emergency fiscal reform support programme (efrsp) country

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AFRICAN DEVELOPMENT BANK AFRICAN DEVELOPMENT FUND

Reference No.: Language: English Distribution: Original: French

EMERGENCY FISCAL REFORM SUPPORT PROGRAMME (EFRSP)

COUNTRY: GUINEA-BISSAU

APPRAISAL REPORT December 2009

Appraisal Team e E

Team Leader Team Members: Sector Director: Country Director: Division Manager:

T. HOUENINVO, Senior Macroeconomist, OSGE.2 O.MANLAN, Principal Economist, ORWB I. CAMPOS, Junior Economist, OSGE.1 1 Consulting Macroeconomist, OSGE.2 G. NEGATU, Director, OSGE F. PERRAULT, Director, ORWB M. KANGA, Division Manager, OSGE.2

Peer Reviewer E

Internal Peer Reviewers: External Peer Reviewers:

H. KOUASSI, Principal Macroeconomist, OSGE; P. YEMBILINE, Senior Country Economist, ORCE; A. MAHDI, Chief Financial Analyst, OSGE.2; J. BANDIAKY, Economist, World Bank, Dakar A. PIRES, Aid and International Cooperation Officer, European Commission P. Drummond, Head of Mission, Africa Department, IMF E. ROUMEGOUS, Economist, Agence Française de Développement M. ROBIN, Pôle de la gouvernance financière, Ministry of Foreign Affairs, France

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TABLE OF CONTENTS List of Annexes iv Currency Equivalents – Fiscal Year iv Acronyms and Abbreviations iv Grant Information v Programme Summary vii-viii Programme Logical Framework ix-xii I. THE PROPOSAL 1 II. COUNTRY AND PROGRAMME CONTEXT 1

2.1 Overall Government Development Strategy and Medium-term Reform Priorities 1

2.2 Recent Socioeconomic Developments, Constraints, Challenges and Perspectives 2

2.3 Bank Group Portfolio Status 3

III. JUSTIFICATION, KEY DESIGN ELEMENTS AND SUSTAIN ABILITY 4 3.1 Linkage with CSP, Country Preparedness and Underlying Analytical Elements 4

3.2 Collaboration and Coordination with Other Donors 7

3.3 Outcomes and Lessons Learnt from Similar Completed or Ongoing Operations 8

3.4 Linkage with Ongoing Bank Operations 8

3.5 The Bank’s Comparative Advantages 8

3.6 Compliance with Good Practices Principles regarding Conditionalities 9

3.7 Compliance with Bank Group Lending Policy 9 IV. THE PROPOSED PROGRAMME 9

4.1 Programme Goal and Objectives 9

4.2 Programme Pillars, Specific Objectives and Expected Outcomes 9

4.3 Financing Requirements and Arrangements 12

4.4 Programme Beneficiaries 13

4.5 Impact on Gender 13

4.6 Environmental Impact 13

4.7 Impact on Governance 14 V. PROGRAMME IMPLEMENTATION, MONITORING AND EVALUAT ION 14

5.1 Implementation Arrangements 14

5.2 Monitoring and Evaluation Arrangements 15 VI. LEGAL DOCUMENTS AND AUTHORITY 15

6.1 Legal Documents 15

6.2 Conditions Precedent to Bank Group Intervention 15

6.3 Compliance with Bank Group Policies 16

VII. RISK MANAGEMENT 16 VIII. RECOMMENDATION 17 ____________________________________________________________________________________ This report was prepared by a team led by T. HOUENINVO, Senior Macroeconomist, OSGE.2, and composed of O. MANLAN, Principal Country Economist, ORWB and I. CAMPOS, Economist, OSGE1, following a mission to Bissau in November 2009. It also benefitted from contributions from a Consulting Macroeconomist as well as exchanges with IMF, World Bank, European Union and French Cooperation economists and other technical and financial partners based in Bissau. Questions on this report should be referred to Mr. G. NEGATU, Director, OSGE (Extension 2077) and Mrs. M. KANGA, Division Manager, OSGE.2 (Extension 2251).

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List of Tables

List of Annexes

Currency Equivalents (December 2009)

Monetary Unit = CFA Franc (CFAF) UA 1 = CFAF 703.061 UA 1 = EUR 1.109 UA 1 = USD 1.541

Fiscal Year

January- December

Acronyms and Abbreviations

ADB : African Bank Development ADF : African Development Fund BSCF : Budget Support Consultation Framework BCEAO : Central Bank of West African States CPIA : Country Policy and Institutional Assessment CPO : Country Programme Office CSP : Country Strategy Paper DAF : Department of Administration and Finance DGB : General Directorate of the Budget DGP : General Directorate of Planning DGT : General Directorate of the Treasury ECOWAS : Economic Community of West African States EFRSP : Emergency Fiscal Reform Support Programme EMCBP : Economic Management Capacity Building Project ENA : National School of Administration EPCA : Emergency Post-Conflict Assistance EU : European Union FSF : Fragile States Facility GDP : Gross Domestic Product HIPC : Heavily Indebted Poor Countries IMF : International Monetary Fund MDG : Millennium Development Goal MTEF : Medium-Term Expenditure Framework NPRSP : National Poverty Reduction Strategy Paper OHADA : Organization for the Harmonization of Business Law in Africa PARCA : Public Administration Capacity Building Support Project PEFA : Public Expenditure and Financial Accountability PEMFAR : Public Expenditure Management and Financial Accountability Review SIGFIP : Integrated Public Financial Management System SNFO : Senegal Regional Office TFP : Technical and Financial Partners UNDP : United Nations Development Programme WADB : West African Development Bank WAEMU : West African Economic and Monetary Union

Table 1: General and Technical Budget Support Conditions Table 2: Areas of Intervention of TFP Budget Support Table 3: Budget Balances and Financing Requirements 2010

Annex 1: Financial Sector Development Policy Letter Annex 2: Matrix of Programme Measures Annex 3: Notes on Relations with the IMF Annex 4: Key Macroeconomic and Financial Indicator Trends Annex 5: Areas of Intervention of Bank Capacity Building Projects

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GRANT INFORMATION

Information on the Beneficiary DONEE: GUINEA-BISSAU EXECUTING AGENCY: Ministry of Finance Financing Plan

Source of finance Amount (in UA million)

Instrument

Bilateral

04.07

Spain 01.36 Grant France 02.71 Grant Portugal NA Multilateral

27.44

World Bank 05.20 IDA Grant

ECOWAS NA ADB Group 05.70 - FSF 04.00 FSF Grant - ADF 01.70 ADF Grant EU 16.24 EDF Grant WAEMU NA

Information on ADF Financing

Grant currency

UA

Interest rate type Not applicable

Basic rate (Floating) Not applicable

Interest rate margin Not applicable

Financial spread Not applicable

Commitment charge None

Other charges None

Duration Not applicable

Grace period Not applicable

Activities Date

1. Approval of Concept Note 13 January 2009 2. Negotiation of Grant Agreement 19 February 2010 3. Board Presentation 24 March 2010 4. Effectiveness 26 March 2010 5. Disbursement of the single tranche 30 March 2010 6. Final review January 2011 7. Completion Report March 2011

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PROGRAMME SUMMARY Overview of Programme

1. Programme title Emergency Fiscal Reform Support Programme (EFRSP)

- Geographical coverage National territory - Time frame 12 months - Programme cost Not applicable - Financing - FSF: UA 4 million - ADF: UA 1.7 million - Programme type Budget support 2. The Emergency Fiscal Reform Support Programme (EFRSP) is a grant to be disbursed in a single tranche in March 2010, following fulfilment of general and specific conditions by the donee. It aims to contribute to more efficient macroeconomic policy management. Its objective is to continue to improve the public financial management framework and performance. Expected Programme Outcomes 3. The expected outcomes of proper implementation of the programme are enhanced quality, efficiency and equity in the management of public funds, through greater credibility, completeness, transparency and control in carrying out budgetary operations. 4. The direct beneficiaries of the programme are public services involved in budgetary cycle management, particularly the central directorates of the Ministry of Finance. The other beneficiaries are the people of Guinea-Bissau, particularly the poorest segments of the population, who will benefit from the extension of resources to social sectors, and the private sector which will take advantage of the expected programme outcomes to develop its activities.

Needs Assessment

5. The EFRSP is consistent with the priorities defined in the 2005-2010 Interim CPS as extended and the provisions of the operational framework for fragile States. It is also in line with the first pillar of the poverty reduction strategy, the NPRSP, adopted in November 2006 for the 2007-2010 period.

6. Furthermore, the programme addresses serious constraints resulting from exogenous shocks (global food and financial crisis, political instability, etc.) which the Government intends to cushion while facing the challenge of consolidating and deepening fiscal reforms. This strong commitment of the country’s authorities requires substantial and coordinated support from the technical and financial partners (TFPs).

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The Bank’s Value Added

7. The Bank’s expertise in the design, monitoring and evaluation of reform support operations contributed significantly to formulation of the programme, which is in line with the Targeted Support, PARCA and EMCBP. The complementarity and synergy of these capacity building projects and the EFRSP constitute optimal conditions for proper implementation of the recommended reforms. Institutional Development and Knowledge Build-up 8. The EFRSP will contribute to the institutional development of the country’s Public Administration by enhancing the efficiency of the public financial management system. Furthermore, the various analytical works (PEFA and PEMFAR) will help to build up knowledge.

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RESULTS-BASED LOGICAL FRAMEWORK EFRSP 2010

Hierarchy of Objectives Expected Outcomes Scope (Beneficiaries)

Performance Indicators Indicative Targets/Time Frames Assumptions/Risks

1. Programme Goal: Contribute to more effective and efficient macroeconomic policy management

Long-term outcomes Strong and sustained economic growth Poverty reduction Increased resource allocation to the social sectors

Population Vulnerable groups Private sector

Real GDP growth rate (Source: DGE-INEC / MEPIR) Incidence of poverty (Source: INEC-Household Survey /MEPIR) Increased budget allocations to the social sectors

Expected long-term progress

3.5% average annual real GDP growth rate in 2010. The incidence of poverty drops to 64.1% in 2010 compared to 68.5% in 2005 + 4% of GDP between 2009 and 2010

Risks

Deterioration of the political and social situation (government instability, economic uncertainty, etc.)

Mitigation measures:

1. Strengthening of social dialogue (political dialogue, improved functioning of republican institutions, etc.) and supervision by the AU, UNO and EU

2. Strong Government commitment to pursuing fiscal reforms

2. Programme Objectives

Continue to improve the framework and performance of the public financial management system

Medium-term outcomes 1. The legibility, predictability

and dissemination of the budget are improved

2. Budgetary expenditure execution and control

Ministry of Finance, MEPIR, technical Ministries and other institutions

Ministry of Finance (DGT, DGB, etc.) DAF of ministries and other institutions

1.1 Improvement of budget

credibility (Sources: DGB/DGT)

1.2 Increased completeness and transparency of the budget (Source: DGT – Revenue services and BSCF reports)

1.3 CPIA Indicator No. 16 –

Transparency and accountability in the public sector

Short and medium-term Outcomes

1.1.1 The primary expenditure execution rate drops from 120.6% in 2007 to less than 100% in 2010

1.1.2 The primary expenditure compliance rate, in terms of weighted gap, falls from 119.8% in 2007 to less than 100% in 2010

1.1.3 The gap between cash plan projections and actuals less than 5% for revenue and more

Risks

External shocks (financial and food crises, etc.) on the real economy and their impacts on public finance Mitigation measure

Mobilization of additional external resources in view of Guinea-Bissau’s fragile State and post-conflict country status

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procedures are strengthened

2.1 CPIA Indicator No. 13 –Quality of budgetary and financial management

than 10% maximum for expenditures

1.2.1 Administrative revenue growth rate of at least 10% in 2010

1.3.1 CPIA Indicator No. 16 – Transparency and accountability in the public sector – increases from 2.5 in 2009 to 3 in 2010

2.1.1 CPIA Indicator No. 13 – Quality of budgetary and financial management – increases from 3.5 in 2009 to 4 in 2010

3. Activities/Resources

Amount ADF UA 5.70 M WB USD 8 M EU EUR 18 M Spain EUR 1.5 M France UA 3 M

Short-term Outcomes 1. Legibility, predictability and

dissemination of the budget

1.1 Preparation of budget implementation status reports

1.2 Development of new budget preparation tools (medium-term expenditure framework (MTEF), etc.)

Number of measures implemented 2.1 Publication and

dissemination of quarterly budget implementation status reports

1.2.1 Definition of budgetary strategies for 2011-2013

At least 8 of the 11 measures proposed (See Annex 2)

1.1.1.1 For 2010, four public budget

implementation status reports will be published, transmitted to the National Assembly and donors, and disseminated to the general public

2.1.1.1 2011-2013 budget framework defined no later than end-June 2010

Assumptions

1. Maintenance of institutional implementation capacities

2. Compliance with legal procedures in the public financial management process

3. Disbursement of budget support within the prescribed deadlines

4. Operationality of the framework for consultation between the

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2. Budget implementation and

control 2.1 Appointment of a Financial

Controller directly under the authority of the Minister of Finance

2.2 Preparation of a financial

control procedure manual 2.3 Definition of conditions for

closure of budgetary operations

2.4 Training of State financial

players in budget implementation and control procedures

2.5 Keeping of administrative

expenditure accounts and preparation of administrative account of

1.2.2 Formation of 3 sector

groups to start putting the MTEF in place

1.2.3 Holding of budgetary conferences

2.1.1 Issuance of a Ministerial Decree or Order appointing the Financial Controller (Source: BSCF reports and TFP mid-term review report)

2.2.1 Ministerial Order instituting

the financial control procedure manual (Source: BSCF reports and TFP mid-term review report)

2.3.1 Circular fixing the period

for closure of budgetary operations

(Source: Cabinet of the Minister of Finance)

2.4.1 Number of civil servants

trained 2.5.1 Periodical production of

accounting documents (Source: DGB, DGT and DAF of technical ministries)

1.2.2.1 Sector groups formed from

the beginning of April 2010 1.2.3.1 Budgetary conferences

initiated in July 2009 and completed no later than end-September 2010

2.1.1.2 Implementation of the said

ministerial decree or order appointing the Financial Controller as soon as the initial 2010 finance law (1/1/10) is enacted

2.2.1.1 Implementation of the Ministerial decree or order by end-June 2010

2.3.1.1 Effectiveness of the circular,

following the enactment of the 2010 finance law

2.4.1.1 At least 100 civil servants

trained by end-June 2010 2.5.1 Monthly administrative accounts

situation and quarterly report on Government administrative accounts in 2010

Government and technical and financial partners

5. Good performances in the implementation of the following capacity building projects: Targeted Support, PARCA and EMCBP

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Government operations

2.6 Human resources management software (salaries, recruitment, career, etc.)

2.7 Use of a treasury operations accounting management software

2.6.1 Use of software

1.7.1 Use of software

2.6.1 Software functional by end-June 2010 (Source: MFPT/DGB)

2.7.1 Software functional by end-June

2010 (Source: DGT)

Financial resources

I. THE PROPOSAL 1.1 This report, submitted to the Board of Directors for consideration, is a grant proposal totalling UA 5.7 million, comprising UA 4 million and UA 1.7 million in FSF and ADF resources respectively, to finance Guinea-Bissau’s Emergency Fiscal Reform Support Programme (EFRSP). It is a budget support, to be disbursed in a single tranche, for the March-December 2010 period. This budget support, which is a response to the request of Guinea-Bissau Government during the Annual Meeting held in Dakar (Senegal) in May 2009, was appraised in November 2009 and is based on the Government’s overall strategy, the National Poverty Reduction Strategy Paper (NPRSP), and the Priority Action Plan for the Reform of the Public Financial Management System adopted in 2006 and 2009 respectively. The Government’s strategy was endorsed by donors at the Round Table held in November 2006. The said programme is also in line with the priorities of the 2005-2010 CSP as extended, regarding its first pillar “enhancing good governance”. This proposal will follow a pragmatic approach: the proposed reforms will be deepened in other operations, particularly the 2010 – 2012 medium-term programme negotiated and concluded with the IMF in the first quarter of 2010 and for which the Bank Group intends to provide financial and technical support. The programme design took into account good practices principles regarding conditionalities and Bank Group non-concessional debt accumulation policy provisions. 1.2 The goal of the EFRSP is to contribute to more effective and efficient macroeconomic policy management so as to accelerate growth and poverty reduction. Its specific objective is to continue to improve the public financial management framework and performance. It comprises one component, namely strengthening of budget implementation and control procedures, divided into two sub-components: (i) enhancement of budget credibility, completeness and transparency; and (ii) improvement of the internal control system. Enhanced quality, efficiency and equity in the management of public funds will be the key expected outcomes of the EFRSP. The other expected outcomes are 3.5% GDP growth rate in 2010 and an increase in budget allocations to social sectors (+4% of GDP) to ensure the country’s eligibility for the resources of the Fast-Track/Education for All initiative.

II. COUNTRY AND PROGRAMME CONTEXT 2.1 Overall Government Development Strategy and Medium-term Reform Priorities 2.1.1 In 2006, the Government adopted a poverty reduction strategy paper, the 2007-2009 NPRSP, and extended it to 2010 pending a new strategy for the 2011-2015 period. The NPRSP comprises four strategic pillars: (i) good governance, modernization of the public administration and stabilization of the macroeconomic framework; (ii) promotion of economic growth and job creation; (iii) broader access to social services and basic infrastructure; and (iv) improvement of the living conditions and environment of vulnerable groups. The NPRSP is a vast programme with a twofold objective of achieving an average annual growth rate of at least 5% and reducing the incidence of poverty from 68.5% in 2005 to 64.1% in 2010. Considering the results obtained, the economic growth rate was far below projections for the 2007 – 2009 period and the projected rates of access to basic social services were not attained (cf. CPS 2005-2010 as extended).

2.1.2 On the other hand and in spite of the unstable political context and an unfavourable economic environment, macroeconomic performance improved mainly as a result of a fiscal consolidation programme initiated by the Government in 2007 and backed by an IMF Emergency Post-Conflict Assistance from February 2008, as well as budget support from the key TFPs (ADB, World Bank, Spain, France, Portugal, EU, WAEMU, etc.). Given the contrasting results in the implementation of the NPRSP, the Government decided to prepare, from

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the beginning of 2010 and with the support of partners, studies which will inform the next strategy to be implemented over the 2011-2015 period that coincides with the end of the period fixed for the attainment of MDGs. For 2010, the Government’s strategy seeks to improve the context and performance of macroeconomic management under an IMF-supported medium-term programme to create optimal conditions for reaching the completion point of the HIPC Initiative not later than the end of 2010. 2.2. Recent Socioeconomic Developments, Constraints, Challenges and Perspectives

2.2.1 The 1998–1999 politico-military conflict led to economic development marked by profound macroeconomic imbalances and dysfunctions in public financial management. The resulting socioeconomic impact was significant: a growth rate eroded by political instability with a significant decline in GDP per capita from USD 212.53 (at 2000 constant prices) in 1997 to an annual average of USD 150 (at 2000 constant prices) in 1998-2006, large segments of the population living below the poverty line (68.5%), and a serious deterioration of basic social services. Consequently, the country was relegated in terms of the Human Development Index raking from the 156th in 1999 to the 173rd position out of 180 countries according to the 2009 Human Development Report. 2.2.2 Concerning macroeconomic performance, the Government of Guinea-Bissau encountered significant obstacles in redressing the financial situation and boosting the economy. Thus, since 2008, economic growth has recovered moderately, owing to the progressive restoration of the fundamentals. However, the global crisis and the political framework negatively impacted the overall economic situation in 2009. In fact, the 30% drop in world cashew nut prices, the country’s main export product, and the uncertainties of the business climate led to slowdown in economic growth and exerted strong pressures on major internal and external balances. The GDP growth rate was estimated at about 3% in 2009 as against 1.8% in 2007 and 3.5% in 2010. 2.2.3 Regarding developments in public finance, total revenue, excluding grants, increased to CFAF 35.4 billion in 2009, representing 118.4% of estimates and 102.3% of the amount of revenue in 2008. However, the increase in tax revenue was not enough to offset the low mobilization of budget support (only 50% of the amounts pledged) due to the wait-and-see policy of TFPs in view of low visibility of the political situation (cf. § 7.1.2). This forced the Government to tighten quantitative public expenditure trend indicators. The tightening up of budgetary control helped to avoid accumulating new arrears on current management and to reduce the primary deficit which fell from 3.2% of GDP in 2008 to 2.9% of GDP in 2009 compared to a projection of 4.5% of GDP.

2.2.4 Concerning the external public debt, with an outstanding debt of around 226.1% of GDP at end-2009 compared to 243.7% for 2008, debt service remains unsustainable and is a major financial constraint on the country’s economic and social development. However, prospects seem to be bright with the possible attainment of the completion point of the HIPC Initiative by end-2010, considering recent macroeconomic performances and the determination of the country’s authorities to accelerate structural reforms.

2.2.5 With regard to money and credit, the net foreign assets of monetary institutions rose by CFAF 2.3 billion in 2009 compared to end-2008. Domestic credit contracted by CFAF 1.3 billion, driven by improvement in the Government’s exposed net asset position with a net decommitment of CFAF 3.4 billion. Consequently, the deceleration of the money supply expansion rate, which was 8.5% in 2009 compared to 20.7% in 2008, reduced the money-induced purchasing power risks.

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2.2.6 Regarding the country’s external position, the trade deficit widened in 2009, due mainly to the sharp increase in imports (+18.3%) and the decrease in export earnings (-3.2%). This poor performance of the only export product, the cashew nut, is the result of contrasting trends: fall in world prices (-30%) and increase in exported volume (+21.8%). This is also true for the balance of services with a deficit which increased by 26.4%. All these developments worsened the current account deficit (excluding official transfers) from 5.4% of GDP in 2008 to10.1% of GDP in 2009. Unilateral transfers, marked by a 10% drop in remittances by Guinea-Bissauans abroad, and net foreign capital inflows, only partially offset the current account deficit. Hence, the overall balance of payments deficit stood at 3.2% of GDP in 2009 as against 2% of GDP in 2008, mainly covered by external debt restructuring. 2.2.7 As regards the implementation of structural reforms, the Government pursued, in close collaboration with TFPs, the implementation of structural reform measures, and particularly improvement of public financial management. In this respect, WAEMU guidelines were transcribed into the national law: the organic law on finance laws and the decree to lay down general public accounting regulations were adopted and are being enacted for effective entry into force; the budget nomenclature and accounting system of the State are operational. The nomenclature, which was included in SIGFIP software tables in 2008, has reinforced the application of budgetary principles and techniques (credit specialization, fine-tuning of budget authorization instruments, annuality, universality, etc.) and improved the publication of accounting and financial data tables on budget implementation. The centralization of revenue at the Public Treasury and institutionalization of a single Treasury account also marked significant progress in terms of completeness of the budget. Lastly, concerning administrative reform, the biometric census of civil servants and the introduction of a single card index for Civil Service personnel management will have a remarkable budget impact in the coming years. 2.2.8 Concerning the business climate, the adoption of OHADA Acts, the establishment of the Commercial Court, the enactment of the new Investment Code and the signing of the Framework Convention on Public-Private Partnership (PPP) are factors conducive to economic growth and job creation. Some progress was also made in the reform of the security sector with the biometric census, identification of ways of reducing the payroll and effectiveness of technical assistance from specialized structures of the African Union, the United Nations and the EU. 2.2.9 As regards political perspectives, it should be noted that the last general elections were described as transparent and credible, and therefore contribute to consolidating structural reforms. They influence the improvement of the medium-term economic outlook: the real GDP growth rate could be 3.5% in 2010 and, subsequently, stabilize around 4.5%. Regarding public finance, the goal is to increase tax revenue by 1.25 percentage points of GDP in 2010 and to contain primary expenses within the limits of available resources. However, the said expenses are expected to increase by 2.5% of GDP to reflect planned increases in the social sectors. The completion point of the HIPC initiative should be attained at the end of 2010, and should reduce the external debt stock to 65.8% of GDP in 2010, that is about one-third of the level in 2009.

2.3 Bank Group Portfolio Status

2.3.1 Since 1976, the date of its first operation in the country, the Bank Group has financed, besides multinational projects, 35 operations (26 projects, 4 studies and 5 institutional support) for net commitments representing a total amount of UA 197.3 million from various windows: ADF (92%), ADB (5%), and NTF (3%). As at end-December 2009, the Bank’s portfolio comprised eight (8) active projects for a total amount of UA 45.95 million, and did not include any reform support operation. The portfolio has significant weaknesses: performance indicators

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show long delays in the implementation of projects with an average age of 6.1 years, delays in fulfilment of conditions precedent to disbursement (2 years), as well as low disbursement rates (36%) and problem operations (4 PP). However, closer monitoring of operations, intensification of supervision missions, capacity building at national level (Targeted Support, PARCA, etc.) and the Senegal Regional Office, working in close collaboration with the Country Programme Office (CPO), have helped improve the portfolio. III. JUSTIFICATION, KEY DESIGN ELEMENTS AND SUSTAI NABILITY 3.1 Linkage with CSP, Country Preparedness and Underlying Analytical Elements 3.1.1 Linkage with CSP: The EFRSP is consistent with the orientations and priorities of the 2005-2010 CSP as extended, one of whose pillars is “enhancing good governance”. The CSP provides for a general budget support operation to maintain public financial management system reform gains. It also highlights the coherence of this programme with the priority areas and guidelines of the strategy for the Bank’s enhanced engagement in fragile States.

3.1.2 Prerequisites for implementing budget support: At the institutional level, the last legislative and presidential elections were considered to be transparent and credible. In addition, during his swearing-in ceremony, the President of the Republic solemnly undertook to strengthen social dialogue (political dialogue, improved functioning of republican institutions, etc.). The conclusive reviews of the different IMF missions and the drawing of the three (3) tranches under the Emergency Post-Conflict Assistance (EPCA) confirm the good performances recorded over the 2007-2009 period and the relative stability of the macroeconomic framework. 3.1.3 Consequently, in January 2010, the country initiated negotiations for a Medium-term Programme backed by an Extended Credit Facility (ECF). A preliminary agreement between the IMF and the Government on the ECF was reached in January 2010, and could be approved by the IMF Executive Board in March 2010, effective as of 1 January 2010. The implementation of this Programme will help to support the country towards the attainment of the completion point of the HIPC Initiative by end-2010. The Government reviewed the NPRSP, and launched the preparation of NPRSP II for the 2011-2015 period with the support of TFPs, including the Bank Group, through Targeted Support financed with FSF resources. 3.1.4 Fulfilment of technical prerequisites: The preparation and appraisal of the programme were carried out in close collaboration with the World Bank, the European Union and France, which were the peer reviewers of this proposal, and all other partners present in the country. It drew on public financial management system reviews, namely the 2005-2007 PEFA and 2008-2009 PEMFAR, which identified the weaknesses of the system. In November 2009, the Government adopted a Priority Action Plan, including recommendations for improving public financial management made by the said reviews. Despite external shocks (falling world prices, low mobilization of financial support for reforms, etc.), the Government’s determination to implement reforms led to good budgetary performance, beyond the quantitative targets of the 2009 Programme. 3.1.5 All in all, this operation does not meet all criteria applicable to guidelines relating to budget support (ADB/BD/WP/2003/143/Rev2 and ADF/BD/WP/2003/182/Rev2); however, it is consistent with budget support eligibility criteria defined in the FSF1 operational framework, as indicated in Table 1 below. The said Framework stipulates that rapid disbursement instruments, including budget support operations, can be used in post-conflict countries provided that: (i)

1 ADB/BD/WP/2008/6, Annex 7

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“there is close monitoring, (ii) governments show proof of commitment to reforms (cf. § 2.1.2 and 2.2.1), but have limited or dwindling resources in terms of revenue (cf. § 2.2.2 and 2.2.3), (iii) and a rapid response by the international community considers that it is necessary to sustain the move in favour of reforms and strengthening of essential public services” (cf. § 3.2.3). However, insofar as part of the support is financed with ADF resources, the allocation of the resources must meet the conditions posed by the Guidelines for Development Budget Support Lending (DBSL)2. Considering that Guinea-Bissau is a fragile State, it cannot meet the strict criteria posed by the Guidelines. The Boards of Directors will therefore be requested to waive these rules and apply the Fragile States Facility eligibility criteria for ADF allocation. The expeditious mobilization of the various planned budget support would help avoid the accumulation of new payment arrears on current management and thus ensure a smooth implementation of the programme so as to attain the completion point of the HIPC initiative in 2010. On the other hand, the country would no longer be able to service its external debt and would thus see disbursements for ongoing projects and programmes suspended again (cf. § 4.3.2 and 4.3.3). Nevertheless, a Bank mission fielded in the country in January 2010 is optimistic about efforts to mobilize resources undertaken by all TFPs.

2 ADB/BD/WP/2003/143/Rev.2 and ADF/BD/WP/2003/182/Rev.2

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Table 1 General and Technical Budget Support Conditions

1. Criteria of the two screenings for eligibility

for the FSF Eligibility analysis in the 2005-2010 CSP as extended and approved in January 2009

2. Existence of a national programming document

NPRSP 2007-2009, extended to 2010 (cf. § 2.1.1)

3. Consensus between Government and TFPs on the development priorities to be supported by DBSL

The Emergency Public Finance Programme stemming from PEFA (2005-2007) and PEMFAR (2008-2009)

4. Implementation of a credible capacity building programme

Joint PEFA (2007) and PEMFAR (2008-2009) concluded by key TFPs (ADB, World Bank, EU, etc.) in 2009. Their conclusions and recommendations were validated in a priority action plan adopted by the Government in November 2009. The key TFPs (World Bank, EU, France, etc.) have capacity building projects to support this action plan

5. Justification for the operation in the programming document and the appraisal report, including fragility risk mitigation measures

Justification for the budget support is found in the 2005-2010 CPS as extended (cf. § 3.1.1)

6. Annual audit of the operation Selection and recruitment of an independent auditing firm in collaboration with the other BSCF partners (cf. § 5.1.4)

7. Recruitment of professionals to be assigned to the concerned public bodies in case of weak institutional capacity of the FSF intermediary

Recruitment of international and local technical assistants under the Targeted Support, PARCA and EMCBP (cf. § 3.3.1 and 3.4.1)

8. Existence of adequate replacement mechanisms to support national systems

Not necessary (cf. point 7 of table)

9. Coordination of activities and resource disbursement between the Bank Group and other TFPs

Quarterly meetings of the Budget Support Consultation Framework established in 2009 and bringing together TFPs providing budget support

10. Disbursement in several tranches, except in exceptional circumstances

One (1) single tranche because of the exceptional circumstances of the programme (urgency of reforms, short-term programme, etc.) and operational consequences of attainment of the completion point of the HIPC initiative in 2010 (cf. § 4.3.2 and 4.3.3)

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3.2 Collaboration and Coordination with Other Donors

3.2.1 The preparation of PEMFAR and adoption of a multi-year plan to strengthen public financial management gave renewed impetus to the recommitment and coordination of technical and financial partners. Accordingly, joint missions have been institutionalized for programme preparation and appraisal, as well as formulation of a joint matrix of reform measures. This drive is facilitated by existing frameworks for consultation on reform support. In 2006, the TFPs present in Guinea-Bissau set up a framework, chaired by the EU and UNDP on a rotation and half-yearly basis, for coordination of their activities and dialogue with the Government. Quarterly and extraordinary meeting reports are shared with non-resident TFPs, where necessary. In February 2009, the TFPs also set up a Budget Support Consultation Framework (BSCF) which holds quarterly meetings chaired by the Minister of Finance. It includes the Bank Group, World Bank, EU, France, Portugal, Spain, IMF, WAEMU/BCEAO/WADB and ECOWAS. This framework promotes the complementarity and efficiency of budget support.

3.2.2 This operation is consistent with and complements those of other TFPs. Indeed, the objective of the World Bank’s USD 8 million general (or non-targeted) budget support is to support reforms to improve the public financial management framework and performance and private sector development. This support is supplemented by a capacity building project covering all major domains of public finance (preparation, implementation, reporting, control, etc.). The contribution of the EU, which amounts to EUR 18 million and earmarked for public financial management, consists of a general budget support for the 2009-2011 period under EDF-X (47.4%), the payment of 2008 salary arrears (47.1%) and building of the capacities of the Ministry of Finance in monitoring the public financial management system reforms (5.5%). Half of the budget support provided by France, amounting to EUR 3 million, is used to finance the current expenses of the Ministries of Health and Education so as to ease financial constraints on the social sectors for the 2009 fiscal year. The other half is intended to finance repayment of advances granted to the State by local banks to overcome constraints on the financing of the economy, particularly during the cashew nut season. It should be underscored that the budget support agreements signed with France and the EU came into force in December 2009, and all related resources have been disbursed. The international community is therefore very committed to sustaining the reform drive.

Table 2

Focus Areas of TFP Budget Support

WORLD BANK EUROPEAN UNION FRANCE ADB

Modernization of the legal framework for public financial management

Improvement of budget programming

Streamlining of budget implementation and monitoring

Modernization of the procurement system

- Filling of financing gap of the 2009, 2010 and 2011 budgets (ABS IV of EDF-X)

- Coordination of budgetary assistance

- Budget implementation in the social sectors

- Clearance of the current expenses of the Ministries of Health and Education under the 2009 budget

- Repayment of advances granted to the State by local banks under the comprehensive arrears clearance plan

Budget credibility, completeness and transparency Strengthening of budget implementation and control procedures

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3.3 Outcomes and Lessons Learnt from Similar Completed or Ongoing Operations

3.3.1 Four main lessons could be learnt from the experience of the Bank and other TFPs (World Bank, EU and UNDP): (i) political stability is a precondition for the initiation and completion of any reform policy; (ii) practical, simple and functional definitions of measures and conditionalities; (iii) need to strengthen and coordinate institutional support to sustain the implementation of reforms; and (iv) importance of close and coordinated monitoring of donors under implementation of the Paris Declaration. 3.3.2 The design of the EFRSP took these main lessons into consideration, laying emphasis on realistic disbursement conditions whose formulation was the subject of consensus between the Government and the Bank Group (cf. § 3.6.1). Institution building operations, the Targeted Support and the PARCA are a response to weak implementation capacities of the Public Administration (cf. § 3.4.1 and 7.1.3). Mention should also be made of other institutional support projects, particularly the EU’s PARAP and World Bank’s SPF. Furthermore, there is a framework for consultation on reform policy bringing together Guinea-Bissau’s key TFPs (cf. 3.2.1 to 3.2.3). 3.4 Linkage with Ongoing Bank Operations 3.4.1 The EFRSP is linked to three (3) other Bank Group operations, and their complementarity is expected to produce a strong synergy in financial good governance. Indeed, budget support creates better conditions for proper implementation of the said operations through the conditionalities of the said programme, and three projects facilitate the implementation of the planned budgetary reforms. These projects are: (i) EMCBP (UA 1.35 million approved in March 2005) which seeks to improve the efficiency of economic planning and public investment programming; (ii) Targeted Support (UA 2.00 million approved in October 2009) co-financed with UNDP which seeks to strengthen the budget preparation and implementation process (inclusion of NPRSP, budget control, debt, demographic and social statistics, etc.) and improvement of the framework for the coordination of public development assistance; and (iii) PARCA (UA 7.80 million approved in July 2009) whose specific objectives are to strengthen budget implementation and control procedures, in particular the provision of technical assistance to put in place a comprehensive and sectoral medium-term expenditure framework (MTEF) and Public Treasury and public procurement accounting management software, and to set up the National School of Administration (ENA) comprising training cycles for public financial management. Furthermore, interim debt relief contributes to proper implementation of the programme by exempting Guinea-Bissau from directly servicing its debt owed to the Bank Group throughout 2010 (indirect budget support). In the event of successful implementation of the programme and its corollary, the attainment of the completion point of the HIPC initiative, external debt service would once more become sustainable and thus ensure the continuous financing of projects and programmes by TFPs.

3.5 The Bank’s Comparative Advantage

3.5.1 The comparative advantage of the Bank lies in its expertise and experience regarding economic and financial reform support in regional member countries, particularly in States weakened by economic crisis and/or political conflicts (the Central African Republic, Comoros and Liberia). In addition, it has institutional support (EMCBP, Targeted Support and PARCA) which creates conditions for smooth implementation of this Programme.

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3.6 Compliance with Good Practices Principles as regards Conditionalities

3.6.1 Disbursement conditions were determined in compliance with good practices as regards conditionalities, as well as on the basis of lessons learnt from Bank Group experience in Guinea-Bissau (cf. § 2.3.1) and the nature of the Programme (emergency reforms, short-term programme, prospects for attainment of completion point of HIPC Initiative, etc.). The conditionalities were defined following lengthy discussions with the Government; accordingly, the number of conditions precedent to Board presentation has been limited to two (2), while ensuring that they are fulfilled before this proposal is presented to the ADF Board of Directors. 3.6.2 Concerning ownership of the Programme by the Authorities, the measures retained reflect the priorities of the first strategic pillar of NPRSP, namely improvement of good governance and stabilization of the macroeconomic framework. They are drawn from the recommendations of PEMFAR 2008-2009 validated by the Government in February 2010, and structural criteria used in the IMF’s EPCA. In accordance with the Paris Declaration, common and complementary measures have been retained to reduce transaction costs. Lastly, the Programme reviews will be coordinated with the IMF and other TFPs of the BSCF. 3.7 Compliance with Bank Group Lending Policy

3.7.1 In line with the technical definitions memorandum relating to Emergency Post-Conflict Assistance (EPCA) concluded with the IMF in February 2008 and currently being implemented, the Government of Guinea-Bissau is required to contract only new loans with a concessionality rate of at least 85%. This target is one of the key quantitative measures of the IMF-backed Programme that the country is rigorously implementing; the present Programme complies with this principle. The related Bank Group policy is therefore observed (category III). IV. THE PROPOSED PROGRAMME 4.1 Programme Goal and Objectives 4.1.1 The goal of the EFRSP is to contribute to more effective and efficient macroeconomic policy management so as to accelerate growth and poverty reduction. Its specific objective is to continue to improve the public financial management framework and performance.

4.2 Programme Pillars, Specific Objectives and Expected Outcomes

4.2.1 In 2007, the Government resolutely embarked on the implementation of community reforms to harmonize the legal framework for public financial management. This regional framework, which was adopted by WAEMU authorities between 1997 and 1998, provides more modern and secure rules for the implementation of the State budget, and specifies the responsibilities of public financial actors (credit managers, vote holders, public accounting officers, etc.). Aware of the need to ensure greater budgetary cycle control, the authorities wanted that the budgetary reform measures recommended for the evaluation and diagnosis of the public financial management system, in particular PEFA 2007 and PEMFAR 2008-2009, be included in a multi-year priority action plan to improve the coherence, accuracy and articulation of various dimensions of reforms to ensure better sequencing of all measures to be implemented.

4.2.2 This fiscal reform plan is a response to the need to restructure the organization of the Administration to bring it in line with new WAEMU statutory regulations. It is in keeping with efforts to deepen and strengthen ongoing reforms, and comprises four (4) pillars: (i) review of the legal and institutional framework for public financial management to align it with community

10

standards; (ii) improvement of the budget preparation process; (iii) strengthening of budgetary operations implementation and control procedures; and (iv) modernization of the public procurement system. 4.2.3 Although the EFRSP will support the country’s entire budgetary reform plan, special emphasis will be laid on the component relating to the implementation of the general State budget, which comprises two (2) sub-components, as presented below. The other components are financed by TFPs, in particular the World Bank and the EU.

Component: Strengthening of Budgetary Operations Implementation and Control Procedures

Sub-component 1: Improving Budget Credibility, Completeness and Transparency 4.2.4 Context and recent actions: The general State budget is not yet a credible orientation document. Indeed, there are significant gaps in budget implementation regarding revenue and expenditure forecasts, which are unreliable as a result. Non-compliance with the closing of budgetary operations (reconciliation of commitments, payment authorizations and payment orders, carrying over or cancellation of appropriations, regularization, etc.) is a de facto infringement of the annuality principle, and leads to accumulation of new payment arrears. With regard to budget completeness and transparency, only part of the different taxes collected for services provided by some ministries are included in the budget under revenue and expenditure, and information on the voted budget and its implementation is hardly disseminated. Consequently, the budget is scarcely in line with NPRSP orientations and priorities due particularly to the absence of a medium-term expenditure framework (MTEF) tracing the logic of results, inadequate qualitative and quantitative human resources and low participation of technical Ministries in budget adjudication, etc. In the last two years, improvements have been made in the preparation of the 2009 State budget on the basis of new nomenclature in line with WAEMU standards and the introduction of SIGFIP, which is a software covering the major public financial management functions, particularly the preparation and monitoring of the budget. 4.2.5 Programme measures: In order to address these weaknesses, the EFRSP intends to: (i) rehabilitate the Treasury Committee responsible for formulating and monitoring, on a monthly basis, the annual cash plan based on total revenue and expenditure ceiling projections; (ii) update the public revenue inventory in order to declare and record all revenue in budget estimates; (iii) publish, on a quarterly basis, the budget implementation status derived from SIGFIP for communication to the National Assembly and the general public; and (iv) prepare draft sectoral programmes including objectives and medium-term expenditure frameworks (MTEF) of the three Ministries with the largest budgetary allocation (health, education, agriculture). Sub-component 2: Improving the Internal Control System 4.2.6 Context and recent actions: Regarding budget implementation, the legal public financial management framework still has many weaknesses. Consequently, there is need to strengthen financial control and establish the judicial control missions provided for by Community directives, as well as reorganize the central directorates of the Ministry of Finance (DGT, DGB, DGCP, etc.) and the departments of administration and finance (DAF) of Ministries and/or other institutions to align them with the new budgetary practice. Indeed, the internal expenditure pre-control system is inapplicable due to widespread use of waiver procedures, in particular expenditure authorization without any settlement instrument (control of services provided prior to payment) and payment of expenditures without well-defined procedures and supporting document nomenclature. Accounting management is also inefficient, with non-

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production of public accounts and impossibility for the Audit Bench to audit them, as well as weak accounting and financial reporting capacities. On the other hand, efforts have been made to restore the single account principle at the Public Treasury and to ensure regular bank reconciliation. As regards predictability of budgetary operations, the management of the cash position of the government is still embryonic and is carried out on a day-to-day basis depending on availability of resources. The absence of settlement bills prevents the National Assembly from controlling budget implementation. In addition, the payroll takes up more than 82% of public revenue thus limiting, in the short term, possibilities for a sound cash position (accumulation of payment arrears on current management and/or drastic expenditure cuts) and, in the medium term, the increase in resources allocated to production and social sectors considered as priority in the NPRSP. In that respect, security sector and public administration reforms are crucial for attaining the expected outcomes of improving the public financial management system. The EU and AU are supporting security reforms.

4.2.7 Programme measures: In order to address the above-mentioned problems, the EFRSP schedule includes implementation of the following measures: (i) strengthening of the internal control mechanism through the appointment of a Financial Controller under the authority of the Minister of Finance; (ii) preparation of a financial control procedures manual; (iii) training of officials of the Ministry of Finance and DAFs of Ministries or institutions on budget implementation and control procedures; (iv) issuance of a circular fixing the period for closing budgetary operations; (v) building the capacities of the SIGFIP Management Unit with multi-disciplinary skills; (vi) keeping of administrative accounts and drawing up of the 2009 public administrative account of public operations within the framework of SIGFIP during the presentation of the 2011 budget; and (vii) developing modern, efficient and reliable accounting tools for Treasury operations and human resource management with the establishment of a single database for the payment of salaries and centralization of recruitment into the Civil Service. 4.2.8 Outcomes: The improvement of quality, efficiency and equity in public resource management should therefore:

(i) improve credibility, completeness and transparency in the management of public funds. In this respect, the rate of execution of primary expenditure will drop from 120.6% in 2007 to less than 100% in 2010, and that of consistency of primary expenditure from 119.8% in 2007 to less than 100% in 2010 in terms of the weighted margin. Government revenue will increase by 25% between 2009 and 2010, and four (4) reports will be published on the status of budget implementation, which will be submitted to the National Assembly and donors, and disseminated to the general public; and

(ii) strengthen budgetary operations implementation and control procedures by putting in place a legal and institutional framework in compliance with WAEMU standards. This involves, in particular, the implementation, during the first quarter of 2010, of legislative or regulatory instruments relating to the appointment of a Financial Controller under the direct authority of the Minister of Finance and to the internal public expenditure pre-control mechanism (description of expenditure channels, preparation of the procedures manual, fixing the period for closing the budget, etc.) and training of about one hundred civil servants in public financial management. In the second half of 2010, accounting documents will be produced periodically (monthly situation of administrative accounts and quarterly report on public administrative accounts) and an accounting software will be introduced for Public Treasury operations.

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4.2.9 The continuous improvement of public financial management will also help to sustain fundamental macroeconomic balances and improve the allocation of available resources by channelling them to priority NPRSP sectors (agriculture, fisheries, tourism, social services, etc.). Consequently, the country policy and institutional assessment (CPIA) indicator No. 13 relating to the quality of budgetary and financial control of the State will increase from 3.5 in 2009 to 4 in 2010, and No. 16 relating to transparency and accountability from 2.5 to 3 over the same period. The two conditions precedent to presentation of the EFRSP to the Boards are: (i) preparation of a financial control procedures manual and evidence of its implementation by a Ministerial Order adopting the said manual; (ii) organization of training on budget implementation and control procedures for the central directorates of the Ministry of Finance, particularly the DGB and DGT, and DAFs of other Ministries and/or institutions and evidence of validation of the training report by the Minister of Finance.

4.3 Financing Requirements and Arrangements

4.3.1 Table 3 below presents the 2010 budget financing requirements. According to forecasts, the requirements would amount to approximately CFAF 41.3 billion, representing the equivalent of the total budget balance (cash basis) excluding budget support. They are covered by budget support amounting to CFAF 23.1 billion and domestic and external resources totalling CFAF 11.6 and 3.5 billion respectively. The financing gap, which is estimated at CFAF 3.6 billion, could be covered by resorting to sub-regional institutions, ECOWAS and WAEMU, and bilateral partners, particularly Angola and Portugal, which contributed to previous budget support operations. The Bank Group budget support accounts for 10.54% of the financing requirements and 18.82% of the planned budget support. 4.3.2 Effective mobilization of the planned budget support would help ensure a sufficiently liquid cash position, which is one of the preconditions for proper implementation of the Programme. Indeed, the first quarter of the year is the slack period for business in Guinea-Bissau, as the cashew nut season covers the period from mid-April to September and the Christmas and New Year holiday-related imports. Within this context of a general structural economic downturn during the first four months of the year, marked by severe Government liquidity pressures, it is necessary to mobilize the planned budget support as soon as possible. This would help offset the potential imbalances in the Government’s cash plan that may stem from revenue and expenditure estimate problems (smoothing of seasonal variations) and thus prevent accumulation of new payment arrears on current management. 4.3.3 The implementation of the Programme during the first half of 2010 will be crucial for the conclusion of an Extended Credit Facility (ECF) with the IMF, as well as for supporting the Government towards attainment of the completion point of the HIPC Initiative by the end of 2010. On the other hand, from January 2011, the country would not be able to service its external debt, and disbursements for ongoing projects and programmes would be suspended again. Thus, the Bank’s involvement in this Programme will contribute to strengthening budgetary reforms and overcoming the financial constraints on the budget. Lastly, it will help to ensure continuity in the management of active operations and extension of the portfolio to the priority sectors of the country’s economy.

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Table 3

Budget Balances and Financing Requirements in 2010 (in CFAF billion)

TOTAL Total revenue of which: Tax revenue Non-tax revenue

+96.70 +30.10 +12.90

Net expenditure and loans of which: Current expenditure Capital investment

-100.10 -56.90 -43.30

Overall balance (commitment basis) - 03.40 Variation in arrears Domestic External

-14.80 -19.10 +04.30

Overall balance (cash basis) -18.20 Financing requirements Domestic financing External financing

+18.20 +11.10 +03.50

Financing gap (to be sought) +03.60

Source: IMF mission estimates, November 2009

4.4 Programme Beneficiaries 4.4.1 The direct beneficiaries of the Programme are public financial services, whose operational capacities will be strengthened through the use of modern, efficient and reliable management tools (ASYCUDA++, SIGFIP’s LEB, accounting and human resource management software, equipment grants, etc.). The other beneficiaries are: (i) the people of Guinea-Bissau, particularly the poorest segments of the population, who will benefit from the extension of resources to the social sectors and to poverty reduction programmes (+4% of GDP) through the transparent management of public funds; (ii) public employees whose salary arrears for the 2008 financial year will be paid with part of budget support resources; and (iii) the private sector which will take advantage of the expected outcomes of the Programme (transparent operations with the State, improvement of the business climate, payment of bank debt arrears, etc.) for business development. 4.5 Impact on Gender

4.5.1 The resources disbursed will help to improve the efficiency of expenditures on poverty reduction, in particular those relating to the fourth NPRSP strategic pillar “Improving the living conditions and environment of vulnerable groups”. This pillar comprises actions with immediate impact on gender included in the State budget, namely social welfare of women (sexual mutilation, early marriages, wife abuse, occupational segregation, etc.), development of income-generating activities for women in precarious circumstances (technical and vocational training, micro-credits, etc.) and female literacy.

4.6 Environmental Impact 4.6.1 This Programme will have no environmental impact. The EFRSP is classified in category III.

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4.7 Impact on Governance 4.7.1 All the measures retained in the EFRSP will contribute to promoting sound governance, enhancing completeness and transparency in the management of public funds, and strengthening budgetary operations implementation and control procedures. This will help to avoid bad and reprehensible practices, as well as slippages in budget management. This environment will also encourage the private sector to do business with the State in public procurement in a transparent and confident manner. V. PROGRAMME IMPLEMENTATION, MONITORING AND EVALUAT ION

5.1 Implementation Arrangements

5.1.1 Institution in charge: the Ministry of Finance will be responsible for implementing the EFRSP. The Ministry satisfactorily implemented the Emergency Post-Conflict Assistance in 2008 and 2009. The Emergency Post-Conflict Assistance Monitoring Committee, headed by the Director of the Office of the Minister of Finance will coordinate and ensure the day-to-day monitoring of the Programme, as well as mobilization of budget support. In this capacity, it will submit Programme status reports to the Bank Group. Concurrently, the Monitoring Commission for the Fiscal Reform Priority Action Plan, chaired by the Secretary of State for the Treasury, will regularly inform all donors involved in financial management on the status of implementation of measures of the said plan. 5.1.2 Disbursements: The UA 5.7 million grant will be disbursed in a single tranche in view of the exceptional nature of the Programme (emergency reforms, short-term Programme, etc.) and the operational impacts of attainment of the completion point of the HIPC Initiative by end-2010 (cf. § 4.3.2 and 4.3.3). At the request of the donee and subject to fulfilment by the donee of the general and specific conditions specified in the grant protocols (cf. § 6.2), the Bank Group will deposit the funds into a special account opened at the BCEAO. 5.1.3 Procurement of goods and services: Considering that the Programme is a general budget support, its implementation does not give rise to direct goods and services procurement issues.

5.1.4 Audits: The special account will be kept in accordance with national legislation and with internationally accepted accounting practices. At the end of the Programme, the special account will be audited by an external auditing firm in accordance with TORs deemed acceptable to the Bank Group. The auditor shall prepare a report for the two grants that finance the Programme; the report will focus on the quality of bookkeeping, the use of the special account, and proper implementation of the Programme. It will identify weaknesses or gaps, and propose corrective measures. The audit report will be communicated to the Bank no later than six months following the end of the fiscal year. Furthermore, the partners will consult with each other on the audit and evaluation of programmes within the framework of the BSCF. The Bank will harmonize the audit TORs with those of other partners.

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5.2 Monitoring and Evaluation Arrangements

5.2.1 Institution in charge: The Emergency Post-Conflict Assistance Monitoring Committee will conduct monitoring-evaluation according to the EFRSP logical framework and matrix of measures. It will transmit the related reports to the Bank Group. Material and skilled human resources will be provided to the Ministry of Finance and its central directorates to perform this task because TFPs contributing to budget support have provided significant international technical assistance. 5.2.2 Monitoring-evaluation of outcomes: In order to monitor and evaluate the measures and outcomes of the EFRSP, a matrix of measures has been prepared on the basis of the conclusions and recommendations of the budgetary evaluation, and the PEMFAR conducted jointly by the ADB, World Bank and European Union. The logical framework will also help to assess the Programme’s outcomes. The Bank Group will monitor the implementation of the EFRSP and the use of grant resources in review missions, in close collaboration with the IMF, World Bank and European Union. At the end of the Programme, a joint completion report will be prepared in collaboration with the Government.

VI. LEGAL DOCUMENTS AND AUTHORITY

6.1 Legal Documents

6.1.1 The legal documents used in this Programme are Grant Protocols. Each protocol (FSF and ADF) will be signed between the stakeholders, the Government and the African Development Fund. 6.2 Conditions Precedent to Bank Group Intervention

6.2.1 The grant resources will be disbursed in a single tranche of UA 5.7 million, comprising UA 4 million from FSF and UA 1.7 million from ADF resources, subject to fulfilment by the donee of the following conditions:

A- Conditions precedent to Board presentation 6.2.2 Based on the dialogue held during the Programme appraisal mission, it was agreed that the Government will implement the following preliminary measures prior to presentation of the Programme to the Boards of Directors of the Bank Group:

(i) Prepare a financial control procedures manual, and provide evidence of its implementation by a Ministerial Order adopting the manual (cf. §4.2.9); and

(ii) Provide training on budget implementation and control procedures for the central directorates of the Ministry of Finance, in particular the DGB and DGT, as well as the DAFs of other Ministries and/or institutions, and provide evidence of validation of the training report by the Minister of Finance (cf. §4.2.9).

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B - Conditions precedent to grant effectiveness 6.2.3 The Grant Protocols shall become effective on the date of signature. C - Condition precedent to disbursement of the single tranche

(i) Provide evidence of opening a special account at the BCEAO into which grant resources for the EFRSP shall be deposited.

6.3 Compliance with Bank Group Policies 6.3.1 The main Bank Group directives used in preparing and appraising the EFRSP are: (i) the operational framework of the Fragile States Facility; (ii) guidelines on budget support loans/grants; (iii) rules governing the preparation of appraisal reports and annotated format; (iv) Bank Group policy on non-concessional debt; and (v) the African Development Bank’s Response to the Financial Crisis in Africa. However, considering that the operation is partly financed with FSF (UA 4 million) and ADF (UA 1.7 million) resources, and given its exceptional nature (cf. § 4.3.1 to 4.3.3), the Boards of Directors will be requested to apply the eligibility criteria for budget support under the Fragile States Facility to the ADF allocation. VII. RISK MANAGEMENT 7.1.1 The main risks likely to affect the implementation of the Programme could stem from the deterioration of the political situation with its resultant institutional instability and economic uncertainty, as well as external shocks ensuing from an unfavourable international economic situation. Furthermore, there is a risk related to the structural weaknesses of the public administration, in particular its capacity to ensure proper implementation of the recommended public financial management reforms. Lastly, fiduciary and operational risks remain relatively high. 7.1.2 Risks related to the political context and economic situation: For almost a decade now, Guinea-Bissau has been experiencing political instability likely to result in a deterioration of public institutions and the social context. Despite this particular context, marked by the sad events of March 2009, the organization of the last general elections raised high hopes regarding the implementation of democratic principles (cf. § 2.2.13 and 3.1.2). The risks of institutional instability should be mitigated by strengthening social dialogue, as underscored by the President of the Republic during his swearing-in ceremony, by promoting political dialogue and improving the functioning of republican institutions. Efforts made by the international community, particularly the United Nations, through its Peace-building Support Office in Guinea-Bissau (UNOGBIS), the African Union and the European Union, could also contribute to mitigating these risks. Regarding the unfavourable international economic situation, such as the food crisis in early 2008 (customs tax freeze) and the consequences of the financial crisis, the Government intends, in the short term, to cushion the exogenous shocks by consolidating and intensifying reforms (cf. § 2.2.3 on the tightening of budgetary control in 2009), as well as mobilizing additional external resources in view of its status as a fragile and post-conflict State. 7.1.3 Risks relating to institutional weaknesses: The capacity to implement the Programme (rate of implementation of measures, level of budget support mobilization, etc.) is a risk factor, due to the structural weaknesses of Guinea-Bissau’s public administration. Indeed, lessons learnt from the experience of operations in Guinea-Bissau show that the capacities of the Government with regard to human, institutional and financial resources for the implementation of

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projects and reforms are weak. To mitigate this risk, the Bank Group has put in place a technical assistance mechanism composed of ten (10) international and local experts specialized in public finance, under the Targeted Support and PARCA projects (cf. Annex 5). Furthermore, the better coordination of these operations with the capacity building projects of other TFPs, such as PARAP of the EU, SPF of the World Bank, and technical support by the French Cooperation Agency, will also contribute to mitigating the said risk. In the long run, ENA, which would be strengthened under of PARCA, would provide human resources to support institutional capacities. 7.1.4 Fiduciary risks: Fiduciary and economic risks remain relatively high due to transition to the WAEMU public financial framework. Therefore, with a transitional period under a hybrid management system, persistence of old practices, through maintaining of inefficient expenditure channels, absence of efficient control of services and continuous practice of DNT, would result in a high risk of implementing a budget without credit authorizations and budget overruns. Measures to mitigate these risks include budgetary reforms initiated since 2008, which should be strengthened and deepened under the EFRSP (mechanism for the control of services provided, limitation of waiver procedures for public expenditure execution, exhaustive quarterly budget status reports, training of public financial managers, etc.) and capacity building for financial services (cf. § 7.1.3). 7.1.5 Operational risks: The rate of project and programme implementation could significantly drop as from 2011 if the completion point is not attained within the specified timeline. This would result in suspension of disbursements for ongoing operations. Close collaboration and monitoring of the programme by TFPs, as well as gradual capacity building for SNFO in conjunction with the Country Programme Office, would significantly reduce the probability of such risk.

III. RECOMMENDATION 8.1 In light of the foregoing, it is recommended that the Boards of Directors should: (i) approve two (2) grants not exceeding UA 5.7 million, and comprising UA 4 million from the Fragile States Facility (FSF) resources and UA 1.7 million from ADF resources, for the Government of Guinea-Bissau to finance the Emergency Fiscal Reform Support Programme (EFRSP), subject to fulfilment of the conditions stipulated in this report; and (ii) as regards the ADF grant, waive the budget support eligibility criteria by authorizing exclusive application of eligibility criteria for the Fragile States Facility to the two grants.

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ANNEXES

1

ANNEX 1

GUINEA-BISSAU: EMERGENCY FISCAL REFORM SUPPORT PROGRAMME (EFRSP)

Appraisal Report

Government’s Development Policy Letter

MINISTRY OF FINANCE ----------

REPUBLIC OF GUINEA-BISSAU Unity – Struggle – Progress

---------- The Minister

----------

Bissau, ……………… Ref./No__________/GMF/2009

To

Mr. Donald KABERUKA President of the African Development Bank (ADB) Tunis, Republic of Tunisia

Subject: DEVELOPMENT POLICY LETTER: ECONOMIC AND GOVERNANCE REFORM SUPPORT PROGRAMME

Mr. President,

1. I have the honour to submit this development policy letter to you to seek support from the African Development Bank (ADB) in the form of a balance of payments support grant under the Economic Reform and Governance Support Programme.

2. This letter, which takes stock of the economic and social situation of Guinea-Bissau in 2009 and presents prospects for 2010, outlines the policies and programmes that the authorities intend to implement under the National Poverty Reduction Strategy Paper (NPRSP).

I. Political and Economic Context

3. The economic and social landscape of Guinea-Bissau was seriously affected by the politico-military conflict that broke out in June 1998, immediately following the integration of the country into WAEMU in May 1997, and lasted till May 1999. This conflict plunged an economy already marked by profound macroeconomic imbalances and dysfunctions in public financial management into recession with a significant socioeconomic impact: a growth rate eroded by political instability (significant decline in GDP per capita) and large segments of the population living below the poverty line. The country was therefore ranked 175th on 177 in the Human Development Index (serious deterioration of basic social services).

4. In fact, the Government of Guinea-Bissau has faced considerable obstacles in redressing the financial situation and rehabilitating the economic fabric. Consequently, in recent years, particularly since 2008, the economy has recorded moderate growth thanks to the

2

restoration of the fundamentals as part of the Emergency Post-Conflict Programme and to credible general elections with the legislative elections at the end of 2008 and presidential elections in 2009. Despite permanent political instability, this raises high hopes of consolidating structural reforms and improving social conditions in our country.

5. It was within this context, marked by the fragility of tools and consensus needed to come out of crisis, that the new Government took office in January 2009 and resolutely undertook to continue to implement reforms aimed at stabilizing the macroeconomic framework, consolidating the bases for growth, and improving access to basic social services in keeping with the NPRSP. The Economic and Governance Reform Support Programme is a follow-up to the support the ADB Group has been providing to Guinea-Bissau to improve public financial management and enhance good governance. In this regard, it is also worth recalling that the Administration Capacity Building Support Project and the Targeted Support are specifically aimed at State financial policy (tightening of budget implementation and control procedures, strengthening of public investment programming system, etc.).

II. Implementation Status of Reforms

6. In early 2008, the Government of Guinea-Bissau concluded a formal agreement with the IMF on an annual programme, supported by an Emergency Post-Conflict Assistance (EPCA). The main objective of this programme, which was extended in 2009, is to achieve economic recovery and consolidate public finance.

Economic growth

7. The global crisis and the political context impacted negatively on the overall economic situation in 2009. Indeed, the drop in world cashew nut prices, the country’s main export product, the decline in remittances by emigrants and the uncertain business climate led to a slowdown in economic growth and intense pressures on major internal and external balances. The GDP growth rate stood at 2.6% in 2009, slightly lower than the 3% projected, compared to 3.3% in 2008. This growth rate was driven mainly by the cashew nut branch, which recorded a good harvest and an increase in the volume of exports, and by the recovery of the public works and civil engineering sector. At the end of 2009, the average inflation rate stood at -1.6% as against 10.4% in 2008, due to falling import prices.

8. The Government’s fiscal policy seeks to consolidate public finances by broadening the tax base and ensuring current expenditure control. Fiscal policy management has translated into better public revenue collection and containment of expenditure within the limits of projections. Total revenue, excluding grants, rose to CFAF 25.8 billion in 2009, that is 135.8% of projections and 98.3% of the 2008 level. However, the increase in tax revenue was not enough to offset low budget support mobilization (50% of the amount pledged and projected), compelling the Government to tighten quantitative public expenditure trend indicators. This stringent management helped to reduce the primary deficit from 8.5% of GDP in 2008 to 6% of GDP in 2009.

Reform programme

9. Regarding structural reforms, the Government, in close collaboration with technical and financial partners, continued to implement measures to modernize the public administration, and particularly to improve public financial management. In this regard, the adaptation of WAEMU directives on harmonization of the financial legal framework

3

to the Guinea-Bissau domestic legal framework is effective, and thus constitutes the framework for the gradual introduction of financial good governance. These are, in particular, legal instruments concerning the organic law on finance laws, general regulations on public accounting and the nomenclature of expenditure supporting documents.

10. With respect to State budgetary nomenclature, the resumption of budgetary codification in database files using SIGFID-GB, a software covering the major functions of public financial management, facilitated the automation of budgetary operations, enhanced the application of budgetary principles and techniques (specialization of votes, budgetary authorization instruments, transparency and trueness of the budget, etc.) and improved the generation of accounting and financial data on budget implementation (production of monthly and detailed statistics on the administrative aspect of expenditure). Concerning administrative reform, a biometric census of civil servants is in its final phase and the establishment of a single card index for the management of public employees will have a significant impact on the budget in the coming years. Lastly, the centralization of all revenues at the Public Treasury and their inclusion in the budget as well as the institutionalization of a single Treasury account were also remarkable achievements in streamlining public financial management. All these reforms contributed in part to the gradual normalization of the budgetary situation and fiscal performance in 2009.

11. Concerning the business climate, the adoption of OHADA Acts, the establishment of the Trade Court, enactment of the new investment code and signing of the public-private partnership contract are factors in boosting economic growth and creating employment. This competitiveness and private sector development component will foster the development of the agricultural and fisheries potential which is a vehicle for stronger growth and food security. In this connection, it is necessary to highlight the important contribution of your Institution to the implementation of the Government’s accelerated growth strategy with the fishing port construction and rice farming and market gardening projects (rehabilitation of irrigation schemes).

12. Some progress was also made in the reform of the security sector with the biometric census, identification of ways of reducing the military wage bill, and effectiveness of technical assistance from the UN specialized agencies and the European Union.

III. Prospects for 2010

Macroeconomic data

13. The Government’s post-crisis programme for 2010 hinges on the progress achieved in 2008 and 2009 and the general will to promote national reconciliation, restore security and revitalize the economy. The Government has reiterated its determination to place good governance in public resource management at the centre of its economic programme. It is determined to combat corruption and fraud at all levels by strengthening the rule of law and restoring an enabling economic and regulatory framework for economic activities.

14. With the prospect of a positive international economic development and expansion of cashew nut production, the real GDP growth rate is expected to stand at 3.5% in 2010 and 4% thereafter. Inflation will be contained, on account of the moderate increase in import prices. Regarding public finance, the objective is to increase tax revenue by 2.7 percentage points of GDP (by eliminating tax exemptions on rice, wheat flour, sugar and building materials and containing primary expenditure within the limits of resources which will increase by 4% of GDP to reflect planned increases in the social sectors).

4

Priority Action Plan

15. To implement the priority action plan, the Government, in collaboration with its traditional development partners, the ADB, World Bank and European Union, commissioned a public expenditure management and financial accountability review (PEMFAR). Preliminary findings proposed urgent medium-term measures. In the short term, these measures concern, in particular, public procurement, improvement of budget preparation and implementation and strengthening of the internal and external control system. The Government undertakes to adopt and implement a Priority Action Plan on the recommendations of the final version of the review report.

16. Budget management and accounting systems will be fully utilized to control and monitor budget implementation, and prepare reports thereon at least once a quarter. To achieve this objective, existing budget implementation procedures will be strengthened and strictly respected, and the use of cash advances reduced.

17. The Government has made efforts to improve revenue collection. In this connection, it has tightened the control of tax exemptions and reinforced customs controls (inspection of external trade flows at the Bissau port, installation of the ASYCUDA ++ software, etc).

18. The Government hopes to attain the completion point of the HIPC Initiative in 2010. To that end, it undertakes to implement the Emergency Post-Conflict Programme satisfactorily and to take necessary measures to obtain the approval of an IMF financial assistance under the Extended Credit Facility (ECF).

Monitoring and Evaluation of the Plan

19. An Inter-Ministerial Committee, chaired by the Minister of Finance, will coordinate the implementation of the Fiscal Reform Priority Action Plan.

20. We hope that the orientations and commitments made by the Government will give an added boost to financial cooperation with the African Development Bank (ADB) and all the other multilateral and bilateral partners. We remain confident that the 2010 budget support grant under the Economic and Governance Reform Support Programme will contribute to the satisfactory implementation of priority actions to consolidate financial stabilization policies and strong economic growth, which is the basis for significant poverty reduction.

Yours sincerely,

Jose Mario VAZ

1

ANNEX 2

GUINEA-BISSAU: EMERGENCY FISCAL REFORM SUPPORT PROG RAMME (EFRSP) Appraisal Report

MATRIX OF MEASURES OF THE PUBLIC FINANCE PRIORITY ACTION PLAN

TIMELINE OBJECTIVES ACTIONS / MEASURES 200

9 2010

2011

INSTITUTIONS IN CHARGE

I. LEGAL AND INSTITUTIONAL FRAMEWORK Adoption of the organic law on finance laws x MF/DGB/DGT Enactment of the organic law on finance laws x Adoption of the Decree to lay down general public accounting rules by the Council of Ministers

x

MF/DGB/DGT

Adoption of the new State budget nomenclature in line with WAEMU directives in 2008 DGB Updating of the Public Accounting System in line with WAEMU directives x DGT Adoption of a legal instrument relating to expenditure supporting documents x DGB Introduction of pre-payment auditing standards in line with WAEMU directives x CF

Align the legal framework with WAEMU (international) standards

Revision of the organic law of the Audit Bench in line with WAEMU directives x MJ/Audit Bench Adoption of legal instruments to set up new DGT structures that reflect WAEMU directives

x x

DGT

Setting up a public accounting service whose functions include regulation x MF/DGT Definition of conditions of intervention of Financial Control in line with WAEMU directives

x

MF/DGB/DGT/DCF

Placing of Financial Control under the direct supervision of the Minister of Finance x Cabinet of MF

Adoption of a new organization chart for Financial Control to decentralize services (pilot ministries: Health and Education) x

Cabinet of MF/DCF

Adoption of a price list DCF Rehabilitation of the Cash Monitoring Committee to monitor the quarterly and monthly cash plan

x

DGT/DGB

Setting up of an SIGFIP management unit (multi-disciplinary team) x DGB

Strengthen the context of management of services involved in the budgetary cycle

Nomination of DAFs on the basis of competence and guarantee of the stability of their career

x

MF/ technical ministries

2

Development of an accounting module for Treasury operations x DGT/DCSI Setting up of the SYGADE software (public debt management) x DGT/DDP/DCSI

Establishment of an interface between SYGADE and SIGFIP x DGT/DDP/DCSI II. BUDGET PREPARATION AND ADOPTION OF FINANCE LAWS

Reproduction of the 2010 budget in SIGFIP – GB according to the new State budget nomenclature

x DGB

Preparation the draft sectoral programmes, including objectives and medium-term expenditure frameworks (MTEF), of the three most important ministries in terms of volume of budgetary allocation

x Ministries of Health, Education and Agriculture

Establishment of the 2011-2013 MTEF in harmony with the NPRSP x DGB/DGP Tabling of the 2010 finance bill before the NA for adoption x PCM/MF/DGB

Improve budgetary predictability and quality of public expenditure

Enactment of the initial 2010 finance law x PR/PCM III. GENERAL STATE BUDGET IMPLEMENTATION AND CONTR OL

Review of legal instruments relating to the payment of revenue of services and autonomous funds and submission of their budgets and quarterly implementation reports to DGB

x

MF/ technical ministries

Redeployment of treasury officers in revenue collection services to DGA (customs) and DGCI (taxation)

x

MF/DGT/DGA/DGCI

Strengthening of the collection of tax arrears totalling CFAF 5 billion through the granting of tax incentives

x DGCI

Enactment of the new investment code that clearly defines tax exemption limits x PCM/MF/DGCI Inventory of administrative revenue to declare and include all revenue in budget estimates

x DGCI

Head count of natural persons and corporate bodies liable to land tax as well as SMEs, self-employed persons and those of the informal sector for other categories of levies and taxes

x

DGCI

Strengthening of DGCI resources to pursue defaulting taxpayers x DGCI Introduction of the SYDONIA ++ software x DGA Auction sale of goods under bond for more than 3 months x DGA

Completeness

Conclusion of a contract with a renowned international company to check export flows prior to loading and import flows after unloading

x MF/DGA

Ceiling of quarterly commitment authorizations (excluding salaries) at 25% of the total budget, excluding for Education and Health

x MFDGB/

Preparation of quarterly analyses of budget implementation (45 days following the end of each quarter) to be transmitted to donors and disseminated to the general

x DGB

3

public Definition of the procedure for exceptional expenditures (DENO) and methods of regularizing them within 30 days

x DGB/DGT

Improvement of the existing double-entry accounting system and establishment of an interface with SIGFIP

x DGT/DCSI

Issuance of a budgetary circular to fix the deadline for closing budgetary operations (commitments, authorizations, cancellation/ reprofiling of funds, etc.)

x DGB/DGT

Strengthen the budget execution monitoring system

Tabling by SIGFIP – GB of the public operations management and the public administrative operations accounts before the Audit Bench for approval Tabling of the settlement bill before the National Assembly for adoption

x x

DGB

Preparation of a procedure manual for Financial Control x Cabinet of MF /DCCF Preparation of a financial procedure manual for users (SIGFIP – CB) x DGB Preparation of a procedure manual for finance inspectorates x IGF Keeping of commitments, authorizations, paid and outstanding 2009 warrant accounts during the presentation of the 2011 budget

x DGB/DGT

Keeping by DAFs of fund and stores accounts x DGT/ technical ministries Recruitment of specialized inspectors and implementation of an annual work programme

x

IGF

Strengthening of the control of services provided by allocating resources to DAF . x MF/DCF

Improve the internal and external control system

Training of DAF on expenditure execution procedures x DGB/technical ministries III. GENERAL STATE BUDGET IMPLEMENTATION AND CONTR OL (CON’T)

Establishment of a single database for salaries and personnel management x DGB/MFPT Launching of biometric census of civil servants and State employees x MFPT

Control the payroll

Layoff of low-level employees identified in 2006 and payment of their allowances x DGB/MFPT Continuation of auditing of outstanding 2000-07 internal public debt initiated in 2008 x MF

Revamp the private sector Clearance of written-down arrears as expected resources are mobilized x MF

V. PUBLIC PROCUREMENT Adoption of the revised executive order enacting the public procurement code in line with WAEMU directives

x

DGCP Improve the transparency of the public contract award system

Setting up of a public procurement regulatory agency in keeping with WAEMU recommendations

x DGCP

* The measures in bold are those included in the Bank programme.

1

ANNEX 3


Appraisal Report

NOTE ON RELATIONS BETWEEN THE IMF AND GUINEA-BISSAU

(ECF and MEFP Preliminary Agreement)

Press Release No. FOR IMMEDIATE RELEASE January 27, 2010

IMF Mission Reaches Preliminary Agreement on Financing for Guinea-Bissau under the ECF3

An International Monetary Fund (IMF) mission led by Mr. Paulo Drummond visited Bissau during January 12-27, 2010, to discuss the government’s medium-term economic program that could be supported by the IMF under the Extended Credit Facility (ECF). The mission met with President Bacai Sanha, Prime Minister Carlos Domingos Gomes, the Minister of Finance. José Mario Vaz, other ministers, the Director of the BCEAO, João Fadia, as well as representatives of the private sector, civil society, and the donor community.

At the conclusion of the visit, the mission issued the following statement:

“Despite the difficult external environment and a challenging political context, Guinea-Bissau made some progress in stabilizing its economy in 2009. Economic growth reached about 3 percent, driven by a favorable cashew harvest and a pick-up in construction activity; inflation slowed down, thanks to lower food and fuel prices, and budgetary stability was regained. Progress on structural reforms accelerated towards the end of last year, with government approval of an action plan for public financial management and enactment of the new investment code”.

“With the objective of consolidating these gains and providing the basis for stronger economic growth and poverty alleviation, the government has defined a medium-term macroeconomic and structural reform program for 2010-2012 for which it is seeking support from the IMF under the ECF. The program focuses on strengthening public finances, by containing the domestic primary budget deficit below 4 percent of GDP per year through 2012, modernizing the public administration, and raising the quality of public services. It also seeks to promote job creation by removing impediments to private sector development and strengthen the provision of financial services.

3 The ECF is a concessional IMF facility for low-income countries. ECF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in the country's Poverty Reduction Strategy Paper. ECF loans carry a zero interest rate until end-2011 and an annual interest rate of no more than 0.5 percent thereafter, and are repayable over 10 years with a 5½ -year grace period on principal payments.

International Monetary Fund Washington, D.C. 20431 USA

2

“The mission was encouraged by progress in preparing public financial management reforms, and by the determination of the government to start moving the reform strategies for the civil service and the military and security sectors into concrete plans of action. The mission reached preliminary agreement with the government on the policies and targets to be monitored under the program, and emphasized that decisive implementation of the reforms will be critical to their success.

“The IMF Executive Board could consider the authorities’ request for an ECF by end-March 2010”.

ANNEX 4 Page 1/5


Appraisal Report

MAJOR MACROECONOMIC AND FINANCIAL INDICATOR TRENDS AND PROSPECTS

ANNEX 4 Page 2/5

GUINEA-BISSAU: EMERGENCY FISCAL REFORM SUPPORT

PROGRAMME (EFRSP) Appraisal Report

Table1.Guinea-Bissau: Selected Economic and Financial Indicators. 2008-12 2008 2009 2010 2011 2012 Est. Proj

(Annual percentage change. unless otherwise indicated)

National accounts and prices Real GDP at market prices 3.5 3.0 3.5 4.3 4.5 Real GDP per capita 1.3 0.8 0.5 1.3 1.5 GDP deflator 10.5 1.1 2.4 2.1 2.0 Consumer price index (annual average) 10.4 1.2 2.5 2.5 2.5 External sector Exports. f.o.b. (Based on US $ values) 61.7 -9.6 13.6 7.5 10.6 Imports. f.o.b. (based on US $ values) 49.4 10.3 10.0 9.7 6.1 Export volume 17.0 25.9 4.3 5.0 5.1 Import volume 14.2 33.1 4.1 8.2 4.8 Terms of trade (deterioration = -) 2.3 -12.7 5.6 1.1 -1.0 Real effective exchange rate (depreciation = -) 7.1 -1.3 1.4 1.2 0.9 Nomination exchange rate (CFAF par US$; average) 478.6 445.7 477.6 465.6 467.8 Government finances Domestic revenue (excluding grants) 30.0 2.3 21.5 2.5 6.6 Total expenditure 9.2 12.1 12.1 0.0 5.9 Current primary expenditure 3.7 0.8 13.2 6.2 6.6 Capital expenditure 4 13.9 40.7 12.5 1.0 5.3

Money and credit 1 Credit to government (net) 5.5 -6.3 …. …. …. Credit to the rest of the economy 3.0 2.6 …. …. …. Board money 20.7 8.5 …. …. …. Velocity (GDP/broad money) 4.5 4.4 …. …. …. Investment and savings

(Percent of GDP. unless otherwise indicated)

Gross investment 13.4 15.9 16.6 16.1 16.0 Of which: government investment 6.5 9.6 10.0 9.5 9.5 Gross domestic savings -1.6 -4.0 -2.7 3.2 0.2 Of which: government savings -11.8 -12.0 -10.7 -9.0 -8.6 Gross national savings 7.5 6.2 6.7 11.0 8.7 Government finances Budgetary revenue 9.1 8.9 10.2 9.9 9.9 Total domestic primary expenditure 12.3 11.8 14.1 13.6 13.5 Domestic primary balance -3.2 -2.9 -3.9 -3.7 -3.6 Overall balance (commitment basis) Including grants -3.8 1.7 -0.8 -0.4 -0.6 Excluding grants -11.9 -13.6 -13.6 -12.5 -12.4 External current account (Including official current transfers) 1.0 -2.2 -2.8 -3.8 -3.5 Excluding official transfers -5.4 10.1 -9.0 -0.7 -9.1 Net present value of external debt/exports of goods and non-factor Services (percent) 3 348.4 368.2 117.9 119.3 117.7 Nominal stock of external debt. including arrears 2 307.3 278.8 112.7 103.5 91.4 Of which external debt. including arrears 243.7 226.1 65.8 62.1 58.5 Of which. arrears 5 89.7 87.1 19.0 18.0 17.0 Memorandum items (US$ millions, unless otherwise indicated) Current account balance (including official current transfers) 8.5 -18.1 -25.6 -36.1 -35.6 Overall balance of payments -16.9 -26.5 -713.7 -2.1 -3.0 Nominal GOP at market prices (CFAF billions) 380.1 305.8 419.5 446.9 476.3 Nominal stock of external arrears. end of period 382.8 402.1 92.8 92.8 92.8

Sources: Guinea-Bissau authorities and IMF staff estimates and projections. 1- Change in percent of beginning-of-period stock of broad money. 2- Values in 2010 and thereafter reflect assumed impact of HIPC and MDRI debt relief. 3- NPV as in the preliminary December 2009 DSA (see background note) 4- Project grants in 2009 include new public investments externally financed such as the new government offices complex and two hospitals. 5- Exclude domestic arrears estimated to reach about 45 percent of GDP at end-2009

ANNEX 4 Page 3/5



Table 2: Guinea—Bissau: Central Government Operations. 2008—12

(CFAF billions) 2008 2009 2010 2011 2012 Prog Proj

Revenue and grants

65.3 113.5 95.9 96.7 98.2 103.3

Revenue 34.6 29.9 35.4 43.0 44.1 47.0 Tax revenue 20.9 19.0 26.6 32.1 35.3 38.8

Non-tax revenue 13.7 10.9 8.8 12.9 11.7 12.1 Grants 30.7 83.6 60.5 53.8 54.1 56.3 Budget support 1 2 16.4 22.0 28.5 20.5 21.5 21.5 Project grants 3 14.4 61.6 32.0 30.6 32.6 34.8

Total expenditure 79.7 120.3 89.3 100.1 100.1 106.0 Current expenditure 52.4 51.6 50.9 57.3 55.7 59.9

Wages and salaries 20.3 22.0 20.5 20.7 22.5 23.7 Goods and services 8.2 7.8 6.4 10.2 11.1 12.3 Transfers 10.9 11.4 11.0 12.7 13.3 14.0

Other current expenditures 5.7 4.3 7.5 7.8 7.1 7.5 Scheduled interest 7.3 6.1 5.5 5.4 1.8 1.8 Domestic interest 1.3 1.1 0.6 0.6 0.6 0.6 External interest 6.0 5.0 4.9 4.8 1.1 1.1 Capital expenditure and net lending 27.3 68.7 38.4 43.3 43.7 46.0 Public investment program 24.7 67.7 38.1 42.0 42.3 44.6

Domestically financed 1.2 1.0 1.0 6.6 8.2 8.4 Foreign financed 23.5 66.7 37.1 35.4 37.7 40.2 Other capital expenditure 2.6 1.1 0.3 1.2 1.3 1.4 Domestically financed 0.4 1.1 0.3 1.2 1.3 1.4 Foreign financed (including DRRP) 2.2 0.0 0.0 0.0 0.0 0.0 Overall balance. including grants (commitment) -14.4 -6.8 6.5 -3.4 -1.9 -2.7 Overall balance. excluding grants (commitment) -45.1 -90.4 -54.0 -57.1 -56.0 -59.0 Net domestic arrears 4.8 -2.0 -4.9 -18.6 -1.5 -1.5 Accumulation current year 10.7 0.0 0.0 0.0 0.0 0.0 Payment previous years -5.9 -2.0 -4.9 -19.1 -1.5 -1.5

External interest arrears current year 5.2 4.3 4.4 4.3 0.0 0.0 Float and statistical discrepancies -0.4 0.0 0.0 0.0 0.0 0.0

Overall balance. including grants (cash) -4.9 -4.6 6.1 -18.2 -3.4 -4.2 Financing 4.9 4.6 -6.1 18.2 3.4 4.2

Domestic financing -4.6 -2.4 -10.5 11.1 -1.3 -0.5 SDR allocation … …. 7.5 Bank financing -4.6 -2.4 -18.0 11.1 -1.3 -0.5

Of which: domestic banks -5.3 -2.0 -2.5 0.0 0.0 0.0 BCEAO 0.7 -0.4 -8.0 8.0 0.0 0.0

Additional deposits/float …. … 0.0 -4.5 -1.3 -0.5 SDR allocation (deposit 09/withdrawal 10) … … -7.5 7.5 …. ….

Of which: capital contribution WAEMU -2.8 Non-bank financing 0.0 0.0 0.0 0.0 0.0 0.0 Foreign financing( Net) 9.5 4.1 3.8 3.5 1.2 1.2 Disbursements 11.4 5.1 5.1 4.7 5.0 5.4 Projects 11.4 5.1 5.1 4.7 5.0 5.4

Amortization (scheduled and arrears) -12.8 -11.0 -10.9 -329.0 -3.9 -4.2 External arrears 6.0 2.1 3.9 1.0 0.0 0.0 Debt relief 4.9 8.0 5.8 326.9 0.0 0.0

Gross financing gap (+ = financing needs) 4 0.0 2.8 0.6 3.6 3.5 3.5 Domestic primary balance

-12.1 -17.7 -11.4 -15.0 -15.8 -15.6

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

1- in 2009 CFAF 5.2 billion( Euro 8 million) of V-Flex 2009 from the EU for payment of 2008 arrears 2- In 2010 includes the EU V-Flex 3- Project grants in 2009 include new public investments externally financed 4- Assumed to be filled with IMF resources and additional donor support

ANNEX 4 Page 4/5



Table 3: Guinea-Bissau: Central Government Operations. 2008 - 12 (concluded) (Percent of GDP)

2008 2009

Prog Prel

2010 Proj. 2011 Proj.

2012 Proj.

Revenue and grants 17.2 28.8 24.2 23.1 22.0 21.7 Revenue 9.1 7.6 8.9 10.2 9.9 9.9 Tax revenue 5.5 4.8 6.7 7.2 7.2 7.3 Non-tax revenue 3.6 2.8 2.2 3.1 2.6 2.6 Grants 8.1 21.2 15.3 12.8 12.1 11.8 Budget support 4.3 5.6 7.2 5.5 4.8 4.5 Project grants 1 3.8 15.6 8.1 7.3 7.3 7.3 Expenditure

21.0 30.5 22.6 23.9 22.4 22.3

Current expenditure 13.8 13.1 12.9 13.6 12.6 12.6 Of which: wages and salaries 5.3 5.6 5.2 4.9 4.9 4.9

goods and services 2.2 2.2 1.6 2.4 2.4 2.4 transfers 2.9 2.9 2.8 3.0 3.0 3.0

other current expenditures 1.5 1.1 1.9 1.9 1.9 1.9 interest 1.9 1.5 1.4 1.3 0.4 0.4 Capital expenditure and net lending 7.2 17.4 9.7 10.3 9.8 9.7 Public investment program 6.5 17.2 9.6 10.0 9.5 9.4 Other capital expenditure

0.7 0.3 0.1 0.3 0.3 0.3

Overall balance. including grants (commitment) -3.8 -1.7 -1.7 -0.8 -0.4 -0.6 Overall balance. excluding grants (commitment) -11.9 -22.9 -13.6 -13.6 -12.5 -12.4 Overall balance. including grants (cash) -1.3 -1.2 1.5 -4.3 -0.8 -0.9 Financing

1.3 1.2 -1.5 4.3 0.8 0.9

Domestic financing -1.2 -0.6 -2.7 2.6 -0.3 -0.1 Foreign financing (net) 2.5 1.0 1.0 0.8 0.3 0.3 Of which: external arrears 1.6 0.5 1.0 0.2 0.0 0.0 debt relief 1.3 2.0 1.05 77.9 0.0 0.0

project and program loans 3.0 1.3 1.3 1.1 1.1 1.1 Gross financing gap (+ = financing needs) 0.0 0.7 0.1 0.9 0.8 0.7 Domestic primary balance

-3.2 -4.5 -2.9 -3.9 -3.7 -3.6

Sources: Guinea-Bissau authorities and IMF staff estimates and projections. 1- Project grants in 2009 includes new public investments externally financed such as the new government offices Complex and two Hospitals

ANNEX 4 Page 5/5

GUINEA-BISSAU: EMERGENCY FISCAL REFORM SUPPORT PROG RAMME (EFRSP)

Appraisal Report Table 4: Guinea-Bissau: Balance of Payments. 2008 - 12

2008 2009 2010 2011 2012 Projections Goods and services -30.9 -49.0 -51.4 -57.3 -57.9 Goods -14.9 -28.9 -29.3 -33.5 -33.0

Exports. f.o.b 52.9 51.2 56.7 61.3 68.3 Of which: cashew nuts 51.3 49.1 54.5 58.6 65.0

Imports fob. -67.8 -80.2 86.0 -94.7 -101.3 Of which: food products -21.7 -25.6 -25.2 -27.4 -28.6

petroleum products -16.6 -19.7 -23.2 -26.3 -28.6 other -29.5 -34.9 -37.6 -42.0 -44.1

Services (net) -15.9 -20.1 -22.1 -23.9 -24.9 Credit 19.1 26.1 24.8 27.1 28.9

Debit -35.0 -46.2 -46.9 -50.9 -53.8 Income (interest scheduled) -6.0 -4.9 -4.8 -1.1 -1.1 Current transfers (net) 40.7 45.3 44.2 41.6 42.2 Official 24.3 31.5 29.6 26.4 26.4

Of which: balance of payments support grants 16.4 28.5 23.1 21.5 21.5 EU fishing compensation 7.9 3.0 6.5 4.9 4.9

Private 16.4 28.5 23.1 21.5 21.5 Of which: remittances 14.8 11.0 11.4 11.8 12.2

license fees 1.4 2.6 3.0 3.2 3.4 Current account Including official transfers 3.8 -8.6 -11.9 -16.9 -16.8 Excluding official transfers -20.5 -40.1 -41.5 -43.3 -43.2 Excluding official transfers and interest payments -14.4 -35.2 -36.8 -42.2 -42.1 Capital and financial balance -16.4 -2.6 -324.0 11.2 9.7

Capital account2 16.6 35.0 33.5 35.8 38.1 Financial account -33.0 -37.6 -357.4 -24.5 -28.4

Official medium- and long-term disbursements 11.4 12.6 4.7 5.0 5.4 SDR allocation 0.0 9.1 0.0 0.0 0.0

Projects loan 11.4 5.1 4.7 5.0 5.4 Scheduled amortization -12.8 -10.9 -329.1 -3.9 -4.2 Treasury bills and regional financing 0.0 0.0 0.0 0.0 0.0 Commercial bank net foreign assets -0.9 -0.3 -0.3 -0.4 -0.5 Private net foreign assets and errors and omissions -25.6 -33.0 -25.4 -20.6 -23.5

Overall balance -7.5 -12.7 -332.3 -1.0 -1.4 Financing 7.5 12.7 332.3 1.0 1.4 Net foreign assets (increase -) -8.6 -2.0 -3.6 -3.9 -4.2 Of which: net IMF credits 1.6 0.6 2.9 3.5 3.5

purchases and loans 2.5 1.3 7.5 3.5 3.5 repurchases and repayments 0.9 0.7 4.6 0.0 0.0

Debt relief 4.9 5.8 326.9 0.0 0.0 Change in debt-service arrears (decrease = -) 11.2 8.3 5.3 0.0 0.0 Memorandum items

Export volume of goods (annual percentage change) 17.0 25.9 4.3 5.0 5.1 Import volume of goods (annual percentage change) 14.2 33.1 4.1 8.2 4.8

Imputed International Reserves (US$ millions)4 149.2 143.4 157.8 173.1 183.7

As percent of broad money 79.9 75.6 76.1 78.6 78.8 WAEMU gross official reserves(billions of US$) 10.5 …. ….. ….. ….. Percent of broad money 56.0 …. …. ….. ….. Months of WAEMU imports of goods and non-factor services

6.4 …. …. …. …..

Scheduled debt service Percent of exports and service credits 19.4 13.0 8.6 5.6 5.4

Percent of total government revenue 40.3 28.3 16.4 11.3 11.3 Current account balance (percent of GDP)

Including official transfers 1.0 -2.2 -2.8 -3.8 -3.5 Excluding official transfers -5.4 -10.1 -9.9 -9.7 -9.1

Overall balance (percent of GDP) -2.0 -3.2 -1.3 -0.2 -0.3 Gross financing gap (percent of GDP) 0.0 0.2 0.9 1.1 1.2

Sources: BCEAO and IMF staff estimates and projections. 1- Includes food aid and technical assistance to projects. 2- Excludes the financing gap which BCEAO includes in the capital account. 3- Assumed to be filled with IMF resources and additional donor support 4 At program exchange rates

ANNEX 5 Page 1/2

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GUINEA-BISSAU: EMERGENCY FISCAL REFORM SUPPORT PROG RAMME (EFRSP)

Appraisal Report AREAS OF INTERVENTION OF BANK GROUP CAPACITY BUILDI NG PROJECTS

SECTORS AREAS DURATION

PUBLIC ADMINISTRATION CAPACITY BUILDING SUPPORT PRO JECT

SNDI service contract issued by SIGFIP for the training of nationals in the management of SIGFIP software (development, database management, system and networks management, etc.)

2010-2011 GENERAL DIRECTORATE OF THE BUDGET Ad hoc technical assistance:

- Protection of the SIGFIP software architectural environment (back-up system) - Preparation of a budget implementation procedure manual for DAF of technical ministries

1 public finance specialist to put in place medium-term expenditure frameworks (sectoral MTEFs) 2010-2011 GENERAL DIRECTORATE OF PLANNING 1 project and programme management and monitoring expert 2010-2011

GENERAL DIRECTORATE OF THE TREASURY

1 team of 2-3 data processing specialists to operate a budgetary accounting software package 2010

GENERAL DIRECTORATE OF PUBLIC PROCUREMENT

1 team of 2-3 data processing specialists to operate a public procurement management software 2011

GENERAL DIRECTORATE OF CONTRIBUTIONS AND TAXATION

Ad hoc technical assistance: - Institution of a unique VAT rate - Strengthening of the taxpayers registration system - Putting in place of a framework to encourage the adhesion of taxpayers to the tax return system

2010

ANNEX 5 Page 2/2

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TARGETED SUPPORT

OFFICE OF MEPIR 1 macroeconomist to act as Adviser to the Minister of MEPIR and coordinator of the teams in charge of strategic planning, budgetary control and coordination of public development assistance

2010-2011

1 macroeconomist responsible for the development and monitoring-evaluation of poverty reduction programmes, the public investment programme and multi-year action plans of the NPRSP

2010-2011

1 expert specialized in the mobilization, coordination and monitoring of the efficiency of foreign aid 2010-2011 GENERAL DIRECTORATE OF PLANNING

Ad hoc technical assistance: • 1 non-resident expert: training in resources negotiation and mobilization techniques • 1 non-resident expert: monitoring of the tripartite implementation of the Paris Declaration • non-resident experts for national capacity building:

- monitoring-evaluation of projects/programmes at the central and regional levels - project and programme implementation monitoring information system - information system for the management and technical monitoring of foreign aid

2010-2011

NATIONAL INSTITUTE OF STATISTICS

1 statistician to put in place an information system for monitoring poverty indicators, MDGs and HDI 2010-2011

GENERAL DIRECTORATE OF THE BUDGET

1 public finance specialist to put in place a medium-term expenditure framework (global MTEF) 2010-2011

PUBLIC DEBT DIRECTORATE

UNCTAD debt management service contract 2010