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© 2004 International Monetary Fund

April 2004

IMF Country Report No. 04/99

Guinea: 2002 Article IV Consultation, First Review Under the Poverty Reduction and Growth Facility, Requests for Waiver of Performance Criteria, Second-Year Program Under the Poverty Reduction and Growth Facility, and for Additional Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries—Staff Report; Staff Statement; Public Information Notice and News Brief on the Executive Board Discussion.

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of a combined discussion of the 2002 Article IV consultation with Guinea and the first review under the Poverty Reduction and Growth Facility, requests for waiver of performance criteria, second-year program under the Poverty Reduction and Growth Facility, and for additional interim assistance under the enhanced Initiative for Heavily Indebted Poor Countries, the following documents have been released and are included in this package:

  • the staff report for the combined 2002 Article IV Consultation, first review under the Poverty Reduction and Growth Facility, requests for Waiver of Performance Criteria, second-year program under the Poverty Reduction and Growth Facility, and for additional interim assistance under the enhanced Initiative for Heavily Indebted Poor Countries, prepared by a staff team of the IMF, following discussions that ended on May 23, 2002, with the officials of Guinea on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on July 10, 2002. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.

  • a staff statement of July 24, 2002 updating information on recent economic developments.

  • a Public Information Notice and News Brief, summarizing the views of the Executive Board as expressed during its July 24, 2002, discussion of the staff report on issues related to the Article IV consultation and the IMF arrangement, respectively.

The document(s) listed below have been or will be separately released.

  • Letter of Intent sent to the IMF by the authorities of Guinea*

  • Memorandum of Economic and Financial Policies by the authorities of Guinea*

  • Statistical Appendix

  • Technical Memorandum of Understanding*

  • *May also be included in Staff Report

The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.

To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to Publicationpolicy@imf.org.

Copies of this report are available to the public from

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International Monetary Fund

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INTERNATIONAL MONETARY FUND

GUINEA

Staff Report for the 2002 Article IV Consultation, the First Review Under the Poverty Reduction and Growth Facility, Requests for Waiver of Performance Criteria, Second-Year Program Under the Poverty Reduction and Growth Facility, and for Additional Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries

Prepared by African Department

(In consultation with the Legal, Monetary and Exchange Affairs, Policy Development and Review, Statistics, and Treasurer’s Departments)

Approved by Donal Donovan and Masood Ahmed

July 10, 2002

Contents

  • Executive Summary

  • I. Introduction

  • II. Recent Developments and Program Implementation

    • A. Political Situation

    • B. Macroeconomic Developments

    • C. Program Implementation

    • D. Performance Under the Consolidation Program

  • III. Report on the Discussions and Policies for 2002/03

    • A. Growth and Macroeconomic Prospects

    • B. Fiscal Policy

    • C. Monetary and Financial Sector Policies

    • D. External Sector

    • E. Medium-Term Macroeconomic Prospects

    • F. External Debt Management, External Financing, and Capacity to Repay the Fund

    • G. Regional Issues

    • H. Structural Reforms and Governance

    • I. The PRSP, Social Policies, and the HIPC Initiative

  • IV. Statistical and Technical Assistance Issues

  • V. Program Monitoring

  • VI. Staff Appraisal

  • Boxes

  • 1. Selected Fiscal and Monetary Indicators, 2001

  • 2. Key Indicators of Prudential Situation of Banks Sector, and Structure of Portfolio Credits of Commercial Banks, 2000-01

  • 3. Structural Reforms Supported by the World Bank

  • 4. Additional Fiscal Measures for 2002

  • 5. The Foreign Exchange Market in Guinea

  • 6. Medium-Term Fiscal Adjustment

  • 7. Medium-Term Impact of Investment in the Mining Sector

  • 8. Guinea’s Position Relative to the Convergence Criteria for the Second Monetary Zone in West Africa

  • 9. Triggers for the Floating Completion Point Under the Enhanced HIPC Initiative

  • 10. Structural Conditionality in the Second Annual Program

  • Figures

  • 1. Selected Economic and Financial Indicators, 2000-05

  • 2. Selected External and Monetary Indicators, 2000-05

  • 3. Effective Exchange Rates, January 1990-February 2002

  • 4. Official and Parallel Exchange Rates, January 2001-February 2002

  • 5. Contribution of Selected Sectors to GDP Growth, 1998-2005

  • Tables

  • 1. Proposed Schedule of Disbursement Under the Three-Year PRGF Arrangement, 2001-04

  • 2. Indicators of Fund Credit and Debt Servicing, 1999-2005

  • 3. Selected Economic and Financial Indicators, 2000-05

  • 4. Gross Domestic Product at Constant 1996 Prices by Sectors, 2000-05

  • 5. Gross Domestic Product at Current Prices by Demand Components, 2000-05

  • 6. Financial Operations of the Central Government, 2000-05

  • 7. Monetary Survey, 2000-02

  • 8. Balance of Payments, 2000-05

  • 9. Social Development Indicators, 1990 and 1999

  • Appendices

  • I. Letter of Intent

    • Attachment I. Memorandum of Economic and Financial Policies of the Government of Guinea for April 2002-March 24

    • Attachment II. Technical Memorandum of Understanding

  • II. Relations with the Fund

  • III. Relations with the World Bank Group

  • IV. Statistical Issues

  • The discussions on the 2002 Article IV consultation and the first review of the Poverty Reduction and Growth Facility (PRGF) arrangement were initiated in Washington in November 2001, and continued in Conakry during November 26-December 6, 2001, and May 1-15, 2002. The last round of discussions, including the negotiation of the second annual program under the PRGF, was concluded in Washington on May 23, 2002.

  • The staff team for the November-December mission consisted of Mr. Harris (head), Ms. Nkusu, Mr. Ossie, and Ms. Kanyabutembo, (Assistant) (all AFR). For the May 2002 mission, the staff team consisted of Mr. Harris (head), Ms. Nkusu, Mr, Ossie, Ms. Yontcheva (all AFR), and Mr. Matson (Assistant, HRD). Mr. Nascimento, the Fund’s Resident Representative in Guinea, participated fully in the missions, as did Mr. Larbi of the World Bank. Messrs. M’baye and Charaf-Eddine took part in the discussions during the May mission for the European Union and the African Development Bank, respectively. Two advisors to the Executive Director for Guinea joined the discussions: Mr. Ismael during the November-December 2001 mission and Mr. Pinto-Moreiro during the May 2002 mission.

  • The Guinean representatives in these discussions included Mr. Sidime, the Prime Minister; Mr. Camara, Minister of Economy and Finance; Mr. Bah, Governor of the Central Bank of the Republic of Guinea; and other senior officials. Members of the mission were also received by President Conte.

  • A three-year arrangement under the PRGF, in an amount equivalent to SDR 64.26 million (60 percent of quota) was approved on May 2, 2001. The first loan, in an amount equivalent to SDR 12.852 million was disbursed soon thereafter. Guinea reached its decision point under the enhanced HIPC Initiative and was declared eligible for interim assistance by the Executive Boards of the Fund and the World Bank on December 20 and 22, 2000, respectively.

  • In addition to the review, the present staff report presents Guinea’s new annual program covering the period from July 2002 to June 2003. If the disbursements under the arrangement are made as requested, Guinea’s outstanding use of Fund resources would rise from SDR 98.1 million (91.6 percent of quota) at end-March 2002 to SDR 102.6 million (95.8 percent of quota) at end-March 2003.

  • The Executive Board concluded the 2000 Article IV consultation on December 20, 2000. At that time Executive Directors stressed the need to establish a sound policy environment conducive to sustained economic growth. They underscored the importance of continued fiscal consolidation and a durable improvement in revenue mobilization. They commended the authorities on reestablishing the momentum of structural reforms, noted the ambitious agenda of monetary reforms, welcomed actions taken to step up the fight against corruption, and encouraged the authorities to continue with the restructuring of the banking sector. They urged the authorities to implement the public enterprise restructuring and privatization program, and to take action to enhance the legal and regulatory frameworks. Directors noted the considerable progress made with respect to the poverty reduction strategy, and the planned completion of the full PRSP by end-2001. They welcomed the authorities’ intention to use the additional resources made available through interim assistance under the enhanced HIPC Initiative for poverty-related spending.

Executive Summary

Background

  • The first review of the three-year PRGF arrangement approved on May 2, 2001 has been delayed in order to give the authorities time to rectify weaknesses in program execution during a four-month consolidation period by meeting specified revenue and expenditure targets set for that period. In the attached letter of intent, the Guinean authorities present the results of this consolidation effort, request waivers for the nonobservance of performance criteria at end-September 2001, request the Fund’s support under the PRGF for the second annual program, and seek additional interim assistance under the enhanced HIPC Initiative.

Recent economic and financial developments

  • Output growth in 2001 is estimated at 3.6 percent, up from 2.1 percent in 2000, reflecting the gradual recovery of activity after the disruptions caused by the border conflict that persisted from September 2000 through the second quarter of 2001 (see table below). Average inflation declined from 6.8 percent in 2000 to 5.4 percent in 2001, as import price increases were moderate and the depreciation of the Guinean franc slowed. The external current account deficit, including official transfers, narrowed from 7.4 percent of GDP in 2000 to 3.7 percent of GDP in 2001, as imports of equipment and capital goods were subdued.

  • The primary fiscal surplus was 0.7 percent of GDP in 2001, compared with 0.8 percent in the program, owing to higher-than-expected defense-related outlays, combined with revenue weaknesses and shortfalls in external assistance. The overall deficit was 3.5 percent of GDP, and the additional financing requirement was covered by greater recourse to central bank credit.

Performance under the 2001/02 program

  • Macroeconomic performance under the program in 2001 was mixed. Most quantitative performance criteria and benchmarks at end-September 2001 relating to the public finances were missed (see Table 1, Appendix I), although the expenditure compression did allow the observance of the criterion on the primary balance. Greater-than-expected recourse to bank credit to finance the fiscal deficit complicated the execution of the monetary program, although net credit to the government was within the adjusted program ceiling. Broad money expanded by 14.8 percent over the year, while private sector credit rose only moderately, by 4.3 percent of beginning-of-period broad money. Reserve money expansion exceeded the program limit, and the increase in the net foreign assets of the central bank fell short of the program benchmark.

  • On the structural front, the implementation of public finance and monetary measures was broadly satisfactory, although some were implemented with delays. However, the performance criterion at end-September 2001 on the establishment of a repayment plan for the verified stock of domestic payments arrears was missed, and the implementation of the public enterprise restructuring and privatization program was disappointing.

  • In the circumstances, the staff and the authorities reached understanding on a four-month consolidation plan aimed at preserving the broad program objectives. Monthly targets for revenue and expenditure and the adoption of key measures in the public enterprise sector were set as prior actions for Board consideration of the review. Performance during the consolidation period has been sufficiently strong for staff to recommend proceeding with the review.

Selected Economic and Financial Indicators, 2000-04

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Sources: Guinean authorities; and staff estimates and projections.

The PRSP process

  • The full PRSP was completed on schedule in December 2001 and adopted by the government in mid-January 2002. The implementation phase was inaugurated at a national workshop on May 6-7, 2002. The integrated household budget-consumption survey was launched late last year and is expected to be completed by the end of 2002. The authorities are extending their macroeconomic projection model to include specific modules on the priority sectors, with a view to projecting, analyzing, and measuring the impact of the poverty reduction effort.

  • The medium-term macroeconomic framework underpinning the PRSP is consistent with that of the initial PRGF-supported program approved in May 2001, and has not yet been adjusted to take into account the latest revisions to the macroeconomic framework undertaken with the May 2002 staff mission. This revised macroeconomic framework forms the basis of the authorities’ program implementation for 2002 and underpins the revised PRGF-supported program. The authorities’ implementation schedule for the PRSP calls for a consultation with donors to determine the amount and timing of external support for the PRSP implementation, followed by renewed consultation with regional stakeholders to set implementation priorities within the binding constraint of the available domestic and external resources. The macroeconomic framework of the PRSP will then be modified to reflect these constraints and the latest evaluation of the macroeconomic environment, and the revised framework will be presented in the annual progress report by the first quarter of 2003. The PRGF-supported program will then be aligned with this new framework.

The program for 2002/03

  • Total revenue is projected to increase by 18 percent in 2002 to 12.6 percent of GDP, reflecting administrative and other reform measures already under way or being prepared. Overall spending is projected at 19 percent of GDP, with priority sector spending increasing by 4 percent over budgeted levels in 2001. The primary fiscal surplus is expected to improve from 0.7 percent of GDP in 2001 to 2.1 percent in 2002, while the overall deficit, on a commitment basis (excluding grants), is projected to decrease to 6.4 percent of GDP from 7.6 percent in 2001. With the repayment in early 2002 of all external arrears accumulated and the planned reduction of domestic arrears, the cash deficit is expected to be 3.0 percent of GDP, compared with 3.8 percent in 2001. Notwithstanding the limited external resources available in 2002, net bank credit to the government would decrease by 3.5 percent of beginning-of-period broad money.

  • On the structural front, the program emphasizes further improvements in the areas of public finance and monetary policy. Regarding fiscal policy, the focus will be on further raising efficiency in revenue mobilization and expenditure management, while monetary reforms aim to bring bank supervision standards closer to compliance with the Basel Core Principles, as well as to improve liquidity forecasting and management and establish an appropriate framework for the supervision of microfinance institutions. The program provides for further progress in reforming the civil service and social security; restructuring and privatizing public enterprises; and continuing the administrative and financial decentralization process. Moreover, the external debt management unit is being revamped, and a timetable has been established for completing the various steps in the judicial follow-up to the cases of corruption investigated by the Anticorruption Committee.

Issues raised in the staff appraisal

The staff appraisal focused on the following issues:

  • The need to maintain a consistent revenue mobilization effort and further improve budget management through a better allocation of resources and greater transparency in budget execution and accountability. In pursuing fiscal decentralization, the authorities should emphasize training for local-level officials, so as to ensure adherence to budgetary procedures and, thus, the efficiency of spending.

  • The need to ensure the timely completion of the restructuring of the two small banks; to press ahead with the strengthening of banking supervision, in order to bring it closer into compliance with international standards; and to further improve liquidity forecasting and management. Moreover, additional efforts should be made to improve the supply of foreign exchange on the official market.

  • The needs to strengthen the capacity at the local level to design, implement, and monitor inputs and outputs of poverty reduction programs.

  • The need to vigorously fight corruption, and to ensure that the justice system deals firmly and transparently with all cases of corrupt practices. A fundamental reform of the justice system should also be launched without delay to help create an atmosphere conducive to private sector activity and investment.

  • The need to proceed with public enterprise restructuring and privatization in a timely fashion, so as to minimize their cost to the budget and reduce bottlenecks to private sector development. The authorities should also complete the planned preliminary studies of civil service reform, so as to move to the implementation stage as soon as possible.

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July 24, 2002

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Public Information Notice (PIN) No.04/43

April 23, 2004

International Monetary Fund

700 19th Street, NW

Washington, D. C. 20431 USA

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News Brief No. 02/75

FOR IMMEDIATE RELEASE

July 25, 2002

International Monetary Fund

700 19th Street, NW

Washington, D. C. 20431 USA

IMF EXTERNAL RELATIONS DEPARTMENT

Washington, D.C. 20431

Telephone 202-623-7100

Fax 202-623-6772

www.imf.org

Guinea: Staff Report for the 2002 Article IV Consultation, the First Review Under the Poverty Reduction and Growth Facility, Requests for Waiver of Performance Criteria, Second-Year Program Under the Poverty Reduction and Growth Facility, and for Additional Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries
Author: International Monetary Fund