Guinea-Bissau is one of the world’s poorest and most fragile countries. Following its independence from Portugal in 1974, Guinea-Bissau has suffered from frequent political upheaval and repeated economic shocks that have made it difficult to achieve and sustain development outcomes.
In April 2012, a coup d’état reversed the social and economic gains that Guinea-Bissau had achieved in the previous few years, and once again pulled the country into a political and economic crisis. However, general elections were held in early 2014, restoring democratic order. These elections provided a strong basis for reengaging, and supporting the government as it works to jumpstart development efforts aimed at reducing poverty reduction and boosting shared prosperity.
Following the restoration of constitutional government, through elections in 2014, there was about a year of relative stability and apparent cooperation between the President, Jose Maria Vaz, and the Prime Minister, Domingos Simoes Pereira. However, despite both coming from the same party, the African Party for the Independence of Guinea and Cape Verde (PAIGC), this partnership collapsed in August 2015, renewing political instability. The current government, led by Baciro Dja (also PAIGC), is the country’s fourth since the elections in 2014, and is in a minority in a parliament dominated by PAIGC. Political gridlock, occasioned by severe political divisions within the PAIGC, and with the government, undermine political stability and delay much needed resources and reforms.
The Economic Community of West African States (ECOWAS) mediated an agreement in early September 2016, providing a possible way out of the current political deadlock. The agreement details a six-point plan, including: a round-table with all concerned stakeholders, including PAIGC dissidents, civil society, etc.; a new “inclusive” government; constitutional reform to address the overlapping roles of the president and prime minister; reform of security and defense sectors; agreement monitoring and the withdrawal of ECOWAS forces from Guinea-Bissau within 6 months. No timeline was given for the formation of the new government or who will be the prime minister.
Guinea Bissau’s economy continues to expand in spite of political gridlock and the suspension of donor flows to the country. Following growth of 4.9% in 2015, real gross domestic product (GDP) growth is projected at above 5% in 2016, based on preliminary information suggesting a good 2016 cashew season. The prices of 350-450 FCFA per kilogram of cashews for producers and $1,400 on average for exports were also very positive. Inflation is expected to pick up with the pace of economic activities but should remain below 3%. The fiscal situation is still strained by political instability and the suspension of budget support.
Available information for the first quarter of 2016 points to a sharp consolidation in central government operations in response to the suspension of grants by donors (approximately 2% of GDP) to realize a deficit of 1.9% of GDP. Project grants fell by 57% accounting for most of the 24% decline in total revenues. Locally funded capital projects were frozen while those activities funded by external sources were cut in half. Government operations were funded primarily from domestic and regional sources.
The controversial government bailout of two commercial banks (equivalent to almost 6% of GDP) has not been fully resolved. The constitutional court is yet to rule on the legality of the transaction, but the current administration has declared the contract null and void and requested that the banks implement corrective steps to unwind the transaction in their balance sheet. The West African Economic and Monetary Union (WAEMU) Banking Commission – the supervisory authority with responsibility to assess the health of financial institutions - is yet to intervene, but both banks will likely need to be recapitalized, should the transaction be reversed.
Real GDP growth is projected to average 5% over 2016-2018. The pickup in growth reflects the assumption that output from the agriculture sector will remain fairly robust and that political stability is achieved to allow for a return of donor financing that would support a recovery in the secondary sector. This growth path also reflects the assumption of a recovery in electricity and water generation.
Given the history of fragility in Guinea Bissau, the outlook is highly uncertain, with pronounced risks to growth and poverty reduction. This is tied to the assumption of stability and the return of donor funding in an environment where inefficiencies in public spending persist. This prevents resources flowing to areas that contribute to building the human, physical and institutional capital of the country. The reliance on cashew nuts for economic livelihood, exposes two-third of the population to terms of trade shocks. Further diversification, either through moving up the value chain, addressing agricultural technology and market support systems, or capitalizing on other green shoots in the agriculture sector will be key to bolstering the resilience of the economy to shocks. Failure to introduce urgently needed reform measures to strengthen project appraisal capacity and introduce equity-based formulas for budget allocation could delay the gains from fiscal and economic improvements. Addressing high inequality in the country also requires efforts to improve service delivery and enhance the access to basic services. However, accelerating or even sustaining the pace of poverty reduction will be difficult if the political situation remains unresolved and if the major development challenges that constrain growth, inclusiveness and sustainability, are not addressed.
There is also an urgent need to address rising inequality in the country through efforts to improve service delivery and enhancing the access to basic services. Equally important are efforts to address agricultural technology and market support systems that are likely to have a positive impact in the cashew sector.
Last Updated: Oct 06, 2016