The World Bank Systematic Country Diagnostic Update for Guinea-Bissau Addressing fragility for sustained poverty reduction and shared prosperity September 2023 2 This report was prepared by a multisector team from the World Bank led by José-Daniel Reyes (Senior Economist, EAWM1), Sering Touray (Economist, EAWPV), and Michael Christopher Jelenic (Senior Public Sector Specialist, EAWG1), with valuable inputs from Catherine Defontaine (Senior Operations Officer, GTFS1), Jose Lopez Calix (Consultant, EAWM1), Yannis Arvanitis (ET Consultant, EAWG1), Zineb Benkirane (Senior Economist, CAFCE), and Patrick McCartney (Economist, EAWM1). The report was finalized under the leadership of Keiko Miwa (Country Director, AWCF1), Anne-Lucie Lefebvre (Resident Representative, AWMGW), Josiane Kwenda (Country Manager, CAWSN), Theo Thomas (Practice Manager, EAWM1), Johan Mistiaen (Practice Manager, EAWPV), and Gael Raballand (Practice Manager, EAWG1). Valuable guidance was provided by Edouard Al-Dahdah (Lead Country Economist, EAWDR), Farouk Banna (Sector Leader, SAWDR), Rebekka Grun (Practice Leader, HAWDR) and Manuel Luengo (Program Leader, ILCDR). Comments from peer reviewers Raju Singh (Lead Economist, EAWM2), Sandu Cojocaru (Senior Economist, EPVGE), and Helene Grandvoinnet (Lead Public Sector Specialist, EGPVA) are gratefully acknowledged. Administrative support was provided by Ramatulay Barbosa (Executive Assistant, AWMGW), Micky O. Ananth (Operations Analyst, EAWM1) and Theresa Bampoe (Program Assistant, EAWM1). The list of team members follows: Global Practice Team Member Equitable Growth, Finance, and Institutions Finance, Competitiveness, and Innovation Rafael Pardo Macroeconomics, Trade, and Investment José-Daniel Reyes, Patrick McCartney Poverty and Equity Sering Touray Governance Michael Jelenic, Yannis Arvanitis, Joao Morgado Human Development Education Emily Gardner Gender Paula Tavares, Quentin Wodon Health, Nutrition and Population Yemdaogo Tougma Social Protection and Jobs Philippe Auffret Sustainable Development Agriculture Aifa Ndoye Environment and Natural Resources Manuela Ravina Social Development Philippe Auffret Urban and Disaster Risk Management, Camille Bourguignon Water Oumar Diallo Infrastructure Energy and Extractives Matteo Malacarne Transport Vincent Vesin Digital Development Daniel Nogueira-Budny Global Themes Fragility, Conflict, and Violence Catherine Defontaine International Finance Corporation Josiane Kwenda, Karamba Badio, Zineb Benkirane Multilateral Investment Guarantee Agency Luisa Texeira Felino, Olanrewaju Malik Kassim 2 Acronyms and Abbreviations BAU Business-as-usual BOAD West African Development Bank CSO Civil Society Organization EAGB Eletricidade e Águas da Guiné-Bissau EHCVM Enquête Harmonisée sur le Conditions de Vie des Ménages FCFA Franc Communauté Financière Africaine FDI Foreign Direct Investment GDP Gross Domestic Product HLO High Level Outcome HR Human Resources ILAP Inquêrito Ligeiro de Avaliação da Pobreza INFORM Index For Risk Management IT Information Technology Kg/ha Kilogram per hectare MoF Ministry of Finance ND-GAIN Notre-Dame Global Adaptation Initiative PFM Public Finance Management PPA Priority Policy Area SCD Systematic Country Diagnostic t/ha Tons per hectare UNDP United Nations Development Programme WAEMU West African Economic and Monetary Union WASH Water, Sanitation, and Hygiene WB World Bank WDI World Development Indicators WGI World Governance Indicators 2 CONTENTS Executive Summary............................................................................................................................6 1 Introduction ......................................................................................................................... 11 2 Country Context for the Update ............................................................................................ 12 3 Development Challenges....................................................................................................... 14 3.1 Institutions, Governance, and Fragility ............................................................................... 14 3.2 Poverty, Inclusion, and Shared Prosperity .......................................................................... 20 3.3 Economic Growth .............................................................................................................. 28 3.4 Sustainability .................................................................................................................... 32 4 Binding Constraints to Growth, Inclusion, and Sustainability .................................................. 34 4.1 Institutional Fragility and Weak Governance ...................................................................... 34 4.2 Lack of Inclusiveness and Low Rural Productivity ............................................................... 34 4.3 Low and Unstable Economic Growth .................................................................................. 35 4.4 High Vulnerability to External Shocks ................................................................................. 35 5 Policy Priorities and High-Level Outcomes ............................................................................. 36 5.1 Prioritization Process......................................................................................................... 36 5.2 High Level Objectives ........................................................................................................ 37 6 Strategies for the Implementation of Policy Priorities ............................................................ 51 7 Knowledge and Data Gaps .................................................................................................... 54 References....................................................................................................................................... 55 Annex 1: Definition of Peer Countries ............................................................................................... 57 Annex 2: Consultations for the SCD Update ...................................................................................... 58 Annex 3: Summary of the 2021 Public Opinion Survey ...................................................................... 59 Annex 4: Comparing Priority Policy Actions in the SCD and the Update ............................................. 60 2 List of Figures FIGURE 1.1. ANALYTICAL FRAMEWORK FOR THE SCD UPDATE ................................................................................................11 FIGURE 3.1. GOVERNANCE CONSTRAINTS PREVENTING PROGRESS TOWARDS THE WORLD BANK TWIN GOALS ...............................14 FIGURE 3.2. DETERMINANTS OF STATE CAPTURE IN GUINEA-BISSAU ........................................................................................18 FIGURE 3.3. GUINEA-BISSAU: WORLD GOVERNANCE INDICATORS ...........................................................................................18 FIGURE 3.4. POVERTY TRENDS IN GUINEA-BISSAU ................................................................................................................21 FIGURE 3.5. INTERNATIONAL POVERTY RATES ......................................................................................................................21 FIGURE 3.6. ABSOLUTE AND EXTREME POVERTY RATES ACROSS REGIONS IN 2018 ....................................................................21 FIGURE 3.7. INEQUALITY TRENDS IN GUINEA-BISSAU (GINI COEFFICIENT, 2010-2018) ...............................................................23 FIGURE 3.8. INEQUALITY IN WAEMU COUNTRIES ................................................................................................................23 FIGURE 3.9. GDP PER CAPITA GROWTH WITH PEERS (PERCENT, 2010-2021) ..........................................................................24 FIGURE 3.10. SECTORAL VALUE-ADDED IN PERCENT OF GDP (2000-19) .................................................................................24 FIGURE 3.11. ESTIMATES OF THE EFFECT OF THE COVID-19 PANDEMIC ON HOUSEHOLD PER CAPITA CONSUMPTION ......................24 FIGURE 3.12. SOCIAL PROTECTION TARGETING AND POVERTY.................................................................................................25 FIGURE 3.13. DRY/HOT MEAN ..........................................................................................................................................27 FIGURE 3.14. WET/WARM MEAN ......................................................................................................................................27 FIGURE 3.16. CASHEW AND RICE YIELDS (KG/HA, 2000-2020) ..............................................................................................28 FIGURE 3.17. CASHEW FARMGATE AND EXPORT PRICE (FCFA/KG, 2000-2020) ......................................................................28 FIGURE 3.18. SUPPLY-SIDE CONTRIBUTION TO GROWTH (PERCENT) .........................................................................................29 FIGURE 3.19. DEMAND-SIDE CONTRIBUTION TO GROWTH (PERCENT).......................................................................................29 FIGURE 3.20. EXPORT CONCENTRATION AND GROWTH ..........................................................................................................30 FIGURE 3.21. BENCHMARKING EXPORT CONCENTRATION.......................................................................................................30 FIGURE 5.1. THREE-STEP PRIORITIZATION PROCESS FOR THE SCD UPDATE................................................................................36 List of Tables TABLE 5.1. SCD UPDATE: BINDING CONSTRAINTS, POLICY AREAS, AND POLICY PRIORITIES .........................................................37 TABLE 5.2. HIGH LEVEL OBJECTIVES AND RELATIONSHIPS WITH PRIORITY POLICY AREAS .............................................................39 TABLE 5.3. HUMAN DEVELOPMENT AND SERVICE DELIVERY INDICATORS ..................................................................................41 TABLE 5.4. INVESTMENT AND SELECTED INFRASTRUCTURE INDICATORS .....................................................................................43 TABLE 5.5. GOVERNANCE INDICATORS (PERCENTILE RANK) ....................................................................................................45 TABLE 5.6. HAZARD INDICATORS ........................................................................................................................................47 TABLE 5.7. LABOR MARKET INDICATORS .............................................................................................................................49 List of Boxes BOX 3.1. ILLICIT ECONOMIES OF NARCO-TRADE IN GUINEA-BISSAU .........................................................................................16 BOX 3.2. A CITIZEN’S PERSPECTIVE ON STATE CAPTURE .........................................................................................................17 BOX 3.3. CLIMATE SCENARIOS IN GUINEA-BISSAU’S FORTHCOMING COUNTRY CLIMATE DIAGNOSTIC REPORT ................................26 BOX 3.4. UNDERSTANDING CASHEW SECTOR DYNAMICS .......................................................................................................31 2 EXECUTIVE SUMMARY 1. Guinea-Bissau continues to face formidable challenges in terms of poverty, economic growth, and social progress, despite its rich endowment of natural resources and strategic location. Much of its forests, vast agricultural land, fisheries, and mineral reserves remain untapped. With a diverse geography, its natural assets are favorable to agriculture, accounting for about 50 percent of Gross Domestic Product (GDP) and employing around 80 percent of workers, high by regional standards. The agriculture sector is dominated by production of raw cashew nuts, representing the main source of income for over two-thirds of households (virtually all small farmers) and represent more than 90 percent of the country's total export earnings. Guinea-Bissau is a member of the West African Economic and Monetary Union (WAEMU), providing it with the opportunity to tap into regional markets through the principle of free movement of goods, services, and people. However, with a Gross National Income per capita of only US$ 570 in 2022, Guinea-Bissau is currently the 12th poorest country in the world. About two-thirds of the population survive on less than US$ 2.15 per day. 2. Institutional and political instability is an entrenched development constraint that revolves around two major factors: first, the control of illicit markets, which have become a means to access power, and second the capture of the state, which only benefits a small elite network. Fragility remains pervasive due to multiple episodes of political instability that have hindered development over the past three decades. This trend started with arms trafficking in the 1990s and then evolved to the illicit timber logging markets and drug trade in the early 2000s. Controlling these activities enables the elite to shift between different illicit economies; access a steady source of revenue; and to remain in or contest for power. This dynamic has allowed a “rentier” economy to fester, countering the country’s economic advancement. Interests in illicit markets is also linked to episodes of political turmoil and shapes alliances between members of the elite, including during electoral periods. As a result, 88 percent of Bissau- Guineans believe that political party leaders are more interested in serving their personal interests than serving the people they represent, and 87 percent think that political rivalry can lead to violent conflicts (Carter 2023). However, political tensions have eased since 2016, and Guinea-Bissau has a window of opportunity for a more stable development path. 3. Guinea-Bissau is one of the most vulnerable countries to climatic hazards. Extreme climate events such as floods, droughts, extreme heat, and epidemic disease events occur frequently, affecting a significant and growing share of the population and economic activities, especially those engaged in agriculture. Estimates of the impact of climate change on economic growth in Guinea-Bissau under three growth scenarios- 1) Business-as-usual (BAU),- where recent growth trends continue, would see income per capita more than double (x2.7) over 2023-2050, with an average annual growth of 3.5 percent.; 2) low growth scenario which assumes political instability would lead to poorer economic performance, with Guinea-Bissau’s per capita income growth only averaging 2.3 percent over 2023-2050 (x2.0); and 3) high growth scenario- which assumes an economic take-off where Guinea-Bissau’s income per capita more than triples (x3.6), averaging 4.6 percent over 2023-2050 - indicate that all else unchanged, further climate change is expected to reduce real GDP by up to 10.3 percent by 2050. The losses are significantly larger under the dry/hot climate scenario, reflecting agriculture's significant contribution to GDP. Agriculture is more affected by rainfall variability and heat impacts labor productivity.The large effects of rain variability is likely to undermine progress in poverty reduction since most of the poor rely on agriculture as their main source of livelihood. 2 4. The 2016 Systematic Country Diagnostic (SCD) concluded that Guinea-Bissau was facing an intertwined battle against political fragility, low growth, and deep and entrenched poverty. These challenges are primarily attributed to continuous cycles of political instability and endemic weak governance in an undiversified and vulnerable economy. This situation has resulted in an unfriendly business climate that discourages investment due to a vicious cycle of low assets, low productivity, and lack of inclusiveness. The SCD grouped these significant development challenges into three binding constraints for achieving inclusive economic growth: (i) low and unstable growth; (ii) lack of inclusiveness and low rural productivity; and (iii) fragility and weak governance. Nine Priority Policy Areas (PPAs) were identified to tackle these constraints. This analysis remains relevant today, albeit with emerging topics. 5. While the primary development challenges identified in the 2016 SCD remain largely unchanged, the country's context has evolved in four significant ways. Firstly, the political landscape has improved slightly, but remains highly volatile.1 President José Mário Vaz was the first Head of State to complete a full term in office in 2020, and, under President Umaro Sissoco Embaló, the authorities have begun implementing some key but difficult structural reforms in areas such as tax administration, debt management, and domestic revenue mobilization; though these have faced some resistance. Additionally, the peaceful conduct of the recent legislative elections on June 4th 2023 – the country’s seventh legislative elections since the opening of the multiparty system in 1994; the results of which is has resulted in a coalition government - is seen as another indicator of improvement in the political landscape. Secondly, despite various efforts to address institutional capacity, poor government effectiveness prevails. Most of the World Governance Indicators (WGI) measuring government effectiveness, regulatory quality, rule of law, and control of corruption have either stagnated or declined over the past decade. Thirdly, the COVID- 19 pandemic has taken a significant toll on the economy, with the deceleration of growth from 4.5 percent in 2019 to 1.5 percent in 2020 reversing small but hard-won poverty reduction gains registered since 2015. The impact of the pandemic led to an additional 69,000 poor people and increased fiscal and debt sustainability pressures. Finally, splill over effects from the Russia’s invasion of Ukraine in 2022 exacerbated food and energy price pressures, placing inflation at 7.8 percent in 2022 (from 3.3 percent in 2021) —the highest in a decade. This situation has further negatively impacted the wellbeing of households, particularly people who spend a larger share of their income on food. 6. Against this backdrop, the SCD Update (the Update) revisits Guinea-Bissau’s development path to update key challenges and priority policies to reduce poverty and increase shared prosperity. The Update takes a bottom-up approach, from the revision of development challenges to the definition of High-Level Outcomes (HLOs) that are critical to achieve the World Bank’s twin goals (see Figure 1.1). It leverages new data and analytics that have become available since 2016 to appraise progress along the macroeconomic, governance, poverty, and shared prosperity dimensions. These aspects are examined through political and institutional fragility lenses. The analysis features a systematic benchmarking exercise using a pre-identified list of structural and aspirational peer countries (see Annex 1). Based on this examination, and in conjunction with internal and external consultations with stakeholders, the Update revises the 2016 SCD prioritization framework to confirm or update the PPAs. Finally, the Update proposes five HLOs that link the PPAs with the World Bank’s goals of ending poverty and increasing shared prosperity. 1 On 1st February 2022, a non-identified group of armed men assaulted the Government Palace during a high-level meeting in which both President Embalo and Prime Minister Nabiam were present. The alleged coup d’état was quelled on the same day. On 16 May 2022, President Embalo dissolved the parliament and called for a new general election in December 2022. The election, which was delayed, took place on June 4th, 2023. 2 7. The Update presents four major findings in Guinea-Bissau’s development challenges: (i) The country’s progress towards improving the lives of its citizens remains hampered by years of fragility and elite capture, which has perpetuated political instability. This primary binding constraint was identified in the 2016 SCD, which underscored the negative effect that repeated military coups, political assassinations, and unconstitutional takeovers of the government have had on stability and economic growth. The accumulated cost of conflict since 1998 is estimated at about US$ 1.1 billion, nearly the same as the country’s annual GDP (World Bank 2020b). Such fragility is intertwined with elite capture and undermined the inclusiveness of growth. Fragility limits the availability of critical public goods to a large swath of the population, including marginalized communities and other vulnerable groups such as women and youth. As a result of the interplay of these forces, a negative feedback loop persists, whereby fragility continues to weaken institutions, and the opportunities for elite capture that emerge continue to perpetuate political instability and violence. Despite mild progress in political stability and voice and accountability post-COVID 19, other governance dynamics continue to be relevant, including: (i) weak public financial management practices, which create opportunities for rent seeking behavior for both public and private actors and drive elite capture; (ii) poor personnel management, inefficient allocation of human resources, and weak capacity, which impede public service delivery in critical social sectors; (iii) a lack of government transparency as well as formal and informal public accountability mechanisms, which undermine civic participation and rule of law; as well as (iv) institutional instability at the center of government and the virtual absence of the state at the local level, which results in large inequalities in non-monetary wellbeing and exclusion— especially in access to basic services. (ii) Poverty remains deep and entrenched. Estimates as of September 2023 combining household survey data, sectoral growth rates and price data show volatile poverty trends. Using the international poverty line of US$ 2.15 (in 2017 purchasing power parity prices), poverty is expected to have increased to 22 percent in 2022 from 21.6 percent in 2021; and a further increase to 23.4 percent in 2023 (World Bank 2023). The sharp increase in poverty (1.35 percentage points increase in 2023; compared to a 0.42percentage point increase in 2022 preceded by a 1.17 percentage points decline in 2021) is partly due to weaker growth in per capita GDP, high food prices and low cashew prices undermining gains in the post-pandemic recovery in 2021. Rising food prices in particular are expected to disproportionately affect poor people who spend nearly 60 percent of income on food- eroding their purchasing power and exposing them to the risk of food insecurity and poverty traps. Poverty remains higher in rural areas where most poor people live and are engaged in agriculture and low productivity jobs. Non- monetary indicators of household wellbeing show moderate improvement in access to basic services- mainly in and around the capital- Bissau. Access to basic services in rural areas remains low with moderate progress between 2010 and 2018, indicating low inclusiveness of progress in access. A cross- country comparison of poverty rates (based on the international poverty line) shows higher poverty in Guinea-Bissau than in most of its aspirational peers (Laos, Rwanda, Cabo Verde and Tajikistan); and lower poverty when compared to some structural peers (Burundi, Central African Republic, The Gambia and Sierra Leone). (iii) Low and volatile growth prevails, aggravated by the impacts of the COVID-19 pandemic and global geopolitical tensions; and has exacerbated fiscal and debt pressures. Sustained growth 2 remains elusive. GDP growth averaged 4.5 percent in 2016-19 (1.3 percent per-capita growth) and 3.8 percent in 2020-22. These modest rates kept Guinea-Bissau as one of the slowest growing economies in the African continent. An excessively high and rising dependence on the cultivation and export of unprocessed cashew nuts locks the economy in a low and highly volatile growth path. In contrast to Guinea-Bissau’s structural peer countries, the concentration of the export basket has increased after 2016, further exposing the country to rising volatility in global markets. The COVID-19 pandemic and spill over effects from Russia’s invasion of Ukraine not only slowed down GDP growth but significantly increased fiscal and debt pressures. The mix of a very low tax revenue with a highly rigid public expenditure, including a disproportionate wage bill, and rising public outlays in response to the pandemic led the fiscal deficit to reach 8.8 percent of GDP in 2020 and 5.2 percent of GDP in 2022. Ensuing public debt increased from 62.5 percent of GDP in 2016 to 79.4 percent in 2022. Use of non- concessional debt led to a downgrade in the risk of external debt distress from moderate to high in February 2021. Fiscal risks are mounting due mainly to inefficiencies in electricity service delivery and higher international fuel prices. On the structural side, the small fiscal space keeps donor-reliant public investment at low levels, and scant infrastructure limits the ability to leverage natural endowments to diversify the economy, which maintains the country as one of the most difficult places in the world to do business. (iv) The sustainability of the development path in the current global context is contingent on tackling fiscal, social, and environmental risks. The country's reduced fiscal space exacerbates fiscal risks and increases public debt, limiting the ability of Guinea-Bissau to tackle its primary development challenges. High dependence on grants from the international community, which are unpredictable due to endemic political fragility, preclude sustained policies and investments in key social sectors. Gender inequality is pervasive, with women having less educational attainment, lower labor force participation, and earning lower wages than men. Women also suffer from norms and practices, such as genital mutilation. Promoting gender equality would promote productivity gains at the economy- wide level, increase human capital at the household level, and improve women's earnings at the individual level. Guinea-Bissau is the 4th most vulnerable country in the world to climate change and has one of the lowest states of readiness to face these events.2 Climate shocks, which are expected to increase both in frequency and magnitude, will deepen preexisting fragilities and increase the vulnerability of poor as most of the population relies on subsistence agriculture, with low preparedness and weak resilience tools. 8. Based on the new evidence, the Update outlines four areas of binding constraints to poverty reduction and shared prosperity in Guinea-Bissau: (1) lack of inclusiveness and low rural productivity; (2) low and unstable growth; (3) fragility and weak governance; and (4) high vulnerability to external shocks. While the first three constraints follow from the diagnostics framework of the 2016 SCD, the review process of the current development context not only confirmed their validity but also added a fourth one addressing the vulnerability of households to external shocks, both economic and climate related. 9. The Update revisited the prioritization process conducted in the 2016 SCD to refresh the list of key PPAs. For each binding constraint, the Update evaluated the policy areas and their priority through a three-step process. First, the relevance of the 2016 SCD policy areas is evaluated in the current country and global context. Second, the relative importance of new policy areas is weighted considering recent analytical work. This step led to the inclusion of new policy areas that were not considered in 2016. Third, 2The high vulnerability is mostly driven by the low-lying coastal areas, which host 80 percent of the population and the bulk of economic activity, and are highly vulnerable to rising sea levels, stronger tides, and salinization of surface water and aquifers. 2 a revised list of the PPAs is established according to four criteria: (i) poverty reduction impact; (ii) political and institutional feasibility ; (iii) traction (ability of the policy action to deliver results in the short and medium term); and (iv) cost and affordability. The proposed PPAs focus on feasible steps to challenge the established framework with the objectives of fostering better delivery of public service, creating an environment to enhance private sector performance, and creating opportunities for shared prosperity. Ten PPAs are identified in this process: (1) Improve cross-cutting economic and production support services; (2) enhance domestic revenue mobilization and the quality of public spending; (3) strengthen the businesss environment by reducing informality, increasing access to credit, and attracting FDI (4) strengthen public financial management; (5) increase accountability and participatory mechanisms for citizens; (6) improve human resource and wage bill management; (7) improve basic service delivery; (8) empower women and the youth; (9) support economic diversification; and (10) improve natural resource governance and disaster risk management. 10. Overcoming the binding constraints through steady implementation of the PPAs led to the identification of five HLOs. These are: (i) improved human capital; (ii) increased access to infrastructure; (iii) improved provision of public services for citizens; (iv) strengthened households’ resilience; and (v) enhanced economic empowerment of women and youth. Each HLO encompasses multiple policy areas and, therefore, contributes to tackling different binding constraints for development. 2 1. INTRODUCTION 11. The Systematic Country Diagnostic Update (the Update) revisits Guinea-Bissau’s development challenges and the prioritization of policy actions to make sustained progress towards decreasing fragility, reducing poverty, and achieving inclusive economic growth. Leveraging new data and analytics, the Update takes stock of recent developments and reviews the findings of the Systematic Country Diagnostic (SCD), published by the World Bank in 2016. Because major constraints to development remain unchanged, the new version of the SCD is being prepared as an update. The Update proposes five High- Level Outcomes (HLOs) that link binding development challenges, priority policy actions, and the World Bank twin goals of ending poverty and increasing shared prosperity. 12. The Update employs a bottom-up approach to revisit Guinea-Bissau’s development prospects, considering the current global context. The analytical approach consists of four steps (Figure 1.1) and is informed by the current global context (Chapter 2): First, it appraises the progress (or lack thereof) in the development challenges that Guinea-Bissau’s faces in the areas of governance and fragility, poverty and inclusion, economic growth, and the sustainability of the development process (Chapter 3). Second, based on this comprehensive review, four binding constraint areas are identified (Chapter 4). Third, based on recent analytical work, internal and external consultations, and a predefined prioritization methodology, the list of Priority Policy Areas (PPAs) is updated (Chapter 5). Fourth, to link the PPAs with the World Bank’s twin goals, five HLOs are proposed. Figure 1.1. Analytical Framework for the SCD Update 13. In addition, building upon the lessons learned in the implementation of policy actions suggested by the 2016 SCD, the Update also suggests two strategies to support the implementation of priority policy actions. The first strategy is lessoning the overarching constraints of elite capture and fragility on development when designing PPAs. The second strategy is addressing nested constraints while considering political economy dynamics (Chapter 6). Finally, the Update discusses knowledge and data gaps that constrain the analysis (Chapter 7). 2 2. COUNTRY CONTEXT FOR THE UPDATE 14. This Update finds that the key development challenges have not changed substantially since the 2016 SCD; however, the current country context differs in the following ways: (i) The political landscape has improved slightly but remains highly volatile. Guinea Bissau experienced frequent government turnovers between 2009 and 2014. The political situation improved marginally after 2015, with President José Mário Vaz becoming the first Head of State to complete a full term in office in 2020, though frequent turnovers within government contributed to limited progress on the Terra Ranka development plan. The authorities have since taken advantage of the window of opportunity to start implementing some critical but difficult structural reforms such as the management of fiscal space through enhanced debt management and efforts to improve domestic revenue mobilization. However, progress has been slow due – in part - to limited capacity. The political situation remains volatile, as demonstrated by a failed coup attempt in February 2022. Nevertheless, on June 4th 2023, the country held its seventh legislative elections since the opening of the multiparty system in 1994. They were peacefully conducted – and have resulted in a coalition government, which is seen as another indicator of improvement in the political landscape. (ii) Despite improvements in political stability and multiple efforts at addressing the endemic deterioration in governance and institutional capacity, poor government effectiveness prevails. Whereas the 2016 SCD underscored the need to tackle state capture as a major factor that limited the availability of public goods, fragility dynamics continue to weaken institutions and offer new rent- seeking opportunities. Between 2011 and 2021, most of the World Governance Indicators (WGI) measuring government effectiveness stagnated or declined.3 The country remains rated as the worst performing country in the Western Africa cluster according to the 2022 Ibrahim Index of African Governance.4 (iii) The COVID-19 pandemic took a toll on the economy in 2020 and, despite mitigation efforts, reversed small but hard-won poverty reduction gains. GDP growth slowed from 4.5 percent in 2019 to 1.5 percent in 2020 (a contraction of 1 percent in per capita GDP), halting an average growth of 4.5 percent registered since 2015. As fiscal pressures increased with the needs to deal with the pandemic- driven crisis, the fiscal deficit widened to 8.8 percent of GDP in 2020 and remained high at 5.5 percent in 2021 and 5.2 percent in 2022. The slowdown of the economy is expected to have resulted in an increase in the incidence of poverty from 22.1 percent in 2019 to 22.8 percent in 2020 (based on the international poverty line of US$ 2.15 per day in purchasing power parity prices 2017), due to the impact of the COVID-19 pandemic. (iv) Inflationary pressures were exacerbated in 2022, further negatively affecting the wellbeing of households—especially poor people. Inflation pressures started to build in 2021 due to disruptions in global supply chains initially caused by the COVID-19 pandemic and later exacerbated by the impact of the war. The adverse terms-of-trade shock hampered domestic activity, via high food and energy price pressures, thereby reducing private consumption and growth. Inflation reached 7.8 percent in 3The two exceptions of the WGI indicators were (1) voice and accountability and (2) political stability. 4The country has performed poorly in the annual reviews of the World Bank Country Policy and Institutional Assessments, with an average score of 2.5 - putting it below the International Development Association fragility threshold and below the Sub- Saharan Africa average of 3.1. In particular, the assessment’s “Public Sector Management and Institutions” cluster was ranked the lowest of all sectors evaluated, receiving a score of 2.0. 2 2022, the highest in a decade. As a result, poverty is expected to have increased in 2022 to 22 percent up from 21.6 percent in 2021 based on the international poverty line of US$ 2.15 (in 2017 purchasing power parity prices) representing a 0.4 percentage point increase in 2022; compared to a 1.2 percentage point decline in 2021. 2 3. DEVELOPMENT CHALLENGES 1.1 Institutions, Governance, and Fragility5 15. Guinea-Bissau’s lack of progress toward reducing poverty and increasing shared prosperity is due to two mutually reinforcing overarching constraints. These are: (i) endemic institutional fragility, which has hampered growth, poverty reduction, and social stability; and (ii) a situation of state capture by elite interest groups, the effects of which have harmed all dimensions of public governance. The constraints are binding in the context of Guinea-Bissau as they define the operating environment and policy arena, which to a great degree, influence outcomes across a variety of sectors, both public and private. In this regard, other technical constraints across development sectors can be seen as a function of these two overarching paradigms. 16. In this context, the SCD Update presents various “nested” challenges that perpetuate weak governance, which function within—and are perpetuated by—an operating environment characterized by state capture, political instability, and fragility. The nested constraints considered by this lens of analysis include, among others (Figure 3.1): (i) weak public financial management practices, which drive elite capture and create opportunities for rent seeking behavior for both public and private actors; (ii) poor personnel management, inefficient allocation of human resources, and weak capacity, which impede public service delivery in critical social sectors; (iii) a lack of government transparency as well as formal and informal public accountability mechanisms, which undermine civic participation and rule of law; as well as (iv) institutional instability at the center of government and the virtual absence of the state at the local level, which results in large inequalities in non-monetary wellbeing and exclusion—especially in access to basic services. A key premise of this SCD Update is that with the removal or mitigation of the overarching constraints of fragility and capture, the nested technical challenges would be significantly less intractable. Figure 3.1. Governance Constraints Preventing Progress Towards the World Bank Twin Goals Source: SCD Author’s Compilation 5 This section relies on Jelenic (2023) and Arvanitis (2023). 2 3.1.1. Fragility and Instability 17. Since gaining independence in 1974, fragility has been Guinea-Bissau’s dominant development challenge. Over the past 50 years, there have been four successful coups d’états, 17 coup attempts, a short but devastating civil war from 1998 to 1999, and the brutal assassination of several senior government officials, including the President in 2009. Between 1999 and 2009, political and institutional fragility also manifested itself in frequent government turnover. Guinea-Bissau’s government resulting from the December 2019 presidential elections seemed to offer a window of opportunity to implement some critical but politically difficult structural reforms; however, progress has been slow and the situation in the country remains extremely volatile. 18. The drivers of fragility in Guinea-Bissau are multi-faceted and span across the political, economic, social, and environmental arenas (World Bank 2020a). First, an unfinished political transformation driven by elite fragmentation and rent seeking contributes to a lack of inclusive institutions. Second, a captured and poorly diversified economy that remain vulnerable to shocks. Third, security sector interference is prevalent in political and economic spheres. Fourth, weak and inequitable administration of justice impedes effective conflict resolution. Fifth, social exclusion is exacerbated by a weak state presence, especially in rural areas, and persistent poverty traps have become sources of resentment and growing grievances. Additional cross-cutting factors also play a role in Guinea-Bissau’s fragility, including drug trafficking, which has increased in recent years, as well as the lack of natural resource governance. External dynamics add a further layer of instability, in a region increasingly affected by fragility, conflict, and violence (see Box 3.1). 19. From a citizen perspective, Guinea-Bissau is characterized by a concentration of power, which excludes most of the population from social, economic, and political opportunities, leading to dissatisfaction and fueling grievances. As the 2018–19 protests led by civil servants and students demonstrated, the lack of a transparent, equitable, and functioning political system and state erodes social cohesion, social capital, and stability. Participation in political violence has become a way to access resources and power. This is exemplified by the interference of the military in political and economic affairs, which is a source of instability and exclusion. The resulting instability has prevented the enactment and implementation of key structural reforms. Likewise, the weak and inequitable administration of justice is a factor of exclusion and cause of popular grievances. 20. The cost of fragility has been severe in Guinea-Bissau with chronic political and institutional fragility undermining economic growth. The economic impact of political instability has been substantial, estimated at US$ 1.1 billion between 1998 and 2018 (World Bank 2020b). This amount is nearly the same as the country’s GDP in 2018 (US$ 1.2 billion). As a result of high levels of risk, policy uncertainty, and political instability, private investment is impeded and currently tone of the lowest in Africa. 21. A main driver of violence and instability in Guinea-Bissau is the control of illicit markets, which have become a means to access power, secure revenues, and supplement public budgets. This trend started with arms trafficking in the 1990s, then evolved to illicit timber logging markets between 2012 and 2014, and the drug trade after 2015 (Shaw 2015). Participation in illicit markets enables the elite to shift between different illicit economies and access a steady source of revenue (Box 3.1). In the case of timber, the issuance of licenses have become a source of corruption and rent-seeking because there are hardly any environmental controls (e.g. checks on the actual versus allowed logging quotas) and no local value-addition as required by the law. The high degree of control over the illicit drug trade by key stakeholders in the political and military sphere has prevented large-scale violence. However, it has also 2 slowly eroded state legitimacy, paving the way for heightened competition between stakeholders vying to dominate the cocaine trade, fueling instability, and spurring episodes of violence. Box 3.1. Illicit Economies of Narco-Trade in Guinea-Bissau Since the early 2000s, drug trafficking expanded dramatically across Africa, reaching between US$ 6 and US$ 7 billion worth of trade. Trafficking was primarily driven by porous borders and weak institutions along the West African coast and higher enforcement in traditional routes of Spain and Morocco. In this context, Guinea-Bissau proved to be a prime candidate for drug transit, given its archipelago of over 82 islands, an unpatrolled airspace, and meagre means of maritime control. The country remains a significant transit point in the illicit drug trade. Further, there is evidence that the politico-military elite, other middlemen, and criminal entrepreneurs, facilitate the trade. Profits for the local elites mainly derive from protection fees, as well as agreements with traders for transshipments. Importantly, illicit trade has been diverting political, judicial, and bureaucratic resources towards rent seeking. Signs of the influx of drug money is reflected in international reserves, which rose from US$ 33 million in 2003 to US$ 174 million in 2008, a period during which there were very low inflows of foreign direct investment and donor assistance. In 2019, local police seized 1.8 tons of cocaine – the second that same year after an 800 kg seizure. International press reports have linked these drug seizures to the Al-Mourabitoun terrorist group, in trade with the Sinaloa cartel in Mexico. Further press reports, as well as accounts from international non-governmental organizations, highlight both impunity (e.g., protection from elites allowed some of the arrested and convicted people linked to these cases not to go to jail), and elite connivence (e.g., drugs stored in private warehouses). A decline in the volume of cocaine seizures was reported between 2020 and 2021 but may not be an indication that drug trafficking has decreased but rather a sign of the increasingly politicized and ineffective criminal justice system, unable to adequately address the issue. Sources: Forrest 2003, World Bank 2015 3.1.2 The role of state capture 22. To a large extent, the institutional fragility and periodic episodes of violence described above have been perpetuated by, and serve as evidence of, a high degree of state capture by connected elites.6 The post-colonial state that emerged after 1974 in Guinea-Bissau was weak, and in the absence of other economic resources, elites and senior officials increasingly relied on informal networks and illicit economies to access power and resources. As a result, elite fragmentation is high and continues to be driven by rent-seeking behavior and competition, with elite networks operating outside of state structures. Allegiances between elites tend to be shifting and opportunistic, with personal rivalries and conflicts emerging at various periods in time. Political disputes are fueled by struggles to control power and resources, with the state being the main vehicle for enrichment. These divisions contribute to tensions that undermine political stability and affect the construction of a unitary state, while allowing a “rentier” economy to fester, countering the country’s economic interests. As a result, the elite bargain in Guinea-Bissau can be characterized as: (i) highly unstable, as it excludes a large swath of the population and within the elite network itself, therefore triggering political instability; (ii) unsustainable, as it relies on illicit and unproductive rents; and (iii) failed, as it does not accommodate cleavages within the elite network. 23. Political upheavals and incapacity to conduct efficient policymaking can be seen as both an outcome as well as a function of state-capture. Weak institutions, the absence of checks and balances on state power, relatively subdued civil society, as well as inadequate law enforcement create conditions for state capture. For instance, the abuse of regulatory systems by elites is especially prevalent under 6 Elite Capture is defined as “the exercise of power by private actors — through control over resources, threat of violence, or other forms of influence — to shape policies or implementation in service of their narrow interest” (World Bank 2017). 2 weak rule of law (Faccio et al. 2006). Weak controls on public financial management systems can also allow for tax privileges for politically connected firms, or undue contracting under rigged public procurement processes. Examples stemming from various reviews of Guinea-Bissau’s institutions highlight their systemic weakness (World Bank 2016, AfDB 2015), especially with regards to public financial management (Arvanitis and Weigert 2017). Concurrently, these are also outcomes of state capture to the extent that institutional weaknesses and political upheavals occur because of the fight over resources and influence. In essence, elite bargaining in the country relies on the extraction of uncompensated value from others without making any contribution to productivity. It also manipulates the sociopolitical environment in which economic activities occur, rather than creating sustainable and accessible economic activities, which further fuels exclusion and social dissent (see Box 3.2). Box 3.2. A Citizen’s Perspective on State Capture A recent public opinion survey, by Carter (2023) revealed that 88 percent of the population believe that political party leaders are more interested in serving their personal interests than serving the people. In addition, 87 percent of the population thinks that political rivalry in their country can lead to violent conflicts, which is considerably above the ECOWAS average (63 percent). Key findings suggest that frustrations over the nation’s political life, widespread poverty, and few economic opportunities impact overall perceptions of quality of life within the country. The survey further revealed that, in Guinea-Bissau, 82 percent of people think that the country is heading in the wrong direction, 26 points above the ECOWAS average. Source: Carter 2023 24. The extent of state capture, including the inclination towards corrupt practices, is perpetuated by a combination of variables.7 These include: (i) incentives generated by weak economic, regulatory, and fiduciary governance; (ii) high degrees of discretion in decision making; and (iii) low threat of sanctions (Zaum 2016, also see Figure 3.2). As will be described in the following section, the overall weakness of PFM systems as well as the large fiduciary gaps in the country suggest many loopholes and opportunities for engagement into rent-seeking activities. Similarly, the absence and/or weaknesses of internal controls provides discretion for overspending and administrative decisions. Lastly, weak internal and external oversight as well as challenges in the judicial system provide a low threat of sanctions with limited accountability. As a result, incentives for policy makers and other influential stakeholders are not necessarily aligned with those of the general population. Thus, policymaking has been short-sighted, affected by power asymmetries amongst stakeholders, and furthering rent-seeking behaviors. 7Given these various dynamics, elite capture has resulted in a number of sub-optimal outcomes. Arvanitis (2023) explores each of these in detail. 2 Figure 3.2. Determinants of State Capture in Guinea-Bissau Incentives Discretion Sanctions •Weak budgetary •Unclear administrative/ • Weak internal and practices budgetary processes and external oversight •Low budget credibility procedures •Weak judicial systems •Hierarchical and and rule of law •Weak cash management and no cumbersome public •Low levels of civil society treasury single account administration 'voice' •Weak IT systems •Political links to the private sector •Lack of internal / external controls Source: SCD Authors adapted from Zaum 2016 3.1.3 Nested Constraints Contributing to Weak Governance and Fragile Institutions 25. Amid a context of fragility and elite capture, almost all international indicators measuring governance have stagnated or declined since the 2016 SCD. According to the 2022 WGI, Guinea-Bissau is trapped in the lowest quintile of all countries surveyed with respect to indicators measuring governance effectiveness, regulatory quality, rule of law, and control of corruption (Figure 3.3). Between 2011 and 2021, it only featured mild improvements in voice and accountability and political stability. Transparency International’s 2022 Corruption Perception Index noted a deteriorating performance since 2012, with Guinea-Bissau ranking 164th out of 180 countries surveyed in 2022. Moreover, Guinea-Bissau was rated the worst performing country in the Western Africa cluster according to the 2022 Ibrahim Index of African Governance, reflecting a year-on-year decline across key governance indicators.8 Figure 3.3. Guinea-Bissau: World Governance Indicators (Percentile performance) 40 30 20 10 0 2011 2015 2020 2021 Voice and Accountability Political Stability Government Effectiveness Regulatory Quality Rule of Law Control of Corruption Source: World Governance Indicators 2022 8The country has also performed poorly in successive WB Country Policy and Institutional Assessments, with an average score of 2.4 in 2021, which puts it well below the International Development Association fragility threshold of 3.0. 2 Nested Constraint 1. Weak public financial management practices continue creating opportunities for rent seeking behavior and drive elite capture. 26. Guinea-Bissau’s budget preparation and planning process lacks transparency and coordination, which leads to a sub-optimal allocation of public resources and creates opportunities for rent seeking. Likewise, strategic multi-year planning and effective budget linkages to policy priorities do not exist due to limited political incentives for medium- to long-term planning. Budget credibility and execution are weak and are undermined by a lack of sufficient commitment controls as well as significant extra budgetary expenditures, which have exceeded 25 percent of government spending in some years. Challenges in budget execution and poorly enforced expenditure controls are closely linked to deficiencies in the Integrated Financial Management Information System as well as the absence of a Treasury Single Account, which creates additional opportunities for rent seeing behavior and capture. Further, capacities for cash management and cash flow forecasting remain weak as are fiscal reporting practices and external audit capacities. Nested Constraint 2. Poor personnel management and inefficient allocation of human resources impede public service delivery in critical social sectors. 27. As of 2022, the wage bill in Guinea-Bissau accounted for 6 percent of GDP, 42 percent of recurrent expenditure, and 65 percent of tax revenues. However, due to weak budget management practices as well as poor oversight to ensure the integrity of the wage bill, official figures do not account for total public sector compensation, which also include pensions, allowances, salary top-ups, health benefits, and other incentives. When considered, the wage bill stands at 10 percent of GDP and 102 percent of tax revenue. Underlying this, Guinea-Bissau has a growing list of government staffing positions with inefficient allocation of human resources between sectors. Payroll and human resources management practices have been ineffective, due to a combination of weak capacity, political instability, and limited resources. Further, the current pension system for public sector is poorly administered and employees represent a comparatively large share of government expenditures. In 2021, the public service pension scheme accounted for 7.7 percent of tax revenue, of which less than 20 percent was covered by civil servant contributions.9 Finally, limited public sector administrative capacity in Guinea-Bissau impedes critical functions of the State, including the ability to plan policies, deliver services, and manage fiscal risks. Nested Constraint 3. A lack of government transparency and public accountability mechanisms undermine civic participation and rule of law. 28. Notable shortcomings exist in public data reporting, fiscal transparency, judicial independence, and CSO capacity. Laws, policies, and administrative data are not routinely published, either in hard copy or online, making it difficult for both public officials and private individuals to access relevant information. A similar level of opacity and weak capacity exists in the judiciary, which negatively impacts public accountability and rule of law. While formal public accountability channels are weak, the position of civil society is fragile, which undermines opportunities for informal social accountability channels and increases perceptions of impunity for political, military, and business elites. In this regard, there is limited access to and dissemination of information of public interest. Citizens also lack mechanisms to channel their demands for improved public goods and opportunities to create bottom-up accountability through 9 In 2021 there was a funding fap of CFA 11.74 bn covered out of the general budget. 2 civic participation. Simultaneously, civil society networks in the country lack funds and organization, which diminishes their voice in formal political processes. Nested Constraint 4. Institutional instability in the center of government and the absence of the state at the local level undermines state legitimacy. 29. Due to prolonged institutional and political instability, Guinea-Bissau’s executive and supporting institutions are weak, which hampers its ability to coordinate policies and deliver services. Likewise, the Center of Government has limited capacity for ensuring quality in regulatory management, which hinders private sector development and opens possibilities for elite capture. At the same time, political decentralization arrangements are almost nonexistent, despite various legal instruments and commitments under WAEMU directives. The 1996 Constitution specifically provides for the presence of decentralized political institutions (municipalities) elected directly by the people. However, local government elections have been delayed due to repeated political crises and lack of resources. Finally, administrative and fiscal decentralization remain limited, which is evidenced by weak state presence at local levels, especially in service delivery sectors. 1.2 Poverty, Inclusion, and Shared Prosperity10 3.2.1 Recent Trends 30. Poverty remains deep and entrenched in Guinea-Bissau. The 2016 SCD documented the presence of deep and entrenched poverty in Guinea-Bissau. Furthermore, poor Bissau Guineans face multiple deprivations including low access to basic services; and appear to be trapped in a vicious cycle of low assets, low productivity, and low income. What has changed since then? Recent data shows that poverty still remains widespread in Guinea-Bissau. Forecasts as of September 2023 combining the latest household survey (Enquête Harmonisée sur le Conditions de Vie des Ménages -EHCVM 2018/19)11, sectoral growth rates and price data reveal volatile poverty trends. Using the international poverty line of US$ 2.15 (in 2017 Purchasing Power Prices)12 poverty is expected to have increased to 22 percent in 2022 from 21.6 percent in 2021; and a further increase to 23.4 percent in 2023 (World Bank 2023). The sharp increase in poverty (1.35 percentage points increase in 2023; compared to a 0.42percentage point increase in 2022 preceded by a 1.17 percentage points decline in 2021) is partly due to weaker growth in per capita GDP, high food prices and low cashew prices undermining gains in the post-pandemic recovery in 2021. Rising food prices are expected to disproportionately affect poor people who spend nearly 60 percent of income on food. High food prices erode their purchasing power and expose them to the risk of food insecurity and poverty traps. A cross-country comparison of poverty rates (based on the international poverty line) show higher poverty in Guinea-Bissau than in most of aspirational peers (e.g. Lao People’s 10 This section relies on Touray (2023). 11 The 2018/19 EHCVM household survey is the most recent survey data available in Guinea-Bissau. A similar survey financed by the World Bank, fully comparable with the previous edition and harmonized across WAEMU countries has been recently concluded (data collection was conducted between 2021-2022 thereby capturing the effects of the COVID-19 pandemic). However, data processing is ongoing through Technical Assistance from the World Bank’s Poverty Team and new poverty numbers are planned to be released by September/October 2023. 12 These estimates are based on a new microsimulation tool which allows for the estimation of household-level consumption growth rates based on the growth in the sectors in which they work and adjusts for food and nonfood inflation. 2 Democratic Republic, Rwanda); and lower poverty when compared to some of structural peers (e.g. Burundi, The Gambia) (Figure 3.5).13 31. Data from the 2018/19 EHCVM survey showed that poverty (based on the national poverty line) declined nationally by only one percentage point between 2010 and 2018. According to these 2018/2019 estimates, 47.7 percent of the population were poor (based on the national poverty line) and 13.2 percent live in extreme poverty. Poverty declined by only one percentage point from 48.7 percent in 2010 (Figure 3.4). Poverty declined in urban areas but increased in rural areas: Poverty declined in Bissau by about 6 percentage points (9.1 percentage point decline in other urban areas) whereas it increased by 5 percentage points in rural areas (Figure 3.6). These patterns are also masked by significant variation across regions. For instance, between 2010 and 2018, poverty declined in Gabu region (-8.3 percentage points), Bissau region (-6.3 percentage points- driven by a large- (5.9 percetange point) decline in the Bissau City), Tombali region (-5.9 percentage points) and Biombo region (-5.5 percentage points); but increased in Cacheu, Oio, Quinara, Bafata and Bolama regions. Furthermore, poverty remains higher in these regions where poverty increased -almost 60 percent. Figure 3.4. Poverty Trends in Guinea-Bissau Figure 3.5. International Poverty Rates (Percentage, 2010-2018) (Percentage) 80 58.062.9 65.1 61.9 80 60 48.747.7 47.7 52 38.8 40 27.221.3 40 21.7 26.1 13.4 7.1 6.1 20 4.6 0 0 Guinea-Bissau Republic (2008) Laos (2018) Sierra Leone (2018) Cabo Verde (2015 Tajikistan (2015) Burundi (2013) Gambia, The (2015) Rwanda (2016 Central African National Sector Other Urban Rural Autónomo de (2018) Bissau (SAB)/Capital City-Bissau 2010 2018 Structural Peers Aspirational Peers Figure 3.6. Absolute and Extreme Poverty Rates Across Regions in 2018 80 58.9 61.0 61.2 62.2 63.9 53.9 60 42.0 47.5 40 21.3 25.9 12.4 13.7 17.7 17.3 14.2 17.9 20 3.8 4.8 0 Bissau Biombo Tombali Gabu Boloma - Cacheu Bafata Quinara Oio Bijagos Poverty Headcount Extreme Poverty Source: Authors’ estimates based on Inquérito Ligeiro para a Avaliação da Pobreza(ILAP) 2010 and EHCVM 2018 survey data 13The international poverty rate is based on US$ 2.15/person per day in 2017 Purchasing Power Prices. This measure allows for cross-country comparison of the incidence of poverty. The national poverty rate on the other hand, is based on the national poverty line of FCFA 271,071.8 per person per year.) 2 32. Poverty remains overwhelmingly rural, with more than 75 percent of poor people living in rural areas, relying on subsistence agriculture and low productivity jobs. Extreme poverty rates are much higher in rural (19 percent) than in urban areas (5.3 percent).14 The poverty gap, which measures how far below the poverty line a household locates, is also higher in rural areas. The average consumption level of poor people in rural areas is around 81 percent of the national poverty line, whereas it is 93.4 percent for urban households. Besides typically being in rural areas, poor households are characterized by being male-headed, having less education, and working predominantly in the agricultural sector. 33. Progress in reducing multidimensional poverty has also been slow, declining by 1.4 percentage points between 2014 and 2018. A Multidimensional Poverty Index comprising nonmonetary indicators of wellbeing was constructed to examine the extent of poverty beyond monetary wellbeing.15 According to the Multidimensional Poverty Index, 65.9 percent of Bissau Guineans were multidimensionally poor in 2018, reflecting a decline of 1.4 percentage points from its 2014 levels. The slight decline in multidimensional poverty is due to improvements in education and health care. The prevalence of multidimensional poverty in rural areas is more than twice the rate in urban areas. In 2018, 81.9 percent of rural Bissau Guineans were multidimensionally poor compared to 36.9 percent of urban Bissau Guineans. Between 2014 and 2018, multidimensional poverty rates declined by 5.2 and 5.4 percentage points in rural and urban areas, respectively. The slow progress in reducing multidimensional poverty in rural areas is largely due to wide inequalities in access to basic services including education and health care. 34. Guinea-Bissau has relatively low inequality, but, between 2010 and 2018, it rose - as illustrated by the large increased share of total consumption for the richest households (almost 10 percentage points) and a marginal increase for the poorest households (under 1 percentage point). Inequality in consumption, as measured by the Gini coefficient, increased from 29.9 in 2010 to 31.6 in 2018 (Figure 3.7). Compared to its peers in the WAEMU, inequality is slightly lower in Guinea-Bissau (Figure 3.8). Shared prosperity proxies confirmed the rise in inequality as illustrated by the large increase in share of total consumption for the richest households (almost 10 percentage points) compared to the marginal increase for the poorest households (under 1 percentage point) during the same period.16 Furthermore, between 2010 and 2018, the share of the urban population belonging to the richest quintile of the national consumption distribution increased from 25.7 percent to 34.3 percent, i.e. +8.6 percentage points. While in the same period, the share of the rural population in the richest national quintile declined by 6.9 percentage points and the poorest quintile of the national distribution was increasingly made up of rural households. To the extent that rural residents migrated to urban areas where the returns to labor are higher, this could explain the observed increase in inequality in urban centers. On the other hand, those left in rural areas may have fewer alternative livelihood sources other than agriculture, which were affected by declining returns of the sector, leading to poorer outcomes but also lower levels of inequality. 14 Extreme poverty is defined as households who cannot afford to buy enough food to meet the minimum nutritional requirements of 2,300 kilocalories (Kcal) per person per day, which is estimated at FCFA 13,500 per month in 2018. 15 Ten indicators are included in the Multidimensional Poverty Index: (1) extent of undernourished household members, (2) child mortality, (3) school attendance, (4) years of schooling, (5) type of cooking fuel used, (6) type of sanitation facility, (7) source of drinking water, (8) access to electricity, (9) housing characteristics/quality, and (10) ownership of assets. A person is considered to be multidimensionally poor if he/she/they experience deprivation in at least one-third of the weighted indicators covering the selected dimensions of wellbeing. 16 Shared prosperity indicators - which highlight consumption growth of households at the bottom of the welfare distribution relative to those in the top- have not been computed due to challenges in data comparability. Nonetheless, we compare the concentration of consumption as well as the share of rural and urban households across the welfare distribution. 2 Figure 3.7. Inequality Trends in Guinea-Bissau Figure 3.8. Inequality in WAEMU Countries (Gini coefficient, 2010-2018) (Gini coefficient, 2018) 50 35 29.9 31.6 32.4 38.1 38.6 30.9 28.4 28.1 40 33.2 34.7 35 35.1 35.1 30 27.2 31.6 35.2 25 21.2 30 20 20 15 10 10 0 5 0 National Bissau Other Urban Rural WAEMU Average** 2010 2018 Source: Authors’ estimates based on ILAP 2010 and EHCVM 2018 survey data 3.2.2 Slow and Volatile Growth Continues to Undermine Poverty Reduction 35. The slow decline of poverty is partially due to low economic growth, which is also impacted by political instability. Between 2010 and 2018, GDP per capita grew by 1.2 percent on average- much slower than most of Guinea-Bissau’s aspirational peers (Figure 3.9). Political instability and a poor business environment are major deterrents to investment (Aisen and Vega 2013). Additionally, poor and inadequate infrastructure - notably electricity - is a major barrier to private sector-led growth and expanding economic opportunities for households. 36. Growth in agriculture, which remains critical for increasing the pace of poverty reduction, remains low. Growth between 2010 and 2018 occurred mainly in the services sector (especially trade, restaurants and hotels, and public sector services) contributing over 40 percent of GDP growth and employing about 20 percent of the labor force (Figure 3.10). The agricultural sector employs more than 70 percent of the labor force and is the main source of income for most of the population- especially in rural areas and for the poorest households. The contribution of the agricultural sector to GDP declined by 10 percentage points between 2013 and 2019. The development of the sector remains constrained by weak infrastructures and outdated technologies. Lack of electricity and skilled labor as well as deficient water and transport infrastructure reduce the incentives for private operators to enter the sector. In addition, agricultural production is highly exposed to climate variability risks and international price fluctuations. 2 Figure 3.9. GDP per Capita Growth with Peers Figure 3.10. Sectoral Value-Added in Percent of (Percent, 2010-2021) GDP (2000-19) 20 60 40 0 20 -20 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 -40 Guinea-Bissau Burundi Agriculture, forestry, and fishing, value added (Percent of GDP) Central African Republic Gambia, The Sierra Leone Laos Industry (including construction), value added (Percent of GDP) Rwanda Cabo Verde Services, value added (Percent of GDP) Tajikistan Source: World Bank WDI database 2000-2021 37. The COVID-19 pandemic and increased global international prices are recent shocks that have also undermined progress in poverty reduction. The pandemic led to the incidence of poverty increasing by 3 percentage points in 2020, driven mainly by a large increase in poverty in Bissau (Mendes et al. 2021). Per capita consumption fell below the 2019 levels for most households, but particularly for those located in the highest decile of the income distribution (Figure 3.11). Data from the High Frequency Phone Surveys conducted in March 2021 shows that more than 80 percent of households reported feeling food insecure, while approximately 75 percent reported not being able to cover expenses in transport, information and communications technology, and electricity due to widespread loss of income. Across regions, the negative effects followed the same pattern but varied in terms of the magnitude of the effect. The region with the largest decrease in per capita consumption was Bissau. Apart from the regions of Biombo and Bissau, poverty rates were estimated to have increased in all regions in 2020. Furthermore, global increases in fertilizer, fuel, and food prices negatively affected the wellbeing of households – especially poor people. As a result, poverty is estimated to have increased in 2022 in line with weaker growth and high inflation. Figure 3.11. Estimates of the Effect of the COVID-19 Pandemic on Household per Capita Consumption 800,000 691,559 670,970 727,063 600,000 364,606 375,584 394,116 400,000 272,219 208,950 280,314 293,896 142,725 215,014 225,142 200,000 146,842 153,653 - Quintile 1 (Poorest) Quintile 2 Quintile 3 Quintile 4 Quintile 5 (Richest) 2018/19 Household Survey 2020 Estimates (With COVID-19) 2020 Estimates (Without COVID-19) Source: Authors’ estimates based on ILAP 2010 and EHCVM 2018 survey data 2 38. Bissau Guineans remain highly vulnerable to external shocks, notably rising food prices. Poor people remain vulnerable to rising food prices, driven mostly by the spill over effects of Russia’s invasion of Ukraine. Consequently, the number of households vulnerable to food insecurity doubled between 2021 and 2022.17 In March 2022, the number of households needing immediate assistance reached 131,444 (9.8 percent of people surveyed), while people “under pressure” facing a serious risk of food insecurity reached 349,610 (26.3 percent). World Food Programme’s monitoring of 44 local markets indicated a 20 percent increase in flour prices between January and March 202, and increases of 9 percent, 25 percent, and 40 percent for rice, beans, and sugar, respectively. 39. Social safety net programs remain limited and fail to effectively target the poorest households. When analyzing the percentage of households with social protection across space, it becomes apparent that the most impoverished rural areas receive nearly equivalent levels of social protection as urban areas, where comparatively wealthier households are concentrated (Figure 3.12Error! Reference source not found.). This imbalance raises concerns about the equitable distribution of resources and suggests a significant gap in addressing the specific needs and challenges faced by the rural population. Figure 3.12. Social Protection Targeting and Poverty Source: EHCVM 2018 Household Survey Data 40. Climate change is projected to have significant implications on economic growth thereby undermining progress in poverty reduction. Macro-modeling carried out for the forthcoming Country Climate Diagnostic Report analyzes climate change's economic and poverty impact through selected impact damages, reflecting the main transmission channels of climate shocks on Guinea-Bissau’s economy (see Error! Reference source not found.). At the macro level, further climate change is expected to reduce r eal GDP by up to 10.3 percent by 2050. The losses are significantly larger under the dry/hot climate scenario, reflecting agriculture's relatively larger GDP share, which is more affected by rainfall variability 17 IMF-World Food Program joint analysis in the context of a pilot collaboration. All data are from World Food Programme. 2 and heat impacts on labor productivity. The large effects of rain variability is likely to undermine progress in poverty reduction since most of the poor rely on agriculture is their main source of livelihood18 Box 3.3. Climate Scenarios in Guinea-Bissau’s Forthcoming Country Climate Diagnostic Report Guinea-Bissau is one of the most vulnerable countries to climatic hazards in the world. The ongoing macro- modeling carried out under the forthcoming Country Climate Diagnostic Report analyzes climate change's economic and poverty impact through selected impact damages, reflecting the main transmission channels of climate shocks on Guinea-Bissau’s economy. To do so, the Country Climate Diagnostic Report first considers three economic pathways, i.e., growth scenarios. These growth were built assuming further climate change in the future and designed to capture, not only the challenges (low growth scenario), but also the opportunities (high growth scenario) that Guinea-Bissau will have over the next three decades: • Business-as-usual (BAU) growth scenario: This scenario follows recent growth trends, with improved political stability translating to somewhat higher growth, though still not enough to address large development needs. Income per capita would more than double (2.7 times) between 2023 and 2050, with an average annual growth of 3.5 percent. • Low growth scenario: This scenario replicates historical episodes that have impeded Guinea-Bissau’s economic growth and development. Political instability would lead to poorer economic performance, with per capita income growth doubling and annual growth averaging 2.3 percent between 2023 and 2050. • High Growth scenario: Under this scenario, investment in human capital would lead to improved development outcomes and increased productivity would result in sectoral shifts (from agriculture into manufacturing). This would imply an economic take-off where Guinea-Bissau’s income per capita more than triples (3.6 times), averaging 4.6 percent over 2023-2050. The impact of climate change on growth, poverty, and distribution is then assessed through shocks to seven impact channels, namely: productivity/heat; health/diseases; crops/rainfed; crops/erosion; inland flooding; sea level rises and storm surges; and roads and bridges. Results show that the largest impacts of climate change on Guinea-Bissau are linked to declines in labor productivity. Given the structure of the economy, rainfall variability represents the other main channel through which climate change would affect Guinea-Bissau’s economy. 18A welfare and distributional analysis of the climate change impacts will be simulated as part of the CCDR work. The poverty and distributional implications of different macroeconomic scenarios in Guinea-Bissau are derived using simulations that link household survey data with the macro projections. The simulations produce the overall poverty and inequality trends under three growth assumptions (assuming current growth trends continue- i.e. Business As Usual-BAU/baseline based on current growth trends; lower growth relative to BAU; and higher growth relative to BAU); and the three climate scenarios (Baseline/BAU, extreme dry and extreme wet climate conditions). At the time of finalizing this report, the distributional analysis were yet to be concluded and hence are not included. 2 Breakdown of impact channel’s contribution to GDP impacts as percentage differences from no further climate baseline under alternative growth baselines Figure 3.13. Dry/Hot mean Figure 3.14. Wet/Warm mean Source: Author’s calculation Guinea-Bissau Country Climate Diagnostic Report (forthcoming). 3.2.3 Structural constraints continue to undermine households’ productive capacity, resulting in persistent poverty traps 41. The rural economy continues to be dominated by agriculture, focusing on raw cashew nut production and exports, while rice production has been declining. As of 2018, 75 percent of rural households relied on cashew nuts cultivation for their livelihoods. The sector represents 50 percent of the agricultural area, 90 percent of national export value, 30 percent of national households’ cash income, and around 40 percent of rural employment. Cashew yields and production in Guinea-Bissau have been increasing over time- with yields being higher than the average in West Africa (Figure 3.15). In contrast, rice production (another major crop) has grown at a slower pace as farmers transition to cashew production. Additionally, rice yields are lower than other regional counterparts and have dropped from their 2010 highs. 42. Despite improvements in cashew yields, cashew farmgate prices remain lower than export prices likely due to governance and market failures; thereby undermining the pace of rural income growth and progress in reducing rural poverty. Between 2000 and 2020, a kilo of cashew nut’s average export price was 491 franc communauté financière africaine (FCFA). However, during the same period, a kilo’saverage farmgate prices was almost FCFA 200 lower than that – FCFA 298 per kilo. Although recent data shows rising cashew prices (farmgate prices per kilo reached FCFA 642 in 2017), the gap between export and farmgate cashew prices has increased reaching FCFA 356 per kilogram in 2020 (Figure 3.16). As a result, the recent increases in the international price of cashews have not translated into significant income growth for cashew farmers and undermined their ability to escape poverty. The widening gap between farmgate and export prices points to the existence of governance and market failures that have kept the sector in a low productivity-low input use equilibrium. 43. Farmers’ returns from cashew production is further undermined by the poor state of infrastructure and absence of well-functioning insitutions.Rural infrastructure is in a poor state characterized by limited roads and poor telecommunication networks, which undermines farmers’ ability and incentives to transport their cashew produce and leverage market arbitrage. Farmers’ bargaining power is reduced due to the absence of strong institutions (producer associations, produce marketing 2 groups, etc), thus allowing middlemen to exploit their vulnerabilities and the resulting market failures. The low performance of the sector is further compounded by a very low share of public spending in agriculture (around 1 percent). As a result, poverty in Guinea-Bissau remains predominantly rural, exacerbating the marginalization of a large swath of the population. Figure 3.15. Cashew and Rice Yields Figure 3.16. Cashew Farmgate and Export Price (kg/ha, 2000-2020) (FCFA/kg, 2000-2020) 3000 1500 300% 1000 200% 2000 500 100% 1000 0 0% 2008 2000 2002 2004 2006 2010 2012 2014 2016 2018 2020 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Difference between Export & Farmgate price/producer price (%) Cashew Yields- Guinea-Bissau Cashew Producer prices (FCFA/kg) Cashew Yields- Western Africa Rice yields- Guinea-Bissau Cashew Export prices (FCFA/kg) Source: Authors’ calculation based on FAOSTATS data and official government estimates 2000-2020 1.3 Economic Growth19 3.3.1 Recent trends 44. Growth in Guinea-Bissau remains low and volatile. The average annual GDP growth between 2017-2022 was 4 percent, well below the estimated growth potential of 6 percent. Average annual GDP per capita growth was only 1.5 percent during the same period. The volatility of growth, proxied by its standard deviation, remains higher than both regional and peer countries. The interplay between low and volatile growth has meant that the country’s per capita income has only marginally increased in 40 years, from US$ 606 in 1981 to US$ 627 in 2021. 45. Growth continues to be driven by services and low-productivity agriculture (mainly cashew), on the supply side, and private and government consumption, on the demand side. While 30 percent of the country’s land is arable, the potentialities offered by geography and geology remain largely underexploited. The agriculture sector is the second largest contributor to growth after services (Figure 3.17). Historically, the domestic demand-side drivers of growth are higher cashew prices and increased remittances (Figure 3.18). Remittance inflows rose from US$ 20 million in 2000-2005 to US$ 70 million in 2015-2020, which helped stimulate private consumption. By contrast, net exports negatively contributed to growth, reflecting Guinea-Bissau’s less diversified export portfolios and vulnerability to adverse terms- of-trade shocks. Public investment declined sharply during the politically turbulent period of 2008–13 but a rebound in donor financing contributed more to growth after 2016 . 19 This section relies on Reyes (2023). 2 Figure 3.17. Supply-side Contribution to Growth Figure 3.18. Demand-side Contribution to Growth (percent) (percent) 10 15 Agriculture Industry Services Real GDP growth 5 5 -5 0 -15 Private Consumption Government Consumption Investment Net Exports Real GDP growth -5 -25 2011 2013 2015 2017 2019 2021 2011 2013 2015 2017 2019 2021 Source: Authors’ computation using the official statistics 3.3.2. The COVID-19 pandemic and higher international prices intensified fiscal and debt pressures, limiting fiscal space to support development. 46. The impact of the COVID-19 pandemic in 2020 and higher international prices in 2022 increased fiscal financing needs and reduced short-term growth perspectives. The shock related to the COVID-19 pandemic spilled over into the economy in 2020 through falling global demand and prices for cashew nuts, domestic economic disruptions caused by the lockdown, and higher expenditure needs for the health sector. As a result, GDP grew just 1.5 percent in 2020, down from 4.5 percent in 2019, and the fiscal deficit increased from 4.1 percent of GDP in 2019 to 9.9 percent in 2020. Global geopolitical tens in 2022 impacted the economy primarily through high food and fuel inflation as the country is import dependent for rice, wheat flour, and refined petroleum. These impacts slowed down economic growth, exacerbated inflationary pressures, widened the current account deficit, and weighed on the fiscal position. 47. Due to sustained primary deficits driven by increasing fiscal financing needs, the government’s gross debt increased from 62.5 percent of GDP in 2016 to 78.5 percent in 2021 and the risk of external debt distress was downgraded to High in 2021. The average primary deficit went from 2.5 percent of GDP between 2011 and 2016 to 4.9 percent between 2017 and 2021. As a result, gross debt reached almost 78.5 percent of GDP in 2021. After 2016, the composition of the debt portfolio shifted towards a larger share of non-concessional debt contracted with the West African Development Bank (BOAD) and short- term Treasury Securities held by local and regional banks. Consequently, Guinea-Bissau’s Risk of External Debt Distress rating was downgraded from Moderate to High in February 2021. Guinea-Bissau’s current external and domestic debt level is higher than those of its aspirational and structural peers. 48. Fiscal risks are mounting due mainly to inefficiencies in electricity service delivery and higher international fuel prices. Limited electricity supply has been one of the long-term bottlenecks for development. The electricity access rate stood at 14.7 percent in 2021, which puts Guinea-Bissau among the countries with the lowest levels of electricity access worldwide. Only Bissau, the capital, and Safim, a city located 15 km from Bissau, are connected to the grid operated by Electricidade e Águas da Guiné- Bissau (EAGB), the vertically integrated electricity and water utility company. In 2019, EAGB substituted diesel-based power generation sources with a rented thermal plant. The thermal plant consisted of two heavy fuel oil-fired diesel units installed on a barge anchored off Bissau. While the change improved electricity supply, EAGB’s poor contract negotiation and oversight accumulated fiscal risks. The increase in international fuel prices coupled with high commercial losses, exacerbated the utility’s financial 2 situation. As a result, EAGB’s liabilities have increased. EAGB’s current fiscal risks include an annual deficit of around 1.2 percent of GDP; guaranteed debt of 0.7 percent of GDP, and non-guaranteed debt of 2.6 percent of GDP. Overall, EAGB’s fiscal risks represent 4.4 percent of GDP or about 45 percent of tax revenue. 3.3.3. A narrow productive base continues to lock the country in a low equilibrium. 49. The economy remains concentrated in raw cashew nut, making it vulnerable to separate but simultaneous climate-related shocks as well as unpredictable shocks in the international cashew nut market. Guinea-Bissau’s economy remains predominantly rural, as smallholder traditional agriculture accounts for about 50 percent of GDP and employs more than 70 percent of the labor force- mostly poor people. The economy is concentrated in a single cash crop, raw cashew nut, and its structure has not changed in decades (see Box 3.4). The production of cashew nuts provides the main cash income for about two-thirds of households and generates 95 percent of the country’s foreign exchange. Services represent nearly 40 percent of GDP and employs about 20 percent of the labor force, including services indirectly related to cashew. 50. In contrast to comparable countries, the concentration of exports increased during the last five years and remains characterized by lost revenues. There is a negative correlation between the concentration of exports, growth, and volatility (Heiko 2008, Lee and Zhang 2022). Export concentration in Guinea-Bissau is higher than most countries at the same level of development as well as than its structural and aspirational peers (Figure 3.19). The country has the second least diversified export portfolio in Sub-Saharan Africa. Export concentration in Guinea-Bissau has increased over the last five year, while decreasing for structural peers (Figure 3.20). As a result, exports of raw cashew nuts account for 90-98 percent of total export earnings. Moreover, trade statistics point to a high degree of forgone revenues as trade mirror analysis highlights both the presence of ‘lost exports’ - i.e. cashew registered in Bissau for export but not in importers’ statistics suggesting that parts were diverted along the trade routes or not adequately registered when re-exported - as well as ‘orphan imports’- i.e. imports are reported by the importing country without the equivalent export by Guinea-Bissau. Figure 3.19. Export Concentration and Growth Figure 3.20. Benchmarking Export Concentration 0.80 0.66 0.57 0.60 0.40 0.32 0.24 0.21 0.20 0.15 0.00 Average 2012-2016 Average 2017-2021 Guinea-Bissau Structural Peers Aspirational Peers Note: This figure shows the Herfindahl-Hirschman index of export Note: This figure shows the average Herfindahl-Hirschman index for concentration in the Y-axis and the log a per-capita GDP in the X-Axis. Guinea-Bissau and peer countries for the periods 2012-16 and 2017- Each dot is a country. Green dots represent structural peers. Green 21. dots represent aspirational peers. The line shows the simple Source: Authors’ computation using the WDI data. correlation between the variables. Source: Authors’ computation using the WDI data. 2 Box 3.4. Understanding Cashew Sector Dynamics The cashew sector remains at the core of Guinea-Bissau’s economy, leading to significant macroeconomic and social impacts. Key factors influencing the sector, its impact on the most vulnerable, and missed opportunities for growth are described below. Major stakeholders. The cashew value chain consists of three main actors. The first is a large number of small family farmers that grow and harvest cashew nuts. The next is cashew traders, who buy from farmers, and then sell to exporters, most of whom are foreign nationals. There are a small number of exporters, with three enterprises from India accounting for over two thirds of the market. The bulk of nuts are exported in raw form. Both traders and exporters are relatively concentrated, meaning that competition is distorted to the disadvantage of farmers. In recent years, associations of smallholder farmers have been set up across the country, with a view of allowing them to better respond to market opportunities and pressures. Pricing. The government estimates farm gate prices at the beginning of each cashew season, which is used by farmers to sell to traders. These estimated prices tend to lie between 40 and 60 percent of the international price although they are not easily enforced. The price that exporters receive, after paying the export tax, is based on a government-set export reference price. While prices have been on a rise since the 1990s, they took a hit as the COVID-19 pandemic disrupted supply chains and processing capacities. Taxes. Cashew nuts are an important source of fiscal revenue, with cashew-specific taxes and fees estimated to directly generate about 10 percent of government revenue. These revenues include the export tax, an industrial contribution, a per kilo rural contribution, a sales tax on services associated with cashew production, a contribution to the Cashew National Agency, export licenses, and port charges. Impact on the most vulnerable. Due to cashews’ higher market value, its production has crowded out other farming products including subsistence ones. Thus, the country imports staple food. The effects of such dependence are critical and have a disproportionate impact on the most vulnerable. First, deteriorating terms of trade and falling international prices for cashew and rice impact the poorest people, particularly smallholders. Second, smallholders bear 80 percent of the cashew sector’s tax burden . Missed opportunities. While cashew exports have more than doubled since the start of the century, official cashew exports are believed to be underreported due to smuggling. Price distortions as well as heavy taxation of the sector are contributors to the heavy losses due to smuggling, especially when compared to neighboring countries. For example, trade data shows The Gambia exports a higher ratio of cashew nuts though formal channels, although it is only a marginal producer. Source: Adapted based on English 2011, Hanusch 2016, and IMF 2017. 3.3.4. Low productivity in the agricultural sector continues to preclude efficiency gains from international trade. 51. Agricultural land is the endowment with the highest potential, but a low level of public and private investment hinders its development. Progress in the sector has the potential to tackle both poverty and food insecurity. Agriculture can also be a catalyst to drive economic diversification via increased productivity. However, current trends invenstment are far from the desired. At 1 percent of GDP in 2019, public investment in agriculture is amongst the lowest in Sub-Saharan Africa and far below the 10 percent target of the Comprehensive Africa Agriculture Development Program. 2 52. Low productivity in agriculture is reflected in low yields of both raw cashew nuts and rice. The average raw cashew nut yield in Guinea-Bissau is 320kg/ha versus 520kg/ha in Côte d’Ivoire. Similarly, the average rice yield in Guinea-Bissau is 1.7t/ha versus 4t/ha in Senegal. Low productivity in the cashew sector is driven by: limited access to inputs and technology; lack of irrigation infrastructure, making it highly vulnerable to adverse climate shocks; lack of distribution infrastructure (e.g. storage facilities, rural roads); little capacity for agro-processing; and lack of access to finance. Financial intermediation is low and the banking sector is constrained by high levels of non-performing loans.20 Despite these constraints, most farmers continue to produce cashew over other crops – partly due to low labor intensity. This low- input-low-yield equilibrium, undermines the productivity of the sector and perpetuates poverty. 1.4 Sustainability21 3.4.1. Fiscal Risks 53. Limited fiscal space, constrained by low domestic revenue mobilization, heightened contingent liabilities, and high public debt, hampers the ability of Guinea-Bissau to tackle critical development challenges. Domestic revenue mobilization remains the primary challenge. The tax policy framework has been unchanged for decades, with the 12 percent personal income tax rate the lowest among peers. Further, the effective corporate income tax is undermined by numerous exemptions. Tax revenue fell from 11.2 percent of GDP in 2017 to 7.7 percent of GDP in 2020, mainly due to the decline in international cashew nut prices and sales, amplified by the COVID-19 pandemic. At an average of 20.5 percent of GDP between 2011 and2021, Guinea-Bissau's level of public spending lies between that of its structural and aspirational peers, but it fluctuates markedly. The fluctuations are primarily driven by the cashew nut harvest and international prices. Among other rigid spending categories, wages and salaries (augmented by various allowances) represent over 40 percent of recurrent spending, substantially higher than structural and aspirational peers. Implicit contingent liabilities related to loan guarantees in the energy sector are an imminent risk for fiscal sustainability. The increase in the debt to GDP ratio from 62.6 percent in 2016 to 78.5 percent in 2021, as well as the change in its composition, favoring non-concessional debt, further increases fiscal pressures. Based on high forecasts for cashew production and international prices, planned fiscal consolidation efforts, and a continued growth recovery, sustainability is expected to strengthen in the coming years, with the debt to GDP ratio falling to 70 percent by 2026. 3.4.2. Social Risks 54. Gender inequality is pervasive in Guinea-Bissau, showing the limited agency of women and girls, with major implications for development. Girls’ educational attainment from the secondary level remains lower than for boys and adult women are less literate than men. Primary school attainment among young women aged 15-19 years stagnated at 37 percent between 2010 and 2018 whereas it improved from 50.7 percent to 54.3 percent for their male counterparts. Apart from this gender gap, discrimination and social norms shape the terms of female labor force participation. Women are less likely than men to join the 20 Microfinance institutions that typically provide financial services for the excluded populations are practically inexistent. The rate of “bancarization” in the country stands at approximately 17 percent, of which less than 1 percent is achieved through microfinance institutions. There are only six microfinance institutions (taking deposits and providing credit) of which only two are operational. The other four are being restructured due to insolvency. The two active microfinance institutions are barely surviving as their margins are squeezed by interest rate caps and the increase in non-performing loans originated as a result of the global pandemic. 21 This section relies on Bejar and Reyes (2023). 2 labor force and work for pay. When they do, they are more likely to work part-time, in the informal sector, or in occupations that have lower wages. These disadvantages translate into substantial gender gaps in earnings, which decrease women’s bargaining power and voice. Many girls are married or have children before the age of 18, before they may be physically and emotionally ready to become wives and mothers. Women and girls also face high risks of gender-based violence, including genital mutilation. Their voice and agency are often lower than that of males, whether this is within the household, in the community, at work, or in national institutions. Women are underrepresented in public bodies and the coexistence of formal and traditional justice systems creates differentiated degrees of protection for women’s and children’s rights. Gender inequality affects children too. Children of young and poorly educated mothers often face higher risks of dying by age five, being malnourished, and doing poorly in school. Lack of agency for women contributes to high fertility rates and population growth, delaying the demographic transition and the benefits from the demographic dividend. 55. Additionally, the elite bargain prevalent in Guinea-Bissau undermines social inclusion, the process of legitimacy, and widens the disconnect between State and citizens. Widening inequality in access to basic services and opportunities, and uneven state presence across regions, exacerbate social risks and popular grievances. Furthermore, the elite bargain negatively impacts the efficient functioning of institutions, distorts the availability and allocation of resources for the provision of basic services and infrastructure in underserviced areas, thus excluding the majority of the population while creating further opportunities for rent-seeking. The presence of these risks is likely to affect social sustainability and undermine poverty reduction efforts and shared prosperity. 3.4.3. Environmental Risks 56. Guinea-Bissau is highly vulnerable to climate change impacts, stressing the need to urgently ramp up climate action. The vulnerability to climate change acts as a threat multiplier in the presence of preexisting fragility risks. The lack of governance and financing significantly reduces the capacity of the state to protect the environment and its natural resources, creating heightened vulnerability and exclusion. The intensification and scale of climate shocks will be particularly challenging with competing urgent development priorities and low capacity. Guinea-Bissau is the 4th most vulnerable country (out of 182 countries) and has the lowest readiness to the impacts of climate change, according to the Notre- Dame Global Adaptation Initiative (ND-GAIN) Index.22 Climate change is expected to have significant impacts and increase vulnerability in all economic sectors, including agriculture, energy, health, housing, water resources, and coastal areas. Future droughts will likely impact crop production and water availability. Climate variability can escalate the risk of diseases (e.g. malaria, meningitis) and can cause the emergence of infections and epidemics. Increased temperatures will worsen air pollution and heightened the threat of acute respiratory illnesses. These impacts can potentially harm long-term human capital accumulation. Heavy rainfall events occur often in the country and cause flooding that has severe impacts on infrastructure, agriculture, and public health. Increased temperatures and humidity will increase malaria transmission. Increased risks of flooding and coastal erosion could lead to the disappearance of biodiversity reserves and agricultural land on which cashew production is based. The country’s low-lying coastal areas make up 61 percent of the territory and are highly vulnerable to rising sea levels, stronger tides, and salinization of surface water and aquifers. They also host about 80 percent of the population, the bulk of the country’s economic activity, and much of the country’s limited existing infrastructure. 22 The ND-GAIN Country Index summarizes a country's vulnerability to climate change and other global challenges in combination with its readiness to improve resilience. It aims to help governments, businesses and communities better prioritize investments for a more efficient response to the immediate global challenges ahead. https://gain.nd.edu/our-work/country-index/ 2 4. BINDING CONSTRAINTS TO GROWTH, INCLUSION, AND SUSTAINABILITY 57. The SCD Update identifies four core interconnected areas of binding constraints. These are: (i) institutional fragility and weak governance; (iii) lack of inclusiveness and low rural productivity; (iii) low and unstable growth; and (iv) high vulnerability to external shocks. The 2016 SCD identified the first three constraints. The decision to keep these results from the update of the diagnostic framework (Chapter 3) as well as external and internal consultations (Annex 2). They reflect the evidence that progress toward the World Bank’s twin goals has been modest and, in some cases, reversed, partially due to the impacts of the COVID-19 pandemic and higher international food and fuel prices. Furthermore, this Update adds a fourth binding constraint reflecting the country’s vulnerability to exogenous economic and climate- related shocks. The high and increasing dependence of the economy on cashew production, the major economic and social impact of the COVID-19 pandemic and heightened inflationary pressures, and the fact that climate events have become more common and of higher magnitude, warrant the inclusion of the high vulnerability to external shocks as a stand-alone binding constraint for the development of Guinea-Bissau. 1.5 Institutional Fragility and Weak Governance 58. Guinea-Bissau’s development remains constrained by an overarching environment of endemic institutional fragility as well as a situation of state capture by elite interest groups (as described in Section 3.1). These dynamics have been especially pernicious as they are highly unstable, rely on illicit and unproductive rents, and result in the exclusion of large segments of society. Stemming from these dual overarching dynamics, a number of specific public sector challenges have emerged, which have created a negative feedback loop between weak governance and stalled development. From a supply side perspective, poor public financial management practices, inefficient human resource management, and the virtual absence of the state at the local levels have created opportunities for public and private actors’ rent seeking and have impeded the provision of government services for citizens. Likewise, from a demand side perspective, a lack of government transparency as well as formal and informal public accountability mechanisms have undermined civic participation, rule of law, and oversight of public institutions—further limiting incentives to improve the delivery of public services. 1.6 Lack of Inclusiveness and Low Rural Productivity 59. Faster economic growth alone will not be enough to bring significant improvements in the living standards of most Bissau-Guineans (see Section 3.2). Between 2010 and 2018, the average GDP growth rate was 3.9 percent. Yet, rural poverty (based on the national poverty line) increased from 58 percent to 63 percent. Underlying the lack of inclusiveness of growth is a low and unequal allocation and utilization of the endowments (human, physical, and natural capital) that are critical to raise productivity and the income generation capacity of households. The assessment of the equity conditions reveals two pervasive and reinforcing mechanisms that perpetuate poverty and inequality. First, the low and unequal allocation of human and physical endowments limits the income generation capacity of poor households. Second, the low and unequal access to basic services, such as clean water, sanitation, digital and electricity, coupled with failures in critical input markets, poor infrastructure, and natural resource depletion, constrain the productivity of rural residents. Certain groups, particularly women and youth, are also disadvantaged in the allocation and utilization of resources, as well as in employment opportunities. 2 1.7 Low and Unstable Economic Growth 60. Growth in Guinea-Bissau has been low and needs to be accelerated and sustained to make a dent on poverty and shared prosperity (see Section 3.3). As indicated by comparably low GDP growth in recent years, the structure of Guinea-Bissau’s economy has changed little over the last decades. Services now contributes to over 40 percent of GDP growth and employs about 20 percent of the labor force. Nevertheless, the agricultural sector continues to employ more than 70 percent of the labor and contributes about 30 percent to GDP growth. Thus, growth and employment performance remain excessively reliant on the production and export of unprocessed cashew nuts, which are concentrated in the part of the global value ladder focused on harvesting and exporting raw products, and thus face large swing in prices. The production of cashews engages more than 75 percent of small farmers, underscoring the tight connection between rural incomes and movements in farm gate prices or production levels, especially for poor people. Last but not the least, inadequate infrastructure –notably electricity, roads, and telecommunications– and a poor business environment are major deterrents to investment and private sector-led growth. For example, electricity tariffs are one of the highest in Sub-Saharan Africa. 61. The impact of the COVID-19 pandemic and global geopolitical tensions has increased the vulnerability of the economic model. Increased fiscal financing needs were reflected in rising public debt, which reached 79.4 percent in 2022, and is currently classified as being in high risk of external debt distress. Additionally, fiscal risks linked to the financial and energy sectors are exacerbated because of international financial tightening and high international oil prices. Consequently, the budget - already very rigid due to an oversized wage bill - has no space to support a counter cyclical fiscal policy that would reduce the volatility of the economic cycle 1.8 High Vulnerability to External Shocks 62. The country’s high exposure to exogeneous economic and climate-related shocks disproportionally affect poor people, exposing them to the risk of poverty traps and jeopardizing the sustainability of the growth model (see Section 3.4). Climate variability and extreme weather events exposes poor households that are predominantly engaged in rain-fed agriculture to the risk of being trapped in poverty. Due to low capacity to mitigate the effect of the shocks, these households are often less resilient and more likely to be exposed to climatic events due to the characteristics and geographic locations of their dwellings. Additionally, economic shocks that impact the cashew market, such as increased international transportation costs caused by the impact of the COVID-19 pandemic or higher prices of fertilizers triggered by Russia’s invasion of Ukraine, also disproportionally affect the most vulnerable households. 2 5. POLICY PRIORITIES AND HIGH-LEVEL OUTCOMES 1.9 Prioritization Process 63. Within each binding constraint, this Update revisits the prioritization process conducted in the 2016 SCD to refresh the list of Priority Policy Areas (PPAs) (Figure 55.1). The prioritization process was based on the principles of transparency and contestability. It was also informed by internal and external consultations (Annex 2) as well as the results of 2021 Public Opinion Survey (Annex 3). It relies on a thorough review of new evidence (Chapter 3) as well as findings from the consultations with government, civil society, and private sector representatives. For each binding constraint, the analysis evaluates the policy areas and their priority through a three-step process. First, the team revised the relevance of the 2016 SCD policy areas in the current context. Second, the team weighed the relative importance of new policy areas considering recent analytical work and latest developments (the COVID-19 pandemic, rising global prices, national political events, and the external environment). This step led to the inclusion of new policy areas that were not considered in the 2016 SCD. Third, the team selected PPAs according to four criteria: (i) poverty reduction impact; (ii) political and institutional feasibility ; (iii) traction (ability of the policy action to deliver results in the short and medium term); and (iv) cost and affordability. Figure 55.1. Three-Step Prioritization Process for the SCD Update Review New Policy 2016 SCD Areas in Policy Areas updated Screening criteria: context • poverty reduction • feasibility Screening • traction of potential • cost and affordability Policy Areas SCD Update Priority Policy Areas 64. The definition of new PPAs under the Update does not minimize the importance of focus areas identified in the 2016 SCD – including social protection and financial inclusion. The changing development context means that some areas identified under the 2016 SCD are not indicated as priority policy areas in the Update. However, these areas remain relevant and are accounted for in the discussion of the HLOs given the links to the PPAs identified in this Update. Importantly, this Update provides additional strategies to help prioritize and program interventions (discussed in Chapter 6), including through: (i) lessening the overarching constraints of elite capture and fragility on development; and (ii) addressing nested constraints while considering political economy dynamics and non-technical barriers 2 to reform. Table 5.1 presents the binding constraints, the list of policy areas, and policy priorities. Annex 4 compares the PPAs in the Update with respect to those identified in the 2016 SCD. Table 5.1. SCD Update: Binding Constraints, Policy Areas, and Policy Priorities A. Low and Unstable B. Fragility and Weak C. Inclusiveness and D. High Vulnerability to Growth Governance Low Rural Productivity External Shocks (PPA1) Improve cross- (PPA4) Strengthen public (PPA7) Improve basic (PPA9) Support economic cutting economic and financial management service delivery, diversification by increasing production support practices and institutions to particularly on value addition in the services (electricity, roads, reduce opportunities for education, nutrition, cashew sector and telecommunications) to rent-seeking and capture.* health, and WASH.* promote the production of increase productivity and rice, cotton, fruit, and promote economic horticulture. * diversification. * (PPA2) Enhance domestic (PPA5) Increase formal (PPA8) Empower (PPA10) Improve natural revenue mobilization and accountability and women and the youth resource governance and the quality of public participatory mechanism for by increasing vocational disaster risk management. spending to promote a citizens, particularly for training and access to sustainable and equitable women. productive assets. fiscal policy* (PPA3) Strengthen the (PPA6) Improve human Improve market support Implement risk mitigation business environment by resource and wage bill services in the cashew policies such as adaptive reducing informality, management to support sector* social protection and increasing access to credit, efficiency and accountability climate-smart agricultural and attracting FDI* in public service delivery practices. Increase financial Strengthen regional state Reform land tenure and Develop a productive social inclusion* presence to mitigate political management systems safety net and institutional instability Notes: The column headers show the four binding constraints that hinder progress towards the WB twin goals. Policy options to tackle these constraints are listed after the first row. Priority policy areas are numbered and highlighted in gray. * Policy Actions identified as priority in the 2016 SCD. 1.10 High Level Objectives 65. Overcoming the binding constraints for making progress towards the WB twin goals through steady implementation of the PPAs leads to the definition of five High-Level Outcomes (HLOs). The achievement of these objectives is central to producing sustained improvements in the wellbeing of the Bissau Guineans. The identification of the HLOs is the result of the internal and external consultations informed by the analytical work undertaken for this Update. The analysis proposes five HLOs: (i) improved human capital; (ii) increased people access to infrastructure; (iii) improved provision of social services for citizens; (iv) strengthened households’ resilience; and (v) enhanced economic empowerment of women and youth. Each HLO encompasses multiple policy areas and, therefore, contribute to tackling different binding constraints for development ( 2 66. Table 5.2). 38 Table 5.2. High Level Objectives and Relationships with Priority Policy Areas High Level Objectives HLO1: HLO2: HLO3: Improved HLO4: HLO5: Improved Increased provision of Strengthened Enhanced human access to social services for households' economic capital infrastructure citizens resilience empowerment of women and youth PPA1. Improve cross-cutting economic and production support services (electricity, roads, telecommunications) to increase productivity and X promote economic diversification. PPA2. Enhance domestic revenue mobilization and the quality of public X X X spending to promote a sustainable and equitable fiscal policy PPA3. Strengthen the business environment by reducing informality, X X increasing access to credit, and attracting FDI PPA4. Strengthen public financial management practices and institutions to X X reduce opportunities for rent-seeking and capture Priority Policy Areas PPA 5. Increase formal accountability and participatory mechanism for X X citizens, particularly for women. PPA6. Improve human resource and wage bill management to support X efficiency and accountability in public service delivery PPA7. Improve basic service delivery, particularly on education, nutrition, X X health, and WASH PPA8. Empower women and the youth by increasing vocational training and X X X access to productive assets. PPA9. Support economic diversification by increasing value addition in the cashew sector and promote the production of rice, cotton, fruit, and X X horticulture. PPA10. Improve natural resource governance and disaster risk X X management. 39 HLO 1: Improved Human Capital 67. Human capital outcomes are very low, with widespread disparities between rural and urban households, which undermines the growth of household incomes over their lifecycle (Table 5.3). Despite mild, but steady, gains in literacy and mortality rates, Guinea-Bissau scored in the lowest quintile of the 2021 United National Development Programme (UNDP) Human Development Index , with an overall ranking of 177th out of 191 countries surveyed.23 Between 2015 and 2021, Guinea-Bissau’s ranking improved by only 0.01 points from 0.472 to 0.483. Although the country’s score reached 0.49 in 2019, it declined again to 0.483 in 2020 and stagnated in 2021. The decline is partly be driven by the COVID-19 pandemic. 68. Noticeable gains have been registered in education and mortality rates, multiple indicators register poor performance , especially among those living in rural areas and among vulnerable groups: • In education, literacy rates in Guinea-Bissau improved from 49.7 percent in 2010 to 55.4 percent in 2018. During the same period, attendance rates also , increasing by 9.1 percentage points in lower secondary and 8.8 percentage points in upper secondary schools. Despite improvements in some aspects of education, concerns about quality remain. For instance, the percentage of repetition in primary schools also increased from 14.1 percent in 2010 to 16.9 percent in 2018. Further, around 21 percent of children between the ages of 6 and 11 had never attended school. Late-entry, poor learning outcomes, and high repetition rates exacerbate primary net enrolment, which was only around 68 percent, and primary education completion rate was only 64 percent. This data indicates there is a significant part of the population that remains unprepared to work and enter the labour force. Rampant teacher strikes also contribute to the education sector's weak performance and the country's poor learning outcomes. In the 2015/2016 school year, more than 90 days of instruction time, over half of the entire school year, were lost due to teacher strikes. In 2018/2019, almost the entire school year was lost due to teacher strikes. As a result, the 2019/2020 school year started on time, with nearly no teacher strikes observed during that academic year. However, this positive outcome was short lived given the outbreak of the global COVID-19 pandemic. • In health and nutrition, Guinea-Bissau had a maternal mortality ratio estimated at 667 deaths per 100,000 live births, and a neonatal mortality rate at 35.1 per 1,000 live births in 2019. These rates h are among the highest rates globally and contribute to lower than the average life expectancy - about 60 years compared to 62.5 years for Lower Income Countries (LICs). Likewise, inequalities in child nutrition across wealth quintiles were pronounced resulting in high rates of stunting24 (28 percent in 2020) and wasting25 (7.8 percent in 2019). Poor health and nutritional outcomes in critical stages of life, such as infancy, have large negative effects on later years of life - particularly on human capital outcomes. 23 The Human Development Index ranges between 0 and 1. The index takes the value 1 only if a child born today can expect to achieve full health (defined as no stunting and survival up to at least age 60) and achieve her formal education potential (defined as 14 years of high-quality school by age 18). 24 Defined as percentage of children under age 5 whose height for age is more than two standard deviations below the median for the international reference population ages 0–59 months. 25 Defined as percentage of children under age 5 whose weight for height is more than three standard deviations below the median for the international reference population ages 0-59. 40 • In access to WASH, only 15 percent of households had access to potable water, and the rate of access water sources declined from 74.8 percent in 2014 to 66.8 percent in 2019. At the same time, only 10 percent of the population had access to public garbage disposal services and almost 75 percent of the population did not have access to improved sanitation, with open defecation still practiced by nearly 10.6 percent of the population. Table 5.3. Human Development and Service Delivery Indicators 2016 SCD 2023 SCD Update 2011 2015 Avg. 2011–15 Avg. 2016–19 2020 2021 Human Capital index 0.452 0.472 0.461 0.49 0.483 0.483 Literacy rate, adult total 49.7 45.58 NA 55.4 NA NA Population with no education (%) 47.2 NA NA 28.4 NA NA Primary school enrolment (%) 33.5 NA NA 35.1 NA NA Primary school completion (%) 62.2 NA NA 70.1 NA NA Mortality rate, under 5 109.1 92.1 100.2 84.1 76.8 NA Life expectancy 57.0 59.1 58.1 60.3 60.0 NA Stunting (%) 30 28.9 29.4 28.7 28.0 NA Sources: UNDP Human Development Index, WB WDI, and household surveys - ILAP 2010 and EHCVM 2018. Notes: Literacy rates for 2011 are based on ILAP 2010; for 2015- based on Multiple Indicator Cluster Survey 2014; and 2016- 19 based on EHCVM 2018. Adults are people ages 15 and above. Mortality rate is per 1,000 live births. Link to Priority Policy Areas 69. Moving out of poverty is slightly more likely among people living in urban areas and among non-agricultural households. Between 2010 and 2018, households in urban areas were more likely to have moved out of poverty than their rural counterparts. The inverse was true for rural households in this period. For instance, while rural households are 33.1 percent more likely to stay in poverty, urban households were only 18.8 percent more likely to stay in poverty. Furthermore, households in non- agricultural sectors (trade, industry, and other services) were more likely to have moved out of poverty during the same period. The persistence of poverty traps in rural areas is further evidence of the slow growth in agriculture during the period. Additionally, limited economic opportunities (especially in the non-farm labor market) further limits farmers’ ability to diversify their income sources and hence escape poverty. 70. This HLO requires reforms to improve education and health service delivery and facilitate access of women and youth to productive assets, especially in the rural areas. The following policies are central to achieve this objective. • Increasing resources and improving the quality of public expenditure especially in deprived areas is a priority (PPA2). Improving human capital requires public resources to effectively increase access to quality basic services, especially in deprived areas. However, public spending in the social sectors is low, misallocated, and volatile due to its aid-dependency (World Bank 2022). Social spending barely increased from 3.5 percent of GDP between 2010 and2013 to 5.7 percent between 2014and 2020. Since below-potential tax revenue limits fiscal space , over half of social spending was financed with external grants and loans. Nearly all of capital spending was donor funded. Spending quality is also a key constraint, as rapid growth in public expenditure in education between 2010 and 2020 is reflective of an an increase in the number of teachers and higher remunerations. Consequently, wage spending 41 in the education sector currently represents 42 percent of the wage bill but education outcomes remain very low. • Improved basic service delivery, particularly in education, nutrition, health, and water, sanitation and hygiene (WASH), is paramount to increase human capital and productivity (PPA7). In this regard, access to basic services such as education, electricity, water and sanitation remains limited and exclusionary- especially for poor people. Attendance rates have improved between 2010 and 2018- increasing by 9.1 percentage points in lower secondary and 8.8 percentage points in upper secondary schools; access to electricity improved from 6.1 percent to 15.8 percent; and access to water improved from 33.7 percent to 51.8 percent during the same period. However, poor households access to electricity remained constant at 4.7 percent while their non-poor counterparts’ access improved by 15.6 percentage point. Similarly, improvements in access to water is lower among poor than non-poor households (12.5 percentage point increase versus a 17.5 percentage point increase). Reforms in service delivery are required to tackle significant disparities in human capital outcomes, especially between rural and urban areas. Through these reforms, Guinea-Bissau will be better prepared to harness its demographic dividend, spur inclusive and sustainable growth, and incentivize opportunities for non-agricultural economic activities. • Empowering women and youth with increased access to productive assets would also contribute to raising human capital (PPA8). Although the recent poverty assessment found that on average female- headed households are less likely to be poor than male-headed households, at the individual level, the incidence of poverty is higher among females (especially those 25 years and older). Apart from multiple gender gaps, women in Guinea-Bissau still face significant barriers in accessing productive assets including land, credit, and education. Gender-based violence is pervasive, in their homes, at work, and in public spaces. Female genital mutilation is widespread and increased from 44.9 percent in 2014 to 52.1 percent in 2018/19 among 15-49 year old women (INE 2020) The existence of these challenges limits women’s productivity. Many girls are married or have children before the age of 18. Child marriage continues to affect more than one in five girls (aged 18-22). Women are underrepresented in public bodies and the coexistence of formal and traditional justice systems creates differentiated degrees of protection for women’s and children’s rights. Discrimination and social norms shape the terms of female and youth labor force participation. Women and youth are less likely than adult men to join the labor force and work for pay. When they do, they are more likely to work part-time, in the informal sector, or in occupations that have lower pay. These disadvantages translate into further gender gaps in earnings, which decrease women’s bargaining power and voice. Gender inequality affects children too. Children of young and poorly educated mothers often face higher risks of dying by age five, being malnourished, and do poorly in school. To achieve gender equity, improving education outcomes for youth male and females requires more than just facilitating access to schools and ensuring that they stay in school, but also addressing social norms which constrain women’s access to labor force participation and credit. HLO 2: Increased Access to Infrastructure 71. The malfunctioning of markets is severely undermined by the dire state of infrastructure, which undermines connectivity to jobs and markets - especially of rural dwellers, prevents private sector development, and reduces productivity growth (Table 5.4). Guinea-Bissau’s infrastructure is in a dire state, from the port to roads, electricity, and the Internet. The uncertainty sparked by political instability is a significant deterrent to private investment, particularly foreign direct investment. Nevertheless, the woeful state of infrastructure also plays a major role. With only 10 kilometers of paved roads per 100 42 square kilometers, the absence of adequate road transportation increases internal transportation costs, reduces economies of scale, and altogether precludes the connection of markets and people. Under- provision of energy also poses a critical constraint. Access to electricity is extremely limited and expensive, at US$ 0.50 per kWh, one of the highest rates in Sub-Saharan Africa. Only 14.7 percent of the population has access to electricity across the country with significant disparities remaining across regions (58 percent in urban areas and 4 percent in rural areas) and income levels. Similarly, businesses face significant challenges in accessing affordable communication services. The price of a monthly subscription for mobile broadband service represents 127 percent of monthly gross national income per capita—the second highest in the world. The deep-water port of Bissau is strategically important and handles the bulk of international trade, but its productivity is low and costs are high, making it cheaper sometimes to bring goods overland from The Gambia. I The port imposes high transaction costs on cashew exports as well as on imports of key commodities such as rice. The failure to provide these key public goods and services, either through direct public investments or through effective public-private partnerships, severely limits the ability of poor households to participate in economic activity. It also limits connectivity to markets, reduces the scope and incentives for income-generating opportunitie,s and undermines income growth critical for poverty reduction. Table 5.4. Investment and Selected Infrastructure Indicators 2016 SCD 2023 SCD Update 2011 2015 Avg. 2011–15 Avg. 2016–19 2020 2021 Gross investment (% of GDP) 10 8.2.3 8.9 19.2 20.2 21.6 Public investment (% of GDP) NA NA NA 3.0 3.8 6.3 Foreign direct investment (% of GDP) 2.3 1.8 1.9 2.0 1.5 1.5 Electricity access (% of population) 13.4 20.1 16.3 14.7 14.7 NA Individuals with internet (% of pop) 3.1 3.8 3.4 3.4 19.5 23.2 Mobile cellular subscriptions (per 100 46.2 63.2 59.4 76.2 95.2 109 people) Sources: World Bank World Development Indicators and International Monetary Fund. Link to Priority Policy Areas 72. Increasing people’s access to physical infrastructure is important for creating markets, fostering private sector development, supporting productivity gains, and improving consumer welfare. To achieve sustained high growth, public and private investments are needed in the infrastructure sectors. Given the long investment cycle of these projects, tackling political instability and institutional fragility is a pre-condition. Simultaneously, opening fiscal space, improving the design and execution of investment projects, and embedding natural resource management considerations in the design, execution, and maintenance of infrastructure are key elements to raise agricultural productivity and maximize the impact of infrastructure for development. The following policies complement each other. (i) Building physical infrastructures facilitates access to economic activities, thereby, increasing the productivity of the economy (PPA1). It is a priority to raise low levels of public investment and foreign direct investment, which represented only 3 percent of GDP and 2 percent of GDP between 2016 and21, respectively. The electricity and telecommunication sector are particularly vital. Electricity’s performance remains sub-optimal due to political instability, lack of planning, vested interests, lack of meaningful investments, fragmented donor assistance, and the poor management of the national utility company. Despite a high tariff rate of $0.50 per kWh, the state- owned utility company is unable to cover generation costs, and its financial viability depends on 43 annual government transfers. On telecommunications, limited international connectivity, and competition have led to elevated prices for internet access and low adoption. Guinea-Bissau requires a national fiber optics backbone and a politically, technically, and financially strong telecoms regulator. The country also needs proper legal and regulatory frameworks to digitalize the public sector, make digital public platforms interoperable, provide digital financial services, protect against cybercrime, and develop a digital skills strategy. Vital priorities for Guinea-Bissau are improving access to reliable and affordable digital services and electricity , especially renewable energy, together with water, transport, and marketing infrastructure. These processes should be supported by private-sector participation. (ii) It is important to improving the business environment to attract foreign direct investment in support of critical physical infrastructure development, particularly in an environment of modest fiscal resources (PPA3). The private sector can be a counteracting force to fragility and help to reverse its economic impact. Through public-private partnerships, private financing can enable critical infrastructure such as roads, electricity, and sanitation. However, the private sector in Guinea-Bissau is small and underdeveloped due to lack of institutional capacity, inconsistent public sector motivation, political instability, weak enabling environments, lack of private investment due to negative perceptions and myriad operational challenges such as lack of human and/or capital resources. Business environment reforms, whether regulatory, institutional, or administrative, are critical to improving the overall regulatory quality and effectiveness of the business environment. Reforms would remove barriers to entry and operation, reduce procedural complexities, and improve economic governance. (iii) Raising the efficiency of public investment with enhanced public financial management is a prerequisite for better infrastructure and sustained growth (PPA2 and PPA4). Public investment is more volatile than recurrent expenditure because it depends on external aid and is affected by weak governance and fragility. This volatility affects the execution of the public investment portfolio and hampers its efficiency. Public financial management challenges frustrate the implementation of public investment. For instance, some of the domestically financed projects may be incorrectly classified as current expenditures. The misclassification is explained by the absence of a rigorous process for investment expenditure decisions and comprehensive ceilings constraining current expenditure. Incorrect budget classifications can also reflect state capture. A key reform is to improve the country’s very limited capacity to appraise, select, implement, and monitor public investment projects. As no central unit within the MoF is tasked with appraising donor-funded projects, the minimal coordination among government entities, as well as between the government and donors/lenders, results in a significantly low execution rate for investment projects. (iv) Proper disaster risk management is needed to ensure resilience of infrastructure to climate shocks (PPA10). Secondary roads connecting rural areas to town centers often become unusable in the rainy season, affecting the ability of farmers to transport cashew production. Increased risks of coastal erosion may lead to the disappearance of biodiversity reserves and agricultural land on which the local economy is based. The country’s low-lying coastal areas make up 61 percent of the territory and are highly vulnerable to rising sea levels, stronger tides, and salinization of surface water and aquifers. 44 HLO 3: Improved provision of social services for citizens 73. Elite Capture and entrenched institutional fragility have resulted in weak government effectiveness in the provision of social services (Table 5.5). In the education sector, limited budget allocations, lack of transparency, and limited compliance with financial procedures have impeded improvements to service provision. At the same time, high staff turnover caused by political instability coupled with frequent teacher strikes, has severely undermined efforts to improve service provision and has negatively impacted both school attendance and quality of instruction. In the health and nutrition sector, key service provision challenges include insufficient quantity and quality of human resources and poor health infrastructure and equipment; low levels of health financing; weak health system governance, leadership, and organizational capacity; non-operational health information systems; and limited access to health inputs, such as drugs and vaccines. In the WASH sector, a lack of technicians, spare parts, logistics of mechanics, as well as underinvestment in basic infrastructure have resulted in a low functionality rate of hand pumps, poor water quality, and a non-functional sanitation system. Table 5.5. Governance Indicators (Percentile Rank) 2016 SCD 2023 SCD Update 2011 2015 Avg. 2011–15 Avg. 2016–19 2020 2021 Voice and Accountability 25.4 26.6 26.0 27.8 34.3 38.1 Political Stability and Absence of Violence/Terrorism 22.8 27.1 24.9 26.2 21.2 36.3 Government Effectiveness 13.7 3.9 8.8 4.9 7.7 8.2 Regulatory Quality 11.9 9.6 10.7 9.3 9.6 9.1 Rule of Law 6.6 6.7 6.7 7.0 6.3 6.7 Control of Corruption 10.9 2.9 6.9 2.9 7.2 7.2 Sources: World Bank Worldwide Development Indicators 2022. Link to priority policy areas 74. Weak institutional capacities for social service provision have had knock-on effects on service delivery outcomes. Despite some progress in improving access to education, around 21 percent of children between the ages of 6 and 11 have never attended school. Late-entry, poor learning outcomes, and high repetition rates exacerbate primary net enrolment, which is only around 68 percent, and primary education completion rate which is only 64 percent. These outcomes indicate that there is a significant part of the population that is unprepared to enter the labour force. With respect to health and nutrition, as of 2019, Guinea-Bissau had a maternal mortality ratio estimated at 667 deaths per 100,000 live births, and a neonatal mortality rate at 35.1 per 1,000 live births—which are among the highest rates globally. These result in a life expectancy lower than the average of 62.5 years for Lower Income Countries (LICs). Likewise, inequalities in child nutrition across wealth quintiles are pronounced, resulting in high rates of stunting (27.7 percent in 2019) and wasting (5 percent since 2010). Finally, with respect to access to WASH, only 15 percent of households have access to potable water and the rate of access to safe water declined from 74.8 percent in 2014 to 66.8 percent in 2019. At the same time, only 10 percent of the population has access to public garbage disposal services and almost 75 percent of the population do not have access to improved sanitation, with open defecation still practiced by 10.6 percent of the population. The following reforms complement each other in improving the government's capacity to provide social services and improve outcomes for citizens. 45 (i) Improving domestic revenue mobilization and the quality of public spending for a more sustainable and equitable fiscal policy (PPA2). A critical element to improving service provision is to enhance domestic resource mobilization channels. Improving domestic resource mobilization is an important determinant of the fiscal space needed to finance services, both in terms of capital investments and recurrent expenditures such as salaries. Currently, the tax-to-GDP ratio barely increased from 7.3 percent in 2014 to 9.1 percent in 2021 (and 8.4 percent of GDP in 2022). Tax collection remains well below potential and underperforms those of peer countries. An obsolete tax policy framework, in conjunction with weak enforcement, explains an estimated gap between tax revenue and potential of 7.6 percentage points (World Bank 2022). Key policies to boost tax collection include broadening the tax base, reducing exemptions, and continuing efforts to improve tax and customs administration. At the same time, budget allocations to social sectors at 6.0 percent of GDP are not only low as compared to peer countries in Sub-Saharan Africa but also misallocated. To close this gap, improvements in the allocation and efficiency of public expenditure are needed to increase the provision and the quality of resources available for service delivery. (ii) Enhancing PFM practices to improve expenditure quality, reduce rent-seeking, and curb capture (PPA4). Starting with the beginning of the expenditure chain, Guinea-Bissau’s budget preparation and planning process lacks transparency and coordination, which leads to a sub-optimal allocation of public resources. Rent seeking and elite capture are equally promoted through political blockages, with negative consequences on investments and spending execution for service delivery. Due to a partially functioning Integrated Financial Management Information System and the lack of a Treasury Single Account, budget credibility and execution are weak. They are further undermined by a lack of sufficient commitment controls resulting in significant extra-budgetary expenditures. In addition to weaknesses in public financial management IT systems, capacities for cash management, cash flow forecasting, procurement, as well as external audit and oversight practices remain weak—all of which diminish public spending efficiency and increase the scope for diversion of resources. In order to address this range of issues and support the effective provision of social services, comprehensive public financial management reforms are needed to ensure that resources are transparently executed and overseen. (iii) Improving voice and accountability mechanisms is critical for service delivery (PPA5). A lack of government transparency as well as formal and informal public accountability mechanisms undermine civic participation and oversight in the provision of public services. Government transparency is low in Guinea-Bissau, with shortfalls in public data reporting on service performance as well as fiscal transparency. While formal public accountability channels are weak, including the judiciary, the position of civil society is precarious. Both of these factors undermine opportunities for informal social accountability channels in service delivery sectors. In order to improve opportunities for citizen engagement in the service delivery process, CSOs, service beneficiaries, and citizens need to have access to transparent information on service performance as well as institutional mechanisms for two-way engagement and grievance redress. (iv) Improving human resource and wage bill management will support efficient frontline public service delivery (PPA6). Poor personnel management, inefficient allocation of human resources, and weak capacity impede service provision in critical social sectors. Unsustainably high levels of public sector compensation crowd out needed investments in infrastructure and supplies in service delivery sectors. At the same time, an inefficient allocation of human resources between sectors, has created a situation where the security sector and military personnel account for a disproportionately high percentage of public employment in comparison with those allocated to 46 service delivery sectors. Underlying these issues is a non-integrated Human Resource Information Management System as well as poorly administered pension system, which do not ensure effective controls in salary and pension payments. In order to strengthen human resource management for effective service provision, improvements are needed to payroll, pension, HR management systems, meritocratic recruitment, performance management processes, as well as capacity building of core government functions. HLO 4: Strengthened Households’ Resilience 75. Reducing the vulnerability of poor and vulnerable households to various unpredictable and simultaneous shocks is central for the sustainability of the development process. Hazard-related indicators for Guinea-Bissau are deteriorating (Table 5.6). A high dependence of livelihoods on a single crop, combined with the fact that climate-related shocks are becoming more common and larger in scale, make poor households n extremely vulnerable shocks affecting the cashew sector. Poor people are more likely to be employed directly in the cashew nut sector and live in highly vulnerable rural areas. Furthermore, the absence of fiscal buffers and social safety nets increases the susceptibility of poor people to external shocks. 76. Considering the increasing frequency and severity of climate change hazards and other simultaneous shocks, it will be important for Guinea-Bissau to adopt an Adaptive Social Protection approach. This approach should identify ways to strengthen social protection systems and enhance their preparedness for significant shocks, with a focus on building the resilience of poor and vulnerable households before, during, and after such events. In line with the Adaptive Social Protection framework, Guinea-Bissau should consider: (i) establishing a regular cash transfer program; (ii) creating a national registry that prioritizes the inclusion of high-risk households residing in “hot-spot” areas; and (iii) establishing a climate change hazard recuperation fund to ensure timely and accessible funding for response programs. Table 5.6. Hazard Indicators 2016 SCD 2023 SCD Update 2011 2015 Avg. 2011–15 Avg. 2016–19 2020 2021 ND Gain Index (out of 183) 137 178 170.4 180 180 NA INFORM Risk Index 4.3 4.2 4.2 4.1 3.8 3.8 Sources: University of Notre Dame and European Commission Note: The ND-GAIN Country Index summarizes a country's vulnerability to climate change and other global challenges in combination with its readiness to improve resilience. The overall Index For Risk Management (INFORM) risk index identifies countries at risk from humanitarian crises and disasters that could overwhelm national response capacity. It is made up of three dimensions - hazards and exposure, vulnerability, and lack of coping capacity. Link to priority policy areas 77. Reforms to improve the resilience of poor households are necessary to lower their vulnerability to shocks and minimize the risk of becoming trapped in poverty. Households can build resilience by harnessing opportunities to improve sources of income and strengthening the productivity of their children to minimize risk of poverty traps and promote inclusivity. As climate change continues to threaten the livelihoods of poor people, reforms to effectively build climate resilience are critical. The following policies support household resilience. 47 • A favorable business environment is instrumental to contribute to household’s resilience by providing alternative job opportunities outside the cashew sector (PPA3). A diverse and vibrant private sector helps to embed greater resilience through sectoral diversification, value chain integration, greater inclusivity by adopting inclusive business models, and improving access to goods, services, and markets for underserved groups or communities. Inclusivity and shared prosperity can serve to heal tensions and/or avoid conflict by mitigating grievances stemming from economic exclusion. • Empowering women and increasing their access to productive assets builds resilience (PPA8). Ownership of and access to assets further illustrates a non-monetary dimension of household wellbeing and indicates the extent of household resilience in the event of shock. According to the 2021 Poverty Assessment, poor Guineans have fewer assets than their peers in peer countries. Across- age groups, young women in particular, did not experience improvements in educational attainment when compared to their male counterparts between 2010 and 2018. Among poor people, social norms constrain women’s access to ownership of productive assets such as land, education, and entrepreneurship. Hence, empowering women and youth through enhanced educational attainment, vocational training and access to credit, is critical to enhancing their ability to fully mitigate the impact of shocks and reducing their vulnerability to poverty traps. • Fostering economic diversification protects livelihoods from shocks (PPA9). A comprehensive diversification policy is the cornerstone of resilient growth in Guinea-Bissau. The country has abundant resources and favorable climate conditions for cultivating a wide range of crops, but the concentration on a single crop exposes two-thirds of the population to production and market risks. Agriculture accounts for around 50 percent of GDP, employs more than 70 percent of the labor force, and is the main source of foreign exchange through exports of raw cashew nuts. Non-mechanized agriculture is the engine of the economy and the principal source of public revenue, but it remains trapped in a low-input, low-output equilibrium, including a high rainfall dependence. Reforms to promote diversification of agricultural activities are critical to building resilience. Connectivity can also incentivize rural dwellers to venture into non-agricultural economic activities to diversify income sources, attract investments to increase opportunities in the rural labor market, and promote the diversification of agricultural activities into horticulture or rice. • Improving natural resource governance and disaster risk management (PPA10). Strengthening institutional reforms to govern natural resource use and disaster risk management includes developing institutional structures to implement strategies for preventing the depletion of natural resource stock, implementing climate-resilience and adaptation policies, and enhancing social protection coverage. Effective implementation of these reforms will complement household coping strategies to strengthen their capacity and build their resilience against shocks. HLO 5: Enhanced economic empowerment of women and youth 78. The exclusion of youth and women from socio-economic opportunities contributes to the development of grievances (Table 5.7). On the one hand, unemployment is high among youth (around 12.8 percent), and the low intensity of labor utilization is evident among young and urban men. In 2010, 11.2 percent of male youth (ages 15-24) in Bissau were unemployed. The small size of the economy means that once students graduate, jobs are few. Vocational training is rarely available, and where such jobs exist, wages are very low. On the other hand, labor force participation is low at about 67 percent, especially among women. Even though women make up more than half of the population, they tend to 48 have reduced access to resources, including land and livelihoods, and limited opportunities to participate in political, economic, and social life. Economically active women are disadvantaged. Just over half of women are engaged in the labor market. Access to health care and education for women is also constrained. While there is relative parity between girls and boys in enrollment at the primary school level, there is still a large gender gap at the secondary level. The literacy rate of adult women is significantly lower than that of men - 30.8 percent and 62.2 percent, respectively. In addition, women are often victims of gender-based violence. 79. Because women tend to work in informal activities related to agriculture and small commerce, the COVID-19 pandemic further exacerbated gender inequality in earnings. As these activities were curtailed during lockdowns and school closures led to a higher burden of domestic care, the pandemic is likely to have affected women’s earnings disproportionally. Mobility restrictions and closure of markets also likely reduced their income. The pandemic also affected cashew exports and harvest, preventing rural women’s participation in the harvest (UNDP 2021). In healthcare, while men fulfill most of the administrative work, most nurses, midwives, and community health workers are female. Hence, women working in the healthcare sector faced heightened risk of exposure to COVID-19 (UNDP 2020); and vaccination rates have been higher for men than women (Mathieu et al. 2021). Confinement measures and higher stress levels are also likely to have increase gender-based violence, which in turn may have affected the ability of women to participate in the labor force and earn wages. Table 5.7. Labor Market Indicators 2016 SCD 2023 SCD Update 2011 2015 Avg. 2011–15 Avg. 2016–19 2020 2021 Labor force participation rate, 66.4 66.7 66.6 67.0 NA NA Youth unemployment rate 11.1 11.2 11.2 12.8 12.8 NA Link to priority policy areas 80. Expanding women's and youth participation in economic activity is key to improving their lives and essential for inclusive and sustained development. Guinea-Bissau could benefit from the demographic dividend over the medium-term if investment into the empowerment of youth and women is made now. This implies enhanced vocational training, better socio-economic opportunities, and improved access to productive assets. The following policy areas would support the country to achieve that objective: • Increasing accountability and reforming participatory mechanism for citizens, particularly for women in justice (PPA5). The justice sector is largely under-resourced and justice is practiced in Portuguese, potentially reducing access to justice for many Bissau-Guineans. The administration of justice is determined by social and financial status, thus reinforcing patronage networks and excluding vulnerable groups, particularly women and the youth. Gender-based violence is pervasive. A recent small-scale survey suggests that 97 percent of women had experienced gender-based violence in the last eight years, 86 percent of which was in their homes. Two out of three of these women never made a complaint to traditional authorities, religious leaders, or the police. Hence, raising women’s trust in the justice sector is a priority for their empowerment. Women are also underrepresented in public bodies and suffer from cultural and religious norms that perpetuate harmful and traditional practices, such as female genital mutilation . The 2012-2017 National Policy on Gender and Equality finds that women hold one third of government positions, and their share in ministerial positions and 49 in Parliament is low. More equal decision making would enhance women’s ability to shape the country’s development and prevent harmful and traditional practices. While traditional judicial institutions exist, they can be strengthened to complement formal judicial systems to effectively serve vulnerable groups such as women and children. • Improving basic service delivery would support women’s and youth empowerment(PPA8). On education, evidence suggests that pregnancy and early marriage are the most common reasons for girls to drop out of secondary school. Education can also make a difference in reducing female genital mutilation . As younger women receive more education, female genital mutilation tends to decrease. The share of girls ages 15-18 who were circumcised (almost half of them) was marginally lower than the corresponding share for older women (Onagoruwa and Wodon 2018). The lack of proper sanitary facilities and long distances to school are also thought to be critical barriers to educational participation, especially for girls. For example, 14-20 percent of poor children must travel 60 minutes or more to reach school. • Vocational training and enhanced access to land and credit is a priority to empower women and the youth (PPA8). Women make up around 27 percent of the formal sector and are less likely than men to work in senior or skilled positions. Women are also disadvantaged in terms of access to land and livelihoods, which constrains their participation in cash crop markets and reduces their agriculture productivity. They have less access to agricultural inputs andincentives to invest in land remain low, due to insecure land rights that perpetuate inequities. 26 Because of their lower educational attainment and social norms, they are much less likely to earn a wage, as most women are self- employed in activities that have limited returns. Overall, women account for only 21.2 percent of total wage earnings whereas men account for the other 79.8 percent. • Economic diversification would enhance women’s empowerment (PPA9). Even though half of the workforce in the cashew sector is female, women do not benefit from the economic returns and they tend to be at the bottom of the value chain. Expanding production opportunities to other sectors for which the country has a latent comparative advantage, such as rice and cotton production, could expand job opportunities for women and the youth. 26 Around 80 percent of land parcels in Bissau are not registered. 50 6. STRATEGIES FOR THE IMPLEMENTATION OF POLICY PRIORITIES 81. While Guinea-Bissau’s binding constraints are deep-rooted—being the result of decades of institutional, social, and political evolution—potential ways to break negative feedback loops exist. As noted, the extent of state capture, including the inclination towards corrupt practices, is perpetuated by a combination of variables. These variable include (i) incentives generated by weak economic, regulatory, and fiduciary governance; (ii) high degrees of discretion in decision making; and (iii) low threat of sanctions. As a result, policymaking has effectively been short-term in nature, affected by power asymmetries, and bargaining amongst interest groups such as political parties, the armed forces, and the private sector. While additional political economy analysis would need to be conducted to understand how these stakeholder groups would respond to specific reform areas at sectoral levels, this section puts forth two strategies, which can contribute to reducing the short-term nature of decision making and elite bargaining in an effort to implement the PPAs and to increase their probability of success. Strategy 1: Lessening the Overarching Constraints of Elite Capture and Fragility on Development 82. Increasing the "pie" to create positive spillovers while ensuring that elites' interests are not affected. As noted above, the current elite bargain in Guinea-Bissau has the following characteristics: (i) it is unstable, as it drives the exclusion of a large swath of the population and among the elite network, therefore triggering violence and instability; (ii) it is unsustainable, as it depends on illicit and unproductive rents and a system that counters the country's economic interests; and (iii) it is failed, as it does not accommodate cleavages. Currently, political disputes are fueled by a struggle for the control of state power to secure access to resources. Allegiances between elites are shifting, opportunistic, and include personal rivalries and conflicts. To move away from a rentier economy that relies on illicit markets, Guinea-Bissau needs to create viable private sector opportunities where elites productively engage in activities with positive social spillovers. Grand bargaining between groups that have captured the economy can help mitigate competition over power and resources, including illicit economies. Such an approach could be accepted by key stakeholder groups to the extent that it would increase the quantum of potential resources available. Increasing resources can help in reducing zero-sum calculations, excessive competition, and short-term decision making. In doing so, it would also provide opportunities to simultaneously direct resources to other segments of society. 83. Selectively improving high-demand services from the public and private sectors, while gradually decreasing discretion in public administration to reduce opportunities for rent seeking and capture. Space may exist for such reforms insofar as they are not so ambitious that they trigger backlash from established elites. Reforms should nevertheless aim to decrease the level of discretion within the public sector over time, while increasing accountability to close off entry-points for capture. For instance, improved usage of IT systems can narrow the breadth of discretion, as does process simplification and re- engineering. Simultaneously introducing economic and administrative efficiencies can increase transparency and reduce incentives for illicit practices. Likewise, improving the most popular or essential services for the public can result in increased demand for reforms from across groups. In turn, this increase in demand can incentivize public sector entities to implement further reforms. Such areas of intervention may include key social sectors (e.g. health, education, and WASH) as well as those relevant to support private sector development and attract domestic and foreign private investment, including in transport and electricity. 84. Supporting the institutionalization of public accountability mechanisms, including access to information, access to justice, and rule of law. A culture of impunity has been perpetuated by several 51 factors, including a lack of: (i) access to information and fiscal transparency to allow public officials to be held accountable; (ii) access to justice for both individuals and private sector actors, including the enforcement of property rights; and (iii) judicial capacity and independence. As a result, impunity for political, military, and business elites and opportunities for state capture have increased. Concurrently, this has negatively impacted access to justice and judicial remedies for both individuals and private sectors actors. It has also undermined rule of law more generally. While these issues are difficult to tackle in the short term, incremental improvements can be made to: (i) improve access to information, including administrative and fiscal data; (ii) support the capacity of justice sectors actors, including judges and public prosecutors, to reduce administrative backlog; and (iii) fill gaps in the institutional set-up in the judicial sector in line with the law. Regarding the latter, the law provides for the creation of nine regional courts as well as the existence of a Constitutional Court, which impacts political stability given that constitutional interpretative issues have been at the center of political upheavals in the past. To increase buy-in for such reforms, elite stakeholders should be actively engaged in the incremental development of such public accountability reforms, which can ultimately increase political support, legitimacy, and stability. Strategy 2: Addressing Nested Constraints while Considering Political Economy Dynamics and Non- Technical Barriers to Reform 85. Understanding political economy dynamics to identify strategic entry points to reform at the sectoral levels. Previous political economy and fragility analyses in Guinea-Bissau have highlighted patterns of elite-capture and rent-seeking behaviors to control access to resources and power. Accordingly, designing reforms at a sector level would require focusing on technical issues within the sector via a pragmatic and sequenced approach. To achieve this, a prior analysis of key stakeholders’ power incentives as well as the sensitivity of the sector to be reformed is warranted. For instance, if the stakeholder analysis reveals that one powerful group derives rents from the sector and is in opposition to any reform attempt, then even the most solid technical solution will not lead to the desired outcome. In order to effectively engage elite stakeholder groups, it is necessary to alleviate these political economy bottlenecks by better understanding and aligning incentives as well as through developing adaptive solutions, including : (i) conducting stakeholder mapping exercises (e.g. NetMap) ex ante for sensitive reform areas; (ii) employing change management, coaching, and communications initiatives in a strategic manner; and (iii) rolling out sensitive reforms gradually with an aim to demonstrate quick wins and build on positive results. 86. Supporting institutional coordination and rewarding results to overcome complex stakeholder incentives. As a result of cleavages among elite actors, critical impediments have emerged with respect to institutions coordinating with each other to reach objectives that serve the common good. To increase elite support for such reforms, it is necessary for donor partners to provide financing in a strategic manner that overcomes zero-sum decision making and other disincentives for cooperation. This can include the development of a government strategy that outlines the necessary high-level reforms needed to transition out of fragility, which could sustain the push for structural reforms.27 In addition, by introducing results-based mechanisms into donor-funded projects, including linking projects disbursements to the achievements of specified results, additional incentives for inter-institutional cooperation can be reinforced. Finally, coordination among donors can help ensure that donor resources are strategically aligned and maximize impact. The creation of a budget support group that coordinates reform efforts and is supported by different budget support operations is one option. 27In this regard, support could be provided for Guinea-Bissau to meet the eligibility requirements for an International Development Association Turn Around Allocation, which could incentivize results, push for reforms, and policy dialogue. 52 87. Diversifying the categories of stakeholders engaged—including the role of civil society, faith- based organizations, and traditionally marginalized groups—to enhance oversight and contestability. Currently, many private sector, civil society, and political parties actors compensate for the deficiencies in public service delivery, because those services are often captured by the elite. This is underscored by the 2020 Risk and Resilience Assessment, which highlights the importance of civil society as a potential resilience factor, given the key role it plays in providing services to local populations, particularly in rural areas. To harness the power of demand-side actors, investing in civil society is critical, as it contributes to oversight and can further raise expectations with reform outcomes. To do so, it will also be necessary to support a broader ecosystem of non-governmental actors, including CSOs, academia, think tanks, media, and citizen-leaders to ensure an added layer of oversight of government performance. Efforts could also be made to develop relevant stakeholder fora and events where demand side actors can engage directly with government officials through public consultations on new policies and strategies. Additionally, technical assistance can be provided for benchmarking and/or membership in international transparency and accountability initiatives, including the Open Budget Partnership, the Extractive Industry Transparency Initiative, and the Open Government Partnership. 53 7. KNOWLEDGE AND DATA GAPS 88. While the main findings of the Update are robust across the existing quantitative and qualitative sources, several knowledge and data gaps constrained the analysis. The preparation of this Update has identified of the following remaining knowledge gaps, both in terms of data and analytical, that need to be filled to facilitate more evidence-based policy making in Guinea-Bissau. This information would also be useful for the World Bank and other development partners to provide more targeted support. The main data weaknesses identified in this update are: • Despite the detailed analysis presented by the Update of the evolution of poverty and shared prosperity indicators up to 2018, it is important to update the national household survey to properly account for the impact of the COVID-19 pandemic and the spill over effects of Russia’s invasion of Ukraine on poverty and social outcomes. • Given the pressing needs to diversify the production base, more analysis is needed on the most appropriated diversification strategies given the overarching constraints of political economy, fragility, and the business environment. The potential role, and effectiveness, of public policies aimed at attracting foreign direct investment to support the diversification process is particularly important. • The production of national accounts remains weak and obsolete. The latest official version of GDP figures from the National Statistical Office is available only until 2017. The publication of the national accounts for 2018-2020 is delayed. There are no official quarterly estimations of GDP growth. The lack of basic information of macroeconomic performance greatly limits macroeconomic surveillance. • Credible and timely fiscal information is needed. Improvements in at least three types of information would greatly help the country in improving fiscal policy. First, an updated Public Expenditure and Financial Accountability assessment for measuring public financial management performance. Second, social sector-specific data on outputs and outcomes; particularly on health, education, and energy. Third, fiscal data classified according to policy purpose (program/activity). Measuring the relationship between inputs and outputs, and between outputs and outcomes would help assessing spending efficiency and effectiveness of public expenditure. Disaggregated data at the sub-national level would also be needed for more comprehensive analysis. • The interplay between risk management mechanisms and production choices of rural households, especially poor people, remains a central knowledge gap. Given the increased vulnerability to climate change, understanding this interaction is crucial for the sustainability of long-term growth because household’s informal risk management influences their welfare. • While the SCD Update provides strategies for selecting reform areas and addressing political economy dynamics, including rent seeking and state capture, additional analytics would be needed in the future to determine elite support for particular reform areas. Such stakeholder mapping exercises (e.g. NetMap) are sector specific and would entail a detailed analysis of interests and positions as well as the influence of relevant stakeholders involved in the process. • The strategy for tackling the sources of fragility and state-capture to prevent reversals in poverty reduction gains remains critical for development. This includes further understanding how to maintain critical development support in the context of recurrent political instability. 54 REFERENCES African Development Bank. 2015. ‘Guinea-Bissau: Applying the Fragility-lens to inform the Bank’s strategic and operational reengagement.’ African Development Bank, Abidjan, Côte d’Ivoire. Aisen, A. and F. J. Veiga,. 2013. ‘How does political instability affect economic growth?’ European Journal of Political Economy, 29 (2013): 151-167. Arvanitis, Y. and M. Weigert. 2017. ‘Turning resource curse into development dividends in Guinea-Bissau.’ Resources Policy, 53 (2017): 226-237. 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University of Birmingham, Birmingham, UK: 56 ANNEX 1: DEFINITION OF PEER COUNTRIES This Update features a systematic benchmarking exercise using a pre-identified list of structural and aspirational peer countries. When possible and relevant, the analysis also benchmarks Guinea-Bissau against its WAEMU counterparts (Republic of Benin, Burkina Faso, Republic of Côte d’Ivoire, Republic of Mali, Republic of Niger, Republic of Senegal, and Republic of Togo), which the government often looks to for policy inspiration, and Sub-Sahara Africa. Structural peers are defined as fragile countries that have similar structural characteristics (population, GDP per capita, contribution of agriculture to economy, life expectancy, trade composition, and government revenue) to Guinea-Bissau. This group includes Burundi, Central African Republic, The Gambia, and Sierra Leone. Aspirational peers are countries that have set a good development precedent and which Guinea-Bissau may aspire to emulate: Laos, Rwanda, and Tajikistan. These countries have been able to grow much faster than Guinea-Bissau, despite their similar initial structural conditions. Income Population GDP percapita Agriculture size Life expectancy Merchandise trade Fiscal revenue Country Region Classification (million) (constant 2015 US$) (% of GDP) (years) (% of GDP) (% GDP) Guinea-Bissau Low SSA 2.1 613.9 30.9 60 34.8 12.4 Structural Peers Burundi Low SSA 12.5 261.0 28.7 62 42.7 15.8 Central African Republic Low SSA 5.4 370.7 30.1 55 29.9 9.5 The Gambia Low SSA 2.6 666.5 22.4 63 31.3 19.4 Sierra Leone Low SSA 8.4 615.3 57.4 60 61.8 -- Aspitational Peers Lao PDR Lower-middle EAP 7.4 2,566.3 16.1 68 74.2 18.2 Rwanda Low SSA 13.4 890.2 24.1 67 40 21.4 Tajikistan Lower-middle ECA 9.7 1,279.6 24 68 72.7 13.5 Note: Latest value is repoterd. The agriculture sector also includes forestry and fishing. Fiscal revenue excludes grants. Source: MFM Find My Friends tool and World Development Indicators 57 ANNEX 2: CONSULTATIONS FOR THE SCD UPDATE The prioritization of the policy actions for the Update was informed by two rounds of external consultations. The first set of consultations, organized between March 21-25, 2022, included government representation from various ministries within the government, representatives from civil society organizations, the private sector, academics, and other development partners. The objectives of these discussion were to (i) validate the main development challenges identified by the analysis and (ii) discuss the binding constraints for Guinea-Bissau to progress towards the World Bank’s twin goals. There were four main findings of these consultations. First, the binding constraints identified in the 2016 SCD remained valid. Second, the inclusion of the new constraint related to the vulnerability of the economy to external shocks was warranted, given the impact of the COVID-19 pandemic. Third, the key policy priorities to tackle the biding constraints were identified as critical for the medium-term development agenda of the country. Fourth, the identification of the five HLOs was the resulted of team discussion conducted during the consultations. The second set of consultations organized on February 27th 2023 had the objective to validate the findings of the Update with high-level policy makers and representatives from Development Partners. The team discussed the key findings of the SCD with the Vice-Prime Minister; the Minister of Finance and his team; and the Minister of Economy and his team. A meeting with the Ambassadors of France and Portugal, as well as high representatives from the International Monetary Fund, the European Union, UNDP, United Nations Children's Fund, and other United Nation’s agencies was also organized. Finally, a discussion with technical teams at director level from several line ministries took place. Overall, stakeholders expressed positive feedback on the content of the SCD update. There was a broad agreement that, at a meso-level, improving agricultural productivity and markets is central to making a dent in poverty reduction and, at the macro level, to building resilience of the economy through less reliance on single crop. The topic of diversification featured centrally in the debate. Reforms to improve backbone services, including energy and water provision, in conjunction with the need to implement policies to attract foreign direct investment to support the gradual diversification of the economy was discussed. The importance to free-up fiscal space through wage bill reforms was also discussed. 58 ANNEX 3: SUMMARY OF THE 2021 PUBLIC OPINION SURVEY In May 2021, the World Bank conducted a survey of 350 stakeholders in Guinea-Bissau to gain a better understanding on their perception of the economy and main development priorities. The key findings of the survey that informed the prioritization exercise are as follow: • Main development challenges: Education (63%), health (45%) and public sector governance (23%). • Main drivers of fragility: Political uncertainty and instability (42%), corruption (38%), and weak institutional capacity (36%). • Main reason why reform efforts fail: Corruption (55%), conflict and instability (46%), political pressures (28%). • Greatest value of the World Bank? Financial resources (32%), technical assistance (30%) and capacity development to implement World Bank projects (20%). • Order of perceived effectiveness of areas supported by the World Bank? Energy, information and communications technology, education, water and sanitation, food security, and agriculture, and rural development. • Future areas where World Bank should focus efforts: Education (56%), health (32%), agriculture (24%) and public sector governance (23%). • Groups with whom the World Bank should collaborate more: Private sector (40%), non- governmental organizations/community -based organizations (32%), youth (29%), local governments (21%). 59 ANNEX 4: COMPARING PRIORITY POLICY ACTIONS IN THE SCD AND THE UPDATE 60