RETIRING THE FISCAL RISK GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2024 Retiring the Fiscal Risk  1 © 2024 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Attribution—Please cite the work as follows: “World Bank (2024) Guinea-Bissau Economic Update: Retiring the Fiscal Risk, Spring 2024. © World Bank.” All queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. RETIRING THE FISCAL RISK Table of Contents Acknowledgments iv Executive Summary v Chapter 1: The State of the Economy 1 1.1. Context 2 1.2. Recent developments 2 1.2.1. Real sector 2 1.2.2. Fiscal and debt dynamics 3 1.2.3. Balance of payments 8 1.2.4. Monetary policy and the financial sector 11 1.2.5. Poverty 12 1.3. Outlook and risks 14 Chapter 2: Public Sector Pension Scheme in Guinea-Bissau 21 2.1. Introduction 22 2.2. The public sector pension scheme: Description 23 2.2.1. Design parameters 23 2.2.2. Administration of the public service pension scheme 24 2.3. The public sector pension scheme: Analysis and challenges 25 2.3.1. Design parameters 25 2.3.2. Pensioners and expenditures 27 2.3.3. Very few pensioners benefit from the bulk of pension payments 29 2.3.4. Age of pensioners 29 2.3.5. Beneficiary coverage 31 2.3.6. Active worker pension contributions 33 2.3.7. System dependency ratio 33 2.3.8. Administration of the schemes 34 2.4. Public service pension schemes: Recommendations for improvement 37 2.4.1. Measures to improve the public service pension system 38 2.4.2. Considerations for setting up a pension fund 39 2.5. Summary 40 References 42 Annex 1. Pension: A Simple Model 43 Annex 2. Summary of Recommendations 45 TABLE OF CONTENTS i GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2024 List of Boxes Box 1.1. Rice subsidy impact 6 Box 1.2. What lies beneath – The Guinea-Bissau wage bill 6 Box 1.3. EAGB: The national utility SOE: A persistent fiscal risk 9 List of Figures Figure 1.1. Annual change in real GDP and annual change in raw cashew nut (RCN) exports (2000–2023) 2 Figure 1.2. Expenditure lines, revenue lines, and tax revenue breakdown as percent of GDP 5 Figure 1.3. Guinea-Bissau public debt (percent of GDP) 8 Figure 1.4. Guinea-Bissau external debt end–2022 (percent of total) 8 Figure 1.5. Price developments of main import commodities: Rice and oil (Jan 2019–Feb 2024) 10 Figure 1.6. Changes related to cashew nut exports (y/y) 11 Figure 1.7. Headline inflation 2020–2023 (y/y) 11 Figure 1.8. Credit to the economy 12 Figure 1.9. Changes in monetary poverty indicators 2018/19–2021/22 by area of residence 14 Figure 1.10. Poverty trends by region: 2018/19–2021/22 15 Figure 1.11. Sectoral share of GDP 17 Figure 1.12. Current account balance (Percent of GDP) 17 Figure 1.13. Karpower vs OMVG costs (millions of dollars per month) 18 Figure 1.14. Fiscal performance (percent of GDP) 18 Figure 1.15. Debt performance (percent of GDP) using the latest DSA* 19 Figure 2.1. Average monthly (net) salary and total number of civil servants including military and reserve by age 27 Figure 2.2. Expenditures on public pension (percent of GDP in selected Sub-Saharan Africa economies) 29 Figure 2.3. Percentage of pension payments as a percentage of pensioners (by pension scheme, 2023) 30 Figure 2.4. Age distribution of pensioners under the regular pension scheme 31 Figure 2.5. Age distribution of pensioners under the pending pension scheme 31 Figure 2.6. Age distribution of pensioners under the veteran pension scheme 32 Figure 2.7. Age distribution of civil servants including military and reserve by age (2016 and 2023) 34 Figure 2.8. Net monthly pension payments in 2016 and 2023 for the regular pension scheme (CFA) 35 Figure 2.9. Net monthly pension payments in 2016 and 2023 for the pending pension scheme (CFA) 35 Figure 2.10. Net monthly pension payments in 2016 and 2023 for the veteran pension scheme (CFA) 35 List of Tables Table 2.1. Parameters of the regular public sector pension scheme 24 Table 2.2. Procedure to process a public sector pension 25 Table 2.3. Accrual rates of public sector pension schemes in selected Sub-Sahara African countries (2023) 26 Table 2.4. Public service pension schemes (June 2023) 28 Table 2.5. Public expenditures on pensions 28 Table 2.6. Recorded birth date 30 Table 2.7. Pension coverage (2023) 32 ii TABLE OF CONTENTS RETIRING THE FISCAL RISK Table 2.8. Pensioners and contributors 33 Table 2.9. Number and pensions of individuals who are pensioners in both 2016 and 2023 36 Table 2.10. Pensioners and pension amounts (2016 and 2023) 36 Table 2.11. Policy options to improve the public pension system 38 Table A1. Pension system in balance (retirement age 60) 44 Table A2. Pension system in balance (retirement age 60) 44 Table A3. Pension system in balance (retirement age 65) 45 List of Maps Map 1.1. Poverty indicators by region (EHCVM 2021) 16 TABLE OF CONTENTS iii GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2024 Acknowledgments The Guinea-Bissau Economic Update monitors significant Inchauste (Lead Economist) and Anna Carlotta Allen recent economic developments in the country, highlighting Massingue (Senior Economist). Gonzalo Javier Reyes the key structural challenges Guinea-Bissau faces in its Hartley (Senior Social Protection Specialist) and Montserrat pursuit of inclusive and sustained growth. Pallares-Miralles (Senior Economist) were the peer- reviewers of this report. Etsehiwot Berhanu Albert (Team This report is prepared by the World Bank’s Macro­ Assistant), Ramatulay Heloysa Barbosa (Executive Assistant), economics, Trade and Investment (MTI) Global Practice and Theresa Bampoe (Senior Program Assistant) provided team led by Patrick McCartney (Economist). Chapter 1 was valuable admin support. Lucy Victoria Davis (Consultant) authored by Patrick McCartney (Economist) with poverty undertook the pre-design editing of the report. Cover photo inputs from Sering Touray (Economist) and energy inputs by Elena Touriño Lorenzo. from Yuri Lima Handem (Energy Specialist). Chapter 2 was authored by Philippe Auffret (Senior Social Protection The findings, interpretations, and conclusions expressed Specialist, Lead Author) and Matilde Grácio (Consultant) in this report do not necessarily represent the views of the with contributions from Patrick McCartney (Economist) World Bank and are entirely those of the authors. and João Leonel Antunes Morgado (Young Professional). The team benefited from the guidance of Anne-Lucie Comments and questions on the content of this report are Lefebvre (Resident Representative), Hans Anand Beck welcome. Please contact Patrick McCartney (pmccartney@ (Practice Manager), Edouard, Al-Dahdah (Lead Country worldbank.org). Requests from the media may be directed to Economist), Daniela Marotta (Lead Economist), Gabriela Joana Rodrigues (jdossantosrodrig@worldbankgroup.org). iv ACKNOWLEDGEMENTS RETIRING THE FISCAL RISK Executive Summary Economic growth that matches potential continues to from 6.2 percent of GDP in 2022 to 5.1 percent in 2023. evade Guinea-Bissau as the international cashew market Although the wage bill declined in 2023, personnel incen- conditions remain testing. Another difficult cashew cam- tives as a percentage of the official wage bill increased from paign limited the translation of high production into 14.7 percent to 18.4 percent, as well as other budget lines economic growth. While cashew production reached that contribute to the real wage bill, such as travel and pen- 260 thousand tons, the highest production yield on record, sions (see box 1.2). These payments constitute a de facto, only 170 thousand tons were exported by the end of 2023. but expensive, compensation mechanism for efforts made It is estimated that the remaining 90 thousand tons were to reduce the official wage bill. Elections, an increase in smuggled out of the country into neighboring Senegal and non-budgeted expenditure, such as payments to Karpower, Guinea. Consequently, economic growth remained below higher debt servicing following rising international interest potential at 4.2 percent. Inflation remained stubbornly rates, and poorly targeted rice subsidies with a value of high at 7.2 percent y/y for 2023, but remittances and tax 0.2 percent of GDP (see box 1.1) also contributed to the evasion from cashew smuggling limited the impact of this consumption of the fiscal space created by efforts made on on disposable income and helped contribute to private the wage bill. consumption. Political uncertainty, both domestically and regionally, The weak export performance of the cashew campaign continues to have a negative impact on the economy. put pressure on the fiscal situation as total revenues Political instability inhibits the ability of the donors to fell causing the fiscal deficit to widen to 7.6 percent. support the government in its fiscal consolidation objectives Total revenues fell from 15.2 percent of GDP in 2022, in a responsive manner, and regional and international to 13.9 percent in 2023 driven by poor export volumes political instability only further stoke domestic tensions in of cashew, the introduction of rice subsidies financed by Guinea-Bissau. Additionally, instability in the Middle East exempting the private sector from import tax duties to affecting shipping lanes to and from Asia may decrease set the price of rice below market value, and lower grant demand and lower prices, which may have a negative financing. Although some domestic revenue mobiliza- impact on exports. tion efforts increased in nominal terms, as a percentage of overall tax revenue they remained the same as in 2022 Public debt remained relatively high, at an estimated or fell. As is often the case in fragile countries, the lack of 77.8 percent of GDP, in 2023 despite falling from domestic revenue collection capacity has created a high 80.4 percent in 2022 – with external debt accounting dependency on indirect taxes, accounting for 63.1 per- for a smaller share. The decline in the ratio is largely cent of tax revenue in 2023, which are mostly collected at attributed to higher nominal GDP growth, as nominal customs during import and export procedures. debt levels continue to rise. This increase was driven by a higher-than-planned fiscal deficit. As in previous years, While expenditures remained largely unchanged as the composition of debt has shifted towards domestic a share of GDP, this masks the significant increase in financing, with external debt accounting for 34 per- discretionary spending and rising interest payments. cent of GDP. According to the latest joint debt sustain- Total expenditure reached 21.5 percent of GDP in 2023, ability analysis by the World Bank and IMF (November largely unchanged from 21.3 percent in 2022. This is 2023), debt is assessed to be sustainable but remains at despite progress in rationalizing the wage bill, which fell high risk of debt distress. Interest rate increases to curb Executive Summary v GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2024 inflation have increased the cost of domestic financing. the government’s annual debt bulletin publishes statistics The IMF has supported the government’s efforts to reduce on debt for EAGB and the airport SOEs. non-concessional debt by implementing a policy of a zero ceiling on new non-concessional debt. The fragile banking system also represents a contingent liability and fiscal risk for the government, made worse The current account deficit (CAD) remained broadly by an undercapitalized bank. A systemically important unchanged from 2022, driven by the high costs of food bank (SIB) holds approximately 40 percent of all deposits and energy imports. The country is highly dependent on in the country, but its low capitalization and very high imports for most sectors, such as staple foods, fuel, medi- level of non-performing loans (NPLs) pose a threat to cation and building materials. Inflationary pressure on macro-financial stability. The Government began looking essential goods and services that Guinea-Bissau imports for a strategic investor in 2021 and a potential buyer has eased in the second half of the year supporting a slight shown interest, despite the bank only managing to recover improvement of the CAD despite poor cashew export approximately 10 percent of its NPLs, but the political performance. Consequently, the CAD fell from 9.6 per- instability post-December 2023 will make this task diffi- cent in 2022 to 9.4 percent in 2023. cult. These issues as well as the lack of depth in the financial markets limit financial inclusion and development. The IMF special drawing rights (SDR) allocation for Guinea-Bissau represented 2.4 percent of GDP in extra Poverty continues to be widespread in Guinea-Bissau resources. Guinea-Bissau received an SDR allocation of increasing by 2.8 percentage points (equivalent to over US$D 38.4 million (2.4 percent of GDP) in August 2021 80,000 additional poor) between 2018 and 2021. Data which contributed to closing the external financing gap from the 2018/19 and 2021/22 EHCVM surveys showed and allowed the government to pre-pay some BOAD that poverty increased from 47.7 percent in 2018 (equiva- debt. In November 2023, the IMF board approved an lent to about 0.802 million poor persons) to 50.5 percent increase to 140 percent of the quota to continue supporting in 2021 (equivalent to over 0.886 million poor). This is Guinea-Bissau’s financing needs in a context of low revenue equivalent to over 80,000 additional poor. Over the same from a weak cashew campaign and EAGB arrear payments period, other measures of poverty increased in Guinea- driving up expenditure. Bissau. The poverty gap (which measures the extent to which individuals on average fall below the poverty line) State-owned enterprises (SOEs) continue to represent increased from 13.7 percent in 2018 to 15.2 percent in a large fiscal risk to the government. There is limited trans- 2021. Similarly, the poverty severity index (which puts parency in the SOE sector, especially with the national more weight on the poorest households, measured by utility company and state-owned enterprise (SOE) Elec- squaring the poverty gap) has also increased, from 5.4 to tricity and Water of Guinea-Bissau (Eletricidade e Águas 6.2 over the same period. The increase in these indicators da Guiné-Bissau, EAGB), which managed to accrue signifi- illustrates the increasing intensity of poverty in Guinea- cant public debt in 2023 (Box 1.3). A lack of transparency Bissau during the period. Recovery from the COVID-19 in the SOE sector makes the identification of contingent pandemic has been constrained by additional shocks- liabilities more difficult, which increases the fiscal risks notably spillover effects of the war on Ukraine resulting in a country with very little debt absorption capacity for in disruptions in global supply chains and rising food additional shocks. The port of Guinea-Bissau is also a prices. The combination of agricultural growth and high loss-making SOE, but it is unclear how much of a loss it food prices is expected to have left poverty unchanged is making or how this loss is being financed, for example. between 2022 and 2023 at about 26 percent (based on However, efforts by the government to improve this in the international poverty line of $2.15 in 2017 PPPs), recent years have been supported by the World Bank’s with population growth implying over 10,000 additional Sustainable Development Finance Policy Framework and poor people. Additionally, low cashew farmgate prices in vi Executive Summary RETIRING THE FISCAL RISK 2023 have also undermined progress in poverty reduction. budget support materialize. OMVG will reduce the over- The combined effects of rising food prices and low spending on EAGB and Karpower-related non-budgeted returns from cashew production are expected to have expenses that have driven the fiscal deficit. Annulation of disproportionately affected the well-being of the poor (who the fixed cost capacity contract with Karpower will result spend nearly 55 percent of their expenditure on food). in huge fiscal savings, approximately equal to the entire health sector expenditure for 2023, and cheaper electricity Early signs indicate that the 2024 cashew campaign for consumers in the country, removing one of the main promises to be strong, which will support real economic constraints on private sector development which should growth of 4.7 percent. Cashew production is expected to result in higher fiscal revenue. The resolution of this con- be strong again due to favorable weather conditions and as tract issue and donor-supported expenditure control and government investments into agricultural inputs over the DRM reforms should reduce debt to WAEMU regional last few years pay dividends. In contrast to the previous two convergence criteria in the medium term. years, however, exports should markedly improve as nine overland border routes become authorized for exports, Risks continue to be centered around political insta- curtailing smuggling. Historically, only cashew exports via bility, shocks to the international cashew market, and the port of Bissau were authorized so this should contribute climate change. The constitutional crisis from December to the growth of processing in neighboring countries, 2023 and the uncertain electoral calendar has caused political potentially creating new export options. Global geopolitical instability. Political stability is crucial to maintain the developments may also create domestic opportunities for authorities’ commitment to a stringent macroeconomic growth in Guinea-Bissau. Maritime disruptions in the policy framework, including: (i) fiscal consolidation; and Middle East have driven rising Asia-Europe freight costs (ii) prudent borrowing, to put debt on a consistent down- which has translated into a growth in demand for cashew ward trend and achieve debt sustainability in the medium from Africa. This disruption allows a premium of 0.2 to term. Additionally, weaker cashew nuts exports and lower- 0.3 USD US$/kg over cashew of Vietnamese origin on than-expected donor support may impact the outlook. spot contracts. This demand for African cashew to avoid Financial stress in state-owned enterprises, such as EAGB Middle East trade lines coupled with cheap electricity (Box 1.3), and banking sector fragilities could also gen- from OMVG (Box 1.3) could stimulate expansion of the erate contingent liabilities adding to fiscal pressures. An processing sector in Guinea-Bissau where the capacity to increased severity of the prolonged Russian invasion of transform cashew is currently limited to 10,000 tons. This Ukraine could impact the economic outlook if it continues presents a potentially positive step towards increasing the to cause supply chain disruptions. Furthermore, if disrup- value chain of the main productive sector in the country. tions to commodity trade routes to Asia worsen owing to Despite maritime trade risks, Chinese firms should enter an escalation in the Middle Eastern conflicts, this could the market for processing in Asia, competing with India have a negative impact on the growth outlook. and Vietnam for Bissau-Guinean cashew, creating new trade links. The second chapter shows that the main challenge faced by the public sector pension schemes is one of gover- Resolution of the Karpower contract situation could nance but with very high fiscal consequences. Pension result in fiscal savings equivalent to the health sector payments disproportionately benefit a very small fraction budget and help ensure medium-term debt sustain- of beneficiaries while discretionary changes deviating ability. The fiscal deficit is projected to narrow in 2024 from the rules are made to individual pension amounts. to 4.8 percent of GDP (on a commitment basis), from Furthermore, pension payments are made using the general 7.6 percent. This assumes that the OMVG electricity line budget exacerbating already high budget rigidity and adding from neighboring Guinea is activated and remains acti- additional challenges to the fiscal consolidation objectives vated, progress is made in the public financial management of the government. An analysis of the 2016 and 2023 payroll reform space, and commitments to grant grant-funded databases appears to suggest that pension payments are Executive Summary vii GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2024 “captured” by those responsible for the implementation Maintaining current governance structures supporting of the schemes. the public pensions sector and instead investing efforts to improve them is the best course of action for Guinea- The analysis shows that the current parametric design Bissau. The Government of Guinea-Bissau is advised to of the public sector pension scheme is unaffordable maintain the current institutional structure of the public in its present form, compromising the fiscal sustain- service pension schemes, immediately introduce the outlined ability of the scheme. An accrual rate of 2.8 percent is much measures including an institutional assessment of the unit higher than the regional average (2.2 percent) and a con- responsible for managing the public pension schemes tribution rate of 6 percent is far lower than it needs to be to improve governance, and consider a coherent reform (16.8 percent) if the accrual rate is to remain at 2.8 per- package on the basis of a model like PROST to introduce cent. Additionally, calculating a civil servant’s pension parametric reforms to improve equity and ensure fiscal based on an average of the last two years of base salary sustainability. makes the pension much more expensive as it creates incen- tives to maximize salaries just before retirement. Additionally, to attenuate the large fiscal risk that materializes annually owing to a lack of information, such The analysis also shows that it is not recommended for as incomplete birthdates, and a lack of government-led Guinea-Bissau to set up a pension fund for the public forward-looking analysis in the pension space, the service pension scheme at this stage. Although the 2015 government may also want to consider systematically Budget Law envisaged creating a pension fund, its current using a model as part of its pension administration. financing (6 percent of payroll) would not be enough to The World Bank’s PROST toolkit could fill this space pay existing pensions. Importantly, creating a pension fund by: (i) assessing the fiscal costs of the current scheme, and in a weak governance environment is extremely risky while (ii) evaluating different pension reform options. The World the establishment of a strong regulatory framework would Bank’s pension reform options simulation toolkit, PROST, be a prior condition for the implementation of such a models pension contributions, entitlements, system reve­ pension fund. As such, establishing a pension fund for the nues, and system expenditures over a long period. It is public service employees would bring significant admin- designed to help policymakers make informed policy deci- istrative and fiscal challenges and therefore is not in the sions. PROST was used for the preparation of the pensions interest of the pensioners. chapter in the recent Public Expenditure Review for Guinea- Some measures could be taken immediately to improve Bissau (World Bank, 2022). The World Bank could pro- the public services pension schemes. These measures vide technical assistance to provide the government of include clarifying the parameters of the pension schemes, Guinea-Bissau with such a model although the ability to reviewing and updating the list of pensioners, establishing usefully employ it will depend on data availability and a “proof of life” procedure, systematically making pension quality as well as completeness for both current civil servants payments through the banking system, and, importantly, and pensioners. This would support the government with conducting an institutional assessment of the unit respon- planning and efficient, proactive mobilization of resources, sible for managing the public pension schemes. rather than the current reactive approach. viii Executive Summary Chapter 1: The State of the Economy GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2024 1.1. Context Figure 1.1. Annual change in real GDP and annual change in raw cashew nut (RCN) exports Guinea-Bissau faces several important structural chal- (2000–2023) lenges to improve growth prospects including reoccur- 10.0% 160.0% ring political instability. A poor national road network, a low-production seaport, and costly access to the internet 8.0% 120.0% hamper efficient access to markets and the development 6.0% 80.0% of national and regional value chains. A challenging busi- 4.0% ness environment, paired with policy uncertainty and 40.0% 2.0% weak institutions, undermine private sector investment, 0.0% preventing progress in economic diversification. 0.0% –2.0% –40.0% The economy remains highly dependent on the export of raw cashew nuts. These make up around 90 percent –4.0% –80.0% 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023e of export value and provide income to around 80 percent of the population, mainly smallholder farmers and tempo- rary harvest workers. Only around 3 percent of domestic Real GDP growth (Left axis) output of raw cashew nuts is processed locally into eatable RCN Export Value (Right Axis) cashew nut kernels. As a result, economic growth is inher- Source: The Ministry of Finance and World Bank. ently linked to the export performance of the crop (Fig- ure 1.1). This dependency makes the country susceptible Technologies (ICT) services. The persistent absence of to external shocks, including from highly volatile inter- these key public goods and services—through direct public national prices, and adverse climatic conditions, such as investments or effective public-private partnerships (PPP)— irregular rainfall or floods. severely limits the ability of private firms to invest and of Guinea-Bissau lacks a conducive enabling environment poor households to participate in economic activity, either for private sector-led growth due to low levels of infra- through more productive autonomous activities or through structure, human capital, and public services. This situa- accessing the employment opportunities that could be gener- tion is compounded by strong elite competition for rents ated by a thriving private sector. and a weak public administration. The investment climate does not have a conducive business environment, with the Heritage Foundation’s business freedom indicator falling 1.2.  Recent developments from 36.9/100 in 2021 to 31.6/100 in 2023, compared to 1.2.1.  Real sector a world average of 60.3/100. Firms and households struggle to obtain access to finance, and the functioning of markets is Growth remained unchanged at 4.2 percent in 2023 as undermined by the absence of public investments in foun- challenges in export performance limited the translation dational economic services, and public goods. Trans- of record-high cashew production into growth. Headline port, logistics, electricity, water, and telecommunications inflation remained high at 7.2 percent, with rising food infrastructure are in a poor state, which raises the cost of prices prompting the authorities to introduce price doing business. Member states in the Economic Com- controls and subsidies on key goods munity of West African States (ECOWAS) region typically exhibit fragmented telecommunications markets and rel- Guinea-Bissau’s cashew campaign was not disrupted by atively very high prices for Information Communication the 2023 legislative elections as much as anticipated, 1 The level of smuggling is estimated to be around 90 thousand tons. 2 Chapter 1: The State of the Economy RETIRING THE FISCAL RISK but weak international demand and high levels of ease in June, coinciding with when households began to smuggling kept economic growth below potential at receive income from the cashew campaign, thus increasing 4.2 percent. A difficult cashew campaign limited the their purchasing power and supporting private consump- translation of high production into economic growth. tion. Despite this, prices for some staple foods continued to While cashew production reached 260 thousand tons, increase underscoring household vulnerabilities to com- the highest production yield on record, only 170 thousand modity price swings, highlighting the country’s dependence tons were exported by the end of 2023. Poor export per- on food imports and raising food security concerns. This formance was partly driven by low international demand prompted the authorities to introduce price controls on and prices, but also due to a monopoly on shipping con- staple foods and a rice subsidy which cost an estimated tainers early in the campaign which drove container 0.2 percent of GDP (Box  1.1). Consequently, both prices up and led to high levels of smuggling into neigh- November and December had y/y inflation rates of boring Guinea and Senegal to avoid the additional cost.1 3 percent and the yearly average fell to 7.2 percent. Although a second shipping container company eventu- ally entered the market and international demand rose 1.2.2.  Fiscal and debt dynamics later in the campaign, the already high levels of smuggling meant there was a lack of stock to take advantage of this. Fiscal consolidation efforts were derailed as higher- Low prices on the international market translated into than-planned discretionary spending and lower low farmgate prices which were as low as 150CFA/kg in customs receipts widened the fiscal deficit to some regions for most of the campaign, and well below 7.6 percent of GDP in 2023 (from 6.1 percent in 2022) the government-determined benchmark of 375CFA/kg. However, cashew smugglers benefited from tax evasion, The fiscal situation worsened in 2023. Despite the giving them an additional margin that likely translated into government’s commitment to a fiscal consolidation pro- higher-than-market-prices for cashew producers, and this, gram that preserves medium-term sustainability, the overall coupled with higher remittances, limited the extent to which fiscal deficit widened to 7.6 percent of GDP in 2023, private consumption was constrained in a high inflation from 6.1 percent in 2022 (on a commitment basis).3 context and allowed the economy to grow by 4.2 percent. This reflects poor revenue performance and higher-than- Consequently, private consumption’s contribution to expected discretionary spending, which have also contributed growth only contracted slightly as compared to 2022 and to the widening of the primary balance (from 4.7 percent elections and urban road infrastructure investment sup- of GDP to 5 percent in 2023). While ongoing fiscal ported government consumption. consolidation efforts have crowded in grant commitments, not all have materialized. Consequently, grants reached Headline inflation averaged at 7.2 percent (y/y), though just 2 percent of GDP in 2023, down from 3.4 percent this masks the underlying trend in monthly data as in 2022, reflecting a significant decline in budget sup- inflationary pressures driven by the Russian invasion port. Inherently, political instability inhibits the ability of of Ukraine begin to ease.2 Inflation averaged 10 percent the donors to support the government in its objectives in a between January and June 2023, up from 7.9 percent in responsive manner, and regional and international polit- 2022. However, international inflationary pressures started to ical instability only further stoke domestic tensions in 2 Inflation data from the National Statistics Institute for January to September and remittance data from the BCEAO for January to September. 3 The fiscal consolidation program is supported by an ongoing three-year IMF program under the Extended Credit Facility (ECF) which began in January 2023 following the successful completion of a Staff Monitored Program (SMP). The ECF program includes quantitative performance criteria (QPC) and indicative targets (IT) that support fiscal consolidation and debt sustainability, such as a floor on tax revenue, a ceiling on wage bill spending, a floor on the domestic primary balance, a ceiling on non-concessional borrowing as well as arrears clearance. Program performance is currently being tested, as the time of writing. Chapter 1: The State of the Economy 3 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2024 Guinea-Bissau4. As a result, financing of the budget deficit largely unchanged from 21.3 percent in 2022. This is has relied on borrowing from the regional debt market – despite progress in rationalizing the wage bill, which which has become increasingly costly. fell from 6.2 percent of GDP in 2022 to 5.1 percent in 2023. The peak in the wage bill in 2022 was driven by Total revenues fell in 2023, driven in part by a fall in tax a government census in Q2 of 2022 with the objective revenue. Total revenues fell from 15.2 percent of GDP in of removing irregular civil servants and ghost workers. 7 2022, to 13.9 percent in 2023 driven by poor export vol- However, the census process erroneously regularized the umes of cashew, the introduction of rice subsidies financed irregular workers numbering over 1,500 health profes- by exempting the private sector of import tax duties to sionals who were hired outside of the budget and without set the price of rice below market value, and lower grant the authorization of the Minister of Finance during the financing. Despite a poor cashew campaign, tax revenue pandemic.8 Despite the decline in the wage bill in 2023, remained unchanged at 9.3 percent of GDP in 2023.5 personnel incentives as a percentage of the official wage Guinea-Bissau’s tax-to-GDP ratio still remains one of the bill increased from 14.7 percent to 18.4 percent, as well lowest in the world owing to a small tax base and poor as other budget lines that contribute to the real wage bill, tax administration. Excessive bureaucracy also harms the such as travel and pensions (see Box 1.2). These payments efficiency of tax collection as tax payments still mostly rely constitute a de facto, but expensive, compensation mech- largely on human interactions and paper-based exchanges. anism for efforts made to reduce the official wage bill. The government is engaged with the international donor Elections, an increase in non-budgeted expenditure, such community, which provides technical assistance to support as payments to Karpower, higher debt servicing following reforms and domestic revenue mobilization efforts to miti- rising international interest rates, and rice subsidies with gate these shortcomings. Corporate income tax increased a value of 0.2 percent of GDP (see Box 1.1) consumed 13.9 percent in nominal terms in 2023 but remained approx- the additional space created by efforts with the wage bill. imately the same as in 2022 in percentage of overall tax Conversely, capital spending fell to 5.3 percent of GDP revenue terms, increasing from 17.8 percent to 18.1 percent. from 6.1 percent as large investments in road infrastruc- Direct taxation also increased in nominal terms by 6.7 per- ture work began to conclude. cent but as a percentage of overall tax revenue, it fell from 38.7 percent to 36.9 percent. As is often the case in fragile countries, the lack of domestic revenue collection capacity Despite this slippage, steady progress is being made to has created a high dependency on indirect taxes, accounting strengthen domestic revenue mobilization, rationalize for 63.1 percent of tax revenue in 2023, which are mostly the wage bill, and improve overall expenditure control collected at customs during import and export procedures.6 The authorities remain committed to implementing While expenditures remained largely unchanged as measures to strengthen domestic revenue mobiliza- a share of GDP, this masks the significant increase in tion (DRM) with notable steps taken in 2023. Ongoing discretionary spending and rising interest payments. tax reforms including the continuation of the rollout of Total expenditure reached 21.5 percent of GDP in 2023, the online tax payment system, Kontaktu, and enhanced 4 Chapter 1 of the Country Economic Memorandum (2020) analyses the impact chronic political instability has had on economic development in Guinea-Bissau. 5 The overwhelming majority of cashew producers are informal sector smallholders and so do not pay corporate tax or any other fiscal contribution. This responsibility falls on the shoulders of the intermediary buyers and the exporters. 6 Due to the ease of charging taxes at customs, some direct taxes are also collected during importation or exportation. They include a contribution to corporate taxes (Anticipação de Contribuição Industrial) and cashew nuts specific income taxes (Contribuição Predial Rustica), among others. 7 The 2022 budget gave the Minister of Finance the exclusive authority to hire new staff in the public administration. 8 Consistent with the discussion in Box 1.2, the Country Economic Memorandum for Guinea-Bissau calculates that when considering non-salaried remuneration and other benefits that are hidden in other budget categories, this number is actually greater than 10 percent of GDP. 4 Chapter 1: The State of the Economy RETIRING THE FISCAL RISK Figure 1.2. Expenditure lines, revenue lines, and tax revenue breakdown as percent of GDP a. Expenditure lines 30% 20% 10% 0% 2021 2022 2023 Salaries Debt Amortization Goods and Services Transfers Other Current Expenditure Interest Payments (Debt) Capital Spending Treasury Special Account b. Revenue lines c. Tax revenue breakdown 16% 12% 14% 10% 12% 8% 10% 6% 8% 6% 4% 4% 2% 2% 0% 2021 2022 2023 0% 2021 2022 2023 Income Tax Property Tax Consumption Tax Tax Revenue Non-Tax Revenue Grants Trade Tax Other Tax Revenue Source: Bissau-Guinean Ministry of Finance. tax compliance as well as the adoption of measures to The fiscal yield from implementation is expected to be improve internal control procedures of customs and tax 2.6 percent by 2029. directorates are key to strengthening tax performance.9 In 2023, the government announced a tax package to sim- Rationalizing the wage bill and improving overall plify and enhance transparency of the tax system. Work expenditure control are also key priorities. Expenditure on the implementation of value-added tax (VAT) is also on salaries narrowed to 5.1 percent of GDP in 2023 from ongoing, supported by technical assistance (TA) from 6.2 percent in 2022, driven by wage bill execution reaching the IMF, the Portuguese government, and the World only 88 percent of the budgeted amount (Box 1.2).10 Spend- Bank which is envisioned to be rolled out in May 2024. ing consolidation has been supported by the continued 9 The Kontaktu electronic system allows fiscal contributors to pay taxes online, facilitating payment efficiency and reducing paperwork. However, an end-2023 World Bank financed taxpayer perception survey in Guinea-Bissau showed that 81 percent of formal sector firms in the sample were not aware of Kontaktu, underscoring the need to communicate the platform to the business community. 10 A wage bill analysis was done as part of the World Bank’s 2019 Public Expenditure Review for Guinea-Bissau and concluded that the real wage bill was much higher than the official wage bill once incentives and other benefits, such as incentives, travel and international healthcare, were considered. For 2023, the real wage bill was approximately 84 billion CFA, compared to the official age bill of 58 billion CFA. The real wage bill (official wage bill) accounts for 12.1 percent of GDP (6.8 percent) and 120.7 percent of tax revenues (67.6 percent). This is much higher than the WAEMU criteria of a wage bill-to-tax revenue ratio of 35 percent. Chapter 1: The State of the Economy 5 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2024 Box 1.1. Rice subsidy impact Price controls on staple foods were introduced in August 2023 to abate the negative impact of high inflation and the poor cashew campaign on real household incomes. The first Council of Ministers meeting of the then newly elected gov- ernment introduced a series of measures to safeguard the poorest in Guinea-Bissau against a cost-of-living crisis driven by high inflation and low household income due to a poor cashew campaign. These measures included price controls on 30,000 tons of imported rice, the main staple food of Guinea-Bissau, and more specifically on broken rice (17,500CFA per 50kg bag) and scented rice (22,500CFA per 50kg bag). The fiscal cost of these measures is estimated at 2 billion CFA. The 2023 Budget Law allocates just 1 billion CFA for internally financed public investment and 615 million CFA for recurrent costs for the Ministry of Agriculture and Rural Development highlighting the disproportionately high opportunity cost for this policy. The measures may have unexpected implications, both positive and negative, on the economy. Some traders with older stock of imported rice that was bought at higher prices, before the measures were introduced, are holding back this stock in anticipation of the price controls subsiding. This affects the supply and demand mechanism for rice and artificial scarcity could potentially encourage higher priced black-market trading which may undermine the price controls and negatively impact the poorest in the country. Additionally, although the traditional practice of trading cashew for imported rice at a ratio of 2:1 has reduced in recent years, increased food insecurity and inflationary pressures have fostered desperation and driven a resurgence in the practice, at a ratio of 3:1 in some areas of the country. Reduced imported rice prices through price controls may improve the bargaining power of cashew farmers and allow for more equitable trade, reducing the predatory 3:1 ratio. Furthermore, the subsidies may be benefitting neighboring countries who purchase the discounted rice in Guinea-Bissau and sell it for a higher price or consume it in their own countries. The policy may reinforce binding constraints to economic diversification away from cashew production. Domestic rice accounts for 55 percent of rice consumption in Guinea-Bissau but domestically produced rice costs 20 percent more than imported rice varieties, a statistic that will be exaggerated with this policy. Domestically produced rice is especially commonplace in rural areas but has limited market presence with two thirds of its consumption being the subsistence farmers who produce it. Imported rice accounts for just 45 percent of consumption but is far more present on the market, boasting 80 percent of all rice transactions in the country. This policy will contribute to a successive series of policies that sideline domestic production and stunt the growth potential of the sector and undermine efforts to diversify the economy. Information in Box 1.1: Rice Subsidy Impact is the work of both the author and work taken from Akong, C. (2023) “Scented Relief” UNRCO Guinea-Bissau Box 1.2. What lies beneath – The Guinea-Bissau wage bill The official wage bill in Guinea-Bissau is somewhat small relative to GDP and in line with those of peer countries, but it remains far above the WAEMU convergence criteria of 35 percent of tax revenues. The official wage bill accounted for 50.1 percent of tax revenues over 2021–2023. According to official figures, wages and salaries have decreased steadily, from 6.1 percent of GDP in 2021 to 5.1 percent in 2023. The share of wages and salaries allocated to the social sectors has grown substantially on the back of higher spending on education. Wages in the education sector account for the highest contribution to the wage bill, at 48.4 percent of the total and equivalent to 2.5 percent of GDP in 2023. 6 Chapter 1: The State of the Economy RETIRING THE FISCAL RISK Box 1.2. What lies beneath – The Guinea-Bissau wage bill (Continued) However, official figures do not provide a complete picture of total government employment and compensation such as pensions and incentive bonuses. Several spending items, including pensions, bonuses, travel benefits, salary top-ups, overseas health benefits, and salaries of staff in autonomous state institutions are classified under different budget lines and therefore not included in official figures. When these items are considered, the total government employee compensation amounts to approximately 1.6 times the official wage bill (2021–2023 average). This puts Guinea-Bissau’s true wage bill among the highest when compared to structural and regional peers, such as Kenya, Senegal, Rwanda, Timor-Leste, Mauritius, and Uganda as a percentage of GDP and all of the above as well as South Africa as a percentage of tax revenue (Public Expenditure Review, 2019). Incentive bonuses paid to MEF staff to incentivize tax collection (incentivos) are disproportionately high and equate to 9.8 percent of total tax revenue 2021–2023. For 2023, incentives expenditure was 121 percent of expenditure for the whole health sector and 28 percent of overall social sector spending (Table Box 1.2). However, the contributions of these incentive bonuses to raising tax revenue is questionable as they are not linked to individual performance. Another large component of the real wage bill is pensions, whose lack of transparency and weak management create an annual fiscal risk as pension payments come out of the general budget rather than a fund or ringfenced sum of money. This topic is discussed in greater detail in the next chapter. Table Box 1.2. Incentive expenditure compared to social sector spending (‘000s CFA) 2021 2022 2023 Incentives 8,883,841 9,944,880 10,596,028 Ministry of Education (incentives %) 26,704,433 (33%) 32,412,527 (31%) 28,331,506 (37%) Ministry of Health (incentives %) 9,463,681 (94%) 13,854,258 (72%) 8,767,884 (121%) Ministry of Women, Family and Social 1,100,027 (808%) 196,485 (5,061%) 179,736 (5,895%) Solidarity (incentives %) Total Social Sector Spending 37,268,141 (24%) 46,463,270 (21%) 37,279,126 (28%) (incentives %) Source: Ministry of Finance. rationalization of the wage bill with measures introduced Public debt remains above the WAEMU convergence over the last two years including the freezing of public criteria, and fiscal risks – particularly from sector salaries and new hires, and the removal of two- SOEs – persist. thirds of advisor positions at the Presidency, Prime Minis- ter’s Office, the Presidency of the National Assembly, and Public debt remained relatively high, at an estimated the Presidencies of the Constitutional and Audit Courts. 77.8 percent of GDP, in 2023 despite falling from Preparation for both an IMF-led blockchain solution and 80.4 percent in 2022 – with external debt accounting a World Bank financed biometric civil service census are for a smaller share. The decline in the ratio is largely underway to further support the government’s efforts to attributed to higher nominal GDP growth, as nominal rationalize the wage bill but are not expected to be rolled debt levels continue to rise. This increase was driven by a out until end-2024. higher-than-planned fiscal deficit. As in previous years, the Chapter 1: The State of the Economy 7 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2024 Figure 1.3. Guinea-Bissau public debt (percent Figure 1.4. Guinea-Bissau external debt end–2022 of GDP) (percent of total) 100 Exim Bank Other Bilaterals 5% India 4% 80 16.6 Kuwait 4% 16.4 14.8 18.6 60 BOAD 32% 16.5 24.5 17.5 22.5 26.7 Angola 7% 11 40 24.6 27.2 29.3 Other 23.1 25 20 Multilateral 8% 13.4 15.8 12.8 11.9 IMF 7% 9.9 0 IDA 26% AfDB 7% 2019 2020 2021 2022 2023e BOAD IMF AfDB BOAD External (w/o BOAD) IDA Other Multilateral Angola Other Domestic Local Banking System Kuwait Exim Bank India Other Bilaterals Source: Guinea-Bissau authorities and IMF and WBG staff calculations. Source: Guinea-Bissau authorities and IMF and WBG staff calculations. composition of debt has shifted towards domestic financ- However, efforts by the government to improve this in ing, with external debt accounting for 34 percent of GDP. recent years have been supported by the World Bank’s According to the latest joint debt sustainability analysis by Sustainable Development Finance Policy Framework and the World Bank and IMF (November 2023), debt is assessed the government’s annual debt bulletin publishes statistics to be sustainable but remains at high risk of debt distress. on debt for EAGB and the airport SOEs. Interest rate increases to curb inflation have increased the cost of domestic financing. The IMF has supported the gov- ernment’s efforts to reduce non-concessional debt by imple- 1.2.3.  Balance of payments menting a policy of a zero ceiling on new non-concessional debt (Figures 1.3 and 1.4). High food and energy import costs maintained the CAD at the same level as in 2022 but the IMF SDRs State-owned enterprises (SOEs) continue to represent were increased by 140 percent to continue support a large fiscal risk to the government. There is limited financing needs transparency in the SOE sector, especially with the national utility company and state-owned enterprise (SOE) Elec- The current account deficit (CAD) remained broadly tricity and Water of Guinea-Bissau (Eletricidade e Água da unchanged from 2022, driven by the high costs of food Guiné-Bissau, EAGB), which managed to accrue signifi- and energy imports. The country is highly dependent on cant public debt in 2023 (Box 1.3). A lack of transparency imports for most sectors, such as staple foods, fuel, med- in the SOE sector makes the identification of contingent ication and building materials.11 Inflationary pressure on liabilities more difficult, which increases the fiscal risks essential goods and services (Figure 1.5) that Guinea-Bissau in a country with very little debt absorption capacity for imports eased in the second half of the year supporting additional shocks. The port of Guinea-Bissau is also a a slight improvement of the CAD despite poor cashew loss-making SOE, but it is unclear how much of a loss it export performance (Figure 1.6). Consequently, the CAD is making or how this loss is being financed, for example. fell from 9.6 percent in 2022 to 9.4 percent in 2023. 11 Although Guinea-Bissau used to be a net rice exporter in the past, now more than half of local rice consumption depends on rice imports. 8 Chapter 1: The State of the Economy RETIRING THE FISCAL RISK Box 1.3. EAGB: the national utility SOE: A persistent fiscal risk Public energy provision in Guinea-Bissau is mainly limited to the capital region. The state-owned utility Electricity and Water of Guinea-Bissau (EAGB), founded in 1983 and located in the capital Bissau, has the objective to provide production, transport and distribution of electricity and water in the national territory. However, only less than 20 percent of the popu- lation, most of whom live in Bissau, have access to the electricity and water network of EAGB. Some provinces have larger generator sets but power supply is limited and unstable. In February 2019, EAGB signed an electricity supply contract with KARPOWERSHIP, which installed a floating power station off the shores in the harbor of Bissau. The boat now produces and supplies all the electricity that EAGB sells to its customers. The contract, due to last five years, agreed to gradually take production capacity up to 24MW over this period. Longstanding business management weaknesses and accounting irregularities affected EAGB financial stability and caused a technical bankruptcy in 2018. On the one hand, EAGB’s operating expenses are high mainly because of its high wage bill. The company employs around 530 people, whose wages are above the national-average and benefit from free electricity and water provision. On the other hand, revenue collection is low as EAGB does not have the capacity to take readings in a timely manner or sometimes does not account for water and electricity consumption. It is estimated that electricity bills of around 4 billion CFA from companies and individual customers are still outstanding. EAGB’s resulting high debt levels are estimated at 63 billion CFA (4 percent of GDP), of which 44 billion CFA is current debt and 19 billion CFA is historical debt. This includes salary arrears and liabilities to the public treasury, commercial banks, and the National Institute for Social Security (INSS). The Government transfers annually around 6 billion CFA to help clear debt. A Portuguese consortium of specialists took over the management of EAGB in 2018. EAGB receives technical assistance from a consortium led by “Energias de Portugal” (EDP) to implement a management improvement and financial restruc- turing plan. Around 18 technical experts and specialists are tasked to modernize the customer service and billing system in Bissau. However, at the outbreak of the pandemic, the consortium returned to Portugal and switched to a teleworking regime. Consequently, the Government of Guinea-Bissau unilaterally suspended their contract on a temporary basis, effective 1st June 2020 with them not returning until July 2021. The contract with the consortium ended in June 2023 and 5 new international experts were hired and started working in January 2024 to manage and continue the operational improvement of EAGB. EAGB is considering significant measures and has started to restructure their debt to form a path towards sustain- ability. EAGB is expected to take firm measures to improve its financial situation. These should include payroll control to reduce the wage bill as well as an expansion of pre-paid meter installations. A commission to collect outstanding bills has started recovering outstanding electricity bills. EAGB successfully negotiated a debt restructuring with National Institute for Social Security (INSS), which allowed around 100 workers of retirement age to retire and receive their pension. An 8-year debt service restructuring agreement with a local commercial bank was achieved. The company has been strictly complying with the debt amortization schedule. However, potential fiscal costs of EAGB’s future operational losses presents a high risk to the government’s debt situation. A new tariff bilaterally agreed by the government with Karpower makes EAGB a large fiscal risk. The government agreed a longer, more expensive contract with Karpower which would take their production up to 70MW over a period of 10 years. When the Portuguese consortium returned from Portugal, they found that monthly payments to Karpower had increased, starting from January 2021, but that reforms to increase revenue, such as receiving payment from the gov- ernment for the electricity it uses, were still finding resistance. This resulted in an unsustainable business model leading to four months of arrears to Karpower. In response, the Government held a roundtable in March 2022 with EAGB to discuss potential solutions. The World Bank attended these meetings as an observer and financed technical assistance in the form of an international lawyer to support the process. Despite this, Karpower activated a letter of credit worth three months of (continues) Chapter 1: The State of the Economy 9 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2024 Box 1.3. EAGB: the National Utility SOE: A persistent fiscal risk (Continued) arrears that was signed at the beginning of the contract. The value of these arrears was over US$6 million. A new letter of credit was signed, postponing but not solving the problem. The donor community continues to support the Government in finding a solution to the problem and the new contract was sent for legal analysis to evaluate its validity. The result is pending. Guinea-Bissau is in a vulnerable position with respect to its energy security and needs to diversify its energy mix beyond Karpower. In October 2023, Karpower cut the power supply to EAGB for two days to demand the payment of six months of invoices from late 2022 and early 2023 totaling US$14.2 million. To recover the power supply, the government and EAGB paid US$10 million of invoices through a government transfer (US$3.9 million) and EAGB’s short-term borrowing (US$6.1 million). The remaining invoices will be paid from a concessional project loan (US$4.2 million) in 2024. As the transfer was already included in the 2023 budget and the borrowing is within the existing line of government guarantees, this intervention created no additional fiscal costs for 2023. The OMVG regional project can help give the government some breathing space whilst a solution is found to the Karpower contract situation. The technical work for L’Organisation pour la mise en Valeur du Fleuve Gambie/The Gambia River Basin Development Organization (OMVG) has almost concluded but can be brought online now whilst the remaining work is finalized. The Karpower contract is divided into two parts. One part is a contracted capacity fixed cost agreement. EAGB has to pay Karpower for contracted capacity irrespective of how much is consumed. Contracted capacity is currently 30 megawatts but will increase to 70 megawatts on a tiered basis over the life of the contract, which ends in 2030. Guinea- Bissau currently has average usage needs of 20 megawatts, but peaks at 24 megawatts, meaning there would be substantial unused capacity that needs to be paid for by EAGB but cannot be used. However, a cement factory in Bissau is estimated to require 6 megawatts alone and the World Bank and other development partners are financing projects to expand electricity access in the country, The second component is the variable consumption cost and is additional to the fixed cost contracted capacity. Current contracted consumption unit prices are US$0.11/kwh for OMVG and US$0.23/kwh for Karpower (Figure 1.13). This means that the fixed cost contracted capacity with OMVG consumption, as opposed to consumption from Karpower, will create significant temporary fiscal space and breathing room, assuming it is not turned back off if/when once online. Figure 1.5. Price developments of main import commodities: Rice and oil (Jan 2019–Feb 2024) 700 140 600 120 Oil price (US$ per Barril) Rice price (US$ per ton) 500 100 400 80 300 60 200 40 100 20 0 0 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Apr-23 Jul-23 Oct-23 Jan-24 Rice Price (Left Axis) Oil Price (Brent) (Right Axis) Note: The figure presents prices in US$. Source: World Bank Pink Sheet. 10 Chapter 1: The State of the Economy RETIRING THE FISCAL RISK Figure 1.6. Changes related to cashew nut exports (y/y) 80% 60% 40% 20% 0% –20% –40% –60% 2017 2018 2019 2020 2021 2022 2023e Volume US$ price US$/CFAF Exchange rate CFAF value Note: The figure presents y/y changes of components of the cashew nut export value. Source: Guinea-Bissau authorities and WBG staff calculations. The IMF special drawing rights (SDR) allocation for by the Russian invasion of Ukraine. Fuel shortages in the Guinea-Bissau represented 2.4 percent of GDP in extra region in 2022 exacerbated this problem, as transport resources. Guinea-Bissau received an SDR allocation of costs increased owing to a rise in haulage times, but price US$38.4 million (2.4 percent of GDP) in August 2021 controls and normalization of global events negatively which contributed to closing the external financing gap impacting inflation have driven a reduction in headline and allowed the government to pre-pay some BOAD debt. inflation in the second half of 2023 (Figure 1.7). Conse- In November 2023, the IMF board approved an increase to quently, inflation in 2023 averaged at 7.2 percent y/y, down 140 percent of the quota to continue supporting Guinea- from 7.9 percent in 2022. Bissau’s financing needs in a context of low revenue from a weak cashew campaign and EAGB arrear payments Figure 1.7. Headline inflation 2020–2023 (y/y) driving up expenditure. 12.0% 10.0% 1.2.4.  Monetary policy and the financial sector 8.0% 6.0% The stock of credit to the private sector remains below the WAEMU average and credit to the economy 4.0% grew but decelerated in 2023. The banking sector 2.0% remains fragile 0.0% Inflationary pressures began to ease in the second half –2.0% of 2023, possibly supported by price controls on staple Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan-23 Mar-23 May-23 Jul-23 Sep-23 Nov-23 foods that were driving inflation. Inflationary pressure increased after the pandemic driven by supply chain dis- ruptions and a global increase in commodity prices caused Source: World Bank figures and National Statistics Institute data. Chapter 1: The State of the Economy 11 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2024 Despite appreciating in recent years, the real effective Figure 1.8. Credit to the economy exchange rate (REER) remains around 2010 levels. The 350 25 CFA peg to the euro has kept the REER relatively stable 300 since 2010. REER changes tend to follow the nominal 20 250 effective exchange rate (NEER), as the inflationary dif- 200 15 ferential with trading partners is minimal. The REER has appreciated about 4 percent since 2019 but remains 150 10 around 2010 levels. 100 5 50 Shallow financial markets limit financial inclusion and 0 0 development. Access and use of financial services have 2019 2020 2021 2022 2023e 2024f 2025f 2026f increased in the last decade, fostered by the government’s Billions of CFA Percentage Change decision to pay salaries only through the banking sector, but it remains low. Recent data in this area is difficult to Source: IMF and World Bank estimations. obtain in Guinea-Bissau but the stock of credit to the private sector was approximately 15 percent of GDP end- the SIB remains undercapitalized, with negative capital 2021, below the WAEMU average of 22 percent of GDP. levels since 2017. Since December 2018, the solvency ratio Increasing the use of mobile phone services could advance in the financial sector has been negative despite a govern- financial inclusion by giving people outside of Bissau ment recapitalization of SIB in December 2019.13 access to financial services. The liquidity of the banking system was supported by the accommodative stance of the Financial soundness indicators show that the banking BCEAO, and credit to the economy grew but decelerated sector, excluding the SIB, has recovered. Gross NPLs in 2023 (Figure 1.8). to total loans declined from 19.4 percent in 2021 to 10.4 percent in 2022 mainly due to the settlement of The fragile banking system represents a contingent lia- cross-arrears by the government with debtors of the under- bility and fiscal risk for the government, made worse capitalized bank. The financial vulnerabilities stemming by an undercapitalized bank. A systemically important from the sovereign debt and exchange rate exposures in bank (SIB) holds approximately 40 percent of all deposits the banking sector remain low. Nevertheless, the sector in the country, but its low capitalization and very high depends on the accommodative stance of the BCEAO, level of non-performing loans (NPLs) pose a threat to which may be indicative of chronic liquidity constraints. macro-financial stability.12 The Government began looking for a strategic investor in 2021 and a potential buyer has 1.2.5. Poverty shown interest, despite the bank only managing to recover approximately 10 percent of its NPLs, but the political Poverty has followed an upward trend in Guinea- instability post-December 2023 will make this task difficult. Bissau since 2018 and is more pronounced in rural areas than urban areas because of low productivity Long-standing structural issues in the banking sector agricultural production. persist. These stem from the 2012 political crisis and a sharp decline in cashew prices in 2013, which damaged Poverty continues to be widespread in Guinea Bissau- two banks highly exposed to the cashew sector, resulting increasing by 2.8 percentage points (equivalent to over in very high levels of NPLs. While one bank recovered, 80,000 additional poor) between 2018 and 2021. Data 12 There is no NPL data for 2022 at the time of writing. NPLs in 2021 were 16.6 percent (6.3 percent excluding the undercapitalized bank). 13 The minimum requirement for the solvency ratio set by the BCEAO is 8.25 percent. In December 2019, the WAEMU average solvency ratio was 11.35 percent. Guinea-Bissau’s solvency ratio was -2.0 percent, the only country in the WAEMU with a negative ratio. 12 Chapter 1: The State of the Economy RETIRING THE FISCAL RISK from the 2018/19 and 2021/22 EHCVM surveys showed poverty increased by 4.1 percentage points over the period that poverty increased from 47.7 percent in 2018 (equiva- to reach 67 percent in 2021. In the capital city, Bissau lent to about 0.802 million poor persons) to 50.5 percent poverty remained relatively unchanged at 21 percent; but in 2021 (equivalent to over 0.886 million poor)14. This is in other urban areas, poverty increased by 3.3 percentage equivalent to over 80,000 additional poor. Over the same points between 2018 and 2021 to reach 42 percent. Poverty period, other measures of poverty increased in Guinea- is most severe in rural areas as shown by higher and larger Bissau. The poverty gap (which measures the extent to increases in both poverty gap and severity indicators over which individuals on average fall below the poverty line) the period. Therefore, not only is poverty more of a rural increased from 13.7 percent in 2018 to 15.2 percent in phenomenon in Guinea Bissau, but the rural poor are 2021. Similarly, the poverty severity index (which puts more also furthest away from the poverty line compared to their weight on the poorest households, measured by squaring counterparts in urban areas. the poverty gap) has also increased, from 5.4 to 6.2 over the same period. The increase in these indicators illustrates This is partly because the rural economy continues to the increasing intensity of poverty in Guinea-Bissau be dominated by low-productive agriculture – mainly during the period. Recovery from the COVID-19 pandemic raw cashew nut production. Over 70 percent of house- has been constrained by additional shocks- notably spill- holds rely on cashew production in Guinea-Bissau, for over effects of the war on Ukraine resulting in disruptions whom income from the sale of cashew nuts is an important in global supply chains and rising food prices. The com- source of livelihood. Despite improvements in cashew bination of agricultural growth and high food prices is yields (supporting growth in agriculture from 4.3 percent expected to have left poverty unchanged between 2022 in 2018 to 5.4 percent in 2021), cashew farmgate prices and 2023 at about 26 percent (based on the international remain lower than export prices due to governance and poverty line of $2.15 in 2017 PPPs), with population market failures; thereby undermining the pace of rural growth implying over 10,000 additional poor people. income growth and progress in reducing rural poverty.15 Additionally, low cashew farmgate prices in 2023 have Between 2000 and 2020, official government estimates indi- also undermined progress in poverty reduction. The com- cate that the average export price of a kilo of cashew nuts bined effects of rising food prices and low returns from was 491CFA. However, during the same period, average cashew production are expected to have disproportionately farmgate prices for a kilo were almost 200CFA lower than affected the well-being of the poor (who spend nearly the average export price - 298CFA per kilo. Furthermore, 55 percent of their expenditure on food). although recent data shows rising cashew prices, the gap Trends in poverty between 2018 and 2021 have largely between export and farmgate cashew prices has increased gone in the same direction in urban and rural areas reaching 356CFA per kilogram in 2020 constraining the but remain higher in rural areas. In rural areas more income growth of farmers and reducing their ability to than half of the population is poor. The incidence of escape poverty. 14 A new national poverty line was constructed in 2021/22 instead of using inflation to update the 2018/19 line because the fixed CPI basket doesn’t allow for any substitution effects, which could overstate poverty rates given the price shocks experienced between 2018 and 2021. The poverty line is constructed in two stages. A basket of goods of the country’s food consumption that allows an individual to satisfy his daily nutritional needs of 2,300 kilocalories is retained and valued to provide a food poverty line. The non-food-poverty line is a portion of the non- food consumption expenditure of households located around the food poverty line. The sum of the two poverty lines gives the national poverty line. The timing of the implementation of the 2018/19 and 2021/22 surveys was not identical. In addition, the 2021/22 welfare aggregate excludes hospitalization expenditures and the rent imputation method for rural areas differs from 2018/19. 15 The recent World Bank Systematic Country Diagnostic (SCD) update- September 2023, discusses in detail the extent to which lack of inclusiveness and low rural productivity continue to constrain growth, inclusion and sustainability- https://documents.worldbank.org/en/ publication/documents-reports/documentdetail/099110323163018763/bosib0f7d3f3e401e0a2a3015c9e962aff5 Chapter 1: The State of the Economy 13 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2024 Figure 1.9. Changes in monetary poverty indicators 2018/19–2021/22 by area of residence a. Poverty incidence b. Poverty gap c. Poverty severity 9 80 25 8 7.7 67.0 21.6 70 62.9 6.2 20 19.0 60 6 5.4 50.5 15.2 50 47.7 42.1 15 13.7 4.3 38.8 11.3 4 3.6 40 10.1 30 10 21.3 21.0 20 4.7 2 1.5 5 4.2 1.2 10 0 0 0 National Bissau Other Urban Rural National Bissau Other Urban Rural National Bissau Other Urban Rural National Bissau Other Urban Rural National Bissau Other Urban Rural National Bissau Other Urban Rural 2018 2021 2018 2021 2018 2021 Source: World Bank calculations based on EHCVM 2018 and 2021. The rural-urban disparities in well-being may also have of 7.5, 5.6, and 2.3 percentage points respectively in the been further exacerbated by the faster post-COVID-19 incidence of poverty over the period. recovery of the services sector – which employs most of the urban households. For instance, the services sector More than half (55 percent) of the poor are concentrated grew by 7.5 percent in 2021 – from 0.35 in 2020 and 3.2 in the regions of Oio, Gabu, and Bafata. In addition to in 2018; mitigating the adverse effects of the COVID-19 having a high incidence of poverty, the regions of Oio and pandemic thereby resulting in a smaller increase in poverty Gabu are home to 23.7 and 17.1 percent of the poor people in urban areas relative to rural areas. in Guinea Bissau respectively (Maps 1.1a and 1.1b). Both regions recorded an additional over 30,000 poor persons Regional disparities in monetary poverty trends persist each in 2021. Furthermore, the region of Bafata has the with the highest incidence of poverty observed in the third highest share of the poor population (14.6 percent) regions of Oio, Gabu Quinera. The region of Oio con- despite a 2.3 percentage point decline in poverty during tinues to record the highest incidence of poverty with the period. Similarly, Bissau which has a low incidence of 72 percent of the population being poor in 2021– about an poverty, has a slightly higher share of the poor -11.5 per- 8.3 percentage point increase from its 2018 levels (see cent of the poor. In contrast, the decline in poverty in the Figures 1.10a and 1.10b). The lowest incidence of poverty regions of Cacheu and Bolama/Bijagos resulted in over is reported in the Bissau region where 21 percent of the 10,000 and 1,000 fewer poor persons respectively (Fig- population are poor – relatively the same rate in 2018. ures 1.10c and 1.10d). The largest increase in poverty between 2018 and 2021 was recorded in the regions of Gabu and Biombo where 1.3.  Outlook and risks poverty increased by 14 and 12.3 percentage points during the period (Figure 3b)- resulting in Gabu becoming the Early signs indicate that the 2024 cashew campaign region with the second-highest incidence of poverty as of promises to be strong, which will support real economic 2021. Despite overall increases in poverty, the regions of growth of 4.7 percent. Cashew production is expected to Cacheu, Bolama/Bijagos, and Bafata experienced reductions be strong again due to favorable weather conditions and as 14 Chapter 1: The State of the Economy Figure 1.10. Poverty trends by region: 2018/19–2021/22 a. Poverty Trends by region: 2018/19–2021/22 80.0 72.1 70.0 68.0 61.1 58.8 61.0 63.8 62.2 64.4 58.9 60.0 54.3 53.3 53.5 54.0 52.6 50.0 47.3 42.0 40.0 30.0 21.2 21.0 20.0 10.0 0.0 Bafata Biombo Bolama/ Cacheu Gabu Oio Quinara Bissau Tombali Bijagos 2018/19 2021/22 b. Changes in poverty incidences by region: 2018/19–2021/22 20.0 14.0 15.0 12.3 10.0 8.3 5.2 5.0 2.1 0.0 –0.2 –2.3 –5.0 –5.6 –7.5 –10.0 Bafata Biombo Bolama/ Cacheu Gabu Oio Quinara Bissau Tombali Bijagos c. Number of poor by region 250,000 200,000 150,000 100,000 50,000 0 Bafata Biombo Bolama/ Cacheu Gabu Oio Quinara Bissau Tombali Bijagos 2018/19 2021/22 d. Changes in the number of poor by region 2018/19–2021/22 40,000 36,874 32,527 30,000 20,000 13,182 10,000 8,154 3,873 3,577 1,150 0 –1,123 –10,000 –10,194 –20,000 Bafata Biombo Bolama/ Cacheu Gabu Oio Quinara Bissau Tombali Bijagos Source: World Bank staff calculation based on EHCVM 2018/19 and 2021/22. GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2024 Map 1.1. Poverty indicators by region (EHCVM 2021) a. Poverty rate b. Share of poor population Source: World Bank calculations based on EHCVM 2021/22. A new national poverty line was constructed in 2021 instead of using inflation to update the 2018 line because the fixed CPI basket doesn’t allow for any substitution effects, which could have otherwise overstated poverty rates given the price shocks experienced between 2018 and 2021. government investments into agricultural inputs over the avoid Middle East trade lines coupled with cheap elec- last few years pay dividends. In contrast to the previous tricity from OMVG (Box 3) could stimulate expansion two years, however, exports should markedly improve of the processing sector in Guinea-Bissau where capacity as nine overland border routes become authorized for to transform cashew is currently limited to 10,000 tons.20 exports, curtailing smuggling.16 Historically, only cashew This presents a potentially positive step towards increasing exports via the port of Bissau were authorized so this should the value chain of the main productive sector in the country. contribute to the growth of processing in neighboring coun- Despite maritime trade risks, Chinese firms should enter tries, potentially creating new export options.17 Global the market for processing in Asia, competing with India geopolitical developments may also create domestic oppor- and Vietnam for Bissau-Guinean cashew, creating new tunities for growth in Guinea-Bissau. Maritime disruptions trade links. in the Middle East have driven rising Asia-Europe freight costs which has translated into a growth in demand for Easing inflationary pressures along with strong demand cashew from Africa.18 This disruption allows a premium for cashew will drive growth on the demand side. On of 0.2 to 0.3 US$/kg over cashew of Vietnamese origin the demand side for the cashew sector, most Western and on spot contracts.19 This demand for African cashew to Chinese importers are covered for their first-quarter needs 16 To be legal, they must pass through specific customs posts: i) East (Bafata - Cambadju, Pitche, Pirada and Bruntuma); ii) North: (São Domingos, Djeguê, Oio/Farim (Dungal); iii) Sul (Tombali - Quebo). 17 It is unclear how the borders will be monitored given how remote they are, potentially opening the door to inaccurate reporting of trade figures. Some of the hundreds of reforms requested by donors in exchange for aid commitments after the 2014 Brussels Roundtable included additional monitoring of customs outposts at land borders but there was little political will to implement these reforms. 18 An escalation of political tensions in the Middle East has resulted in Houthi attacks on international merchant ships in the region, prompting a military response from select Western countries. 19 Vietnam is the world’s largest exporter of processed cashew. 20 Guinea-Bissau currently has the second most expensive electricity tariff in Africa, and this is widely seen as an impediment to private sector development. 16 Chapter 1: The State of the Economy RETIRING THE FISCAL RISK Figure 1.11. Sectoral share of GDP Figure 1.12. Current account balance (Percent 100% 7.0 of GDP) 90% 20.0 0.0 6.0 80% 15.0 –2.0 70% 5.0 10.0 60% –4.0 4.0 5.0 50% –6.0 3.0 0.0 40% –8.0 30% 2.0 –5.0 20% –10.0 1.0 –10.0 10% –15.0 –12.0 0% 0.0 2020 2021 2022 2023e 2024p 2025p 2026p 2020 2021 2022 2023e 2024f 2025f 2026f Agriculture Industry Export Growth Import Growth Services Real GDP (RHS) Current Account Balance (RHS) Source: World Bank estimates. Source: World Bank calculations. and are also awaiting information to complete their orders to 236.4 billion CFA and increasing to 297.5 billion CFA for the second and third quarters of 2024. Vietnam has in 2026. This may exacerbate problems with NPLs within released strong figures for cashew imports and exports the banking sector. in 2023, indicating that there will be high demand for the 2024 campaign. Additionally, the access road to the Decreased external pressure in 2024 as fuel and food port has been restored which should remove a barrier to prices stabilize as well as improved cashew exports will exports from the 2023 campaign. The access road is part cause the CAD to contract to 5.7 as a percent of GDP. of a larger urban road investment program which will As inflation falls, the costs of imports for essential goods, stimulate the construction sector. On the demand side such as food and fuel, as well as the capital goods needed more broadly, inflationary pressures will continue to ease, for investments in road recovery will complement the stimulating private consumption. expected higher cashew exports and cause the CAD to narrow. Despite higher cashew nut exports, the high Following the worldwide trend, inflation is expected to dependence on imports for basic needs and investments have already peaked and is projected to fall to 4.5 per- prevents quick changes in the CAD. As such, the CAD is cent in 2024. Inflation stabilized in 2023, as supply disrup- projected to only marginally decrease in 2025 and 2026, tions abated, and fuel and energy prices stabilized. Over at 4.7 and 4.4 percent respectively, as import costs fall the mid-term, the country’s membership in the WAEMU (Figure 1.12). economic and monetary zone, which provides a strong nominal anchor with its peg to the euro, and the govern- The authorities are committed to fiscal consolidation ment’s commitment to fiscal consolidation will keep infla- to ensure medium-term debt sustainability. The fiscal tion contained, converging to an estimated 2 percent by deficit is projected to narrow in 2024 to 4.8 percent of 2026. The monetary stance is expected to remain accom- GDP (on a commitment basis), from 7.6 percent. This modative, with the BCEAO helping to maintain liquidity assumes that the OMVG electricity line from neighboring in the banking sector by increasing domestic credit in the Guinea is activated and remains activated (Figure 1.13), economy in the mid-term, growing 13.7 percent in 2024 progress is made in the public financial management reform Chapter 1: The State of the Economy 17 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2024 Figure 1.13. Karpower vs OMVG costs (millions of dollars per month) Figure 1.14. Fiscal performance (percent of GDP) 6 30.0 0.0 25.0 –2.0 5 20.0 –4.0 4 15.0 –6.0 3 10.0 –8.0 2 5.0 –10.0 1 0.0 –12.0 2020 2021 2022 2023e 2024p 2025p 2026p – Total Revenue and Grants 30MW 40MW 50MW 60MW 70MW Total Expenditures OMVG (+ Contracted Capacity) Overall Fiscal Balance (RHS) Karpower (+ Contracted Capacity) Source: World Bank calculations. Just OMVG space,21 and commitments to grant-funded budget support set to eventually narrow to 3 percent and the debt ratio materialize. OMVG will reduce the overspending on to 70 percent of GDP in the mid-term, aligning with the EAGB and Karpower-related non-budgeted expenses that WAEMU convergence criteria (Figures 1.14 and 1.15). have driven the fiscal deficit. Annulation of the fixed cost capacity contract with Karpower will result in huge fiscal There is untapped potential for economic diversification savings, approximately equal to the entire health sector and additional revenue sources. The government has expenditure for 2023, and cheaper electricity for consumers revisited the possibility of allowing the mining of bauxite in the country, removing one of the main constraints on and phosphate reserves in the country, which will help private sector development which should result in higher diversify exports and has the potential to positively impact fiscal revenue (Box 3). Concurrently, the World Bank the country’s growth and fiscal revenue. However, there is has begun supporting the government’s fiscal consoli- reluctance to begin investment and extraction as there is dation commitment with a governance project aimed at no legal framework in place to ensure environmental pro- rationalizing expenditure, controlling the wage bill, and tection, due to the location of the reserves in the bend of improving cash management by supporting the govern- a river. Despite this, a mining project with an investment ment with the implementation of a treasury single account. of US$200 million has begun near Farim. The company Similarly, to support the same objectives, the ongoing has started building temporary accommodations for the IMF ECF program will support the implementation of workers and relocating locals, but progress has stopped needed structural reforms to bolster domestic revenue col- because of changes to the mining agreement. Although lection and reduce expenditure. The fiscal deficit is still uncertain, if the project goes ahead, estimates suggest that 21 The graph shows three scenarios: 1) monthly cost of continued usage of Karpower for electricity consumption plus the fixed cost contracted capacity payment that EAGB has to pay to Karpower, even if no Karpower generated electricity is consumed; 2) monthly cost of OMVG generated electricity for consumption plus the fixed cost contracted capacity Unit costs for electricity are all factual and confirmed; and 3) monthly cost of electricity consumed solely from OMVG and if a resolution to the Karpower contract is found, removing the fixed cost contracted capacity. However, some assumptions have been made: i) the contract conditions remain the same as they are at present, including length of the contract, fixed cost production capacity, and unit costs; ii) a 30-day month; iii) electricity demand of 30mw – currently energy demand averages at 20mw and peaks at 24 but the cement factory alone uses 6mw and World Bank financed projects are working to expand electricity access around the country, increasing demand. 18 Chapter 1: The State of the Economy RETIRING THE FISCAL RISK Figure 1.15. Debt performance (percent of GDP) The outlook is uncertain and subject to substantial using the latest DSA* downside risks related to political instability, global geo­ 90 political tensions, and climatic shocks. Political stability is crucial to maintain the authorities’ commitment to a 80 stringent macroeconomic policy framework, including: 70 (i) fiscal consolidation; and (ii) prudent borrowing, to put 60 debt on a consistent downward trend and achieve debt 50 sustainability in the medium term. Political instability from 40 a constitutional crisis in December 2023 resulting in the 30 dissolution of parliament could also affect political support 20 for revenue mobilization and expenditure containment 10 measures, as well as deterring both domestic and inter- 0 2020 2021 2022 2023e 2024p 2025p 2026p national private investment. There is an unknown elec- External Debt Domestic Debt toral calendar for both legislative and presidential elections. It is not clear how both elections will be financed, and this Source: Joint World Bank/IMF DSA. could also create instability. Recent regional and inter- *This version of this DSA reclassifies BOAD debt as external debt. national geopolitical uncertainty only threatens to stoke the project could increase GDP by 8 to 16 percent and fiscal domestic tensions further. revenues by about 50 to 80 percent during the exploration Global commodity market shocks, SOEs, and the years, both in nominal increase terms. EAGB and the SIB banking sector also present potential risks. In addition continue to represent large fiscal risks, as outlined above. to risks arising from volatile global food and oil prices, Public debt is expected to fall to 75.6 percent of GDP in weaker cashew nuts exports and lower-than-expected donor 2024 and meet WAEMU convergence criteria by 2026. support may impact the outlook. Financial stress in state- Despite the projected economic growth, the financing owned enterprises, such as EAGB (Box 1.3), and banking requirements will remain high over the mid-term, with sector fragilities could also generate contingent liabilities a financing gap of approximately 0.7 percent of GDP adding to fiscal pressures. An increased severity of the each year due to the large wage bill, and a considerable rise prolonged Russian invasion of Ukraine could impact the in interest payments and investments to ensure economic economic outlook if it continues to cause supply chain development. This gap is expected to be covered mainly by disruptions. Furthermore, if disruptions to commodity grants and external concessional loans, as the government trade routes to Asia worsen owing to an escalation in the looks beyond BOAD, whose loans to date are almost Middle Eastern conflicts, this could have a negative impact entirely non-concessional22. In the mid-term, the govern- on the growth outlook. If downside risks materialize, social ment is committed to filling the financing requirement tensions could increase, constraining fiscal adjustment, from multilateral external creditors on concessional terms. reform implementation, and increasing debt vulnerabilities. Strengthened investment planning and execution to ensure There are also downside risks related to weather events, value for money and better alignment with the budget pro- particularly drought or flooding, severely impacting the cess will also contribute to the decline in public debt. agriculture sector. 22 BOAD debt constitutes 17 percent of overall debt and is the country’s largest creditor. Chapter 1: The State of the Economy 19 Chapter 2: Public Sector Pension Scheme in Guinea-Bissau GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2024 2.1. Introduction Security Forces. However, to date, the implementation of these reforms has not materialized including the provisions Tight fiscal space and rising debt levels have limited of the 2015 Budget Law. crucial investments in economic and human capital to advance Guinea-Bissau’s economic growth and develop- The objective of this note is to analyze recent devel- ment goals. The authorities’ economic program to over- opments, challenges, and prospects for public sector come this issue involves ambitious objectives to strengthen schemes including fiscal sustainability, adequacy, and the fiscal position and move towards fiscal consolidation. administrative challenges. This note does not cover the The challenges are significant including a costly public scheme for the private sector which is analyzed in other service pension system, which consumed 6.8 percent of documents including a note on pension (World Bank, overall expenditure in 2023, equating to approximately 2016) and the more recent Public Expenditure Review for 10 percent of fiscal revenue or a third (32.9 percent) of Guinea-Bissau (World Bank, 2022). Also, this note does overall social sector spending.23 not include two schemes that are not related to old age: (i) the social assistance program which transfers 10,000CFA The current pension system in Guinea-Bissau consists on a monthly basis to invalid persons (368 beneficiaries of two parallel systems: (i) public sector schemes which in June 2023); and (ii) a program that pays military and consist of a contributory public service pension scheme paramilitary officers who are retired but can be called upon for public sector workers, the military24 and political office at any time (Reserva) (1,082 beneficiaries in June 2024).25 bearers and a non-contributory public pension scheme for veterans; and (ii) a contributory social security pension The note relies on detailed payroll datasets for the month scheme that covers private-sector employees and employ- of June 2023 provided by the Ministry of Finance. It also ees of state-owned enterprises. The public sector schemes uses the January 2016 payroll data used in the 2016 note are managed by the Pensions Unit in the Ministry of on pension to analyze the recent evolution of the schemes Finance while the private sector scheme is managed by the as well as an August 2021 database used for the 2022 Public National Social Security Institute (INSS). Expenditure Review.26 In 2015, the authorities took initial steps to reform the This note is structured as follows. The first section dis- public service pension scheme. The 2015 budget law cusses the characteristics of the public sector pension included provisions to deduct 6 percent from the payroll of schemes. The second section presents an analysis of these all public employees and deposit the amounts in a special schemes, focusing on coverage, cost, and sustainability. account jointly managed by the Ministry of Public Admin- The analysis presents medium and long-term fiscal expen- istration and the Ministry of Finance. A decree in 2015 diture scenarios based on available information. Finally, also mandated the creation of a Special Pension Fund to the third section presents some concluding remarks and provide one-off payments and pensions to the Defense and policy recommendations. 23 Social sector spending is defined here as expenditure for the Ministry of Education, the Ministry of Health, and the Ministry of Women, Family and Social Solidarity. 24 Military personnel only started contributing to the pension scheme in 2018. 25 The August 2019 payroll database included 1,145 reservists paid 284.51 million CFA (equivalent to US$446,000) while the June 2023 payroll database included 2,082 reservists paid 282.01 million CFA (equivalent to US$462,000). Consequently, the payment to reservists per annum can be estimated to hover around US$5.5 million (US$462,000 x 12 months). 26 The data for 2016 and 2023 are perfectly comparable as the two datasets were retrieved from the same source: the payroll data from the Ministry of Finance. It is however noteworthy that information retrieved for 2023 is more complete, as it contains more information for each individual in the dataset (for example date of entry into the payroll system). The comparability between these two datasets and the data for 2021 is however more restricted. The data for 2021 relies on other sources besides the payroll data from the Ministry of Finance. 22 Chapter 2: Public Sector Pension Scheme in Guinea-Bissau RETIRING THE FISCAL RISK 2.2.  The public sector pension scheme: retired and applied for a pension but whose pension Description has not been fully processed. c. Veteran pensioners (Pensões Combatentes): These pen- The public sector pension system in Guinea-Bissau con- sioners include individuals who fought during the War sists of two pension schemes: (i) a contributory27 public of Independence and their ascendents and descendants. service pension scheme that covers civil servants, the military, and political office bearers; and (ii) a non-contributory public pension scheme for veterans. It is structured as an 2.2.1.  Design parameters earnings-related, defined benefit, pay-as-you-go scheme28 The regular pension scheme is a defined benefit scheme. where 6 percent of civil servants and military personnel The system’s parameters feature a retirement age of 60, base salaries are deducted from their paycheck. Although a minimum of 15 years of service requirement to get a the system is contributory, the contribution is notional, pension (this is called the vesting period), a 2.8 percent and pensions are paid out of general fiscal revenues. In increase per year of service (this is called the accrual rate), practice, there is no transaction of funds corresponding and a pension base equal to the average of the last two years to the civil servants’ 6 percent payroll deduction. Also, in of service (Table 2.1).31 Thus, the minimum replacement practice, the percentage of contribution depends on the beneficiary in an unexplained manner.29 The Government rate a retiree can get is 42 percent of the average of the does not formally contribute to a pension fund to back up last two years of service (i.e., 2.8 percent times 15 years its liabilities and there is no ring-fenced fund in which these of service), while someone with 36 years of service in the contributions accumulate, nor is there an explicit subsidy public sector receives a lifetime pension equivalent to from the government for pensions. 100 percent of the average of the last two year’s salary. After 36 years of service, the accrual rate decreases to There are three categories of pensioners in the public sector 2.5 percent up to a maximum of four years. This implies pension schemes, as follows: that someone who works in the public sector can receive a maximum pension equal to 110 percent of his average a. Regular pensioners (Pensões Reforma): These are retired base salary during his last two years of service.32 public servants (civil servants, the military personnel, and political office bearers)30 who are receiving a pen- The pending pension scheme is a transitory scheme for sion under the public service pension scheme. retired public servants until their pension request has been b. Pending pensioners (Pensões em Situação de Reforma): fully processed at which time, they are transferred to the reg- Pending pensioners are retired public servants who have ular pension scheme. Pensioners in the pending pension 27 Contributory means that participating employees in the pension scheme are required to support the scheme with contributions. 28 Earnings-related means that pensions are based on the beneficiary’s earnings. Pay-as-you-go (PAYG) in its strictest sense, is a method of financing whereby current pensions are paid out of current revenues from contributions. When revenues are higher than expenditures (which is not the case in this particular scheme) some reserves could be accumulated, hence PAYG could be fully or partially funded. Defined benefit (DB) means the pensions are calculated based on a prescribed formula (benefit formula) that usually considers several factors - mostly length of employment and salary history. 29 In practice, pension contributions vary between 0.3 percent and 17.8 percent, despite the well-established rule of 6 percent contributions from all individuals that receive from the Public Treasury. There was no discernable relationship established between the characteristics of different contributors and contributions made. 30 This includes the members of parliament who receive a life pension after completing two electoral cycles. Their pension is transferred to their survivors (children and spouse). 31 The regular scheme and pending pension schemes do not provide for survivor benefits. Nor do they provide benefits in case of illness or accident. However, the cost of a trip is covered on a case-by-case basis for illnesses that require travel abroad, to Dakar for example. 32 100% + 2.5% × 4 years = 110%. Chapter 2: Public Sector Pension Scheme in Guinea-Bissau 23 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2024 Table 2.1. Parameters of the regular public direct (even notional) contribution to this scheme as the sector pension scheme former combatants and veterans who benefit from this scheme have retired long ago). Parameter Value Contribution rate Employer: 6 percent, Employee: 0 percent 2.2.2.  Administration of the public service pension scheme Retirement age 60 years Minimum years of 15 years The process of receiving a pension is a complex and service required for lengthy manual process, with many steps and stake- benefit eligibility holders. The retiree starts by filing a retirement claim with the supervising ministry. Then, the process involves Maximum years of 36 years service the Ministry of Finance, the Prime Minister’s Office, the Ministry of Public Administration, the Council of Minis- Accrual rate Accrual rate: 2.80 percent ters, the Budget Department, the Court of Accounts, and Pension = Base salary × years the General Directorate of the Public Service (Table 2.2). of service/36 Each institution works on the retirement file in succession, Pension base Average of last two years’ base and the process leads to the issuance of a pension under the salary pending pension scheme while the procedure continues with the reconciliation of the career history. In the end, sev- Indexation of None eral double checks and signatures are needed before the final pension pension is issued. Also, if for whatever reason the paperwork Survivor pension The survival benefit for civil is lost by either side, which anecdotally happens a lot, the servants upon death is six pending pensioner has to start the whole process again. months of salary/pension. For politicians, survival benefits are There is no legislation that establishes a systematic 75 percent of salary/pension split process to request proof of life. The last mass requests to between spouse (40 percent) and children (60 percent). deliver proof of life were done in 2017 and 2023. Other- wise, the removal of individuals from the pensions lists is Source: Ministry of Finance. only done if someone reports the death of the pensioner or if there is an issue identified through the banking system. scheme receive a pension equal to 80 percent of their pre- There are no revisions of the value of the pension from retirement salary. Transfers to the regular pension scheme the regular pensioners. Once established, this value is fixed. depend on the lengthy process that takes place between However, the value for the veteran’s pension is indexed to claiming the benefits and receiving payments but also the the minimum wage, while the pension for members of overall availability of public funding. parliament is indexed to the current salary. The veteran pension scheme is similar to the regular pen- All pension payments that exceed 28,000CFA are paid sion scheme with two exceptions. First, years worked using the banking system. However, for pension payments before April 25, 1974 (year of independence) are counted below 28,000CFA it is not mandatory to use the banking as double the actual years of service, and the years worked by system. Alternatives such as mobile money can be used to non-war veterans before September 9, 1974, are counted make these payments. Additionally, the Ministry of Former as 1.2 times the actual years of service. Second, survival Combatants distributes the former combatants’ pensions benefits extend to spouses and children and also to the directly in certain locations across the country, as there is veteran’s ascendants and descendants. Today, there is no also no mandatory requirement to use the banking system. 24 Chapter 2: Public Sector Pension Scheme in Guinea-Bissau RETIRING THE FISCAL RISK Table 2.2. Procedure to process a public sector pension Step Entity Activities 1 Retiree’s supervising ministry • Collection of pension files • Issuance of notes to the Ministry of Finance for calculations 2 General Secretariat, Ministry of Finance • Issuance of statement certificate 3 Prime Minister • Validation of seniority • Setting of pending annual pension • Publication in the Official Journal 4 Ministry of Public Administration, Labor, • Process compliance validation Employment, and Social Security • Seniority calculation • Fixing pending annual pension • Producing financial statement of retiree’s position 5 Prime Minister, Council of Ministers • Sign financial statement of retiree Secretariat 6 Ministry of Finance, Budget • Receipt of retiree’s financial statement Department • Production of budget cover note 7 Court of Accounts • Approval of budget cover note 8 General Directorate of the Civil Service • Extract from financial statement given to retiree • Publishing extract and accompanying note in the Official Journal 9 General Directorate of Operations, • Database registration Ministry of Finance 10 Ministry of Finance, Treasury Department • Payment of retiree’s pension Source: World Bank. 2.3.  The public sector pension scheme: time during which people collect pensions. Retirement age Analysis and challenges for the public service pension scheme in Guinea-Bissau is 60 for both men and women while life expectancy at age 2.3.1.  Design parameters 60 currently stands at 15.5 years on average.33 This is in line with the international yardstick of 15 years for the The 60-year retirement age under the public service “ideal” duration of pension benefits. As such, the current pension schemes is in line with international yardsticks. retirement age of 60 is not particularly low relative to life Life expectancy at retirement age determines the length of expectancy.34 Also, legislation allows for civil servants aged 33 There is a lack of data in Guinea-Bissau allowing for an accurate life expectancy at 60 but the WHO Global Health Observatory data repository calculates the life expectancy at 60 for Bissau-Guineans to be 15.5 years (13.9 men and 16.7 women) in 2019. Civil servants may expect to live longer however, owing to privileged access to state-financed health care in Portugal and Senegal and a higher-than-average salary and therefore standard of living in Guinea-Bissau. 34 It is however important to note that reviewing the retirement age as life expectancy increases in the country is useful. The same WHO data repository shows that life expectancy at 60 was 15 years in 2015 (13.4 for men and 16.3 for women), 14.6 in 2010 (12.9, 16), and 13.8 in 2000 (12.1, 15.4). Thus, it is reasonable to assume that this will need reassessment in the near future as life expectancy at 60 continues to increase. Note that considering life expectancy at 60 years old to be 15.5 years, the contribution rate to match the 2.8 percent accrual rate would have to be 43.4%. See Annex 1. Chapter 2: Public Sector Pension Scheme in Guinea-Bissau 25 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2024 at least 35 years old and with 15 years of service to qualify Table 2.3. Accrual rates of public sector pension for pension benefits. The data indicates that there are schemes in selected Sub-Sahara African people exercising this option as there are pensioners below countries (2023) the statutory retirement age of 60. Country Accrual Rates The public service pension benefit formula leads to Cabo Verde 2.9% generous benefits relative to pre-retirement salary. At Mozambique 2.9% 2.8 percent, the accrual rate of the public service pension scheme is one of the highest in the Africa region. The Guinea-Bissau 2.8% accrual rates in high-income countries (1.2 percent on Mauritania 2.7% average), which are fiscally sustainable and international best practice, are nearly half the average accrual rates of Togo 2.5% 2.2 percent in fifteen Sub-Sahara African countries, and Uganda 2.4% less than half the accrual rate in Guinea-Bissau (Table 2.3). Annex 1 shows that a contribution rate of 6 percent is Namibia 2.4% much too low to cover future pension payments when the Cameroon 2.0% accrual rate is 2.8 percent, or equivalently, that an accrual Burkina Faso 2.0% rate of 2.8 percent is much too high to cover future pen- sions when the contribution rate is 6 percent. In fact, for Madagascar 2.0% the pension system to be in balance, the contribution rate Zambia 1.8% should be increased from 6 percent to 16.8 percent if the accrual rate is maintained at 2.8 percent or the accrual Senegal 1.8% rate should be decreased from 2.8 percent to 1 percent if Cote d’Ivoire 1.8% the contribution rate is maintained at 6 percent.35 Tanzania 1.7% Calculating the public service pension based on the Mauritius 1.7% average of the last two years of base salary (instead of a longer period) leads to higher pensions. Salaries in Average 2.2% the public sector tend to monotonically increase with age. Source: World Bank. The average salary of civil servants (including military and reserve personnel) who are 58 years of age (158,258CFA) is 27.2 percent above that of civil servants who are 25 years compensation just before retirement. Salaries during the of age (124,463CFA) while the median salary remains last few years of work increase abnormally when these broadly unchanged (Figure 2.1).36 However, this average last few years of salaries determine the pension amount. salary jumps by 40.3 percent (from 158,258CFA to This may result from administrative norms or habits, 222,089CFA) in only two years just before retirement collusive behaviors between supervisors and workers, or from the age of 58 to the age of 60. Using the average of the incentives for opportunistic behavior by employees who last two years of salary as the basis for pension calculation look for higher-remunerated jobs a few years before retire- generates perverse incentives to inflate wages or seek higher ment. The latter possibility does not seem to apply in 35 The current system is by design unsustainable. Financial sustainability of a defined benefit pension scheme financed on a pay-as-you-go basis is achieved by balancing retirement benefits with the contributions paid to earn the pensions rights. There is a fundamental misalignment of the low contribution rate with the promised benefits at the current retirement age. 36 This trend raises serious incentive issues and may explain the general low motivation of public servants whose salaries in real terms are eroded as they accumulate experience. 26 Chapter 2: Public Sector Pension Scheme in Guinea-Bissau RETIRING THE FISCAL RISK Figure 2.1. Average monthly (net) salary and total number of civil servants including military and reserve by age 1,200 700,000 1,000 600,000 Number of civil servants 500,000 800 Amount (CFAF) 400,000 600 300,000 400 200,000 200 100,000 0 0 20 25 30 35 40 45 50 55 60 65 70 75 80 85 Age Average Salary Median Salary Civil servants incl. military and reserve Source: June 2023 payroll data. Ministry of Finance. Note: Average salary of active civil servants: 142,808CFA; Std. Dev: 94,627.3; N: 27488. Guinea-Bissau as only 2 percent of individuals have changed context, this amount is substantial: it is almost three times job category between 2021 and 2023.37 per capita GDP and represents 86 percent of the average public sector salary. The average monthly pension received 2.3.2.  Pensioners and expenditures by regular pensioners (208,350CFA) is more than twice that received by pending pensioners (102,498CFA) which The three public service pension schemes pay widely dif- is itself 65 percent higher than that received by veterans ferent pension amounts. According to the payroll database, (62,204CFA). The average pension for veterans, the category the Ministry of Finance paid 7,045 pensioners in June 2023 with the lowest average pension, still represents 1.4 times (Table 2.4). Of the total number of pensioners, 28 percent per capita GDP despite representing only 44 percent of the (1,964 individuals) were regular pensioners, 48 percent were average public sector salary. Pending pensioners are expected pending pensioners (3,385 individuals), and 24 percent to collect higher pensions once their pensions are processed (1,696 individuals) were veterans. The ratio of pending and classified as regular pensioners. pensioners to regular pensioners was 1.72. Total monthly payments made under the three schemes amount to According to the June 2023 payroll data, annual expen- 862 million CFA (equivalent to US$1.4 million at the diture on the three public service pension schemes can exchange rate of 611CFA/US$).38 The average monthly pen- be estimated to hover around 10.3 billion CFA (around sion amounted to 122,307CFA (US$200). In Guinea-Bissau’s US$16.9 million) (Table 2.5).39 This amount represents 37 Matching the active and retires population between 2021 and 2023 shows that 524 individuals have changed category between these two dates. 38 The exchange rate of 611CFA/US$ is used throughout the paper. 39 There is a discrepancy between the pensions payment data on the payroll and the pensions payment data in the system that collates executed expenditure, SIGFIP. The latter reports 10.9 billion CFA for 2023 for public sector pensions for the whole year and just 5.3 billion CFA until the month of June. Chapter 2: Public Sector Pension Scheme in Guinea-Bissau 27 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2024 Table 2.4. Public service pension schemes (June 2023) Monthly Pension Average Pensioners Payment Average Pension Monthly Average Pension (% of Average Number Percentage CFA Million Percentage Pension (CFA) (% of Per Capita Public Sector Schemes (A) of Total (B) of Total (B/A) GDP) 1/ Salary) Regular pension 1,964 28% 409.2 47% 208,350 481% 146% Pending pension 3,385 48% 347.0 40% 102,498 237% 72% Veteran pension 1,696 24% 105.5 12% 62,204 144% 44% Total 7,045 100% 861.7 100% 122,307 282% 86% 1/ Per-capita GDP (2023) = 519,895 CFA (World Development Indicators and IMF 2022 Article 4). 2/ Average monthly public sector salary of 142,808 CFA from the June 2023 Payroll database. Source: June 2023 payroll data from the Ministry of Finance. Table 2.5. Public expenditures on pensions 2016 2021 2023 Pension payments (CFA billion) 1/ 8.0 10.8 10.3   % of GDP 1.14 1.14 0.96  % of domestic revenue (tax and non-tax) 9.5 9.4 6.9   % of public expenditures 5.5 5.2 4.4   % of wages and salaries 23.0 19.0 17.9 Memo: Nominal GDP at market prices (CFA billion) 2/ 698.7 943.7 1081.3 Domestic revenue (tax and nontax) (CFA billion) 2/ 84.3 114.9 149.9 Public expenditures (CFA billion) 2/ 144.5 206.1 237.4 Wages and salaries (CFA billion) 1/ 25.6 37.1 47.1 1/ Monthly pension payments and wages and salaries from the January 2016, August 2021 and June 2023 databases multiplied by 12 months. 2/ From IMF 2018 and 2022 Article 4 (Tables 2.1 and 2.3). Sources: January 2016, August 2021 and June 2023 databases from the Ministry of Finance and IMF. 9.9 percent of fiscal revenue and 4.3 percent of total contribution rate could be shared between the public expenditure. It is also equivalent to 18 percent of wages servants and the state. and salaries. Therefore, a 6 percent contribution rate is largely insufficient to finance public pensions. In fact, Expenditures on public pensions dramatically increased 18 percent of active public servants’ (net) wages and salaries from 2016 to 2021 but then decreased from 2021 to 2023 would be needed to fully fund the current pensions. This (Table 2.5). Public expenditures on pensions increased 28 Chapter 2: Public Sector Pension Scheme in Guinea-Bissau RETIRING THE FISCAL RISK Figure 2.2. Expenditures on public pension (percent of GDP in selected Sub-Saharan Africa economies) 2 Public Sector Pension Expenditure 1.8 1.6 1.4 1.2 (% GDP) 1 0.8 0.6 0.4 0.2 0 in 21 ib 20 ric 019 21 20 ad 19 1 9 9 0 oi 019 1 qu 21 ga 21 9 1 an 021 0 21 ne oo 20 20 20 so 202 M Ga 202 2 1 an 01 To 01 Co am 02 Ke 202 20 bi 20 0 pu 20 20 20 Ch 20 20 Bi 20 0 20 20 20 Se e 2 ts ic 2 l2 2 2 d' ia 2 i2 2 of re am on Re go a Es au a e o au pia ia a n n a a ny i Th th l b bi Ca eni b ss ic b at o ne So am m Iv bl Af w hi a, r w rit B G me Za Le pu Z Et bi a- N h Bo te am ut Re oz M n ca ui G tic fri ra lA oc ra em nt Ce D o, ng Co Source: World Bank. from 8.0 billion CFA in 2016 (representing 1.14 percent who held political offices) represent 3.6 percent of the of GDP) to 10.8 billion CFA in 2021 (1.1 percent of GDP) 1,964 persons who benefit from this scheme while their but decreased to 10.3 billion CFA in 2021 (1.0 percent pensions represent 25 percent of all pension payments of GDP).40 made under this scheme. Their average monthly pension is 1.4 million CFA (approximately US$2,324). In fact, At 1.14 percent in 2016 and 2021,41 spending on public under the regular pension scheme, 14 percent of all pen- service schemes as a percentage of GDP is comparable sioners (representing 277 individuals) receive half the to that of other countries in the region including middle- total pension paid under the scheme while the remaining income and high-middle-income countries (Figure 2.2). 86 percent (representing 1,687 individuals) receive the As shown in Figure 2.2, Guinea-Bissau is among the second half. The other schemes also largely benefit a few: countries with the highest expenditures on public pension one-quarter of the pending pensioners receive half of all as a percentage of GDP. payments made under the pending pension scheme while 20 percent of the veterans get 40 percent of all payments made under the veteran scheme. 2.3.3.  Very few pensioners benefit from the bulk of pension payments 2.3.4.  Age of pensioners Importantly, pension payments overly benefit a very small fraction of beneficiaries (Figure 2.3). In 2023, the The payroll database from the Ministry of Finance 71 pensioners with the highest pension under the regular does not include the birthdate of a large number of pension scheme (they are mostly retired judges or people pensioners. In 2023, the birthdate of about 70 percent of 40 One possible explanation for this variation is the change in the total number of pensioners. From 2016 to 2021 this number increased. From 2021 to 2023 this number decreased to a lower number than in 2016. 41 Table 2.5 reports that expenditure on public pension is 0.96 percent of GDP in 2023. However, this is a provisional number based on forecast. Chapter 2: Public Sector Pension Scheme in Guinea-Bissau 29 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2024 Figure 2.3. Percentage of pension payments as a percentage of pensioners (by pension scheme, 2023) 100% 90% Percentage of total pension payments 80% 70% 60% 50% 40% 30% 20% 10% 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of pensioners Regular Provisional Veterans Source: June 2023 payroll data. Ministry of Finance. all pensioners is recorded (53 percent of regular pension- Almost all pensioners with a recorded birth date ers, 98 percent of pending pensioners, and 42 percent of (93.5 percent) are over 60 years of age. The percentage veteran pensioners) while the birthdate of 30 percent of pensioners above 60 is 94 percent for the regular of all pensioners is not recorded (Table 2.6). The fact that pension scheme, 96 percent for the pending pension the percentage of pending pensioners with a recorded scheme, and 65 percent for the veteran scheme. In 2023, birthdate is increasing is a positive development. How- the average age of pensioners with a recorded birth ever, the fact that the birthdate of many pensioners is not date is 63.4 years (69.3 years under the regular pension recorded remains a critical issue. scheme, 64.5 years under the pending pension scheme, Table 2.6. Recorded birth date 2016 2021 2023 Recorded Recorded Recorded Pensioners Number Birth Date Percentage Number Birth Date Percentage Number Birth Date Percentage Regular 2,467 998 40.5% 2,591 1,166 45.0% 1,964 1,043 53.1% pensioners Pending 1,791 702 39.2% 3,185 2,882 90.5% 3,385 3,315 97.9% pensioners Veteran 3,585 1,409 39.3% 2,158 848 39.3% 1,696 709 41.8% pensioners Total 7,843 3,109 39.6% 8,441 4,896 58.0% 7,045 5,067 71.9% Source: January 2016, August 2021, and June 2023 payroll data from the Ministry of Finance. Note: Pensioners with a recorded birth date who are older than 18 years. It does not include six regular pensioners, one pending pensioner and one veteran pensioner who are below 18 years of age and two pensioners with erroneously reported birthdate in the future. 30 Chapter 2: Public Sector Pension Scheme in Guinea-Bissau RETIRING THE FISCAL RISK and 63.4 years under the veteran scheme). Figures 2.4, pensioners with a recorded birthdate are currently 53 years 2.5, and 2. 6 show the age distribution of the pensioners of age.42 with a recorded birthdate under the three public pension schemes. Figure 2.4 (regular pensioners) and Figure 2.6 2.3.5.  Beneficiary coverage (veteran pensioners) need to be interpreted with caution as the birthdates of approximately half of these pensioners The public service pension schemes benefit a very small are missing. More than a quarter (27 percent) of the veteran share of the elderly. Assuming that all pensioners have Figure 2.4. Age distribution of pensioners under the regular pension scheme 120 100 80 Frequency 60 40 20 0 20 24 28 32 36 40 44 48 52 56 60 64 68 72 76 80 84 88 92 96 Age Source: June 2023 payroll data. Ministry of Finance. Note: Age calculated from May 31, 2023. Observations = 1,043. Figure 2.5. Age distribution of pensioners under the pending pension scheme 450 400 350 300 Frequency 250 200 150 100 50 0 20 24 28 32 36 40 44 48 52 56 60 64 68 72 76 80 84 Age Source: June 2023 payroll data. Ministry of Finance. Note: Age calculated from May 31, 2023. Observations = 3,315. 42 The bulge at 53 years old might be caused by the default date that the system reports when no birthdate information is provided for the individual. Chapter 2: Public Sector Pension Scheme in Guinea-Bissau 31 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2024 Figure 2.6. Age distribution of pensioners under the veteran pension scheme 200 180 160 140 120 Frequency 100 80 60 40 20 0 20 24 28 32 36 40 44 48 52 56 60 64 68 72 76 80 84 88 92 96 100 104 108 112 116 120 124 Age Source: June 2023 payroll data. Ministry of Finance. Note: Age calculated from May 31, 2023. Observations = 709. the same age structure as those whose birth date is available (2.4 percent benefit from a regular pension and 4.2 percent in the payroll database, then the three schemes can be from a pending pension).43 This is very low by international estimated to provide pensions to 6,198 individuals who standards. For example, Cabo Verde covers 14.4 percent of are over 60 years of age (Table 2.7). Thus, in 2023, it can the population over the age of 60. This is in the context of be estimated that 8.0 percent of the elderly defined as very limited, almost non-existent social protection safety persons above 60 years of age benefit from a public pension nets for the elderly in Guinea-Bissau. Table 2.7. Pension coverage (2023) Pensioners Pensioners 601 Pensioners 601 Schemes (Number) (Number) 1/ (% of Population 601) Regular pension 1,964 1,846 2.4% Pending pension 3,385 3,250 4.2% Veteran pension 1,696 1,102 1.4% Total 7,045 6,198 8.0% Memo: Population (60+) 77,168 1/ Under the assumption that pensioners without a reported birthdate have the same age structure as pensioners with a reported birthdate. Source: Payroll data from the Ministry of Finance and World Development Indicators. INE, November 2022, Rapport de présentation des projections de la population de la Guinée-Bissau 2014–2063. 43 “Reserva” which is constituted by military and paramilitary officers who are retired but can be called upon at any time was not considered for this analysis. However, it is worth noting that given the age distribution of this group, it would increase the coverage of the elderly by the public service sector. 32 Chapter 2: Public Sector Pension Scheme in Guinea-Bissau RETIRING THE FISCAL RISK 2.3.6.  Active worker pension contributions If veteran pensioners are not taken into account, then the dependency ratio decreased from 22 percent in 2016 In 2023, it is estimated that about 6.5 percent of the to 19 percent in 2023.46 Improvement in the system labor force contribute to a pension scheme. This coverage dependency ratio is due to a 10 percent decrease in the has been calculated using the following assumptions: number of pensioners (from 7,843 in 2016 to 7,045 in (i) 27,488 civil servants paid by the government in June 2023) combined with a sharp 42 percent increase in the 2023 are accumulating rights to a public service pension; number of civil servants between 2016 and 2023.47 (ii) 32,886 workers contribute to the social security pen- sion scheme managed by INSS44; and (iii) labor force is The system dependency ratio is unlikely to increase 924,300 (Table 2.8). until the mid-2030s. Figure 2.7 shows the 2016 and 2023 age distribution of civil servants whose birthdate is available in the payroll database. It needs to be inter- 2.3.7.  System dependency ratio45 preted with caution as only 51 percent of civil servants had a recorded birth date in 2016 (83 percent in 2023). The ratio of the number of pensioners to the number However, it shows a drastic change in the age distribution of contributors (system dependency ratio) has steadily of civil servants with a bulge in the recruitment of civil decreased since 2016. The system dependency ratio servants between the ages of 30 and 47 between 2016 and decreased from 40 percent in 2016 to 28 percent in 2021 2023, consistent with the findings of the Public Expendi- and 26 percent in 2023 (Table 2.8). In 2023, there are ture Review (2022) pensions chapter for Guinea-Bissau. approximately four active civil servants per pensioner These bulge cohorts will become eligible for retirement compared to 2.5 active civil servants per pensioner in 2016. starting in 2036 so the system dependency ratio is unlikely Table 2.8. Pensioners and contributors Schemes 2016 2021 2023 Pensioners (Regular, pending and veteran) (A) 7,843 7,934 7,045 Pensioners (Regular and pending) (B) 4,258 5,776 5,349 Number of civil servants including military and reserve (C) 19,398 27,918 27,488 Dependency ratio (Regular, pending and veteran) (%) (A)/(C) 40% 28% 26% Dependency ratio (Regular and pending) (%) (B)/(C) 22% 21% 19% Memo: Labor force (15–59) 827,494 895,571 924,300 Source: Payroll data from the Ministry of Finance and World Development Indicators. INE, November 2022, Rapport de présentation des projections de la population de la Guinée Bissau 2014–2063. 44 The 32,886 figure is the most up to date and comes the publicly available INSS 2020 report. The number of beneficiaries totaled 4,329 effective 5th March 2024 (source: INSS) 45 There are two types of dependency ratio: i) the old age population dependency ratio (old people/young people) and ii) the system dependency ratio (beneficiaries/ contributors). This discussion focuses on the latter. 46 The veteran scheme does not have any contributor while the number of veteran pensioners is steadily decreasing as veterans are passing away while most of their descendants do not benefit from the scheme. 47 The August 2023 payroll payment module from the Budget Department at the Ministry of Finance includes 27,488 civil servants who account for 3.0 percent of the Bissau-Guinean labor force (Table 2.8). Chapter 2: Public Sector Pension Scheme in Guinea-Bissau 33 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2024 Figure 2.7. Age distribution of civil servants including military and reserve by age (2016 and 2023) 1,000 Number of civil servants 800 600 400 200 0 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 Age 2016 2023 Source: January 2016 and June 2023 payroll data. Ministry of Finance. Note: Age calculated from December 31, 2015, and May 31, 2023. Observations = 9,948 (2016) and 22,741 (2023). to increase until then48. This, combined with the fact that (the figure on the right magnifies the left figure focusing salaries in the public sector (on which pensions are based) on payments below 500,000CFA). If the pension amount do not tend to increase with age (Figure 2.1) leads to the had remained fixed between 2016 and 2023 then all the conclusion that pension payments are not expected to dots should fall along the first diagonal (y = x). In fact, increase substantially in the coming years. none of the 1,098 individuals who received a regular pension in both 2016 and 2023 received the same pen- sion in both years. More precisely, 83 individuals had an 2.3.8.  Administration of the schemes increase in their net pension which averaged 181,798CFA per pension (approximately US$300), while 1,015 indi- The administration of the public sector pension schemes viduals had a decrease in their net pension (for 982 of faces significant challenges. First, important discre- them, their net pension in 2016 became their gross pension tionary changes to individual pension amounts were in 2023 while the net pension of 33 others decreased by made between 2016 and 2023. Although the amount 247,069CFA on average (approximately US$400). The of pension received by each pensioner is supposed to be same applies to the pending and veteran pension schemes fixed during retirement (Table 2.1 indicates that it is not (Figures 2.9 and 2.10).49 indexed), a comparison of the pension amounts received by the same pensioners in 2016 and 2023 shows that their The average monthly pension for the 3,511 individuals pensions changed in a discretionary manner between the who were pensioners in both 2016 and 2023 increased two dates. Figure 2.8 compares the net pension amount by 4.3 percent between 2016 and 2023 (Table 2.9). The paid in 2016 (x-axis) and 2023 (y-axis) to the 1,098 regular total increase represented 182.56 million CFA (about pensioners who received a pension in both 2016 and 2023 US$300,000).50 48 It should be noted as well that dependency ratios can also increase due to the increase of life expectancy at old age. 49 A different example that might show imbalances in the way that pensioners are inputted in the system is the significant difference in the net pension between individuals who have a birthdate registered and those who do not. This statistical difference is true for the civil service, pending pensioners, and veteran pensioners. 50 (103,865–99,532) × 3,511 individuals × 12 months = 182.56 million CFA. 34 Chapter 2: Public Sector Pension Scheme in Guinea-Bissau RETIRING THE FISCAL RISK Figure 2.8. Net monthly pension payments in 2016 and 2023 for the regular pension scheme (CFA) 500,000 3,000,000 2,500,000 400,000 Net payments in 2023 Net payments in 2023 2,000,000 300,000 1,500,000 200,000 1,000,000 500,000 100,000 0 0 0 0 00 00 0 0 0 0 00 00 00 00 ,0 ,0 0 0 0 0 0 0, 0, 0, 0, 00 00 00 00 00 00 00 50 00 50 00 0, 0, 0, 0, 0, 1,0 1,5 2, 2, 3, 10 20 30 40 50 Net payments in 2016 Net payments in 2016 Source: January 2016 and June 2023 payroll data. Ministry of Finance. Note: Number of observations: 1,097. A pensioner with a net monthly pension of 5,000,000CFA in 2016 and 4,111,527CFA in 2023 is not included as it is an outlier. Figure 2.9. Net monthly pension payments in 2016 Figure 2.10. Net monthly pension payments in 2016 and 2023 for the pending pension scheme (CFA) and 2023 for the veteran pension scheme (CFA) 500,000 500,000 400,000 400,000 Net payments in 2023 Net payments in 2023 300,000 300,000 200,000 200,000 100,000 100,000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 00 00 00 00 00 00 00 00 00 00 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 10 20 30 40 50 10 20 30 40 50 Net payments in 2016 Net payments in 2016 Source: January 2016 and June 2023 payroll data. Ministry of Finance. Source: January 2016 and June 2023 payroll data. Ministry of Finance. Note: Number of observations: 796. Note: Number of observations: 1,617. A pensioner with a net monthly pension of 432,600CFA in 2016 and 1,008,152CFA in 2023 is not included as it is an outlier. Chapter 2: Public Sector Pension Scheme in Guinea-Bissau 35 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2024 Table 2.9. Number and pensions of individuals who are pensioners in both 2016 and 2023 Average Monthly Pension Average Monthly Pension Pension Schemes Number of Individuals in 2016 (CFA) in 2023 (CFA) Regular pension 1,098 210,084 206,604 Pending pension 796 65,209 64,142 Veteran pension 1,617 41,360 53,657 Total 3,511 99,532 103,865 Source: January 2016 and June 2023 payroll data. Ministry of Finance. The creation of the pending pension scheme is becoming a situation where all pensioners would have immediately the new norm for retirement. The pending pension scheme benefitted from a regular pension.51 was originally created as an ad-hoc mechanism to post the new pensioners until their pensions were fully processed Processing of pension applications and subsequent as it could take several years between the time a pension pension payments largely depends on the applicant’s request was initiated and the time when the first payment personal connections within the administration who occurred. It has become the new norm as 73 percent of the can “facilitate” the process. As a result, the application 3,534 individuals who became pensioners between 2016 of some public servants is processed quickly while the and 2023 were still under the pending pension scheme application of others can take years. in 2023 (Table 2.10). The pending pension scheme has de facto led to a reduction in pension payments amounting Gathering proof of work is very time-consuming, as to 25,625CFA per month per person (approximately only hard copies of administrative records are avail- US$42 per month or US$500 per annum) compared to able. In the end, the employment history may be difficult Table 2.10. Pensioners and pension amounts (2016 and 2023) New Pensioners Deceased Between Between 2016 and 2016 2016 and 2023 2023 2023 Average Average Average Average Monthly Monthly Monthly Monthly Number of Pension Number of Pension Number of Pension Number of Pension Pension Schemes Pensioners (CFA) Pensioners (CFA) Pensioners (CFA) Pensioners (CFA) Regular pension 2,467 160,400 1,369 120,552 866 210,564 1,964 208,350 Pending pension 1,791 70,584 995 74,884 2,589 114,290 3,385 102,498 Veteran pension 3,585 40,196 1,968 39,239 79 237,141 1,696 62,204 Total 7,843 84,945 4,332 73,123 3,534 140,628 7,045 122,307 Source: January 2016 and June 2023 payroll data. Ministry of Finance. 51 Without the 20% discount applied to pending pension, total monthly payments under the pending pension scheme would be 128,123CFA (102,498CFA/80%) so that the discount leads to a “savings” of 25,625CFA per month (128,123CFA − 102,498CFA = 25,625CFA). 36 Chapter 2: Public Sector Pension Scheme in Guinea-Bissau RETIRING THE FISCAL RISK to evidence, and it may be eventually necessary to estimate 2.4. Public service pension schemes: the period of service. The Ministry of Public Administra- Recommendations for improvement tion may not have the necessary computers and software to automate the pension amount or may be unwilling to The main challenge faced by the public sector pension do so. As a result, the calculation of the pension amount schemes is not its costs. As evidenced above, the pension is done manually which leaves the door open to errors and system has been able to reduce spending through the cre- possible fraud in the absence of any control. ation of the pending scheme (which de facto reduced pen- sion by 20 percent) and ad-hoc discretionary changes to Eventually, the final approval by the Budget Depart- individual pensions while the dependency ratio is unlikely ment at the Ministry of Finance depends on whether to deteriorate in the coming years. the funds are available – although what happens when no sufficient funding is available remains unclear. The The main challenge is one of governance and design of budgeting process does not adequately project and budget the pension schemes. for new retirements in any given year. This lack of plan- ning is – de facto – a fiscal risk that materializes annually.52 a. Governance: the pension rules are not systemati- The public sector pension scheme has never benefited cally applied. The management of the schemes makes from an actuarial assessment to determine its ongoing important discretionary changes to individual pension viability, or the amount of liabilities incurred to date. In amounts which do not comply with the rules. This fact, an actuarial assessment may be difficult to implement finding combined with the fact that pension payments considering the ad-hoc discretionary changes to individ- overly benefit a very small fraction of beneficiaries is ual pension amounts made by those responsible for the unsettling. It gives the perception that pension payments management of the pension schemes. are “captured” by those responsible for the implemen- tation of the schemes. Benefits should be secure and Efforts to gather the necessary data are limited. In non-discriminatory, schemes should be managed in a 2023, the birthdate of 28 percent of the pensioners and sound and transparent manner, and for confidence to 17 percent of the civil servants is still missing. There is exist, good governance is essential. no systematic process to validate that a pensioner is still b. Design: alive (i.e., an annual “proof of life”). The database includes i. The base wage for pension calculation (reference beneficiaries with unrealistic ages (below 18 or more salary) includes only the 2 last years: this is not than 100 years) and people who have died (5 of the 30 only costly but inequitable (by design). Including individuals with the highest pension in June 2023 were reportedly dead at this time). all (valorized) wages (entire career) in the pension’s calculation would be the fair way to do it between Although most pension payments are made through the people with different patterns of pay over the career banking system, some payments are still made in cash and would also avoid distortions to people’s request- with little associated control.53,54 ing wage increases just before retirement. 52 Solely from the lack of birthdates in the system (and considering that individuals will transition into a pending pensioner scheme) the government in unable to predict approximately 450 million CFA in pension payments until 2050. 53 The unions express concern that for some pensioners, the cost of receiving the pension is equivalent to the pension and that pension payments should be decentralized. In fact, when the payments are made in cash, they do not always reach the intended beneficiaries while a fraction of the cash amount is withdrawn to pay the payers and the unions. This is also the case for the payment of teachers’ salaries. 54 There is also some concern that two pension laws are being simultaneously used to pay pensions – i.e., the old pre-2012 law and the new post-2012 law. This requires further investigation. Chapter 2: Public Sector Pension Scheme in Guinea-Bissau 37 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2024 ii. Pensions indexation: not automatically indexing factor (that would equalize the net present value pensions already represents a challenge. If pension for early vs normal retirement age). payments are not regularly adjusted, then the living standards of retirees are eroded by inflation. Pensions The creation of a pension fund is not likely to resolve should be increased regularly and automatically, the governance challenge. It is not clear how the deposit linked to changes in economic variables (not ad of 6 percent from the payroll of all public employees into hoc or discretionarily). Typically, they should be a special account (or pension fund) jointly managed by increased based on prices and/or average earnings. the Ministry of Public Administration and the Ministry iii. Accrual rate: in fact, there are two features of of Economy and Finance as stipulated in the 2015 Budget the pension system – accrual rate structure and Law would improve the management of the schemes. maximum replacement rate – that should be con- Furthermore, as outlined in the Public Expenditure Review sidered together, and best practice is to have an (2022), substantial reforms to overhaul the governance ‘affordable’ and linear accrual rate (where retire- of INSS would first be needed before this could even be ment income accumulates at the same proportion seriously considered as an option. of earnings for each and every year of contributions) with no maximum. iv. Early retirement: a good practice would include 2.4.1.  Measures to improve the public service penalizing early retirement with an actuarial neutral pension system Table 2.11. Policy options to improve the public pension system Policy Options Reform Cost of Inaction (or of keeping Challenges Short-term Medium/Long-term the status quo) Poor public Review the list of pensioners, Inadequate soft infrastructure sector pension complete the database with limiting information available governance the correct birth date of each to properly manage the public pensioner, obtain “proof of sector pension system. life” and set up a mechanism Continuation of potentially to update them on a yearly expensive irregularities basis. related to pension payments. Systematically pay pensions A lack of reliable diagnostics through the banking system to to guide and inform reform avoid irregularities associated efforts. with cash payments and request that the commercial banks send proof of pension payment to the Treasury. Conduct a study into the feasibility of using mobile money for pension payments to reduce cost of distribution and cost of receipt. Conduct a functional review of the pensions department within the Ministry of Finance. 38 Chapter 2: Public Sector Pension Scheme in Guinea-Bissau RETIRING THE FISCAL RISK Table 2.11. Policy options to improve the public pension system (Continued) Policy Options Reform Cost of Inaction (or of keeping Challenges Short-term Medium/Long-term the status quo) Poor design Clarify the parameters of the The introduction of parametric An inequitable and opaque of the public pension schemes including reforms, benchmarked to pension system sector pension the indexation, reviewing appropriately selected peer system retirement age as Bissau- countries, to the public sector Guinean life expectancy pension scheme to provide increases and the criteria to more equitable rule-based be eligible into the veteran pension benefits and limit scheme and the mechanism fiscal costs into the future. to transfer pensioners from the pending to the regular pension scheme. Limited fiscal Develop a system to keep Introduce, train staff on and The continuation of an annual space individual records of current institutionalize an independent fiscal risk in the form of pension civil servants with their model in the Ministry of payments birthdate, positions, and Finance to help inform the Inability to forecast and salaries to anticipate and expected impacts of reform adequately plan for the bulge manage future pension alternatives on fiscal costs of pensioners which will have payments. and benefit levels. a massive fiscal impact 2.4.2.  Considerations for setting up a corresponding financial transaction.56 In 2023, the total pension fund55 annual wage bill of the 27,488 civil servants is 47.1 billion CFA (equivalent to approximately US$77 million) (see Although the 2015 Budget Law envisages creating a Tables 2.4 and 2.5), so that the notional amount corre- pension fund, the assessment of current conditions sponding to 6 percent of payroll represents 2.83 billion suggests it is not recommended at this juncture. The CFA (US$4.6 million). Currently, the total annual pen- main reasons are: (i) the fiscal costs of creating a pension sion payment is 10.3 billion CFA (US$16.9 million) fund are considerable; (ii) creating a pension fund in a (see Table 2.5). Consequently, even if the 6 percent pay- weak governance environment is extremely risky; and roll withdrawal (equivalent to 2.83 billion CFA) were to (iii) the implementation of a pension fund requires as a be transferred into a special account, this amount would fall prior condition the establishment of a strong regulatory framework. very short of the amount required to pay current pensions (10.3 billion CFA). Consequently, the government would The fiscal cost of creating a pension fund would go much not only need to transfer in cash to the pension fund the beyond the 6 percent payroll contribution included notional 6 percent payroll reduction (2.83 billion CFA) in the 2015 Budget Law. As already mentioned, under but also 7.47 billion CFA (approximately US$12 million) the current public service pension scheme, 6 percent is from general revenues so that the pension fund can pay deducted from the gross salary of civil servants. However, all pensions. It would also need to cover the operating this is currently just a notional paper transaction with no costs of the pension fund. However, the 2015 Budget Law 55 This section draws on: Schwarz, Anita, and Miglena Abels. November 2016. Issues for Civil Service Pension Reform in Sub-Saharan Africa. Social Protection and Labor Discussion Paper No. 1613. The World Bank Group. 56 In other words, the 6 percent contribution is not transferred to any account. Chapter 2: Public Sector Pension Scheme in Guinea-Bissau 39 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2024 remains silent on this critical issue: it does not specify how not be adequately funded or be unable to protect the the pension fund would be financed beyond the 6 percent pension reserves to meet future pension obligations. Also, payroll contribution which, once again, falls very short the investments of the pension fund reserves (if they of the amount necessary to pay all current (and future) materialize) would need to be regulated by possibly allow- pensions. ing for investments in international capital markets. Creating a pension fund in a weak governance envi- ronment is extremely risky. First, the management of the 2.5. Summary pension fund would likely be captured by a few individuals or a political party. The INSS which manages private sector The note shows that the main challenge faced by the pensions is largely seen as politically captured. According public sector pension schemes is one of governance. to the 2015 budget law, the pension fund would be jointly Pension payments overly benefit a very small fraction of managed by the Ministry of Public Service and the Ministry beneficiaries while discretionary changes deviating from of Economy and Finance. However, a dedicated admin- the pension rules are made to individual pension amounts. istration would need to be created to manage the pension An analysis of the 2016 and 2023 payroll databases gives fund. This would be extremely risky in the weak governance the perception that pension payments are “captured” by environment which currently prevails in Guinea-Bissau. those responsible for the implementation of the schemes. Second, the administrative costs of setting up the pension Some measures could be taken immediately to improve fund are likely to be high. International experience shows the public services pension schemes. These measures that pension fund management can spend heavily on include clarifying the parameters of the pension schemes, administrative costs including luxurious offices, cars as well reviewing and updating the list of pensioners, establishing as perks for their own staff. Third, any reserves accumulated a “proof of life” procedure, systematically making pension by the pension fund in the future are likely to be diverted.57 payments through the banking system, and, importantly, In fact, INSS reserves are currently diverted by the gov- conducting an institutional assessment of the unit respon- ernment and there is no reason to believe that the same sible for managing the public pension schemes. would not occur with a public pension fund. International experience with pension funds shows that pension fund The government may want to consider developing a administrators frequently have a lot of leeway in where and model like the World Bank’s PROST toolkit to: (i) assess how they invest pension fund reserves. Also, international the fiscal costs of the current scheme, and (ii) evaluate experience shows that pension fund administrators have different pension reform options. The World Bank’s the incentive to ask for the contribution rates to be raised pension reform options simulation toolkit, PROST, models over time, even if they just lead to the accumulation of pension contributions, entitlements, system revenues, and incremental reserves, and for deficit-running pension funds system expenditures over a long period. It is designed to to be closed, with the corresponding deficits being passed help policymakers make informed policy decisions but the on to the government. ability to develop this model would depend on data avail- ability for both current civil servants and pensioners. The establishment of a pension fund requires a strong regulatory framework. Currently, there is no legal frame- The analysis also shows that it is not recommended work or specific institutions responsible for the regulation for Guinea-Bissau to set up a pension fund for the and supervision of pension schemes in Guinea-Bissau. public service pension scheme at this stage. Although This poses extremely high risks: a pension fund may the 2015 Budget Law envisages creating a pension fund, 57 As shown in previous paragraphs, the payments to the pension fund from the 6 percent payroll contribution are not sufficient to cover the pension payments. As such, any accumulation of reserves would require a substantial transfer from the national budget to the pension fund. This transfer would need to be above the sum of the pension payments and pension fund administrative costs. 40 Chapter 2: Public Sector Pension Scheme in Guinea-Bissau RETIRING THE FISCAL RISK its financing (6 percent of payroll) would not be enough The Government of Guinea-Bissau is advised to: (i) main- to pay existing pensions. Importantly, creating a pension tain the current institutional structure of the public fund in a weak governance environment is extremely risky service pension schemes, (ii) immediately introduce while the establishment of a strong regulatory framework the measures outlined above including an institutional would be a prior condition for the implementation of assessment of the unit responsible for managing the such a pension fund. As such, establishing a pension fund public pension schemes to improve governance, and for the public service employees would bring significant (iii) consider a coherent reform package based on a administrative and fiscal challenges and therefore is not in model like PROST to introduce parametric reforms to the interest of the pensioners. improve equity and ensure fiscal sustainability. Chapter 2: Public Sector Pension Scheme in Guinea-Bissau 41 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2024 References Miglena Abels and Melis U. Guven. Pension Systems in Anita M. Schwarz and Miglena Abels. 2016. Issues for civil Sub-Saharan Africa: Brief Review of Design Parameters service pension reform in Sub-Saharan Africa. Social and Key Performance Indicators. Social Protection & Protection and Labor Discussion paper, no. SP 1613. Labor Discussion Paper, SP 1610. Washington, D.C.: Washington, D.C.: World Bank Group. https://hubs. World Bank Group. http://documents.worldbank.org/ worldbank.org/docs/imagebank/pages/docprofile. curated/en/271551477284461959/Pension-systems- aspx?nodeid=26941476 in-Sub-Saharan-Africa-brief-review-of-design-parameters- and-key-performance-indicators Anita M. Schwarz.; Fiona Stewart; Zahid Hasnain; Yutaka Yoshino; Melis U. Guven and Himanshi Philippe Auffret and Melis U. Guven. 2016. Pension Systems Jain. 2018. Guidelines for Reforming African Pension in Guinea-Bissau: Key Challenges and Prospects for the Systems. Washington, D.C.: World Bank Group. Future. Washington, D.C.: World Bank Group. https:// Unpublished. ssrn.com/abstract=3671125 or http://dx.doi.org/10.2139/ ssrn.3671125 World Bank. December 2022. Public Expenditure Melis U. Guven and Phillippe G. Leite. 2016. Benefits Review for Guinea-Bissau: Creating Fiscal Space and costs of social pensions in Sub-Saharan Africa. Social While Enhancing Public Expenditure in Health, Pensions, Protection Discussion Paper series, no. SP 1607. and Energy (English). Washington, D.C.: World Bank Washington, D.C.: World Bank Group. https://hubs. Group. http://documents.worldbank.org/curated/en/ worldbank.org/docs/imagebank/pages/docprofile. 099090723141535862/P17726604e686502e091f aspx?nodeid=26602949 70c5b7833f486e 42 References RETIRING THE FISCAL RISK Annex 1. Pension: A Simple Model The following is a simple model which formed the basis for His total pension benefits TB are: some of the theoretical analysis in the above chapter. The model offers insight into the area of accrual and contribution TB = P : : LE _ a R i - a R D = AR : _ a R - a W i : w : : LE _ a R i - a R D rates in Guinea-Bissau. However, as with any model, it has made simplifying assumptions to limit the inputs needed for the model. For example, the model does not account for We say that a pension system is in balance when total returns to contributions during the contributory period contribution equals total pension benefits: and the discount rate on the retirement period. This might affect the equilibrium contribution rates it calculates by over- TC = TB estimating them. Nevertheless, it effectively demonstrates the order of magnitude of and the direction of travel that which can be written: CR : _ a R - a W i : w = AR : _ a R - a W i : w : : LE _ a r i - a R D pension policy must follow to reduce the proportion of fiscal space the public pension sector occupies and the consequent fiscal risk it generates each year.58 which after simplification leads to: —————————————————————––– CR = AR : : LE _ a R i - a R D Consider an individual who starts working at age aW and retires at age aR. which says that for a pension system to be in balance the contribution rate should equal the accrual rate times the Assume that his wage w is constant in real terms (the wage years of pension benefits. can easily be made to vary with time). Equivalently: Assume that the contribution rate to pension is CR. CR LE _ a R i - a R AR = Then, his total contribution TC during his lifetime is: TC = CR : _ a R - a W i : w which says that the accrual rate should equal the contribu- tion rate divided by the years of pension benefits. Assume that the accrual rate is AR. Then, at retirement, he gets a yearly pension of: In Guinea-Bissau, AR = 2.8 percent, CR = 6 percent and [LE(aR) − aR] can be estimated at 6 years assuming P = AR : _ a R - a W i : w a retirement age of 60 and a life expectancy at retirement He gets this pension during (LE(aR) − aR) years where of 6 years,59 so that: LE(aR) is life expectancy at retirement which depends on CR = 6% < AR : : LE _ a R i - a R D = 2.8% # 6 = 16.8% retirement age aR. 58 The World Bank has developed a forthcoming tool which is still under development that will be able to produce a more precise indication of the equilibrium parameters in the pensions system, both in Guinea-Bissau and in other countries. 59 Pensioners who deceased between 2016 and 2023 had an average age of 71.0 for regular pensioners, 66.3 for pending pensioners and 62.2 for veteran pensioners. Note that the life expectancy at birth for the overall population was 60 years in 2021. Annex 1. Pension: A Simple Model 43 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2024 which shows that the contribution rate of 6 percent is considering a mean 2016–2023 as presented in the above much too low to cover future pension payments when calculations (Table A1). The years before COVID-19 the accrual rate is 2.8 percent, or equivalently, that an (2016–2019) will also have had a lower life expectancy at accrual rate of 2.8 percent is much too high to cover 60, as this tends to improve with time as medical science future pensions when the contribution rate is 6 per- and development in the health sector advances. These two cent. In fact, for the pension system to be in balance, the factors will skew the average age of mortality downwards. contribution rate should be increased from 6 percent to As noted in the chapter, WHO data estimates the life 16.8 percent if the accrual rate is maintained at 2.8 percent expectancy at 60 to be 15.5 years in Guinea-Bissau. This or the accrual rate should be decreased from 2.8 per- might increase to 17.2 years by 2038, based on the increase cent to 1 percent if the contribution rate is maintained from 2000 to 2019 in the same WHO dataset. This would at 6 percent. coincide with the first bulge of retirees in 2036, noted in the chapter above, and so is an important consideration. Any other combination presented in Table A1. below also corresponds to a balanced pension system. Another parameter that might be worse considering is changes to the retirement age. The table below presents The COVID-19 epidemic in 2020 disproportionately the different scenarios for different life-expectancy con- affected older people as reflected in the global pandemic sidering an increase in the retirement age of 5 years using mortality statistics, lowering the average age of mortality if the same life expectancy at 60 assumptions. Table A1. Pension system in balance (retirement age 60) AR (%) 1.0 1.1 1.2 1.3 1.4 1.5 1.6  1.7  1.8  1.9 CR (%) 6.0 6.6 7.2 7.8 8.4 9 9.6 10.2 10.8 11.4 AR (%)  2.0  2.1  2.2  2.3  2.4  2.5  2.6  2.7  2.8 CR (%) 12.0 12.6 13.2 13.8 14.4 15.0 15.6 16.2 16.8 Note: Calculations performed using LE(aR) − aR = 6 years (average time lived after retirement between 2016–23). Table A2. Pension system in balance (retirement age 60) LE after retirement AR (%) 1  1.1  1.2  1.3  1.4  1.5  1.6  1.7  1.8  1.9 15.5 years CR (%) 15.5 17.1 18.6 20.2 21.7 23.3 24.8 26.4 27.9 29.5 17.2 years CR (%) 17.2 18.9 20.6 22.4 24.1 25.8 27.5 29.2 31.0 32.7 LE after retirement AR (%) 2  2.1  2.2  2.3  2.4  2.5  2.6  2.7  2.8 15.5 years CR (%) 31.0 32.6 34.1 35.7 37.2 38.8 40.3 41.9 43.4 17.2 years CR (%) 34.4 36.1 37.8 39.6 41.3 43.0 44.7 46.4 48.2 44 Annex 1. Pension: A Simple Model Table A3. Pension system in balance (retirement age 65) LE after retirement AR (%) 1  1.1  1.2  1.3  1.4  1.5  1.6  1.7  1.8  1.9 1 year CR (%)  1.0  1.1  1.2  1.3  1.4  1.5  1.6  1.7  1.8  1.9 10.5 years CR (%) 10.5 11.6 12.6 13.7 14.7 15.8 16.8 17.9 18.9 20.0 12.2 years CR (%) 12.2 13.4 14.6 15.9 17.1 18.3 19.5 20.7 22.0 23.2 LE after retirement AR (%) 2  2.1  2.2  2.3  2.4  2.5  2.6  2.7  2.8 1 year CR (%)  2.0  2.1  2.2  2.3  2.4  2.5  2.6  2.7  2.8 10.5 years CR (%) 21.0 22.1 23.1 24.2 25.2 26.3 27.3 28.4 29.4 12.2 years CR (%) 24.4 25.6 26.8 28.1 29.3 30.5 31.7 32.9 34.2 Annex 1. Pension: A Simple Model 45 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2024 Annex 2. Summary of Recommendations (Schwarz, Anita et al. 2018, p. 24) • Keep the pension system design simple: easy to admin- develop sufficiently to make accumulating reserves ister, easy to understand, easy to govern. worthwhile. • Focus on the primary purposes of the pension system: – Keep benefits modest, in line with ILO rec- keeping the elderly out of poverty and providing a ommendation of 40% benefit after 30 years of mechanism for consumption smoothing. contribution. – Social objectives and capital market development are – Base pensions on lifetime average salary. useful secondary objectives, but not at the expense of – Revalue past wages with growth in average wages. the workers and pensioners. – Keep minimum pensions modest. • Keep administrative costs low, eliminating all unneces- • Civil service pension systems: sary expenses. – Integrate with national systems if possible – can grad- • Improve record-keeping, tying in with national ID ually move parameters closer to national system. systems where available. – Do not impose high contribution rates – typically • Collect data on the mortality experience of the covered fall on Government as employer. population and set retirement ages so that life expec- – Unify salaries and allowances and base both contri- tancy after retirement averages 15 years. butions and benefits on the unified salary. • Eliminate lump-sum payments given in addition to – Follow recommendations for defined benefit monthly pension over time. systems. • Index benefits to inflation, protection of retirees against cost-of-living increases. • Informal sector workers: • Universal schemes: – Recognize that informal sector schemes will have to – Keep benefits sustainable! be specially designed for needs of informal sector • Defined contribution systems: workers. – Improve governance. – Will should be a defined contribution savings – Enhance supervisory capacity to ensure that the scheme, with early access to a portion of the savings. funds are safe. – Will be unlikely to provide an adequate living pen- – Develop investment instruments for the funds to sion but will make the individual better off than if invest in. they had not saved. • Defined benefit systems: – Low administrative costs and good investment – Keep contribution rates low in line with what returns crucial to success. is needed to pay benefits until financial markets – Requires careful piloting and evaluation. 46 Annex 2. Summary of Recommendations