Guinea: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Publication Date:
14 Aug 2003
eISBN:
9781451815184
ISBN:
9781451815184
Language:
English
Keywords:
ISCR; CR; microfinance institution; broad money growth; Guinea; mining sector; terms of trade improvement; trade pattern; Guinea's export; exports-to-GDP ratio; Trade policy; Real effective exchange rates; Competition; Real exchange rates
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The paper first discusses price trends and the relationship between money growth and inflation. Second, it focuses on the central challenge of improving competitiveness and promoting exports to enhance growth in the economy. Finally, it reviews the microfinance sector. The study also includes the following statistical data: economic and financial indicators, consumer price index, central government revenue and expenditure, monetary survey, structure of interest rates, balance of payments, composition of imports and merchandise exports, nominal and effective exchange rates, and external public debt.

Abstract

The paper first discusses price trends and the relationship between money growth and inflation. Second, it focuses on the central challenge of improving competitiveness and promoting exports to enhance growth in the economy. Finally, it reviews the microfinance sector. The study also includes the following statistical data: economic and financial indicators, consumer price index, central government revenue and expenditure, monetary survey, structure of interest rates, balance of payments, composition of imports and merchandise exports, nominal and effective exchange rates, and external public debt.

III. Competitiveness and Exports12

A. Introduction

27. The Guinean authorities share the widely held view that an export-oriented development strategy stimulates economic growth and would advance the implementation of their poverty reduction strategy. Guinea’s poverty reduction strategy paper (PRSP) attributes to export promotion an important role in raising income per capita and reducing poverty. It considers that the objective of reducing the incidence of poverty to 10 percent in 2010, from 40 percent in 1995, hinges to a great extent on increasing rural incomes through development of agricultural and other nontraditional exports.

28. To promote exports, policies and reforms that foster appropriate incentives and enhance competitiveness are required. Guinea’s PRSP highlights important impediments to increased production—including limited access to basic social services, poor governance and institutional framework—and discusses actions that are needed to boost output and exports.

29. The academic literature considers that trade policy—encompassing tariffs, quotas, and export subsidies—and exchange rate policy and restrictions to the foreign exchange system have a bearing on a country’s trade in general, and the competitiveness of its exports in particular. Accordingly, the openness of the trade regime and the evolution of the real exchange rate have, traditionally, been taken into account in the assessment of competitiveness. The concept of “competitiveness” is not without controversy. It has been defined with reference to products, micro-scale entities, and nations. The OECD defines a nation’s competitiveness as “the degree to which it can, under free and fair market conditions, produce goods and services, which meet the test of international markets while simultaneously maintaining the real incomes of its people over the long run.” (cited by Oughton, 1997, p.1488). Krugman (1994) argues that competitiveness is a meaningless word when applied to national economies. Among many researchers and policymakers who think of the concept as relevant for nations, there is an understanding that competitiveness is influenced by price and nonprice factors. For instance, Tiwari (1998) argues that competitiveness is an outcome of numerous price and nonprice factors emanating from internal supply and external demand conditions, but largely influenced by the internal supply conditions of the export country. He cites trade and production policies among the factors influencing competitiveness.

30. Considering that competitiveness is relevant for nations, this chapter reflects on the competitiveness of Guinea’s exports by looking at the evolution and status of selected traditional and nontraditional indicators. The chapter is organized as follows: section discusses Guinea’s trade patterns and developments in the area of exports. Section C discusses developments in traditional competitiveness indicators. Section D highlights some structural factors relevant to the competitiveness of Guinea’s exports. Section E concludes.

B. Trade Patterns and Developments in the Area of Exports

31. Guinea’s exports depend heavily on a few commodities (Table III.1). Bauxite and alumina are the country’s main exports, followed by gold and diamonds. During the period 1997–2002, the share of bauxite and alumina in exports of goods averaged almost 63 percent, while all mining products accounted for an average of 85 percent. Coffee, fish, hides and skins, and other products made up the remaining 15 percent. Exports of manufactured products were marginal. Guinea is a price taker on the world market. The structure of its exports highlights the country’s vulnerability to fluctuations in international commodity prices.

Table III.1.

Guinea Exports of Goods, 1991–2002

(In millions of US dollars)

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Source: Guinean authorities; Fund staff estimates.

32. Export performance in the past several years has not been encouraging in three particular aspects. First, Guinea’s exports-to-GDP ratio has averaged 23.4 percent over the period 1997–2002 (Table III.2), a level well below the country’s potential—as indicated by its climate favorable to agriculture and its mineral and hydropower resources—and the average for sub-Saharan Africa and Guinea’s neighbors from the West African Economic and Monetary Union (WAEMU). Second, during the period 1997–2002, real exports growth was sluggish and again below the average for sub-Saharan Africa (Table III.3). It averaged about 4 percent a year, compared with 6 percent and 4.75 percent for the WAEMU countries and sub-Saharan Africa, respectively. Third, efforts to diversify the export base have not been forceful and have had only very limited success. Amongst nontraditional exports, only hides and skins have registered a remarkable pickup. An analysis of the development of competitiveness indicators could provide insights into the development of exports.

Table III.2.

Exports of Goods and Services, 1996–2002

(In percent of GDP)

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Sources: African Department data base, April 2003, and WEO, 4/02/2003.
Table III.3.

Real Exports of Goods and Services Growth, 1996–2002

(In percent)

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Sources: African Department data base, April 2003, and WEO, 4/02/2003.

C. Competitiveness of Exports

33. Guinea’s competitiveness needs to be analyzed by looking at developments of its competitiveness indicators in comparison with its main competitors in the world market for bauxite/alumina (Australia, Brazil, and Jamaica), and neighbors (WAEMU countries and Ghana).13 Competitiveness is assessed looking at traditional competitiveness indicators such as the real exchange rate and the openness of the trade regime.

Exchange rate policy and the real exchange rate

34. Guinea has maintained a floating exchange rate over the past decade, although in recent months the rate against the U.S. dollar has been kept broadly stable. The foreign exchange market is made up of an official market that has, since 1999, operated through an auction system. The official exchange rate is determined at the end of each auction session and remains in force until another auction is held. Besides the official market, there is a parallel market that comprises licensed foreign exchange bureaus and informal traders. An estimated 70 percent of foreign exchange transactions in the country are channeled through the parallel market. The official market is thin, suffering from a shortage of foreign exchange, which has reduced the frequency of auctions. Auctions, which were weekly at the onset of the auctions system, have been held on a monthly basis since the last quarter of 2001.

35. During the past several months, despite the shortage of foreign exchange and the growing macroeconomic imbalances,14 the authorities have maintained the Guinean franc per US dollar exchange rate almost unchanged by using moral suasion on commercial banks participating in the auctions. In light of these developments, the Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) issued by the IMF has reclassified Guinea’s exchange rate arrangement from independently floating to managed floating with no preannounced path for the exchange rate.

36. The floating exchange rate had been an encouraging development in view of the many shocks—terms of trade and other real shocks—which necessitated adjustment in the economy. The Guinean franc has depreciated continuously over the past several years. During the period 1997–2002, the CPI-based nominal effective exchange rate (NEER) and the real effective exchange rate (REER) depreciated by an annual average of 6.3 percent and 4 percent, respectively, indicating that Guinea has at least maintained its external competitiveness compared to its major competitors.15 The depreciation of Guinea’s REER is second only to that of Brazil. In a descending order, Guinea is followed by Ghana, Australia, and Jamaica, which is the only country in the group of bauxite producing competitors having registered an annual average appreciation of the REER (Table III.5 and Figure III.1). Depreciations of the REER were driven by nominal depreciations, which more than offset the differential between inflation in Guinea and the average inflation of its trading partners.

Figure III.1.
Figure III.1.

Guinea: Real Effective Exchange Rate (1990=100), 1996–2002

Citation: IMF Staff Country Reports 2003, 251; 10.5089/9781451815184.002.A003

Source: Fund staff estimates.

37. Maintenance of Guinea’s competitiveness is also illustrated by adjustment of its REER to the terms of trade shocks compared to its competitors.16 During 1997–2002, Guinea’s REER depreciated by 4 percent as indicated above while its terms-of-trade improved by an annual average of 2.5 percent, notwithstanding a deterioration by 8.5 percent and 7.8 percent in 1999 and 2000, respectively. Its neighbors and its bauxite producing competitors faced less favorable terms of trade but registered, with the exception of Brazil, REER depreciations below 4 percent. Brazil, whose average REER depreciation was larger than Guinea’s, experienced adverse terms-of-trade shocks compared with Guinea’s terms of trade improvement (Table III.4).

Table III.4.

Terms of Trade, 1997–2002

(Index, 1995=100; annual percentage change)

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Sources: African Department data base, April 2003, and WEO, 4/02/2003.
Table III.5.

Real Effective Exchange Rate Developments, 1996–2002

(Index 1990=100)

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Source: IMF, Information Notice System.

Trade policy

38. Trade policy, as assessed through some trade openness indicators, is an important component of competitiveness. For firms or countries to be competitive, they must be able to produce products that can compete with foreign goods in the domestic market, as well as abroad. Restrictions in the trade regime can interfere with that ideal on two fronts. First, they can foster inefficiency in the domestic production of goods. This is the case of export subsidies or import restrictions that make imports of final goods more costly, thereby encouraging inefficient production of import substitutes. Second, they can reduce the competitiveness of domestic products compared with foreign goods. This is the case for export taxes or import restrictions applied to raw materials, intermediate, or capital goods. Although variations in trade restrictions influence the exchange rate by affecting the supply and demand of foreign exchange, the trade regime itself has a bearing on competitiveness beyond its impact on the exchange rate.

39. Guinea’s trade system gives it a competitive edge, compared with many of the selected competitors. Trade liberalization efforts undertaken over the last decade have led to a significant reduction in tariff and nontariff barriers. At 3, the IMF’s trade restrictiveness index for Guinea is second only to that for Australia (Box III.1).17 Moreover, Guinea’s overall index will improve to 2 once it adopts the common external tariff (CET) of the WAEMU and simplifies its tariff system further.

Trade Restrictiveness Indices

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Despite a depreciating REER and relatively open trade regime, Guinea’s exports have performed poorly. As shown in Table III.1 and Table 16 of the statistical appendix, the Guinean economy has not experienced any major change in the structure of its exports as a result of improved competitiveness associated with movements in the CPI-based REER or the openness of its trade regime. Moreover, Guinea’s share in the world production of its main export product, bauxite, declined from 14.4 percent in 1992 to 11.9 percent in 2001 (Figure III.2). While world production of bauxite grew by an annual average of 2.8 percent during 1992–2001, Guinea’s output rose by only 0.8 percent on average per year, the worst performance among the major producers.18 Clearly, these developments indicate that a lack of diversification policies and new investments in the mining sector, combined with institutional and structural weaknesses, have prevented the depreciation of the real exchange rate and the opening up of the trade regime from encouraging a positive supply response.

Figure III.2.
Figure III.2.

Bauxite Production, 1992–2001

(to percent of world total production)

Citation: IMF Staff Country Reports 2003, 251; 10.5089/9781451815184.002.A003

Institutional and structural aspects of competitiveness

40. Competitiveness is multifaceted and encompasses the existence of a broad range of factors that affect firms’ incentive to invest in the production of tradables. The World Competitiveness Yearbook lists many relevant factors, including the creation of a stable legislative environment; development of traditional and technological infrastructure; investment in health and education; and maintenance of a stable macroeconomic environment.19 These factors create conditions that attract investment, which is generally recognized as crucial for increasing a country’s productive capacity, notably though technology transfers.

41. The macroeconomic policies and structural reforms implemented by Guinea over the past several years have not been sufficient to ease bottlenecks that limit investment and the diversification of the export base. The efforts made in macroeconomic management, including maintenance of low and stable inflation and a non-appreciating REER, have had only marginal positive results. The easing of structural and institutional constraints is important for strengthening the extent to which good macroeconomic policies that improve traditional competitiveness indicators contribute to export development and thereby to economic growth.

D. Main Constraints to Export Development

42. The constraints to the development of Guinea’s exports are the same as those preventing the emergence of a buoyant private sector in the country. These constraints include poor governance, weaknesses in the regulatory framework and the administration of justice, an inadequate transportation network, a shallow financial sector, inefficiency in the provision of public utilities such as water, electricity, and telecommunication services, complex tariff regulations, and inefficiencies in the operation of the port and international airport.

43. These structural constraints appear to have played an important role in restraining FDI flows into Guinea (Table III.6). Looking at indicators such as availability and cost of communication services, electricity supply, and road network, Guinea ranks poorly among the comparators chosen. For instance, all the countries chosen, except Ghana, have increased their electricity production significantly.20 In Guinea, the electricity sector has been in decline; frequent outages in the past few several months have been disruptive to domestic economic activity and have raised production costs for many businesses.21 To correct the weaknesses in the provision of electricity, the government intends to promote private sector involvement as indicated in its PRSP. The recent crisis highlights the urgency of taking concrete appropriate actions. With regard to the road infrastructure, Guinea is also at a disadvantage compared with competitors.22 All these factors, coupled with poor governance and other institutional weaknesses, have made Guinea less attractive to FDI and have also prevented the establishment of formal small-scale mining activities.

Table III.6.

Selected Development Indicators, 1991–2000

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Source: World Development Indicators.

44. Over the last decade, Guinea had the worse performance in attracting FDI compared with its competitors (Figure III.3). Between 1991 and 2000, FDI averaged only a paltry 0.8 percent of GDP in Guinea, compared with 3.6 percent of GDP in Jamaica, 2.1 percent of GDP in Brazil, 1.9 percent of GDP in Australia, and 1.5 percent of GDP in Ghana. Guinea’s shrinking share of world bauxite production indicates that the country has not kept up with its competitors in improving the investment climate. Without action to remove or ease structural impediments to private investment, Guinea will not be able to increase its market share in the world market for mining products or other nontraditional products for which it has a comparative advantage (Box III.2).

Figure III.3.
Figure III.3.

Net Inflows of Foreign Direct Investment, 1991–2000)

(In percent of GDP)

Citation: IMF Staff Country Reports 2003, 251; 10.5089/9781451815184.002.A003

45. Some aspects of the constraints identified above prevent the pickup in nontraditional exports from rural areas. The inadequacy of transport infrastructure linking villages and production areas to markets and social services has been a major constraint to rural development. Other factors such as the underdevelopment of rural electrification, insufficient access to credit and lack of information on opportunities for trade also constitute nonnegligible constraints. If those constraints were eased, the agricultural sector could flourish and probably provide raw material to industrial activities downstream, while also boosting exports and helping to raise rural incomes. Therefore, rural development should be considered as an important aspect of competitiveness and diversification of the export base and a critical ingredient of the poverty reduction strategy, as reflected in the country’s PRSP.

Exports and Growth Potential

Mining products

Guinea’s mining sector could in principle play an even greater role in the country’s exports and economic development. Guinea has one third of the world’s known reserves of bauxite, the largest of any country in the world. Its bauxite remains of good quality despite the decline in alumina content registered in the last couple of years. In addition, low labor costs, the proximity of a port, and the presence in the country of the major international aluminum companies, should constitute clear advantages for Guinea, and help attract additional FDI. Nonetheless, these advantages need to be reinforced by the providing of a reliable electricity supply and easing of numerous structural and institutional bottlenecks, so as to improve the investment climate. Besides bauxite, Guinea has reserves of iron ore, diamond, and gold, the exploitation of which would also benefit from an improvement in the investment climate.

Nontraditional products

Guinea’s Poverty Reduction Strategy Paper (PRSP) points out that Guinea has the potential for developing agricultural exports, livestock, and fish farming. The development of industrial fisheries is also a promising area. Nonetheless, to make headway in the exportation of fresh produce, fish and meat products, Guinea needs to improve conservation facilities so as to meet international quality standards. Here again, reforms in the electricity sector are crucial.

E. Concluding Remarks

46. Sound macroeconomic policies and structural and institutional reforms ought to reinforce each other to boost competitiveness. Historical developments have shown that good performance of the traditional competitiveness indicators—REER and trade openness—is not sufficient to promote exports. Numerous analyses conducted over the years, including in the context of the elaboration of the poverty reduction strategy paper (PRSP), have identified key areas that need decisive actions in order to unlock Guinea’s considerable growth potential. The PRSP envisages a number of medium- and long-term actions to ease the constraints identified and support sectors with a strong growth potential. These actions include (i) the development of production and distribution infrastructure, (ii) the improved provision of basic social services in rural areas, (iii) the provision of training in entrepreneurship, (iv) the facilitation of access to financing, (v) the simplification of procedures for small-scale mining operators to obtain mining titles, and (vi) the improvement of the regulatory framework and the administration of justice. In addition, policies in these areas will be guided by the results of the World Bank’s Diagnostic Trade Integration Study for Guinea, which seeks to link more clearly trade reform and poverty reduction.

47. There is no miracle solution to boost the competitiveness of Guinea’s exports. While some actions envisaged in the PRSP require financial resources, including from the international donor community, political determination will be the key to promoting an environment in which formal private sector activities can emerge and prosper.

References

  • Government of Canada, National Resource Site, http://www.nrcan.gc.ca/mms/efab/mmsd/wnf/2002/Wnf01b.pdf

  • Krugman, P., 1994, “Competitiveness: A Dangerous Obsession”, Foreign Affairs, Vol.73 (2), pp. 28–44.

  • Oughton, C., 1997, “Competitiveness Policy in the 1990s”, Economic Journal: The Journal of he Royal Economic Society, Vol. 107, pp. 1486–1503.

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    • Export Citation

  • Republic of Guinea, Poverty Reduction Strategy Paper, 2002, available at http://www.imf.org/external/NP/prsp/2002/gin/01/

  • Tiwari, R.S., 1998, “Export Competitiveness and Trade Cooperation Among NICs”, Foreign Trade Review: Quarterly Journal of the Indian Institute of Foreign Trade, Vol. 33 (3&4), pp. 73–102.

    • Search Google Scholar
    • Export Citation

  • World Economic Forum/IMD, 2003, The World Competitiveness Handbook, (Geneva/Lausanne: World Economic Forum).

  • World Bank, World Development Indicators, 2003.

12

This paper was prepared by Mwanza Nkusu.

13

The rationale for including Ghana is that, besides its vast agricultural resources, it has a strong potential for mining and can be considered by relevant investors as an alternative destination for foreign direct investment (FDI).

14

2001 and 2002 were years of serious macroeconomic imbalances driven by expansionary fiscal and monetary policies.

15

The REER can also be based on labor cost. Such a measure is not available for Guinea.

16

The comparison is only indicative as it ignores changes in other determinants of the real exchange rate.

17

On a scale of 0–10, where 10 represents the most restrictive trade regime.

18

Source: Canadian Government Natural Resource site http://www.nrcan.gc.ca/mms/efab/mmsd/wnf/2002/Wnf01b.pdf

20

Electricity production figures for Guinea are not available.

21

During the May 2003 mission, some businessmen indicated that the cost of operating a private power generator is almost 10 times as high as that of electricity provided by the power company.

22

Ghana has an area about 95 percent the size of Guinea, but its road network is 29 percent longer, and the share of paved roads is 50 percent higher. Jamaica is only 5 percent the size of Guinea, but its road network is almost half the length of Guinea’s and the ratio of paved roads that is four times higher. Australia and Brazil have better road networks than Guinea.

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Cover IMF Staff Country Reports
Guinea: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Volume/Issue:
Volume 2003: Issue 251
Publisher:
International Monetary Fund
ISBN:
9781451815184
ISSN:
1934-7685
Pages:
83
DOI:
https://doi.org/10.5089/9781451815184.002
  • View in gallery

    Guinea: Real Effective Exchange Rate (1990=100), 1996–2002

  • View in gallery

    Bauxite Production, 1992–2001

    (to percent of world total production)

  • View in gallery

    Net Inflows of Foreign Direct Investment, 1991–2000)

    (In percent of GDP)

Guinea: Real Effective Exchange Rate (1990=100), 1996–2002

Bauxite Production, 1992–2001

(to percent of world total production)

Net Inflows of Foreign Direct Investment, 1991–2000)

(In percent of GDP)