Prior actions

The prior actions for Board consideration of the First Review were set out in Paragraph 454 of the Memorandum of Economic and Financial Policies (Appendix I, Attachment I) of the staff report. They comprised:

• Meeting the fiscal and monetary targets for end-March 2002 set out in the consolidation program, including the catching up of priority sector expenditure;

• Fully implementing phases 0 and 1 of the action plan for the electricity sector;

• Formally adopting the domestic arrears repayment plan, a structural performance criterion not observed at end-September 2001;

• The submission of definitive monthly tables on external debt service covering the period January 2001 through March 2002; and

• Notification to the consultant selected to prepare a strategic study of the water sector of the conditions of the contract.

The first three conditions were met prior to the negotiation of the second annual program, and the final two in late June 2002 and at end-May 2002, respectively. In a letter to the Managing Director dated July 12, 2002, the Minister of Finance of Guinea formally confirmed that all these measures had been taken.

Program Implementation Since May 2002

Program implementation since May 2002 has been mixed. The 12-month rate of inflation at end-May was 2.5 percent, and average annual inflation slowed from 3.7 percent in April 2002 to 3.4 percent in May. Although concrete data are not available, the rise in private sector credit and the opening of new bank letters of credit to finance imports seem to indicate that the recovery of private sector activity is continuing. The exchange rate has remained broadly stable, and the parallel market premium was 1.2 percent at the last auction on July 3.

The fiscal stance weakened in May-June. Revenues were somewhat lower than expected, in part due to an unexpected administrative problem at the Customs, but expenditures jumped sharply, reflecting the planned outlays for security based on existing contracts, contributions to international organizations, and goods and services, as well as the start-up of major donor financed projects and the government’s contribution to the liquidation of the microfinance institution CMG and to the recapitalization of a commercial bank. Most of this additional spending was foreseen in the budget but was expected to be spread out over the year. The cumulative deficit through end-May was GF 40 billion (0.6 percent of GDP) higher than programmed, and was financed largely by recourse to domestic bank credit. This led to a sharp increase in reserve money. Annual broad money growth is estimated at 18.4 percent, compared to the annual program target of 8 percent.

On the structural front, the central bank has issued the instructions for the prudential supervision of microfinance institutions; the terms of reference for the study of contractual employment in the civil service are being prepared; the treasury has closed all dormant accounts at the central bank; and an action plan for the reorganization of the external debt unit has been drawn up with external technical assistance.

Finally, the legislative elections delayed since November 2000 were held peacefully on June 30, despite the boycott by some opposition parties, with the majority party winning 85 of 114 seats.