Guinea-Bissau has one of the least developed economies in the world. The economy relies mostly on agriculture. Nearly 80 percent of the workforce is engaged in agriculture; most work on small family farms and some work as laborers on cotton or cashew nut plantations. The production of cashew nuts is vital to the economy, making up 70 percent of the country's total exports. The gross domestic product (GDP) grew by 4.7 percent per year in between 1995 and 1997, compared to 2.6 percent between 1993 and 1994. However, the civil war caused output to fall by 28 percent in 1998, with the industry and services GDP output falling by 40 percent. This decline was a serious setback, as Guinea-Bissau was already one of the 15 poorest countries in the world.
The economy of Guinea-Bissau has not performed well in recent years. Output has increased less rapidly than population, and average living standards have fallen. But development in its widest sense involves more than just income, and in that sense Guinea-Bissau also suffers. The United Nations (UN) includes education and health as well as income in its Human Development Index, for which Guinea-Bissau was ranked 169 out of the 174
The reasons for such poor economic performance stem from the country's tumultuous political situation. At the end of the 1990s, Guinea-Bissau weathered corruption, a devastating civil war, a coup d'etat, near destruction of Bissau, and displacement of more than 250,000 people. The problems in the country can be traced back to the end of the colonial period in 1974. Since independence, the economy and infrastructure has been poorly managed, leading to a reliance on international aid and imports. Weak infrastructure, the lack of equipment, and unskilled labor are the major obstacles to increasing output in the country's main economic sector: agriculture. Without these resources, Guinea-Bissau is also unable to exploit its abundant fish reserves, due to its lack of a modern fleet and port facilities. Hence, fishing is contracted out to foreign fleets. Manufacturing is also small, and mining is undeveloped.
After the decline caused by the centrally planned economy that was introduced after independence in 1974, the government began liberalizing the economy in the late 1980s. Since 1987, the World Bank and the International Monetary Fund (IMF) have had almost complete control of Guinea-Bissau's economic policy, and structural adjustment programs (SAPs) have aimed at removing price controls , increasing private enterprise, and reforming the public sector . However, the programs have been suspended periodically due to the government's inability to meet fiscal targets, and only after 1994 did the situation start to improve, mainly due to a $15 million 3-year IMF loan. The GDP growth was restored, inflation fell, and the trade deficit was reduced. The civil war also disrupted the plans, but by 2000 the programs were getting started again, and Guinea-Bissau was aided by the receipt of US$790 million in debt relief .
Guinea-Bissau's 1997 entry into the Franc Zone meant that the country adopted the CFA franc as its official currency and required the membership of the regional central bank, the Union Economique et Monetaire Ouest-Africaine (West African Economic and Monetary Union, UEMOA). UEMOA demanded expenditure cuts and higher tax collection. A comprehensive tax reform in 1997 involved the introduction of a generalized sales tax, streamlined custom tariffs , and reformed excise tax . The government also began eliminating 4,000 civil service posts. However, government expenditure rose due to reform costs and the re-capitalization of Banco Central de Guinea-Bissau. In addition, the rise in prices following Guinea-Bissau's entry into the Franc Zone led to a 50 percent pay raise for civil servants in late 1997. Inflation, which ran at 107 percent per year (1992-96), was chronically high before Guinea-Bissau entered the Franc Zone due to a rise in credit to the economy and the depreciation of the peso (the country's old currency). With the adoption of the CFA franc the government was able to reduce inflation to 17 percent at the end of the year, and, despite the civil war, it fell to 8 percent in 1998 and is estimated to have been 6 percent in 1999 and 3 percent in 2000.
The outbreak of civil war in June 1998 created turmoil in the reform program and put an end to US$10 million of the IMF loan. During the civil war, most economic activities were disrupted, especially in urban areas where most of the fighting took place. The government requested US$138 million in post-war assistance in May 1999. However, only in September 1999 did the IMF give US$3 million, which was designed to help prepare Guinea-Bissau for another 3-year loan program to support economic reforms. At the same time, the IMF urged Guinea-Bissau to increase tax revenue, control expenditure, restructure public enterprise, and re-capitalize the financial sector. This action led to a US$25 million Economic Rehabilitation and Recovery Credit (ERRC) loan in November, and in conjunction with other loans, this should help with the rebuilding of Guinea-Bissau.