Guinea: Staff Report for the 2004 Article IV Consultation
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International Monetary Fund
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Publication Date:
07 Dec 2004
eISBN:
9781451815245
Language:
English
Keywords:
ISCR; CR; EU assessment mission; government delegation; delegation; assessment; spending overrun; current account; debt service; banking sector; balance of payments; private sector
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This 2004 Article IV Consultation highlights that in 2003, Guinea’s economic situation deteriorated on account of exogenous conditions, as well as poor macroeconomic management and the lack of progress in key structural areas. Annual real GDP growth slowed down from 4.2 percent in 2002 to an estimated 1.2 percent. In the structural reform area, progress was mixed. The outlook for 2004 is plagued by poor performance in the first quarter of the year and by important downside risks, exogenous as well as policy related.

Abstract

This 2004 Article IV Consultation highlights that in 2003, Guinea’s economic situation deteriorated on account of exogenous conditions, as well as poor macroeconomic management and the lack of progress in key structural areas. Annual real GDP growth slowed down from 4.2 percent in 2002 to an estimated 1.2 percent. In the structural reform area, progress was mixed. The outlook for 2004 is plagued by poor performance in the first quarter of the year and by important downside risks, exogenous as well as policy related.

I. Recent Developments

1. Guinea’s economic situation worsened in 2003, with real GDP growth slowing and inflation accelerating. Real GDP grew by 1.2 percent, relative to an average of about 4 percent during 2001-02 (Tables 1 and 2, Figure 1), due to a fall in agriculture growth, as well as a decline in manufacturing output and construction activities owing to the continued electricity outages and shortage of water and cement. Moreover, an uncertain business climate during the run-up to the presidential elections led to a sharp decline in private investment to about 6 percent of GDP compared with over 9 percent during 2001-02 (Table 3). Owing in large part to rapid growth in broad money, the 12-month rate of inflation (CPI-based) reached 14.8 percent in December 2003 (from 6.1 percent in December 2002).

Table 1.

Guinea: Selected Economic and Financial Indicators, 2002-07

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Sources: Guinean authorities; and staff estimates and projections.

In percent of broad money stock at beginning of period.

Includes expenditure for restructuring.

Table 2.

Guinea: Gross Domestic Product at Current Prices by Demand Components, 2002-07

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Sources: Guinean authorities; and staff estimates and projections.
Figure 1.
Figure 1.

Guinea: Real Sector Developments, 1998–2003

(In percent of GDP, unless otherwise indicated)

Citation: IMF Staff Country Reports 2004, 392; 10.5089/9781451815245.002.A001

Sources: Guinean authorities; and staff estimates.
Table 3.

Guinea: Gross Domestic Product at Constant 1996 Prices by Sectors, 2002-07

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Sources: Guinean authorities; and staff estimates and projections.

Guinea: Core Indicators, 2000 - 2003

(In percent of GDP, unless otherwise specified)

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2. These unsatisfactory developments moved Guinea to the bottom of regional economic performance (Box 1).1 On average between 1998 and 2002, Guinea outperformed the West African Economic and Monetary Union (WAEMU) and West African Monetary Zone (WAMZ) member countries. However, in 2003, Guinea became the worst performer in the regional context, except for higher average inflation in WAMZ countries due to the rapid price increases in Ghana.

3. Economic performance is expected to remain weak in 2004. Real GDP growth is projected at around 2.6 percent, in light of the poor economic performance during the first quarter of the year and the lags for the more rigorous policy to translate into an economic recovery. In May 2004, inflationary pressures eased somewhat, to 9.4 percent year-on-year, owing to temporary factors, including an unsustainable freeze on domestic petroleum product prices.

Guinea: WAEMU and WAMZ—Selected Economic Indicators, 1998–2003

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A01ufig01

Real Gross Domestic Product Growth

(Percent)

Citation: IMF Staff Country Reports 2004, 392; 10.5089/9781451815245.002.A001

A01ufig02

Overall Balance Excluding grants

(In percent of GDP)

Citation: IMF Staff Country Reports 2004, 392; 10.5089/9781451815245.002.A001

A01ufig03

Inflation, Average

(Percent)

Citation: IMF Staff Country Reports 2004, 392; 10.5089/9781451815245.002.A001

A01ufig04

Broad Money Growth

(Percent)

Citation: IMF Staff Country Reports 2004, 392; 10.5089/9781451815245.002.A001

Source: World Economic Trends in Africa; Guinean authorities; and staff estimates.

4. Fiscal policy slippages persisted in 2003 and little progress was made in the first quarter of 2004. A one percent of GDP revenue shortfall, coupled with a 1½ percent of GDP overrun in current spending,2 led to a widening of the fiscal deficit (commitment basis, including grants) to 5.1 percent of GDP from 4.4 percent in 2002 (Table 4). In the absence of external budgetary assistance, this deficit was financed by an accumulation of arrears and by increased borrowing from the banking system. The 2004 budget envisaged a tightening of fiscal policy (a primary surplus of 2.1 percent of GDP) and reduced borrowing from the banking sector. However, budget implementation in the first quarter of 2004 was poor. Revenue registered a 0.6 percent of annual GDP shortfall due to poor collection efforts and use of an overvalued exchange rate to value imports. The shortfall was accommodated by expenditure curtailment covering domestically-financed investment and nonwage spending in the social sectors.

Table 4.

Guinea: Financial Operations of the Government, 2002-07

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Sources: Guinean authorities; and staff estimates and projections.

Revenue minus noninterest expenditure, excluding foreign-financed investment projects.

Comprises changes in check float and changes in expenditure commitments unpaid during a period of no more than 90 days beyond which they become arrears.

Includes outlays financed by resources from the enhanced HIPC Initiative.

A01ufig05

Government Finances, 1998 - 2003

(In percent of GDP)

Citation: IMF Staff Country Reports 2004, 392; 10.5089/9781451815245.002.A001

A01ufig06

Public Expenditure, 1998 - 2003

(In percent of GDP)

Citation: IMF Staff Country Reports 2004, 392; 10.5089/9781451815245.002.A001

A01ufig07

Monetary Aggregates, January 1998 - May 2004

(In billions of Guinean francs)

Citation: IMF Staff Country Reports 2004, 392; 10.5089/9781451815245.002.A001

5. Monetary policy was highly expansionary in 2003 and the first quarter of 2004. With a limited use of T-bills, the substantial government deficit was, to a large extent, financed by central bank credit. Moreover, the issuance of sterilization bills was inadequate to control bank liquidity and, accordingly, reserve and broad money increased significantly, reaching 27.4 percent and 35.3 percent, respectively, at end 2003 (Table 5). In the absence of external budgetary assistance, the net foreign assets of the central bank declined and were negative at end-December 2003, at US$ -10.4 million. Real interest rates were negative for most of the year, reflecting a wait-and-see attitude from commercial bank managers, who believed that the recent rapid pick-up in inflation would be reversed soon and were wary of the impact of higher (deposit and lending) rates on their profit margins. In the first quarter of 2004, there was a further loss in net official reserves and rapid increase in credit to the government. Reserve money increased by 25 percent on a twelve-month basis to March 2004.

Table 5.

Guinea: Monetary Survey, 2002-04

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Sources: Guinean authorities; and staff estimates and projections.
A01ufig08

Credit to the Government and to the Private Sector, 2001-2004

(In percent of broad money)

Citation: IMF Staff Country Reports 2004, 392; 10.5089/9781451815245.002.A001

A01ufig09

Monetary Aggregates and Sterilization Bills, January 1998 - May 2004

(In billions of Guinean francs)

Citation: IMF Staff Country Reports 2004, 392; 10.5089/9781451815245.002.A001

6. The financial sector indicators reveal that the banking sector in Guinea has remained relatively sound, in spite of the deterioration of the macroeconomic environment (Table 6). The main banking soundness ratios for the seven banks operating in Guinea have remained above prudential limits, except for the ratio of risk concentration. The large exposure to the government is a risk to the banking system, even though the government so far has remained current on its obligations. Large excess liquidity in the banking system, reflecting the lack of lending opportunities outside a few large corporate clients, suggests that the crowding out of the private sector by government borrowing is limited. The share of nonperforming loans in the total loan portfolio has remained stable at around 30 percent over the last three years, reflecting continued weaknesses in the judicial system. Because of reinforced supervision, provisioning of nonperforming loans improved from 83.7 percent in December 2003 to 86.6 percent in March 2004. The foreign exchange exposure of domestic banks is low, limiting the direct risk of the financial sector being destabilized by exchange rate variations.

Table 6.

Guinea: Financial Soundness Indicators for the Banking Sector, 1999 - 2003

(In percent, unless otherwise indicated)

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Source: BCRG.

Included in the prudential regulation of the BCRG.

The minimum regulatory net capital was GNF 2 billion before March 2002.

Corresponds to the new prudential ratios, effective in June 2003.

Includes exploitation of natural resources; extraction and production of minerals; energy and water production; and nonbu

NPLs + frozen credits + nonimputed values.

A01ufig10

Interest rates on sterilization bills (TRMs) and Consumer Price Inflation, 2001-2004

(In percent)

Citation: IMF Staff Country Reports 2004, 392; 10.5089/9781451815245.002.A001

A01ufig11

Effective Exchange Rates, January 1998 - April 2004

(Index, 1990 = 100)

Citation: IMF Staff Country Reports 2004, 392; 10.5089/9781451815245.002.A001

7. The authorities continued to de facto peg the official exchange rate of the Guinean franc against the US dollar. The official rate depreciated only marginally until July 2004. The spread between the official and parallel exchange rates remained above 20 percent during the second half of 2003 and widened further to around 25 percent by mid-2004. Notwithstanding the stickiness of the official rate, during the 12-month period ended April 2004, the nominal effective exchange rate depreciated on average by 11.8 percent, largely because of the depreciation of the US dollar against the euro.3 The real effective exchange rate depreciated by only 0.4 percent reflecting the acceleration in inflation.

8. The external current account deficit (excluding official transfers) narrowed to 4 percent of GDP in 2003, from 5.6 percent in 2002 (Figure 1, Table 7). This narrowing is mainly due to a decline in imports of intermediate and capital goods associated with the sharp fall in investment. This more than offset a fall in exports, reflecting the continued downward trend of bauxite shipments, notwithstanding increased shipments of alumina and diamonds.4 Foreign direct investments fell to very low levels because mining and other investments were deterred by corruption and bureaucratic inefficiency. There was a near absence of official budgetary support because of donor discontent with policy implementation and governance issues. Reflecting the above-mentioned factors, as well as an overvaluation of the official exchange rate, gross international reserves of the central bank5 dropped to US$138 million (1.5 months of imports) at end-2003 compared with US$170 million at end-2002. External arrears at end-2003 amounted to US$18 million and increased further in early 2004.6

Table 7.

Guinea: Balance of Payments, 2002-09

(In millions of U.S. dollars; unless otherwise indicated)

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Sources: Guinean authorities; and staff estimates and projections.

Including debt-service payments on publicly guaranteed debt.

In percent of exports of goods and nonfactor services.

9. Progress in the structural reform area slowed down. On the fiscal front, the authorities prepared the draft legislation for the adoption of WAEMU’s common external tariff (CET). They continued their efforts to better monitor government cash-flow by closing most of the extra budgetary accounts and transferring all non-project accounts from deposit money banks to the central bank. In the monetary area, the banking and microfinance laws have not yet been adopted, and the computerization of the banks’ accounting plan was not completed, although most of the background actions were implemented. The recapitalization of the only bank in difficulty is still pending. While progress has been made toward adoption of international accounting standards, there were further delays in the implementation of the main recommendations of the safeguards assessment mission (special audit of the central bank’s reserves, set up of an audit committee, and financial audit of the central bank).

10. The authorities finalized their first PRSP progress report in April 2004, following a participatory process involving civil society. They provided an update of the medium-term macroeconomic framework underlying the strategy in June 2004. The report notes that while Guinea was able to make progress in the social sectors, the deterioration in the macroeconomic environment has significantly impaired the achievement of the PRS targets.

II. Report on the Discussions

A. The Ex-Post Assessment Report7

11. The main conclusion of the Ex-Post Assessment (EPA) report is that Guinea has not yet been able to sustain consistent implementation of a long-term development strategy. The main lessons are the need for: (i) ensuring ownership and commitment at the highest level of government at the onset of any program; (ii) encouraging early and decisive progress in raising fiscal revenue and implementing structural reforms; (iii) paying more attention to poor governance; and (iv) setting realistic macroeconomic objectives and incorporating ex ante contingency plans as a precautionary cushion should new risks materialize. These lessons guided the policy discussions with the authorities on the way forward. The authorities were in agreement with the main thrust and conclusions of the EPA, except for small reservations.8 They recognized that Guinea must change its behavior and persevere in its adjustment efforts.

B. Immediate Policy Challenges and Outlook for 2004

12. The staff and the authorities agreed that the continued pursuit of past policies would result in a worsening of the economic situation. The authorities indicated that their immediate challenge was to strengthen policy implementation to slow down inflation and normalize relations with donors to facilitate access to the much needed external finance that would help advance the implementation of the poverty reduction strategy.

13. Cognizant of the urgent need to take corrective measures and reflecting their desire to reengage more meaningfully with the Fund, the authorities adopted an emergency recovery program in March 2004. Key elements of the package are: cuts in expenditure;9 respecting rigorously the expenditure commitment procedures; improving revenue collection by curtailing exemptions and strengthening fiscal administration; and tightening monetary policy. The authorities emphasized that it would be very difficult to make up for the revenue shortfall of the first quarter. Under the circumstances, the original 2004 budget was revised to extend the revenue shortfall and the spending curtailment to the year as a whole, albeit with defense spending exceeding earlier projections. The authorities indicated that the fiscal adjustment underpinning the revised budget represented the maximum they could accommodate in the short run without hampering the government’s ability to provide minimal public services. The overall deficit (commitment basis, including grants) would be limited to 2.6 percent of GDP.

14. The mission acknowledged the difficulty of realizing short-term adjustments beyond what is currently envisaged and encouraged the authorities to persevere in implementing their emergency program. It indicated that, while the implementation of such a program will be a step in the right direction, it would not be sufficient to ease inflationary pressures as initially envisaged.10 The mission urged the authorities to pursue the strict expenditure control implemented since April and to ensure that unprogrammed resources that may become available be used to reduce government indebtedness to the banking sector.11 Also, the mission and the authorities agreed that monetary policy should be significantly tightened by active open market operations and ensuring that the budget deficit is financed through issuance of treasury bills, as this would avoid the direct expansion of base money by way of central bank advances to the government.

15. In light of the problems highlighted above, economic performance in 2004 is projected to be weaker than envisaged at the time of the 2003 Article IV consultation.12 Real GDP growth at 2.6 percent is only half the rate projected earlier. The envisaged fiscal consolidation is reflected in a slower growth in broad money.13 However, end-2004 inflation is expected to rise somewhat reflecting the pass-through of the exchange rate depreciation (including through the upward adjustment of administered prices). The external current account excluding grants is projected to narrow further to 3.7 percent of GDP as a low investment rate continues to subdue imports. Owing to the lack of external budgetary assistance and the low private capital flows, official reserves would decline further to 1.2 months of imports, from 1.5 months in 2003.

C. Exchange Rate Policy

16. The staff indicated that the rationing of foreign exchange with regard to imports and the use of multiple exchange rates constitute a new exchange restriction and a new MCP, and that it would not recommend Board approval of such practices.14 The lack of a mechanism to prevent the rates in the official and the parallel markets from diverging by more than 2 percent constitutes an MCP subject to IMF jurisdiction under Article VIII. Since mid-2003, the government actions—(i) limiting the availability of foreign exchange in the official market to particular categories of importers and (ii) with respect to other importers, tolerating commercial banks to finance those imports at negotiated exchange rates which diverged by more than 2 percent from the official exchange rate—have given rise to new exchange restrictions and a new MCP subject to Fund approval under Article VIII.

17. There was agreement between the staff and the authorities that the de facto fixed exchange rate was inappropriate as it resulted in a large parallel market premium and an overvaluation of the official rate. The parallel foreign exchange market has existed in Guinea for a long time, albeit as an illegal market up to 1995. Changes that followed the legalization of foreign currency trading outside the organized banking sector include the introduction of the foreign exchange auction system in 1999. During 1999-2002, in the absence of government interference with a free determination of the official rate at auctions, the official rate generally tracked the parallel market.15 Since 2003, while market forces have led to a gradual depreciation of the parallel market rate in light of the deteriorating macroeconomic environment, the government de facto fixed the official rate and, in early 2004, introduced a rationing of foreign exchange with regard to imports. Accordingly, excess demand in the official market spilled over into the parallel one, and the spread between the parallel and official rates widened markedly by mid-2004. Under the circumstances, the staff is of the view that the observed parallel market premium—of almost 25 percent by mid-2004—is broadly indicative of the overvaluation of the official rate.

A01ufig12

Exchange Rates, January 2000 - July 2004

(Guinean francs per U.S. dollar)

Citation: IMF Staff Country Reports 2004, 392; 10.5089/9781451815245.002.A001

18. The staff urged the authorities to adopt a more flexible exchange rate and to abandon the administrative allocation of foreign exchange with regard to imports. It indicated that such a system provides a cushion against Guinea’s vulnerability to exogenous shocks—terms of trade and other real shocks. In a similar vein, the staff indicated that an administrative allocation of foreign exchange distorts resource allocation. In sum, the staff stressed that a more liberalized and flexible exchange rate system would serve Guinea better.

A01ufig13

Demand and Sales of Foreign Exchange at Official Auctions, January 2001 - May 2004

(In millions of U.S. dollars)

Citation: IMF Staff Country Reports 2004, 392; 10.5089/9781451815245.002.A001

19. The authorities agreed that a more flexible exchange rate system was necessary.16 However, they feared that liberalization could lead to a speculative rapid depreciation of the Guinean franc. The staff argued that the best guarantee of market participants’ confidence in the currency is the credibility of public policies. It also indicated that an overvalued exchange rate would hurt competitiveness, which is already adversely affected by structural and institutional weaknesses. The staff argued forcefully, in line with MFD technical assistance recommendations, that the authorities move to a more flexible exchange rate system.17

D. Way Forward

20. The authorities stressed that normalizing Guinea’s relations with the Fund and other donors was important to the implementation of their development strategy. They expressed their determination to take all the actions called for to enter into a track-record SMP as soon as possible. There was agreement between the authorities and the staff that entering into an SMP would imply going beyond short-term fiscal tightening and notably include:

  • Disciplined implementation of the fiscal and monetary tightening;

  • Adoption of a floating exchange rate system, with the rate determined through interbank trading and the central bank disseminating indicative rates;

  • Immediate implementation of the long overdue three critical measures recommended by the 2002 safeguard assessment mission to limit the vulnerabilities in the central bank’s financial reporting and internal control system;18 and

  • Strong commitment to structural reforms in key areas, notably to prepare the adoption of the WAEMU’s CET and restructure the public utility enterprises to alleviate the shortages in electricity and water supply.

E. Medium-Term Prospects and Challenges

21. The medium-term challenge facing the authorities is to set the country on a path of sustainable growth and poverty reduction. The staff and the authorities agreed that the pursuit of past policies would lead to a further drop in investment and per capita real GDP growth, exacerbating the vulnerabilities of the Guinean economy (Box 2). In the absence of external assistance, bank financing of the fiscal deficit would lead to continued significant monetary expansion and higher inflation. In this context, the discussions focused on policies and reforms needed to promote macroeconomic stability, enhance policy credibility, and create conditions for increased private investment, broad-based economic growth, and poverty reduction.

22. The staff and the authorities concurred that improved macroeconomic management and an acceleration of reforms would generate faster growth, though still insufficient to meet the Millennium Development Goals (Table 8). The adoption of sound policies—assuming improved security in the region and larger donor support—could allow the economy, after a transition period (2004-05), to return to a growth path of 5 percent beginning in 2006, with inflation falling back to single digits from 2006 onward (Figure 2). Decisive progress in implementing reforms could improve the private savings rate from about 7.7 percent of GDP in 2003 to above 10 percent in 2007. With renewed confidence and a rekindling of foreign direct investment, particularly in the mining sector, gross domestic investment could rise from 10 percent of GDP in 2003 to 15½ percent in 2007, driven by the private sector. However, the staff and the authorities agreed that achieving the MDGs would require a more ambitious macroeconomic performance and more financial resources than envisaged in the current medium-term framework.

Table 8.

Guinea: Millennium Development Goals

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Sources: World Bank; and Fund staff estimates.

The target reported corresponds to the authorities’ own objectives in the PRSP.

Targets 12-15 and indicators 33-44 are excluded because they can not be measured on a country specific basis. These are related to official development assistance, market access, and the HIPC initiative.

Figure 2.
Figure 2.

Guinea: Medium-Term Framework (Policy Adjustment Scenario), 2003–08

(In percent of GDP, unless otherwise indicated)

Citation: IMF Staff Country Reports 2004, 392; 10.5089/9781451815245.002.A001

Source: Fund staff projections.

Guinea: Risks and Vulnerabilities

Four main vulnerabilities are key concerns for the short- and the medium-term:

  • Political vulnerabilities and private investment variations: political instability and/or regional insecurity could hinder a rebound in economic activity. Fear of social unrest may delay necessary reforms, notably in the area of exchange rate and price policies, while the fight against corruption may encounter resistance from vested interests. In this context, investors may adopt a wait-and-see attitude.

  • Lack of diversification: the large share of agriculture in GDP makes growth highly dependent on climatic conditions; the economy’s dependence on the mining sector makes it highly vulnerable to downturns in the world market for minerals; and the economy is also vulnerable to fluctuations in oil prices as it imports all of its petroleum products.

  • Possible shortfalls in donors’ support: with Guinea’s deteriorating economic performance and in the absence of a program with the Fund, budgetary and HIPC support will remain limited. Also, if it continues to experience difficulties to make timely debt service payments, a number of donors will continue to suspend their project assistance.

  • Balance sheet vulnerabilities: the domestic debt of the government has increased sharply, from 4.5 percent of GDP in 2000 to 12.2 percent at end-2003. Though still low by regional standards, there is a risk of crowding out other expenditure, and that the central bank may refrain from issuing the needed volume of T-bills in the fear of an upward adjustments in interest rates that would increase debt service further.

Fiscal policy

23. The authorities agreed that implementation of a sound fiscal policy stance reflecting the priorities of the poverty reduction strategy was crucial to their medium-term strategy. The staff emphasized that a key aspect of such a stance was to entrench discipline in public finances and break with the unsteady policy implementation of the past several years and the authorities concurred. Assuming greater government efforts on both the revenue and the expenditure fronts, the staff and the authorities projected a 0.8 percentage point of GDP decline in the overall fiscal deficit (commitment basis, excluding grants) during 2004-07, predicated on an increase in revenue that outweighs the increase in spending.

24. Revenue is projected to increase by 1.2 percent of GDP over 2004-07, driven by collections from the nonmining sector. Increasing revenue collection would hinge on a strengthening of tax administration, progress in the fight against corruption, and the implementation of the WAEMU’s CET. The latter would, while encouraging regional trade, simplify the taxation of trade so as to reduce discretionary and rent-seeking actions.19 The mission also urged the authorities to fully implement the specific revenue enhancement measures recommended by the 2003 public expenditure review (PER) and the May 2004 FAD technical assistance mission.

25. Expenditure policy is geared toward raising development and social outlays while curtailing other expenditures. In that regard, the medium-term budget framework envisages that a greater share of spending would be allocated to social sectors. In particular, current nonwage primary spending on social sectors is projected to increase by almost 0.6 percent of GDP between 2004 and 2007, while total primary current spending would increase by only 0.3 percent of GDP over the same period. Overall, the primary balance is projected to increase only marginally as part of the revenue increase would be absorbed by higher domestically-financed development spending.20

26. The staff emphasized and the authorities agreed that, to benefit the poverty reduction agenda, the increased spending on social programs should be coupled with an improved public expenditure management system. This should encompass greater transparency in budget execution and a better tracking of spending, including at the decentralized levels where most poverty reduction expenditures are executed. In particular, the staff encouraged the authorities to improve the management of the externally-funded part of the development budget to ensure that it reflects the priorities of the poverty reduction strategy. The authorities indicated that some donors do not facilitate the planning and tracking of development expenditure as they make direct transfers to decentralized services or pay suppliers abroad, forcing the government to record commitments ex-post.21 The mission and the authorities also concurred that implementation of the measures recommended by the PER would be key to improving expenditure management to benefit the social sectors. Such measures include a tighter control of the budget share of wages through the reduction of staff in the central services, an inclusion in the medium-term expenditure framework of budget ceilings for defense spending and the introduction of a more transparent review process for such spending, and the introduction of more robust procedures for the transfer of funds to the local levels and for improved controls by the General Finance Inspectorate.

Monetary and financial policies

27. The staff and the authorities concurred that keeping inflation under control should be the primary focus of monetary policy over the medium term. The authorities indicated that the central bank would stop accommodating the Treasury and would pursue an active liquidity management, based on the recommendations made by MFD technical assistance missions. The staff pointed out that the capacity of the central bank to absorb liquidity through its auctions—to which only commercial banks subscribe—is limited because of the composition of reserve money.22 The staff therefore encouraged the central bank to foster better bank intermediation and to promote the sale of treasury bills to the nonbank sector, which would also help to absorb liquidity outside the banking sector.

28. While Guinea’s banking sector appears relatively sound, the staff stressed the need for continuous efforts to enforce supervisory rules. The authorities replied that prompt action will be taken for the rapid adoption of the new banking law and the law on microfinance.23 Concerning the strengthening of the supervisory capacity of the central bank, they noted difficulties in recruiting qualified experts for bank supervision.

External sector policies and debt

29. Guinea’s external accounts could improve markedly over the medium term, provided that the envisaged foreign direct investments in the mining sector are undertaken starting in 2005 and that measures are implemented to diversify the export base, notably to respond to the growing regional demand for agricultural products. To help achieve this goal, the staff pointed to the benefits of further trade liberalization—notably through the full implementation of the WAEMU’s CET in 2005—and limiting government interference in the regulation of the export sector,24 combating corruption and streamlining bureaucracy. Liberalization efforts would also facilitate the introduction of the reciprocal trade opening under the EU’s Economic Partnership Agreement25 and taking full advantage of the Africa Growth and Opportunity Act (AGOA).26

Medium-Term Balance of Payments

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Source: staff projections.

30. Guinea’s external debt burden is projected to remain heavy, unless the country can benefit from full HIPC debt relief. Since Guinea reached the decision point in 2000, its external debt indicators have deteriorated owing mainly to lower-than-projected exports. The staff and the authorities concurred that in light of Guinea’s limited foreign exchange reserves and the suspension of interim debt relief under the HIPC Initiative by some creditors, the difficulties the country has been experiencing in servicing external debt would continue, unless the country gains access to more of the HIPC relief it qualified for at the decision point.27 Against this background, the authorities reasserted their determination to improve policy implementation and deepen reforms to facilitate resumption of external assistance and the attainment of completion point under the HIPC. While encouraging the authorities in their endeavor, the staff indicated that the completion point could be reached at best in late 2005/early 2006 after meeting all the completion point triggers,28 the rigorous policy implementation under an SMP, and a satisfactory track record in the form of completion of one review under a new PRGF-supported program covering a period of policy implementation of at least six months. The authorities indicated that the envisaged timing of the completion point would be costly to the implementation of their poverty reduction strategy and emphasized their need to enter into an SMP as soon as possible.

31. The authorities indicated that they will pursue efforts toward regional integration. They reaffirmed their commitment to adopt the WAEMU’s CET in January 2005 and to adhere to the WAMZ monetary union when it will be launched on July 1, 2005, despite the deterioration of Guinea’s performance with regard to the convergence criteria of the WAMZ (Box 3). The staff encouraged the authorities on their planned adoption of the CET, which would result in reducing Guinea’s trade restrictiveness index from 3 to 2. However, the staff expressed skepticism about the benefit of joining the monetary union, in light of the lack of progress toward economic convergence with other WAMZ member countries, and the difficulties Guinea might encounter to adjust to asymmetric exogenous shocks in the envisaged monetary union.

Governance

The mission emphasized the need for the authorities to make significant progress in the fight against corruption. There was progress on two HIPC Initiative completion point triggers on governance, with the publication of the 2002 progress report of the Anti-Corruption Committee (CNLC) and the launching of the bids for the auditing of the government procurement contracts.29 Nevertheless, the mission expressed concerns that the change in the status of the CNLC from being an independent structure under the Presidency to being part of a new Ministry, may impair its independence and effectiveness in the fight against corruption. The authorities assured the mission that the change in the reporting channels was intended to reinforce the power of the CNLC by giving it a say within the government.

Guinea’s Position Relative to the Convergence Criteria for the Second Monetary Zone in West Africa (WAMZ)

The convergence criteria established for the new monetary zone are divided into four primary and six secondary criteria:

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32. The authorities attributed the delays in the adoption of the reforms pertaining to the judicial system to the electoral agenda in 2003. They indicated that the regulation governing the special statute of magistrates was adopted by the Council of Ministers, and the effective implementation of legislation pertaining to the reorganization of the judiciary will be undertaken this year.

III. Statistical and Technical Assistance Issues

33. Notwithstanding the efforts made in recent years to improve statistics, problems remain in the areas of public finances, the real sector, balance of payments, and external debt (Appendix III). Some of the weaknesses in the fiscal area should be alleviated by the closure of most non-project extra budgetary accounts, the use of a computer-based budget monitoring system, and the consolidation of all government cash flows under a unified accounting framework. Weaknesses in real sector statistics relate to the data quality, as well as coverage. The launch of a new consumer price index in March 2004 should improve price statistics, and the authorities indicated that they will continue to use the improved methodology for GDP accounting. Notwithstanding some progress after two technical assistance missions from Debt Relief International, debt statistics remain weak because of lax recordkeeping, insufficient coordination among government entities, and inadequately trained personnel.

34. The authorities identified capacity-building needs in the areas of real sector statistics, monetary policy formulation, and public debt management. The World Bank will continue to provide assistance under the Capacity Building for Service Delivery project. The staff encouraged the authorities to continue implementing the recommendations of previous technical assistance missions and to work closely with the West Africa Regional Technical Assistance Center (West AFRITAC) to address capacity-building needs.

IV. The PRSP Progress Report

35. The mission discussed the PRSP progress report, including the revised medium-term macroeconomic framework underlying the strategy, and the content of the Joint Staff Assessment (JSA).30 The JSA indicates that the progress report could have benefited from (i) a better analysis of the sources of growth; (ii) taking account of up to date poverty indicators; and (iii) a list of measures to correct the strategy in areas where objectives were missed. The authorities concurred with these observations and indicated that they will be taken into account in next year’s progress report.

V. Staff Appraisal

36. Policy implementation was very weak in 2003. The government’s expansionary fiscal stance, its continued de facto control of the official exchange rate, and the absence of progress in the structural reform area, weakened economic performance. Economic growth was very low and savings and investment declined sharply. In the absence of external budgetary assistance, the increasing fiscal deficit was financed by an accumulation of arrears and an increased recourse to bank financing. The resulting monetary overhang has been associated with accelerating inflation, harmful to the poor.

37. Multiple currency practices were intensified in 2003 and the first half of 2004. As indicated in the last Article IV consultation report (Country Report No. 03/250, 8/14/03), the lack of a mechanism to prevent the rates in the official and the parallel markets from diverging by more than 2 percent constitutes an MCP. The measures introduced in 2003 consisting in an administrative allocation of foreign exchange have given rise to new exchange restrictions and a new MCP subject to Fund approval under Article VIII. Since the authorities have not yet set a clear timetable for eliminating these practices, the staff does not recommend the approval of these MCPs. The staff welcomes the depreciation of the official rate that took place in July 2004, which brings it more in line with market levels, but recommends abandoning the present auction system and moving toward a floating exchange rate determined through interbank trading.

38. The government’s emergency recovery program adopted in March 2004 is a step in the right direction but is not sufficient to put the economy back onto a solid growth trajectory. The program proposes a substantial tightening of policies, albeit not sufficient to bring about a desired rapid decline in inflation. Cognizant of the difficulty in realizing short-term fiscal adjustments beyond what is currently envisaged, initiating a track-record SMP would require that the emergency program has started to bear fruit, is vigorously pursued, and augmented with decisive action on adopting a floating exchange rate system and implementing the long delayed recommendations of the 2002 safeguards assessment mission, and initiating urgently needed structural reforms.

39. The medium-term prospects will depend on continued political will to adopt and steadily pursue sound, pro-growth, and poverty reducing policies. The staff welcomes the cautious growth assumptions underlying the revised macroeconomic framework of the PRSP, but achieving these targets will require strong commitment to implement the structural reform agenda so as to elicit the appropriate supply response. It encourages the government to consider an even more ambitious reform agenda to accelerate growth further and help achieve the Millennium Development Goals. In particular, the staff urges the authorities to rapidly restructure the public utility enterprises to alleviate the shortages in electricity and water supply, to tackle the operational difficulties in the mining sector, and to promote export diversification. Also, the staff urges the authorities to rapidly and forcefully step up the fight against corruption and show determined progress in reforming the judicial system.

40. The risks to successful policy reform are significant. They include political and security tensions, lack of diversification of the economy, shortfalls in donors’ support, and balance sheet vulnerabilities linked to the growing domestic debt. The staff urges the government to demonstrate unwavering commitment to sound policies, resist pressures from entrenched interests, and improve institutions to resolutely move the reform agenda forward.

41. The cornerstone to improving macroeconomic performance and reducing domestic debt is the implementation of much tighter fiscal policies. This will require continuation and reinforcement of the fiscal tightening undertaken since April. For the medium-term, achieving a sound fiscal policy will depend critically on improving revenue performance, containing defense spending, and on keeping nonproductive outlays to a strict minimum to free up resources to bolster domestically financed investment and social outlays. The staff calls on the government to fully implement the WAEMU’s CET in 2005, to adopt the measures proposed by the recent FAD technical assistance mission on fiscal administration, and to continue strengthening the customs administration to enhance revenue. It also encourages the government to implement the recommendations of the 2003 public expenditure review to increase the efficiency of spending.

42. The staff encourages the central bank to focus monetary policy on its primary objective of containing inflation. Given the monetary overhang, liquidity management needs to become much more proactive, based on the recommendations of MFD technical assistance missions. The central bank should stop accommodating the Treasury and finance the government through the issuance of treasury bills. The central bank should also continue to strengthen bank supervision and push for the adoption of the revised banking and microfinance laws by Parliament.

43. Sustaining external accounts will require implementing structural reforms and lessening interventionist policies in order to diversify the export base. Regarding external debt, it will be important for the government to pursue its reforms efforts so as to eventually regain access to more of the HIPC Initiative relief it qualified for at the decision point, without which debt will remain unsustainable. In this regard, the authorities should endeavor to eliminate external debt arrears to normalize relations with donors.

44. Guinea’s statistical data remain weak and needs to be improved to strengthen surveillance. The staff calls on the authorities to pursue the improvements already underway, notably by drawing on the technical assistance from STA, West AFRITAC, and donor agencies.

45. It is proposed that the next Article IV consultation be held on the standard 12-month cycle.

APPENDIX I Guinea: Relations with the Fund

(As of May 31, 2004)

I. Membership Status: Joined on September 28, 1963; Article VIII

II. General Resources Account:

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III. SDR Department:

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IV. Outstanding Purchases and Loans:

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V. Financial Arrangements:

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VI. Projected Payments to the Fund (without HIPC Assistance)

(SDR million; based on existing use of resources and present holdings of SDRs):

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Projected Payments to the Fund (with Board-approved HIPC Initiative Assistance) (SDR million; based on existing use of resources and present holdings of SDRs):

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VII. Implementation of HIPC Initiative:

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VIII. Safeguards Assessments:

An on-site safeguards assessment of the BCRG was completed on July 11, 2002; it concluded that substantial risks existed in the central bank’s external audit mechanism, financial reporting framework, and system of internal controls. The authorities have yet to implement all the corrective actions recommended.

IX. Exchange Arrangements:

Guinea has a de jure managed floating exchange rate with no preannounced path, which has been reclassified as a de facto peg because of the central bank’s de facto fixing of the exchange rate. The official exchange rate of the Guinean franc is determined monthly in the auction market for foreign exchange at the central bank. However, due to a lack of liquid foreign exchange, no auctions were held between late 2003 and July 2004, and the official rate of the Guinean franc remained at GF 2,000 per U.S. dollar. An auction was held on July 14, 2004, with the rate depreciating to GF 2,500 per U.S. dollar; at the auction held on July 21, 2004, the official rate remained unchanged. Commercial banks are, in principle, free to buy and sell foreign exchange at any rate. The lack of a mechanism to prevent the rates in the official and parallel markets from diverging by more than 2 percent and the administrative allocation of foreign exchange to finance specific imports give rise to multiple currency practice.

X. Article IV Consultation:

Guinea is on the 12-month cycle. The last consultation was concluded by the Executive Board on July 16, 2003.

XI. Technical Assistance: 32

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XII. Resident Representatives:

Mr. Jones has been Resident Representative since July 2003.

APPENDIX II Guinea: Relations with the World Bank Group

Partnership in Guinea’s Development Strategy

1. Guinea’s development strategy is laid out in the government’s poverty reduction strategy paper (PRSP), which was endorsed by the Executive Board of the Bank on July 25, 2002. The PRSP rests on three main pillars: first, to sustain faster economic growth and create income-earning and employment opportunities, particularly for the rural poor; second, to increase and extend access to basic services; and third, to improve governance and strengthen institutional and human capacity. The PRSP builds on the groundwork of Guinea’s poverty reduction policies as formulated in the “Guinea—Vision 2010” document of December 1996 and the interim PRSP of 2000.

2. The World Bank is taking the lead in the policy dialogue and areas of structural reforms, including banking sector restructuring; privatization; administrative decentralization; capacity building; sector programs in the priority areas of health, education, rural development, and road maintenance; and the anticorruption program. Overall, noticeable improvement has been made in the above-mentioned areas; however, in the judicial sector and utilities sector (telecommunications, electricity, and water), progress has been slow.

Bank Group Strategy

3. The current Country Assistance Strategy (CAS 2004-06) for Guinea was approved by the Board in June 2003. The CAS presents three scenarios. In the high-case scenario, the Bank would increase budget support through the PRSC and provide project financing to the power and water sectors. The PRSC would provide an adequate time frame and resources for tackling medium- and long-term reforms in the key areas of decentralization, governance, and divestiture. In the base case, the CAS would support those aspects of the PRSP approved by the authorities in March 2002 and prepare the way for a new relationship with the development partners based on a gradual phasing in of programmatic lending, leading to more efficient allocation and utilization of external aid. Finally, the low-case scenario assumes government is unable to make significant progress in resolving key macroeconomic, fiscal and governance issues. Any assistance would be limited to safeguarding the progress achieved in the priority sectors, vital to poverty reduction. There would be no budget support nor infrastructure financing.

4. IDA provided a fourth Structural Adjustment Credit (SAC IV) to Guinea in 2001, which is designed to support the country’s poverty reduction strategy in the areas of public expenditure management, governance, and public goods delivery to the poor. The SAC IV has had a satisfactory impact on the country’s macroeconomic performance in the medium term. The credit was disbursed in one tranche (US$50 million) on the grounds that, despite the lack of any external budget support for a two-year period, Guinea had kept its economy broadly on track and had demonstrated commitment to the program reforms with regard to public expenditure management, governance, and the decentralization of basic service delivery. The adjustment program supported by SAC IV paved the way for programmatic lending to support the government’s poverty strategy and, to a large extent, prepared the ground for preparation of a Poverty Reduction Support Credit (PRSC), originally scheduled for FY04, on the assumption of continuing sound macroeconomic performance and implementation of the reform program. However, macroeconomic management began to deteriorate seriously in mid-2002 and the Fund’s PRGF program went off track in December 2002. Key contributing factors were: overspending related to security outlays, a highly expansionary fiscal stance, a lax monetary policy and fixing of the exchange rate leading to rising inflation and a serious decline in gross reserves. A wavering commitment to sound macroeconomic policies, slow progress in governance and risks to political stability, combined with exogenous risks - lower prices for bauxite and other commodities against a backdrop of regional instability - suggest that GDP growth in 2003 will only reach 2.1 percent. Given this continuing poor macroeconomic performance, Guinea may be considered as currently reflecting the CAS’ low-case scenario. Consequently, the Bank’s support will be limited to protecting the sectors vital to poverty reduction.

5. As of June 29, 2004, the IDA has approved 62 credits for Guinea, of which four were in the transport and infrastructure sector; eight in the energy, water, and telecommunications sector; five in strengthening the country’s management capability [Technical Assistance / Economic Management], six in financing rural sector development; four in the urban sector; three in the health sector; four in the education sector; three in mining sector development; four in structural adjustment; four in the financial sector; and one in private sector development. The total value of these projects amounts to about US$1,420 million equivalent, of which US$1,287 million has been disbursed. During the period FY98-04, the Board approved two adjustment operations (Public Expenditure Management Adjustment Credit and the Fourth Structural Adjustment Credit) and six investment operations: the Village Community Support Program, the Capacity Building for Service Delivery Program, the Microfinance LIL, the Pre-Service Teacher Education LIL, the Urban Project, and the Population and Reproductive Health Project. In July 2001, the Fourth Structural Adjustment Credit (US$50 million), the Education-for-All Project (US$70 million), and the Rural Electrification LIL (US$5 million) were approved. The Bank’s current portfolio in Guinea reflects the priorities of the PRSP. It comprises eight projects totaling US$204.3 million, of which US$20.3 million is in the form of a grant, and US$132.2 million remains undisbursed. The Education for All Program, the Multisectoral HIV/AIDS Program and the Decentralized Rural Electrification Project will be implemented throughout the CAS period. The non lending program includes fiduciary assessment; a public expenditure review (PER); analysis of public finance management and audit systems; a cross-cutting assessment of Guinea’s social, structural, and sector development under the PRSP; and Bank/Fund collaborative work on social impact analysis.

6. Under the current low-case CAS scenario, the proposed World Bank lending program for FY04-06 will support a second Health Sector Project (US$15 million) in FY04, a second Village Community Support Program (US$35 million) in FY05, and a second Capacity Building for Service Delivery Program (US$10 million) in FY 06.

Bank-Fund Collaboration in Specific Areas

7. The IMF and World Bank staffs maintain a collaborative relationship in supporting the government’s structural reforms. As part of its overall assistance to Guinea through lending, country analytic work, and technical assistance, the Bank supports policy reforms in the following areas in collaboration with the Fund.

Public Expenditure Management

8. Improvements in public expenditure management have been one of the top priorities of the Guinean government since 1996. The Bank, the Fund, and other donors have worked closely together to provide the government the needed support for institutional and policy reforms. While the Fund is leading the dialogue on tax policy, the Bank is focusing on strategic resource allocation and operational efficiency of public expenditures. To enhance strategic resource allocation and operational efficiency, the Bank has assisted the government in the preparation of the medium-term expenditure framework (MTEF) and is supporting the strengthening and opening up of the budget process as well as the allocation of resources to pro-poor priority areas at the decentralized level. A Country Procurement Assessment Review (CPAR) was undertaken in 2002 while in 2003 a Public Expenditure Review (PER), managed by the Bank, was conducted with strong government ownership, extensive consultation of beneficiaries and development partners and in close collaboration with the Fund and the AfDB. The PER was complemented by a full CFAA which gave close attention to public expenditure management systems, to the auditing of public finances and to related governance issues

Poverty and Social Impact Analysis

9. The Bank and Fund’s respective Guinea country teams are currently discussing the Poverty and Social Impact Analysis. It is envisaged that a few selected areas may be analyzed over the coming years. These might cover: an analysis of the impact on social output indicators of government spending in health and education, an assessment of the impact of the adoption of the Common External Tariff of the West African Economic and Monetary Union (WAEMU) on the taxation of basic consumer goods, an assessment of the impact of exchange rate flexibility on consumer prices, a social impact analysis of trade reforms, and an analysis of the impact of taxation on growth and income distribution. The selection of the few reforms to analyze will be based on the importance of the expected poverty and social impacts of each reform, the prominence of the issue in the government’s agenda, the timing and urgency of the reform, and the level of national debate surrounding the reform. The 2003 household survey should be completed as soon as possible so that the key determinants of poverty and their interdependency be identified, making it possible to track poverty impact over time.

Public Service Reform and Improved Service Delivery

10. In recent years, the government of Guinea, with the support of the Bank and other donors, has launched a number of major initiatives to improve performance and to foster greater accountability, transparency, and integrity in the public sector. These include (i) the Public Finance Management Reform Program; and (ii) the National Anti-Corruption Strategy and Action Plans for Guinea. Among these reforms, the public service reform program plays a central role, since its objective is to improve accountability, transparency, and resource management for service delivery. The program is closely linked with other major reforms in public finance and decentralization. Cooperation between the Bank and the Fund covers those areas where public sector reform has a direct impact on fiscal stability and public sector financial management.

Trade Reforms

11. The Bank and the Fund also are working together closely to assist Guinea in establishing a pro-growth trade framework. While the Fund has taken the lead in reforms in the tariff regime, the Bank is trying to foster trade through the Integrated Trade Framework. The Bank is also involved in a dialogue on trade reforms in the context of the WAEMU at the regional level.

World Bank Contact Person: Mr. Ezzeddine Larbi (Phone: 458-2996).

Guinea: Financial Relations With the World Bank Group—Statement of Loans and Credits

(As of June 29, 2004; in millions of U.S. dollars)

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APPENDIX III Guinea: Statistical Issues

12. Although improvements have been made in recent years in the availability of detailed government finance data, serious statistical problems remain, particularly in the compilation of real sector and balance of payments statistics. Changes in the financial system in recent years have affected the quality of data for deposit money banks. A law on statistics that organizes the institutional setting for producing statistics at a decentralized level was approved in 1995. However, neither the National Council of Statistics, responsible for coordinating the production of statistics, nor a technical committee responsible for providing recommendations on the statistical program—both created under the new law—seem to have improved the quality of statistics.

13. Guinea is participant to the General Data Dissemination System (GDDS) and its metadata were first posted on the Dissemination Standard Bulletin Board (DSBB) on December 12, 2003.

14. Economic and financial data provided to the Fund are generally adequate for program monitoring, although problems with the internal consistency of fiscal data and their consistency with monetary data are frequently encountered.

Real sector statistics

15. Statistics on the real sector are weak and incomplete. Only the consumer price index (CPI) is published on a regular basis, while other statistics are published irregularly, not widely distributed, and are often not reliable. There is no regular survey on mining and industrial production, nor are there statistics on employment and population.

16. After extensive work in 1990-93 to build a solid database for the national accounts, the authorities, with technical assistance from the World Bank, produced final national accounts tables for 1986 to 1988 and provisional data for 1990 and 1991; an input-output table was produced for 1990. A comprehensive household survey was prepared for 1994. Provisional national accounts were produced for 1992-96, but they do not use fully the results of the household survey and have serious shortcomings. The Ministry of Planning and Cooperation prepared updates of macroeconomic data and projections on the basis of the 1994 national accounts before it was eliminated in June 2000 and some of its functions allocated to the Ministry of Finance. In October 2000, the authorities presented final national accounts for 1995-96, and provisional accounts for 1997-98. All national accounts data were significantly revised on that occasion. A program to reinforce the national accounts is being undertaken with the technical assistance of the regional statistical office (AFRISTAT) and the Gesellschaft für Technische Zusammenarbeit (GTZ). The work is expected to lead to the production of input-output matrices on an annual basis.

17. The consumer price index for Conakry is available on a monthly basis, with a one-month lag. Export prices are estimated on the basis of information supplied directly by the mining companies, while import prices are based on a weighted average of partner countries’ export prices. Exchange rates are reported monthly.

18. Data on the agriculture sector have been published only sporadically in the form of Food and Agriculture Organization/United Nations Development Program surveys. No data on employment or labor costs are available.

19. In March 2000, a STA mission presented detailed recommendations on how to improve real sector statistics. The mission identified the lack of a budget for the compilation of current statistics and poor professional training as the main causes of the statistical system’s weakness. Guinea has developed an action plan to address these weaknesses, but financial resources for many of these measures remain to be identified.

Balance of payments statistics

20. The authorities have implemented some of the recommendations made by a balance of payments statistics mission in May 1995. Notably, coverage of trade in services, private transfers, and capital flows has been expanded by surveying service providers and large companies on an annual basis. However, the survey is not comprehensive, and there are no sanctions for nonresponse. In view of the difficulties encountered with the compilation of annual statistics, the mission’s recommendation to compile data on a quarterly basis has not yet been implemented.

21. Merchandise trade statistics are reported in the standard Harmonized System of Customs Classification, net of imports by diplomats and transit trade. In spite of the technically advanced method of presentation, the data are clearly inconsistent with actual developments in the country. Some of these inconsistencies may be due to smuggling, as exports of gold and diamonds are subject to modest export taxes and imports are subject to import duties. However, the trade statistics also report significant exports of aluminum products, which, according to the Ministry of Mining and Energy, are not produced in the country. Thus, these data are substantially adjusted prior to publication.

22. The balance of payments statistics also affect national accounts data. The national accounts are based on trade data that include transit trade and imports by diplomats, and thus overestimate the openness of the economy. However, the national accounts use estimates of trade in services, which are well below those estimated on the basis of the surveys conducted by the central bank. The authorities have requested additional technical assistance from STA for balance of payments statistics.

23. However, since December 2002, the authorities have not reported monthly data on international reserves to the IMF Statistics Department.

Government finance statistics

24. Comprehensive monthly central government budgetary data are compiled by the Ministry of Finance on a cash basis for revenue and on commitment and cash bases for expenditure. AFR receives preliminary data within 15 days and main final data within one month. Budgetary data are often not internally consistent. Consolidated central government operations data come from the Treasury.

25. The budget includes the bulk of all government operations, although it excludes a number of “satellite” accounts that are not directly incorporated in the budget. There are also significant differences between the national definition of general government and that provided by the Government Finance Statistics Manuals (GFSM). Moreover, autonomous funds, such as the Road Fund, are only partly incorporated in the budget. For the Road Fund, the largest autonomous fund, 100 percent of resources are “committed” through the budget and transferred from the budget to the fund. Actual disbursements are made at the Road Fund’s discretion (monitored, however, through its account at the central bank). The fuel tax is not expressly earmarked for the Road Fund, but it is received by the general budget and transferred to the Road Fund through the budget.

26. The latest data published in the GFS Yearbook are for 1999. Guinea does not report fiscal data for publication in International Financial Statistics (IFS).

Monetary accounts statistics

27. Monthly data on monetary authorities, deposit money banks, and interest rates are available. Developments and changes in the financial system during the last few years, including the liquidation and restructuring of some banks, are not fully reflected in the monetary statistics, owing to problems of data collection, the classification of instruments, and the sectorization of economic activities. A monetary and financial statistics mission visited Conakry in the second half of November 2000 to review the coverage of the monetary statistics, as well as data collection and compilation practices. The mission summarized its main findings and recommendations in a report and action plan left with the authorities. The authorities have made good progress in taking the measures the report proposed. In particular, efforts are being made to strengthen the commercial banks’ reporting practices, especially the classification of nonperforming loans.

28. Beginning 2001, the authorities undertook regular reporting of monetary data for publication in IFS. However, the timeliness of monetary data reporting has been uneven since 2003. The most recent data for the monetary authorities and the deposit money banks that will be published in the August 2004 edition of the IFS refer to December 2003.

Guinea: Core Statistical Indicators

(As of May 31, 2004)

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D = daily; W = weekly; M = monthly; Q = quarterly; A = annual.

BCRG = Central Bank of the Republic of Guinea; MEF = Ministry of Economy and Finance; MOP = Ministry of Planning.

C = cable or facsimile; M = mail; V = staff visits/missions.

U = unrestricted.

APPENDIX IV Guinea: Debt Sustainability Analysis

1. At end 2003, Guinea’s external public debt amounted to US$3.4 billion in nominal terms, including arrears. Of this total, 62 percent is owed to multilateral creditors, and the quasi-totality of the remainder to bilaterals. The Paris Club accounts for almost 70 percent of the debt owed to bilaterals. After full use of traditional debt relief mechanisms, the stock of debt at end-2003 is reduced to US$2.5 billion. Nominal debt service due was US$146 million in 2002 and US$184.2 million in 2003. After taking into account the different Paris Club rescheduling agreements and the interim assistance under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative, debt service to be paid in these two years was US$88 million and US$103 million, respectively. In 2003, the amount actually paid was US$85 million because of an accumulation of arrears of US$18 million.

2. At the time Guinea reached its decision point under the HIPC Initiative in December 2000, its stock of debt was reduced substantially. The NPV of debt-to-exports ratio after full use of traditional debt relief mechanisms was estimated at 219 percent at end-1999 and projected to decline to 166 percent by end-2003. With HIPC debt relief of US$545 million in NPV terms, this ratio was reduced to 150 percent at end 1999 and 133 percent at end-2003, and was expected to remain under the 150 percent threshold throughout the projection period. Since then, there have been changes in key variables affecting the NPV of debt-to-exports ratio. These changes are taken into account in the new projections.

3. Projections under the baseline scenario assume the implementation of sound macroeconomic policies to correct the imbalances of the past couple of years as described in section II, C of the staff report. Real GDP growth is projected to average 5 percent of GDP during 2005-09 and 7 percent afterwards as new private investment comes on board, reforms and policies allowing.33 The scenario also critically depends on regional security, climatic conditions, and by the evolution of bauxite, alumina, and gold prices. The overall fiscal balance is projected to record deficits until 2015. The external current account is projected to improve gradually and to become roughly balanced after 2015.

4. On external debt, the baseline projections assume, as at the decision point, full use of traditional debt relief mechanisms in the computation of the NPV of debt and borrowing on concessional terms for all new loan disbursements. Based on the policies and assumptions indicated above, Guinea’s external debt ratios would remain at unsustainable levels, as defined under the debt-to-exports criteria. At end-2003, the NPV of debt-to-exports ratio would be 201.4 percent compared with 166 percent estimated for the same year at the decision point. The increase is explained by a 2 percentage point decline in the discount rate—from over 7 percent to 5 percent—and by an almost 30 percent shortfall in exports.

5. The DSA indicates that the HIPC debt relief Guinea qualified for at the decision point would reduce the country’s debt burden to sustainable levels, provided that the authorities persevere with the implementation of appropriate policies to bring down domestic debt servicing costs and that the residual financing gaps from 2005 onward be financed at highly concessional terms. Although the NPV of debt-to-exports has deteriorated compared with projections made at the decision point, an unchanged HIPC debt relief of US$545 million in NPV terms would reduce Guinea’s NPV of debt-to-exports ratio below the threshold of 150 percent. In particular, the end-2003 NPV of debt-to-exports ratio would be reduced to about 133 percent. Nonetheless, Guinea remains vulnerable to policies and exogenous shocks that affect output and exports.

6. The sensitivity analyses indicate that Guinea’s debt indicators would worsen if key variables such as real GDP and export growth were to be affected by adverse shocks. In an alternative scenario that assumes that key variables remain at their historical averages from 2004 onward, the NPV of debt-to-exports ratio is higher than in the baseline scenario from 2006 onward. The difference reaches almost 31 percentage points in 2008. As the bound tests indicate, when the growth of exports is assumed to remain—from 2004 onward—permanently one standard deviation below their historical averages, the deterioration in the NPV of debt-to-exports ratio is, not surprisingly, even more substantial.

Figure 1.
Figure 1.

Guinea: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2003-2023

(In percent)

Citation: IMF Staff Country Reports 2004, 392; 10.5089/9781451815245.002.A001

Source: Staff projections and simulations.
Table 1.

Guinea: External Debt Sustainability Framework, Baseline Scenario, 2000-2023 1/

(In percent of GDP, unless otherwise indicated)

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Source: Staff simulations.

Includes both public and private sector external debt.

Derived as [r - g - ρ(l+g)]/(l+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. do

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from

Assumes that NPV of private sector debt is equivalent to its face value.

Current-year interest payments devided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Table 2.

Guinea: Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed External Debt, 2003-23

(In percent)

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Source: Staff projections and simulations.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flow.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in this.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.
1

See also West African Economic and Monetary Union—Recent Economic Developments and Regional Policy Issues of June 30, 2004 (www.imf.org).

2

Defense accounted for about 50 percent of the overruns, which the authorities attributed to the need to reinforce border security to prevent rebel incursions from unstable neighboring countries. The balance included spending associated with the run-up to the December 2003 presidential elections. There was an almost 0.5 percent of GDP shortfall in nonwage current spending in social sectors.

3

Countries in the euro area and the West African Monetary Union account for over 60 percent of Guinea’s trade.

4

The large rise in diamonds exports is believed to reflect a better recording of these exports since the introduction in 2003 of national export certificates in line with the 2002 UN Resolution on Conflict Diamonds.

5

There is a question mark over the degree of liquidity of official reserves, given the difficulties Guinea has had recently in meeting its debt service obligations. This matter would be clarified by implementing the safeguards assessment mission’s recommendations.

6

Guinea has a record of being in short-term arrears to the Fund, which has worsened recently, with 11 occurrences since the beginning of 2004.

7

See Ex-Post Assessment Report of July 7, 2004 (www.imf.com).

8

They indicated that increases in fiscal revenue would come only gradually given the large role of the informal sector in economic activity, and that the slow pace of structural reforms under the second PRGF (2001-04) was partly due to limited progress in terms of increased production and employment generation from the first wave of reforms. Also, they suggested that in assessing performance, the Fund pay greater attention to country-specific considerations, notably the hostile regional environment that Guinea had faced.

9

Including a curtailment of nonwage spending on social sectors.

10

The mission and the authorities estimated that to get inflation on a clear downward path in 2004, base money growth should not exceed 10 percent, implying a bank financing of the budget deficit limited to 1.2 percent of GDP. Considering the currently projected deficit and the need to reduce external payment arrears to normalize relations with donors, this would entail financing more than half the deficit by the nonbank sector or reducing the deficit itself by more than one half. The former is very unlikely and the latter is not realistic.

11

Such resources could come from a better-than-envisaged revenue performance or from privatization receipts.

12

Country Report No. 03/250; 8/14/03.

13

Given limited external financing and negative non-bank domestic financing, the fiscal deficit is expected to be financed mostly through bank credit, including central bank advances.

14

The authorities administratively allocated foreign exchange to finance rice and petroleum products imports, and allowed banks to finance other priority imports at negotiated exchange rates in between the official and parallel rates.

15

With an estimate of at least 70 percent of foreign exchange transactions channeled into the parallel market owing to the limited use of formal mechanisms in Guinea, this market, which functions free of government intervention, largely reflects market conditions. Except for a few spikes, the divergence between the parallel and the official exchange rates was generally 2 percent, indicating that structural factors did not affect the parallel market premium significantly.

16

On July 14, 2004, in the first foreign exchange auction to be held since November 2003, the official rate depreciated by 20 percent.

17

The May 2004 MFD technical assistance mission proposed the abandonment of the present auction system (MED), which is unable to provide an indicator of the true value of the Guinean franc, because it attracts only small amounts and increases the scarcity of foreign currencies in the banking system and the holding of export receipts in offshore accounts.

18

The mission expressed concern to the authorities about the rapid increase in the “other items (net)” item in the central bank balance sheet, for which the authorities were not able to provide a full explanation.

19

The 2002 FAD technical assistance mission indicated that the main benefit of the adoption of the WAEMU’s CET would be the simplification of Guinea’s tariff system. It projected the positive revenue impact to amount to 0.4 percent of GDP by 2005, mostly from the suppression of ad hoc exemptions. In light of this, the projected revenue increase over the medium-term is quite conservative.

20

As the primary balance path encompasses an almost 1 percentage point of GDP increase in domestically-financed investment during 2004-07, its steadiness is not at odds with the projected almost 1 percent of GDP increase in government savings over the same period.

21

The difficulty in tracking externally financed development expenditures has created problems in determining the public investment item in the national accounts.

22

On a monthly average in the first quarter of 2004, currency accounted for 87 percent of reserve money.

23

In the area of microfinance, the four major institutions that currently operate in the sector have been accredited by the central bank, and on-site audits are undertaken since 2003. A strengthening of the central bank supervisory capacity is still needed to ensure adequate surveillance of the sector.

24

The World Bank is helping to foster trade through its support under the Integrated Trade Framework.

25

An impact study prepared by the EU in April 2004 convincingly highlights the large adjustment that the Guinean economy may face because of the Economic Partnership Agreement, including an important revenue loss from tariff collections on Guinean imports form the EU in the absence of rebalancing tax and tariff revenues.

26

So far, Guinea has not yet taken advantage of AGOA. However, interest among the government and the local community remains high. The AGOA action committee has identified several products that would be AGOA-export worthy, including shea butter, fresh fruit, artisanal goods, and textiles. The staff encourages progress in this area, noting the role FDI has played in countries that have benefited more from AGOA than Guinea.

27

The DSA presented in Appendix IV indicates that the debt relief Guinea qualified for at the decision point would reduce the country’s stock of debt to sustainable levels.

28

Most of which have already been met. For more details, see Box 6 in Country Report No. 03/250, 8/14/03.

29

The bids are due to be opened on July 30, 2004.

30

PRSP Progress Report and Joint Staff Assessment report; 7/15/04 (www.imf.org)

31

The PRGF went off track as of end-December 2002.

1

Assistance committed under the original framework is expressed in net present value (NPV) terms at the completion point, and assistance committed under the enhanced framework is expressed in NPV terms at the decision point.

2

Under the enhanced framework, an additional disbursement is made at the completion point corresponding to interest income earned on the amount committed at the decision point but not disbursed during the interim period.

32

This does not reflect continuing technical assistance provided since 2003 by the West AFRITAC resident experts.

33

In Guinea’s PRSP Report of July 3, 2002 (www.imf.org), annual real GDP growth was targeted to reach 10 percent by 2010. The current projections take into account the setback resulting from bad policies during 2002/03 and delays to date in the implementation of structural reforms.

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Cover IMF Staff Country Reports
Guinea: Staff Report for the 2004 Article IV Consultation
Author:
International Monetary Fund
Volume/Issue:
Volume 2004: Issue 392
Publisher:
International Monetary Fund
ISBN:
9781451815245
ISSN:
1934-7685
Pages:
66
DOI:
https://doi.org/10.5089/9781451815245.002
  • Figure 1.
    View in gallery
    Figure 1.

    Guinea: Real Sector Developments, 1998–2003

    (In percent of GDP, unless otherwise indicated)

  • View in gallery

    Real Gross Domestic Product Growth

    (Percent)

  • View in gallery

    Overall Balance Excluding grants

    (In percent of GDP)

  • View in gallery

    Inflation, Average

    (Percent)

  • View in gallery

    Broad Money Growth

    (Percent)

  • View in gallery

    Government Finances, 1998 - 2003

    (In percent of GDP)

  • View in gallery

    Public Expenditure, 1998 - 2003

    (In percent of GDP)

  • View in gallery

    Monetary Aggregates, January 1998 - May 2004

    (In billions of Guinean francs)

  • View in gallery

    Credit to the Government and to the Private Sector, 2001-2004

    (In percent of broad money)

  • View in gallery

    Monetary Aggregates and Sterilization Bills, January 1998 - May 2004

    (In billions of Guinean francs)

  • View in gallery

    Interest rates on sterilization bills (TRMs) and Consumer Price Inflation, 2001-2004

    (In percent)

  • View in gallery

    Effective Exchange Rates, January 1998 - April 2004

    (Index, 1990 = 100)

  • View in gallery

    Exchange Rates, January 2000 - July 2004

    (Guinean francs per U.S. dollar)

  • View in gallery

    Demand and Sales of Foreign Exchange at Official Auctions, January 2001 - May 2004

    (In millions of U.S. dollars)

  • Figure 2.
    View in gallery
    Figure 2.

    Guinea: Medium-Term Framework (Policy Adjustment Scenario), 2003–08

    (In percent of GDP, unless otherwise indicated)

  • Figure 1.
    View in gallery
    Figure 1.

    Guinea: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2003-2023

    (In percent)

Figure 1.

Guinea: Real Sector Developments, 1998–2003

(In percent of GDP, unless otherwise indicated)

Real Gross Domestic Product Growth

(Percent)

Overall Balance Excluding grants

(In percent of GDP)

Inflation, Average

(Percent)

Broad Money Growth

(Percent)

Government Finances, 1998 - 2003

(In percent of GDP)

Public Expenditure, 1998 - 2003

(In percent of GDP)

Monetary Aggregates, January 1998 - May 2004

(In billions of Guinean francs)

Credit to the Government and to the Private Sector, 2001-2004

(In percent of broad money)

Monetary Aggregates and Sterilization Bills, January 1998 - May 2004

(In billions of Guinean francs)

Interest rates on sterilization bills (TRMs) and Consumer Price Inflation, 2001-2004

(In percent)

Effective Exchange Rates, January 1998 - April 2004

(Index, 1990 = 100)

Exchange Rates, January 2000 - July 2004

(Guinean francs per U.S. dollar)

Demand and Sales of Foreign Exchange at Official Auctions, January 2001 - May 2004

(In millions of U.S. dollars)
Figure 2.

Guinea: Medium-Term Framework (Policy Adjustment Scenario), 2003–08

(In percent of GDP, unless otherwise indicated)
Figure 1.

Guinea: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2003-2023

(In percent)