Our Guinean authorities would like to thank staff for their candid reports which reflect the constructive policy dialogue held under the 2016 Article IV consultation in Conakry. The discussions covered the challenges facing the economy as well as the opportunities lying in the country’s buoyant natural resource endowment and the authorities’ upcoming development plan.
Guinea is implementing an ECF-supported program whose 6th and 7th reviews were successfully completed in March 2016. Despite the country’s situation of fragility associated with the shocks of the Ebola pandemic and the sharp decline in commodity prices, our authorities have taken unpreceded measures to boost growth, improve public financial management and create a conducive environment for private sector development. Furthermore, for the period ahead, they are developing an ambitious five-year plan to unlock the development potential and diversify the economy. Key pillars of their strategy include making significant steps to close the energy and infrastructure gaps, boosting production in the mining sector, revamping the agriculture sector and increasing human capital.
I. Recent Developments and Outlook
The recent period is marked by a steady recovery from the Ebola outbreak, which took a huge toll in human lives and socio-economic loss. After averaging 1.8 percent over the 2012–15 period, growth is projected to rebound to 3.7 percent in 2016. Activity will benefit from higher energy provision from the newly built Kaleta hydroelectric dam. Inflation has picked up to 7.9 percent but should decline gradually to 5 percent in 2019.
Our Guinean authorities have initiated a strong fiscal consolidation to reverse the expansionary stance of the past years. As a result, the basic fiscal balance turned to a surplus of 1.2 percent of GDP during the first quarter of 2016, that is 2.4 percent of GDP above the program target. For the whole year, the fiscal deficit is projected to contract sharply to 0.4 percent of GDP from 7.1 percent in 2015. Such effort in an environment of high social demand and required public investment is a clear sign of the authorities’ strong commitment to rebuild buffers and enhance macroeconomic stability.
For the medium term, the authorities remain more optimistic while staying alert vis-à-vis some of the risks pointed to by staff. Projections on both sides are consistent with respective perceptions. The authorities’ baseline scenario backed by the Post-Ebola Recovery Plan assumes growth to stand at 5.1 percent in the medium term against 4.5 percent under staff’s conservative scenario. Moreover, the government’s five-year plan under discussion set more ambitious goals. High public and private investments should further boost electricity supply notably through the Souapiti dam, enhance road infrastructure, increase mining output and boost agriculture production.
External stability is benefitting from the recent tightening of monetary policy. The latest developments communicated by the authorities indicate that the level of international buffers points to 3 months of imports.
Our authorities are cognizant that sound policymaking and decisive reforms will be critical in the period ahead to sustain their efforts towards high and inclusive growth and spur economic transformation. In this regard, they remain committed to pursue fiscal and monetary policies conducive to macroeconomic stability while stepping up structural reforms.
II. Macroeconomic and Structural Policies Going Forward
The authorities will continue their efforts to restore fiscal sustainability. In this regard, the ongoing consolidation is viewed as an important step to break from the past and put public finances on a sound footing. Government has adopted a freeze on spending while measures are being taken to boost revenue. Subsidies in the electricity sector are maintained as programed in the 2016 budget. On the revenue side, an array of measures is underway to enhance tax collection, including; (i) eliminating tax exemptions; (ii) registering informal commercial outlets; (iii) setting up mechanisms to cross-check and exploit the Customs and Tax databases; (iv) creating a property taxation unit; and (v) improving the efficiency of the Tax Department. Our authorities have also welcomed staff presentation of a blue print for tax reform that would help tap the 3–5 percent of GDP tax potential. This analysis will feed into the internal thinking on ways to broaden the tax base and enhance revenue collection.
Our authorities are also taking actions to improve public financial management. Guinea has adopted far-reaching laws and procedures in PFM and the authorities are committed to enhance enforcement of existing regulations from all public officials. In this regard, emphasis will be put on public procurements and value for money of investment spending.
In the same vein, the authorities pay due regard to debt sustainability in their financing strategy and intend to seek concessional resources to the most possible. This principle will guide their efforts in closing the energy infrastructure gap, including on the Souapiti project, which remains critical in the authorities’ plan to boost electricity supply as a key factor for high and sustained growth. Financing scenarios are under discussion and assistance from donors is being sought to minimize costs to public finances.
Monetary and exchange rate policy
The reform of the relationship between the fiscal and monetary authorities is key to our authorities; with the goal of enhancing the framework for monetary and exchange rate policies and avoiding the reoccurrence of issues of the like of the recent guaranteed loans. In this regard, important recommendations from the Safeguards Assessment aimed at strengthening the operational independence of the Central bank have been included in the new BCRG law. The draft law has been discussed by Cabinet and is being further improved before submission to Parliament. The changes include enforcing the legal limits to monetary financing of the budget, reducing the concentration of power of the Governor and limiting intervention from ministry officials seating at the Board to non-voting roles.
In terms of policies, the BCRG has made good progress on the exchange rate policy and management, including the reform of the exchange rate determination mechanism aimed at enhancing the role of market forces. As a result, the gap between the official and the parallel exchange rates has been significantly narrowed in addition to enhancing the transmission mechanisms. Going forward, efforts will continue to be made in strengthening international reserves and in meeting the medium term inflation target.
Financial sector issues
Our authorities share staff assessment made in the Selected Issues paper on the shallowness of the financial sector, the limited competition and access, as well as the many impediments to the development of microfinance institutions. Many initiatives are underway to strengthen banks, improve supervision and competition and promote financial inclusion. On supervision, the BCRG is making steps to address capacity constraints and implement the risk-based supervision as agreed with AFRITAC West. The authorities have adopted in 2014, a multi-pronged National Strategy for Financial Inclusion to address key bottlenecks and promote financial inclusion. The implementation has been slowed by the Ebola outbreak, but should gain traction following the ongoing revision of the strategy. It is built around four pillars - the policy and regulatory framework of mobile-based financial services, the regulation frameworks, consumer literacy and protection, and data collection – and emphasizes actions to enhance access to financial services, especially for the poor. This will be paired with initiatives to strengthen the banks, including lifting governance standards.
The authorities also take good note of staff additional recommendations to increase competition and reduce intermediation costs, facilitate mobile financial services, improving financial literacy, simplify regulations and improve the judicial system to reduce risks for banks. Likewise, they will step up actions to revamp the microfinance sector which has proved effective in increasing access for populations living in rural areas or involved in the informal sector.
It is our authorities’ belief that the development of the financial sector and access will go hand in hand with the overall effort to further modernize the economy and reduce informality. As more activities are brought to the formal sector, thus enlarging the tax base, those actors will seek financial services for their growing activities.
Cognizant of the need to bolster structural reforms for entrenching growth and promoting economic diversification, our authorities endeavor in many areas, including improving the business environment especially enacting the new mining code, enforcing the public procurement code and reforming the agriculture sector.
Agriculture remains with electricity a priority sector the government intends to overhaul through important projects. Traditional and new cash crops such as cashew, palm trees, coffee and cocoa are planned to be developed. A massive undertaking is also envisaged to meet the demand in foodstuffs, rice in particular, which is mainly supplied through large imports. To enhance domestic agricultural production, the government is expecting investments in irrigation technologies, rural road infrastructure and storage facilities. Under their development plan, processing agricultural products is also contemplated as a means to diversify the economy and create jobs.
Improving the business environment with the view to attract more private investment is a major endeavor for our authorities. To this end, a particular emphasis is put on improving the judicial system, in addition to the efforts to upgrade the physical infrastructure notably roads and electricity. The government is also planning campaigns to showcase Guinea as a top destination for investment and business opportunities. In the same vein, our authorities are committed to maintain efforts to enhance democracy and promote peaceful elections.
Guinea has come a long way. The country was reaping the democratic dividends following the 2011 elections when it was hit hard by the Ebola outbreak. Compounded with the commodity price fall, these shocks slowed the growth momentum. Thanks to the authorities‘ strong resolve and response, paired with the assistance of the international community, the country is now Ebola-free. The government has resumed its efforts towards economic transformation and poverty reduction. The impressive fiscal adjustment initiated in 2016 is meant to ensure macroeconomic stability, build buffers and create the space for the investment envisaged under the authorities‘ development plan. In the same vein, structural reforms will be pursued with the view to diversify the economy and create jobs. The support of the financial community, including the Fund, will continue to be instrumental in our authorities‘ strategy to create prosperity and reduce poverty.