on the Implementation of the N-PRSP (November, 2010).

13

several successful measures to improve public financial management and the business climate

were initiated or accelerated during 2009-2010. Much of the substantive progress on major NPRSP

policy areas was achieved during a period of relative peace, stability and security.

C. PROGRESS WITH POVERTY REDUCTION POLICIES AND PROGRAMS

Policies to strengthen governance, improve public administration, and ensure

macroeconomic stability

3.6 The government has been making satisfactory progress on the macroeconomic

stabilization front. Solid performance under the IMF 2009 EPCA program paved the way for the

approval, in May 2010, of a three-year Extended Credit Facility (ECF). Guinea-Bissau’s

completion of the first ECF review in December 2010 was, in turn, crucial to meeting one of the

long overdue HIPC completion point requirements. The country’s improved fiscal performance

has been key to the success of its macroeconomic stabilization efforts.

3.7 Satisfactory progress has been achieved in implementing PFM reforms. The legal and

institutional framework for public financial management has been strengthened with the adoption

by the Council of Minister and the National Assembly of a number of key laws aimed at bring ing

the legislation in the area of public finances in conformity with the 1997 WAEMU directives. The

budgetary preparation and execution is supported since late 2008 by the entry into effect of the

budgetary software system SIGFIP, and the adoption of a budgetary nomenclature in line with

WAEMU standards. To improve transparency and oversight in the use of public finances, the

government began publishing comprehensive quarterly budget execution reports in 2010. More

significantly, for the first time since independence the government’s fiscal year (FY) 2009 and

2010 Annual Statement of Accounts was submitted to the Court of Accounts in September 2010

and May 2011, respectively.

3.8 Wide-ranging and well-focused public procurement reforms were adopted by the

authorities in mid-2010. The new Public Procurement Law was passed in June 2010, which

harmonizes procedures with WAEMU standards and internationally recognized good practices.

The new Law establishes a Public Procurement Regulatory Authority with policy formulation and

external oversight responsibilities, as well as a Central Procurement Unit that should replace

individual procurement units for line ministries.

3.9 Initial progress has also been made in implementing reforms to modernize the public

administration. In 2009 the government launched a comprehensive administrative reform

program supported by an EU-funded project Public Administration Reform Assistance Project

(PARAP) which aims at reforming the government’s administrative structure, strengthening

control over the wage bill, reducing the size of the public service, and rationalizing the

management of human resources. During the first half of 2010 the government completed the

verification process and on-site controls for the 2009 biometric census of all public sector staff.

The census helped to identify ―double dippers‖ (officials holding multiple posts) and ―ghost

workers‖ (individuals receiving unearned salaries), which together represent about 18 percent of

employees (almost 4,000 out of the 22, 236) covered by the census.

14

Policies to promote economic growth and job creation

3.10 Limited progress has been achieved in the expansion and rehabilitation of economic

infrastructure. The poverty reduction strategy has included infrastructure development as one of

its top priorities. However, the performance of the energy, seaport and road transportation sectors

continues to seriously constrain economic growth and poverty reduction.

3.11 The government recognizes the importance of improving the environment for private

sector development. Guinea-Bissau ranks 176th out of 183 countries covered by the World Bank’s

2011 Doing Business report. In two out of the nine issues covered by the survey, the ease of

starting and closing a business, the country ranks in last place; and in an additional area,

registering property, it ranks 175th. In April 2010 a decree simplifying procedures for business

registration and significantly reducing the number of administrative steps required for these

processes, was adopted by the government. Another decree was passed formally mandating the

establishment of a one-stop shop for business registration.

3.12 In addition, the government has made strong progress on the institutional and fiscal

treatment of investment with the adoption of a new Investment Code in December 2009. The

Investment Code of 1991 was rife with the potential for abuse and discretionary preferential

treatment. The new Code ensures that incentives are considered automatic, removing the discretion

that could be exercised by government officials under the old law; it also guarantees that there is

no discrimination among projects on the basis of size, and that the multiplicity of investment

regimes is eliminated to remove confusion and reduce fraud and evasion.

3.13 Finally, the National Assembly recently approved a new Telecommunications Law.

Last year’s EGRG pointed out that in this sector the main challenge is to consolidate an enabling

regulatory framework to allow for further growth and competition. The new law for

telecommunications ensures a level playing field for private investors in a sector that has expanded

rapidly in recent years.

Policies to increase access to social services and basic infrastructures

3.14 Broader access to social services contributed to the strong improvement in education

and health indicators in recent years. This has been well illustrated by the results of the July

2010 Multiple Indicators Cluster Survey (MICS), which show strong progress on most indicators

related to education, gender equality, health and HIV/AIDS. The 2010 MICS follows similar

surveys conducted in 2000 and 2006.

3.15 In the education sector, school enrolment and gender equality in education improved

considerably during the last ten years. The MICS surveys show that school enrolment rates

increased from 42 percent in 2000 to 65 percent in 2010 after falling to 45 percent in 2006. There

was an equally rapid improvement in gender equality in education, with converging school

enrollment rates: the ratio of girls’ to boys’ enrollment grew from 0.67 in 2002 to 0.83 in 2006 and

to 0.94 in 2010. Also remarkable is the reduction in illiteracy rates among young women (15 to 24

years) from 83 percent in 2000 to 72 percent in 2006 and to 61 percent in 2010.

3.16 In the health sector, promising developments have also taken place after 2006. Under-

five child mortality, after increasing from 203 deaths per 1000 births in 2000 to 223 in 2006, fell to

155 in 2010. Infant mortality followed the same pattern, increasing from 124 deaths per 1000

births in 2000 to 138 in 2006 and declining to 104 in 2010. Moreover, in 2009, the government

15

completed the construction of four new health centers, as well as rehabilitated and re-equipped two

hospitals, expanded the national hospital in Bissau, and renovated the Motor Bra rehabilitation

clinic and appointed new management.

Policies to improve the living conditions of vulnerable groups

3.17 Vulnerable groups are numerous and diverse in Guinea-Bissau, including women,

youth, orphaned children, handicapped, people living with HIV/AIDS, and survivors of

armed conflict. The NPRSP had emphasized the need to improve the lives of vulnerable groups

and prescribed actions to ensure that these groups are effectively able to benefit from economic

opportunities and access social services. The broad strategy in this area is to (i) increase and

improve access to basic social services; and (ii) develop programs to promote the development of

income-generating activities and the economic integration of the most vulnerable populations,

mainly through micro lending and community development.

3.18 This NPRSP pillar has received insufficient attention from successive Bissau-Guinean

governments over the recent past. Government actions targeted to improve the welfare of

vulnerable groups have been concentrated on gender and youth areas. In addition to efforts to

improve girls’ school enrollment rates, key actions undertaken in 2009 and 2010 towards

promoting gender equality centered on drafting proposed legal texts on reproductive health,

violence against women and girls; and trafficking in persons.

The Second National Poverty Reduction Strategy Paper (NPRSP II)

3.19 The implementation of the first NPRSP provides a foundation for the preparation of

the second NPRSP, which is expected to be adopted by the Council of Ministers by mid-2011.

The government has demonstrated an impressive and laudable commitment to learning from the

experience of the first NPRSP and to using those lessons to inform future development planning.

The first and second Annual Progress Reports are being used by the government to strengthen their

strategy, including by focusing on a few specific policy objectives, providing guidance on

budgetary prioritization, relying on realistic macroeconomic assumptions, devoting more emphasis

on economic growth, strengthening the results framework and corresponding mechanisms for

monitoring and evaluation, and ensuring overall consistency in government actions.

3.20 The main objectives of the government strategy are to achieve a significant and

lasting reduction in poverty and to make progress toward the achievement of the MDGs. To

that end, the pace of economic growth will need to be stepped up, particularly in those sec tors that

provide employment for the poor, and the economy will need to diversify. Particular attention has

to be given to private sector development, an area where the NPRSP is expected to draw from the

recommendations of the recent Diagnostic Trade Integration Study (DTIS) and Country Economic

Memorandum (CEM). Efforts must be pursued to improve macroeconomic management and

consolidate administrative reforms to ensure the quality provision of basic public services

(education, healthcare, and water and sanitation). Environmental management will be dealt with

more consistently in the next NPRSP.

16

4. BANK SUPPORT TO THE GOVERNMENT’S

CORE REFORM PROGRAM

A. LINKS TO THE INTERIM STRATEGY NOTE

4.1 The Interim Strategy Note (ISN) discussed by the Board in June 2009 sets out the

Bank Group’s support to the government’s reform program for the period FY10-11. The

ISN aims at helping the government to address select and immediate challenges within the

confines of IDA’s limited resource envelope for the country by supporting the government in its

efforts to implement a basic transitional program in a challenging environment. As noted above,

its goals are aligned with the 2008 National Poverty Reduction Strategy Paper (NPRSP) and

articulated around three of its pillars: (i) strengthening economic management and (ii) laying the

foundations for growth in existing productive sectors, and (iii) increasing access to and quality of

basic services. Capacity development will be a cross cutting theme, and building partnerships a

guiding principle. The ISN foresees the use of development policy operations, investment

projects and trust fund resources, and the undertaking of analytical and advisory activities.

4.2 By supporting the first three pillars of the NPRSP, the proposed operation is an

integral part of the Bank’s strategy and is seen as an important step in helping stabilize the

economic situation in Guinea-Bissau, support economic recovery and prepare the ground

for the post HIPC completion point period. In particular, the EGRG supports the core

objectives and expected outcomes of the ISN, strengthening economic management with its

focus on improving governance, transparency and efficiency in public expenditure management,

laying foundations for improvements in productive sectors by advancing legal and administrative

reforms aimed at fostering private sector development, and improving service delivery in

education through the strengthening the human resource management in the sector.

B. COLLABORATION WITH THE IMF AND OTHER DONORS

4.3 The staffs of the IDA and the IMF collaborate closely on Guinea-Bissau. The

preparation of the Joint Staff Advisory Note on the Second Annual progress Report on the

NPRSP and the HIPC Completion Point Document and the Joint Debt Sustainability Analysis

prepared by the staffs has demanded a high level of cooperation between both institutions in

2010. Regularly IDA typically takes the lead on sectoral issues, including public sector

management, private sector development and infrastructure provision. The IMF takes the lead on

macroeconomic policies. Both institutions support structural reforms in public finance,

procurement, debt management and private sector development. Staffs collaborate in identifying

and supporting reforms in budget systems, accounting and treasury that are part of the IDA

budget support operations and the IMF ECF program with the country. In a number of areas

where the ECF and this operation overlap the work is being carefully coordinated to ensure that

consistent advice is provided to the authorities and that triggers and structural benchmarks are

complementary.7

4.4 In particular, the staffs have closely collaborated on the preparation of the

structural agenda that is supported by the proposed EGRG III and the Fund’s ECF

approved in May 2010. The specific PFM reforms supported by the proposed operation are

7 IFC has recently reengaged in Guinea Bissau and it is collaborating with IDA in the investment climate and the

energy areas. IFC is also developing a short-term finance project for exporting cashew nuts.

17

fully consistent with IMF policy and technical advice. Moreover, efforts are made to ensure

complementarities between Fund and Bank supported reforms: first, the Fund takes the lead in

tax policy and administration, while reforms under the proposed operation focus on expenditure

management; second, Fund-led reforms aim at addressing structural issues critical to improving

fiscal policy outcomes, while Bank-led reforms aim at addressing foundational and systems

issues that underpin the authorities’ capacity to implement their NPRSP.

4.5 As recommended by the 2001 WDR, the proposed operation has benefitted from the

cooperation with other partners. As indicated above, the EU is funding a technical assistance

project for the reform of the public administration. The EU is supporting the authorities in

designing a comprehensive multi-year reform action plan to reform and modernize the public

administration and reduce its size. A project unit was put in place in 2008 and it is expected to be

completed in mid 2011. With regard to downsizing, the authorities have selected three ministries

to pilot the reforms – the Ministry of Finance, the Ministry of Civil Service and the Ministry of

Public Administration Reform. The project also has financed the bio-metric census of the civil

service, functional reviews of departments, and activities aimed at easing the reintegration of

retrenched workers in the private sector.

4.6 Engagement from donors is only slowly evolving towards a more harmonized

approach. The NPRSP has not been a key point of reference for government actions and

coordination of donors’ support. Guinea-Bissau still benefits from financial support from a range

of aid agencies with different, often uncoordinated instruments, given the complex political

environment and uneven macroeconomic performance. In 2009, seven budget support providers

including the AfDB, EU, France, IDA, IMF, Portugal and Spain established the Joint Framework

for Budget Support Coordination (Quadro Conjunto de Concertação para Apoio Orçamentário,

CCAB). The objectives of this mechanism are modest as it aims at enhancing exchange

information and coordination. The nature of this mechanism is primarily consultative and does

not create obligations to its members. An enhanced harmonization of donor support and a more

predictable flow of resources remain necessary conditions for a better implementation of the

NPRSP, notwithstanding an enhanced coordination role by the Ministry of Economy, Planning

and Regional Integration that, since mid-2009, has yielded some results.

4.7 The NPRSP has been supported through investment and budget support. In addition

to the EU, project specific and budget support has been provided by UN organizations, regi onal

economic organizations (WAEMU, the BCEAO), development banks (African Development

Bank, West African Development Bank) and bilateral donors, including Portugal, Brazil and

Spain. A framework agreement among donors, the Bank and IMF providing budget support has

been set up in 2009 to ensure better coordination and information sharing. The recently

completed PEMFAR, a joint undertaking with the African Development Bank and the EU office

in Bissau, has also provided an important opportunity for enhancing collaboration with other

donors aligning donor technical assistance on the country’s key PFM and public administration

reform priorities.

18

Table 4.1: Development Partners –Areas of Support

AfDB EU IDA IMF UN

Macro-Fiscal

Public Financial Management

Human Resource Management

Procurement

State Modernization

Private Sector Development

Security and Defense

C. RELATIONSHIP TO OTHER BANK OPERATIONS AND ANALYTICAL UNDERPINNINGS

4.8 The proposed EGRG III grant builds on the previous EGRG I and II and

complements other Bank capacity building and investment operations. The PSD plank of

the proposed operation builds in its entirety on a multi-year program of analytical, policy and

technical assistance supported under the IDA Private Sector Rehabilitation and Development

Project (PSRDP); this project has been instrumental in advancing far-reaching legal and policy

reforms including the preparation of business laws consistent with the OHADA Acts, the

Investment Code and the proposed Law on PPP, privatization, and initiatives to improve the

business climate based on project-supported analytical work (including a 2007 update of a 2001

FIAS ―road map‖ study of administrative procedures for opening a business). The PFM policy

plank of the proposed operation complements capacity building activities funded under a past

US$1.2 million LICUS grant which closed in December 2008 and an ongoing US$1.7 million

SPF grant approved in December 2008. The operation also complements, in its development

objectives, a multi-sector infrastructure project, funding the restoration of a minimum of critical

investment requirements in transport and energy infrastructure. The proposed DPO focuses on

reforms that would leverage actions supported through technical and financial assistance

provided by these other instruments.

4.9 While the proposed operation does not provide direct support to the government

efforts in lessening infrastructure bottlenecks, it complements other Bank investment

lending operations supporting infrastructure sectors. In particular, improvements in

government budget predictability, expenditure management and procurement systems would

favor, in the medium term, a better execution of government infrastructure investment and

maintenance. In addition, it is expected that a more effective control of the payroll would

generate savings that could free up space to finance government infrastructure and social sector

investments. In this regard, the recent approval of the Emergency Electricity and Water

Rehabilitation Project (EEWRP) and its additional finance could be benefitted from the enhanced

predictability of government resources. The selection of the PSD plank actions, focused on

administrative and legal procedures and regulatory frameworks to foster private sector activities,

19

has taken into account the fact that the Bank is already preparing an additional financing

proposal under the Multi-Sector Rehabilitation Project (P097975) aimed at addressing the crucial

electricity generation shortfall.

4.10 A number of analytical studies provide the basis for the design of the proposed

operation. They include core diagnostic assessments by the World Bank in collaboration with

the government and other donors as well as various studies conducted by the government with

donor support. The studies include: (i) a Public Expenditure Management and Financial

Accountability review (PEMFAR) completed in 2010, and drawing on an early 2009 EU -

supported Public Expenditure Financial Accountability (PEFA) Diagnostic Assessment which

provides an updated diagnostic analysis of the current strengths and weaknesses in the country’s

public financial management system and practices, including public procurement and a

considerable range of inputs for the design and preparation of the next phase of the PFM and

public procurement reform strategy; (ii) various FIAS studies and project documents and aide-

memoire of the IDA-financed private sector PSRD Project, which have provided analytical

background and specific recommendations on business environment reforms, the investment

code and other PSD reforms; (iii) a Diagnostic Trade Integration Study (DTIS) that also

highlighted red tape and related petty corruption as a barrier to private activity and investment.

In addition and (v) a recent Country Economic Memorandum (CEM) that provides the analytical

underpinnings for a stepped-up program that would be supported by the Bank, called as High

Impact Program (HIP), designed to achieve transformative change in key sectors of the economy

and a related institutional agenda focused on PFM and PSD reforms.

D. LESSONS LEARNED

4.11 The design of the proposed operation has benefited from a number of lessons drawn

from the recent JSAN and HIPC Completion Point Document and the implementation of a

LICUS grant on PFM reforms, the PSRD project, the Economic Rehabilitation and Recovery

Credit, a quick disbursing credit of US$25 million that supported the implementation of Guinea-

Bissau’s National Reconciliation and Reconstruction Program and the EGRG I and II. Key

lessons are highlighted below:

Focus and realism. There is a need for a realistic program design to avoid overloading the

very limited institutional and implementation capacity of Guinea-Bissau. Thus, selectivity in

objectives that are mutually enhancing and realism in targeted outcomes are important to

keep the program focused on fundamentals of the reform agenda;8

Implementation. Fragile states may require more detailed implementation programs than

usually seen in other development policy operations, particularly during periods of political

transition. Detailed action planning and monitoring may be needed to help the government

and program partners track progress, address bottlenecks and adjust to delays in program

implementation.

Follow up on government reforms and complementarities with other projects. Experience

with the EGRG I and II indicates that after government or legislative adoption of laws and

regulations, additional assistance is required to guarantee a full implementation of

government policy reforms. On the positive side, the implementation of the PFM reforms has

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

2004.

20

been successful due to the support provided by the SPF Economic Governance Support

Grant. Similar conclusions can be found in regard to the state and civil service reforms where

the EU PARAP project has provided resources to the implementation of reforms in this area.

On the negative side, only limited support has been provided on private sector development

plank since 2009 (when the PSRDP closed); and

Technical Assistance. Related to the previous point, financing for policy reforms should not

rely on the policy support alone to catalyze and implement reforms. Technical assistance and

capacity building resources should accompany policy operations in order to ensure: (i) the

strengthening of capacity of domestic counterparts; and (ii) support to specific reforms via

specialized analytical work or reform-specific capacity building. Achieving the results

targeted by the EGRG requires strengthening counterpart capacity, and IDA will remain

closely involved in capacity building through technical advice.

5. THE PROPOSED OPERATION

A. OPERATION DESCRIPTION

5.1 The proposed operation, in the amount of SDR 4 million (US$6.4 million equivalent)

is a single-tranche development policy operation. The proposed EGRG III is designed to

sustain momentum in the implementation of the focused reform agenda supported by EGRG I

(approved in June 2009) and EGRG II (approved in June 2010). Accordingly, the operation

focuses on two of the four pillars of the NPRSP (i) strengthening governance, enhancing the

efficiency of public administration, and guaranteeing macroeconomic stability with focus on

public financial management (PFM) and state reorganization; and (ii) promoting economic

growth and job creation to foster more robust private sector development (PSD). The first of

these pillars—the agenda for governance, public administration, and macroeconomic stability—

aims at completing and consolidating the development and implementation of a modern legal

and organizational framework for PFM that is consistent with WAEMU standards, reorganizing

the government structure and strengthening human resource management. The second of these

pillars—promoting economic growth and job creation—focuses on improving the business

climate, adjusting previous regulatory reforms supported by the earlier EGRGs series, and

creating an environmental impact regulatory framework for investment.

5.2 The specific objectives of the reforms supported by the proposed grant are to : (i)

promote efficiency, transparency and accountability in the use of public resources through

improved budget and public financial management; and (ii) improve specific aspects of the

investment climate, including streamlining procedures for business registration and licensing and

reforms of the existing legal framework for investment. The development objectives are

consistent with pillars 1 (good governance, macroeconomic stability, public administration

reform) and 2 (private sector-led growth) of the government’s national development program

outlined in its NPRSP.

5.3 The proposed EGRG III supports follow-up reform measures designed to

consolidate the improvements in PFM and PSD that have been obtained since 2008 and

that were supported by the first and second EGRGs. In addition, the proposed DPO will

support government actions in PFM, state reform, the rationalization of the government’s human

21

resource management, and improved debt management, actions that are essential for the

successful implementation of fiscal adjustment.

5.4 Several principles underpin the design of the operation and the specific choice of policy

areas and measures that it supports:

Drawing on Bank lessons for engagement in fragile states, the design of the policy

program reflects first and foremost a high degree of selectivity, with a focus on a small

number of measures that are technically ready, and feasible given the complex political

context and the weak institutional capacity. In particular, the operation focuses on a

select number of concrete reforms that (i) are backed by extensive analytical work; (ii)

have been subject to repeated consultations with stakeholders; (iii) have benefitted from

technical assistance; and/or (iv) are leveraging reforms supported by other Bank and

donors instruments (such as the CFAA-CPAR and PEMFAR diagnostic reports, a SPF

Economic Governance Support Grant, and the Private Sector Rehabilitation and

Development Project).

To avoid placing an excessive burden on the government’s limited capacity for policy

formulation and implementation, while still ensuring that its overall program has no

critical gaps, reforms supported by the operation are consistent and complementary with

undertakings under the IMF Extended Credit Facility (ECF) program and with activities

funded under the SPF Economic Governance Support Grant and the EU-supported Public

Administration Reform Program (PARAP).

The operation focuses on PFM, state organization and human resource management, and

business law reforms that reflect the implementation of fundamental commitments

towards regional integration that successive governments of Guinea-Bissau have made in

the past decade. While the pace of implementation has been and may continue to be

delayed by political instability their general direction has long been a matter of

established policy and enjoys broad political support. PFM reforms follow this principle,

as Guinea-Bissau has only recently started to implement its legal, economic and

institutional commitments under WAEMU. Similarly, business law reforms rest on the

country’s commitments under OHADA.

B. POLICY AREAS

5.5 As described above, the proposed operation would support essential policy reforms

and institutional strengthening actions in two government NPRSP pillars: (i) strengthening

governance, enhancing efficiency in public administration, and securing macroeconomic

stability; and (ii) promoting economic growth and job creation. It encompasses five components

within these two pillars: public financial management, human resource management, debt

management, measures to improve the investment climate, and environmental regulations.

5.6 The results of the first and second EGRGs have been broadly satisfactory. The most

notable achievements of the EGRGs under the first pillar were the resumption of the process of

harmonizing public financial management with WAEMU rules through the approval of the new

institutional framework, the improvement in budgetary and financial management through the

introduction and development of a computerized system of Financial, Budget, and Accounting

Management (SIGFIP), the re-establishment of the single treasury account, the completion of the

22

biometric census of the civil service staff, and the implementation of remedial measures to

eliminate the irregularities found by the census and the adoption of a institutional framework for

procurement. Major achievements under the second pillar included the approval of the new

investment code, the approval of a set of measures to streamline business regulations, the

establishment up of a ―one-stop shop‖ (guichet único) for business registration, and the approval

of the Law on Information and Communications Technology, which sets out a new regulatory

framework for the country’s telecommunications system.

C. PRIOR ACTIONS UNDER THE PROPOSED EGRG III

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

macroeconomic stability

a) Public Finance Management

5.7 Actions supported by the proposed EGRG III under the PFM component aim at

consolidating recent progress in: (i) extending the coverage of the SIGFIP to the accounting

management phase; and (ii) enhancing the transparency of the budget through more

comprehensive, timely and regular reporting.

5.8 The previous EGRG I and II supported the adoption of the legal framework for

PFM, which represented a very significant shift that has required sweeping change in the

organization of departments and administrative procedures, namely the Financial Control Office

(DAF), the Budget Office, and Treasury and Accounting (DGTCP). In addition, the EGRGs

supported the installation of the Integrated Public Financial Management System (SIGFIP). In

particular, the EGRG I and II supported the installation and functioning of the budget preparation

and execution modules.

5.9 Despite these encouraging measures to strengthen the country’s legal, institutional,

and administrative framework and to build its capacity for public financial management,

considerable progress remains to be made. The government’s recent efforts have been

directed at ensuring that all consolidated expenditures are processed through the computerized

financial management system and relate to specific approved budget appropriations. The lack of

computer equipment and applications for accounting management reduces auditing opportunities

for the departments receiving the appropriations, makes it impossible to obtain accounting

information quickly, results in the duplication of certain tasks, and makes it difficult to prepare

management accounts and the general account of the state, thereby preventing external and

independent auditing of compliance with budget authorization by the National People’s

Assembly.

5.10 This current situation facilitates various lapses, such as exceeding planned

appropriations for advances, extremely long timeframes for the preparation of statements of

accounts, the inability to track expenditures, the lack of frequent, prompt, and reliable reporting,

and the limited scope for conducting ex-post audits. Delays persist in the consolidation of

budgetary information, the production of comprehensive and regular in-year budget execution

reports and the preparation of financial statements.

5.11 Recognizing these limitations, in October 2010 the government completed the

implementation of SIGFIP, computerizing the accounting management process with a view of

ensuring adequate communication between the budget preparation and execution modules to

guarantee the accuracy of the reports. The installation and integration of the SIGFIP

23

computerized accounting system is a prior action for the proposed EGRG III . As mentioned

above, this action complements the implementation of the SIGFIP budget preparation and

execution modules, which had been supported in the two preceding EGRGs (the 2009 budget

was presented using SIGFIP and the SIGFIP procedures manual) and completes the

computerization and integration of the budget cycle.

5.12 It is expected that future budgets will be prepared and presented using the SIGFIP

budget system, providing the following functionalities: it will ultimately integrate into a single

application (SIGFIP) all areas of public finance (budget execution and budget preparation,

treasury and accounting, etc.); it produces the budget documents required for dra fting budgetary

laws; it produces the various accounts (budget and accounting), expenditures and revenues for

both the state general budget and the Treasury’s special accounts; it reflects outstanding

payments to be made or outstanding sums to be collected; and it facilitates the preparation of all

end-of-fiscal year documents, linking the various agents handling expenditure and revenue

operations for both the state general budget and the Treasury’s special accounts.

5.13 Currently, the public has extremely limited access to budget information. There is

limited dissemination of the structure and execution of the state budget. However, with the

clarification of the budgetary and accounting framework, the computerization of the budget

system via SIGFIP and the creation of a website for the Ministry of Finance, the government is

undertaking important steps towards improving budget transparency. The 2010 Budget Law and

the budget laws for the three previous years are now available on the Ministry of Finance’s

website. In addition, the government has presented to Parliament and made available to the

general public the four quarterly budget execution reports for 2010 and the first quarter of 2011.

Furthermore, from the first time since independence the government’s general administrative

accounts for 2009 were submitted to the Court of Accounts in October 2010 (before the end of

the following year). The government also submitted the general administrative accounts for 2010

to the Court of Accounts in May, 2011. The submission to the Court of Accounts of the

government’s general accounts for 2009 and 2010 is the prior action for the proposed EGRG III .

5.14 The proposed prior actions under this component would include:

(i) The Recipient’s Minister of Finance has completed the computerization and integration of the

Recipient’s budget cycle with the installation of the SIGFIP accounting module, as evidenced by

a letter from the Recipient’s Minister of Finance dated May 4, 2011; and

(ii) The Recipient’s Minister of Finance has submitted to the Recipient’s Court of Accounts the

Recipient’s state general accounts for the Recipient’s Fiscal Years of 2009 and 2010, as

evidenced by the Recipient’s Minister of Finance’s letters to the Recipient’s Court of Accounts,

dated September 27, 2010 and April 21, 2011.

b) Debt Management

5.15 Poor debt management has been another factor explaining the uncontrolled growth

of indebtedness experienced by the country in the past two decades. The lack of reliable debt

information, uncoordinated borrowing policies and the absence of debt strategies have

exacerbated the debt, contractual or not, generated by chronic fiscal disequilibria. Up to now

there has been no systematic electronic record of debt data. The Public Debt Office (PDO) staff

relies on billing from creditors to plan repayments in the short term. The software program for

debt management installed at the PDO is still not operational. Related to these problems, debt

reporting is irregular, and there is no official publication addressing debt issues.

24

5.16 In 2009, with the support of UNCTAD, the Integrated Debt Management System

(SIGADE) was installed. The operation of this system will guarantee reliable debt information

and will reduce risks related with the manual introduction of debt information into non-

integrated electronic spreadsheets. Debt information provided by creditors (e.g. billing

information and debt reports sent by creditors at their own initiative or upon request from MoF)

must be kept in electronic format –written documentation must be digitalized. Nevertheless, the

lack of technical capacity has thus far prevented the operation of the system.

5.17 Further efforts remain needed to strengthen capacity in debt management. In 2010, the

debt reconciliation exercises undertaken as part of the HIPC completion point process proved to

be difficult and made evident the precarious debt management system and the need for

improvements in this area. With the support of UNCTAD, UNDP and the Bank, the government

is taking important actions to strengthen the Public Debt Office (PDO). The EGRG III includes

as a prior action the adoption of the action plan for further reinforcing the PDO to improve debt

management, through the enhanced use of SIGADE. Among the key actions identified in the

action plan is the publication of SIGADE’s procedural manual , training activities, improvements

in the working conditions of the PDO and the full operation of the SIGADE system.

5.18 The prior action under this component would be:

(iii) The Recipient’s Minister of Finance has adopted an action plan for the strengthening of its Public

Debt Office, as evidenced by letter from the Recipient’s Minister of Finance, dated May 4, 2011.

c) Human Resource Management and State Reorganization

5.19 As mentioned above, the government has undertaken important steps toward

controlling personnel expenses and enhancing its human resource management. The

government’s strategy consists in two sequential sets of actions. The first is the improvement of

the currently unreliable information systems regulating staffing, individual remuneration and

overall payroll. More effective control over the management of government employees is

recognized as the most critical component for strengthening and improving PFM. The second set

of actions involves the strengthening of human resource management through the adoption of a

new civil service framework law and clear secondary regulations for recruitment, promotion,

deployment and dismissals, and HR functions such as workforce planning, career development

and training.

5.20 An additional factor related to the government’s human resource management is

the institutional structure of each ministry and agency. Currently, the haphazard organization

of government entities, the lack of clear definitions of their mandates and the services they

provide, the allocation of functions, overlapping task, roles and responsibilities all seriously

affect the effectiveness of the civil service. This is reflected in an excessive number of civil

servants, many with inadequate qualifications, the absence of proper management or oversight,

and the lack of clear and precise descriptions of professional duties.

5.21 In 2009 the government initiated a bold reform program for its human resource

management system. The completion of a biometric census of the civil service provided an

accurate count of public sector employees and identified a large number of ―double dippers‖

(officials holding multiple posts) and ―ghost workers‖ (individuals receiving unearned salaries).

The next step in this area was the installation of the human resource management IT system, the

Integrated System for the Human Resource Management of the Public Administration

(SIGRHAP) that will provide payroll processing security for active employees, pensioners and

25

survivors. In June 2010, the EGRG II supported the government’s decision to transfer to the

Minister of Public Administration (MoPA) the management of the payroll system and civil

service database to be included in the SIGRHAP and the selection of the IT platform for

SIGHRAP.

5.22 The authorities need to accelerate progress in this area. The government has faced

difficulties in transferring payroll system management to the MoPA, consolidating of the

database generated by the biometric census of civil servants and the database used by the MoF to

unify the payroll bill. In February 2011 the civil service’ payroll system was effectively

transferred from the Budget Department of the Ministry of Finance to the MoPA. Technical

difficulties in consolidating the databases and political resistance initially delayed the unification

of the payroll bill, but the technical problems have been overcome and the MoPA has been

processing the payroll bill since March 2011. The main challenge to the development of a fully

unified payroll is resistance by the Ministries of Defense and the Interior to integrate their staff

into the new payroll system. Therefore, the MoPA is currently processing a provisional payroll

system. Delays have been also experienced in the installation of the SIGRHAP. As a result, the

integration of the unified payroll system and the database generated by the biometric census in

the SIGRHAP is expected to be completed by August 2011.

5.23 A further challenge to the development of the unified payroll is the large number of

temporary teachers currently employed by the Ministry of Education and the irregular

procedures for their recruitment. One of the major issues confronting the education sector is

the recruitment and management of teachers. A large number of teachers have been hired at the

regional level but have not been integrated into the formal civil service system. This practice has

led to the frequent generation of salary arrears in the sector and abuse of the payroll system by

regional directions of the Ministry of Education. Recognizing that the irregular recruitment of

teachers not only prevents the consolidation of the civil service database and unification of the

payroll, but also undermines the efforts in controlling the payroll bill, the government decided in

March to forbid the regional directors from any further recruiting or the singing of employment

contracts without Ministry authorization. The EGRG III includes as a prior action the enactment

of the Prime Minister resolution forbidding the recruitment of teachers by regional directors

without the prior authorization of such Ministry. More broadly, in response to the pressing need

to ensure appropriate mechanisms for good governance concerning the human resources of the

public administration the government, with the assistance of the EU-funded project PARAP, has

drafted a number of secondary regulations as executive acts of the civil service law for

recruitment, job re-classification, careers, disciplinary measures, conflicts of interests,

professional status, and the career tracks of senior civil service staff, all of which are expected to

be approved by the end of the year.

5.24 Greater progress has been made in the reorganization of the government structure.

In line with the objective of streamlining the public administration for viable, cost -effective,

client-oriented and transparent service delivery and management, the MoPA has initiated a

process of administrative rationalization and has submitted to the Council of Ministers the

Organic Law of the Government. The Organic Law of the Government is consolidating the

functions of the ministries according to thematic areas as a measure to increase efficiency and

contain public expenditures. The EGRG III supports the adoption by the Council of Ministers of

the Organic Law of the Government. A follow-up action in this area is the adoption of organic

laws for all the ministries and their staff charts, which is expected to be completed by the end of

the year.

26

5.25 The proposed prior actions under this component would include:

(iv) The Recipient’s Prime Minister has issued a resolution (Despacho) dated May 3, 2011,

regulating the recruitment and contracting of temporary teachers; and

(v) The Recipient’s Council of Ministries has adopted the Government’s Organic Law (―Lei

Orgânica do Governo‖), consolidating the functions of the Recipient’s ministries.

Pillar 2: Promoting economic growth and job creation

5.26 Despite recent reforms Guinea-Bissau scores very low on internationally recognized

measure of the ease of doing business. Based on the Doing Business report for 2011, Guinea-

Bissau is second from the bottom in the West Africa region and among the ten lowest (176th out

of 183 countries) in the world. At the broadest level, political instability and fiscal fragility have

undermined the rule of law. Coupled with the deep infrastructure deficits – energy, seaport

facilities and roads – and severe weaknesses in public administration capacity, private companies

face a very challenging environment in Guinea-Bissau.

5.27 At the micro-level, the legal and administrative environment for business remains

weak and unstable. Guinea-Bissau still needs to complete its transition from the legal and

institutional framework inherited from colonial times towards one that is both more adequate to

its current economic challenges and consistent with its regional commitments to integration.

Guinea-Bissau needs to promote investment, both domestic and international, and attract foreign

investors that will bring entrepreneurial skills and knowledge to domestic markets. Guinea-

Bissau is a small economy, with limited entrepreneurial capacities, a skeletal financial system,

and weak linkages with foreign markets. In this context it is especially important to be able to

attract foreign investors who possess these scarce skills and capitals.

5.28 Completing the legal transformation to a market-friendly regulatory environment is

expected to be a multi-year undertaking, going well beyond the timeframe of the proposed

operation. The transition to a modern and efficient legal and institutional regime will require not

only the adoption of the relevant legislation, but also the development of more regular,

predictable administrative and judicial structures and practices, as well as the routine and

widespread publication of information about legal reforms.

5.29 In addition to damage caused by protracted political instability and increasingly

dilapidated infrastructure, red tape remains another important impediment to private-

sector investment and growth. In a context of weak administrative capacity complex

regulations and opaque procedures, create opportunities for corruption, which in turn weakens

incentives to simplify the regulatory environment. The problems related to a poor investment

climate are not unique to Guinea-Bissau; however, these are particularly acute in an environment

where extremely limited institutional capacity enables poor governance and corruption as coping

mechanisms, which then reinforce the incentives to maintain the status quo.

5.30 This unnecessary administrative complexity and general lack of information

generate obstacles that are particularly adverse for international investors. A fundamental

obstacle for investors interested in exploring business opportunities is the near-total absence of

reliable information on investment and startup procedures. Compounding this lack of

27

information is the multiplicity of administrative processes and requirements based on ex-ante

control, a concept that generates onerous bureaucratic procedures.

5.31 The government views the improvement of the investment climate as a critical

prerequisite to boost economic growth and reduce poverty through private sector development.

Its private-sector growth agenda is reflected in the NPRSP and has been developed over several

years on the basis of diagnostic studies and consultations with stakeholders, benefitting from

technical support under the IDA-funded Private Sector Rehabilitation and Development Project.

5.32 Important progress has been achieved since 2008 with the adoption by the Council of

Ministers of draft laws based on the OHADA Acts, while a Commercial Tribunal has also been

established and judges been trained in commercial law procedures. The commitment of the

government to these reforms has been confirmed by the adoption by the Council of Minist ers in

March 2010 of a decree simplifying registration procedures and establishing a one-stop-shop for

business registration, called Center for Firm Registration (CFE) or Guichet-Unique. Finally, the

Telecom Law has been approved by Parliament and enacted by the president in May 2010,

formalizing the regulatory framework for telecommunications in support of a rapidly expanding

and employment-generating sector.

5.33 Substantial progress in developing a new legal and regulatory framework for

investment has been observed with the adoption of a new Investment Code in 2009.

Developed with the support of the Foreign Investment Advisory Service (FIAS), this Investment

Code was signed into law by the president on December 31, 2009. This code ensures that

investment incentives are automatic, removing the discretion that could be exercised by

government officials under the old law; there is no discrimination among projects on the basis of

size; the multiplicity of investment regimes is eliminated to remove confusion and reduce fraud

and evasion; and the opacity of rules regarding sanctions and the uncertainty with which they

were previously applied are ended. Fiscal risks related to tax incentives would also be mitigated

with the consolidation of incentives in an automatic and transparent system. Nonetheless,

administrative weaknesses and the lack of secondary regulatory framework have prevented the

implementation of the new investment code.

5.34 Since 2009, the EGRG I and II supported actions judged critical to advancing

reforms in private sector development, namely: (i) the adoption by the Council of Ministers of

nine OHADA acts on business law; (ii) the adoption by the Council of Ministers of the new

investment code; (iii) the adoption by the Council of Ministers, and more recently its

promulgation by the president, of the draft Law on Public-Private Partnerships, thus sending a

much-needed signal of the government’s commitment to fostering private sector-led growth; (iv)

the adoption by the Council of Ministers of a decree simplifying procedures for business

registration to promote formalization and provide a further indication of the government’s

commitment to simplifying administrative procedures for doing business; (v) the adoption by the

Council of Ministers of a decree establishing the formal constitution of a one-stop-shop for

business registration, reinforcing the ongoing legal reforms related to the investment climate; (vi)

and the enactment by the president of the Telecommunications Law.

5.35 The government’s reform efforts aimed at fostering the development of the private

sector have been maintained through early 2011. With the support of UNDP and the EU, the

CFE is expected to be inaugurated in mid May 2011. The government has also created a bulletin

to publish the registration of new businesses at the CFE that should contribute to increasing the

28

transparency of business information. This improvement is aligned with the ongoing effort to

concentrate the procedures for starting a business at the CFE in order to simplify administrative

processes and reduce bureaucratic costs. The decree to simplify procedures to start a business,

issued in March 2010, already authorized the publication of new company registrations in

newspapers as permitted by Art. 257 of the OHADA Companies Law. That decree eliminated the

publication rights monopoly of the official gazette, but costs of publication in local newspapers

remain high (around CFAF 40,000) and are prohibitive for small companies. As a result, many

companies opt not to publish, undermining access to information about new companies. The

proposed action will authorize the one-stop shop to publish legal announcements in line with

OHADA and following the precedent of countries like Senegal and Burkina Faso. The notice of

publication can be done at the website of the one-stop shop at no cost. Due to limited

connectivity in Guinea-Bissau, the one-stop shop will also produce a printed version of the

bulletin. A minimum fee will be charged to cover the cost of printing the bulletin. The EGRG III

includes as prior action the Prime Minister resolution creating the bulletin for business

registration.

5.36 Solid progress has been also achieved in the simplification of license procedures.

Streamlining business licenses is necessary to meet the government’s goal of promoting

formalization, expanding the fiscal base and creating new job opportunities. Until now all new -

businesses required ex-ante authorization by the Ministry of Commerce, Industry and Tourism.

Commerce, industry and tourism licenses are regulated by several decrees, some of which date

back to the colonial era (e.g. the Decree on Industrial Activities approved in 1950) and which are

clearly obsolete and no longer applied in practice. In addition, the licensing requirements

mandated in these decrees often do not meet a clear regulatory purpose, but rather serve as tools

to generate revenue. Good regulatory practices suggest using ex-ante authorizations, such as

licenses, only for those activities that pose a risk to public safety, health, the environment or

national security, or as means of safeguarding the public interest and regulating the access to

scarce resources (e.g. such as fossil fuels, forestry, etc.).

5.37 In this context the government has adopted a simplification decree that would apply

the principle that low risk activities do not require a license, which would be replaced by a

sworn declaration by the entrepreneur. The declaration would serve to notify the relevant

authorities, including the Ministry of Commerce, Industry, and Tourism, of the company’s

intention to undertake a certain activity. The compliance of the company with relevant laws

would be monitored through ex-post inspections. Another key principle in the simplification is

the non-duplication of information. One agency should not require entrepreneurs to provide

information that has already been sent to another. For example, information required for the

registration of companies at the Commercial Registry should not be part of the requirements to

request a license. The implementation of this principle will contribute to reducing costs for

entrepreneurs.

5.38 The decree would be one of the steps in a reform strategy to rationalize business

regulations and improve regulatory enforcement in Guinea-Bissau. In the medium term,

related reforms will include strengthening tax administration and expanding the tax base,

establishing a single classification system for business activities consistent with international

practice, modifying and updating regulations in key strategic sectors such as tourism, as well as

in sensitive areas such as food handling or the importation of medicines, and establishing bet ter

coordination and information-sharing between government agencies. The EGRG III includes as

a prior action the adoption of the decree simplifying the licensing of businesses .

29

5.39 Implementation difficulties in reforming the legal and regulatory framework have

prevented the development of a level playing field for private investors. While the

Investment Code was promulgated at the end of 2009, the implementation process and the set of

reforms to transform and modernize the Investment Promotion Directorate of the Ministry of

Economy have not yet been initiated, leaving investors without a clear set of rules to follow. The

lack of capacity to manage a tax credit system, the lack of secondary regulation and the non-

exemption of customs rates and of the General Sales Tax (IGV) on imported capital goods

continue to impede new private capital investment in the country.

5.40 In this context, the government has decided to take advantage of the redefinition of

the implementing regulations for the investment code to make additional revisions. The

Council of Ministers created a special commission to review the investment code and propose

adjustments to it. With the support of the Bank, the special commission drafted a revised

investment code law that was adopted by the Council in May 2010.

5.41 The structure of the new draft code is similar to that of the current Investment Code

but several important changes were introduced. The revised Investment Code maintains the

principles of transparency, simplicity and non-discrimination enshrined in the 2009 Investment

Code and addresses three limitations that prevented its successful implementation. First, it

explicitly lists all possible fiscal incentives and duty concessions available for potential

investors. It eliminates the possibility of granting new incentives by other laws, which Art. 9.7 of

the 2009 investment code left open, which enhances transparency eliminates the possibility of

granting discriminatory fiscal benefits. Second, in line with other countries in the region it

reintroduces duty concessions and general sales tax exemptions for capital goods. Finally, given

Guinea-Bissau’s weak tax administration capacities the revised code introduces a set of

incentives that are easier to manage than the tax credit mechanism in the 2009 Investment Code.

Specifically, it introduces a gradually declining scale of deductions in the corporate income tax

(Industrial Contribution) for the first five years of the investment which are aligned with the draft

of the WAEMU investment code that is expected to be adopted by 2012. Furthermore, the

revised code re-introduces an incentive to encourage training and skill formation, a particularly

important issue for improving firm productivity.9 On the negative side, the new code restores the

role of the Investment Promotion Directorate of the Ministry of Economy in the process of

approval for projects, which is granted with the power to allocate tax incentives, but the new

Code also limits the Investment Promotion Directorate’s discretion and preserves the non

discrimination rules for investments by size, sector and region. In addition, the Investment

Promotion Directorate must decide in favor or against granting the incentives within 30 days

from the date the request is received. The decision must depend exclusively on verification

whether the requirements of the Code are satisfied. Economic unfeasibility of the proposal

cannot be alleged to refuse the request. Finally, the revised investment code also defines more

clearly the role of the Ministries of Economy and Finance in the administration of tax incentives.

The EGRG III supports the adoption of the revised investment code described above by the

Council of Ministers.

5.42 Finally, the government has made strong progress in improving environmental

regulations. In the second part of 2010 the government adopted the Law on the Environment

9 This point is particularly important as the recent investment climate report found that Guinea-Bissau companies are

the ones that invest the least and less often in training – which obviously have important implications for

productivity

30

(Lei Base de Ambiente), the Law on Protected Areas (Lei Quadro das Areas Protegidas) and the

Law on Environmental Impacts (Lei de Avaliação Ambiental). In September 2010, the Council

of Ministers adopted the Law on the Environment. This law provides the procedural framework

for the concession of environmental licenses and establishes the requirements for private and

public projects that use natural resources or activities that generate environmental externalities to

submit an assessment of environmental impacts, mitigation measures and compensation

mechanisms (if applicable). In addition, the law set out the criteria for projects that require

environmental assessment as well as defining the role of the Center of Evaluation of

Environmental Impacts (CAIA) in the approval of the terms of reference of the environmental

studies and the final reports. Finally, the law establishes the fees to be collected by CAIA. The

EGRG III includes as prior action the adoption by the National Assembly of the Law on

Environmental Impacts for private and public investment projects.

5.43 The proposed EGRG III would support the continuation of this agenda through:

(vi) The Recipient’s Prime Minster has issued a resolution authorizing the creation of a

bulletin to be published by the Center of Business Registration (Centro de Formalizaçao

de Empresas, CFE), to publish the notifications of new companies registration at

minimum cost;

(vii) The Recipient’s Council of Ministers has adopted a law decree streamlining business licensing by

eliminating redundant and unnecessary licenses, simplifying requirements and reducing costs;

(viii) The Recipient’s Council of Ministers has approved ad referendum and submitted to the

Recipient’s National Assembly a bill on the Recipient’s revised investment code, covering the

key non-discrimination principles and promoting transparency and simplicity in its

implementation, in accordance to WAEMU best practices; and

(ix) The Recipient’s National Assembly has adopted a law establishing the Recipient’s environmental

impact assessment procedures.

31

Table 5.1: Prior Actions for the Proposed EGRG III

Actions Status of implementation /

Supporting Documentation

(i) The Recipient’s Minister of Finance has completed the

computerization and integration of the Recipient’s budget cycle

with the installation of the SIGFIP accounting module, as evidenced

by a letter from the Recipient’s Minister of Finance dated May 4,

2011.

Completed. The SIGFIP

accounting module is installed

and operating since October

2010. Letter from the Minister of

Finance to the Bank dated May

4, 2011.

(ii) The Recipient’s Minister of Finance has submitted to the

Recipient’s Court of Accounts the Recipient’s state general

accounts for the Recipient’s Fiscal Years of 2009 and 2010, as

evidenced by the Recipient’s Minister of Finance’s letters to the

Recipient’s Court of Accounts, dated September 27, 2010 and April

21, 2011.

Completed. The State’s General

Accounts of 2009 and 2010 were

submitted to the Court of

Accounts on September 27 and

April 21, 2011. Letters from the

Minister of Finance to the Court

of Accounts.

(iii) The Recipient’s Minister of Finance has adopted an action plan for

the strengthening of its Public Debt Office, as evidenced by letter

from the Recipient’s Minister of Finance, dated May 4, 2011.

Completed. The Action Plan was

formally adopted by the Minister

of Finance on May 4, 2011.

(iv) The Recipient’s Prime Minister has issued a resolution (Despacho)

dated May 3, 2011, regulating the recruitment and contracting of

temporary teachers.

Completed. Resolution issued

May 3, 2011.

(v) The Recipient’s Council of Ministers has adopted the Government’s

Organic Law (―Lei Orgânica do Governo‖), consolidating the

functions of the Recipient’s ministries.

Completed. Approved the Decree

20/11 by the Council of

Ministries in April 29, 2011 and

published in the Official Gazette

on May 3, 2011.

(vi) The Recipient’s Prime Minster has issued a resolution authorizing

the creation of a bulletin to be published by the Center of Business

Registration (Centro de Formalizaçao de Empresas, CFE), to

publish the notifications of new companies registration at minimum

cost.

Completed. Resolution issued on

May 4, 2011.

(vii) The Recipient’s Council of Ministers has adopted a law decree

streamlining business licensing by eliminating redundant and

unnecessary licenses, simplifying requirements and reducing costs.

Completed. Adopted the Decree-

Law 8/20111 by the Council of

Ministries on May 3, 2011 and


on May 10, 2011.

(viii) The Recipient’s Council of Ministers has approved ad referendum

and submitted to the Recipient’s National Assembly a bill on the

Recipient’s revised investment code, covering the key non-

discrimination principles and promoting transparency and

simplicity in its implementation, in accordance to WAEMU best

practices.

Completed. Approved by the

Council of Ministries on May 3,

2011 and submitted to the

National Assembly on May 5 as

per Letter from the Council of

Ministries to the National

Assembly dated May 5, 2011.

(ix) The Recipient’s National Assembly has adopted a law establishing

the Recipient’s environmental impact assessment procedures.

Completed. Law Nr.10 adopted

by the National Assembly on

July 7, 2010, promulgated by the

President of the Republic in

September 17, 2010 and


Law on September 24, 2010.

32

D. MONITORING FRAMEWORK

5.44 The government’s program matrix in Annex 3 contains baseline (2010) and target

values (expected to be reached in 2012) for performance monitoring indicators for the

EGRG III supported prior actions. There are 5 indicators on public financial management,

and 3 on private sector development, for a total of 8 indicators. The indicators on public financial

management consist mainly of measures of improved performance in budget execution,

reduction of arrears and reporting. In particular, the program will monitor progress in compliance

with defined calendars for budget formulation, approval, and reporting and the stock of arrears.

Improvements in budget execution that have been supported by the previous EGRGs and the

proposed EGRG III should reduce the probability of contingent liabilities and progressively

reduce the stock of arrears. In turn, the installation of the accounting module that will complete

the SIGFIP should enhance the reporting of fiscal accounts that now can be timely published.

The action plan to enhance the debt management office should pave the fully operation of the

SIGADE and guarantee a more effective debt management. Finally, the actions supported by the

EGRGs on the area of human resource management should allow a better control of personnel

expenditures with the unification of the payroll system and the elimination of irregular contracts

in the Education sector.

Box 5.1: Good Practice Principles on Conditionality

Principle 1: Reinforce ownership

The reform agenda underpinning the proposed operation is rooted in both the fundamental commitments of

successive governments towards regional integration (under the West African Economic and Monetary Union

and the Organization for the Harmonization of Business Laws in Africa) and on the country’s own PRSP which

was prepared through a highly participatory and consultative process. For the latter, stakeholder consultative

workshops and focus group discussions were held with representatives of the public and private sectors and

civil society, down to the level of local communities. The government is completing its second PRSP at the end

of May, 2011. A series of public consultations with major stakeholders and regions have been already

scheduled to discuss it previous to its adoption by the Council of Ministries.

Principle 2: Agree up front with the government and other financial partners on a coordinated

accountability framework

There are only a limited number of financial partners involved in providing budget support, facilitating joint

understanding of areas of common and special interest (see paras. 5.3-5.5). A framework agreement among

donors providing budget support has been set up to ensure better coordination and information sharing. The

recently completed PEMFAR will also provide an important opportunity for enhancing collaboration with other

donors aligning donor technical assistance on the country’s key PFM reform priorities.

Principle 3: Customize the accountability framework and modalities of Bank support to country

circumstances

The policy matrix was developed in close coordination with the government, thus ensuring that it reflects the

government’s expressed policy intentions and the country circumstances – including weak capacity for policy

formulation and implementation. The design of policy reforms has been backed by analytical work and

technical assistance in place. Most of the reforms are longstanding and ongoing government initiatives which

were prioritized in the PRSP. Donor coordination on the budget support has reduced transaction costs and the

expected timing of the IDA disbursement is aligned with the government’s domestic budgeting process.

Principle 4: Choose only actions critical for achieving results as conditions for disbursement

Prior actions for the proposed grant focus on a selected number of measures that are critical to achieving the

objectives of the government’s reform program as detailed in this Section.

33

Principle 5: Conduct transparent progress reviews conducive to pred ictable and performance-based

financial support

The existing institutional structure for the PRSP process will be used to implement and monitor the policy

reforms supported by the proposed development policy operation. The limited number of active development

partners providing budget support allows for easy coordination and monitoring of actions and progress reviews

of the implementation of the policy matrix. After the disbursement of its single tranche, IDA plans to continue

working with the government and other participating development partners to monitor implementation and help

determine whether adjustments to the policy matrix need to be made to take into account the latest country

developments, stakeholder support and alternative options for realizing the intended development goals. The

disbursement of the proposed IDA grant is targeted towards mid CY11, in line with the domestic budgeting

process which is based on the calendar year. The disbursed funds are expected to be used in filling the CY11

budget financing gap provoked by the interruption of the budget support by the European Union.

5.45 The indicators on private sector development are measures of the depth of

administrative barriers to private investment, including the number of days, procedures and

costs to start a business and obtain business licenses, which would be easily monitored through

reviews of government procedures and surveys of business climate (as the Doing Business),. In

particular, the publication of new companies’ registration by the CFE is expected to reduce the

registrations costs calculated by the DB while the simplification of business licenses should be

reflected in the improvement of the dealing with construction permits indicators. Finally, the

number of environmental impact studies assessed by CAI will measure the effect of the

environmental regulations supported by the proposed EGRG III.

6. OPERATION IMPLEMENTATION

A. POVERTY AND SOCIAL IMPACTS

6.1 Quantitative measurement of the poverty impact of government interventions is

currently limited by the government’s weak statistical capacity, which prevents effective

monitoring and evaluation of government policies. Consequently, any assessment of trends in

poverty remains sharply limited by the lack of data. Since the first poverty assessment survey

(Inquêrito Ligeiro de Avaliação da Pobreza, ILAP I) in 2002, no new income or expenditure

data on poverty has been produced. The government’s Statistical Institute undertook a new

poverty survey (ILAP II) in July 2010, the results of which were issued as a draft by the end of

2010, and the final version of which should be published in the first half of 2011. The Bank will

support a priority statistical program focused on the country’s most urgent data needs, namely

economic data, poverty statistics and social indicators—including a household survey program—

designed to strengthen the country’s statistical development, with funding likely provided by the

Bank’s Trust Fund for Statistical Capacity Building (TFSCB). This program would allow for the

monitoring of poverty and other socioeconomic indicators as well as quantitative measurement

of government policies and reforms supported by the Bank.

6.2 From a funding perspective, the proposed operation is expected to have positive

direct impacts on poverty and social indicators. Given the shortfall in budget support flows,

the proposed operation would obviate the need for spending cuts that could place the provision

of basic social services at risk, and such cuts would disproportionately affect the poor, who

frequently depend on these services to a disproportionate degree. The measures supported by the

proposed EGRG II are also expected to have a positive indirect impact on poverty reduction,

34

mainly through increased overall growth and rising employment, though these growth effects

may be strongly tempered by the evolving sovereign debt problems in the Euro zone.

6.3 From a policy perspective, the indirect poverty and social impact of the reforms

supported by the operation are also expected to be positive. To the extent that these

initiatives will favor the broadening of the fiscal space for increasing public investment, as well

as enhancing efficiency in the use of public resources, the operation should have a positive

indirect impact on the government’s ability to increase the quality and accessibility of public

infrastructure and social services. The support to the human resource management in the

education sector has not only a fiscal effect (reduction of arrears to teachers) but also an effect on

the own organization of the education sector. Incidence analysis shows that low-income groups

have lower rates of access to educational, health, energy, water and sanitation services, yet low -

income groups are the primary users of these services. Improvements in the coverage and quality

of public services would therefore disproportionately benefit the poor.

6.4 In the medium term, reducing poverty and improving income distribution

consistently will require raising the country’s economic performance and expanding the

coverage and quality of education and health services. To the extent that the policy reforms

supported by the proposed operation will enable Guinea-Bissau to resume fiscal sustainability

and improve its growth prospects, this operation is expected to have a positive impact on

poverty. The government’s ability to expand access to quality social and economic infrastructure,

along with more direct effects on growth and poverty reduction, will depend on its maintenance

of strong fiscal and macroeconomic fundamentals.

B. ENVIRONMENTAL ASPECTS

6.5 The specific actions supported under the proposed EGRG III are likely to have

positive effects on the country's environment, forests, fisheries or other natural resources .

The first plank of this operation, governance, is not expected to have a meaningful effect on

Guinea-Bissau’s environment due to the primarily administrative nature of the reform program,

(public financial management, civil service reform and decentralization, monitoring and

evaluation systems, improved health care and social protection). The reforms under the second

plank, private sector development, expected to have positive effects on the environment. In

particular, the Law on Environmental Impact Evaluation in public and private investment

projects is a fundamental step in strengthening the country environmental regulations.

Furthermore, the recent adoption of the laws on environment (Lei de Base do Ambiente) and on

protected areas (Lei Quadro das Areas Protegidas) represent important improvements and their

implementation should guarantee a more effective government environmental protection.

C. IMPLEMENTATION, MONITORING AND EVALUATION

6.6 Since the preparation of the EGRG I, the IDA team has worked in close

collaboration with the government and its budget support partners to ensure adequate

monitoring and evaluation of the program as well as a high level of accountability for the

success of each of the previous DPOs. The government and the Budget Support Group have

agreed on a matrix of indicators that is reviewed biannually to assess progress in the different

policy areas.

35

6.7 The existing institutional structure for the NPRSP process will be used to implement

and monitor the policy reforms supported by the proposed development policy operation .

The Ministry of Finance and the Ministry of Economy will assume overall responsibility for

coordinating the implementation, monitoring and evaluation of the policy matrix. They will be

ultimately responsible for reporting progress and coordinating actions among other concerned

Ministries and agencies. The Council of Ministers will provide overall guidance for the budget

support program. Periodic stakeholder consultations included in the implementation of the ISN

will serve to provide additional feedback on the impact of the proposed operation.

6.8 The limited number of cooperating partners currently providing budget support

will allow for easy coordination and monitoring of actions and for regular progress reviews

of the implementation of the policy matrix. After the disbursement of its single tranche, IDA

plans to continue working with the government and other cooperating partners to monitor

implementation and help determine whether adjustments to the policy matrix need to be made in

order to take into account the latest political and economic developments, stakeholder

perspectives, and alternative options for realizing the intended development goals.

D. FIDUCIARY ASPECTS

6.9 While some important progress has been achieved in public financial management

over the last two years, and some key reforms are close to be implemented, the internal

control environment in Guinea-Bissau remains weak. Improving fiduciary standards is a

central objective of the public financial management component of the proposed operat ion. The

2006 CFAA and 2008 PEFA were key inputs in the preparation of the government’s PFM reform

program. Implementation of key reforms is closely monitored and included in the ongoing

dialogue between the government, the IMF, the Bank and other donors, with further technical

assistance provided by the cooperating partners. Lessons drawn from past diagnostics and

ongoing implementation experience are provided in the form of recommendations, and will be

incorporated in a revised multi-year reform agenda that the government is disseminating as part

of the recently completed PEMFAR in 2009.

6.10 The Central Bank of West African States (BCEAO) is the common central bank of

francophone West African countries, including Guinea Bissau. The updated safeguards

assessment of BCEAO issued by the IMF in March 2010 revealed that the institution continues

to have controls in place at operational level. However, the IMF noted that the overall

governance framework should nonetheless be strengthened by the addition of an audit committee

to ensure that the Board of Directors exercises appropriate oversight over the control structure,

including the audit mechanism and financial statement. The upcoming implementation of the

institutional reform of the West African Monetary Union (WAMU) and the BCEAO should help

correct that situation. In addition, efforts to fully implement International Financial Reporting

Standards (IFRS) should be pursued as adopted internationally by other central banks.

E. DISBURSEMENT AND AUDITING

6.11 The proposed operation would consist of a single tranche grant of SDR 4 million

(US$6.4 million equivalent) to be available upon effectiveness and disbursed on the basis of

a withdrawal application. The grant will follow the Bank’s disbursement procedures for

development policy lending. Once the grant becomes effective, the Government of Guinea-

Bissau (Recipient) will submit a withdrawal application to IDA requesting that the grant

36

proceeds be deposited in the BCEAO into a dedicated account that forms part of the country’s

official foreign exchange reserves. The Recipient shall ensure that upon the deposit of the grant

into said account an equivalent amount in CFAF is credited in the Recipient’s budget

management system in a manner acceptable to IDA. The Recipient will report to the World

Bank the amounts deposited in the foreign currency dedicated account and credited to the budget

management system. Disbursement would not be linked to specific purchases. If the grant

proceeds are used for the ineligible purposes, as defined in the Financing Agreement, IDA will

require the Recipient to refund an amount equal to the amount of said payment to IDA promptly

upon notice from IDA. Amounts refunded to the Bank upon request shall be cancelled.

6.12 Through the Ministry of Finance, the Recipient will: (i) report, within one week from

the date of receipt, the exact sum received into the dedicated account; (ii) ensure that all

withdrawals from the dedicated account are for budgeted public expenditures, excepting military

expenditures or other items on IDA’s proscribed list; and (iii) provide IDA with evidence that the

CFAF equivalent of the Credit proceeds were credited to the Consolidated Fund account and that

disbursements from that account were for budgeted public expenditures. Although an audit of the

deposit account will not be required, IDA reserves the right to require audits at any time.

F. RISKS AND RISK MITIGATION

6.13 The proposed operation presents significant risks, but as in the recent past, an

active engagement in Guinea-Bissau is a high-risk and potentially high-gain enterprise. The

specific risks that could jeopardize the expected outcomes and benefits of the proposed grant

relate to political instability, macroeconomic policy performance, support from donors, and

capacity constraints. The greatest countervailing risk, however, remains the potential failure to

support the stabilization and recovery process, missing a window of opportunity for helping to

stabilize a fragile country in a challenging transition.

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

(a) Shortfalls in budget support flows. Due in part to concerns over recent political

developments, a significant overall shortfall in budget support and financial assistance

of about CFAF 20 billion or 4 percent of GDP was observed in 2010. The shortfall

prompted a dramatic adjustment in government investments and goods and service

purchases. Further shortfalls would put the provision of key social services at risk and

potentially cause the accumulation of arrears in the wage bill, which could interrupt the

progress observed in the areas over the last two years. In 2011, the fiscal program

supported by the IMF’s ECF anticipates a modest recovery in budget support flows of

about CFAF 4 billion compared to 2010 levels and a residual financing gap of 1.5

percent of GDP, which is expected to be filled by the first round of ECF disbursement

in early 2011.

(b) Other External shocks. The economy, being poorly diversified, is susceptible to

external shocks. In particular, recent increases in food prices could have serious

impacts on domestic inflation, government accounts and external balances. The scope

for fiscal mitigation of external shocks from internal resources alone is sharply limited,

and would require donor support. In addition, despite the significant improvement in

the debt profile produced by Guinea-Bissau’s achievement of the HIPC completion

point, the risk of external debt distress is still considerable and shocks to exports or

37

GDP could make debt to breach threshold levels. The grant supports reforms in public

financial management, debt management and related areas, that would help strengthen

the country’s ability to attract external support to help cope with shocks.

(c) Political risks. Heightened political instability remains a persistent risk, particularly if

tangible benefits from the reform program do not become apparent to the population, or

if the costs of reform to influential constituencies become too high. To mitigate these

risks continued support from the international community to the economic reform

agenda will remain critical. The specific reforms supported by the proposed operation

have been carefully selected from the government’s own NPRSP; they include

measures that are technically ready (benefitting from extensive analytical work and

supported by technical assistance) and politically achievable (produced through

numerous consultations with stakeholders and internal governmental discussions).

Most of these measures build on the government’s longstanding commitment towards

regional integration in the context of WAEMU and OHADA, which mitigates the risk

of reversibility.

(d) Implementation capacity. Guinea-Bissau’s technical and institutional capacity to

implement the reforms supported by the EGRG III is low. To address this risk in the

short term the Bank and other partners have made available a combination of capacity

building and technical support. Coordination with other development partners,

especially UNDP and the AfDB, on the provision of technical assistance will further

alleviate implementation risks.

38

Annex 1: Timetable of Key Process Events

Concept Review

ROC Meeting:

January 21, 2011

May 2, 2011

Authorization to Negotiate: May 6, 2011

Negotiation: May 11, 2011

Board Presentation: June 16, 2011

Effectiveness:

Closing Date:

July 5, 2011

December 31, 2011

39

Annex 2: Letter of Development Policy

40

41

42

43

44

45

46

Annex 3: EGRG III Policy Matrix

Component EGRG II – Prior Actions EGRG III - Prior Actions Results Indicators Base

(2010)

2011 Target

(2012)

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

Public

Finance Management

(i) Submission to Recipient’s Parliament of the draft Organic Law for Budget Framework.

(ii) Adoption by the Council of Ministries of: (i) a decree defining the organization, attributions and functioning of the Recipient’s Financial Controller; and (ii) a decree reorganizing the Recipient’s Budget General Directorate and redefining its attributions.

(iii) Adoption by the Council of Ministries of a decree: (i) defining the role of credit managers in all of its ministries and public entities; and ii) defining the role of public accountants in accordance with the Public Accounting Decree dated on April 28, 2010.

(iv) Issuance by the Ministry of Finance of a manual of procedures for budget execution for the use of all Recipient’s ministries.

Adoption by the Council of Ministers of: (i) a decree

(i) The Recipient’s Minister of Finance has completed the computerization and integration of the Recipient’s budget cycle with the installation of the SIGFIP accounting module, as evidenced by a letter from the Recipient’s Minister of Finance dated May 4, 2011.

(ii) The Recipient’s Minister of Finance has submitted to the Recipient’s Court of Accounts the Recipient’s state general accounts for the Recipient’s Fiscal Years of 2009 and 2010, as evidenced by the Recipient’s Minister of Finance’s letters to the Recipient’s Court of Accounts, dated September 27, 2010 and April 21, 2011.

Stock of arrears to the private sector (million of CFAF)

Stock of arrears cleared (million of CFAF)

Number of years to submit the General Accounts of the State to the Court of Accounts

Number of Quarterly Budget Execution Reports in a year

93,170

23.500

2

4

70.000

20,000

1

4

<50,000

20,000

1

4

47

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

2011 Target

(2012)

approving the new procurement code defining the regulatory and control functions thereof in line with WAEMU’s procurement directives; and (ii) a decree establishing the Recipient’s central procurement unit.

Debt Management

(iii) The Recipient’s Minister of Finance has adopted an action plan for the strengthening of its Public Debt Office, as evidenced by letter from the Recipient’s Minister of Finance, dated May 4, 2011.

SIGADE fully operational

Number of Quarterly Debt Reports in a year

N

0

Y

3

Y

4

Human Resource

Management and State

Reform

(v) Jointly decision by the Recipient’s Ministers of Finance and Public Administration Reform on the selection of an appropriate payroll IT system to be acquired, installed and integrated with SIGFIP and formal submission of their recommendation to the Recipient Council of Ministers.

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

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

Percentage of personnel expenditures not included in the unified payroll system

SIGRHAP fully operational

Number of Ministries with Organic Structure Approved

Number of Ministries with Staffing Charts

46%

N

0

0

30%

Y

13

13

0

Y

15

15

48

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

2011 Target

(2012)

Pillar 2: Promoting economic growth and job creation

Business

Climate

(vi) Adoption by the Council of Ministers of a decree simplifying procedures for business registration.

(vii) Adoption by the Council of Ministers of a decree establishing the formal constitution of a one-stop shop for business registration.

(viii) Enactment by the President of the Republic of the Telecommunications Law adopted by the Recipient’s Parliament on March 9, 2010.

(vi) The Recipient’s Prime Minster has issued a resolution authorizing the creation of a bulletin to be published by the Center of Business Registration (Centro de Formalizaçao de Empresas, CFE), to publish the notifications of new companies registration at minimum cost.

(vii) The Recipient’s Council of Ministers has adopted a law decree streamlining business licensing by eliminating redundant and unnecessary licenses, simplifying requirements and reducing costs.

(viii) The Recipient’s Council of Ministers has approved ad referendum and submitted to the Recipient’s National Assembly a bill on the Recipient’s revised investment code, covering the key non-discrimination principles and promoting transparency and simplicity in its implementation, in accordance to WAEMU best practices.

(ix) The Recipient’s National Assembly has adopted a law establishing the Recipient’s environmental impact assessment procedures.

Number of procedures required to register a firm

Number of days to register a firm

Cost of registering a firm (% income per capita)

One-Stop-Shop fully operational

Number of firms registered through the one-stop-shop in one year

Number of days to obtain a license

Number of environmental impact studies assessed by CAIA

17

216

183.3

N

0

167

0

120

150

Y

50

150

0

15

50

100

Y

300

50

10

49

Annex 4: IMF Relationship Note

IMF Executive Board Completes First Review Under Extended Credit

Facility for Guinea-Bissau and Approves US$3.71 Million Disbursement Press Release No. 10/492

December 14, 2010

The Executive Board of the International Monetary Fund (IMF) has completed the first review of

Guinea-Bissau’s economic performance under its program supported by the Extended Credit

Facility (ECF) arrangement. Completion of the review, on December 13, 2010, enables the

immediate disbursement of SDR 2.414 million (about US$3.71 million), bringing total

disbursements under the arrangement to SDR 10.295 million (about US$15.83 million).

The Executive Board approved a three-year, SDR 22.365 million (about US$33.4 million) ECF

arrangement for Guinea-Bissau on May 7, 2010 (see Press Release No. 10/185). Guinea-Bissau

became a member of the IMF on March 24, 1977 and has a Fund quota of SDR 14.2 million.

The Executive Board also agreed, in principle, that Guinea-Bissau has taken the steps necessary

to reach its completion point under the Enhanced Heavily Indebted Poor Countries (HIPC)

Initiative. This decision on the HIPC completion point is contingent upon the Executive Board of

the World Bank’s International Development Association (IDA) reaching a similar decision at a

meeting scheduled for December 16, 2010, after which a joint press release will be issued.

Following the Executive Board’s discussion of Guinea-Bissau, Mr. Murilo Portugal, Deputy

Managing Director and Acting Chair, said:

“The authorities’ commitment to sound policies has been crucial in maintaining macroeconomic

stability in Guinea-Bissau amid challenging political and financial circumstances. Performance

under the ECF-supported program has been satisfactory and substantial progress with structural

reforms has been achieved. Benefitting from a rebound in the price of cashew, growth is

expected to accelerate slightly in 2010, while inflation is projected to be within the West African

Economic and Monetary Union (WAEMU) target.

“The government had to adjust its 2010 fiscal plans to make up for a shortfall in budget support.

The 2011 fiscal framework is realistic and consistent with available financing. The budget

contains strong revenue increasing and spending control measures. Continued discipline on

budget execution will be critical to achieving the authorities’ fiscal objectives.

“Fiscal reforms in 2011 will aim at mobilizing more revenues and strengthening public financial

management, including debt management. These reforms should help create more fiscal space

for priority spending to support economic growth and poverty reduction. To make decisive

progress toward the Millennium Developments Goals, further concerted efforts will be needed to

secure sufficient concessional financing in the coming years, including budget support from

development partners.

“Guinea-Bissau has qualified for debt relief, including topping up assistance, but its debt ratios

remain high, and the authorities are committed to meeting their external financing needs

through grants and highly concessional loans. Going forward, the authorities intend to build on

their recent efforts to normalize relations with all external creditors and to maintain their

commitment to the successful implementation of economic reforms.”

http://www.imf.org/external/np/sec/pr/2010/pr10185.htm

IMF Executive Board Completes Second Review Under the ECF Arrangement with Guinea-Bissau

and Approves US$3.85 Million Disbursement

Press Release No. 11/193

May 24, 2011

The Executive Board of the International Monetary Fund (IMF) has completed the second review

of Guinea-Bissau’s economic performance under a three-year Extended Credit Facility (ECF)

arrangement.1 The Board's decision, which was taken on a lapse-of-time basis,2 enables the

authorities to draw an additional SDR 2.414 million (about US$3.85 million), bringing total

disbursements under the arrangement to an amount equivalent to SDR 12.709 million (about

US$20.27 million).

Satisfactory policy implementation continues in the Fund-supported program under challenging

conditions. The authorities have met all performance criteria through end-December 2010 and all

structural reforms for the second review.

Sound macroeconomic policies, strengthened institutions, and debt relief have stabilized the

economy and supported confidence building. While medium-term growth prospects are bright,

huge developmental challenges remain. It is critical that the government maintain the reform

momentum and continue to build on the satisfactory performance under the ECF.

The three-year ECF arrangement for Guinea-Bissau was approved on May 7, 2010 (see Press

Release No. 10/185) in an amount equivalent to SDR 22.365 million (about US$33.3 million, or

157.5 percent of the country’s quota in the Fund). On December 16, 2010 the Executive Boards of

the IMF and the World Bank’s International Development Association decided to support US$1.2

billion in debt relief for Guinea-Bissau under the Heavily Indebted Poor Countries (HIPC) Enhanced

Initiative and the Multilateral Debt Relief Initiative (MDRI—see Press Release No. 10/498).

1 The Extended Credit Facility (ECF) has replaced the Poverty Reduction and Growth Facility (PRGF)

as the Fund’s main tool for medium-term financial support to low-income countries by providing a

higher level of access to financing, more concessional terms, enhanced flexibility in program

design features, and more focused streamlined conditionality. Financing under the ECF carries a

zero interest rate, with a grace period of 5½ years, and a final maturity of 10 years

(http://www.imf.org/external/np/exr/facts/ecf.htm). The Fund reviews the level of interest rates

for all concessional facilities every two years.

2 The Executive Board takes decisions under its lapse-of-time procedure when it is agreed by the

Board that a proposal can be considered without convening formal discussions.

http://www.imf.org/external/np/sec/pr/2011/pr11193.htm#P18_385






http://www.imf.org/external/np/exr/facts/ecf.htm


50

Annex 5: Country at a Glance

Guinea-Bissau at a glance 4/19/11

Sub-

Key Development Indicators Guinea- Saharan Low

Bissau Africa income(2009)

Population, mid-year (millions) 1.6 819 828Surface area (thousand sq. km) 36 24,242 17,838Population growth (%) 2.2 2.5 2.2Urban population (% of total population) 30 36 28

GNI (Atlas method, US$ billions) 0.89 897 389GNI per capita (Atlas method, US$) 540 1,095 470GNI per capita (PPP, international $) 533 1,981 1,131

GDP growth (%) 3.5 5.2 6.2GDP per capita growth (%) 1.2 2.7 3.9

(most recent estimate, 2003–2009)

Poverty headcount ratio at $1.25 a day (PPP, %) 49 51 ..Poverty headcount ratio at $2.00 a day (PPP, %) 78 73 ..Life expectancy at birth (years) 48 52 57Infant mortality (per 1,000 live births) 115 83 77Child malnutrition (% of children under 5) 17 25 28

Adult literacy, male (% of ages 15 and older) 66 72 73Adult literacy, female (% of ages 15 and older) 37 54 59Gross primary enrollment, male (% of age group) .. 105 107Gross primary enrollment, female (% of age group) .. 95 100

Access to an improved water source (% of population) 61 60 64Access to improved sanitation facilities (% of population) 21 31 35

Net Aid Flows 1980 1990 2000 2009 a

(US$ millions)Net ODA and official aid 58 126 81 132Top 3 donors (in 2008): European Commission 11 5 17 48 Portugal .. 13 15 18 Spain 0 0 1 16

Aid (% of GNI) 55.5 54.2 12.7 10.2Aid per capita (US$) 69 124 33.9 54

Long-Term Economic Trends

Consumer prices (annual % change) .. 33.0 8.6 1.1GDP implicit deflator (annual % change) 11.5 30.2 3.3 1.7

Exchange rate (annual average, local per US$) 0.8 33.6 712.0 471.0Terms of trade index (2000 = 100) .. 105 100 52

1980–90 1990–2000 2000–09

Population, mid-year (millions) 0.8 1.0 1.3 1.6 2.0 2.4 2.3GDP (US$ millions) 111 244 361.9 878.5 4.0 1.2 0.9

Agriculture 44.3 60.8 56.4 55.3 4.7 3.9 4.4Industry 19.7 18.6 13.0 13.0 2.2 -3.1 3.8 Manufacturing .. 8.4 10.5 10.3 .. -2.0 3.8Services 36.1 20.6 30.6 31.6 3.5 -0.6 1.3

Household final consumption expenditure 73.3 86.9 79.6 87.8 -1.2 2.0 -1.5General gov't final consumption expenditure 27.6 10.3 17.2 13.3 7.2 1.9 -1.9Gross capital formation 28.2 29.9 21.8 85.3 12.9 -6.5 3.8

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

Note: Figures in italics are for years other than those specified. 2009 data are preliminary. .. indicates data are not available.a. Aid data are for 2008.

Development Economics, Development Data Group (DECDG).

(average annual growth %)

(% of GDP)

10 5 0 5 10

0-4

15-19

30-34

45-49

60-64

75-79

percent of total population

Age distribution, 2009

Male Female

0

50

100

150

200

250

300

1990 1995 2000 2008

Guinea-Bissau Sub-Saharan Africa

Under-5 mortality rate (per 1,000)

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

95 05

GDP GDP per capita

Growth of GDP and GDP per capita (%)

51

Guinea-Bissau

Balance of Payments and Trade 2000 2009

(US$ millions)

Total merchandise exports (fob) 62.1 126.4

Total merchandise imports (cif) 49.1 206.6

Net trade in goods and services -9.2 -121.6

Current account balance 31.9 -58.8 as a % of GDP 8.8 -6.7

Workers' remittances and

compensation of employees (receipts) 8 25.8

Reserves, including gold 87 55.3

Central Government Finance

(% of GDP)

Current revenue (including grants) 22.3 20.4

Tax revenue 6.4 8.0

Current expenditure 20.1 11.9

Technology and Infrastructure 2000 2008Overall surplus/deficit -4.1 -0.2

Paved roads (% of total) 10.3 ..

Highest marginal tax rate (%) Fixed line and mobile phone

Individual .. .. subscribers (per 100 people) 1 32

Corporate .. .. High technology exports (% of manufactured exports) .. 3.9

External Debt and Resource Flows

Environment

(US$ millions)

Total debt outstanding and disbursed 825.2 517.3 Agricultural land (% of land area) 58 58

Total debt service 28.0 3.7 Forest area (% of land area) 75.4 73.0

Debt relief (HIPC, MDRI) 189 956 Terrestrial protected areas (% of surface area) .. 18.2

Total debt (% of GDP) 228.1 58.9 Freshwater resources per capita (cu. meters) 11,691 10,156

Total debt service (% of exports) 45.1 2.9 Freshwater withdrawal (billion cubic meters) 0.2 ..

Foreign direct investment (net inflows) 1 8 CO2 emissions per capita (mt) 0.15 0.19

Portfolio equity (net inflows) 0 0

GDP per unit of energy use

(2005 PPP $ per kg of oil equivalent) .. ..

Energy use per capita (kg of oil equivalent) .. ..

World Bank Group portfolio 2000 2009

(US$ millions)

IBRD

Total debt outstanding and disbursed – –

Disbursements – –

Principal repayments – –

Interest payments – –

IDA

Total debt outstanding and disbursed 228 304

Disbursements 14 1

Private Sector Development 2000 2009 Total debt service 4 4

Time required to start a business (days) – 216 IFC (fiscal year)

Cost to start a business (% of GNI per capita) – 181.5 Total disbursed and outstanding portfolio 1 0

Time required to register property (days) – 211 of which IFC own account 1 0

Disbursements for IFC own account 0 0

Ranked as a major constraint to business 2000 2009 Portfolio sales, prepayments and

(% of managers surveyed who agreed) repayments for IFC own account 0 0

Electricity .. 41.4

Access to/cost of financing .. 19.6 MIGA

Gross exposure 0 20

Stock market capitalization (% of GDP) .. .. New guarantees 0 0

Bank capital to asset ratio (%) .. ..

Note: Figures in italics are for years other than those specified. 2009 data are preliminary. 4/19/11

.. indicates data are not available. – indicates observation is not applicable.


0 25 50 75 100

Control of corruption

Rule of law

Regulatory quality

Political stability

Voice and accountability

Country's percentile rank (0-100)higher values imply better ratings

2009

2000

Governance indicators, 2000 and 2009

Source: Kaufmann-Kraay-Mastruzzi, World Bank

IBRD, 0

IDA, 309

IMF, 9

Other multi-lateral, 199

Bilateral, 423

Private, 0

Short-term, 144

Composition of total external debt, 2008

US$ millions

52

Millennium Development Goals Guinea-Bissau

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

Goal 1: halve the rates for extreme poverty and malnutrition 1990 1995 2000 2008

Poverty headcount ratio at $1.25 a day (PPP, % of population) 41.3 52.1 48.8 ..

Poverty headcount ratio at national poverty line (% of population) .. .. 65.7 ..

Share of income or consumption to the poorest qunitile (%) 2.1 5.2 7.2 ..

Prevalence of malnutrition (% of children under 5) .. .. 21.9 17.4

Goal 2: ensure that children are able to complete primary schooling

Primary school enrollment (net, %) 40 .. 52 ..

Primary completion rate (% of relevant age group) .. .. 31 ..

Secondary school enrollment (gross, %) 6 .. 20 36

Youth literacy rate (% of people ages 15-24) .. .. 59 70

Goal 3: eliminate gender disparity in education and empower women

Ratio of girls to boys in primary and secondary education (%) .. .. 65 ..

Women employed in the nonagricultural sector (% of nonagricultural employment) 11 .. .. ..

Proportion of seats held by women in national parliament (%) 20 10 8 14

Goal 4: reduce under-5 mortality by two-thirds

Under-5 mortality rate (per 1,000) 240 233 218 195

Infant mortality rate (per 1,000 live births) 142 138 129 117

Measles immunization (proportion of one-year olds immunized, %) 53 45 71 76

Goal 5: reduce maternal mortality by three-fourths

Maternal mortality ratio (modeled estimate, per 100,000 live births) 1,200 1,100 1,100 1,000

Births attended by skilled health staff (% of total) .. 25 35 39

Contraceptive prevalence (% of women ages 15-49) .. .. 8 10

Goal 6: halt and begin to reverse the spread of HIV/AIDS and other major diseases

Prevalence of HIV (% of population ages 15-49) 0.2 0.8 1.7 1.8

Incidence of tuberculosis (per 100,000 people) 160 170 190 220

Tuberculosis case detection rate (%, all forms) 72 80 51 68

Goal 7: halve the proportion of people without sustainable access to basic needs

Access to an improved water source (% of population) .. 52 55 61

Access to improved sanitation facilities (% of population) .. 16 18 21

Forest area (% of total land area) 78.8 77.1 75.4 73.0

Terrestrial protected areas (% of surface area) .. .. .. 18.2

CO2 emissions (metric tons per capita) 0.2 0.2 0.2 0.2

GDP per unit of energy use (constant 2005 PPP $ per kg of oil equivalent) .. .. .. ..

Goal 8: develop a global partnership for development

Telephone mainlines (per 100 people) 0.6 0.6 0.9 0.3

Mobile phone subscribers (per 100 people) 0.0 0.0 0.0 31.7

Internet users (per 100 people) 0.0 0.0 0.2 2.4

Personal computers (per 100 people) .. .. 0.2 0.2

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


Guinea-Bissau

0

25

50

75

2000 2002 2004 2006 2008

Primary net enrollment ratio

Ratio of girls to boys in primary & secondary

education

Education indicators (%)

0

10

20

30

40

2000 2002 2004 2006 2008

Fixed + mobile subscribers Internet users

ICT indicators (per 100 people)

0

25

50

75

100

1990 1995 2000 2008

Guinea-Bissau Sub-Saharan Africa

Measles immunization (% of 1-year

olds)

C A C H E UC A C H E UO I OO I O

B A FB A FAATT ÁÁ

G A BG A B ÚÚ

T O M B A L IT O M B A L I

Q U I N A R AQ U I N A R A

B O L A M AB O L A M A

B I O M B OB I O M B O BISSAUBISSAU

BulaBula

SafimSafim

PrPráábisbis

JolmeteJolmete

BarroBarro

BissorBissorããMansabMansabáá

OlossatoOlossato

JumbembemJumbembem

CambajuCambaju

MansabMansabáá

ContuboelContuboel

CanhCanhââminamina

Sare BSare BáácarcarCambajuCambajuCuntimaCuntima

DungalDungal

GGêêbaba

GamamudoGamamudo

UacabaUacaba

CamajCamajáábbáá

BajocundaBajocunda

BuruntumaBuruntuma

PitchiePitchie

CabucaCabuca

BBéélili

VVenduenduLeidiLeidiBoBoéé

SaafaSaafa

GuilegeGuilege

ChChéé Ch Chéé

BambadincaBambadinca

MansainaMansaina

XimeXime

CanquelifCanquelifáá

PiradaPirada

MansMansôôaa

PorPorto Goleto Gole

SSãão Domingoso Domingos

BinarBinar EncheiaEncheia

NhacraNhacra

SusanaSusana

CanchungoCanchungo

TTombaliombali

Madina deMadina deBaixoBaixo BedandaBedanda

CachambaCachambaBalantaBalanta

QueboQuebo

GandembelGandembel

SongonhaSongonha

XitoleXitole

DulombiDulombi

GalomaroGalomaro

OlossatoOlossato

GarGarfanhapafanhapa

EmpadaEmpada

EticogaEticoga

CaravelaCaravela

BolamaBolama

FulacundaFulacundaEnxudEnxudéé

TTiteite

JabedJabedáá

GanquecutaGanquecuta

SSãão Joo Joããoo

QuinhQuinháámelmel

CatiCatióó

BubaBuba

CacheuCacheu

IgnorIgnoréé

FarimFarim

BafatBafatáá

GabuGabu

BISSAUBISSAU

C A C H E UO I O

B A FAT Á

G A B Ú

T O M B A L I

Q U I N A R A

B O L A M A

B I O M B O BISSAU

Bula

Safim

Prábis

Jolmete

Barro

BissorãMansabá

Olossato

Jumbembem

Cambaju

Mansabá

Contuboel

Canhâmina

Sare BácarCambajuCuntima

Dungal

Gêba

Gamamudo

Uacaba

Camajábá

Bajocunda

Buruntuma

Pitchie

Cabuca

Béli

VenduLeidiBoé

Saafa

Guilege

Ché Ché

Bambadinca

Mansaina

Xime

Canquelifá

Pirada

Mansôa

Porto Gole

Calequisse

Caió

São Domingos

Binar Encheia

Nhacra

Varela Susana

Canchungo

Ondame

Iljante

Cacine

Tombali

Madina deBaixo

Campeane

Bedanda

CachambaBalanta

Quebo

Gandembel

Songonha

Xitole

Dulombi

Galomaro

Olossato

Garfanhapa

Empada

Bubaque

Uno

Eticoga

AbuCaravela

Bolama

FulacundaEnxudé

Tite

Jabedá

Ganquecuta

São João

Quinhámel

Catió

Buba

Cacheu

Ignoré

Farim

Bafatá

Gabu

BISSAU

S E N E G A L

G U I N E A

Canal

doGêb

a

Man

sôa

Cacheu

Canjambari

Coruba

l

RioGrande de Buba

Tomba

li

Cacin

e

Gêba

Gêba

Corubal

Cacheu

ATLANTICOCEAN

To Kabrousse

To Oussouye

To Ziguinchor To

Diiattakounda

To Sédhiou

To Sédhiou To

Kolda To Kolda

To Kounkané

To Youkounkoun

To Youkounkoun

To Koumbia

To Féfiné

To Bénnsané

To Boké

To Boké

Ilha de Orango

I. deMeneque

I. deCanogo

IIlhaJoao Vieira

Ilhéudo Meio

I. dasGalhinas

Ilha deBolama

Ilha de Orangozinho

Ilha deFormosa

Ilha deBubaque

I. de SogaI. de Rubane

lha deCarache

Ilha deUno

Ilha deCaravela

Ilha de Roxa

Arquipélagodos Bijagós

(300 m)

16°W 15°W 14°W

14°W

16°W 15°W

11°N

12°N 12°N

GUINEA-BISSAU

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 2010 30

0 20 3010 40 Miles

40 Kilometers

IBRD 33415

DEC

EMBER 2004

GUINEA-BISSAUSELECTED CITIES AND TOWNS

REGION CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

REGION BOUNDARIES

INTERNATIONAL BOUNDARIES

Documents

Document of The World Bank Report No. 58533 - GW ... · Number of procedures required to register a firm Number of days to register a firm Cost of registering a firm (% income per