Guinea-bissau Economy Profile 2012

• Introduction
• Recent Economic Developments and Prospects
• Macroeconomic Policy
• Fiscal Policy
• Monetary Policy
• External Position
• Structural Issues
• Other Recent Developments
• Public Resource Mobilisation
• Social Context and Human Resource Development
• Construction & Real Estate
• Industry
   

Business outline for Guinea-Bissau

Economic Overview

During the last decade, the economic performance of Guinea-Bissau has been mediocre nad irregular. The economic vulnerability of the country is due to its little diversified production and exports base. Agriculture is the most important sector of the economy of Guinea-Bissau since it accounts for nearly two thirds of GDP. The export of seafood and cashew nuts is the main source of revenue in the country. In 2010, thanks to good agricultural performance (increase in the price of cashew nuts), investment in public works and construction and new pledges from donors, the GDP growth reached 3.5%. The forecasts count on a strenghtening of growth in 2011.

The government is making a great effort in diversifying the economy with the support of international financial institutions such as the International Monetary Fund (IMF). A three-year program was signed with the latter in May 2010, as part of the Extended Credit Facility framework and in December, the country has completed its Heavily Indebted Poor Countries (HIPC) debt reduction initiative. The 2011 budget plans to pursue budget rigor and a careful debt management, in a way to concentrate spending on key sectors linked to economic growth and poverty reduction.

Guinea-Bissau is the third poorest country in the world and among the least developed; more than two thirds of the population are living below the poverty line. Life expectancy does not exceed 51 years.

FDI in Figures

Guinea-Bissau has been able to attract substantial foreign investments during the last few years. FDI stocks, as percentage of GDP, have experienced an increase. However, in 2008 FDI influx clearly weakened due to the bad international economic situation and have been recovering since 2009.

Offshore oil exploration and the rise in international prices of cashew nuts are offering investment opportunities to foreign investors. The country has a still untapped potential: large mining resources, fertile soils, the possibility of developing fishing and tourism, The main weakness of the country consists on the large number of Latin American drug traffickers, who have installed their base in the territory to ship drugs into the European market and this constitutes a risk, not to be ignored, for the business environment. The poor condition of infrastructures, weak legal system and high cost of energy, as well as political instability, pose further difficulties to investment.

The fishing sector attracts the maximum foreign investment. The main investing countries are the United States, Portugal and India.

Foreign Trade Overview

Guinea-Bissau is entirely open to international trade. The trade policy of the country aims at strengthening relations with several countries and organizations in order to develop its foreign trade, which represented 80% of its GDP in 2008.

Customs duties remain relatively high. However, the country does not have many trade barriers.

The measures taken by government like price liberalization, privatization and structural adjustments should benefit international trade on the long run. However, inadequate infrastructure and high cost of raw materials are some of the barriers to the development of trade.

The country imports more than what it exports and the result is a trade deficit. The trade balance is expected to remain negative during the next following years.

The main trading partners of Guinea-Bissau are Brazil, Portugal and ECOWAS (Economic Community of West Africa).
 

Recent Economic Developments and Prospect

Despite its huge natural resources potential, the Guinea-Bissau economy remains extremely undiversified. The leading sector is agriculture, in particular cashew nut production, which employs 95% of the population and represents 62% of gross domestic product (GDP). The relatively low capital content of cashew production allowed the sector to support families even in economic and political troubles. An ideal climate, a high land allocation and very low processing requirements made Guinea-Bissau one of the world’s most important raw-nut producers and exporters.
The primary sector performance in 2009 was outstanding, with a production increase of 5.2%, concentrated in agriculture. Cashew nut production, in particular, increased by over 20% thanks to good weather and new plants that started producing. Prospects are good for coming years, because trees are progressively reaching their most productive ages. For several reasons, however, income is below potential. A higher producer price, a transition from bartering to cash payments and production modernisation could make cashew nuts a greater income source for farmers and the government. Reforms are set to start in 2010-11.

Although cashew production in Guinea-Bissau has suffered less from production disruption compared with other producers, the sector suffers from structural bottlenecks exacerbated by political instability and the civil war legacy. There is an opaque land regulation, a poor judicial system and a lack of access to credit and insurance. Modern technology is still not used, or used in a casual way, and there are no storage facilities. But a positive development came with banks financing the agricultural campaign for the first time in 2008.

These problems, coupled with the poor business environment, high energy costs and a lack of government support, blocked the cashew nut processing industry at a very undeveloped stage. Only between 1% and 2% of production is currently transformed. The only existing project, owned by a Libyan firm, plans three processing firms, each with a capacity of 5 000 tonnes. Capacity at the moment allows for transforming between 2% and 4% of total production and will go up to 10-15% of production.

Economic diversification remains a priority if the country wants to increase its resilience to external shocks. Despite the ideal soil and climate, since the 1970s the increasing success of cashew production and the simplicity of its culture made farmers progressively quit other crops, except for basic subsistence. The country lacks the facilities to support an efficient marketing system for competitive crops. Despite its huge potential, Guinea-Bissau remains one of the most undiversified countries in Africa.

An important agricultural project, PRESAR (Rural and Agricultural Sector Rehabilitation Project), financed by the African Development Bank (AfDB) over the period 2007-11 aims to increase rice production from 2.9 tonnes per hectare to 5 tonnes/ha, through the transfer of technology, a wider spread of services and anti-pest programmes. The project is being implemented in five of the eight regions, including Bissau. The programme also concentrates on improving horticulture and livestock.

The country should also exploit the fishing industry. Non-compliance with health and sanitary rules currently prevents direct exports to Europe. Fishing licences are sold to European fleets and constitute an important source of non-tax revenue. By 2010, a new fishing port is expected to be ready, which will make fishing more profitable.
In mining, estimates are that the exploitation of bauxite, phosphates and oil could double or even triple Guinea-Bissau’s foreign exchange and fiscal revenues. Phosphate exploration near Farim has the greatest potential to begin soon. Guinea-Bissau Phosphate Mining Co., which holds the lease, brought in an Italian company, Trevi, and a local firm, Alscon, to evaluate the project. Conservative estimates put the gross revenue generation at 90 million US dollars (USD) annually. Decisions on exploiting the mines are imminent.
Bauxite Angola plans to invest USD 321 million in a bauxite extraction project in Boe, which has the potential to double GDP. The mine should reach full-scale production by 2011 and would be jointly owned by Bauxite Angola (70%) and the governments of Angola (20%) and Guinea Bissau (10%).
Oil potential remains unclear and is a politically sensitive topic. Reserves are estimated at 1.1 billion barrels. Petroguin, the state-owned oil company, has said 14 offshore blocks are being explored. Senegal and Guinea Bissau are creating an agency to manage the sector.
The secondary sector, in particular construction, contributed significantly to growth in 2009. According to the authorities, the sector grew by 4.8%, thanks to an important infrastructure programme financed by donors and public investment.
A very large share of the Guinea-Bissau economy is informal. Beside the widespread subsistence agriculture, retail and wholesale trade represent the main source of income in the capital, Bissau, and remain almost totally informal. Only 75 firms are currently registered, while there are an estimated 8 000 enterprises. Despite the difficulties measuring the unaccounted sector, authorities estimate at 5.8% the growth rate for the tertiary sector for 2009.
Real GDP growth slowed to 2.9% in 2009, from 3.3% in 2008, but supported by agriculture and construction. Growth is progressively expected to increase again to 3.4% and 4.0% in 2010 and 2011. The leading sectors will remain agriculture and construction, while mining and related services are expected to see their contribution rise, if political stability is assured.
Representing over 70% of GDP, private consumption is the leading component of domestic demand. This has been depressed in recent years, owing to the performance of the agricultural sector, unpaid wages and higher inflation. In 2009, private consumption contracted again, owing to salary arrears, the weak income generation of the farm sector and lower remittances. The drivers for growth in 2009 were exports and public investment, which increased significantly with ODA–financed infrastructure programmes. Private investment remained depressed by the poor business environment and the loss of confidence due to political instability in the first half of the year. External demand’s contribution to growth remained negative, although it improved thanks to a strong increase in exports.
In the mid term, domestic demand is expected to support growth. While public expenditure should remain controlled, in an effort to address fiscal imbalances and gain donor and market confidence, private consumption is expected to increase, thanks to the good performance and diversification of agriculture and lower inflation. Private investment could increase marginally with mining exploration and foreign direct investment. Exports are expected to rise considerably over the mid-term. However, this is all conditional on structural reforms, more stable politics and donor support.

Macroeconomic Policy

Fiscal Policy
Since independence, Guinea-Bissau’s fiscal situation has been marked by significant imbalances. There is a bloated public sector, very low revenue to GDP ratio and dependency on the cashew nut sector. Political instability, erratic donor support and scarce administrative capacity have hampered different reforms implemented since the 1990s.

However, since 2008 the EPCA has supported a new programme of fiscal management reform, resulting in improved revenue collection and a rationalisation of expenditure (see section on public resources mobilisation and aid).

Domestic revenues as a share of GDP have decreased for years and the food and oil crisis in 2008 worsened this through reduced import tariffs and indirect taxes on food items, while fishing licences produced less income. Despite support from the European Union (EU) and World Bank wages went unpaid for several months. Fiscal policy in 2009 focused on stabilising public finances, keeping expenditure within the limits of domestic and external resources and avoiding more domestic arrears.
While the global crisis and domestic political crisis of 2009 impacted public finances through lower export prices and delayed external assistance, the revenue collection target was achieved, thanks to a successful customs reform and improved tax administration, which included the collection of 2007 tax arrears. Tax revenue increased by 16%, which is 1% of GDP.

Reforms also had a positive impact on expenditure, with the regularisation of unaccounted expenditure dating from the end of 2007 to April 2008. While basic expenditure was maintained, the level of recurrent expenditure decreased, in particular wages and salaries and goods and services. Besides the repayment of some arrears to teachers early in the year, no resources were available to repay domestic arrears or commercial bank debt. Despite the late arrival of budget support due to the instability, investment increased by 40.7%, owing to the construction of a new government office complex and the rehabilitation of two hospitals. All public investment remains financed by donors, whose overall support decreased in 2009.
Against expectations, the fiscal balance improved in 2008 and 2009. While most of the budget deficit was covered by donor assistance, domestic borrowing remained jeopardised by past insolvencies. The small gap was covered by a third EPCA purchase.
The 2010 budget law foresees a significant increase in revenues, due to the reintroduction of import tariffs and an increase in EU fishery compensation. Expenditure is set to increase, in line with a revised poverty reduction strategy and a much bigger effort will be put into social sectors (health and education), agriculture and infrastructure. Fiscal discipline, in line with the framework defined with the IMF, and increased ODA will determine a progressive mid-term reduction in fiscal imbalances.

Reforms agreed under the ECPA and implemented in 2009 include an audit of domestic arrears. These include nine months of salaries, commercial banks, BCEAO and West African Development Bank (BOAD) arrears, and private sector arrears. At the end of 2009, domestic arrears accounted for 45% of GDP. Under a 2009 programme, the government will clear the arrears over five years from 2010. Other reforms included the establishment of a legal framework for WAEMU budget classification and an integrated management system for public accounts. The new management system aims to integrate budget preparation, execution and accounting and improving expenditure monitoring.

To improve fiscal imbalances, besides avoiding off-budget expenditure, the government must contain the wage bill. After attempts in 2000 and 2004 to reform the salary structure, the wage bill was multiplied by five and now represents over 90% of fiscal revenues (against only 20% in 2000). Despite exceptional budget support from donors to help the government to pay salaries the excessive wage bill does not leave proper resources for basic services.
A new reform, supported by development partners, aims at rationalising public administration by reforming pensions for civil servants and the military. Real wages need to be raised, however, especially for lower-ranking levels. As part of the campaign a census aiming to identify ghost civil servants was finished in November 2009.

Monetary Policy
As part of WEAMU, monetary policy is handled by the West African central bank. After record inflation in 2008 of 10.4% , which triggered government intervention to stabilise prices, inflation in 2009 registered a negative rate of 1.3%, due to the sharp decrease in oil and food prices. Sound monetary policy by the central bank and the improved performance of the agricultural sector will help limit price increases, despite the rise in imported inflation foreseen for the mid-term.

Inflation is expected to go back to 2.5% and 2.3% in 2010 and 2011 respectively, in line with the 3% limit set by the BCEAO.

External Position
Cashew nut exports represent more than 95% of total trade. India, which has purchased almost 70% of the production in 2009, processes the cashew and re-exports it to the United States and other developed nations. Remaining produce is re-exported through Senegal. An unknown yet considerable quantity is smuggled to neighbouring countries through porous borders and inefficient customs.
The increase in cashew production from 110 000 tonnes to over 140 000 tonnes resulted in a significant export expansion in 2009, despite the international financial crisis. One possible reason for this spectacular rise might be improved customs security. The entire harvest was exported to India, increasing dependence on this country. The rise in quantity did not compensate for a big decrease in prices, which led to a decrease in the value of exports.

The country imports almost all consumer and capital goods. Some 90% of imports are represented by rice, flour, sugar and oil, the last item alone representing almost 30% of total imports. In 2009, the price of imports decreased owing to lower international prices, while volumes increased significantly owing to increased public investment. However, this did not offset the negative impact of the fall in export prices and the trade balance deteriorated.
After the sharp deterioration in 2008, the current account deficit deteriorated further in 2009 because of adverse terms of trade, passing from 1.8% of GDP (including grants) to -2.2%. Indeed, the decrease in remittances, representing 8% of GDP, added to the deterioration in the trade and services balance. The mid-term trend is expected to worsen, reflecting falling cashew prices and the deteriorating trade balance.

The current account deficit is compensated by the capital account, resulting in a positive balance of payment in 2009. Foreign direct investment (FDI) is very limited because good business conditions are not in place, while costs are high because of the lack of infrastructure, political doubts and weak rule of law. However, FDI is expected to start flowing in coming years, thanks to good prospects for the mining sector.

Foreign exchange reserves have been increasing regularly in recent years, reaching USD 124.5 million in 2008. Reserves fell sharply in the first half of 2009, because of the late arrival of ODA. The level increased again in the second half thanks to export revenues for cashews and aid flows.
The country is very dependent on external assistance, yet ODA is largely under potential, owing to bad governance and unsteady politics. Until recently, donor assistance has been erratic, a result of weak political commitment and a lack of co-ordination. With the administration lacking capacity, there has often been wasteful duplication of donor efforts and inefficient aid allocation. Budget support has increased, but more as an exceptional measure to allow the government to pay salaries than a co-ordinated effort to increase aid efficiency. More co-ordination can only happen if the government increases its capacity to prioritise and co-ordinate. The United Nations Development Programme (UNDP) has been working to help the government and progress has been made with a common framework for budget support agreed. Donors are aware of the importance of their support in this critical phase of Guinea-Bissau’s development. Major donors are the EU, the World Bank, the AfDB, Portugal, France and Japan. WEAMU and ECOWAS also provide assistance.

Co-operation is growing with other developing nations. China’s presence has increased in recent years, with infrastructure building in exchange for raw materials. In September 2009 new agreements were signed, involving aid worth USD 8.2 million. Angola’s presence is also increasing, in terms of assistance for infrastructure development and business, mainly due to the countries’ common colonial past and language.

Guinea-Bissau benefited from bilateral debt cancellation from Angola, Cuba, China and from the AfDB. The country reached the decision point under the Heavily Indebted Poor Countries (HIPC) Initiative in 2000, but never got to completion because of government failure to meet targets. Since 2001, the country has not paid any creditor who has not provided some interim relief, with the exception of the IMF, and has accumulated arrears. The re-establishment of relations with the IMF gives hope that the HIPC process will be achieved by 2011. Despite the concessional nature of most of its debt, Guinea- Bissau is in debt distress, with an external debt level of 227% of GDP at end-2009 in nominal terms. Some 49% of the debt is multilateral, and 51% bilateral and (marginally) commercial.

Structural Issues

Operating a business in Guinea-Bissau remains challenging as reflected in its ranking – 181 out of 183 economies – in the 2010 World Bank Doing Business survey, the lowest in the WAEMU. In addition to chronic political instability, potential investors are discouraged by the labyrinthine administration and regulations imposed on private investment which, paradoxically, the government cannot enforce. It takes on average 233 days to open a business and the costs are prohibitive. A few reforms to help business start-ups were implemented in 2009 and a new investment code to eliminate exemptions for investment projects and replace them with tax credits was passed in May 2009, although it has not yet become operational. More traders and exporters have entered the cashew nut market thanks to regulatory reforms that eliminated legal barriers and reduced entry costs. With more attractive investment opportunities in the region, the country’s chances for competing depend largely on government willingness to further streamline procedures and create investment incentives.

The privatization process that began in 1987 has produced mixed results. Forty-four state-owned enterprises were identified for privatisation but only 15 have completed the process and many have gone into bankruptcy. The Economy Ministry promised participating companies benefits including a tax holiday and free equipment that were in many cases not delivered. An addendum to privatisation contracts is being negotiated to address the issue. State-controlled electricity, water and port firms are now under consideration for privatisation.

Guinea-Bissau relies on electricity imported from Senegal. Power reaches only 20% of the population 70% of the time and is limited to Bissau and seven other urban centres. The sharp rise in oil prices in 2008 caused considerable disruption to energy production. The World Bank’s USD 15 million Multi-sector Infrastructure Rehabilitation Project seeks to renew and extend the country’s high- and mid-level tension network and find ways to strengthen the public electricity and water company, EAGB. The EU will in 2010 finance a EUR 15 million project to create a network to harness and distribute energy throughout Bissau.

With no electricity, no running water is available for most of the population. The infrastructure rehabilitation also aims to improve the urban water system. It will extend the water network, produce a reservoir, distribution system and public fountains in Bissau.

New mining projects could harm the environment. The mines in the south threaten rivers and the fishing industry. Some bauxite deposits are in a national park and both the planned railway and the new Buba port are planned in environmentally sensitive areas. In 2009, an Environmental Law was put before Congress that covers everything from the use of toxic substances to extraction in protected areas. Enforcement, however, will be a challenge given the weak governance institutions in Guinea- Bissau.

Public Resource Mobilisation

Guinea-Bissau’s capacity to raise finance is severely hampered by political troubles and the low capacity of the tax administration. Small gains made during peace times are practically undone during times of conflict. As a result, over the past decade, Guinea-Bissau’s revenues have been falling – by more than 2 billion CFA Francs (XOF) between 1997 and 2003 alone. Negligible increases in tax revenues and the withdrawal of international aid all accentuated the trend.

Poor tax administration and the big informal sector have led to an over-reliance on indirect taxes collected at customs which, over the past decade, have accounted for 85% of all tax revenues. This trend has declined more recently and there is pressure for more reforms. Tax revenues as a percentage of GDP remain low at about 10% and will continue as long as the tax administration capacity remains poor and the complex tax system encourages the growth of the informal economy.

Tax reforms made in the early 1990s were eroded during the civil war of 1998. They started again in 2001 but instability which culminated in a 2003 coup severely limited the tax administration. Also contributing to the decline were the introduction of the common external tariff of the WAEMU in 2000, an increase in smuggling of beer and cigarettes following an April 2002 hike in taxes, and the reduction in the effective tax rate on cashew exports in 2002 following a slump in international prices. Non-tax revenue – mostly fishing licence fees – declined from 1997-2003 as surveillance deteriorated and licensing and payments took place outside official channels.

Tax legislation is complex, and dispersed among several codes. Key documents governing business profits is the Code de la contribution industrielle (CCI); labour income and social security tax is governed by the Code de l’impôt professionnel (CIP); building and rural enterprise taxes are governed by Decree number 5/84; capital income taxes are governed by the relevant tax code (CIC); consumption taxes are governed by Law 15/97; general sales tax is governed by Code de l’impôt général sur les ventes et services (CIGVS).

Corporate tax rates in Guinea-Bissau are relatively high and the financial and administrative burden of paying taxes became more difficult in 2008-09, according to the World Bank’s Doing Business Survey which saw the country fall from the 122th rank in 2008 to the 130th in 2009. Profits from commercial or industrial activities are taxed at 25%. According to the CIP, the professional tax is levied on a progressive scale from 1%-12% for salaried workers and 10%-25% for independent workers. Building and rural enterprise taxes are applied at a rate of 10%-15% depending upon location and type of construction. Capital taxes are levied at a rate of 25%. Indirect consumer taxes are levied on domestically produced goods at a rate that varies between 5% and 20%. Rice imports have been tax exempt since 2008 in a bid to counter inflated prices. The normal 15% sales tax rate is reduced to 10% for food oils, petrol, butane gas and pharmaceutical products.

There are four directorates within the Finance Ministry implicated in tax administration: Budget, Taxation, Customs and Treasury. All four design policy and establish targets but general directives come from the central government, which recently conducted a tax collection review, with technical support from the UNDP. From this came a plan in 2009 to increase the tax base and boost revenues. It included upgrading software systems to improve customs control and import valuations, updating taxpayer rosters using 2009 census data, increasing incentives to patrol agents to apprehend illegal fishing boats, offering incentives for taxpayers to pay arrears and using a pre-shipment inspections agency to enhance customs duties.

The big agriculture sector and the large number of people working in the informal sector hinder revenue collection. The Finance Ministry reported that only 22 000 people paid income tax in 2008. Non-compliance is also a result of outdated and incomplete taxation laws. There is no legislation governing the on-site verification of accounting methods or of the individual status of taxpayers. Customs officials frequently accept bribes in exchange for not collecting import taxes.

Social Context and Human Resource Development

Because of political and institutional disruption, the PRSP, originally planned for 2006-08, only became effective in 2007. Another will be started in 2011. According to the 2009 PRSP followup, the strategy suffered from having too many unprioritised, optimistic objectives, poor aid co-ordination, poor implementation, monitoring and evaluation; poorly chosen results indicators and a lack of government priority to economic growth.
Guinea-Bissau was ranked 173 out of 182 countries on the UNDP Human Development Index. It is unlikely to meet Millennium Development Goals (MDGs) as between 2007 and 2009, the economy grew by less than 5% while the population grew between 2.5%-3.5%. The UN Children’s Fund (UNICEF) Multiple Indicator Cluster Surveys show that from 2000-06 maternal mortality decreased from 822 to 800 deaths per 100 000 live births (a reduction of only 2.75% against the 8% targeted) and infant mortality increased from 124 to 138 per 1 000 live births.
The country is on track for meeting a couple of goals however: the number of people suffering from hunger declined from 32.9% in 1990 to 17% in 2008; and gender disparity in primary education improved from 0.56% to 0.90% from 1990-2006. On the other hand, in 2005-06, the probability of girls completing primary school was half that of boys in rural areas and 1.8 times less in urban areas. A Ministry for Women was inaugurated in 2008 to address equality issues.

In 2009, only 20.7% of the budget was dedicated to health and education compared to the 40% recommended for developing countries. Only 38% of the population had access to health services in 2009 and a National Health Development Plan drawn up in 2007 is awaiting financing. There have been improvements in medical training and the hospitals at Mansôa and Canchungo received x-ray, sonogram and reanimation machines, the Motrice Rehabilitation Centre was renovated and the Simão Mendes national hospital is being renovated and enlarged. Little has been done to improve health management however. Quality control is inadequate and the last comprehensive review of the health system was in 2006.

Poor infrastructure, poorly trained teachers, lack of materials and teaching manuals and sporadic attendance in rural areas during the cashew harvest season plague the education system. A 2009 study by the Ministries of Education and Finance, the World Bank and the United Nations Educational, Scientific and Cultural Organisation (UNESCO) and its regional education office (BREDA) found that Guinea-Bissau invests only 9% of its budget in education and that over 93% goes on teacher salaries. Primary school enrolment has improved (from 46.3% in 1990 to full enrolment in 2006) due to heavy government investment in the construction and rehabilitation of schools. There are also more private and community schools. Nonetheless, only 48% of children finished primary school in 2006, one of the lowest rates in Africa. Only 37% reach secondary school and only 17% finish. The government is developing an Education Sector Plan to improve access to quality education and to overhaul the curriculum.

Data on HIV/AIDS prevalence are unreliable but national estimates are that in 2006 it was anywhere between 3.8% and 8%. The situation may worsen owing to the lack of awareness about transmission, premature sexual activity (55% of the population is active at 15), limited access to antiretroviral (ARV) drugs and the practice of male and female circumcision in precarious hygienic conditions. A National Secretariat for the Fight Against HIV/AIDS was created in 2008; the Global Fund for AIDS, Tuberculosis and Malaria (GFATM) provided USD 44 million for 2009-13 and identified co-ordination, awareness-raising, patient care (about 3 000 people receive ARV), and blood transfer security as priority areas. One positive side is that through the training of 243 counsellors between 2006 and 2009, youth awareness about reproduction, HIV/AIDS and personal health has improved substantially.

The latest unemployment rates of young people aged between 15 and 24 for 2006 are 46.87% in Bissau and 19.34% in rural areas.