58296 v1 GUINEA-BISSAU COUNTRY ECONOMIC MEMORANDUM A Fresh Start SUMMARY GUINEA-BISSAU COUNTRY ECONOMIC MEMORANDUM A Fresh Start SUMMARY ii GUINEA-BISSAU: COUNTRY ECONOMIC MEMORANDUM SUMMARY This is a summary of the World Bank Group’s 2015 Country Economic Memorandum, available at http://www.worldbank.org/en/country/guineabissau Contents FOREWORD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 GROWTH AND POVERTY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Recent economic developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 FRAGILITY AND STATE BUILDING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 PRIORITY #1: STRENGTHEN THE PUBLIC SECTOR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Priority #1.1: Pay public wages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Priority #1.2: Strengthen public financial management.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Priority #1.3: Increase the efficiency and impact of the civil service.. . . . . . . . . . . . . . . . . . . . . . . . 13 Priority #1.4: Mobilize additional fiscal revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 PRIORITY #2: IMPROVE THE PROVISION OF BASIC PUBLIC SERVICES.. . . . . . . . . . . . . . . . . . . . . 17 Priority #2.1: Enhance health and education outcomes.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Priority #2.2: Implement social assistance programs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Priority #2.3: Improve access to affordable electricity and potable water.. . . . . . . . . . . . . . . . . . 19 PRIORITY #3: SUPPORT THE REVIVAL OF THE PRODUCTIVE SECTORS.. . . . . . . . . . . . . . . . . . . . 22 Priority #3.1: Enhance the potential of the cashew sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Priority #3.2: Support the production of rice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Priority #3.3: Promote sustainable fisheries development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Priority #3.4: Prepare for the development of extractive industries.. . . . . . . . . . . . . . . . . . . . . . . . 25 Priority #3.5: Preserve the country’s natural wealth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 PRIORITY #4: FOSTER PRIVATE INVESTMENT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Priority #4.1: Improve the port. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Priority #4.2: Improve the business environment, including roads and ICT.. . . . . . . . . . . . . . . . . 29 ACKNOWLEDGMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Foreword G uinea-Bissau is a country with enormous potential. It is a wealthy country. It is rich in natural resources and its tremendous biodiversity is unique. It is the fifth largest exporter of cashew nuts globally and the quality of Bissau-Guinean cashew is world class. Guinea-Bissau also has a comparative advantage in rice production and may become a net rice exporter once again. Finally, Guinea-Bissau is rich in its people whose ingenuity, perseverance, and resilience have been tested frequently, in times of war, hunger, and crisis. Yet it is one of the few African countries where poverty appeared to be increasing following many years of political instability. Guinea-Bissau is once again emerging from a period of political instability. With a new democratic and inclusive government in place, and political stability being restored, the signs for a less fragile and more prosperous future appear promising. This will be a period of progress in Guinea-Bissau. There is opportunity for a fresh start—as captured by the Créole motto Terra Ranca! Guinea-Bissau’s great potential has so far barely translated into better livelihoods for its population. How can the country’s wealth be harnessed for the good of all Bissau-Guineans? How can high rates of poverty be reduced? How can incomes be raised, including for the poorest and most vulnerable? How can Guinea-Bissau building on its rich biodiversity become a prosperous country? These are some of the questions that the World Bank Group’s 2015 Country Economic Memorandum discusses in this thorough analysis of the constraints to shared growth. According to the Country Economic Memorandum, the key priorities for Guinea-Bissau to emerge as a stable and prosperous country are the following: Strengthening the public sector, including the timely payment of public wages, investing in public financial management, increasing the efficiency of the civil service, and mobilizing additional fiscal revenue. Improving the provision of basic public services, including in health and education, electricity and water, and through social assistance pro- grams. Supporting the revival of the productive sectors, including cashew, rice, fisheries, and extrac- tive industries, while carefully managing the natural resource wealth. Fostering private investment, focusing on the port, the investment climate, roads, Information and Communications Technologies (ICT), and others. Finally, climate change adds extra incentive to protect the environment. Decisive and well-coordinated efforts in these areas can turn the vicious cycle of fragility, anemic growth, and poverty, into a virtuous one, unlocking the tremendous potential of Guinea-Bissau for the benefit of all Bissau-Guineans, especially its women and youth. Vera Songwe Country Director  1 Introduction G uinea-Bissau has suffered from continuous political many Africans, and over the past few decades growth has instability and the absence of well-functioning resulted in a considerable reduction in poverty (Figure 2). institutions for more than two decades has made A fresh start—as captured by the Créole motto, Terra it one of the poorest and most fragile countries in Ranca—holds the promise of bringing growth and pros- the world. Guinea-Bissau has faced much adversity in the perity to Guinea-Bissau as well. past. Its struggle for independence was one of the earli- Fragility will continue to frame Guinea-Bissau’s est, longest, and bloodiest in Africa. Once independence development trajectory, but it can be overcome. The was won in 1974, building a viable and prosperous state World Bank’s 2011 World Development Report defines presented many challenges: there had been little effort fragility as a period ‘when states or institutions lack the to develop either infrastructure or institutions during capacity, accountability, or legitimacy to mediate rela- colonial times; and rising ethnic tensions resulted in civil tions between citizen groups and between citizens and war in 1998, taking a toll on human lives and however the state, making them vulnerable to violence.’ Indeed, little physical assets existed. After decades of turmoil and mediating between competing interests to advance instability, a period of calm and progress evolved in 2009. the greater good is the core responsibility of govern- A military coup in April 2012 interrupted it. A fresh start ment. Defining and upholding the rule of law ensures a is needed to alter the dynamics that kept Guinea-Bissau level playing field for all interactions, including business poor. In 2013, Gross National Income per capita was US$590. Average economic growth barely kept pace with population growth. In 2010, poverty at the national poverty line of US$2 a day was 70 percent; extreme poverty at US$1 a day was 33 percent. These numbers have increased from their 2002 levels—and they are estimated to have increased further since 2010. It is time to make a fresh start and turn the page on anemic growth and poverty. Guinea-Bissau’s elections of May and June 2014 are described by many observers as the freest and fairest in the country’s history. Voter regis- tration and turnout were at record-levels. The conditions for progress and stability are favorable. For example, Cabo Verde, following a joint struggle for independence with Guinea-Bissau, has shot ahead, making steady progress to the point where income per capita is now five times higher than in Guinea-Bissau (Figure 1). Since 2007, Cabo Verde is no longer regarded as a Least Developed Country. Today, success stories from Sub-Saharan Africa abound. The region is currently among the most dynamic ones in the world, which has resulted in better lives for 2 GUINEA-BISSAU: COUNTRY ECONOMIC MEMORANDUM SUMMARY FIGURE 1: Guinea-Bissau has been stagnating while FIGURE 2: Poverty has been falling in Sub-Saharan Cabo Verde has been transformed Africa. (GNI per capita, US$, Purchasing Power Parity (PPP)) (poverty at US$ 1.25 PPP, millions of poor and poverty headcount, Sub-Saharan Africa) Cabo Verde Guinea Bissau millions of poor poverty headcount poverty headcount (US$ `.25, PPP) in % of pop. 6000 450 70 400 5000 60 Graduation from 350 UN list of Least 50 4000 Developed 300 millions of poor Countries (2007) 250 40 3000 200 30 Joint independence 2000 following a long and 150 bloody struggle 20 Civil War 100 1000 10 Stagnation 50 0 0 0 1974 1984 1994 2004 1981 1990 1999 2008 Source: World Development Indicators and World Bank staff. Source: World Bank Poverty & Equity Databank and PovcalNet. transactions: it is the basis for fair competition to ensure Focusing on (i) strengthening the public sector, the most efficient allocation of resources, enhancing (ii) improving the provision of public services, and (iii) value for money for society as a whole. Where even com- unleashing the potential of the private sector are crucial petitive markets fail, governments enhance the nation’s for a fresh start to restore growth, a driver of poverty welfare by levying taxes to provide public goods and ser- reduction and greater prosperity. Jointly, they will sup- vices. In doing so, governments should focus especially port the progress of state-building, by strengthening the on those who are economically most disadvantaged: the social compact between the government and citizens. country’s poor. Strong governance and private enterprise Competitive private enterprises will create jobs and are thus mutually reinforcing and jointly pave the way for pay taxes to a government that in turn delivers public growth, poverty reduction, and shared prosperity. services. A more effective government—competently The newly elected government has already made mediating between citizens based on the rule of law and significant efforts to enhance its legitimacy. Increasing enhancing public welfare—will be in a better position government capacity and accountability will be vital next to insulate itself from competing factions pursing their steps. The government was formed on an inclusive prin- interests at the expense of societies’. Leveraging the ciple, with one-third of the cabinet made up of minority support of development partners—while investing in its parties. This enhances the government’s legitimacy as it own capacity to deliver public services—the government is representative of a broad cross-section of the popula- should focus on the key constraints to private enterprise tion. Decisive steps to pay public wages, keep schools to foster the conditions for growth. Supporting the open, and improve access to much needed water and productive sector and improving governance can be energy services, have shown that the government is mutually reinforcing: rising incomes empower citizens to committed to its mandate of addressing the population’s hold government accountable and demand better gover- needs. Continued efforts to sustain and further enhance nance, while improved public policies play a crucial role the government’s legitimacy will be a top priority. It will for a functioning market economy. Guinea-Bissau started be further enhanced by making the government more to make headway in 2009–12. Reviving and building on accountable, and by enhancing its capacity to deliver these achievements will lead the way out of fragility and public goods and services. poverty, moving toward a brighter future.  3 Growth and poverty is thus a close connection between poverty and farm Overview gate prices and production levels. Since Guinea-Bissau Guinea-Bissau is a rural economy, almost entirely depen- is largely an agrarian society, poverty is relatively evenly dent on a single cash crop: cashew. It is the main source spread throughout the country, although it is somewhat of income for most of the country’s poor. Cashew nuts are lower in the capital, Bissau (Figure 3). Guinea-Bissau’s main export, accounting for 85 to 90 per- Poverty reduction has been hampered by low cent of the country’s total exports. The vast majority of growth, averaging 3.1 percent over the past 10 years the cashew crop is produced by small farmers, three- (Figure 4). This is just over half the growth performance quarters of whom are poor, and virtually all small farmers of Sub-Saharan Africa, at an average 5 percent. The are engaged in growing at least some cashew. There economy is dominated by agriculture, which includes FIGURE 3: Poverty is relatively evenly spread across Guinea-Bissau, albeit somewhat concentrated in the north (extreme poverty headcount ratios at US$1/day (PPP)) (.5,.6] (.4,.5] (.3,.4] (.2,.3] [.1,.2] Source: J. Montalvão., M. Hanusch, and J. Baez. 2014. ‘Mapping Poverty in Guinea-Bissau’ (draft), based on World Bank staff calculations and poverty data from the census (2009) and ILAP II (2010). 4 GUINEA-BISSAU: COUNTRY ECONOMIC MEMORANDUM SUMMARY FIGURE 4: Agriculture and services have been driving FIGURE 5: The primary sector dominates economic growth production (real GDP growth and its sectoral contributions) (percent of nominal GDP in 2013) 10 Agriculture and other primary Primary sector Industry and other secondary Agriculture, fishing and 8 Services forestry Real GDP growth Secondary sector 6 Industry (incl. water & electricity) 4 Construction Tertiary sector (services) 2 Commerce, restaurants, & hotels 0 Public administration Transport and –2 communications Banks, insurance & other –4 services 2004 2006 2008 2010 2012 2014e 0 5 10 15 20 25 30 35 40 45 50 Source: INEC, IMF, and World Bank. Source: INEC, IMF, and World Bank. Note: Contributions to GDP growth (bars); real GDP growth (line). cashew cultivation but also a few other activities, includ- While productivity growth has been relatively low and ing rice production and horticulture. In fact, rice is the fragile, the demographic structure of the country resulted main staple grain and was, for a time, an export product in a modest demographic dividend as the working age of Guinea-Bissau. Since the mid-90s, however, favor- population grew, relative to dependents. However, at an able cashew prices led many farmers to disregard rice, average 2.2 percent, overall population growth over the and its more intensive labor requirements, in favor of past 10 years has only been 0.9 percentage points below cashew. Rice still accounts for nearly two-thirds of the average GDP growth, and accordingly GDP per capita grain production in the country and three-quarters of has only grown by about 0.4 percent, symptomatic of a consumption. However, all locally grown rice is now stagnating economy. consumed domestically and primarily in rural areas, while The balance of payments is dominated by cashew, urban residents depend on imports. Fishing is relatively on the export side, and food and fuel, among imports. underdeveloped in Guinea-Bissau, although foreign ves- The economy is open, with exports and imports by land sels catch and export substantial amounts. Agriculture and sea amounting to more than 70 percent of GDP; and other activities in the primary sector account for over however, openness on the import side reflects necessity 40 percent of gross domestic product (GDP) (Figure 5), as much as policy. Guinea-Bissau has one major export, which is high by regional standards. Due to the signifi- cashew nuts, and one main destination, India, where the cant share of agriculture in GDP, the sector has also been raw nuts are further processed for local consumption and a main determinant of growth performance, and it is the re-exported to other Asian and/or developed countries. main source of employment in Guinea-Bissau, employing Shocks to cashew, rice and oil prices have a considerable about 80 percent of workers. effect on the current account balance. More importantly, GDP per capita has stagnated, partly due to weak terms-of-trade and climate shocks can quickly translate productivity growth and moderate population growth. into rising poverty and food insecurity; in the event of an Guinea-Bissau has yet to experience a green revolu- adverse shock to cashew prices, poor farmers struggle tion like those having spurred development in other to muster the necessary resources—through cash or regions—notably in East Asia—and accordingly pro- barter—to purchase rice. Rice production was severely ductivity gains in agriculture, the engine of economic reduced in 2014 due to the late onset of the rainy season. growth in the country, have been modest. Commerce, Guinea-Bissau mostly imports fuel and food— the two another major sector in Guinea-Bissau, tends to be being equivalent to about 60 percent of total imports, small-scale with little potential for productivity gains. as well as construction material (e.g., cement) and GROWTH AND POVERTY 5 FIGURE 6: ODA remains the most important financial FIGURE 7: Stronger institutions are associated with inflow in Guinea-Bissau; it plummeted in 2012 in more ODA response to the coup (CPIA score and ODA per capita) (percent of GDP) Net ODA received 20 Net FDI inflows 180 18 Remittances 160 16 140 14 120 ODA per capita 12 100 10 80 8 60 6 GNB 4 40 2 20 0 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 1 2 2 3 3 4 4 5 5 –2 CPIA Source: World Development Indicators. Source: World Development Indicators. Note: The Country Policy and Institutional Assessment (CPIA) is a World Bank index measuring the institutional strength of developing countries. manufactured goods, especially cars. Foreign Direct (Figure 9), reflecting higher wages in their host countries. Investment (FDI) has been relatively low, at about 2 per- Remittances support households and evidence is also cent of GDP over the past 10 years. mounting that remittances are invested in small family Official Development Assistance (ODA) makes a criti- businesses. This is especially the case in countries with cal contribution to supporting the state budget. In 2011, large informal economies and shallow banking systems, Guinea-Bissau ranked 20th among the world’s most aid- as in Guinea-Bissau. Remittances are thus likely to make a dependent countries. Domestic revenues for the period contribution to consumption and poverty reduction, but 2007–2012—mostly financed by grants—were lower than also to private enterprise. the West African average and those in the rest of the Inflation has been relatively low, partly due to sub-region. Grants to Guinea-Bissau made up almost Guinea-Bissau’s membership in the CFA franc zone. 10 percent of GDP in 2012. However, declines in external By joining the West African Economic and Monetary financing owing to the withdrawal of aid by many donors Union (WAEMU) and the CFAF zone, the Bissau-Guinean in 2012 and 2013 following the political crisis of 2012 led authorities effectively adopted a set of modern institu- to a reduction in ODA (Figure 6)—it is likely to pick up tions to conduct monetary and exchange rate policy. At again following the recent restoration of constitutional its center is the regional Central Bank of West African order. Most donor organizations allocate more aid ODA States (BCEAO, Banque Centrale des Etats de l’Afrique to countries with stronger institutions (Figure 7). Decisive de l’Ouest), which has a long track record of exercising a improvements to Guinea-Bissau’s governance arrange- cautious regional-based monetary policy focused mainly ments will likely translate into a higher ODA allocation. on consistency with a peg to the euro. For Guinea-Bissau, Remittances support household budgets. Guinea- then, monetary financing of the fiscal deficit is all but Bissau’s diaspora is large and mostly concentrated precluded. The result has been low and broadly stable in Portugal, Senegal, and The Gambia (Figure 8). inflation, although Guinea-Bissau does remain vulnerable Bissau-Guineans living abroad send home consider- to imported inflation. Being the member of a currency able amounts of resources, equivalent to 7 to 8 per- union also means that external competitiveness cannot cent of GDP in recent years. On a per capita basis, be enhanced through exchange rate policies. Raising migrants based in Europe, especially Portugal, France, productivity is thus key both to boosting competitiveness and Spain, send the largest amounts of remittances and real wages. 6 GUINEA-BISSAU: COUNTRY ECONOMIC MEMORANDUM SUMMARY FIGURE 8: Portugal, Senegal, and The Gambia are the FIGURE 9: Migrants from Europe send the largest top destinations for Bissau-Guinean migrants amount of remittances in relative terms (estimates for Bissau-Guineans in selected countries, in (remittances in million US$, LHS, and remittances in US$ per thousands) migrant, RHS) 35 18 700 30 16 600 Remittances 14 per migrant 25 (RHS) 500 12 20 10 400 Remittances 15 8 (LHS) 300 6 10 200 4 5 2 100 0 0 0 Portugal Senegal France The Gambia Spain Other North Nigeria Guinea Portugal Senegal Gambia, The France Spain Other South Nigeria Guinea Mauritania Cabo Verde Source: World Bank Migration and Remittances Factbook. Source: World Bank Migration and Remittances Factbook 2011 and World Bank Remittance Database, 2013. Note: The estimates for remittances for migrants are only broad approximations. Significant progress was made on fiscal stabiliza- Recent economic developments tion during 2009–11, further supported by debt relief. Following the military coup of 2012, GDP plummeted Following a period of uneven fiscal policy following the and only picked up again in 2014, following the success- civil war, prudent fiscal policies allowed Guinea-Bissau ful return to democracy. Having grown at 9.0 percent in to weather the impacts of the global financial crisis of 2011, GDP contracted by 2.2 percent in 2012 and has not 2007/08 and subsequent years relatively well. While the recovered since. In 2013, GDP grew by about 0.3 percent. deficit (including grants) reached 8 percent of GDP in Two main channels can be identified for the effect of the 2007, it fell to 0.8 percent in 2008. In 2009, strong revenue coup on economic performance, through the withdrawal performance and exceptional budget support, coupled of donor finance and domestic policy choices. with tight control over current primary spending, led to Most donors withdrew their financial support in the first overall budget surplus in a decade, equal to an response to the coup. The international community impressive 3 percent of GDP. The recurrent spending- strongly condemned the military intervention and to-domestic-revenue ratio fell from 151 percent in 2008 reacted by suspending their activities. Official grants to 107 percent in 2011, and the wage-bill-to-domestic- almost halved between 2011 and 2013, from 6.6 percent revenue ratio from 60 percent to 45 percent. Meanwhile, of GDP to only 3.7 percent. Accordingly, expenditure donor support allowed public investment to rise from had to be cut. Capital expenditure, which was almost 6.5 percent of GDP in 2008 to 9 percent in 2011. In a entirely financed by donors, fell by 80.4 percent in 2012, period of unprecedented stability and relatively sound but current expenditure also had to be cut, falling by policy performance, Guinea-Bissau was granted debt 20.1 percent in 2013. The overall deficit was financed by relief under the Heavily Indebted Poor Countries policy depleting treasury resources at the central bank, through (HIPC) in 2010 and under the Multilateral Debt Relief financial support from non-traditional donors (generally Initiative (MDRI) in May 2011, although debt started to be at non-concessional terms), and with the accumulation written off earlier to support the good fiscal performance of arrears. As the transitional period came to an end, the of the government. Between 2005 and 2011, public debt World Bank stepped in to provide temporary support dropped from over 200 percent to 43 percent of GDP, by financing wages in the education and health sectors, reducing the country’s debt burden significantly. alleviating some pressure on the budget. Yet the fiscal GROWTH AND POVERTY 7 situation remained dire and strikes among public sector rice was traded for 3 kg of cashew nuts in 2013, up from workers continued to take place regularly. an exchange rate of 1:1 in 2011. Consequently, food Feedback effects through other sectors have com- insecurity increased. A 2013 survey on food security by pounded the economic difficulty. The lack of donor sup- the World Food Program (WFP) found that the percent- port and associated low investment negatively affected age of the rural population facing severe food insecurity sectors such as construction and energy. The energy situ- increased from 20 percent in 2011 to 40 percent in 2013 ation in the country is desperate and the deterioration (or 260,000 people). It is estimated that the FUNPI tax has in the provision of energy further weakened economic increased absolute poverty by 2 percentage points and activity. Similarly, the lack of energy affected the provision extreme poverty by 3 percentage points.1 of tap water—especially in the capital city, Bissau—pos- In 2014, the economy may begin to recover. On ing serious risks to public health, in addition to having a one hand, this is due to a return of donors, follow- depressive effect on businesses. ing the successful general elections. All major donors Policy mistakes aggravated an already dire situation. are re-engaging with Guinea-Bissau and the country’s In 2011, when global cashew prices were particularly suspension by the African Union was lifted. An estimated high, the government decided to support the private fiscal gap of about 9% of GDP in mid-2014 was expected sector in moving toward cashew processing, which to be financed with support of the World Bank (pay- potentially has a higher value-added than raw exports, as ing salaries for teachers and health workers) and other well as other agribusiness activities, through an addi- multilaterals, the European Union, and bilateral partners, tional surcharge on cashew exports. However, this had including Timor-Leste. The IMF has approved a Rapid a number of unintended consequences, as the weak Credit Facility, to counter the fall in international reserves governance environment of FUNPI resulted in the misuse of about 23 percent between 2011 and the year of the of the resources, while driving an additional wedge into coup, and local and regional commercial banks, with the price structure. Cashew exporters refused to pay renewed faith in a democratic Bissau-Guinean govern- the FUNPI surcharge and bargaining over it resulted ment acquired government bonds over CFAF 15bn, in serious disruption to the cashew campaigns of 2012 helping to pay salaries and reduce arrears. Recovering and 2013. This had repercussions on the banking sector, public finances will support growth by re-establishing as non-performing loans increased, lending to traders an operational government and re-launching the public slowed, and a vicious cycle was set in motion, under- investment agenda. mining the success of subsequent cashew campaigns, The 2014 cashew campaign was been better than even as international cashew prices improved in 2014. the 2013 campaign, and the prospects for a pick-up in FUNPI also helped erode the budget, partly through the growth have improved Adjusting for seasonality, recent disruptive effect on the cashew campaign but also as it estimates suggest that the volume of cashew exports encourages the smuggling of raw cashew. Smuggling remained relatively flat. This may partly be due to the leads to lost tax revenue and port/freight charges. Using FUNPI surcharge, and smuggling, but also an increase in 2013 smuggling figures of approximately 65,000 tons, illegal export of timber which temporarily blocked access this could mean again losing over US$6 million in tax to the port for cashew exports. However, an increase in revenues and US$600,000 in port/freight charges. international prices suggests that overall the 2014 result The effects on farmers have been devastating. The will be a modest improvement on prior years. The esti- additional fiscal burden has had a negative effect on mate for real economic growth for 2014 is thus 2.5 per- poor farmers, who have the weakest bargaining power cent, with a modest acceleration to about 4.0 percent in and thus bore the brunt of the FUNPI tax and falling 2015. If further gains are made on restoring macro-fiscal world prices. Farm-gate prices fell by 59 percent in stability, continuing the state building process, and 2013, and the terms of exchange between cashew and enabling private enterprise, a more dynamic economy rice worsened. With the fall in farm-gate prices, 1 kg of can be expected in the medium to longer term. 1 G. Porto and W. Cont. 2014. ‘Measuring the Impact of a Change in the Price of Cashew Received by Exporters on Farm-Gate Prices and on Poverty in Guinea-Bissau’, World Bank Policy Research Working Paper. 8 GUINEA-BISSAU: COUNTRY ECONOMIC MEMORANDUM SUMMARY  9 Fragility and state building F ragility constitutes a major challenge to poverty an environment of weak institutions, competition over reduction and boosting shared prosperity. Social rents can result in fragility as elites struggle for power in indicators demonstrate that people in fragile and government and thus its authority over rents. conflict-affected states are more likely to be poor, to Military coups are often symptomatic of weak institu- miss out on schooling, and to lack access to basic health tions, fragmented elites, and high rent seeking. Together services. According to the 2011 World Development with Somalia, Guinea-Bissau has experienced the highest Report, countries that went through major periods of incidence of planned or actual coups recorded, point- instability have a poverty rate 21 percentage points ing to severe institutional constraints. Public office is higher than countries that saw no violence. In addition, always associated with certain rents, ranging from the children born in a fragile state are twice as likely to be legal income from office, to less legal activities (i.e., undernourished and nearly twice as likely to lack access corruption), in which elites abuse their authority for self- to improved water; those of primary-school age are three enrichment. When elites are fragmented and institutions times as likely not to be enrolled in school; and they are limiting corruption are weak, competition can result nearly twice as likely to die before their fifth birthday. in elites ousting each other, including through violent Estimates from the report also show that fragile states means, such as military coups (Figure 10). However, account for 70 percent of infant deaths, 65 percent of rent-extraction, and especially disruptive competition people without access to safe water, and 77 of percent of over rents, hurts economic activity, explaining the posi- children missing from primary school. Low-income, frag- tive correlation between economic growth and corrup- ile states are the least likely to achieve most Millennium tion control (Figure 11). State-building is a process of Development Goals by 2015, and Guinea-Bissau is no strengthening institutions. It involves establishing clear exception. rules for preventing illicit rent-seeking, and sharing a Institutions are key to development but Guinea- nation’s legitimate rents, providing a fair chance to all citi- Bissau inherited weak ones. According to academic zens to contribute to and receive a share of the national research, institutions in the developing world derive from wealth. In Guinea-Bissau, this means special attention countries’ colonial history: in countries where Europeans must be paid to the sustainable development of natural settled, they emulated European institutions, strongly wealth. based on property rights and checks and balances on State-building requires improved governance to political power, provisions that in Europe were a conse- strengthen the social compact and the legitimacy of the quence of popular opposition to excessive rent-extrac- state—thus reducing fragility. As citizens benefit from tion by absolutist monarchs. In countries where colonial better public policies, support for the state and the rules powers did not settle but only exploited their colonies’ that govern it will grow. Citizens will accept the govern- resource wealth—or even traded in slaves—, institutions ment’s authority and in return demand accountability: a were designed purely to extract rents (mainly in the form social compact. As the rule of law strengthens, citizens of resources). Newly independent governments tended will expect everyone to play by the rules of the game. to inherit the former colonial administration and the Changing these rules unilaterally, for example through system of rent extraction remained in place—only now coups, will be ever less acceptable, especially as it accruing to local elites rather than to colonial ones. In threatens the provision of services citizens have come to 10 GUINEA-BISSAU: COUNTRY ECONOMIC MEMORANDUM SUMMARY FIGURE 10: Easier access to rents is associated with a FIGURE 11: Rent seeking is correlated with worse higher incidence of military coups economic performance (number of coups and ‘corruption control’ index) (‘corruption control’ index and percentage growth) 18 10 Number of military coups & coup attempts 16 9 GNB 8 14 Corruption control 7 12 6 10 5 8 4 6 3 4 2 GNB 2 1 0 0 0 1 2 3 4 5 6 7 8 –4 –2 0 2 4 6 8 10 Corruption control Annual growth Source: Transparency International, Center for Systematic Peace, and Source: Transparency International, WDI, and World Bank staff World Bank staff calculations. calculations, using latest available information. Note: ‘Corruption control’ is used as a proxy for the difficulty of extracting rents. Shows number of attempted and successful military coups; only includes countries that had at least one attempted or successful coup. FIGURE 12: Launching a virtuous circle for growth and poverty reduction Governance expect from the state. A more legitimate state fosters the Redistribution rule of law and reduces fragility. Boosting shared growth is possible in spite of fragil- ity by encouraging private enterprise. State-building takes time and stability will not come to Guinea-Bissau overnight. In fact, growth can precede good gover- nance. Today, Bangladesh is one of the biggest garment exporters in the world. Yet the sector took off during a Private sector-led period of heightened political instability. Improving the growth conditions for private enterprise is thus as important as state-building. A fresh start is more likely to succeed if improvements are made to governance, public service delivery, and the conditions for private enterprise. This can set in motion Poverty reduction a virtuous cycle between private sector-led growth and better governance (Figure 12) jointly accelerating poverty Source: World Bank staff. reduction and boosting shared prosperity. Kick-starting the economy can result in better governance by empow- ering citizens and reducing elite-competition. Better governance reinforce each other. Better governance can governance in turn, supported by robust revenue collec- then redistribute the proceeds of growth through public tion, will allow the government to carry out the policies services or social assistance programs. These three areas needed to support the private sector. In this sense, should be the priorities for the government to escape the conditions for private economic activity and good persistent, anemic growth and endemic poverty.  11 Priority #1: Strengthen the public sector S trengthening the public sector is an integral Priority #1.1: Pay public wages element of state-building. A government needs to The civil service executes government policy and pro- be supported by a competent and efficient public vides public services. Government cannot function if administration in order to enjoy popular legitimacy, civil servants are not paid. Guinea-Bissau has a history a precondition for its undisputed sovereignty and politi- of strikes of public officials. Multiple school years have cal stability. A functioning government needs to meet been annulled in the past due to teachers being on its obligations towards its employees, while avoiding strike rather than in the classroom. Health workers, too, unjustified hiring, administer with integrity the resources provide vital services—especially against the currently with which it is entrusted, and levy taxes in an equitable heightened threat of the spread of Ebola in the region. and efficient manner which does not discourage private Paying civil servants properly (including timely) reduces initiative. Currently, the quality of governance in Guinea- incentives to take bribes and ensures an adequate level Bissau is among the lowest in the world, according to the of morale and commitment for civil servants to properly World Bank’s Worldwide Governance Indicators (Figure carry out their public duties. The newly elected govern- 13). According to the 2014 Ibrahim Index of African ment has already managed to clear wage arrears, having Governance of the Mo Ibrahim Foundation only four accumulated to 4–7 months of salary delays over the past countries in Africa are ranked lower than Guinea-Bissau. years.2 The government has also stepped up its efforts to include all civil servants in one database, the Folha Unica, to ensure that only contractually guaranteed payments FIGURE 13: Guinea-Bissau ranks among the bottom are made. 10 percent globally on the quality of governance Meeting its obligations toward civil servants provides (percentile rank, 0 worst, 100 best) a strong signal that the government is both functional and competent. Especially in a fragile state context, signaling competence is crucial to build legitimacy. If the Rule of Law Out of 100 government fulfills its contractual obligations it offers an example for citizens to meet their obligations toward both the state and other citizens. In this sense, it is a first Regulatory Quality step toward improving the rule of law. It may also encour- age investment as the public sector builds confidence in its ability to honor its commitments to suppliers. Conrtrol of Corruption Government Effectiveness 0 2 4 6 8 10 2 The World Bank helped reduce arrears by paying salaries of Source: World Bank Worldwide Governance Indicators. education and health workers for the first half of 2014. 12 GUINEA-BISSAU: COUNTRY ECONOMIC MEMORANDUM SUMMARY FIGURE 14: The quality of budgetary, financial, and Priority #1.2: Strengthen public overall economic management is poor in Guinea-Bissau financial management (score, 1 worst, 6 best) Stronger processes for budget execution, including 6 fiduciary safeguards, are necessary to administer both Quality of budgetary and financial domestic revenue and foreign aid. It will be crucial to put 5 systems in place that enable the government to adminis- ter public resources while minimizing fiduciary concerns. management Guinea-Bissau’s public financial management (PFM) sys- 4 tem is currently weak, even by the standard of other IDA countries (Figure 14).3 On the one hand, this will ensure 3 that the resources citizens entrust to the government are used for the intended purposes, with minimal leakage. GNB 2 This will increase the efficiency of public programs, and the legitimacy and accountability of the government. On the other hand, strong progress on improving PFM will 1 1 2 3 4 5 6 be important for donors to provide aid through country Economic management systems. This is especially relevant for budget support. The government’s medium-term goal is to build a PFM Source: World Bank Country Policy and Institutional Assessment (CPIA), 2012. system able to manage the government’s own resources Note: Figure only displays IDA countries. as well as donor funding with reasonable fiduciary integrity. PFM priorities include the establishment of a credible budget process with sufficient commitment controls, expenditure chain, from budget preparation to the finan- the reduction of off-budget expenditures, procurement cial reporting of budget execution. However, the more reform, and a credible set of internal and external con- advanced provisions in the WAEMU directives will not be trols. It is therefore of some urgency to ensure that the implemented until a sufficiently functional PFM system is budget exercise is filled with substance and relevance, by in place. This will require action on the following issues: making the annual budget forum a meaningful exer- (i) improving the reliability and timeliness of macroeco- cise. This would require some prior planning and strong nomic forecasts for better annual budgeting; (ii) budget technical leadership to pull together individual ministries’ and financial control to improve budget preparation, contributions, lead negotiations and function as the ulti- commitment management, control and accounting, as mate arbiter. Also budget units or ministries must enforce well as timely and accurate budget execution reports; budget priorities, ensuring that planned expenditures (iii) improving payment management and control, more are in line with the budget. Proper commitment controls timely and reliable in-year financial execution reports and need to be in place for this to happen and senior manag- their reconciliation with the budget execution reports ers will need to be ready to reject expenditures that do published by the Directorate of the Budget (DGO). not fit with priorities. Once it is clear that the budget is There is an urgent need to restore the use of SIGFIP a credible policy instrument with which to guide priori- for all budgetary expenditures. This should help the ties and control expenditures, the incentive to monitor it government design improved procedures for the inter- will be stronger, and regular monitoring reports should facing of SIGFIP with all other systems in the Ministry of be produced and used as a tool to follow progress on Finance (Accounting, Payroll, Debt Management, Taxes program implementation, as was the case in the past. and Customs) and with the Central Bank. Once the Guinea-Bissau has officially adopted the 2009 central level is back on line, the roll out of SIGFIP to line WAEMU PFM directives. They should be implemented ministries should be implemented, in order to facilitate quickly. These directives will provide the framework the progressive devolution of budget authority to line for PFM reforms and specifically for revision of the ministries. This would need to be based on an assess- ment of the quality of internal controls within each line ministry and agency. 3 International Development Association (IDA), a World Bank fund for the world’s poorest countries. PRIORITY #1: STRENGTHEN THE PUBLIC SECTOR 13 FIGURE 15: The armed forces and paramilitaries account for a large part of public employment (percent of total employment, 2010 data) Legislative 1% Armed Forces Govt Admin 18% 20% Paramilitary 16% 27% 10% 8% Education Indirect admin, incl. SOE Health Source: O Recensamento Biometrico da Administraçao Publica da Guiné-Bissau, 2010, Ministerio da Funçao Publica, Trabalho e Modernizaçao do Estado. For Military Data, The Military Balance, 2010 Priority #1.3: Increase the efficiency (International Institute for Strategic Studies). and impact of the civil service Finally, internal and external controls, including Legitimacy and accountability demand efficiency and financial and organizational audits, are important. Internal results. An efficient government that uses the minimal controls can provide important corrective action dur- needed level of public resources is more likely to be ing budget execution. In Guinea-Bissau, an inspection supported by the population as it does not tax more than service exists within the Ministry of Finance (Inspectorate necessary. Especially in a country as poor as Guinea- General of Finance), but its mandate and scope is Bissau, raising domestic revenue often implies that very limited, and awaiting the promulgation of new the poor bear the fiscal burden (witness cashew taxes). draft legislation, its activities are limited and subject to Especially for the poor it is thus important that tax expen- ministerial and Council of Minister approvals. In 2011 ditures increase their well-being overall, through better and 2012, this service conducted an internal audit to public services or policies that remove obstacles for them identify weaknesses in controls of the payroll and ghost to do business. Public efficiency means that civil servants workers, which resulted in significant savings. Approving are productive which means both that the right people the statute of the Public Administration Inspectorate- are in the right job and that civil servants are doing their General (IGAP) would be an important step in ensuring jobs competently and diligently. Building the capacity of greater institutional independence and more systematic civil servants can raise their productivity. and effective internal controls. Re-instituting the defunct There is considerable need to strengthen the Treasury Committee is a good first step to ensure such capacity of civil servants. The latest civil service census controls. The previous committee, which lasted from confirmed the widely held belief that civil servants in around 2003 to 2012 and was co-chaired by the Ministry Guinea-Bissau lack the necessary formal education to of Finance and the Central Bank, was at times effective in capably undertake the required functions of a modern imposing both cash-management and fiduciary controls civil service. Only 14.2 percent of public employees hold and as an instrument of policy control. A re-instituted a bachelor degree or above, while over 24 percent have Treasury Committee could go some way of alleviating six years of formal education or less. Almost as many fiduciary concerns, both of citizens and donors. External employees indicated that they do not know how to controls are seriously lacking, at both at the Court of read or write as those that hold doctorates. Education Accounts and the National Assembly, but capacity rein- is relatively low overall and hiring the right people from forcement should be carried out only when acceptable a pool of relatively low-skilled applicants will not neces- yearly accounts are produced by the government. sarily increase quality. On-the-job training will have to be provided. 14 GUINEA-BISSAU: COUNTRY ECONOMIC MEMORANDUM SUMMARY FIGURE 16: The number of customs officials is large in Guinea-Bissau is hindered by the composition of the (officials per US$million imported/exported) civil service. The military and paramilitary sectors as well as customs services are large compared to overall public 1.5 employment, while the relative size of the education and health sectors in Guinea-Bissau is inadequate (Figure 15 1.0 and Figure 16). Adequate staffing is a broader problem for Guinea-Bissau and should be addressed, through re- 0.5 allocation, where possible, and attrition—there is limited room to hire given the relatively high wage bill. Given the current age profile of the civil service, reform of the civil 0.0 service can only partly be managed through attrition or Guinea-Bissau Guinea Gambia Cote d’Ivoire Nigeria Benin Senegal Ghana Sierra Leone Togo Liberia voluntary retirement schemes. Better planning tools for human resource manage- ment will be important to ensure that the right civil servants are in the right job. For new hiring this includes (i) the development of systems and processes capable Source: World Customs Organization (2013) and World Bank staff calculations. of accurately tracking civil servants from the time they enter public administration to the time they pass away; (ii) development of forward-looking tools to inform the Civil servants need the tools and resources to carry discussion about human resources planning within a out their responsibilities. Enforcing the country’s laws and realistic and well-defined budgetary envelope. The key executing the government’s policies means that civil ser- to ensuring tight management of the wage bill lies in vants have to be appropriately equipped. For example, the development of a sound transaction-based system illegal fishing is a widespread problem in Guinea-Bissau, to track personnel actions. Each ministry must develop reducing the country’s natural wealth. To prevent over- a recruitment policy in line with its policy priorities and fishing, the institutional and technical capacities of the cognizant of the government’s constraints in the area of fisheries surveillance agency (FISCAP) will need to be public finances. enhanced. Similar arguments apply to line ministries and also national agencies, such as the environmental administrative and enforcement agencies SEAD, CAIA, and IBAP. Ensuring the efficiency and efficacy of CAIA is Priority #1.4: Mobilize additional fiscal of particular significance as it holds the environmental and social safeguards mandate. revenue While tasks abound, it is important to contain the size Revenue collections are low in Guinea-Bissau. Raising of the civil service. By sub-regional standards, Guinea- additional concessional revenue from donors would be Bissau’s public administration is large. At just 1.45 percent the most pro-poor. Budgetary revenue lies between of the population, public employment in Guinea-Bissau 10 and 11 percent of GDP, among the lowest ratios is above that of Senegal (1.1 percent) and comparable in the world. This is largely due to a limited tax base, to some of the largest in the region, such as Ghana given pervasive informality, but also to poor revenue and Mauritania. All of these countries are lower-middle administration. Given pervasive poverty, new taxes will income countries with much larger revenue bases. There likely worsen it, but there is potential to apply existing are more workers in the public sector than there are in taxes more equitably. Before broadening the domestic the private formal sector. Employment in public admin- tax base, there is room to leverage additional donor istration has increased from 12,100 civil servants in 1995 resources, especially if the government makes consid- to a current level of about 22,000 to 23,000, an average erable progress on improving the PFM system and its increase exceeding 4 percent per year—well outpacing institutional environment more generally. Guinea-Bissau growth in population or revenue. ranks low on most governance indicators—and many Some crucial areas are understaffed while others may large donor institutions allocate proportionately higher be overstaffed. The efficiency of public administration amounts of concessional resources to countries with PRIORITY #1: STRENGTHEN THE PUBLIC SECTOR 15 better governance. Official grants and other revenues, The country’s tax department needs to be strengthened such as fishing licenses, can improve the government’s considerably. Improving the efficiency of collections at financial position without hurting the poor. To increase the port will be crucial. The streamlining of import/export its envelope of donor finance, the government may con- procedures should be accompanied by a renovated sider approaching non-traditional donors, i.e. those that customs administration framework. This will help the are not currently active in the country. government strengthen customs laws and administration Guinea-Bissau’s natural resources constitute another for more predictable taxation and increased revenue. important source of fiscal revenue, if managed properly Priority should be given to establishing a simple and and sustainably. Domestic revenues could be increased transparent system that could fit the needs of such a by enforcing existing regimes governing assets such small country and encourage foreign private investment. as timber and fish. On paper, Guinea-Bissau has an It could include the streamlining of the current informa- adequate regime in place that governs the exploitation tion system SYDONIA++ and its interface with Treasury. of these resources but in practice revenues are being Guinea-Bissau should abolish the FUNPI tax and lost through the failure to halt illegal activities. Fishing consider abandoning all export taxes on cashew in the licenses, on average, accounted for 15.5 percent of gov- medium term. Given the weaknesses of the tax col- ernment revenue between 2009 and 2011 (dropping to lection system, Guinea-Bissau relies on taxing exports only 4.9 percent in 2012–2013 in the aftermath of the mili- which is a relatively simple procedure, concentrating tax tary coup). This stream of income could be even higher if collection efforts on transactions at the port. Given that license fees were increased to reflect the catch capac- cashew is Guinea-Bissau’s most successful economic sec- ity of foreign vessels entering Guinea-Bissau’s waters. tor, it appears sensible at first sight for the government Improvements in forest governance and tax collection to derive revenue from it. Yet there are few countries could result in greater revenues from the sale of timber that tax their exports since this discourages production and timber related products. Moreover, forests have the in sectors where they are most competitive and there- potential to provide the country with carbon credits to fore should be promoted. In addition, cashew farmers sell in international carbon markets. Large revenue gains are predominantly poor, and since they are the ones are likely from mining and oil, as elaborated below. While who ultimately absorb the taxes through lower prices, these can only be expected in a number of years, laying cashew taxes are anti-poor. As noted above, the FUNPI the foundations for their proper management should surcharge has been particularly harmful. Guinea-Bissau start today. needs to increase public revenues, but to boost shared There is an urgent need to strengthen tax laws and growth, it will be important to look for alternative sources improve administration in order to increase revenue. of taxation. 16 GUINEA-BISSAU: COUNTRY ECONOMIC MEMORANDUM SUMMARY  17 Priority #2: Improve the provision of basic public services A government must provide basic public services Priority #2.1: Enhance health and to enjoy popular legitimacy. Where institutions education outcomes and capacity are weak and revenue is low, the government should focus on the provision of Economic growth and improved public services are the most basic services. Once it demonstrates that it preconditions for poverty reduction in Guinea-Bissau. successfully delivers those, it can expand into others, and Improving basic public services including health and having a sound track record of good public management education is necessary to protect the poor while increas- can credibly justify the need for additional domestic ing the human capital needed to realize the country’s revenue. The most basic services are health, education, growth potential. In particular, strengthening the educa- security, justice, water, sanitation, and energy. Paying tion system is critical to further enhance the country’s public wages and increasing the capacity of civil servants, human capital base and the productivity of its workers. elaborated above, are the most important priorities in Academic studies find strong evidence that the quality of this area. Additional effort will be required in the energy education in developing a population’s cognitive skills is sector, which is a necessary condition for adequate linked to economic growth. In addition, health is consid- access to water, especially in Bissau. ered a key component of human capital in that workers If given the means, citizens can take on additional with superior health are more productive. Furthermore responsibility, allowing the government to focus on a repeated malaria episodes in high incidence and preva- few key areas. While the government focuses on improv- lence settings as in Guinea-Bissau decrease school atten- ing service delivery on the most basic services, social dance and learning through two main pathways; direct assistance programs would enable citizens to address effect of the infection (illness) and the associated anemia, other urgent needs. Social assistance programs, well and indirectly through high maternal and child mortality. targeted to the poorest of society, can provide them While Guinea-Bissau was already facing poor basic with resources to look after themselves. Especially where service delivery in education and health, these criti- access to credit is limited, as in Guinea-Bissau, the lack cal areas were further stunted due to the recent crisis. of financial resources results in a poverty trap from which Ranking 176th out of 186 countries on the 2013 Human the poor can only escape through some form of external Development Index, Guinea-Bissau is well below the assistance. Relying more on citizens can release their Sub-Saharan African average. While the country has initiative and spread the work across many hands. This made great strides in primary education, challenges can not only improve the conditions for growth and remain including low completion (only 62 percent of poverty reduction but also strengthen the social contract children completed primary education in 2010) and lack between the citizens and the state—and thus reduce of learning, with one study finding only half of 8-year-olds fragility. recognizing single digits, and less than half of 9-year-olds recognizing letters of the alphabet. In the area of health, Guinea-Bissau has made significant progress in reduc- ing child mortality in the past several years, however, this achievement risks being reversed in the event of continu- ing reduced funding to the health sector and increasing 18 GUINEA-BISSAU: COUNTRY ECONOMIC MEMORANDUM SUMMARY help the government to make evidence-informed policy decisions and build a more resilient system. In education, there is a considerable need to improve learning outcomes and build skills. Strategies must address the failure of the education system to build basic numeracy and literacy and persistent issues such as low internal efficiency. In addition to address- ing strikes, teacher training and licensing urgently need to be improved. Solid fiscal accounts are important to ensure that teachers can be both paid and trained. Improving education quality also implies investments in the education and vocational training sector. NGOs can be valuable partners in the education sector; jointly with donors they can also support the government in setting up a strong system for vocational training. Finally, there may be opportunities to develop vocational training in cooperation with large businesses: the extractive weak institutional capacity. Life expectancy is 54 years resource sector, if developed, may be one area for such (three years below the Sub-Saharan Africa Average) and cooperation. under-five mortality at 129 deaths per 1,000 live births, In health, it will be critical to address glaring inequali- while having declined from 170 in 2000, remains one of ties which persist across regions. The most critical the highest in the world according to UNICEF. Maternal element crippling the health system is the shortage of mortality has improved slowly but ranks close to the qualified health staff, particularly in underserved areas bottom globally, however there is some indication that and in some health disciplines such as midwifery, surgery, it has improved between 2010 and 2013, falling to 560 and gynecology and obstetrics. The few qualified health deaths per 100,000 live births (upper and lower estimates staff are on high demand and are unevenly distributed, are 1,200 and 270 respectively). Spending in health is also resulting in low quantity and quality of services provided. the lowest among countries in the sub-region. Additional The distribution of health staff is skewed towards urban critical challenges in health include bottlenecks along the areas and remote regions are left without a minimum service delivery chain, cholera epidemics and regional health team. Given the fragility of the state and its inequities in health status and utilization of health high dependency on external aid, Guinea-Bissau will services. need sustained support for years to come to ensure During the current period of peace and stability, the delivery of basic health services and reduce health there is a window of opportunity to prevent further detri- inequalities. ment to human capital and help the government consoli- date core institutions and provision of services. Gains on which the country can build include palpable progress in key health status indicators from 2009-2012, sustained Priority #2.2: Implement social growth in education enrollment between 1999–2010 and significant improvement in education coverage, and assistance programs the presence of NGOs with considerable experience in Given the high level of poverty, the need for social pro- delivering services at community level, among others. tection in Guinea-Bissau is huge. Social protection refers However, Guinea-Bissau must continue to address the to contributory or noncontributory ‘social safety nets’ non-payment of salaries and ensure the delivery of basic or ‘social assistance programs’ to protect segments of services. Furthermore, it will be necessary to address the population against adverse shock. Their objective is structural issues in the medium to long term in order to both to provide assistance or a minimum income to the improve and sustainably provide such services. In-depth poor and provide a safety net to the vulnerable before analysis will be needed to further understand the effects they land in destitution. Such programs include pensions, of the crisis on human development outcomes and the school feeding, labor-intensive works, and cash transfers, potential impact of government responses in order to among others. PRIORITY #2: IMPROVE THE PROVISION OF BASIC PUBLIC SERVICES 19 In recent years, social assistance programs have increasingly been adopted across the developing world, including in African countries, with measurable impacts on the poverty level of targeted households. Social assistance programs empower the poor to make deci- sions regarding the use of resources, and evidence shows that the poor do so responsibly, focusing on important consumption goods, health and education related expenses, and productive investments. A recent review of the empirical evidence suggests that 82 percent of relevant studies find no increase in expenditure on so- called temptation goods, such as alcohol and cigarettes, by cash transfer beneficiaries.4 Another mechanism is the shift in relative power within households, as many programs target women who are often reported to focus more on children-related expenditure. While social assis- tance programs’ main objective is to reduce poverty, they can also promote investments in capital which increase provide temporary income to vulnerable groups includ- productivity.5 They can raise human capital, for example, ing the youth and women. with better nutrition and learning results through school In the short term, Guinea-Bissau should develop feeding programs, or by conditioning cash payments on a Social Protection Strategy to inform the choice and school attendance or vaccinations. Social assistance pro- design of social protection programs. Implementation grams can also have a positive effect on asset formation, capacity, the structure of the local economy, consump- for example through road or irrigation maintenance. tion patterns, the state of infrastructure, and the nature Currently, Guinea-Bissau does not have a social pro- of communities are some of the considerations which tection strategy. The National Poverty Reduction Strategy could be taken into account. An in-depth analysis would includes a few social protection programs targeting war be required to: (i) assess poverty and its characteristics as veterans, the handicapped and senior citizens. Other well as the vulnerability of the population, (ii) evaluate the programs are small ad-hoc interventions with limited existing community-based risk mitigation mechanisms coverage and little coordination, financed by donors. The as well the programs financed by both the government scope of these interventions has decreased in the after- and donors, (iii) comparing the needs and the programs, math of the April 2012 military coup and the suspension define priority programs and beneficiary groups as well of donors’ assistance. However, with World Bank support, as cost the program options. Pilot social assistance pro- the Government has developed and implemented a grams should be accompanied by impact evaluations to community-driven development project in five of the ensure their maximum possible impact on poverty reduc- nine regions of Guinea-Bissau whereby communities plan tion and shared prosperity. their micro-project priorities and one such micro-project is financed per community. Micro-projects typically consist of the extension or rehabilitation of schools, Priority #2.3: Improve access to water points, or feeder roads. The new Government, with World Bank support, is considering expanding this affordable electricity and potable approach to the remaining four regions. Also, with World water Bank support, the new Government is considering to Electricity is a basic necessity. It is also important the implement a labor-intensive public works program to production of potable water. Access to electricity is important for businesses and required for most forms of 4 D. Evans. 2014. ‘Do the Poor Waste Transfers on Booze and modern production. Yet it is also important to power a Cigarettes? No.’, World Bank. 5 J. Haushofer and J. Shapiro. 2013. ‘Policy Brief: Impacts of modern public administration and ensure the provision Unconditional Cash Transfers’; V. Monchuk. 2014. ‘Reducing Poverty of basic services that require electricity. One of the key and Investing in People: The New Role of Safety Nets in Africa’, The basic services requiring electricity is the supply of potable World Bank. 20 GUINEA-BISSAU: COUNTRY ECONOMIC MEMORANDUM SUMMARY FIGURE 17: Energy consumption is among the lowest FIGURE 18: posing a major constraint to businesses in the world… (percent of businesses identifying electricity as constraint) (kWh per capita) 500 80 450 70 400 60 350 300 50 250 40 Sub-Saharan Africa Guinea-Bissau 200 30 World 150 20 100 50 10 0 0 Guinea-Bissau West Africa Sub-Saharan Africa Percent of firms identifying Proportion of electricity electricity as a major constraint from a generator (%) Source: U.S. Energy Information Administration (EIA), WDI, and World Bank staff calculations. Source: World Bank Enterprise Surveys. water. In 2012 the water shortages caused by sustained many activities of companies, households, and even the power cuts almost triggered a cholera outbreak. Reliable government (Figure 18, and Figure 19). The prolonged and affordable electricity and water are thus also crucial electricity crisis and a decade of ineffective remedial from a public health perspective. measures have led to a vicious cycle of regular blackouts; Under-provision of electricity is endemic in Guinea- high operating costs, including fuel theft; poor billing Bissau and should be addressed urgently. Guinea- and collection of revenues, including electricity theft Bissau has one of the lowest consumption levels of through illegal connections; high retail tariffs to cover energy. According to the EIA, energy consumption in unsuccessfully these inefficiencies; a significant fiscal Guinea-Bissau at 32 kWh per capita compares to an burden through direct and indirect subsidies; and very average 141 kWh in West Africa and 462 kWh in Sub- high consumer outlays for alternative self-generated Saharan Africa (Figure 17). In addition, Guinea-Bissau electricity. This outlay represents a very high economic often experiences severe electricity shortages, affecting cost, raising production costs due to the lack of reliable service, and ultimately dissuading investment and reduc- ing competitiveness. There is a critical need to invest in new generation capacity and distribution. Improving the provision of electricity requires re- establishing the financial viability of the sector. Restoring the income statement will be necessary to sustainably improve access to, and quality of, service. An ineffective billing system currently results in low payment rates and there is also a considerable degree of electricity and fuel theft, undermining the profitability of the public utility, the Electricity and Water Company of Guinea-Bissau (EAGB). The company does not break even, although rates are exceptionally high, even by regional standards. Improving collections and reducing losses due to theft would yield two benefits: (i) Electricity prices would likely fall as a stronger payment discipline would distribute the cost of electricity more broadly, and lower prices in turn PRIORITY #2: IMPROVE THE PROVISION OF BASIC PUBLIC SERVICES 21 FIGURE 19: Most households in Guinea-Bissau do not have access to electricity (percentage of households with access to electricity) 10–12% 8–10% 6–8% 4–6% 2–4% 0–2% Source: Census 2009 and World Bank staff calculations. would strengthen payment discipline. Sustainable access power and reserve capacity through the Gambia River to electricity and lower rates are crucial for business Development Organization (OMVG) and West African development and growth. (ii) Restoring financial viability Power Pool (WAPP) interconnections. In this regard, will reduce the need for subsidies and will release public Guinea-Bissau should take a proactive role in the promo- resources for potentially more productive uses. Without tion of regional interconnections, especially within the considerable government subsidies, EAGB would be OMVG power system, so that it can benefit from a secure bankrupt. and cheaper source of electric power to meet its needs Moreover, it will be important to reduce the exces- at the earliest possible time. A third set of longer-term sive dependence on imported gasoil fuel and maximize measures is the rational development of indigenous the benefits from regional trade. A first step in reducing energy resources for domestic use and for exports. This the excessive dependence on imported high-cost fuels concerns notably the development of hydropower (e.g., is to complete the switch from diesel to heavy fuel oil the Saltinho hydropower project) and solar resources for (HFO) for power generation. A second step is to ensure rural areas. However, the country should ensure that the acceleration of the development of regional/bilateral development of local projects is more cost-effective than electricity interconnections that would provide base-load imported electricity. 22 Priority #3: Support the revival of the productive sectors issues, increase the resilience of farmers to external Priority #3.1: Enhance the potential of shocks, obtain buy-in from rural communities on working the cashew sector throughout the value chains, develop sustainable and In spite of its relevance in the country, Guinea-Bissau’s new economic opportunities in agriculture, and inform cashew sector only represents 4 percent of the world future policies on structural change. market of cashew, which totals US$4.3 billion. In order In agriculture, it is important to secure the long-term to gain an increased share in the world market, Guinea- sustainability of the cashew sector by improving produc- Bissau needs to invest to upgrade the value chain and tivity. It is critical to promote improved farming practices promote the processing industry. The interventions need including addressing issues such as tree density, as well to be informed by past failures and recent successes in as intercropping cashew trees with staple crops such as order to put in place a system that (i) is sustainable and upland rice. Research is needed to develop new variet- operates at a profitable scale; and (ii) will also benefit ies and cropping patterns which will prevent pests and the currently most disadvantaged groups through more disease from decimating the trees. Cashew farmer’s equitable growth. bargaining power needs to be improved, by setting up The value chain requires an integrated approach in a price information system and communal storage facili- its development, complemented by activities to promote ties. The storage facilities serve the double purpose of diversification. The integrated approach to developing improving farmers’ bargaining power and strengthening the sector is critical to address emergency food security linkages with local processors. Farmers will not be forced to sell their entire harvest at once and thus will be able to negotiate better prices. By linking with processing plants, farmers will be able to participate in the returns from FIGURE 20: Cashew processing has barely begun (thousand metric tons, 2013) those investments while securing a fair price for their raw cashew. Potential Measures should be taken to attract foreign invest- production of 46.0 ment into cashew processing. Past attempts by domes- cashew kernel* tic investors have proven how challenging it is to be a profitable processor, especially given the high cost Current capacity of local financing. Foreign investment has kick-started to produce 9.2 cashew kernel the industry in Cote d’Ivoire. The investment case and <4% marketing materials should be prepared and presented Current to the right international investors. National authorities production of 0.3 (such as the DGPIP and ANCA) should map and target cashew kernel specific international investors and attend trade shows and investment conferences to promote investments in * 200 thousand of raw cashew could be processed into 46 thousand tons the Guinea-Bissau cashew agro-processing. These round of cashew kernel (23% in the production of kernel from raw cashew nuts). tables include the African Cashew Alliance, an important Source: World Bank. source of leads for potential investors. Organizing this PRIORITY #3: SUPPORT THE REVIVAL OF THE PRODUCTIVE SECTORS 23 event in Guinea-Bissau would also attract attention from the players in the market. There is also considerable scope for organizing community processing facilities. Concurrent investment in both medium and small-scale processing would be beneficial, in that it would create a broader group of domestic stakeholders. The EU/SNV recent experience in establishing community-level processing plants has shown that connecting farmers with processors helps to alleviate capital constraints and facilitates the develop- ment of a processing industry. Experiences from India, Vietnam, and Mozambique have shown that small cashew processing units established at the village level can operate competitively if working together. The Gates Foundation has been investing with some success in the development of processing plants in other countries in the country, such as Côte d’Ivoire, Ghana, and Benin. Small decentralized units are not viable or competitive Priority #3.2: Support the production by themselves; instead they must be organized as part of a cluster around a central unit, which provides services of rice and facilitates access to markets. These units are small Growing cashew instead of rice has traditionally been in size but transforming raw cashew into a good quality a rational choice for most farmers. It has been easier kernel is highly labor-intensive and thus can be a large for rural households to ensure food availability through employer of primarily female labor in low-income rural the barter of cashews for rice rather than producing rice communities. themselves for many reasons: (i) rice production systems The sector also needs to improve its quality stan- are in a state of disrepair; (ii) inputs for rice production dards and management. Currently, most factories lack (including seed) are often unavailable and/or not avail- the certification that would be essential to sell to the able in a timely manner; (iii) marketing systems for the international market, and there is no laboratory spe- sale of surplus rice are rudimentary at best and non-exis- cializing in the quality control of exported kernels. tent in many areas; (iv) it has been hard to compete with Furthermore, entrepreneurial and managerial shortcom- cheap imported rice; and (v) cashews require much less ings are common. Factory managers often lack adequate labor input. Allocating labor to cashew and not to rice management and financial skills, and many factories lack has therefore been a perfectly reasonable response. adequate accounting systems and procedures. However, a critical mass of farmers can be expected Finally, there is a need for improvement of the techni- to switch to rice with sufficient investment in the sector cal skills of the operational staff working in the factories, and the prospect of higher world prices. Recent analysis as well as addressing the issues of labor turnover and indicates that Guinea-Bissau has a significant compara- absenteeism. The high rotation and low skills of workers tive advantage in rice production, through both lowland cause low productivity compared to the rates achieved irrigated rice and traditional mangrove production sys- by other countries. Public vocational training programs tems. The latter are concentrated in low-lying areas and could be set up in this area, potentially with support from along rivers where cashew does not grow well, prefer- donors and NGOs. Moreover, if large foreign investors ring dryer areas. In other parts of the country, it should were to be attracted, it may also be possible to set up be possible to combine both crops, given the low labor in-house training systems. To address labor participa- demand of cashew cultivation. However, this will require tion issues, different mechanisms should be tested with a concerted effort to overcome the considerable upfront regards to recruitment, promotion, work organization, constraints posed by physical capital investment, provide and wage policy. research and extension services, and improving the avail- ability of credit and market linkages. 24 GUINEA-BISSAU: COUNTRY ECONOMIC MEMORANDUM SUMMARY FIGURE 21: Rice production was growing steadily up to 2010. Yields have stagnated. (volumes, area planted, and yields) Kg/ha (RHS) Ha Metric Tons 250 2.5 200 2 Thousands Thousands 150 1.5 100 1 50 0.5 0 0 1961/65 1966/70 1971/75 1976/80 1981/85 1986/90 1991/95 1996/2000 2001/05 2006 2007 2008 2009 2010 2011 2012 An ambitious investment program implemented over the next five years could substantially increase productiv- ity, and approach national self-sufficiency. About 100,000 Source: FAO Stats. tons of additional rice would have to be produced to cover national needs with domestic production. The core of this program would be 10,000 ha of irrigated national or international firms. In addition, resources will rice in alluvial soils following a model similar to that be needed for investments in improved seeds, fertilizers, utilized successfully in Guinea-Bissau by the Chinese and pesticides, and technical assistance for the man- government’s cooperation program. The Ministry of agement of the planting areas. Since cost recovery on Agriculture, in cooperation with INPA, would identify inputs will not be possible until after the first year, startup publicly-owned lands in low areas along major rivers costs could be met by matching grants, with community (particularly the Geba and Corubal), and would contract labor as counterpart, with no repayment obligations, out and supervise the preparation of lands for irrigation or through revolving funds with repayments made to and the purchasing of irrigation equipment for rental to a community-managed account in order to create a small farmers, together with the provision of technical reserve for future operational and maintenance costs, assistance by the private sector. The program could be minor investment requirements, and/or other community open to private investors willing to rent land and commit improvements. to following recommended practices. With double- Agricultural research and technical assistance to season cropping—irrigated during the dry season and farmers will be essential for implementing and sustain- rain-fed during the rainy season—the expected annual ing the program. Although high-yield varieties of rice production increase at full implementation in all perim- have been tested and proven suitable in Guinea-Bissau eters would be around 90,000–100,000 tons of paddy, and improved seed can be imported in the short-term, equivalent to around 68,000–75,000 tons of clean rice. If national agricultural research will have to play a key role restricted to small farmers, the proposed program would in seed production and the continuous adaptation of benefit about some 40,000 households or around 250,000 high-yield varieties. Linkages between smallholder farm- people. ers and private firms need to be improved to provide Given existing institutional and credit limitations, advisory services, as well as marketing. With the neces- carrying out this kind of high-impact program in the sary support, INPA would be able to produce about two- short-term will require that the government—supported thirds of the seed required, but the private sector could by donors—be the main actor in terms of financing provide the rest and it will be fundamental in providing investments for the development of the irrigation system. other inputs, technical assistance, processing, and mar- However, planning and execution of the works them- keting. The World Bank is supporting the government selves would be contracted out to experienced private in rehabilitating land for rice production and will also PRIORITY #3: SUPPORT THE REVIVAL OF THE PRODUCTIVE SECTORS 25 support the provision of improved agricultural inputs. sustainable monitoring, control, and surveillance system; Guinea-Bissau could become part of the Bank-funded iii) strengthen the knowledge base for the sustainable West Africa Agricultural Productivity Program, currently exploitation and management of the fisheries resources; involving 14 West African countries. iv) participate in collaborative efforts at the regional level; and v) carry out institutional and legal framework reforms, accompanied by best practice governance and sustain- Priority #3.3: Promote sustainable able management of fisheries resources, conducted in a participatory and transparent manner. fisheries development Fisheries represent a key renewable resource with major potential but also important risks. The waters of Guinea- Bissau are very rich in terms of fish abundance and Priority #3.4: Prepare for the diversity of species, sustained by an influx of nutrients from the country’s many estuaries, breeding grounds in development of extractive industries the extensive mangrove cover, and an extensive conti- Guinea-Bissau may be on the verge of significant mining nental shelf. While the status of the fisheries resource and oil developments which could transform the country. is not sufficiently understood, it is estimated that the In recent years, long-term exploration leases have been sustainable annual catch of demersals and small pelagics signed for both bauxite (2007) and phosphates (1997). is about 120,000 tons. The industrial catch has averaged In the latter case, new owners are putting together a about 70,000 tons in recent years, while Bissau Guinean bankable feasibility study for a mine which would be artisanal fisherman accounted for another 22,000 tons the largest investment in the history of Guinea-Bissau. in 2011. However, the catch by the important foreign There have also been several offshore discoveries of artisanal fishery is not known, and there is undoubtedly heavy oil deposits, the most recent of which in late 2013 substantial illegal, unregulated and unreported fishing shows promise of being economically viable. Including due to the weak institutional capacity to control fishing domestic sourcing, larger public spending and multiplier activity. Thus, the current fishing effort may already be impacts, the development of one bauxite and one phos- exceeding sustainable levels. phate mine could generate 25,000 jobs, increase GDP by Marine fisheries resources are enduring excessive 13–26% (depending on prices), and double domestic tax fishing pressure in an essentially unregulated environ- and non-tax revenues. ment, leading to overexploitation and underperfor- But extractive industry development in the context mance. With its vast resource base, the fisheries sector of of weak governance carries high risks. The potential for Guinea-Bissau has the potential to make a much greater environmental damage which harms agricultural and contribution to economic growth and poverty alleviation, fishing livelihoods is substantial, while the medium-term but only if better managed. Studies and field observa- implications for a nascent tourism industry should not be tions indicate that fisheries stocks are dwindling in size neglected. In addition, the large rents to be earned can due to (a) insufficient capacity to govern and manage the lead to greater corruption, a competition for power, and use of the resources at sustainable levels; and (b) inability eventually political instability. Guinea-Bissau has much to prevent illegal fishing. Since the resources are largely to do to avoid the problems observed in similar cases of taken in an offshore economy by foreign or industrial weak governance. Joining the EITI initiative would be a vessels that rarely land their fish catch in the region or necessary but not sufficient first step. participate in the local economy, so that the country only The 2010 Mining Law contains most of the elements captures a fraction of the value. that investors are looking for but falls short on the pro- Through the West Africa Regional Fisheries Program, motion of local and national socio-economic benefits. Guinea-Bissau has begun to lay the foundation for Security of ownership, a predictable, stable, and relatively a gradual transition from an offshore to an onshore generous fiscal structure, the ability to transfer owner- economy, to add more value locally to fish products ship, and the ability to repatriate profits are all included. and encourage the development of associated services. The bigger challenge is building the capacity of the To attain this vision, the fisheries authorities of Guinea- state to implement laws and regulations, develop an Bissau should i) allow the recovery of overexploited efficient cadaster, and accurately estimate the amount of stocks or populations; ii) put in place an effective and taxes and royalties due. While an environmental impact 26 GUINEA-BISSAU: COUNTRY ECONOMIC MEMORANDUM SUMMARY TABLE 1: Mining could generate substantial employment and fiscal revenues Farim (phosphate) Boe (bauxite) Total** Product Price (US$/t) 100 125 150 30 40 50 125/40 Direct Employment* 1,000 1,000 1,000 1,000 1,000 1,000 2,000 Total Employment 12,696 15,052 18,391 7,903 9,570 11,274 24,622 Fiscal Revenues (US$m) 37.0 46.2 60.3 19.4 26.1 32.9 72.3 GNI Contribution (US$m) 48.0 58.0 71.2 29.3 35.9 42.7 93.9 Corporate Profits (US$m) 31. 51.0 71.3 10.9 27.3 44.2 78.3 GDP Contribution (US$m) 73.7 105.1 141.5 40.1 63.3 86.9 168.4 Balance of Payments (US$m) 60.1 65.6 75.2 37.2 40.5 43.9 106.1 * 20 assumed to be foreigners; includes workers at port and in shipping to the port. ** Sum of middle product price case for each deposit. Source: World Bank staff estimates. assessment is required, there is little on community authorize a minister to act in setting policy, negotiating development or promoting links with the private sector. contracts, approving development plans, and other nor- Local communities bear the brunt of negative externali- mal responsibilities. The role defined for Petroguin in the ties generated by mines, whether these are environmen- Law is very broad and includes responsibilities normally tal, migrant inflows, or health impacts. The large majority reserved for a ministry or a regulator. Its transparency of low skilled jobs should go to local community mem- requirements should extend beyond the disclosure of bers, though this will likely entail literacy training. Efforts licensing data, taxes received, and expenses of the State, should also be made to train local residents for some to include the volume of petroleum produced, trans- skilled jobs and to assist local enterprises to provide ported, refined, and consumed. services. It will be important to invest the fiscal revenues The most notable shortcoming in the oil sub-sector from extractive industries prudently. When depleting is the institutional framework for managing the sector. one source of national wealth, it is necessary to build International best practice normally calls for the estab- other forms of wealth, so ideally fiscal revenues should lishment of three entities: a ministry with overall respon- not finance consumption. While capital expenditure in sibility for the sector, an independent regulator, and a physical assets will be important, paying teachers or national oil company. The proposed new law does not health workers can be an investment in human capital if done efficiently. Social assistance programs can enhance human capital and also have an effect on household investment. Some of the fiscal revenues should probably be saved, especially as the government has limited capac- ity to make sound public investments. Furthermore, overwhelming the economy with natural resource-fuelled expenditures could inflate prices of non-tradable goods and services, and wages, making local exports less competitive. The stronger real exchange rate would hurt the cashew sector and make it more difficult to develop the rice and tourism sectors, or any other export-oriented sectors. To prevent such negative side effects, the government could consider establishing a sovereign wealth fund—especially if the exploitation of petroleum materializes. PRIORITY #3: SUPPORT THE REVIVAL OF THE PRODUCTIVE SECTORS 27 FIGURE 22: Guinea-Bissau’s wealth is dominated by Priority #3.5: Preserve the country’s natural capital natural wealth (% of total wealth, 2010) The bulk of Guinea-Bissau’s wealth lies in its natural 90% endowments. While non-renewable resources will prob- 80% ably increase in the near future, for the moment renew- Intangible 70% capital able natural resources account for over 90 percent of this 60% wealth. This includes agricultural land (crop and pasture), 50% fisheries, forests (timber, non-timber forest resources), 40% and natural habitats and ecosystems often protected in Natural 30% capital national parks. As renewable resources, they can provide a sustainable source of income, but only if properly man- 20% aged. This is particularly important for the poor, who rely 10% Produced Capital on agriculture, fishing, and forests for their livelihoods. 0% Net foreign assets The threat of over-fishing has already been discussed, –10% but there are other areas of concern. –20% There is evidence that the forests are being Source: World Bank. Optimizing Guinea-Bissau’s Natural Wealth, 2014. destroyed through illegal logging. Timber exports have increased after the coup, as a result of a combination of poor governance, unprincipled foreign clients, and While in the case of over-fishing and illegal logging, desperate villagers suffering from mismanaged cashew the choices are relatively clear, in other cases there are harvests. It is crucial to halt illegal logging and export. complex trade-offs to consider. Mining and oil hold Guinea-Bissau has an adequate regime in place that huge promise, but will threaten biodiversity and tourism governs the harvesting and export of timber, but it needs resources. Expanding rice production could hamper the to be enforced. The recent suspension of wood exports protection of mangrove swamps and their contribution in July 2014 is a step in the right direction. Stronger to fish reproduction and flood control. Extending cashew enforcement at the port and at land border posts is plantations will encroach on forests. Limited logging may required, as proper licensing of logging activities, to be justified by job creation but will need to be compared put an end to the plunder of Guinea-Bissau’s timber with the benefits of non-timber forest resources and resources. carbon sequestration. These trade-offs exist at any point Guinea-Bissau houses exceptional biodiversity in time, and between the present and the future. and ecosystems of both local and global significance. To evaluate these trade-offs and make informed It is among the last countries in West Africa where choices about management of the country’s natural development has had limited negative impact on the resource wealth, there is a need to improve the knowl- environment. The country’s ecosystems not only sup- edge base, governance and the decision-making port a wealth of biodiversity but also provide valuable systems. Priority should be given to fishery, forest and services to the country’s population. The Bolama- mineral sectors, all of which present considerable Bijagós Archipelago is a recognized UNESCO Man and immediate economic opportunities if well managed, and Biosphere Reserve due to its exceptional combination for which the potential economic, social and environ- of biological and cultural assets. Sustainable tourism mental repercussions of mismanagement are signifi- and ecotourism in Guinea-Bissau have the potential to cant. Securing the ongoing conservation efforts for the become a source of economic growth and employment, National System of Protected Areas is also critical if the building upon the small but well-established sport fishing ecosystem services and economic opportunities pre- business and the country’s extensive national system of sented by the tourism sector are to be preserved for the protected areas. future. 28 Priority #4: Foster private investment P rivate sector investment is very low in Guinea- FIGURE 23: Private sector investment is low in Bissau due partly to the many constraints to doing Guinea-Bissau business. Over the past five years it averaged about (private sector gross fixed capital formation in percent of 5 percent of GDP. Removing them will unlock the GDP 5-year averages) potential of private enterprise and support the virtuous 35 cycle between governance and private sector-led growth. Roads and the port are in a woeful state, increasing the 30 costs of accessing markets. Access to finance is severely 25 limited, reducing the scope for entrepreneurs to invest in their businesses’ productivity. For example, accessing 20 credit to buy fertilizer in order to increase yields is impos- 15 sible for most Bissau-Guineans. Poor access to finance also hurts the marketing of cashew. An inefficient regula- 10 tory environment is not conducive to doing business. It 5 is also a major deterrent to attracting foreign investment 0 which could be transformative in Guinea-Bissau, espe- NER LBR SEN GHA World SLE SSA MLI GMB TGO BEN GIN BFA GNB CPV CIV cially if the country is to move into large-scale cashew processing. Rice production has considerable potential, including possibly exports. Other potential growth Source: WDI and World Bank staff calculations. sectors are fishing, mining and tourism. mainly the port’s inadequate capacity; it is now handling Priority #4.1: Improve the port annually close to 25,000 Twenty-Foot Equivalent Unit (TEUs), compared to a designed capacity of 5,000 TEUs. An efficient port is key to any trading nation, but the port Infrastructure and cargo-handling equipment is in a of Bissau is in a woeful state. A smoothly functioning port state of disrepair. Terminal handling charges are up to reduces transaction costs and increases the share of the ten times higher than in Banjul, The Gambia, which is a world price of exports which can be retained in-country. direct competitor. The country is losing business and tax It also reduces the cost to consumers of critical imported revenues as a result. goods like food and fuel, while reducing risks for local A range of institutional and organizational issues enterprises which depend on imported inputs. However, impact on the port’s performance and financial viability. the port of Bissau has suffered for many years from a host The port entity, APGB, functions outside a clear legal of problems, managerial and physical, that include poor and regulatory framework and under an inadequate operational performance, high tariffs, decaying infra- institutional arrangement, with no master plan or port structure and poor corporate governance. Access to the investment strategy. It is de facto self-regulated. A private port is hampered by shipwrecks. Loading and unloading concession to manage the port was cancelled in 1999 delays for its container and bulk traffic are long, reflecting but outstanding obligations for compensation have yet PRIORITY #4: FOSTER PRIVATE INVESTMENT 29 to be paid, preventing the attraction of any new private constraints in marketing their goods, especially during operators. The immediate step needed to produce rapid the rainy season when roads are flooded or even washed and visible improvement in business operations at the away. Secondary and tertiary roads are in particularly port would be the introduction of a technical assistance bad condition, yet these are the roads which tend to be management contract at APGB. Among other things, the most important for the poorest populations. Rural access contractor could be tasked with the development of a roads require considerable rehabilitation work to con- coherent port investment and rehabilitation strategy and nect producers with markets, increasing the gains from a detailed plan for management reform. exports, in the case of cashews, and improving competi- An emergency investment plan is needed pending tiveness with imports for domestic rice. While donors introduction of a private operator. This project would can be called upon for new investment, the government remove shipwrecks, deepen sea depth in front of the will be expected to take responsibility for road main- quays and in the approach channel, rehabilitate quays, tenance. Operation of the existing road fund will need container terminal surface, and infrastructure facilities strengthening. for sewage, water, and electricity, and develop storage The potential of telecommunications as an engine for areas and security walls. Subsequent investment phases economic growth and poverty reduction remains largely should be left to follow the signing of a concession untapped. Despite a certain degree of competition contract under which a potential private operator would (lower prices, increasing demands, and investment pro- take on significant commercial and financial risks as port grams), the mobile telephony and broadband markets operator, including the financing of the proposed new could be much more developed. Mobile phone cover- infrastructure. APGB would then focus on its regulatory age has increased dramatically over recent years and this function as port landlord. moment should be sustained. Further developing ICT Priority #4.2: Improve the business TABLE 2: Terminal charges are far higher than in neighboring countries (US$) environment, including roads and Container Bissau Banjul Dakar ICT 20 foot full 330 28 163 Access to markets and provision of public services are 20 foot empty 70 28 82 limited by inadequate road infrastructure. The road 40 foot full 510 56 325 infrastructure was comparable to regional averages in 40 foot empty 410 56 163 2010 but is likely to have deteriorated since then due to the lack of donor support. Farmers report considerable Source: APBG website, Banjul and Dakar Port Authorities. 30 GUINEA-BISSAU: COUNTRY ECONOMIC MEMORANDUM SUMMARY FIGURE 24: The internet revolution has not yet taken off in Guinea-Bissau (Internet users per 100 people) 16 Guinea-Bissau 14 Developing Sub-Saharan Africa 12 10 8 6 4 2 0 1999 2005 2011 systems as technology can connect market participants across distances and remote areas. Mobile phones in Source: World Development Indicators. particular are also increasingly used to channel cash to individuals, through remittances or potentially through social assistance programs, such as potentially cash fiber optic built alongside the planned OMVG electricity transfers. Regarding broadband, evidence shows that grid. Such terrestrial fiber connectivity would benefit not broadband infrastructure and services contribute directly only Guinea-Bissau as it would provide the connectivity at to a country’s productivity, competitiveness, and ability to a cost of at US$16–17 million (compared to US$31–35 mil- attract FDI, reducing transaction costs and helping coun- lion for the estimated cost of the connection to ACE) but tries diversify into more sophisticated sectors (Figure 24). also the rate of return on the landing stations in neigh- Voice and data broadband communications can also boring countries (some of which are currently underused). enhance efficiency in the public sector, increase transpar- The investment climate and finance are pillars of ency, and thus render government more accountable, economic growth. Considerable efforts are necessary improving the governance environment. To develop the to strengthen them. Guinea-Bissau ranks among the ICT sector, the following steps should be undertaken ten worst performers on the Doing Business indicators. i) develop a Master Plan for the ICT sector; ii) rehabilitate, Yet the constraints are not limited to a poor regulatory restructure, and privatize Guiné-Telecom and Guinetel; framework for businesses. In addition to poor infrastruc- iii) invest in international and national infrastructure con- ture, they also include a largely unskilled labor force, nectivity; and iv) promote the transition to 3G. and a shallow financial market. These are key areas for In particular, a fiber optic cable could be deployed policy interventions, including new laws and regula- alongside the electricity transmission line proposed tions that improve the business climate, investments in under the regional power project WAPP/OMVG, link- infrastructure, education and training, and strengthening ing Guinea-Bissau to the ACE submarine cable via The financial intermediation, for example through micro- Gambia and Guinea-Conakry. Improving international finance. One key challenge will be to re-define the connectivity in Guinea-Bissau is a major challenge. While relationship between the private sector and the govern- the Government expressed its readiness to invest in an ment in order to minimize political interference in the ACE submarine cable landing station, the World Bank private-sector and rent-seeking behavior from govern- considering an alternative scenario whereby private ment officials. Private sector development interventions operators would be incentivized to invest in terrestrial have the potential to boost existing growth sectors but fiber optic networks from existing submarine cable land- also encourage the entry into new sectors, allowing the ing stations (among them Senegal, Guinea, Sierra Leone, economy to diversity. If the conditions improve and the Gambia), bearing in mind that in the coming years addi- business climate becomes more hospitable to investors, tional regional connectivity will be brought through the FDI may play a transformative role.  31 Acknowledgments T his Country Economic Memorandum was prepared by a team led by Marek Hanusch. The team included the following World Bank Group staff: Leopold Sedogo, Pierre Graftieaux, Arthur Foch, Isabelle Huynh, John Virdin, Aniceto Bila, Berengere Prince, Barak Hoffman, Kjetil Hansen, Eric Brintet, Francisco Moraes Leitao Campos, Eneida Fernandes, Helen Edmundson, Gary McMahon, Felicien Donat Edgar Towenan Accrombessy, Javier Baez, Philippe Auffret, Emily Weedon, Aline Coudouel, Fernando Blanco, and Alain D’Hoore. The team also included the following consultants: Joao Montalvao, Tanya Yudelman Niamh O’Sullivan, Antonio Pedro Mota, Asberr Mendy, Ehui Adovor, as well as Steven Kyle (Cornell University) and Paul Vaaler (University of Minnesota). Carmen Pereira and Rui Djarte provided support from Bissau, Glaucia Ferreira, Sylvaine Cussac, Judite Fernandes, Anta Loum Lo, and Upulee Iresha Dasanayake from Washington, DC, and Ndeye Magatte Fatim Seck, Ramatulay Heloysa Barbosa, Eric Yves Dacosta, Khady Fall Lo, and Mademba Ndiaye from Dakar. Vera Songwe, Miria Pigato, Blanca Moreno-Dodson, Philip English, Marie-Chantal Uwanyiligira, Jerome Cretegny, Demetrios Papathanasiou, and Raja Bentaouet Kattan provided guidance to the team. The team is grateful for constructive comments from McDonald Benjamin, Anand Rajaram, Kofi Nouve, Liang Wang, Benjamina Randrianarivelo, Elan Cusiac-Barr, Pierre Francois-Xavier Boulenger, Evelyn Awittor, Stefano Paternostro, Sidy Diop, Willy McCourt, Eric Mabushi, Monyl Nefer Toga Makang, Philip Keefer (Inter-American Development Bank), Yannis Arvanitis (African Development Bank), and Sunhee Park (Yale University), as well as inputs from the IMF Guinea- Bissau team. The team would also like to thank the government of Guinea-Bissau, with whom they discussed and deliberated the findings of the Country Economic Memorandum in February 2015.