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.
Introduction
1. On behalf of my Guinean authorities, I would like to express their deep appreciation to management and staff for their support and constructive policy dialogue in the implementation of the staff-monitored program, and the development of a medium-term program of economic and financial adjustment.
2. In December 2010, following open and free Presidential elections, a new Government was formed. In order to address the difficult situation experienced in 2009-10 while meeting the urgent needs of the population, the authorities embarked in early 2011 on a program of fiscal and monetary adjustment monitored by staff. In implementing their SMP, my authorities also aimed at paving the way for a three-year program supported by an arrangement under the Extended Credit Facility and for reaching as soon as possible the completion point under the HIPC initiative.
3. In addition to their macroeconomic stabilization efforts, my Guinean authorities have also undertaken efforts to improve the political environment and reform the security sector. In this regard, they have initiated a political dialogue involving all main stakeholders with a view to hold free and fair legislative elections scheduled to take place in May 2012.
Recent Economic Developments and Performance under the SMP
4. In 2011, my Guinean authorities implemented with success an ambitious SMP, which included unprecedented economic, financial and structural measures. All the quantitative and structural benchmarks for end-June and end-September under this program were met. In addition, provisional data for end-December indicate that program targets remain on track.
5. In the real sector, improved performance in the agricultural and mining areas led the real GDP to grow at 4.0 percent against 1.9 percent a year earlier. In addition, significant public investments were initiated with the support of development partners that led to increased electricity and water supply and improved infrastructure.
6. On the fiscal front, the authorities implemented a rigorous fiscal policy that enabled the basic fiscal balance to be reduced from 12.6 percent of GDP in 2010 to less than 1 percent of GDP in 2011. This remarkable achievement was possible through the elimination of ad hoc exemptions from customs tariff, intensification of efforts to collect back taxes and the strengthening of control of contributions from autonomous revenue-collecting agencies. The authorities also established the Treasury Single Account to all public entities. On the spending side, a stringent cash-based expenditure management system was put in place, Government contracts totaling 40 percent of GDP and signed in violation of the procurement code were frozen following external audits. Moreover, the procedure of competitive selection as the normal process for awarding government contracts and strict controls of expenditure were enforced. Following the elimination of the central bank financing, the Treasury net borrowing from the banking system was also reduced in line with the staff-monitored program.
7. In their efforts to improve transparency in the mining sector and increase the government revenue, the authorities signed in April 2011 an agreement with a multinational mining company concerning the iron ore of Simandou south concession. Under this agreement, the company paid US $ 700 million to the Treasury, which was deposited in an account with the central bank. In addition, the authorities increased, in October, fuel prices by 27 percent, which helped to reduce the losses in tax revenue, and paved the way for smooth implementation of the pass through adjustment mechanism. Efforts to normalize the financial relations with foreign creditors were also intensified with the clearance of arrears due notably to development partners.
8. Progress was made in implementing prudent monetary and exchange policies. In this respect, the central bank’s policy rate was raised from 16.75 to 22 percent in March 2011 and the reserve requirement rate was increased in March and October to stand at 22 percent. These measures helped reduce inflation and stabilize the exchange rate. Moreover, regulations to improve the functioning of exchange bureaus were streamlined and the authorities set up an interbank foreign exchange market. With Fund’s technical assistance, the central bank strengthened its capacities in the banking supervision.
9. In the area of structural reforms, my Guinean authorities established a framework for public-private sector dialogue, set up a private investment agency and implemented a one-stop window for creating enterprises. The authorities launched the reform program to restructure the justice and security services. With the support of the World Bank and the Agence Française du Développement (AFD), the institutional audit of the energy sector was completed and submitted to stakeholders in September 2011. This step led to the round-table held in January 2012 with a view to restructure the electricity company and enhance its capacities.
10. My authorities have also taken steps to improve the exploitation of Guinea’s mineral resources that should contribute to increase government revenue and improve the management of the sector. To this end, they promulgated in September 2011 a new mining code that is in line with international standards. They also resumed Guinea’s participation in the Extractive Industries Transparency Initiative (EITI). Based on Guinea’s sizeable potential in the agricultural sector and the need to attain over the medium-term sustained food self-sufficiency while increasing agricultural exports, the authorities initiated a broad agricultural recovery program. In this context, needed structures for agricultural training and extension services were launched throughout the country.
Macroeconomic Policies and Structural Reforms under the ECF-Program
11. My Guinean authorities are strongly committed to continue and strengthen the ambitious reform efforts already started. In this regard, they have put in place a comprehensive and far-reaching program of economic, financial and structural reforms, which they intend to implement under an ECF-supported program. They view this program as an appropriate vehicle to sustain macroeconomic stability, resume with a higher growth, fight poverty and improve the business climate. To ensure a good implementation of the program, they have established an institutional mechanism of coordination and monitoring consisting of a Reform Coordination Committee at the ministerial level, assisted by a Technical Support Committee as well as a Program Monitoring Technical Unit created as a unit of the Ministry of Economy and Finance.
12. Under the program, the authorities aim at substantially reducing inflation and building solid foundations for a sustained and diversified economic growth. In particular, they aim at achieving a real growth of 4.7 percent in 2012 and an average rate of 4-5 percent in 2013-14; reducing inflation gradually to single digits by 2014; and maintaining the exchange reserves at above 2.5 months of imports.
Fiscal Policy
13. Building on progress made in implementing the SMP, my authorities will pursue their efforts focused on mobilizing government revenue and strengthening public expenditure management. In this context, their fiscal policy will continue to play a key role in the strategy to reduce inflation and ensure debt sustainability before and after reaching the completion point.
14. On the revenue side, they intend to raise the tax ratio to 20 percent of GDP in 2014 from 17.5 percent in 2011 thus meeting the ECOWAS convergence criterion. In this regard, measures and reforms to improve tax policy and tax administration will be pursued. In particular, the mechanism to regularly adjust fuel prices to changes in world prices and exchange rate will be reinstituted as of July 1, 2012. Regulatory and contractual exemptions will be reviewed by end-June 2012 to eliminate exemptions that no longer respond to their purposes. It is also envisaged to conduct an institutional and regulatory audit of all revenue-generating services and complete the tax audits initiated in 2011.
15. As regards expenditure, the authorities’ efforts will continue to further control public outlays, improve the quality of expenditure and channel spending towards priority social and economic sectors. The wage bill will be stabilized around 5.3 percent of GDP. Further measures to rationalize subsidies with reforms in electricity and agricultural sectors will be implemented as will the reform of the security sector. The authorities, with assistance from development partners, will develop well-designed safety nets targeting poverty reduction and human capital development.
16. In a context of declining budgetary assistance, the financing of these actions will be met with increased domestic resources mobilization and external debt relief. As for infrastructure financing, the authorities have created a Special Investment Fund (SIF) with the windfall revenue received in May 2011 from the mining sector. Based on this policy, the overall deficit will decline to 3.4 percent of GDP in 2013 and remain at that level over the medium-term.
Monetary and Exchange Policies
17. The priority of my authorities’ monetary policy will be to substantially reduce inflation by regularly mopping up excess liquidity in the economy. To this end, the growth of base money will be limited to the inflation reduction target by revitalizing the use of market instruments and interventions on the foreign exchange market. Efforts to improve the determination of rates by market forces will be pursued with IMF technical assistance in order to unify the official and parallel markets.
18. The authorities will intensify their efforts to further strengthen the banking supervision by the central bank including the modernization of, and increased transparency in, the conduct of its operations. My authorities welcome the recommendations made by the IMF mission to update the 2007 safeguards assessment that will be implemented in 2012.
Structural Reforms and Competitiveness
19. My Guinean authorities will continue implementing far reaching structural reforms to create an environment conducive to diversified and sustained economic growth. They intend in particular to ensure that the population will benefit from the exploitation of the country’s natural resources and promote synergies with the rest of the economy. Further efforts will be focused on improving the business climate, encouraging investments in the mining and energy sectors as well as promoting the development of agriculture.
20. To improve the business climate, ongoing efforts to promote competition and public-private partnerships, enhance the credibility and authority of the judiciary system and, strengthen the National Governance and Anti-Corruption Agency will be continued. A strategy to withdraw the government from business will be adopted by end-December 2012 and a list of enterprises to be privatized will be established by end-June 2012.
21. The authorities’ efforts to reform the energy sector will rehabilitate the state-owned electricity company (EDG) and develop Guinea’s hydroelectric potential. Given the urgent need for a regular supply of electricity to increase economic growth and improve on living conditions in Guinea, the authorities attach a high priority to reforms and new investments in the energy sector. Following the round-table on the electricity in January 2012, the authorities will adopt a comprehensive reform plan for the sector by end-March 2012. This plan will include a tariff adjustment to limit the budgetary support to EDG within the budget law. In the same vein, an institutional audit of the water sector will be conducted in 2012 and a round-table of partners will be held thereafter.
22. As regards the mining sector, the authorities’ policy embedded in the new mining code adopted in September 2011 is based on the concept of mines and sustainable integrated development. They will pursue their efforts focused on finalizing the adoption of its implementing texts, auditing and revising the existing contracts to comply with the new mining code, and rehabilitating the mining cadastre. The authorities will also strive to fully implement the principles of EITI and the Kimberly Process to increase transparency and build credibility in the management of mining revenue.
Debt Sustainability and HIPC Completion Point
23. My Guinean authorities are determined to reach the completion point under the HIPC initiative without delay in order to ensure the sustainability of public finances, normalize Guinea’s relations with its creditors and refocus budget priorities on poverty reduction and infrastructure spending. In this regard, they have made good progress in achieving the remaining completion point triggers notably the implementation of the PRSP extended for 2011-12, the audit of large public procurement, and update of poverty database. In the same vein, they are also strongly committed to a satisfactory implementation of the ECF-supported program.
24. My authorities are cognizant of the need to achieve and maintain debt sustainability. They intend to seek a debt rescheduling from Paris Club creditors and have initiated discussions with other external official bilateral and commercial creditors. They are also committed to prudent debt management by mobilizing only grants and concessional loans.
25. In view of the tremendous development challenges facing the country notably the fight against poverty, the need to develop natural resources and boost economic growth, my authorities are of the view that reaching the completion point by end-June 2012 will help them to alleviate the unsustainable debt burden and direct available resources towards investments in education, health and infrastructure sectors.
Conclusion
26. My Guinean authorities are confident that their strong commitment to sound policies and structural reforms will be sustained under the implementation of the ECF-supported program. They are determined to achieve, with the assistance of the international community and the Fund, the program’s objectives in particular sustaining fiscal and debt stability, enhancing resource mobilization, increasing the economy’s competitiveness and growth to fight poverty and unemployment. Based on their good track record under the SMP and their commitment to pursue needed reforms, I would appreciate Directors’ support to my Guinean authorities’ request for a three-year program under the Extended Credit Facility and for quick additional interim assistance under the HIPC initiative.