The government faces an uncertain fiscal picture after most donors suspended disbursements of budget support in the first half of 2010 because of concerns over political developments. The shortfall in budget support last year amounted to an estimated 3.2% of GDP. Under the medium-term fiscal framework negotiated as part of the ECF, the government is obliged to keep the domestic primary budget deficit below 4% of GDP, along with efforts to modernise the public administration and strengthen the provision of financial services. For 2011, the authorities have set a target for the domestic primary budget deficit of 1.7% of GDP. However, with disbursements greatly reduced and the risk of renewed political instability, the government could struggle to control spending and boost fiscal revenue through improved tax collection. Without the full resumption of donor budgetary support, the government will face problems in paying down its substantial public-sector salary arrears and will have to delay plans to clear all debt to the domestic banking sector and start repaying debt to private businesses. It will also hamper progress with reform of the cashew sector, which is essential both for reviving the sector and for increasing tax revenue. In addition, a continued compression of public investment will take its toll on overall economic growth and poverty reduction.

According to IMF data, the government ran an overall fiscal surplus (including grants) of 2.9% of GDP in 2009, reflecting an influx of donor funding that year. However, following the suspension of donor support in the wake of the April 2010 military mutiny, the Economist Intelligence Unit estimates that the fiscal balance moved back to a deficit of around 3% of GDP in 2010. Pledges of budget support from Angola and China should help to plug some of the financing gap, as should modest donor inflows, assuming a reasonable level of political stability over the forecast period. This should help to limit the fiscal deficit to an average of 3.5% of GDP in 2011-12. However, should political instability result in a military takeover, fiscal policy could go off-track rapidly, resulting in a rapid widening of the deficit and the collapse of the government's ability to meet its payments.