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.
With high rates of voter registration and participation, the elections of April/May 2014 concluded with a win for the African Party for the Independence of Guinea and Cabo Verde (PAIGC). PAIGC’s candidate, José Mario Vaz, was elected president and was sworn in on June 23, 2014. However since the elections, tensions between President Vaz and the Prime Minister, Domingos Simoes Pereira, gradually escalated and, on August 12, 2015, President Vaz dismissed Prime Minister Pereira and his government. Following two months of political deadlock, a new government was sworn in on October 13, 2015. The new team is led by Prime Minister Carlos Correia, 81, a veteran of the struggle for independence, and is made up of 15 ministers and 14 secretaries of state.
The economy expanded by 5.1% in 2015, up from 2.9% in 2014. A bumper cashew harvest supported by increased international demand for the commodity were the main factors underpinning the pickup in activities. The volume of cashew exported in 2015 is estimated at 175,000 tons, an increase of 30%. This coincided with an administrative increase in the local reference price for the commodity as prices rose by 25% on the international market. Since most households in Guinea-Bissau, especially the poor, rely on cashew production, the 2015 cashew campaign bodes well for poverty reduction. Furthermore, the restoration of basic public services and investments propelled growth, supported by the resumption of donor financing. The African Union lifted its suspension on Guinea-Bissau and donors renewed their faith in Guinea-Bissau’s fiscal management when the IMF launched a Rapid Credit Facility in November 2014, followed by an Extended Credit Facility approved by the IMF Board on July 10, 2015. However, the dismissal of the government in August 2015 and the subsequent political deadlock raised questions whether progress has been sustained.
Early actions by the government—before it was removed in August 2015—demonstrate that progress is possible when there is political stability. Upon taking office, the government swiftly passed a retroactive budget for 2014 and prepared a 2015 budget in record time. Both were unanimously adopted by parliament. The government suspended the controversial and regressive ‘FUNPI surcharge’, an additional tax on export which the World Bank estimates to have increased poverty by 2%.
The new government also successfully strengthened domestic revenue mobilization, significantly increasing non-tax revenues (especially through fishing licenses), while also raising customs and tax revenues by 39% and 9% year-on-year respectively. In addition, structural reforms were put in place that tightened control over fuel imports, reduced tax exemptions, rehabilitated customs posts and intensified tax audits of large taxpayers. Combined, these actions have given a much-needed boost to public revenues. The government also succeeded in clearing all external arrears and a significant portion of domestic arrears. Budget support from a number of donors resumed and the international community pledged $1.5 billion in support to Guinea-Bissau at a donor roundtable held in Brussels in March 2015. Although over 50% of these additional resources were grants, public debt to finance the government’s development plan ‘Terra Ranca’ was expected to increase. Nevertheless, given that this debt would translate into growth, overall, the risk of debt distress remains moderate under the IDA-IMF Debt Sustainability Analysis.
The economy is expected to expand in the range of 5 to 6% between 2016 and 2018. This is contingent on the materialization of the planned investments in critical infrastructure financed by the donor community. Output from the cashew sector is also expected to remain fairly robust, the impact of which will be offset by rising imports of capital goods. In this context, the deficit on the external current account is likely to worsen. Ongoing reforms, including revenue mobilization and attempts to improve the efficiency of public expenditures, are expected to keep the overall deficit in the range of 2 to 3% of GDP. Poverty ($1.9 per day at the international PPP 2011 poverty line) is projected to fall as growth following the 2012 political crisis has begun to pick up. GDP per capita growth is projected to be in the 1.9 to 2.9% range between 2015 and 2018, and could reduce poverty to around 66.3% in 2015 and 2016, and to 62.9 in 2018. 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.
In addition to the issue of fragility, addressing the allocative, technical and regressive inefficiencies in public spending by redirecting resources to areas that contribute to building the human, physical and institutional capital of the country, strengthening project appraisal capacity, and introducing equity-based formulas for budget allocation are key challenges over the near-term. 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. Further diversification, either through moving up the value chain in the cashew sector or capitalizing on other green shoots in the agriculture sector will be key to bolstering the resilience of the economy to shocks.
Last Updated: Apr 12, 2016