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.
The Executive Board of the International Monetary Fund (IMF) today approved a new arrangement for Guinea under the Extended Credit Facility (ECF) in an amount equivalent to SDR 128.52 million (about US$198.9 million). The Board’s decision will enable an immediate disbursement equivalent to SDR 18.36 million (about US$28.41 million).
The authorities’ program is aimed at supporting higher growth, reducing poverty and reaching quickly the completion point under the enhanced
Following the Board’s discussion of Guinea, Mr. Naoyuki Shinohara, Deputy Managing Director and Acting Chair issued the following statement:
“Performance under the authorities’ 2011 program, monitored by the IMF’s staff, has been strong. GDP growth picked up to an estimated 3.6 percent; the surge in inflation during 2010 was contained; and the exchange rate has been broadly stable. The fiscal deficit was cut sharply; government recourse to bank financing was halted, and monetary policy was tightened. Progress was made with administrative and policy reforms, while improved relations with the international community led to the resumption of budget support and project assistance.
“The government’s medium-term program, which is supported by an arrangement under the Extended Credit Facility, aims to consolidate macroeconomic stability and lay the foundations for sustained and broad-based growth and poverty reduction. Immediate policy priorities include reducing the high inflation rate; strengthening public financial management, including of windfall mining revenues, and increasing public investment and social sector spending.
“A key medium-term challenge is to create a policy and infrastructure environment that will ensure that sharp growth in mining activity translates into inclusive growth and poverty reduction. The government’s structural reform agenda aims at developing hydroelectricity and agriculture, while improving government services, including utilities, infrastructure, and the business climate.
“Fiscal policy aims at containing the budget deficit to support the monetary tightening needed to reduce inflation while preserving debt sustainability. Key measures include reform of the tax system to boost non-mining revenues and reorientation of spending to priority areas—specifically, public investment and social sector spending. The authorities are working to enhance efficiency and transparency of the foreign exchange market.
“Reaching the completion point as soon as possible would pave the way for permanent debt relief under the HIPC initiative and MDRI. Guinea’s external debt position would then become sustainable, subject to prudent public external borrowing policies,” added Mr. Shinohara.
Recent economic developments
Guinea is emerging from a prolonged period of social unrest and from military rule. Following presidential elections completed in December 2010, the new government adopted an economic stabilization program for 2011, monitored by Fund staff. Performance under the Staff Monitored Program (SMP) has been good. Real GDP growth rebounded on the back of the improved political situation and a sharp increase in agricultural production. Strong adjustment and prudent use of the windfall revenue resulted in a sharp decline in the 2011 fiscal basic balance. The authorities made good progress with structural reforms, notably the adoption of a new mining code compatible with international standards in September 2011.
The medium-term macroeconomic outlook is driven by large investments in the mining sector. Foreign direct investment (FDI) in the mining sector, which could be as high as 40 percent of GDP or more per year during 2012–14, will raise output, imports, and the external current account deficit, and should boost employment with the construction of infrastructure such as railroads and ports. However, this outlook is subject to downside risks, mainly renewed political instability. Social unrest would affect both short- and long-term growth and complicate the implementation of the reform agenda.
The government’s medium-term program (January 2012–December 2014), supported by the ECF arrangement, seeks to address Guinea’s development challenges. Building on the progress made under the SMP in 2011, it aims at real GDP growth in the range of 4–5 percent per year during 2012–14; a drop in inflation to the single digits; and maintenance of gross official reserves at a level at least equivalent to 2.5 months of imports (excluding imports for large mining projects). International reserves, which were boosted by the 2011 windfall revenue, will be negatively affected by the subsequent use of these resources over the program period, which will be partly offset by the support under the ECF arrangement.
Fiscal policy will be guided by the need to maintain expenditure within the constraints of the objective for net domestic financing and limited availability of external financing while ensuring (post-HIPC) debt sustainability. Strengthening public financial management remains a high priority. In this regard, the authorities intend to implement a comprehensive reform and capacity building strategy in close coordination with external partners, including the Fund and AFRITAC West. The main objective of the central bank’s (BCRG) monetary policy is to reduce inflation through an orderly unwinding of the economy’s remaining excess liquidity.
On the structural front, the reform agenda, which is in line with the extended PRSP, the authorities focus on the implementation of the new mining code. The authorities will review and may renegotiate the existing mining concessions, while pursuing Guinea’s reintegration into the Extractive Industries Transparency Initiative process. In the electricity sector, the authorities’ first priority is to reduce the severe shortages by adding generating capacity and strengthening the electricity company (EDG). The government expects to adopt a comprehensive plan for the sector, which will also focus on developing Guinea’s abundant hydroelectric potential, including by reforming the institutional and legal framework by upgrading the law on public-private partnerships to international best practices. Reform in the agricultural sector will be based on a National Plan for Agricultural Investment and Food Security (PNIASA). This plan is expected to be approved by government early in 2012 and aims at ensuring food security by 2014 and becoming a food exporter thereafter.