In Guinea-Bissau, the path to economic growth and development is hampered by structural challenges that prevent the nation from realizing its full potential. The economy continues to be heavily reliant on raw cashew nut exports, which constitute approximately 90% of export value and serve as a source of income for about 80% of the population, primarily smallholder farmers. This dependency leaves Guinea-Bissau vulnerable to external shocks such as fluctuating international prices and adverse weather conditions like irregular rainfall or floods. In 2023, a difficult cashew season restricted the conversion of high production into economic growth.
The fiscal situation also deteriorated in 2023. Despite the government's commitment to a fiscal consolidation program aimed at preserving medium-term sustainability, the overall fiscal deficit expanded to 7.6% of GDP in 2023, up from 6.1% in 2022. The weak export performance during the cashew season exerted pressure on the fiscal situation as total revenues declined, leading to a wider fiscal deficit.
Political uncertainty at both domestic and regional levels continues to negatively impact the economy. Moreover, Guinea-Bissau lacks an environment conducive to private sector-led growth due to inadequate infrastructure, human capital, and public services. This challenging business climate, coupled with policy uncertainty and weak institutions, hampers private sector investment and impedes progress towards economic diversification.
Against this backdrop, poverty remains pervasive in Guinea-Bissau. It has been on an upward trend since 2018 and is more pronounced in rural areas than urban ones due to low productivity agricultural production.
The Economic Update 2024 reveals that public sector pension schemes pose significant challenges with severe fiscal implications for the country. Pension payments are made from the general budget which heightens already high budget rigidity and poses additional obstacles to the government's fiscal consolidation objectives.
The primary challenge faced by public sector pension schemes is governance-related. Pension payments disproportionately benefit a very small fraction of beneficiaries and a minimal share of the elderly, while arbitrary changes deviating from pension rules are made to individual pension amounts. An analysis of the 2016 and 2023 payroll databases suggests that pension payments are "captured" by those tasked with implementing the schemes.
Immediate measures could be taken to improve public services pension schemes. These include clarifying the parameters of the pension schemes, reviewing and updating the list of pensioners, establishing a "proof of life" procedure, systematically making pension payments through the banking system, and conducting an institutional assessment of the unit responsible for managing public pension schemes.
The Economic Update monitors significant recent economic developments in Guinea-Bissau, highlighting key structural challenges faced by the country in its pursuit of inclusive and sustained growth. This year's edition - Retiring the Fiscal Risk - offers a comprehensive overview of the economy, pensions system, and provides several recommendations for Guinea-Bissau to overcome existing challenges, stimulate economic growth and advance its development trajectory.