This 2005 Article IV Consultation highlights that Guinea’s economic performance has deteriorated in recent years, largely as a result of a weak policy framework and against a background of mounting regional insecurity and low prices for its main commodity exports. Economic growth since 2000 has slowed to an average of about 2.5 percent, inflation accelerated to almost 30 percent, and international reserves fell to less than one month of imports. Real GDP growth is expected to recover moderately in 2005, but little progress is expected in reducing inflation.

Abstract

This 2005 Article IV Consultation highlights that Guinea’s economic performance has deteriorated in recent years, largely as a result of a weak policy framework and against a background of mounting regional insecurity and low prices for its main commodity exports. Economic growth since 2000 has slowed to an average of about 2.5 percent, inflation accelerated to almost 30 percent, and international reserves fell to less than one month of imports. Real GDP growth is expected to recover moderately in 2005, but little progress is expected in reducing inflation.

1. This statement reports on information that has become available since the issuance of the staff report for the 2005 Article IV Consultation and Staff-Monitored Program. This information does not change the thrust of the staff appraisal.

2. Although Guinea met most of the quantitative criteria and structural benchmarks under the SMP for end-September 2005, inflation remains high and recently there were slippages in policy implementation. Notwithstanding the decline in inflation in recent months, the authorities’ year-end objective is likely to be exceeded by a wide margin. Monthly inflation has declined gradually from a peak of 6 percent in June 2005 to 0.8 percent in November; however, 12-month inflation is expected to reach close to 29 percent by end-2005, compared to the SMP objective of 19 percent. Recent indicators suggest that real GDP growth as well as balance of payments developments in 2005 remain in line with the expectations in the staff report.

3. All but one of the end-September 2005 quantitative indicative targets under the staff-monitored program (SMP) were met (Table 1):

  • The fiscal primary balance improved to a surplus of 2.9 percent of GDP in the first nine months of 2005 compared to the target of 2.2 percent of GDP.

  • The indicative target on central government noninterest current expenditure was exceeded, albeit by a small margin; the excess was mainly due to the faster than expected depreciation of the exchange rate.

  • Net bank credit to the government contracted during the first nine months of 2004.

  • Reserve money contracted by GNF 25 billion between March and September, compared to an expansion of GNF 29 billion under the SMP.

  • The target on the stock of net foreign assets (NFA) of the central bank was met, in part owing to tax advances from the mining companies (discussed in the staff report) and the proceeds of the sale of a GSM telephone license to a foreign operator in the third quarter of 2005.

Table 1.

Guinea: Quantitative Indicative Targets, 2004-September 2005

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On a commitment basis; the domestic primary balance is defined as the difference between total revenue (excluding grants) and noninterest domestic expenditure, excluding foreign-financed capital expenditure.

Cumulative from the beginning of the calendar year

Subject to adjustment mechanisms for deviation in cash settlement of domestic arrears and disbursement of external budgetary assistance as specified in the Technical Memorandum of Understanding (TMU).

Subject to adjustment mechanisms for accumulation of new external arrears and deviation in disbursement of external budgetary assistance as specified in the Technical Memorandum of Understanding (TMU).

Excluding commercial credits.

Excluding arrears under negotiation with creditors; monitored on a continuous basis.

Priority sectors include public health, education, transport, road maintenance, justice, rural development, urban planning, and social affairs. This expenditure includes outlays funded by HIPC resources.

The program targets have been revised downwards throughout by about US$23 million, following the adjustment to the central bank balance sheet on account of a foreign exchange transaction between the Central Bank and a private company. The targets from end-June are also adjusted upward for US$ 1 million of budgetary assistance obtained from China in June 2005 and which was not expected in the program.

The reserve money is reported at program exchange rates: 3200 GNF/USD for end-June and 3276 GNF/USD for end-September.

4. All end-September SMP structural benchmarks were met (except for the continued presence of a multiple currency practice; Table 2):

  • A provision of the general rules on public accounting was amended to eliminate the possibility of extrabudgetary spending, and the government launched a call for bids for an audit of the computerized expenditure management system.

  • The government adopted an action plan to combat corruption. As part of this plan, a draft anti-corruption law is being finalized. In addition, a number of measures are being taken to strengthen the ability of citizens to bring cases of corruption to the attention of the authorities and to increase public awareness of corruption. The anti-corruption plan is part of a broader strategy to promote good governance, which is being developed with the support of the World Bank and the European Union.

  • Action plans were adopted to strengthen the financial situation of the water and electricity companies. These plans envisage actions to reduce widespread fraud, clarify financial relationships between the government and the utilities, ensure timely payment of government bills for water and electricity consumption, and prepare an opening balance for 2006.

  • No new ad-hoc tax or customs exemptions (a continuous structural benchmark) were introduced.

  • The external audit of the international reserve position of the central bank was completed by the external auditor, and the central bank forwarded its reactions by end-September. The auditor submitted his final report in October 2005.

Table 2.

Structural Benchmarks for the 2005-06 Staff-Monitored Program

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5. However, there were serious slippages in program implementation during October-November 2005, as a result of which several of the SMP’s end-December 2005 quantitative targets may not be attained. As of end-November, base money had almost reached the level of the end-December target and central bank NFA had dropped to their end-December program levels. Also, external arrears—which had contracted until September 2005—increased in October-November. The main problems were a very rapid expansion of central bank credit to the government (reflecting in part higher government expenditures that had been delayed from earlier in the year and reduced commercial bank financing to the government) and the absence of an efficient program monitoring mechanism.

6. The authorities are taking measures to bring their program back on track. These measures include efforts to place additional treasury bonds with the commercial banks, including by raising interest rates; purchasing foreign exchange in the market to rebuild central bank NFA; and reducing external arrears by end-December to below the program ceiling. The authorities will also take action to improve policy coordination between the fiscal and monetary authorities; in particular, they will set up the treasury and liquidity committees, as specified in their November 2005 MEFP.

7. There was progress in the area of structural reform during the last quarter, and all but one of the end-December structural benchmarks under the SMP are likely to be achieved. The benchmarks related to the audit of the 2004 accounts of the central bank, closing private accounts in the central bank, performing an inventory of cross-debts between the government and the public enterprises, and adopting a plan to settle these cross debts will be met. However, the benchmark relating to the audit of domestic government debt to the private sector is not expected to be completed on time. A number of other positive developments have taken place in the last few months. On the fiscal front, wage demands have been kept under control in the face of social pressure, the number of military personnel was reduced substantially in the last quarter of 2005, and the civil service census is advancing as planned. Regarding monetary and exchange rate policy, the central bank is taking action to publish the reference exchange rate on a daily and weighted basis and to reinforce its foreign exchange department; it also raised reserve requirements. The government sold a significant proportion of its shares in the largest commercial bank to a key foreign investor. Also, three foreign investors have announced plans to develop large alumina refinery plants in Guinea. Finally, nationwide local elections took place on December 18, 2005; the elections were peaceful although voter participation seems to have been very low.

Guinea: Staff Report for the 2005 Article IV Consultation and Staff-Monitored Program
Author: International Monetary Fund