GUINEA-BISSU,S ECONOMY IS GROWING DESPITE WEIGHT

C O N F I D E N T I A L SECTION 01 OF 02 DAKAR 000831 SIPDIS SIPDIS STATE FOR AF/EPS, EB/IFD/ODA AND AF/W TREASURY FOR SONJA RENANDER E.O. 12958: DECL: 04/05/2016 TAGS: ECON EFIN EAGR EINV MARR PU SUBJECT: GUINEA-BISSU,S ECONOMY IS GROWING DESPITE WEIGHT OF MILITAR AND CIVIL SERVANT SALARIES; WILL OIL TRANSFORM T? Classified By: CDA Robert P. Jackson for reaons 1.4 (b) and (d). ¶1. (C) SUMMARY: American and British oil companies have drilled two exploraory oil wells in shallow Bissau-Guinean waters; wo more will be drilled by the end of 2006. If oi is found, it could transform Guinea-Bissau,s agiculturally based economy. The GOGB is optimistic, and President Vieira asked Charge and PolOff for U.S. advice on managing potential oil wealth. The IMF and World Bank project real GDP growth of 4.2 percent in 2006, with cashew production reaching 120,000 tons. Two donors meetings are planned for 2006. Investment in industry and tourism could have a significant long-term impact, but continued political stability is critical to Guinea-Bissau,s economic prospects. END SUMMARY. ¶2. (C) On March 29, Charge and PolOff attended the joint International Monetary Fund (IMF)/World Bank debrief on Guinea-Bissau,s economy. The joint IFI team concluded that the economy grew 3.5 percent in real terms in 2005, principally due to growth in the agricultural sector. Growth could reach 4.2 percent in 2006, but a lack of investment, especially in industry and tourism, continues to restrain the economy. Inflation was 3.4 percent in 2005, mainly due to imports. Exports were up and receipts were up. IMF ResRep Ousmane Dore expressed concern about government borrowing from banks to pay salaries. The deficit declined from 15 to 12 percent of GDP in 2005. Internal debt amounted to about 14 billion CFA francs (CFAF) (USD 28 million),and external debt, excluding debt to multilateral development banks equaled 8.3 billion CFAF (USD 16 million). The team concluded that accounting and customs collections require strengthening. The team underscored concern about 75 percent of the budget financing salaries, noting that 11 months of salary arrears from 2002 and 2003 account for over 90 percent of the 2006 financing gap of 14 billion CFAF (USD 28 million). (NOTE: The salaries pay 12,000 civil servants and between 3,000 and 26,000 soldiers and sailors. A military census is to be completed by June and is expected to show that the armed forces currently have about 4,500 men under arms. END NOTE.) The team was unable to estimate the budgetary impact of the March/April Bissau-Guinean Armed Forces attacks on Movement of Democratic Forces of the Casamance bases in northern Guinea-Bissau. A mini-donors roundtable on the financing gap and security sector reform is set for May or June, and a major donors conference is planned for late 2006. ¶3. (U) Cashew exporters anticipate a crop of 120,000 tons in 2006, but they worry about declining U.S. consumption, which has caused the world price to fall. Other businesspeople we met are similarly upbeat. All acknowledge that continued political stability is essential for economic growth, and they urged the United States to reopen its Embassy in Bissau as a sign of confidence in the Government and the private sector. The business community also hopes that debt relief may be forthcoming. ¶4. (C) The big economic issue is oil exploration. British-owned Premier Oil and U.S.-owned Occidental Petroleum have drilled two exploratory off-shore wells and will drill two more in 2006. They believe there is a &potential for large prospects.8 They will know fairly quickly whether they have a commercially viable project if they hit something big. The big problems arise when they get a "tweener" well which might be viable and might not. The area is fairly prospective although not nearly as good as Nigeria/Angola. The GOGB thinks the potential is great enough that President Vieira requested that we provide model legislation and regulations on how to manage new-found oil wealth and thus avoid some of the mistakes that other countries have made. The Embassy has requested information from the World Bank Institute and would welcome the Department,s suggestions. ¶5. (C) COMMENT: Petroleum could have an enormous impact of Guinea-Bissau,s economy )- just as it has had on Chad, Cameroon, Equatorial Guinea and Sao Tome and Principe,s in recent years. The good news is that it may not only be there but that the GOGB is seriously thinking about how to manage it. Before everyone starts jumping for joy, however, oil experts tell us that following a viable offshore discovery, DAKAR 00000831 002 OF 002 it can take four or more years to install production facilities. In fact, in a place like Guinea-Bissau, it could take a lot longer as there is no really usable infrastructure to support a deepwater operation. END COMMENT. JACKSON