EMERGENCY FISCAL REFORM SUPPORT PROGRAMME (EFRSP)

Transcription

1 AFRICAN DEVELOPMENT BANK AFRICAN DEVELOPMENT FUND Reference No.: Language: English Distribution: Original: French EMERGENCY FISCAL REFORM SUPPORT PROGRAMME (EFRSP) COUNTRY: GUINEA-BISSAU APPRAISAL REPORT December 2009 Appraisal Team e E Team Leader Team Members: T. HOUENINVO, Senior Macroeconomist, OSGE.2 O.MANLAN, Principal Economist, ORWB I. CAMPOS, Junior Economist, OSGE.1 1 Consulting Macroeconomist, OSGE.2 Sector Director: Country Director: Division Manager: G. NEGATU, Director, OSGE F. PERRAULT, Director, ORWB M. KANGA, Division Manager, OSGE.2 Peer Reviewer E Internal Peer Reviewers: External Peer Reviewers: H. KOUASSI, Principal Macroeconomist, OSGE; P. YEMBILINE, Senior Country Economist, ORCE; A. MAHDI, Chief Financial Analyst, OSGE.2; J. BANDIAKY, Economist, World Bank, Dakar A. PIRES, Aid and International Cooperation Officer, European Commission P. Drummond, Head of Mission, Africa Department, IMF E. ROUMEGOUS, Economist, Agence Française de Développement M. ROBIN, Pôle de la gouvernance financière, Ministry of Foreign Affairs, France ii

2 TABLE OF CONTENTS List of Annexes Currency Equivalents Fiscal Year Acronyms and Abbreviations Grant Information Programme Summary Programme Logical Framework iv iv iv v vii-viii ix-xii I. THE PROPOSAL 1 II. COUNTRY AND PROGRAMME CONTEXT Overall Government Development Strategy and Medium-term Reform Priorities Recent Socioeconomic Developments, Constraints, Challenges and Perspectives Bank Group Portfolio Status 3 III. JUSTIFICATION, KEY DESIGN ELEMENTS AND SUSTAINABILITY Linkage with CSP, Country Preparedness and Underlying Analytical Elements Collaboration and Coordination with Other Donors Outcomes and Lessons Learnt from Similar Completed or Ongoing Operations Linkage with Ongoing Bank Operations The Bank s Comparative Advantages Compliance with Good Practices Principles regarding Conditionalities Compliance with Bank Group Lending Policy 9 IV. THE PROPOSED PROGRAMME Programme Goal and Objectives Programme Pillars, Specific Objectives and Expected Outcomes Financing Requirements and Arrangements Programme Beneficiaries Impact on Gender Environmental Impact Impact on Governance 14 V. PROGRAMME IMPLEMENTATION, MONITORING AND EVALUATION Implementation Arrangements Monitoring and Evaluation Arrangements 15 VI. LEGAL DOCUMENTS AND AUTHORITY Legal Documents Conditions Precedent to Bank Group Intervention Compliance with Bank Group Policies 16 VII. RISK MANAGEMENT 16 VIII. RECOMMENDATION 17 This report was prepared by a team led by T. HOUENINVO, Senior Macroeconomist, OSGE.2, and composed of O. MANLAN, Principal Country Economist, ORWB and I. CAMPOS, Economist, OSGE1, following a mission to Bissau in November It also benefitted from contributions from a Consulting Macroeconomist as well as exchanges with IMF, World Bank, European Union and French Cooperation economists and other technical and financial partners based in Bissau. Questions on this report should be referred to Mr. G. NEGATU, Director, OSGE (Extension 2077) and Mrs. M. KANGA, Division Manager, OSGE.2 (Extension 2251). iii

3 List of Tables Table 1: General and Technical Budget Support Conditions Table 2: Areas of Intervention of TFP Budget Support Table 3: Budget Balances and Financing Requirements 2010 List of Annexes Annex 1: Annex 2: Annex 3: Annex 4: Annex 5: Financial Sector Development Policy Letter Matrix of Programme Measures Notes on Relations with the IMF Key Macroeconomic and Financial Indicator Trends Areas of Intervention of Bank Capacity Building Projects Currency Equivalents (December 2009) Monetary Unit = CFA Franc (CFAF) UA 1 = CFAF UA 1 = EUR UA 1 = USD Fiscal Year January- December Acronyms and Abbreviations ADB : African Bank Development ADF : African Development Fund BSCF : Budget Support Consultation Framework BCEAO : Central Bank of West African States CPIA : Country Policy and Institutional Assessment CPO : Country Programme Office CSP : Country Strategy Paper DAF : Department of Administration and Finance DGB : General Directorate of the Budget DGP : General Directorate of Planning DGT : General Directorate of the Treasury ECOWAS : Economic Community of West African States EFRSP : Emergency Fiscal Reform Support Programme EMCBP : Economic Management Capacity Building Project ENA : National School of Administration EPCA : Emergency Post-Conflict Assistance EU : European Union FSF : Fragile States Facility GDP : Gross Domestic Product HIPC : Heavily Indebted Poor Countries IMF : International Monetary Fund MDG : Millennium Development Goal MTEF : Medium-Term Expenditure Framework NPRSP : National Poverty Reduction Strategy Paper OHADA : Organization for the Harmonization of Business Law in Africa PARCA : Public Administration Capacity Building Support Project PEFA : Public Expenditure and Financial Accountability PEMFAR : Public Expenditure Management and Financial Accountability Review SIGFIP : Integrated Public Financial Management System SNFO : Senegal Regional Office TFP : Technical and Financial Partners UNDP : United Nations Development Programme WADB : West African Development Bank WAEMU : West African Economic and Monetary Union iv

4 GRANT INFORMATION Information on the Beneficiary DONEE: EXECUTING AGENCY: GUINEA-BISSAU Ministry of Finance Financing Plan Source of finance Amount (in UA million) Instrument Bilateral Spain Grant France Grant Portugal NA Multilateral World Bank IDA Grant ECOWAS NA ADB Group FSF FSF Grant - ADF ADF Grant EU EDF Grant WAEMU NA Information on ADF Financing Grant currency Interest rate type Basic rate (Floating) Interest rate margin Financial spread Commitment charge Other charges Duration Grace period UA Not applicable Not applicable Not applicable Not applicable None None Not applicable Not applicable Activities Date 1. Approval of Concept Note 13 January Negotiation of Grant Agreement 19 February Board Presentation 24 March Effectiveness 26 March Disbursement of the single tranche 30 March Final review January Completion Report March 2011 v

5 PROGRAMME SUMMARY Overview of Programme 1. Programme title Emergency Fiscal Reform Support Programme (EFRSP) - Geographical coverage National territory - Time frame 12 months - Programme cost Not applicable - Financing - FSF: UA 4 million - ADF: UA 1.7 million - Programme type Budget support 2. The Emergency Fiscal Reform Support Programme (EFRSP) is a grant to be disbursed in a single tranche in March 2010, following fulfilment of general and specific conditions by the donee. It aims to contribute to more efficient macroeconomic policy management. Its objective is to continue to improve the public financial management framework and performance. Expected Programme Outcomes 3. The expected outcomes of proper implementation of the programme are enhanced quality, efficiency and equity in the management of public funds, through greater credibility, completeness, transparency and control in carrying out budgetary operations. 4. The direct beneficiaries of the programme are public services involved in budgetary cycle management, particularly the central directorates of the Ministry of Finance. The other beneficiaries are the people of Guinea-Bissau, particularly the poorest segments of the population, who will benefit from the extension of resources to social sectors, and the private sector which will take advantage of the expected programme outcomes to develop its activities. Needs Assessment 5. The EFRSP is consistent with the priorities defined in the Interim CPS as extended and the provisions of the operational framework for fragile States. It is also in line with the first pillar of the poverty reduction strategy, the NPRSP, adopted in November 2006 for the period. 6. Furthermore, the programme addresses serious constraints resulting from exogenous shocks (global food and financial crisis, political instability, etc.) which the Government intends to cushion while facing the challenge of consolidating and deepening fiscal reforms. This strong commitment of the country s authorities requires substantial and coordinated support from the technical and financial partners (TFPs). vii

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

7 RESULTS-BASED LOGICAL FRAMEWORK EFRSP 2010 Hierarchy of Objectives 1. Programme Goal: Expected Outcomes Long-term outcomes Scope (Beneficiaries) Performance Indicators Indicative Targets/Time Frames Assumptions/Risks Expected long-term progress Risks Contribute to more effective and efficient macroeconomic policy management Strong and sustained economic growth Poverty reduction Increased resource allocation to the social sectors Population Vulnerable groups Private sector Real GDP growth rate (Source: DGE-INEC / MEPIR) Incidence of poverty (Source: INEC-Household Survey /MEPIR) Increased budget allocations to the social sectors 3.5% average annual real GDP growth rate in The incidence of poverty drops to 64.1% in 2010 compared to 68.5% in % of GDP between 2009 and 2010 Deterioration of the political and social situation (government instability, economic uncertainty, etc.) Mitigation measures: 1. Strengthening of social dialogue (political dialogue, improved functioning of republican institutions, etc.) and supervision by the AU, UNO and EU 2. Programme Objectives Continue to improve the framework and performance of the public financial management system Medium-term outcomes 1. The legibility, predictability and dissemination of the budget are improved 2. Budgetary expenditure execution and control Ministry of Finance, MEPIR, technical Ministries and other institutions Ministry of Finance (DGT, DGB, etc.) DAF of ministries and other institutions 1.1 Improvement of budget credibility (Sources: DGB/DGT) 1.2 Increased completeness and transparency of the budget (Source: DGT Revenue services and BSCF reports) 1.3 CPIA Indicator No. 16 Transparency and accountability in the public sector Short and medium-term Outcomes The primary expenditure execution rate drops from 120.6% in 2007 to less than 100% in The primary expenditure compliance rate, in terms of weighted gap, falls from 119.8% in 2007 to less than 100% in The gap between cash plan projections and actuals less than 5% for revenue and more 2. Strong Government commitment to pursuing fiscal reforms Risks External shocks (financial and food crises, etc.) on the real economy and their impacts on public finance Mitigation measure Mobilization of additional external resources in view of Guinea-Bissau s fragile State and post-conflict country status ix

8 Hierarchy of Objectives Scope Expected Outcomes Performance Indicators Indicative Targets/Time Frames Assumptions/Risks (Beneficiaries) procedures are strengthened 2.1 CPIA Indicator No. 13 than 10% maximum for Quality of budgetary and expenditures financial management Administrative revenue growth rate of at least 10% in CPIA Indicator No. 16 Transparency and accountability in the public sector increases from 2.5 in 2009 to 3 in CPIA Indicator No. 13 Quality of budgetary and financial management increases from 3.5 in 2009 to 4 in Activities/Resources Amount ADF UA 5.70 M WB USD 8 M EU EUR 18 M Spain EUR 1.5 M France UA 3 M Short-term Outcomes 1. Legibility, predictability and dissemination of the budget 1.1 Preparation of budget implementation status reports Number of measures implemented 2.1 Publication and dissemination of quarterly budget implementation status reports At least 8 of the 11 measures proposed (See Annex 2) For 2010, four public budget implementation status reports will be published, transmitted to the National Assembly and donors, and disseminated to the general public Assumptions 1. Maintenance of institutional implementation capacities 2. Compliance with legal procedures in the public financial management process 1.2 Development of new budget preparation tools (medium-term expenditure framework (MTEF), etc.) Definition of budgetary strategies for budget framework defined no later than end-june Disbursement of budget support within the prescribed deadlines 4. Operationality of the framework for consultation between the x

9 Hierarchy of Objectives Expected Outcomes Scope (Beneficiaries) Performance Indicators Indicative Targets/Time Frames Assumptions/Risks Formation of 3 sector groups to start putting the MTEF in place Sector groups formed from the beginning of April 2010 Government and technical and financial partners 2. Budget implementation and control 2.1 Appointment of a Financial Controller directly under the authority of the Minister of Finance Holding of budgetary conferences Issuance of a Ministerial Decree or Order appointing the Financial Controller (Source: BSCF reports and TFP midterm review report) Budgetary conferences initiated in July 2009 and completed no later than end- September Implementation of the said ministerial decree or order appointing the Financial Controller as soon as the initial 2010 finance law (1/1/10) is enacted 5. Good performances in the implementation of the following capacity building projects: Targeted Support, PARCA and EMCBP 2.2 Preparation of a financial control procedure manual Ministerial Order instituting the financial control procedure manual (Source: BSCF reports and TFP mid-term review report) Implementation of the Ministerial decree or order by end-june Definition of conditions for closure of budgetary operations Circular fixing the period for closure of budgetary operations (Source: Cabinet of the Minister of Finance) Effectiveness of the circular, following the enactment of the 2010 finance law 2.4 Training of State financial players in budget implementation and control procedures 2.5 Keeping of administrative expenditure accounts and preparation of administrative account of Number of civil servants trained Periodical production of accounting documents (Source: DGB, DGT and DAF of technical ministries) At least 100 civil servants trained by end-june Monthly administrative accounts situation and quarterly report on Government administrative accounts in 2010 xi

10 Hierarchy of Objectives Expected Outcomes Government operations Scope (Beneficiaries) Performance Indicators Indicative Targets/Time Frames Assumptions/Risks 2.6 Human resources management software (salaries, recruitment, career, etc.) 2.7 Use of a treasury operations accounting management software Use of software Use of software Software functional by end-june 2010 (Source: MFPT/DGB) Software functional by end-june 2010 (Source: DGT) Financial resources xii

11 I. THE PROPOSAL 1.1 This report, submitted to the Board of Directors for consideration, is a grant proposal totalling UA 5.7 million, comprising UA 4 million and UA 1.7 million in FSF and ADF resources respectively, to finance Guinea-Bissau s Emergency Fiscal Reform Support Programme (EFRSP). It is a budget support, to be disbursed in a single tranche, for the March-December 2010 period. This budget support, which is a response to the request of Guinea-Bissau Government during the Annual Meeting held in Dakar (Senegal) in May 2009, was appraised in November 2009 and is based on the Government s overall strategy, the National Poverty Reduction Strategy Paper (NPRSP), and the Priority Action Plan for the Reform of the Public Financial Management System adopted in 2006 and 2009 respectively. The Government s strategy was endorsed by donors at the Round Table held in November The said programme is also in line with the priorities of the CSP as extended, regarding its first pillar enhancing good governance. This proposal will follow a pragmatic approach: the proposed reforms will be deepened in other operations, particularly the mediumterm programme negotiated and concluded with the IMF in the first quarter of 2010 and for which the Bank Group intends to provide financial and technical support. The programme design took into account good practices principles regarding conditionalities and Bank Group nonconcessional debt accumulation policy provisions. 1.2 The goal of the EFRSP is to contribute to more effective and efficient macroeconomic policy management so as to accelerate growth and poverty reduction. Its specific objective is to continue to improve the public financial management framework and performance. It comprises one component, namely strengthening of budget implementation and control procedures, divided into two sub-components: (i) enhancement of budget credibility, completeness and transparency; and (ii) improvement of the internal control system. Enhanced quality, efficiency and equity in the management of public funds will be the key expected outcomes of the EFRSP. The other expected outcomes are 3.5% GDP growth rate in 2010 and an increase in budget allocations to social sectors (+4% of GDP) to ensure the country s eligibility for the resources of the Fast- Track/Education for All initiative. II. COUNTRY AND PROGRAMME CONTEXT 2.1 Overall Government Development Strategy and Medium-term Reform Priorities In 2006, the Government adopted a poverty reduction strategy paper, the NPRSP, and extended it to 2010 pending a new strategy for the period. The NPRSP comprises four strategic pillars: (i) good governance, modernization of the public administration and stabilization of the macroeconomic framework; (ii) promotion of economic growth and job creation; (iii) broader access to social services and basic infrastructure; and (iv) improvement of the living conditions and environment of vulnerable groups. The NPRSP is a vast programme with a twofold objective of achieving an average annual growth rate of at least 5% and reducing the incidence of poverty from 68.5% in 2005 to 64.1% in Considering the results obtained, the economic growth rate was far below projections for the period and the projected rates of access to basic social services were not attained (cf. CPS as extended) On the other hand and in spite of the unstable political context and an unfavourable economic environment, macroeconomic performance improved mainly as a result of a fiscal consolidation programme initiated by the Government in 2007 and backed by an IMF Emergency Post-Conflict Assistance from February 2008, as well as budget support from the key TFPs (ADB, World Bank, Spain, France, Portugal, EU, WAEMU, etc.). Given the contrasting results in the implementation of the NPRSP, the Government decided to prepare, from

12 the beginning of 2010 and with the support of partners, studies which will inform the next strategy to be implemented over the period that coincides with the end of the period fixed for the attainment of MDGs. For 2010, the Government s strategy seeks to improve the context and performance of macroeconomic management under an IMF-supported medium-term programme to create optimal conditions for reaching the completion point of the HIPC Initiative not later than the end of Recent Socioeconomic Developments, Constraints, Challenges and Perspectives The politico-military conflict led to economic development marked by profound macroeconomic imbalances and dysfunctions in public financial management. The resulting socioeconomic impact was significant: a growth rate eroded by political instability with a significant decline in GDP per capita from USD (at 2000 constant prices) in 1997 to an annual average of USD 150 (at 2000 constant prices) in , large segments of the population living below the poverty line (68.5%), and a serious deterioration of basic social services. Consequently, the country was relegated in terms of the Human Development Index raking from the 156 th in 1999 to the 173 rd position out of 180 countries according to the 2009 Human Development Report Concerning macroeconomic performance, the Government of Guinea-Bissau encountered significant obstacles in redressing the financial situation and boosting the economy. Thus, since 2008, economic growth has recovered moderately, owing to the progressive restoration of the fundamentals. However, the global crisis and the political framework negatively impacted the overall economic situation in In fact, the 30% drop in world cashew nut prices, the country s main export product, and the uncertainties of the business climate led to slowdown in economic growth and exerted strong pressures on major internal and external balances. The GDP growth rate was estimated at about 3% in 2009 as against 1.8% in 2007 and 3.5% in Regarding developments in public finance, total revenue, excluding grants, increased to CFAF 35.4 billion in 2009, representing 118.4% of estimates and 102.3% of the amount of revenue in However, the increase in tax revenue was not enough to offset the low mobilization of budget support (only 50% of the amounts pledged) due to the wait-and-see policy of TFPs in view of low visibility of the political situation (cf ). This forced the Government to tighten quantitative public expenditure trend indicators. The tightening up of budgetary control helped to avoid accumulating new arrears on current management and to reduce the primary deficit which fell from 3.2% of GDP in 2008 to 2.9% of GDP in 2009 compared to a projection of 4.5% of GDP Concerning the external public debt, with an outstanding debt of around 226.1% of GDP at end-2009 compared to 243.7% for 2008, debt service remains unsustainable and is a major financial constraint on the country s economic and social development. However, prospects seem to be bright with the possible attainment of the completion point of the HIPC Initiative by end-2010, considering recent macroeconomic performances and the determination of the country s authorities to accelerate structural reforms With regard to money and credit, the net foreign assets of monetary institutions rose by CFAF 2.3 billion in 2009 compared to end Domestic credit contracted by CFAF 1.3 billion, driven by improvement in the Government s exposed net asset position with a net decommitment of CFAF 3.4 billion. Consequently, the deceleration of the money supply expansion rate, which was 8.5% in 2009 compared to 20.7% in 2008, reduced the money-induced purchasing power risks. 2

13 2.2.6 Regarding the country s external position, the trade deficit widened in 2009, due mainly to the sharp increase in imports (+18.3%) and the decrease in export earnings (-3.2%). This poor performance of the only export product, the cashew nut, is the result of contrasting trends: fall in world prices (-30%) and increase in exported volume (+21.8%). This is also true for the balance of services with a deficit which increased by 26.4%. All these developments worsened the current account deficit (excluding official transfers) from 5.4% of GDP in 2008 to10.1% of GDP in Unilateral transfers, marked by a 10% drop in remittances by Guinea- Bissauans abroad, and net foreign capital inflows, only partially offset the current account deficit. Hence, the overall balance of payments deficit stood at 3.2% of GDP in 2009 as against 2% of GDP in 2008, mainly covered by external debt restructuring As regards the implementation of structural reforms, the Government pursued, in close collaboration with TFPs, the implementation of structural reform measures, and particularly improvement of public financial management. In this respect, WAEMU guidelines were transcribed into the national law: the organic law on finance laws and the decree to lay down general public accounting regulations were adopted and are being enacted for effective entry into force; the budget nomenclature and accounting system of the State are operational. The nomenclature, which was included in SIGFIP software tables in 2008, has reinforced the application of budgetary principles and techniques (credit specialization, fine-tuning of budget authorization instruments, annuality, universality, etc.) and improved the publication of accounting and financial data tables on budget implementation. The centralization of revenue at the Public Treasury and institutionalization of a single Treasury account also marked significant progress in terms of completeness of the budget. Lastly, concerning administrative reform, the biometric census of civil servants and the introduction of a single card index for Civil Service personnel management will have a remarkable budget impact in the coming years Concerning the business climate, the adoption of OHADA Acts, the establishment of the Commercial Court, the enactment of the new Investment Code and the signing of the Framework Convention on Public-Private Partnership (PPP) are factors conducive to economic growth and job creation. Some progress was also made in the reform of the security sector with the biometric census, identification of ways of reducing the payroll and effectiveness of technical assistance from specialized structures of the African Union, the United Nations and the EU As regards political perspectives, it should be noted that the last general elections were described as transparent and credible, and therefore contribute to consolidating structural reforms. They influence the improvement of the medium-term economic outlook: the real GDP growth rate could be 3.5% in 2010 and, subsequently, stabilize around 4.5%. Regarding public finance, the goal is to increase tax revenue by 1.25 percentage points of GDP in 2010 and to contain primary expenses within the limits of available resources. However, the said expenses are expected to increase by 2.5% of GDP to reflect planned increases in the social sectors. The completion point of the HIPC initiative should be attained at the end of 2010, and should reduce the external debt stock to 65.8% of GDP in 2010, that is about one-third of the level in Bank Group Portfolio Status Since 1976, the date of its first operation in the country, the Bank Group has financed, besides multinational projects, 35 operations (26 projects, 4 studies and 5 institutional support) for net commitments representing a total amount of UA million from various windows: ADF (92%), ADB (5%), and NTF (3%). As at end-december 2009, the Bank s portfolio comprised eight (8) active projects for a total amount of UA million, and did not include any reform support operation. The portfolio has significant weaknesses: performance indicators 3

14 show long delays in the implementation of projects with an average age of 6.1 years, delays in fulfilment of conditions precedent to disbursement (2 years), as well as low disbursement rates (36%) and problem operations (4 PP). However, closer monitoring of operations, intensification of supervision missions, capacity building at national level (Targeted Support, PARCA, etc.) and the Senegal Regional Office, working in close collaboration with the Country Programme Office (CPO), have helped improve the portfolio. III. JUSTIFICATION, KEY DESIGN ELEMENTS AND SUSTAINABILITY 3.1 Linkage with CSP, Country Preparedness and Underlying Analytical Elements Linkage with CSP: The EFRSP is consistent with the orientations and priorities of the CSP as extended, one of whose pillars is enhancing good governance. The CSP provides for a general budget support operation to maintain public financial management system reform gains. It also highlights the coherence of this programme with the priority areas and guidelines of the strategy for the Bank s enhanced engagement in fragile States Prerequisites for implementing budget support: At the institutional level, the last legislative and presidential elections were considered to be transparent and credible. In addition, during his swearing-in ceremony, the President of the Republic solemnly undertook to strengthen social dialogue (political dialogue, improved functioning of republican institutions, etc.). The conclusive reviews of the different IMF missions and the drawing of the three (3) tranches under the Emergency Post-Conflict Assistance (EPCA) confirm the good performances recorded over the period and the relative stability of the macroeconomic framework Consequently, in January 2010, the country initiated negotiations for a Medium-term Programme backed by an Extended Credit Facility (ECF). A preliminary agreement between the IMF and the Government on the ECF was reached in January 2010, and could be approved by the IMF Executive Board in March 2010, effective as of 1 January The implementation of this Programme will help to support the country towards the attainment of the completion point of the HIPC Initiative by end The Government reviewed the NPRSP, and launched the preparation of NPRSP II for the period with the support of TFPs, including the Bank Group, through Targeted Support financed with FSF resources Fulfilment of technical prerequisites: The preparation and appraisal of the programme were carried out in close collaboration with the World Bank, the European Union and France, which were the peer reviewers of this proposal, and all other partners present in the country. It drew on public financial management system reviews, namely the PEFA and PEMFAR, which identified the weaknesses of the system. In November 2009, the Government adopted a Priority Action Plan, including recommendations for improving public financial management made by the said reviews. Despite external shocks (falling world prices, low mobilization of financial support for reforms, etc.), the Government s determination to implement reforms led to good budgetary performance, beyond the quantitative targets of the 2009 Programme All in all, this operation does not meet all criteria applicable to guidelines relating to budget support (ADB/BD/WP/2003/143/Rev2 and ADF/BD/WP/2003/182/Rev2); however, it is consistent with budget support eligibility criteria defined in the FSF 1 operational framework, as indicated in Table 1 below. The said Framework stipulates that rapid disbursement instruments, including budget support operations, can be used in post-conflict countries provided that: (i) 1 ADB/BD/WP/2008/6, Annex 7 4

15 there is close monitoring, (ii) governments show proof of commitment to reforms (cf and 2.2.1), but have limited or dwindling resources in terms of revenue (cf and 2.2.3), (iii) and a rapid response by the international community considers that it is necessary to sustain the move in favour of reforms and strengthening of essential public services (cf ). However, insofar as part of the support is financed with ADF resources, the allocation of the resources must meet the conditions posed by the Guidelines for Development Budget Support Lending (DBSL) 2. Considering that Guinea-Bissau is a fragile State, it cannot meet the strict criteria posed by the Guidelines. The Boards of Directors will therefore be requested to waive these rules and apply the Fragile States Facility eligibility criteria for ADF allocation. The expeditious mobilization of the various planned budget support would help avoid the accumulation of new payment arrears on current management and thus ensure a smooth implementation of the programme so as to attain the completion point of the HIPC initiative in On the other hand, the country would no longer be able to service its external debt and would thus see disbursements for ongoing projects and programmes suspended again (cf and 4.3.3). Nevertheless, a Bank mission fielded in the country in January 2010 is optimistic about efforts to mobilize resources undertaken by all TFPs. 2 ADB/BD/WP/2003/143/Rev.2 and ADF/BD/WP/2003/182/Rev.2 5

16 Table 1 General and Technical Budget Support Conditions 1. Criteria of the two screenings for eligibility for the FSF 2. Existence of a national programming document Eligibility analysis in the CSP as extended and approved in January 2009 NPRSP , extended to 2010 (cf ) 3. Consensus between Government and TFPs on the development priorities to be supported by DBSL 4. Implementation of a credible capacity building programme 5. Justification for the operation in the programming document and the appraisal report, including fragility risk mitigation measures The Emergency Public Finance Programme stemming from PEFA ( ) and PEMFAR ( ) Joint PEFA (2007) and PEMFAR ( ) concluded by key TFPs (ADB, World Bank, EU, etc.) in Their conclusions and recommendations were validated in a priority action plan adopted by the Government in November The key TFPs (World Bank, EU, France, etc.) have capacity building projects to support this action plan Justification for the budget support is found in the CPS as extended (cf ) 6. Annual audit of the operation Selection and recruitment of an independent auditing firm in collaboration with the other BSCF partners (cf ) 7. Recruitment of professionals to be assigned to the concerned public bodies in case of weak institutional capacity of the FSF intermediary 8. Existence of adequate replacement mechanisms to support national systems 9. Coordination of activities and resource disbursement between the Bank Group and other TFPs 10. Disbursement in several tranches, except in exceptional circumstances Recruitment of international and local technical assistants under the Targeted Support, PARCA and EMCBP (cf and 3.4.1) Not necessary (cf. point 7 of table) Quarterly meetings of the Budget Support Consultation Framework established in 2009 and bringing together TFPs providing budget support One (1) single tranche because of the exceptional circumstances of the programme (urgency of reforms, short-term programme, etc.) and operational consequences of attainment of the completion point of the HIPC initiative in 2010 (cf and 4.3.3) 6

17 3.2 Collaboration and Coordination with Other Donors The preparation of PEMFAR and adoption of a multi-year plan to strengthen public financial management gave renewed impetus to the recommitment and coordination of technical and financial partners. Accordingly, joint missions have been institutionalized for programme preparation and appraisal, as well as formulation of a joint matrix of reform measures. This drive is facilitated by existing frameworks for consultation on reform support. In 2006, the TFPs present in Guinea-Bissau set up a framework, chaired by the EU and UNDP on a rotation and half-yearly basis, for coordination of their activities and dialogue with the Government. Quarterly and extraordinary meeting reports are shared with non-resident TFPs, where necessary. In February 2009, the TFPs also set up a Budget Support Consultation Framework (BSCF) which holds quarterly meetings chaired by the Minister of Finance. It includes the Bank Group, World Bank, EU, France, Portugal, Spain, IMF, WAEMU/BCEAO/WADB and ECOWAS. This framework promotes the complementarity and efficiency of budget support This operation is consistent with and complements those of other TFPs. Indeed, the objective of the World Bank s USD 8 million general (or non-targeted) budget support is to support reforms to improve the public financial management framework and performance and private sector development. This support is supplemented by a capacity building project covering all major domains of public finance (preparation, implementation, reporting, control, etc.). The contribution of the EU, which amounts to EUR 18 million and earmarked for public financial management, consists of a general budget support for the period under EDF-X (47.4%), the payment of 2008 salary arrears (47.1%) and building of the capacities of the Ministry of Finance in monitoring the public financial management system reforms (5.5%). Half of the budget support provided by France, amounting to EUR 3 million, is used to finance the current expenses of the Ministries of Health and Education so as to ease financial constraints on the social sectors for the 2009 fiscal year. The other half is intended to finance repayment of advances granted to the State by local banks to overcome constraints on the financing of the economy, particularly during the cashew nut season. It should be underscored that the budget support agreements signed with France and the EU came into force in December 2009, and all related resources have been disbursed. The international community is therefore very committed to sustaining the reform drive. Table 2 Focus Areas of TFP Budget Support WORLD BANK EUROPEAN UNION FRANCE ADB Modernization of the legal framework for public financial management Improvement of budget programming Streamlining of budget implementation and monitoring Modernization of the procurement system - Filling of financing gap of the 2009, 2010 and 2011 budgets (ABS IV of EDF-X) - Coordination of budgetary assistance - Budget implementation in the social sectors - Clearance of the current expenses of the Ministries of Health and Education under the 2009 budget - Repayment of advances granted to the State by local banks under the comprehensive arrears clearance plan Budget credibility, completeness and transparency Strengthening of budget implementation and control procedures 7

18 3.3 Outcomes and Lessons Learnt from Similar Completed or Ongoing Operations Four main lessons could be learnt from the experience of the Bank and other TFPs (World Bank, EU and UNDP): (i) political stability is a precondition for the initiation and completion of any reform policy; (ii) practical, simple and functional definitions of measures and conditionalities; (iii) need to strengthen and coordinate institutional support to sustain the implementation of reforms; and (iv) importance of close and coordinated monitoring of donors under implementation of the Paris Declaration The design of the EFRSP took these main lessons into consideration, laying emphasis on realistic disbursement conditions whose formulation was the subject of consensus between the Government and the Bank Group (cf ). Institution building operations, the Targeted Support and the PARCA are a response to weak implementation capacities of the Public Administration (cf and 7.1.3). Mention should also be made of other institutional support projects, particularly the EU s PARAP and World Bank s SPF. Furthermore, there is a framework for consultation on reform policy bringing together Guinea-Bissau s key TFPs (cf to 3.2.3). 3.4 Linkage with Ongoing Bank Operations The EFRSP is linked to three (3) other Bank Group operations, and their complementarity is expected to produce a strong synergy in financial good governance. Indeed, budget support creates better conditions for proper implementation of the said operations through the conditionalities of the said programme, and three projects facilitate the implementation of the planned budgetary reforms. These projects are: (i) EMCBP (UA 1.35 million approved in March 2005) which seeks to improve the efficiency of economic planning and public investment programming; (ii) Targeted Support (UA 2.00 million approved in October 2009) co-financed with UNDP which seeks to strengthen the budget preparation and implementation process (inclusion of NPRSP, budget control, debt, demographic and social statistics, etc.) and improvement of the framework for the coordination of public development assistance; and (iii) PARCA (UA 7.80 million approved in July 2009) whose specific objectives are to strengthen budget implementation and control procedures, in particular the provision of technical assistance to put in place a comprehensive and sectoral medium-term expenditure framework (MTEF) and Public Treasury and public procurement accounting management software, and to set up the National School of Administration (ENA) comprising training cycles for public financial management. Furthermore, interim debt relief contributes to proper implementation of the programme by exempting Guinea-Bissau from directly servicing its debt owed to the Bank Group throughout 2010 (indirect budget support). In the event of successful implementation of the programme and its corollary, the attainment of the completion point of the HIPC initiative, external debt service would once more become sustainable and thus ensure the continuous financing of projects and programmes by TFPs. 3.5 The Bank s Comparative Advantage The comparative advantage of the Bank lies in its expertise and experience regarding economic and financial reform support in regional member countries, particularly in States weakened by economic crisis and/or political conflicts (the Central African Republic, Comoros and Liberia). In addition, it has institutional support (EMCBP, Targeted Support and PARCA) which creates conditions for smooth implementation of this Programme. 8

19 3.6 Compliance with Good Practices Principles as regards Conditionalities Disbursement conditions were determined in compliance with good practices as regards conditionalities, as well as on the basis of lessons learnt from Bank Group experience in Guinea-Bissau (cf ) and the nature of the Programme (emergency reforms, short-term programme, prospects for attainment of completion point of HIPC Initiative, etc.). The conditionalities were defined following lengthy discussions with the Government; accordingly, the number of conditions precedent to Board presentation has been limited to two (2), while ensuring that they are fulfilled before this proposal is presented to the ADF Board of Directors Concerning ownership of the Programme by the Authorities, the measures retained reflect the priorities of the first strategic pillar of NPRSP, namely improvement of good governance and stabilization of the macroeconomic framework. They are drawn from the recommendations of PEMFAR validated by the Government in February 2010, and structural criteria used in the IMF s EPCA. In accordance with the Paris Declaration, common and complementary measures have been retained to reduce transaction costs. Lastly, the Programme reviews will be coordinated with the IMF and other TFPs of the BSCF. 3.7 Compliance with Bank Group Lending Policy In line with the technical definitions memorandum relating to Emergency Post- Conflict Assistance (EPCA) concluded with the IMF in February 2008 and currently being implemented, the Government of Guinea-Bissau is required to contract only new loans with a concessionality rate of at least 85%. This target is one of the key quantitative measures of the IMF-backed Programme that the country is rigorously implementing; the present Programme complies with this principle. The related Bank Group policy is therefore observed (category III). IV. THE PROPOSED PROGRAMME 4.1 Programme Goal and Objectives The goal of the EFRSP is to contribute to more effective and efficient macroeconomic policy management so as to accelerate growth and poverty reduction. Its specific objective is to continue to improve the public financial management framework and performance. 4.2 Programme Pillars, Specific Objectives and Expected Outcomes In 2007, the Government resolutely embarked on the implementation of community reforms to harmonize the legal framework for public financial management. This regional framework, which was adopted by WAEMU authorities between 1997 and 1998, provides more modern and secure rules for the implementation of the State budget, and specifies the responsibilities of public financial actors (credit managers, vote holders, public accounting officers, etc.). Aware of the need to ensure greater budgetary cycle control, the authorities wanted that the budgetary reform measures recommended for the evaluation and diagnosis of the public financial management system, in particular PEFA 2007 and PEMFAR , be included in a multi-year priority action plan to improve the coherence, accuracy and articulation of various dimensions of reforms to ensure better sequencing of all measures to be implemented This fiscal reform plan is a response to the need to restructure the organization of the Administration to bring it in line with new WAEMU statutory regulations. It is in keeping with efforts to deepen and strengthen ongoing reforms, and comprises four (4) pillars: (i) review of the legal and institutional framework for public financial management to align it with community 9

20 standards; (ii) improvement of the budget preparation process; (iii) strengthening of budgetary operations implementation and control procedures; and (iv) modernization of the public procurement system Although the EFRSP will support the country s entire budgetary reform plan, special emphasis will be laid on the component relating to the implementation of the general State budget, which comprises two (2) sub-components, as presented below. The other components are financed by TFPs, in particular the World Bank and the EU. Component: Strengthening of Budgetary Operations Implementation and Control Procedures Sub-component 1: Improving Budget Credibility, Completeness and Transparency Context and recent actions: The general State budget is not yet a credible orientation document. Indeed, there are significant gaps in budget implementation regarding revenue and expenditure forecasts, which are unreliable as a result. Non-compliance with the closing of budgetary operations (reconciliation of commitments, payment authorizations and payment orders, carrying over or cancellation of appropriations, regularization, etc.) is a de facto infringement of the annuality principle, and leads to accumulation of new payment arrears. With regard to budget completeness and transparency, only part of the different taxes collected for services provided by some ministries are included in the budget under revenue and expenditure, and information on the voted budget and its implementation is hardly disseminated. Consequently, the budget is scarcely in line with NPRSP orientations and priorities due particularly to the absence of a medium-term expenditure framework (MTEF) tracing the logic of results, inadequate qualitative and quantitative human resources and low participation of technical Ministries in budget adjudication, etc. In the last two years, improvements have been made in the preparation of the 2009 State budget on the basis of new nomenclature in line with WAEMU standards and the introduction of SIGFIP, which is a software covering the major public financial management functions, particularly the preparation and monitoring of the budget Programme measures: In order to address these weaknesses, the EFRSP intends to: (i) rehabilitate the Treasury Committee responsible for formulating and monitoring, on a monthly basis, the annual cash plan based on total revenue and expenditure ceiling projections; (ii) update the public revenue inventory in order to declare and record all revenue in budget estimates; (iii) publish, on a quarterly basis, the budget implementation status derived from SIGFIP for communication to the National Assembly and the general public; and (iv) prepare draft sectoral programmes including objectives and medium-term expenditure frameworks (MTEF) of the three Ministries with the largest budgetary allocation (health, education, agriculture). Sub-component 2: Improving the Internal Control System Context and recent actions: Regarding budget implementation, the legal public financial management framework still has many weaknesses. Consequently, there is need to strengthen financial control and establish the judicial control missions provided for by Community directives, as well as reorganize the central directorates of the Ministry of Finance (DGT, DGB, DGCP, etc.) and the departments of administration and finance (DAF) of Ministries and/or other institutions to align them with the new budgetary practice. Indeed, the internal expenditure pre-control system is inapplicable due to widespread use of waiver procedures, in particular expenditure authorization without any settlement instrument (control of services provided prior to payment) and payment of expenditures without well-defined procedures and supporting document nomenclature. Accounting management is also inefficient, with non- 10

21 production of public accounts and impossibility for the Audit Bench to audit them, as well as weak accounting and financial reporting capacities. On the other hand, efforts have been made to restore the single account principle at the Public Treasury and to ensure regular bank reconciliation. As regards predictability of budgetary operations, the management of the cash position of the government is still embryonic and is carried out on a day-to-day basis depending on availability of resources. The absence of settlement bills prevents the National Assembly from controlling budget implementation. In addition, the payroll takes up more than 82% of public revenue thus limiting, in the short term, possibilities for a sound cash position (accumulation of payment arrears on current management and/or drastic expenditure cuts) and, in the medium term, the increase in resources allocated to production and social sectors considered as priority in the NPRSP. In that respect, security sector and public administration reforms are crucial for attaining the expected outcomes of improving the public financial management system. The EU and AU are supporting security reforms Programme measures: In order to address the above-mentioned problems, the EFRSP schedule includes implementation of the following measures: (i) strengthening of the internal control mechanism through the appointment of a Financial Controller under the authority of the Minister of Finance; (ii) preparation of a financial control procedures manual; (iii) training of officials of the Ministry of Finance and DAFs of Ministries or institutions on budget implementation and control procedures; (iv) issuance of a circular fixing the period for closing budgetary operations; (v) building the capacities of the SIGFIP Management Unit with multidisciplinary skills; (vi) keeping of administrative accounts and drawing up of the 2009 public administrative account of public operations within the framework of SIGFIP during the presentation of the 2011 budget; and (vii) developing modern, efficient and reliable accounting tools for Treasury operations and human resource management with the establishment of a single database for the payment of salaries and centralization of recruitment into the Civil Service Outcomes: The improvement of quality, efficiency and equity in public resource management should therefore: (i) (ii) improve credibility, completeness and transparency in the management of public funds. In this respect, the rate of execution of primary expenditure will drop from 120.6% in 2007 to less than 100% in 2010, and that of consistency of primary expenditure from 119.8% in 2007 to less than 100% in 2010 in terms of the weighted margin. Government revenue will increase by 25% between 2009 and 2010, and four (4) reports will be published on the status of budget implementation, which will be submitted to the National Assembly and donors, and disseminated to the general public; and strengthen budgetary operations implementation and control procedures by putting in place a legal and institutional framework in compliance with WAEMU standards. This involves, in particular, the implementation, during the first quarter of 2010, of legislative or regulatory instruments relating to the appointment of a Financial Controller under the direct authority of the Minister of Finance and to the internal public expenditure pre-control mechanism (description of expenditure channels, preparation of the procedures manual, fixing the period for closing the budget, etc.) and training of about one hundred civil servants in public financial management. In the second half of 2010, accounting documents will be produced periodically (monthly situation of administrative accounts and quarterly report on public administrative accounts) and an accounting software will be introduced for Public Treasury operations. 11