Guinea
2011 Article IV Consultation and Requests for a Three-Year Arrangement Under the Extended Credit Facility, and for Additional Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries—Staff Report; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Guinea.

This paper presents Guinea’s 2011 Article IV Consultation and requests for a three-year arrangement under the Extended Credit Facility. The macroeconomic improvement in 2011 has been mainly owed to sharp fiscal adjustment. The deficit on the budget’s basic balance has been reduced from 13 percent of GDP in 2010 to an estimated 2.5 percent of GDP, while monetary financing of the budget has been avoided in an effort to reduce excess liquidity stemming from large central bank advances in 2009–10. Key medium-term challenges are to reduce inflation while preparing the economy for an expected substantial increase in mining activity.

Abstract

This paper presents Guinea’s 2011 Article IV Consultation and requests for a three-year arrangement under the Extended Credit Facility. The macroeconomic improvement in 2011 has been mainly owed to sharp fiscal adjustment. The deficit on the budget’s basic balance has been reduced from 13 percent of GDP in 2010 to an estimated 2.5 percent of GDP, while monetary financing of the budget has been avoided in an effort to reduce excess liquidity stemming from large central bank advances in 2009–10. Key medium-term challenges are to reduce inflation while preparing the economy for an expected substantial increase in mining activity.

I. A new beginning

1. Guinea’s outlook has improved significantly over the course of 2011. During 2010, the country transitioned from a military regime and underwent a tense election process. The new government inherited a stagnating economy and serious macroeconomic imbalances. One year later, an improved political environment and strong stabilization efforts have contributed to resurgent growth, a sharp decline in the fiscal deficit, and an improved international reserves position. The resolution of a long-standing dispute with a foreign mining company resulted in a one-off payment ($700 million, some 15 percent of GDP)1 in 2011, improving the government’s ability to start addressing urgent public-sector investment needs. The positive outlook for political stability and better governance has led to the start of large new private investment in the mining sector, raising the prospect that economic activity will expand sharply following the start of production by the middle of the decade.

2. But major challenges remain. A legacy of weak governance and intermittent periods of domestic unrest has left Guinea among Africa’s poorest countries (Figure 1), a fragile state with weak institutions and limited technical capacity. The transition toward full constitutional rule remains to be completed by legislative elections; the consolidation of political stability also depends on security sector reform. Reducing still-high inflation will be important to maintain support for the stabilization and reform effort. Over the medium term, the recent windfall revenue and the expected boom in the mining sector present major challenges for Guinea to ensure that its natural resource wealth translates into broad-based poverty reduction and sustained and diversified economic growth.

Figure 1.
Figure 1.

Cross-Country Comparisons, 2004–10

Citation: IMF Staff Country Reports 2012, 063; 10.5089/9781475502602.002.A001

Sources: Guinea authorities and Fund staff estimates.

II. Recent Economic Developments

3. The government’s main macroeconomic objective for 2011 was to sharply reduce the imbalances. The abandonment of fiscal control under the 2009–10 military regime resulted in a large fiscal deficit, sharp monetary expansion, and external arrears. By end-2010, annual inflation was over 20 percent and climbing, the market exchange rate was depreciating rapidly, and external reserves covered less than 1 month of imports (Figure 2; Tables 1-4). In its economic program for 2011, which was monitored by Fund staff, 2 the government’s stabilization policies focused on bringing inflation and the fiscal deficit under control, and on tightening monetary policy. Structural reform priorities included improving public financial management and governance in the mining sector.

Figure 2.
Figure 2.

Recent Economic Developments, 2004–10

Citation: IMF Staff Country Reports 2012, 063; 10.5089/9781475502602.002.A001

Sources: Guinea authorities and Fund staff estimates.
Table 1.

Guinea: Selected Economic and Financial Indicators, 2008–16

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

Growth of GDP excluding the large iron ore project of Simandou, expected to start production in 2015.

In percent of the broad money stock at the beginning of the period.

Figures in 2015-16 are in percent of GDP excluding the large iron ore project of Simandou.

The one-off mining revenue in 2011 is included under non-bank financing.

In months of imports excluding imports for large foreign-financed mining projects.

Table 2a.

Guinea: Fiscal Operations of the Central Government, 2008–16

(Billions of Guinean franc)

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

Revenue minus expenditures excluding interest on external debt and foreign-financed investment.

Figures in 2015-16 are in percent of GDP excluding the large iron ore project of Simandou.

The one-off mining revenue in 2011 is included under non-bank financing.

For 2011, the program assumed toleration of arrears by Paris Club and other bilateral creditors.

For the columns 2011 Est. Sep and 2011 proj, figures show actual accrual of arrears.

For 2012 and following years, assumes Paris Club debt relief for end-2011 arrears and maturities falling due in 2012-14 on terms similar to those under the 2008 Paris Club agreement. Comparable terms are assumed for other bilateral creditors. HIPC/MDRI relief is assumed to be delivered effective October 2012.

Table 2b.

Guinea: Fiscal Operations of the Central Government, 2008–16

(Percent of GDP, unless otherwise indicated)

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

Figures in 2015-16 are in percent of GDP excluding the large iron ore project of Simandou.

Revenue minus expenditures excluding interest on external debt and foreign-financed investment.

The one-off mining revenue in 2011 is included under non-bank financing.

For 2011, the program assumed toleration of arrears by Paris Club and other bilateral creditors.

For the columns 2011 Est. Sep and 2011 proj, figures show actual accrual of arrears.

For 2012 and following years, assumes Paris Club debt relief for end-2011 arrears and maturities falling due in 2012-14 on terms similar to those under the 2008 Paris Club agreement. Comparable terms are assumed for other bilateral creditors. HIPC/MDRI relief is assumed to be delivered effective October 2012.

Table 2c.

Guinea: Statement of Operations of the Central Government 1/

(Billions of Guinean franc)

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Sources: Guinean authorities and Fund staff estimates.

Presentation according to the GFSM 2001.

Table 3a.

Guinea: Central Bank and Deposit Money Banks Accounts, 2008–12 1/

(Billions of Guinean franc; unless otherwise indicated)

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

End of period.