Abstract
Guinea has implemented an impressive policy shift toward macroeconomic stabilization under the economic program. Executive Directors commended this development and stressed the need for tight fiscal and monetary policies and welcomed the debt sustainability analysis and implementation of the Extractive Industries Transparency Initiative. They emphasized the need for reinstating fiscal control, improving governance, implementing structural reforms, sustained assistance from the international community to boost economic growth, and encouraged the authorities to take necessary steps to reach the HIPC completion point and qualify for debt relief under these initiatives.
I. Introduction
The Guinean authorities would like to thank Management and staff for their support to Guinea's efforts towards sound macroeconomic and structural policies.
Guinea experienced in January and February 2007 the deepest general strikes and mass protests in its history, due to the continued deterioration of the population's living standards. The strike was ended with the appointment of a new government headed by a new Prime Minister, whose mandate was to restore good governance, implement economic and financial reforms and resume cooperation with the international community, including through a Fund-supported program. Strongly committed to reverse the economic situation and put reforms back on track, the new authorities implemented an emergency recovery program, in order to curb the rise of inflation, restrain public expenditure and restore confidence with donors leading to strong mobilization of resources for infrastructure development and basic services delivery. In particular, a cash budget was adopted; extra budgetary spending suppressed and control on public expenditure strengthened with a ban on central bank financing. As a result, the economy was stabilized, as demonstrated by the resumption of economic activity and imports, sharp drop of inflation from 40 percent by end-December 2006 to 17 percent by September 2007, containment of government spending within its monthly revenue envelope, return of confidence in the national currency and the initiation of discussions with staff for a new PRGF-supported program. I should also mention that all prior actions to the PRGF which have been agreed with Staff have all been implemented.
July this year, Guinean authorities organized a donor round table in Paris in order to mobilize donor support for the country's emergency recovery program (July-December 2007) and the second PRSP for the period 2007–10. The outcome of this round table has been satisfactory as the donors made substantial pledges to bridge the financing gaps.
In order to strengthen their efforts to reinstate fiscal control, improve governance and implement needed structural reforms to boost economic growth, the Guinean authorities are requesting a three-year arrangement under the Poverty Reduction Strategy and Growth Facility (PRGF). They also call on the resumption of the interim assistance granted by the IMF under the enhanced HIPC Initiative, in particular, the third tranche of interim HIPC assistance. The well-documented debt sustainability analysis has highlighted the debt distress of Guinea. The authorities are hopeful that successful performance in implementing a new PRGF program will enable them to reach in a near future the HIPC completion point and benefit from MDRI which would reduce the external debt burden to sustainable levels.
II. Recent Economic Developments
Lack of external assistance along with laxed fiscal and monetary policies led to a deep deterioration of the economy in 2006, which fueled the general strike in early 2007. In 2006, real GDP growth slowed, inflation reached 39 percent, gross foreign reserves amounted to two weeks of imports, large amount of domestic and external arrears accumulated and the external current account widened, despite the increase in bauxite and alumina prices. On the fiscal front, the overall deficit deteriorated further and was mainly financed by the central bank, which led to high inflation and exchange rate depreciation. To reverse this situation and put the needed reforms on track, the new government strongly supported by all stakeholders, notably the trade unions and civil service organizations, took tightened fiscal and monetary measures to stabilize the economy.
The strong commitment of the Guinean authorities to adjustment and reforms in order to stabilize the economy and restore stakeholders' confidence has translated into significant progress in the fiscal and monetary areas as well as in the structural reforms. Due to past policy shortfalls and to the strikes which affected all economic sectors, real GDP growth is projected to rebound to less than 2 percent in 2007. However, inflation decelerated to 17 percent in September and the target of 15 percent set out for year-end will be reached. Public expenditure is contained within ceilings given to line ministries, automatic debits of treasury accounts by the central bank were forbidden and extra budgetary spending were also prohibited as well as ad hoc tax and customs exemptions. Financial audits for most public entities, including the central bank were initiated in addition to the review of several mining contracts with a view to check their conformity with best international practices and the appropriateness of the government share in mining revenue.
With regard to the management of the central bank, the authorities are implementing the recommendations made by the external audit and the recent IMF safeguards assessment. In this context, the treasury and the central bank signed an agreement reconciling mutual claims and setting the debt service schedule. Bold steps are being taken to strengthen the accounting and internal control of the central bank. The authorities have also called on the Fund for technical assistance in these areas and foreign exchange management as well. Furthermore, it is important to note that new organizational charts have been designed and approved by presidential decree for all ministries, in order to improve efficiency in the public administration. These new charts will be fulfilled by new high level staff committed to integrity and reform agenda.
III. Medium-Term Program and Policies for 2008
In order to reverse the trend of poverty observed since 2002, the authorities have adopted their second poverty reduction strategy (PRS-II) covering the period 2007-10. This strategy is based on improving governance and building capacity, accelerating sustainable economic growth and developing basic services. In particular, the objectives set out by the Guinean authorities are to lower the incidence of poverty to 49 percent in 2010 from 54 percent in 2005; achieve over the period 2008–10 an average annual real GDP growth of more than 5 percent, restore price stability in targeting 15 percent by end-2007 and 5 percent by-end 2010 and strengthening the external position in building gross foreign exchange reserves equivalent of three months of imports by end-2010. Furthermore, needed structural reforms will be fully implemented to improve the environment for the development of the private sector and major infrastructure programs will also be carried out to remove the main obstacles to economic growth.
1. Fiscal Policy and Debt Sustainability
The authorities are strongly committed to strengthen the newly restored fiscal discipline. Based on this progress, the authorities intend to increase government revenue and redirect public expenditure towards the priority sectors, while preserving macroeconomic stability and the reduction of public debt. In this context, the basic primary fiscal balance will be gradually brought to more than 4 percent of GDP. To this effect, tax revenue will be increased to reach 15.5 percent of GDP in 2010 by expanding the tax base, improving the tax collection, including the mining sector and reducing tax and customs exemptions. More specifically, the authorities intend to revise the investment code, modernize the revenue -collection units and enforce controls over revenue collection services by applying performance contracts.
On the expenditure side, spending in the priority sectors will be increased on the basis of resources mobilized from reduction in debt service and donor support. A youth employment program will be launched and the development of public infrastructure will also be accelerated. The authorities intend to reduce subsidies and military expenditure, while increasing wage bill to overhaul the system of bonuses for managerial level staff and narrow the sizable gap vis-Ã -vis the private sector. The execution of the budget will continue to be subject to strict monthly monitoring in the context of treasury committee meetings under the aegis of the prime minister. On the other hand, the authorities will apply basic international standard to public finance management. To this end, a reform strategy and a 2008-10 priority action plan will be finalized by end-2007. This plan will cover the expenditure procedure from budget preparation to submission of the budget review law to the National Assembly. To ensure the incorporation of PRS-II objectives in the budget, a medium-term expenditure framework is under preparation beginning with the budget of 2009.
The authorities welcome the debt sustainability analysis. They concurred with staff that in the absence of the country's benefiting from the Enhanced HIPC Initiative and the MDRI; Guinea will continue to be in debt distress. Indeed, the protracted accumulation of external arrears and the low level of official reserves demonstrated the fragility of the Guinea's external situation, which highlights the importance of a rapid attainment of the HIPC completion point, sustained implementation of sound macroeconomic and structural policies and a prudent debt strategy. The authorities are hopeful that the delivery of HIPC and MDRI with the attainment of the completion point before 2009 will help bring down the external debt to sustainable levels. They are committed to prudent debt management through reliance on grants and highly concessional loans for future financing needs. They will also seek assistance to help them upgrade the public debt management capacity.
2. Monetary, Exchange Rate and Financial Policies
The authorities' main monetary policy objective is to contain inflation at a very low level. To this end, the central bank is committed to pursue firm control of base money growth. In 2008, measures designed to align the growth of the money supply with nominal GDP growth will be implemented. To facilitate the implementation of these measures, the authorities have already prohibited any new advances from the central bank to the treasury. In the same vein, the existing indirect monetary instruments will be strengthened as well as the coordination between the central bank and the treasury. The central bank will also energize its liquidity management through the issuance of central bank bills and treasury bills besides the activation of the liquidity monitoring committee. The compliance by the commercial banks of the required reserve ratio will be strictly observed and, if necessary, the ratio or policy interest rate will be adjusted.
The floating exchange rate policy will be maintained. In this respect, the authorities are committed to build an interbank foreign exchange market and enhance the central bank capacity to manage foreign exchange and reserves. Based on the recommendations made by the external audits and the safeguard assessment, an action plan has been designed to strengthen the central bank in these areas. A strong technical assistance from the Fund is needed to help the central bank to further enhance its accounting and internal controls as well as monetary policy and foreign exchange market reforms. The authorities welcome the multiyear program of Fund technical assistance to support their efforts. They are also committed to further enhance transparency in the determination of the exchange rate and eliminate the existing multiple currency practice.
In order to promote the development of the financial sector and boost its contribution to growth, the authorities will design a medium-term strategy for the sector. They intend to modernize the payment system, address dollarization issues and introduce financial instruments necessary for the promotion of the private sector. The authorities are hopeful that the FSAP for which they have applied would provide useful information on which to base the reforms in the financial sector. In the meantime, they will vigorously enforce the banking supervision as well as the supervision of microfinance institutions, with a view to ensure their compliance with the prudential regulation.
3. Structural Reforms
In 2008, the Guinean authorities will step up their efforts to improve the climate for business and investment by promoting transparency and good governance and implementing needed structural reforms. In particular the focus will be on the electricity and water sectors, telecommunications, the mining sector, the privatization of public enterprise and combating corruption. With the support of the development partners, the financial situation and management of the utilities' companies will be strengthened. The legal framework governing the mining sector including the taxation is under revision with the assistance of World Bank in order to be harmonized and aligned with international standards. On the other hand, it is envisaged to finalize several privatization deals during the first year of the program.
The authorities are also committed to gradually reinstate the formula-based mechanism for monthly adjustments of petroleum products prices to better reflect international prices and alleviate the budget. The outstanding debt towards oil companies at end-2006 will be reconciled and settled as agreed by stakeholders. Measures envisaged in the area of transparency, good governance and combat corruption include the publication of audited reports in the context of EITI for 2006; adoption of a civil service code of professional conduct and specific charters for tax staff; completion of ongoing audits in all ministerial departments and publication of the summary reports including the list of cases submitted to the courts; promulgation of UN and African union anti-corruption agreements and promulgation of the anti-money laundering law passed by the National Assembly in 2006 and establishment of the financial intelligence unit provided in that law.
IV. Conclusion
The Guinean authorities are determined to pursue their efforts in implementing sound policies and far-reaching reforms, with a view to achieve sustained economic growth and fight the poverty facing the population. Under their emergency recovery program, the macroeconomic situation has been stabilized. To supplement the authorities' efforts, a strong and sustained assistance from the international community is needed. In this respect, the authorities are hopeful that progress made so far will be supported through a new PRGF program, in order to enable them to reach the completion point under the Enhanced HIPC Initiative and benefit from the Multilateral Debt Relief Initiative (MDRI). The authorities are grateful for the valuable technical assistance received from the IMF and are strongly committed to implement policy measures set out in the PRGF-supported program. They continue to count on their development partners to enhance the macroeconomic stability and reform process and to achieve the MDGs.