Guinea-Bissau's economic prospects are dependent on political developments, which look uncertain given the rising influence of the military and Mr Sanhá's weak grip on power. Although the risk of fresh coup attempts or assassinations remains, the growth prospects for 2011-12 are good, as donors (who have suspended budget support) are expected to maintain some funding for infrastructure and social sector projects, buoyed by fresh funding from Angola and China. We also expect the recovery in the cashew sector to continue, along with new foreign investment in phosphate mining and infrastructure. We estimate that real GDP grew by 3.5% in 2010, supported by a rebound in international cashew prices and inflows of emigrant remittances. With modest donor inflows expected in 2011-12, bolstered by further recovery in cashew output, the first trickle of foreign direct investment and a revival in domestic demand, we forecast that real GDP growth will rise to 4.5% in 2011 and 4.8% in 2012. However, there is a downside risk to this forecast relating to a potential military seizure of power, which could have a heavy impact on growth.

The sound monetary policies of the BCEAO and the improving performance of the agricultural sector will be positive factors in helping to control inflation. Nonetheless, food prices, which depend on the success of the annual harvest, are the main component of the consumer price index and will continue to have the largest impact on inflation. Despite a 14% increase in last year's cereals harvest (to 157,223 tonnes), food shortages became more acute in the second half of 2010. Reflecting the resulting upward pressure on food prices, as well as the rising cost of fuel imports, the year-on-year inflation rate accelerated from just 0.7% in June to 5.6% in December. Average inflation in 2010 rose to 2.5%. With global food and oil prices likely to remain strong, we expect inflation to rise to an average of 3.7% in 2011, before moderating slightly to 3% in 2012. However, there is a risk that inflationary levels could be higher if below-average rainfall results in a poor harvest, driving up local food prices.