Guinea: Second Review Under the Three-Year Arrangement Under the Extended Credit Facility, Requests for Waiver of Nonobservance and Modification of Performance Criterion, and Financing Assurances Review
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International Monetary Fund. African Dept.
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Publication Date:
03 Jul 2013
eISBN:
9781484390375
Language:
English
Keywords:
ISCR; CR; government; Guinean authorities; fiscal policy; financing; bank financing; excess reserves; rate of return; last quarter; financial support; Government debt management
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This paper discusses Guinea’s Second Review Under the Three-Year Arrangement under the Extended Credit Facility, Requests for Modifications of Performance Criteria and Waiver of Nonobservance of Performance Criterion, and Financing Assurances. Growth is projected at 4.5 percent for 2013, slightly lower than envisaged because of lower growth in the mining sector. The programs inflation target has been revised upward slightly, mainly reflecting the higher than programmed outcome at end-2012, together with some modest impact from an agreement on increases in civil service wages. Key risks include continued political unrest in the run-up to elections, which could affect growth, investment, and reform momentum, and a rebound in inflation if the private sector follows the increase in civil service wages.

Abstract

This paper discusses Guinea’s Second Review Under the Three-Year Arrangement under the Extended Credit Facility, Requests for Modifications of Performance Criteria and Waiver of Nonobservance of Performance Criterion, and Financing Assurances. Growth is projected at 4.5 percent for 2013, slightly lower than envisaged because of lower growth in the mining sector. The programs inflation target has been revised upward slightly, mainly reflecting the higher than programmed outcome at end-2012, together with some modest impact from an agreement on increases in civil service wages. Key risks include continued political unrest in the run-up to elections, which could affect growth, investment, and reform momentum, and a rebound in inflation if the private sector follows the increase in civil service wages.

Background and Recent Developments

1. Guinea’s economy performed reasonably well in 2012 (Figure 1; Tables 1–4; MEFP ¶3–4). Real GDP growth is estimated to have been almost 4 percent, despite the closure of the Friguia alumina refinery in April and a slow-down in mining sector investment in the last quarter of the year. Inflation declined gradually, ending the year at 12.8 percent, while international reserves amounted to the equivalent of 3.1 months of imports by end-December.

Figure 1.
Figure 1.

Guinea: Recent Economic Developments

Citation: IMF Staff Country Reports 2013, 192; 10.5089/9781484390375.002.A001

Sources: Guinean authorities and IMF staff.
Table 1.

Guinea: Key Economic and Financial Indicators, 2008–16

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

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

In months of the following year’s imports excluding imports for large foreign-financed mining projects.

Table 2a.

Guinea: Fiscal Operations of the Central Government, 2011–16

(Billions of Guinean francs; unless otherwise indicated)

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

Includes interest due in 2012 on the central bank’s debt (GNF 196 billion) recorded under the float in 2012 to be paid in 2013.

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

For 2012, Paris Club debt relief for end-2011 arrears and maturities falling due agreed under October 2012 Paris Club agreement.

Comparable terms are assumed for other bilateral creditors. HIPC/MDRI relief is assumed to be delivered effective October 2012.

The large errors and omissions in 2012 reflect to a large extent exchange rate losses on the 2011 exceptional mining revenue held in dollar accounts.

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.

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

For 2012, Paris Club debt relief for end-2011 arrears and maturities falling due agreed under October 2012 Paris Club agreement. Comparable terms are assumed for other bilateral creditors. HIPC/MDRI relief is assumed to be delivered effective October 2012.

Table 3a.

Guinea: Central Bank and Deposit Money Banks Accounts, 2008–131

(Billions of Guinean francs; unless otherwise indicated)

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

End of period.

Table 3b.

Guinea: Money Survey, 2008–131

(Billions of Guinean francs; unless otherwise indicated)

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

End of period.

Table 4.

Guinea: Balance of Payments, 2008–16

(Millions of U.S. dollars; unless otherwise indicated)

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

For 2012, Paris Club debt relief for end-2011 arrears and maturities falling due agreed under October 2012 Paris Club agreement. Comparable terms are assumed for other bilateral creditors. HIPC/MDRI relief is assumed to be delivered effective October 2012.

2. Fiscal policy was tighter than envisaged (Figure 2; MEFP ¶8–10). The 2012 revenue target was exceeded, reflecting strong collection efforts despite a shortfall in fuel taxes due to rate cuts to offset the impact of rising world prices on domestic retail prices. Higher outlays on goods and services were more than offset by lower-than-budgeted spending on wages (reflecting a delay in implementing an increase in base wages and other allowances). Delays in implementing a large electricity sector project were a major factor in lower domestically financed investment spending. The basic balance deficit was more than 1 percent of GDP lower than targeted, facilitating the avoidance of central bank financing of the government (other than from drawing down deposits from the one-off mining receipts in 2011).

Figure 2.
Figure 2.

Guinea: Recent Fiscal Developments

Citation: IMF Staff Country Reports 2013, 192; 10.5089/9781484390375.002.A001

Sources: Guinean authorities and IMF staff.

3. Monetary conditions also tightened during 2012 (Figure 3; MEFP ¶11). Reflecting a decline in the domestic financing of the fuel sector, credit to the private sector fell slightly despite an uptick in the second half of 2012. Commercial banks’ excess reserves fell sharply as their net foreign assets increased and the deposit base declined; interest rates on treasury bills rose toward year-end. Broad money stayed virtually flat during 2012; the liquidity overhang, attributable to high fiscal deficits in 2009–10, is gradually disappearing.

Figure 3.
Figure 3.

Guinea: Recent Monetary Developments

Citation: IMF Staff Country Reports 2013, 192; 10.5089/9781484390375.002.A001

Sources: Guinean authorities and IMF staff.

4. Guinea benefitted from a substantial reduction in its external debt stock after reaching the completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative at end-September 2012 (MEFP ¶12). Following the completion point, Guinea’s debt stock is to fall by about $1.95 billion. Multilateral creditors provided debt relief of $1.4 billion, including under the Multilateral Debt Relief Initiative. In October 2012, Paris Club official bilateral creditors provided HIPC and additional relief amounting to $0.5 billion. Bilateral debt relief agreements have been signed with France, and are pending signature with Italy, Norway, and the United Kingdom; the authorities are contacting other bilateral creditors.

5. The political environment remains fragile. Government and opposition remain divided about preparations for long-delayed legislative elections, which are presently scheduled for June 30, 2013. Social tension is further aggravated by the lack of basic services, especially electricity.

Program Performance

6. Most of the indicative targets for end-September and all but one of the performance criteria (PCs) under the ECF-supported program for end-December 2012 were met (Table 5; MEFP ¶5–7). The continuous PC on no new nonconcessional (grant element of less than 35 percent) medium- or long-term external debt was breached in the case of four loans:

  • Three of the loans—for a total of $28 million (0.45 percent of GDP) with grant elements of 22, 29 and 30 percent, respectively—are relatively small and have a negligible impact on external debt and fiscal sustainability (Appendix II). These debts were contracted on nonconcessional terms because of weak technical capacity, including lapses of coordination between departments in the Ministry of Economy and Finance (MEF) and misunderstandings of the use of the IMF’s methodology for assessing concessionality. To prevent a recurrence, the government is receiving technical assistance from the European Union (EU) to strengthen debt management and recently established a public debt monitoring commission (prior action) to ensure, amongst other things, that loans comply with the PC.

  • The fourth loan, for the Kaleta hydroelectricity project, is $335 million (5.3 percent of GDP); the grant element exceeded the program floor of 35 percent at the time the final terms were negotiated in early-December 2012, but had dropped to 33.2 percent by the time it was signed on January 4, 2013, because of the change in the discount rate used for concessionality calculations that took effect on December 15. The project—which is part of a regional project supported by the African Development Bank for which the feasibility study shows a high expected rate of return—will considerably improve electricity supply and reduce average costs.

Table 5.

Guinea: Performance Criteria and Indicative Targets, ECF 2012–13 1, 2

(Billions of Guinean francs, unless otherwise indicated)

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Sources: Guinean authorities; and IMF staff projections.

Definitions and adjustors are included in the technical memorandum of understanding (TMU).

Flow for fiscal criteria and stock for end-December 2012 for monetary and external debt criteria.

Calculated using the program exchange rates.

External debt contracted or guaranteed other than with a grant element equivalent to 35 percent or more, calculated using a discount rate based on the OECD commercial interest rates. Excludes borrowing from the IMF.

Continuous performance criterion.

Priority sectors include education, health, agriculture, energy, justice, social affairs, and public works (as defined in the TMU).

Ceiling established on loans contracted with China’s EXIMBANK (US$334.65 million), ECOWAS (US$10.53 million), and the OFID (US$17 million). These loans were contracted in 2012-13; they became effective starting from late 2012.

7. The authorities continue to make good progress with structural reform; most of the actions constituting structural benchmarks (SBs) under the program were implemented, although some with delays (MEFP ¶13–15; Table 2). Longer-than-anticipated consultations with stakeholders led to delays in preparing amendments to the 2011 mining code; these amendments were approved by parliament in April 2013. In April 2013, the Ministry of Economy and Finance (MEF) and the Central Bank of the Republic of Guinea (BCRG) signed a framework agreement on the securitization of outstanding advances, while the medium-sized taxpayer unit became operational. Reflecting continued unease about sociopolitical stability, the authorities decided to delay applying an automatic adjustment mechanism for fuel prices until mid-2013.

Discussions on the Program for 2013

A. Economic Outlook and Risks

8. The macroeconomic outlook for 2013 remains broadly as projected at the time of the first ECF review (MEFP ¶18–19).1 Growth is projected at 4.5 percent for 2013, slightly lower than previously envisaged because of lower growth in the mining sector. The program’s inflation target has been revised upward slightly, mainly reflecting the higher-than-programmed outcome at end-2012, together with some modest impact from a recent agreement on increases in civil service wages (Box 1). The target for gross official reserves remains set at 2.9 months of imports by end-2013. Investment in the large Simandou iron ore project slowed sharply toward the end of 2012, against the background of a worldwide reconsideration of investment plans by mining companies and delays in completing the project’s legal investment framework and resolving the project’s infrastructure provision arrangements, including the government’s financial role. The medium-term projections have been adjusted to reflect the expected delays in completing this project.

9. Downward risks to the outlook have intensified (Appendix III). Key risks include continued political unrest in the run-up to elections, which could affect growth, investment, and reform momentum; and a rebound in inflation if the private sector follows the increase in civil service wages. Also, attainment of the fiscal targets remains vulnerable to a rise in international oil prices in the absence of an adjustment mechanism for domestic prices. The policies and reforms in the government’s program have been formulated to mitigate these risks. Prolonged delays in moving ahead with mining projects would significantly reduce Guinea’s medium-term growth potential; discussions are under way to allow investment in the Simandou project to resume, while the implementation of the new mining code by mid-2013 is expected to promote new projects.

B. Fiscal Policy

10. Recent projections, taking into account the 2012 outcome, indicate that the program’s fiscal objectives for 2013 remain within reach (MEFP ¶20–28). The interim parliament adopted the 2013 budget broadly in line with the program. Updated projections indicate a revenue shortfall of about 0.4 percent of GDP, owing to a delay in applying the automatic adjustment mechanism for fuel prices from January to August 2013 (SB). However, this is more than offset by higher net external assistance (1.4 percent of GDP), including a $90 million grant from Abu Dhabi, most of which will be used for additional investment. The basic balance deficit is projected to amount to 3.3 percent of GDP, compared to the initial program target (adjusted for the additional net external assistance) of a deficit of 2.8 percent of GDP.2 The slightly higher deficit results from planned reprogramming of investment expenditure budgeted but not committed in 2012.3

Guinea: The Agreement on 2012–13 Civil Service Wage Increases (MEFP ¶25)

Following a drop in real wages since 2010 and high expectations after attainment of the HIPC completion point, civil service unions demanded a 200 percent wage increase. In December 2012, the government, trade unions, and employers’ organizations reached agreement on a phased increase in the September 2012 basic wage for the civil service of 50 percent: (i) 10 percent, starting from October 2012; (ii) 15 percent, from January 2013; and (iii) 25 percent before end-2013. The agreement also included the implementation, as of January 2013, of long-agreed special allowances for personnel in the education and health sectors, and the creation of a Social Security Fund and a system of health insurance for civil servants. The agreement also introduced a national minimum monthly wage of GNF 440,000 (about $60; compared to annual per capita GDP of $565).

The salary increase accounts for about half of the programmed growth in the 2013 budgetary wage bill of 0.8 percent of GDP. The impact is mitigated by the fact that the increase applies only to about 40 percent of the budget’s wage bill because (i) civil service wages account for only about 65 percent of the total wage bill, while other government wages (mainly military, a substantial part of whose pay is paid in kind and thus automatically adjusted to inflation) are not expected to rise by such amounts; and (ii) about 40 percent of total civil service pay consists of allowances that, after a 10 percent increase in October 2012, will not be raised further during 2013. Other important elements in the increase in the wage bill are the implementation of the special allowances cited above (23 percent of the increase) and additional recruitment (19 percent).

11. The wage increase will be accompanied by strengthened civil service reform (MEFP ¶25). The authorities intend to maintain the budget’s medium-term wage bill at about 5.2 percent of GDP, while improving productivity and addressing severe capacity constraints. In addition to the ongoing cleanup of the civil service roster and improving control over recruitment, the authorities intend to develop, with assistance from the World Bank, a civil service reform plan for adoption by the government by September 2013 (SB).

C. Monetary, Exchange Rate, and Financial Sector Policies

12. The central bank will maintain a cautious monetary policy stance despite the tightening liquidity situation (MEFP ¶29–30). While the stagnation in credit growth and the fall in banks’ excess reserves indicate growing room for a relaxation of monetary policy, inflation has remained slightly higher than expected and upward risks from wage increases and political uncertainty have increased, calling for continued caution. The BCRG reduced its main (signaling) policy rate from 22 to 16 percent in February, bringing it more in line with rates prevailing in the banking sector, but has delayed reducing the reserve requirement until the downward trend in inflation is confirmed. The BCRG will continue weekly foreign exchange auctions, aimed at avoiding large exchange rate fluctuations.

13. The authorities are making progress in strengthening the financial sector (MEFP ¶31). With technical assistance from the IMF’s Regional Technical Assistance Center for West Africa (AFRITAC West), the BCRG has rebuilt its banking supervision department. In 2012, it closed the small agricultural bank BADAM (in which the government held a 51 percent share), for which it will nominate a liquidator by June 2013 (SB). The BCRG also plans to double the initial minimum capital requirement for banks to avoid a proliferation of small banks. It is also reviewing the recommendations of a recently completed consultant’s study on the financial sector, for implementation in the second half of the year.

14. The BCRG’s financial position is being strengthened (MEFP ¶32). Pending an evaluation of its balance sheet and future capital needs by the IMF’s Money and Capital Markets Department (MCM), the budget made a capital transfer to the BCRG equivalent to 0.6 percent of GDP in 2012; a further infusion of 0.3 percent of GDP is planned for 2013 to raise the BCRG’s capital to its statutory requirement. The BCRG also continues to implement the recommendations of the January 2012 safeguard assessment mission of the IMF’s Finance Department and a new central bank act is expected to be submitted for government approval in the first half of 2013. Monetary analysis and policy formulation is being strengthened with IMF technical assistance, while delays in preparing accurate monetary data, because of the transition to a new accounting system, are being addressed.

D. External debt

15. The authorities are strengthening external debt management (MEFP ¶35; 48). To improve external debt management, in addition to the recently established (technical-level) external debt monitoring commission, the authorities will prepare a medium-term action plan by October 2013 (SB). They will also establish, before end-2013, a National Debt Committee that will prepare a national debt policy and a strategy for medium-term debt management, and then oversee their implementation. In the meantime, the authorities will, with EU technical assistance, prepare a procedures manual for the debt department and train staff on its application. The authorities intend to seek only grants and concessional loans to meet their financing needs. However, they noted that this may be difficult owing to the limited availability of concessional resources from lenders.4

16. Guinea is seeking to normalize financial relations with its commercial creditors. Guinea’s debt to these creditors is in arrears, and the government has invited them for collaborative discussions to reach agreement, based on the principle of “inter-creditor equity” and in line with the HIPC Initiative. IMF staff believes this approach is consistent with the good faith criterion of the IMF’s lending into arrears policy.

E. Structural Reform

17. Structural reform will continue to focus on tax administration and public financial management (PFM), reforms in the mining, electricity, and agricultural sectors, and on improving the business climate. Key measures include the following:

  • Revenue administration (MEFP ¶23): the revision of the tax and customs codes will incorporate tax incentives in the new codes and strengthen the value-added tax (VAT) system.

  • PFM (MEFP34): (i) adoption of the governance structure of the Special Investment Fund for exceptional mining revenue by end-June 2013 (SB); (ii) regularization of suspense accounts and production of the financial accounts for 2005–12, by end-2013 (SB); and (iii) adoption of the legal texts concerning public entities to make them consistent with the new budget framework law and the General Regulation on Budget Management and Public Accounting, by end-2013 (SB).

  • Business climate (MEFP 36–38): the government recently adopted a National Investment Policy Letter, outlining the government’s new streamlined investment policy (prior action). To implement this policy, the authorities will submit for parliamentary approval revisions to the Investment Code by end-June (SB), and related fiscal and customs laws by end-May (SB).

  • Mining sector (MEFP39–42): the 2011 new mining code is expected to become operational following adoption and publication of the implementing regulations and the standard mining agreement (SB for end-August 2013). These actions will improve the environment for mining investment by strengthening regulatory stability, while allowing the review process of the existing mining titles and conventions to advance.5

  • Electricity (MEFP43–45): progress in strengthening the financial situation of the government-owned electricity company Electricité de Guinée (EDG) has been slow. Pending recruitment of a strategic partner, the government has put EDG under close financial supervision, ensuring that its need for government financial support remains within the budgeted amounts, and will adopt, following consultation with its external partners, a new reform program by end-June 2013 (SB).

  • Agriculture (MEFP46): Officials are currently reviewing the effectiveness of reform measures taken in 2011–12, assisted by a World Bank public expenditure review. The evaluation will be discussed during a national workshop, tentatively planned for October 2013, to determine how best to promote sectoral growth.

Poverty Reduction Strategy Paper (PRSP)

18. Guinea is finalizing its third PRSP, covering 2013–15 (MEFP ¶16–17).6 The PRSP III gives priority to (i) strengthening democracy and the effectiveness of the state; (ii) accelerating diversified economic growth; (iii) increasing employment; and (iv) reducing regional inequalities. The new strategy, which was prepared through a consultative process, was approved by the government on May 2, 2013. The authorities are planning a donor meeting in the last quarter of 2013 to seek financing for the PRSP priority action plan.

Program Monitoring and Financing

19. The authorities request a waiver for the PC on nonconcessional external borrowing; IMF staff proposes to modify that same PC to take account of the four nonconcessional loans (Table 5). The request for a waiver for the nonobservance of the PC on nonconcessional debt is supported by staff because the four new loans do not jeopardize Guinea’s moderate risk rating of debt distress;7 the high economic rate of return of the Kaleta hydroelectricity project; and the corrective actions taken to prevent a recurrence of breaching the PC. The PC on nonconcessional debt would be modified to include a window for nonconcessional borrowing equal to the amount borrowed under the four nonconcessional loans (($363 million; 5.8 percent of GDP), to incorporate them transparently in the program. IMF staff also proposes PCs for end-December 2013 and updated indicative targets for end-September 2013. Proposed structural benchmarks for 2013 are set out in Table 3 of the MEFP.

20. The 2013 program’s financing requirements are expected to be fully met (Table 6; MEFP ¶47). The bulk of the external current account deficit—mainly reflecting imports for the mining sector—will be financed by foreign direct investment. For other external financing, in addition to debt relief under the HIPC Initiative, the government intends to rely mainly on grants and concessional external loans (particularly from the World Bank, the African Development Bank, the Islamic Development Bank and the EU) and disbursements on the four loans included in the proposed new limited window for nonconcessional borrowing.

Table 6.

Guinea: External Financing Requirements and Sources, 2012–16

(US$ millions)

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

For 2012, Paris Club debt relief for end-2011 arrears and maturities falling due agreed under April 2012 Paris Club agreement. Comparable terms are assumed for other bilateral creditors. HIPC/MDRI relief is assumed to be delivered effective October 2012.

Staff Appraisal

21. Macroeconomic developments continue to be broadly positive. Although mining sector investment has slowed, economic growth was relatively strong in 2012, driven by agriculture and services. Continued tight fiscal and monetary policies contributed to a gradual decline in inflation. The exchange rate was stable, and gross official reserves have remained at a comfortable level.

22. Implementation of the ECF-supported program has been satisfactory. All but one of the PCs for end-December 2012 were observed, the exception being the PC on contracting nonconcessional debt. The government is also making good progress with its ambitious structural reform agenda, despite some delays; it will be important to maintain the strong high-level policy coordination that was in place in the run-up to the HIPC completion point.

23. Fiscal policy remains tight. Domestic bank financing of the budget deficit continues to be limited to drawing down balances of the 2011 exceptional mining revenue. Cash-based expenditure management remains an important instrument for fiscal control while public financial management is being strengthened. The 2013 fiscal program makes a strong effort to safeguard domestically financed investment spending notwithstanding the declining availability of financing from the 2011 exceptional revenue.

24. Containing budgetary subsidies remains a major challenge. The recent measures to strengthen oversight of the electricity company are crucial, as will be an acceleration of reforms in the sector to ensure its financial viability, expand supply, and support economic growth. The further delay in bringing domestic fuel prices in line with import costs is understandable given the sociopolitical environment, but the budget’s revenue loss needs to be addressed in a timely manner, alongside the deployment of measures to deliver targeted compensatory assistance to the poor.

25. Under present projections, the 2012–13 increases in civil service wages can be financed, but it will be important to develop a structural and medium-term approach to public sector wages. The wage increase is understandable given the erosion in purchasing power the last few years, although a more gradual adjustment would have been preferable to minimize the risk of rekindling inflation. In light of this, the timing of the implementation of the third tranche of the wage adjustment, to be implemented in the second half of the year, should await reassurance that the wage bill envelope in the 2013 budget will be maintained and that inflation is trending toward the single digits. Regular consultation between the authorities and the social partners would contribute to building consensus on macroeconomic and social policy issues and on an appropriate medium-term wage-policy framework. Accelerating civil service reform would assist in creating space for improving wages.

26. Liquidity is tightening, but a cautious monetary policy stance remains appropriate. Considering the increase in civil service wages and political uncertainty, the key criterion for relaxing monetary policy should be solid evidence of a persistent declining trend in inflation towards single digits, along with the maintenance of an adequate level of international reserves.

27. External debt management needs to be further strengthened. The staff welcomes the recent start of an EU-funded technical assistance project in debt management. Priority should be given to improving procedures and their application, and to the preparation of a medium-term action plan to strengthen debt management.

28. The significant downward risks highlight the importance of structural reform. The government’s reform agenda remains ambitious, but continued progress in the key areas will make Guinea more attractive for investors in both mining and other sectors, promoting growth and poverty reduction. Close high-level monitoring of the work being done on reform measures remains essential if progress is to be maintained.

29. The staff recommends completion of the second review under the ECF arrangement and of the financing assurances review. The authorities have taken corrective measures to improve debt management to ensure that new loans comply with program undertakings; the impact on Guinea’s debt-sustainability and on the successful implementation of the program of the four new nonconcessional external loans is minor and the loan for the Kaleta hydroelectricity project is expected to yield a major economic return. In this context, IMF staff recommends approval of the request for a waiver for nonobservance of the PC on no new nonconcessional debt. It also recommends the modification of the PCs to include a nonconcessional borrowing window and the setting of the proposed PCs for December 2013 and indicative targets for September 2013, and supports the authorities’ request for the second disbursement under the ECF arrangement of an amount equal to SDR 18.36 million.

Table 7.

Guinea: Indicators of Capacity to Repay the IMF, 2013–25

(SDR millions, unless otherwise indicated)

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Sources: Guinean authorities; and IMF staff projections.
Table 8.

Guinea: Proposed Schedule of Disbursements and Timing of Reviews Under the EFC Arrangement, 2012–15

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Source: IMF staff.

Appendix I. Letter of Intent

Conakry, May 3, 2013

CENTRAL BANK OF THE REPUBLIC OF GUINEA

MINISTRY OF ECONOMY AND FINANCE

Madame Christine Lagarde

Managing Director

International Monetary Fund

Washington, D.C. 20431

USA

Subject: Letter of Intent

Dear Ms. Lagarde:

1. On behalf of the government of Guinea, we would like to provide you with an update on the progress we have achieved under our economic program supported by the IMF’s Extended Credit Facility (ECF). Since the first review under the program in September last year, continued tight fiscal and monetary policies have contributed to a further decline in inflation. The exchange rate has remained stable and our international reserves’ position is satisfactory. Economic growth was negatively affected by the closure of an alumina refinery and, towards the end of the year, a slowdown in investment in a major mining project, but still amounted to close to 4 percent in 2012.

2. The implementation of the program’s policies and measures continues to be satisfactory. Important progress has been made with regard to structural reform, in spite of delays in the implementation of some measures. The end-December 2012 quantitative performance criteria have been met, with the exception of the continuous performance criterion of no contracting of new medium- or long-term nonconcessional external debt. Four such loans were contracted, of which three were due to capacity constraints in external debt management; they are relatively small amounting to about $28 million. The fourth loan is larger, amounting to $335 million. It is intended to finance the Kaleta hydroelectric dam project, which has been evaluated to have a high economic return and will help close the country’s energy shortfall, export electricity to the neighboring countries, and boost growth prospects. This loan, which was deemed concessional at the conclusion of the negotiations in early-December 2012, became nonconcessional at the time of its signing in January 2013, following a change in the discount rate used for the calculations of the grant element on December 15, 2012. Corrective measures have been taken to strengthen debt management to ensure that new external debt complies with the program; the impact of the nonconcessional nature of these loans on debt sustainability is minor. Based on this, we request a waiver for the nonobservance of the performance criterion on no new medium- or long-term nonconcessional external debt.

3. The attached second Supplement to the Memorandum of Economic and Financial Policies (MEFP) sets out the government’s objectives and policies for 2013. The policies build on the progress made in 2011–12 and are consistent with the objectives of the third Poverty Reduction Strategy Paper (2013–15), which has just been approved by the government, and with the 2011–15 Five-Year Development Plan. Our medium-term objective remains to reverse the increase in the poverty rate that occurred during the last decade, develop our country’s abundant natural resources, and promote broad-based economic growth. For 2013, we will maintain tight fiscal and monetary policies, aiming at reducing inflation to the single digits. Several important structural reforms, such as in the mining sector and in investment incentives, are expected to be completed during 2013 while others, such as restoring the viability of the electricity sector, will be accelerated.

4. The government is seeking a modification of the program performance criterion on no new nonconcessional external debt. The requested change will set a limit on the total amount of nonconcessional debt equal to the four above-mentioned already contracted loans. In this context, the government remains committed to mobilizing only grants and concessional loans to finance its program. The modified performance criterion for end-June 2013 and the performance criteria for end-December 2013 are included in Table 1 of the attached MEFP.

5. In view of the good performance in program implementation, as well as the policies and measures contained in the attached MEFP, the government is requesting completion of the second review of the ECF-supported program and a third disbursement of SDR 18.36 million (17.1 percent of quota) under the ECF agreement.

6. The government firmly believes that the policies and measures described in the attached MEFP are adequate to achieve the program objectives. However, it will take any further measures that may become appropriate for that purpose. The government will consult with the IMF on the adoption of such measures, either at its own initiative or at the request of the Managing Director of the Fund, prior to adopting such measures, or in advance of revisions to the policies contained in the MEFP, in accordance with the IMF’s policies on such consultations. The government undertakes to provide the IMF with any information that may be necessary to monitor implementation of the measures and attainment of the program objectives.

7. The government authorizes the IMF to publish this Letter, the attached Supplement to the MEFP and Technical Memorandum of Understanding, and the Staff Report relating to the second review of the IMF-supported program under the ECF.

Sincerely yours,

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Attachments: - Second Supplement to the Memorandum of Economic and Financial Policies

- Technical Memorandum of Understanding

Attachment 1. Supplement to the Memorandum of Economic and Financial Policies

Conakry, May 3, 2013

This second supplement to the February 11, 2012 Memorandum on Economic and Financial Policies (MEFP) summarizes implementation of the program supported by the IMF’s Extended Credit Facility (ECF) since the first program review in September 2012. It also sets forth the key program policies and measures for 2013.

Introduction

1. Having achieved the completion point of the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative in September 2012, the government of President Alpha Condé has continued its efforts to consolidate macroeconomic stability and strengthen structural reforms. End-December 2012 data show that the country’s macroeconomic performance has been maintained, despite a slowdown in the rate of growth of real gross domestic product (GDP). All but one of the end-December 2012 quantitative performance criteria (PCs) under the program were met. Considerable progress was made with structural reforms, despite the fact that a number of structural benchmark actions experienced delays.

2. The government’s program is in line with the Second Poverty Reduction Strategy Paper (PRSP II) and the Third Poverty Reduction Strategy Paper (PRSP III) covering the period 2013–15, which was approved by the government on May 2, 2013. Following attainment of the HIPC completion point and a favorable conclusion of the second review of their three-year program, the government and people of Guinea will continue to implement prudent policies in line with the PRSP III.

Macroeconomic Results and Implementation of the Program in 2012
A. Recent Macroeconomic Development

3. The very good performance under the program recorded in the first half of 2012 continued during the second half of the year.1 Real GDP growth remained at around 4 percent in 2012, the same as in 2011, compared to a program target of 4.8 percent. The shortfall in relation to the target is explained mainly by the weakness of the recovery in the mining sector, following the halt at the Fria alumina factory and the slower pace of investments in the main large-scale mining projects, including the Simandou iron ore project and the Guinea Alumina Corporation’s alumina project. Agricultural production continued to improve, benefiting from government support to the rural sector, although the growth rate was slower than expected, owing to delays in implementing a new support system for the crop season. Economic activity was also held back by delays in the rehabilitation of the Conakry power plants (Tombo) and in bringing into the electricity grid the new power plants purchased by the government under the electricity sector reform plan.

4. Inflation continued to trend downward, falling to 12.8 percent in December 2012 year-on-year (or an annual average of 15.2 percent), compared to a program target of 12 percent and down from the 19 percent recorded at end-December 2011. The drop in inflation reflects the implementation of policies to strengthen public finances, tight monetary policies, and higher rice production; government measures to help the population purchase essential goods also helped. The monetary and exchange rate policies made it possible to stabilize broad money at its end-2011 level. The real effective exchange rate appreciated against the main currencies, while the foreign exchange market premium vanished; international reserves of the Central Bank of the Republic of Guinea (Banque de la République de Guinée—BCRG) amounted to the equivalent of more than three months of imports at end-December 2012.

5. The end-December 2012 PCs under the ECF-supported program were met, except for the continuous PC on no new nonconcessional external debt (Table 1). Strong performance on government revenue and continuation of cash-based expenditure management allowed holding the government’s fiscal basic balance deficit at 2.5 percent of GDP, compared to a program target of 3.6 percent of GDP, despite a shortfall on fuel taxes. This facilitated maintaining the PC on net bank credit to the government (including a net repayment of treasury bills of about GNF 400 billion (almost 1 percent of GDP) to the commercial banks) and on the BCRG’s net domestic assets. The PC on net international reserves of the BCRG was met with a good margin.

Table 1.

Guinea: Performance Criteria (PC) and Indicative Targets, ECF 2012–13 1, 2

(Billions of Guinean francs, unless otherwise indicated)

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Sources: Guinean authorities; and IMF staff projections.

Definitions and adjustors are included in the technical memorandum of understanding (TMU).

Flow for fiscal criteria and stock for end-December 2012 for monetary and external debt criteria.

Calculated using the program exchange rates.

External debt contracted or guaranteed other than with a grant element equivalent to 35 percent or more, calculated using a discount rate based on the OECD commercial interest rates. Excludes borrowing from the IMF.

Continuous performance criterion.

Priority sectors include education, health, agriculture, energy, justice, social affairs, and public works (as defined in the TMU).

Ceiling established on loans contracted with China’s EXIMBANK (US$334.65 million), ECOWAS (US$10.53 million), and the OFID (US$17 million). These loans were contracted in 2012-13; they became effective starting from late 2012.

6. The breach of the PC on no new nonconcessional external debt was not met because of four new loans with grant elements below the program’s floor of 35 percent. The four nonconcessional loans were:

  • A large loan from Exim Bank of China ($335 million) to finance the Kaléta hydroelectric dam. This loan was considered concessional when its terms were finalized early in December 2012, but was no longer concessional at the time of signature in January 2013, because the benchmark interest rates used for the calculation of the minimum grant element had fallen on December 15, 2012, resulting in a drop in the grant element to 33.2 percent; and

  • Three small loans, of which two loans contracted by the government from the OPEC Fund in March 2012 and January 2013, to finance agriculture ($10 million) and water ($7 million) projects, together with a $10.53 million loan from the Investment and Development Bank (BIDC) of the Economic Community of West African States (ECOWAS), contracted in August 2012 to finance projects to rehabilitate the distribution network in the electricity sector; the grant elements of these loans range between 22–30 percent.

7. The government is requesting a waiver for the breach of the PC concerning these four loans. Projects in the agriculture, water, and power distribution sectors are important for the welfare of the rural population; moreover the amounts involved are relatively small and the concessionality level below the floor of 35 percent has a minor impact on external debt sustainability. The Kaléta project and the project to reestablish and extend the power distribution network have very high rates of return and are beneficial for growth and poverty reduction. Moreover, the Kaléta project is of primary importance for West African regional integration, since 30 percent of its output is intended for export to neighboring countries. The government has taken corrective measures to ensure that new external debt henceforth complies with the undertakings under the program: (i) the Minister for Economy and Finance has created a technical public debt monitoring committee in April 2013 (prior action under the ECF-supported program) to ensure, amongst other things, that external loans comply with a grant element of at least 35 percent before they are put forward for signature; and (ii) the Debt Department of the Ministry of Economy and Finance (MEF) is receiving technical assistance financed by the European Union (EU) and its staff will also receive training from the IMF’s Regional Technical Assistance Center for West Africa (AFRITAC West).

B. Budget Execution

8. Fiscal policy in 2012 continued to aim at avoiding net bank financing other than from the use of deposits from the 2011 exceptional mining revenue. In this regard, measures focused on increasing revenue while expenditure continued to be managed on a cash basis.

9. Government revenue exceeded projections by more than 0.9 percent of GDP due to a combination of increases in tax rates, administrative measures, and strong collection efforts. In direct taxes, an important factor was the collection of tax arrears following tax audits performed for fiscal years 2009 to 2012. Revenue from the withholding tax on non-wage income grew following a rise in the rate (from 10 to 15 percent) and the large number of mining-sector expatriates subject to this tax. The customs department exceeded its revenue target despite accumulated losses in fuel taxes (pump prices remained stable while import costs increased, and the gap was closed by reducing the tax rate—the loss is estimated to have amounted to 1.8 percent of GDP in 2012). Important administrative measures were (i) increased use of levying customs taxes on the market value of imports instead of on a lump-sum valuation by container; (ii) harmonization of customs clearance at the port and land borders to reduce leakage; and (iii) close monitoring of tax exemptions for companies eligible for advantages under the Investment Code. However, some problems persisted: (i) clearing the backlog of VAT credits started in the second half of 2012, but delays persist at the treasury in refunding VAT credits to mining companies, which, in turn, have begun to default on their VAT obligations; and (ii) the expansion of the VAT base was hampered by delays in establishing the medium-sized taxpayer unit.

10. Expenditures were lower than budgeted. Savings in the wage bill were generated as a result of the retirement of a large number of military personnel, postponement of the implementation of a number of special personnel statutes in public administration, the continued cleaning up of the civil service database, and better management of new recruitment. The start of cleaning up the list of scholarship recipients in higher education lowered subsidies. Investment expenditures were well below forecasts, mainly due to a change in the procurement contract for new thermal power plants and the postponement of contracts to build and renovate military barracks.

C. Monetary, Exchange Rate, and External Debt Developments

11. In 2012, the BCRG maintained its monetary policy aimed at further reducing inflation and stabilizing the exchange rate. The central bank’s policy interest rate and the reserve requirement ratio remained unchanged at 22 percent. To strengthen the official foreign exchange market, the central bank continued to organize weekly foreign exchange auctions, selling a total of $251.6 million in 2012, equivalent to a net liquidity contraction of GNF 1,728 billion. Although indicators show that interest rates fell in the banking system, bank credit to the private sector declined in 2012 (by 4.3 percent, compared to an increase of 94 percent in 2011). This partly reflected the repayment of loans after foreign financing was replaced by domestic financing for petroleum product imports in 2011, as well as the drastic reduction in bank liquidity. The fact that broad money stabilized relative to end-December 2011 indicates that the monetary policy objective of absorbing excess liquidity in the economy is being achieved. The Guinean franc appreciated by 1.7 percent against the U.S. dollar, but depreciated by 0.6 percent in relation to the euro during the course of 2012. The better supply of foreign exchange in the market is also evident from the sharp decline in the average spread between the official and parallel markets from almost 11 percent in June 2011 to almost zero during most of 2012.

12. Guinea is starting to benefit from reaching the HIPC completion point in September 2012. In October 2012, Paris Club creditors reached agreement with the government to cancel 99 percent of its eligible external public debt on exceptionally favorable terms. Several bilateral agreements under the agreement were signed in recent months, including with the government of the United States, which cancelled 100 percent of the arrears and outstanding debt owed by Guinea in January 2013. In early February 2013, a bilateral agreement was signed with France, cancelling 100 percent of its debt except for debt eligible for conversion into debt reduction and development contracts (C2D). For the latter, two C2Ds were proposed for a total amount of €171 million, covering the future debt service due on the eligible debt, which will be converted into grants for development projects. Discussions have started with other official bilateral and commercial creditors on debt restructuring on comparable terms. In the case of multilateral creditors, following the World Bank, the European Investment Bank and the African Development Bank (AfDB) cancelled outstanding debt in line with the Multilateral Debt Relief Initiative (MDRI) in early November 2012. The government continued discussions with its commercial creditors, in a manner consistent with the IMF’s policy on lending to countries in arrears, in particular regarding the transparency of information, equity between creditors, and a collaborative approach in discussions with creditors.

D. Implementation of the Structural Reforms

13. The government continued to implement and monitor structural reforms at the highest level, by reviewing them regularly in the Cabinet chaired by the Prime Minister. This made it possible to coordinate and rapidly implement an ambitious structural reform program and the majority of the structural benchmarks (SBs) under the program were met. The draft technical amendments to the 2011 Mining Code were sent to the interim parliament (Conseil National de Transition—CNT) in March 2013 and adopted in April; the delay was due to consultations with the mining sector and civil society that lasted longer than expected; the adoption and publication of the implementing regulations for the new Code and the standard mining convention are expected to follow shortly. Nonetheless, delays have occurred in meeting some of the SBs; most of these are expected to be completed during the first half of 2013. The government decided that the mechanism for adjusting fuel prices on a monthly basis (continuous SB from January 1, 2013) could not be implemented owing to an unfavorable social context.

14. The government continued to implement its major program for strengthening tax administration and public financial management. In late September 2012, it adopted a three-year rolling public investment program (PIP) 2013-15 with support from the AfDB and the United Nations Development Program (UNDP). This PIP served as the basis for preparing investment expenditure for the 2013 budget. Following promulgation, on August 6, 2012, of the Budget Framework Law (loi organique relative aux lois de finances – LORLF), which was drafted in collaboration with the IMF’s Fiscal Affairs Department, the government continued to implement its public financial management reform program. In particular, it: (i) promulgated a new Government Procurement Code; (ii) signed a new decree on General Regulations of Budgetary Management and Public Accounting (Règlement Général de Gestion Budgétaire et de Comptabilité Publique –RGGBCP), and started work on a procedural manual for budgetary management and public accounting, as well as a decree on governance and transparency in budget preparation and execution; (iii) instituted a new medium-sized enterprise unit in the National Tax Directorate, and extended the scope of VAT to cover medium-sized enterprises (in April 2013); and (iv) signed a framework agreement between the BCRG and the Ministry of Economy and Finance, updating the 2010 securitization agreement (also in April 2013). The government also consolidated the operational rules of the Treasury Single Account (TSA), with assistance from the IMF, and launched an audit of domestic payment arrears, with support from the French development agency (AFD). Lastly, it strengthened procedures for closing government accounts at December 31, 2012, by implementing new closure instructions, transmitted throughout the entire accounting network.

15. The central bank maintained its policy to strengthen and develop the financial system. A new draft banking law was adopted by the government in December 2012 and sent to the CNT. The BCRG started to implement a payment incidents clearing house to upgrade the payments system, with support from de Banque de France; disseminated new instructions on microfinance institutions; and strengthened regulation in the insurance sector. With technical assistance from AFRITAC West, the BCRG also continued to strengthen the supervision of banks and microfinance institutions, for which purpose 16 young inspectors were recruited in late 2012. A decision was taken to put the African Agriculture and Mining Bank (BADAM) into liquidation, and its license was withdrawn. In accordance with recommendations made by the IMF safeguards assessment mission in January 2012, the BCRG’s new independent auditor approved the monetary statistics used to evaluate the performance of the program as of June 30, 2012.

Implementation of the Extended PRSP II for 2011–12 and Adoption of the PRSP III for 2013–15

16. The government started implementing an emergency program to combat poverty, based on the Second Poverty Reduction Strategy Paper (PRSP II). The latter, which initially covered the period 2007–10, was extended to cover 2011–12 to achieve some of the goals that had not been attained during the period of the military regime in 2009–10. The 2011–15 Five-Year Development Plan adopted by the government is consistent with the extended PRSP II. It includes a priority public investment program, particularly in infrastructure, but also in the mining, industrial, water and energy, tourism, education and health sectors. The annual progress report on the implementation of the PRSP II for 2011, which was submitted to the IMF and World Bank in May 2012, shows the continuing increase in expenditures in the priority sectors.

17. The PRSP III, covering 2013–15, was completed and adopted by the government on May 2, 2013. The document was prepared in a highly inclusive participatory process, involving stakeholders from the regions, boroughs and local communities of Guinea, along with civil society, labor unions, the private sector and technical and financial partners, as well as the government and the CNT. The PRSP III is divided in two major parts. The first lays out the present situation by assessing poverty and reviewing the lessons learned from the implementation of the PRSP I and II. The second part sets out the government’s vision and sectoral strategies, arranged around six pillars: (i) macroeconomic stability; (ii) governance and institutional reforms; (iii) development of economic infrastructures; (iv) rural development; (v) mining and industrial development; and (vi) human capital development. The PRSP III defines a process for implementing the strategy and the priority action plan, along with a communication program and mechanisms for evaluating the strategy’s impact on the living conditions of Guinea’s population measured against the Millennium Development Goals.

Economic and Financial policies and Structural Reforms for 2013

18. The government will continue to implement the rigorous macroeconomic policies and structural reforms of its medium-term ECF-supported program, with a view to unlocking the country’s vast economic potential and supporting strong, sustainable and diversified growth. It will use the savings from debt relief under the HIPC Initiative, as well as remaining funds available in the Special Investment Fund (SIF) from the 2011 exceptional mining revenue, to finance priority expenditure programs—including for the energy sector, basic infrastructures and social spending—formulated with assistance from the country’s development partners.

A. Macroeconomic Outlook for 2013

19. Despite the persistence of the global economic crisis and other risks, macroeconomic prospects for Guinea remain favorable for 2013. Output growth in agriculture, particularly rice, should remain strong; and the mining sector is set to expand due to the expected recovery of alumina production from the second half of the year. The objective for the real GDP growth rate for 2013 is 4.5 percent. Nonetheless, there are major uncertainties stemming from delays in the large Simandou mining project and the impact of legislative elections on investment. The government aims to undertake new priority public investments in the energy and agriculture sectors—drawing on targeted budgetary support from the government of the United Arab Emirates—and EU funding. The letter, which is predicated on the completion of the legislative elections now scheduled for June 30, 2013, is expected to increase during the second half of the year. On the inflation front, the aim is to reduce the rate of increase in the consumer price index to 9.7 percent year-on-year by December 2013, which will correspond to an annual average rate of 11.2 percent. Given the large wage rises awarded in 2012–13, achieving this target will require prudent budgetary and monetary policies. The central bank’s foreign exchange reserves should be equivalent to at least 2.9 months of imports by end-2013.

B. Fiscal policy

20. Fiscal policy for 2013 will continue to aim at avoiding net bank financing of the budget other than from drawing down resources stemming for the 2011 exceptional revenue. The 2013 budget was approved by the CNT in line with the program, in December 2012; updated provisions indicate that the overall targets remain attainable. Priority expenditures will benefit from the savings on external debt service obtained from attainment of the HIPC completion point and the MDRI. The government’s basic balance deficit is expected to rise from 2.5 percent of GDP in 2012 to 3.3 percent in 2013. The latter is consistent with the initial program objective of 1.4 percent of GDP for 2013, after adjusting for additional net external financing (especially additional budget support from the United Arab Emirates and higher-than-projected debt relief), and a shift of expenditure to be financed by the balance of the 2011 exceptional mining revenues from 2012 to 2013. Special Investment Fund (SIF) resources—$250 million by end-2012—will be used on a staggered basis in 2013-15, to ensure a sufficient level of public investment before the expected increase in mining revenues in the second half of this decade. External financing will be consistent with the goal of keeping the debt sustainable after achievement of the completion point.

21. Budget revenue is projected to drop slightly, from 20.1 percent of GDP in 2012 to 19.6 percent in 2013. The projections assume continued strong collection efforts but also continuing losses on fuel taxes (estimated at 0.7 percent of GDP) due to a delay in bringing fuel prices in line with import costs. Key measures are: (i) the cancelation of tax benefits for companies that no longer comply with the obligations under the Investment Code; (ii) the recent implementation of the medium-sized enterprise unit within the National Tax Directorate (DNI), and extension of the scope of VAT to cover medium-sized enterprises; and (iii) clearance of the backlog of VAT credits by end September 2013—restoring the system for refunding these credits should enhance incentives for taxpayers, particularly in the mining sector, to collect and pay the tax.

22. The government intends to introduce a mechanism for monthly adjusting fuel prices starting by August 2013 (SB). The government is aware of the importance of avoiding large subsidies on oil products. However, instruments to protect the poorest groups in society against increases in fuel prices are not yet available. For the time being, the government has chosen to emphasize efforts to collect other revenue to offset the losses for fuel taxes; however, the losses have been substantial and they reduce resources available for priority sector spending such as education and health, which also benefit the poorest in society. Guinea plans to set up a framework social protection strategy, which may allow adjusting fuel prices while mitigating the impact on poverty. Starting August 2013, the price adjustments will be set by the Joint Committee on Petroleum Products, of which the Director General of Customs and the Special Customs Collector will be members.

23. The revenue agencies will continue to implement the measures provided for in the action plans for tax and customs reform, with assistance from development partners. The action plan of the National Tax Directorate (DNI) is based on (i) streamlining the organization to allow more effective administration; (ii) harmonizing and simplifying tax legislation; (iii) promoting taxpayer compliance; (iv) strengthening employee skills; (v) expanding the tax base; and (vi) strengthening management and supervision of the administration. The action plan of the Directorate-General of Customs (DGD) aims at: (i) strengthening the customs agency; (ii) improving its human and financial resources; and (iii) modernizing customs procedures and strengthening risk-based control. The following priority activities will be carried out:

  • Revision of the General Tax and Customs Codes and the Customs Tariff to take account of recent tax changes and to incorporate the tax incentives that are presently included in the Investment Code and other statutes;

  • Preparation of a study, with IMF assistance, to provide recommendations on reforming real estate taxation;

  • Operationalization of the Tax Appeal Commission to speed up the settlement of disputes and tax collection;

  • Implementation, by end-September 2013, of a VAT refund system to ensure that refunds to enterprises are made within a reasonable timeframe and with the necessary safeguards, in line with IMF recommendations;

  • Implementation of risk-based customs control by selectively using SYDONIA ++ declarations, followed by SYDONIA World, and by computerizing customs offices at inland border posts;

  • Forging of a partnership with the private sector by signing an agreement on the gradual payment of customs duties; importers will have the possibility to take just a portion of the imported goods and to pay a portion of customs duties; the unpaid portion of customs duties will be guaranteed by the goods that are not collected; and

  • Interconnection of computers between the two tax agencies and with the other administrations—in particular the National Procurement Directorate, the Treasury, and the BCRG—to speed up services for users, including payment of taxes and customs clearance of goods, and to limit fraud.

24. Current expenditure is projected to decline slightly in percent of GDP in 2013 compared to the 2012 outcome, despite a sharp increase in civil service wages. The wage bill declined sharply in percent of GDP during 2012 in line with the government’s strict expenditure management policy, but is projected to return in 2013 to about the same level, relative to GDP, as in 2011. Expenditure on goods and services will rise by 4 percent in real terms, reflecting more effective budgeting of public consumption of water and electricity, but agriculture and electricity sector subsidies will be restricted to their nominal 2012 values.

25. The government intends to maintain the wage bill at around 5.2 percent of GDP over the medium-term, while creating additional space for wage increases through administrative improvements and civil service reform. Following two years of decline in real wages and in light of high expectations following attainment of the HIPC completion point, the government agreed to raise civil service basic wages by 50 percent over the period October 2012–December 2013 (Box 1); the timing of the third tranche in the increase, during the second half of the year, will depend on budgetary and inflation developments. It will also hire about 10.000 new employees (about 10 percent of the end-2012 payroll) in the priority sectors (education, health, environment, justice, and police). The effects of these additional expenditures over the medium-term will be partly offset by measures aimed at cleaning up the civil service database and improving workforce management, including: (i) harmonizing the civil service database and payroll administrations; (ii) securing the database through a biometric census, carried out with support from the World Bank; (iii) correcting anomalies, including the removal of duplicate and fictitious workers and better monitoring of contractual workers; (iv) strengthening recruitment practices; and (v) establishing line managers and strengthening employee management with support from the World Bank. To this end, the government intends to adopt, before end-September 2013, a civil service reform plan, based on the results of the ongoing biometric census and the action plan of the state reform and public sector modernization program (HCREMA) (SB).

Guinea: The Increase in the 2013 Wage Bill

Following demands by civil service unions for a 200 percent wage increase, the government, trade unions, and employers’ organizations reached agreement on an increase in civil service wages and other issues in December 2012. The September 2012 basic wage of civil servants would be increased in a phased manner: (i) 10 percent starting from October 2012; (ii) 15 percent from January 2013; and (iii) 25 percent before end-2013. The government also agreed to implement, starting in January 2013, the special employment conditions (charters) for personnel in the education and health sectors that had been agreed in 2008 and to create a Social Security Fund and a system of health insurance for civil servants. The agreement also introduced a minimum monthly wage for the public and private sector of GNF 440,000 (about $60; 1.3 times monthly per capita GDP).

The salary increase accounts for about half of the budgeted growth of 35 percent (0.8 percent of GDP) in the 2013 wage bill by (see text table below). The impact is mitigated by the fact that the increase applies to only about 40 percent of the budget’s wage bill as (i) civil service wages account for only about 65 percent of the total wage bill and other government wages are not expected to follow the same increase; and (ii) about 40 percent of total civil service pay consists of allowances; following a 10 percent increase in October 2012, the latter will not be raised further during 2013. Other important elements in the increase in the wage bill are provisions for the full implementation of the special charters (23 percent of the increase) and additional recruitment (19 percent).

Guinea: Details of the Increase in the 2013 Wage Bill

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Source: Guinean authorities.

26. In 2013, the government will incur a number of exceptional expenses to improve tax compliance and help strengthen the financial sector. In this regard, it will clear the backlog of VAT credits (GNF 45 billion; 0.1 percent of GDP). Budgetary credits are also expected to finance the operating expenses of the government-owned entity set up to manage the government’s economic and financial activities in the mining sector (SOGUIPAMI). The budget includes a provision of GNF 20 billion for the liquidation of BADAM; the BCRG will appoint a liquidator for this bank by the end of June 2013, under terms of reference that will ensure, in particular, that the advances from BCRG to BADAM and deposits up to GNF 10 million will be reimbursed (SB). The liquidator will also recover the assets of the bank in liquidation and of its managers. Lastly, projections for 2013 include the second tranche of the recapitalization of the BCRG (GNF 138 billion).

27. As a ratio of GDP, domestically financed investment expenditure is expected to drop slightly to 6.6 percent of GDP in 2013. This fall reflects the lesser availability of financing from the 2011 exceptional mining revenues. During 2012, the equivalent of $250 million of the exceptional revenue was used, mainly to finance projects in the electricity sector; the 2013 budget provides for the use of $125 million (2.5 percent of GDP), which is half of the exceptional revenue that was transferred to the SIF in 2012. Nonetheless, the reduction was mitigated by retargeting external budgetary assistance toward investments and by reprogramming expenses that could not be executed in 2012, specifically with regard to the installation of new thermal power generating plants. Projects to be financed from SIF resources are based on the three-year public investment program prepared in 2012. With assistance from the World Bank, the government will set up the governance structure for the SIF to make the fund operational by June 2013. Projections for externally financed investment (3.4 percent of GDP) assume, among other things, that EU financing under the 10th European Development Fund (EDF) that is contingent upon legislative elections, will remain available.

28. The budget is expected to be fully financed, including due to debt relief from achievement of the HIPC completion point. The external debt service savings from the HIPC completion point, the MDRI, and from additional relief from bilateral creditors are estimated at about $203 million. The budget also includes grants associated with the debt reduction and development contracts (C2Ds) with France to finance jointly agreed projects. Under the C2Ds, Guinea will make debt service payments on debts under the C2D which will be returned as grants to finance development projects. The government also received $90 million in budget support from Abu Dhabi, targeted on the electricity and agriculture sectors. The government is planning to organize a consultative group meeting of donors and private investors towards the end of 2013 in Abu Dhabi, which could generate additional financing. Net bank financing of the Treasury will be avoided, other than the planned use of SIF resources and the remainder (outside the SIF) of the deposits from the 2011 exceptional mining revenue, amounting to $43 million.

C. Monetary and Exchange Rate Policy

29. The main objective of monetary policy remains to lower inflation; the BCRG will continue to focus on containing reserve money growth. Given the absence of indirect instruments, interventions in the weekly foreign exchange auctions (marché interbancaire des changes—MIC) will continue to be the main monetary policy instrument, allowing the BCRG to control the level of liquidity by selling foreign exchange, within the limit of the target for international reserves. Nonetheless, the sharp drop in the inflation rate in 2012, a decline in bank lending, and a reduction in the banks’ demand for treasury bills while rates increased, shows that bank liquidity is drying up. Against this background, the BCRG lowered the central bank’s policy rate—which mainly fulfills a signaling function—by six points to 16 percent on February 28, 2013 (while maintaining a spread of six percentage points for the interest rate on special overdrafts at the BCRG to encourage banks to develop an interbank market). A further loosening of monetary policy by reducing the reserve requirement in the coming months will depend on evidence of a sustained downward trend in inflation and stability in international reserves.

30. The exchange rate is largely market-determined, and BCRG interventions have been limited to the weekly auctions. The weekly offered amounts in the MIC have fluctuated very little and banks’ purchases have been mainly used to satisfy marginal needs. To further enhance transparency, the BCRG will adopt new regulations to clarify the MIC’s operating regulations, such as the modalities for allocating foreign exchange and setting the exchange rate, based on IMF technical assistance.

31. The BCRG is pursuing its policy to strengthen the financial sector. The BCRG will continue to strengthen banking supervision, with technical assistance from the IMF. Key measures for strengthening the financial sector include (i) adoption of a plan for the recapitalization of banks that are not compliant with the minimum capital requirement; (ii) an increase in the minimum capital requirement for banks from GNF 50 billion to GNF 100 million. By end-December 2013, the central bank will adopt a plan for the liquidation of banks that have not complied with their recapitalization plans; (iii) a study the feasibility of setting up a deposit insurance fund; and (iv) preparation of a new draft chart of accounts for banks in accordance with the new banking law, targeted for completion by end-2014. It is also planning to strengthen supervision on microfinance institutions and the insurance sector. To increase the sector’s contribution to the country’s development, a study on the development of the financial sector, prepared with assistance from the AfDB, the UNDP, and other economic and financial partners, was recently completed; its recommendations are expected to be adopted by the government by June 2013.

32. The BCRG will also continue to strengthen its own financial position and implement the recommendations of the IMF’s safeguard assessment. The planned second capital contribution for the budget would bring the central bank’s capital up to the statutory minimum in 2013. A further increase in the bank’s capital may be needed to bring it in line with the growing banking system; to this end, it has asked the IMF’s Monetary and Capital Markets Department to prepare a financial assessment of its entire balance sheet to more precisely determine such additional capital requirements. The central bank will also work to define its investment policy, set up the trading room for its foreign exchange investments, and train staff with technical assistance from the IMF and the World Bank. The new external auditors will review the agreed procedures to validate the level of net domestic assets and net international reserves indicated in the December 31, 2012 monetary survey. The new independent auditor will certify the monetary data used to evaluate the program’s performance on December 31, 2012 and audit the central bank’s accounts for December 31, 2012 by end-June 2013; the latter will subsequently be published on the BCRG’s external web site. In March 2013, the BCRG received comments from the IMF’s Legal and other Departments on a new draft central bank act, which it intends to submit for government approval in the first half of 2013.

D. Structural Reform

33. Structural reform is crucial to remove bottlenecks to economic growth and reduction in poverty, and for unlocking Guinea’s abundant natural resources. During 2013, and following much preparatory work in 2011–12, a number of important reforms are expected to be completed, such as in the mining sector and with regard to the revision of the investment code. In other areas, such as in public financial management (PFM), our actions will build on the important progress made in 2012. Efforts to restore the viability of the energy sector are planned to be intensified, while part of the work in the agricultural sector will be to evaluate the effectiveness of previous reform measures.

Fiscal management

34. The government will continue to implement its public financial management modernization program in 2013, with support from its technical and financial partners. Many actions focus on the implementation of the 2012 Budget Framework Law (LORLF) and the new Decree on the General Regulations on Fiscal Management and Public Accounting (Règlement Général de Gestion Budgétaire et de Comptabilité Publique – RGGBCP). It will implement the following action plan:

  • By end-June 2013, finalize the transfer of accounts to be integrated into the Treasury Single Account (TSA) and perform a weekly leveling of the balances in credit accounts of financial administrations in the account of the National Treasury Directorate (DNT), except for the bank accounts of public accountants in the regions.

  • Produce and disseminate accounting and budgetary procedures, under the new regulatory framework, to units that execute the government budget.

  • Regularize suspense accounts and produce administrative and general financial management accounts for 2005-2012 by end-December 2013 (SB).

  • Adopt a new order to limit the use of special budget execution procedures, providing modalities for their regularization, pursuant to the new regulatory framework.

  • Reintroduce oversight of the budget implementation process through budget review laws; prepare the administrative and management accounts for 2010–12, in order to submit the draft expenditure laws for 2010, 2011, and 2012 to Parliament.

  • With technical assistance from the World Bank, put the SIF governance structure in place by end-June 2013 (SB), including the management committee, consultative and monitoring committee, and the executive secretariat; and submit projects that could be financed by it in the framework of the 2013–15 triennial public investment program.

  • Adopt a public investment program for 2014-16, based on recommendations made by the country’s development partners.

  • By end-October 2013, adopt the implementing regulations for the Procurement Code that was adopted by the CNT and promulgated in 2012.

  • Adopt the procedural manual for budgetary management and public accounting, and the computerization master plan; and, with assistance from the development partners, computerize the expenditure chain and public accounting on a secure basis, with real-time access for authorized personnel.

  • Adopt the decree on budgetary governance and transparency in the management of government finances—the second implementing regulation of the LORLF—which sets rules on the formulation of budgetary policy and the preparation of the budget laws.

  • Adopt orders in relation to the government chart of accounts and budget nomenclature, to be applied for the first time in fiscal year 2014;

  • Prepare a functional budgetary classification, targeting priority expenses;

  • Prepare a plan, by end-September 2013, to clear domestic payment arrears, based on the findings of the ongoing audit, supported by AFD; and

  • Implement the regulations, requiring that expenditure commitments cannot be made after November 30, and complete payments on related expenses on January 31 of the following year (i.e. a supplementary period of one month). These provisions will make it possible to limit the overflow of 2013 expenses into fiscal 2014. Transactions made under special procedures will also be limited.

35. To strengthen the management of the country’s external debt, the government will adopt, by end-December 2013, revisions to the statutes of public entities to align them with the new LORLF and the RGGBCP (SB). In this context, Order O/91/025 of March 11, 1991 concerning the institutional framework of public enterprises, and Decree D92/133/PRG/SGG of May 26, 1992, will be amended to control recourse to borrowing and thus limit the risks for the government budget. Similarly, a draft revision of Law L/93/021/CTRN/SGG of May 6, 1993 on public administrative entities (EPAs) will be submitted to Parliament, forbidding those entities to borrow. The government has requested technical assistance from the IMF for this purpose.

Improve the business climate

36. To implement the reforms needed to promote the private sector, improve the business climate, and provide incentives for investment, work on reviewing the Investment Code is continuing, with technical assistance from the World Bank, the International Finance Corporation (IFC), and the IMF. The government decided to separate investment regulation from tax incentives: a new Investment Code will be limited to nontax regulations while all tax and customs incentives will be included in the General Tax Code, the Customs Code, and the Customs Tariff. A draft national private investment policy letter was prepared during a workshop with stakeholders in September 2012, and adopted by the government in March 2013 (prior action). Key actions for 2013 will be:

  • (i) Submission of a draft law on tax and customs incentives to Parliament by end-May 2013 (SB); this law will encompass all tax and customs incentives for private investment, including those that are presently granted by Ministries outside the Investment Code, and have precise triggering thresholds. Once this law has been adopted, projects and businesses will no longer be required to seek approval for the incentive systems, because the tax and customs administrations will apply the advantages according to the legally defined trigger thresholds. The government will submit to parliament a draft law revising the Investment Code, by end-June 2013 (SB). This draft law will contain provisions relating only to nontax and non-customs incentives.

  • (ii) Preparation, with assistance from the IMF and IFC, and submission to Parliament, of new General Tax and Customs Codes and a new Customs Tariff, incorporating the tax incentives for private investment, between September 2013 and June 2014.

Pending parliamentary adoption of the law on tax incentives, the National Investment Commission (CNI) will continue to operate under the Ministry of Industry and SMEs. Then, the government will set up a private-sector reform coordination unit in the Ministry of Industry and SMEs, to monitor the reforms. Lastly, to complete the operationalization of the private investment promotion agency (APIP), the government will appoint its executive board and nominate the deputy managing director and the heads of the four departments provided for under its statutes, before end-June 2013.

37. Guinea rose three places on the “Doing Business” indicators ranking in 2013 and the government will continue efforts toward further improvement. The improvement in the country’s ranking resulted from the intensification of its reforms on three indicators during 2012 and the first four months of 2013, based on the following performance criteria: (a) the delays; (b) the number; and (c) the cost of procedures, while monitoring effective implementation of the reforms. For the remainder of 2013, the government will focus on the remaining four indicators. It will also work with the private sector to streamline professional organizations, including the organization of a round table in 2013 with support from the country’s development partners and the participation of all stakeholders from the private sector.

38. Strengthening the legal system is an important condition for improving the business climate. In 2013, the government will maintain its continuous training program for judges and other court officers, and it will continue to help strengthen the capacities of the associations of attorneys, notaries, court clerks and auctioneers, and accounting experts and auditors, to execute court decisions more effectively and strengthen shareholder control of enterprise management and accounts. It will submit a draft anticorruption law to Parliament by end-September 2013, which transposes the provisions of the United Nations and African Union conventions on controlling corruption into domestic law; and it will launch a second survey to evaluate the level of corruption in the country by end-December 2013. As part of the fight against money laundering, a decree on the operation and duties of the National Financial Information Processing Unit (CENTIF) will be issued by end-June 2013. This will provide the unit with human, financial and technical resources, pursuant to the provisions of Articles 19 and 20 of the law to combat money-laundering and the financing of terrorism.

Mining policy

39. Mining policy will continue to focus on the development of investments in the sector to promote growth and employment. This entails providing the necessary support for projects currently under development to facilitate their transition to the production phase in line with initially planned schedules. In addition, the government intends to foster mining exploration so as to diversify the exploitation of mining resources and make the mining sector more resilient to shocks on mineral prices in international markets. Further, with a view to enhancing added value from the sector and strengthening its contribution to poverty reduction, the government plans to encourage local processing of mining products. With support from the World Bank, the government intends to commission a study on a master plan for mining sector-related infrastructure (port and rail), which is expected to be finalized in September 2013, as well as a study on the organization of artisanal gold exploration, which is expected to be finalized by end-December 2013. To maintain a comprehensive and updated database on the mining cadaster and permits, the government will mobilize resources to modernize the information system of the Mining Promotion and Development Center (CPDM). The government will take delivery of the findings of the geological study.

40. In addition to the revision of the mining code, an important aspect of the government’s policies in the mining sector is a review of all existing contracts. The adoption of the amendments to the mining code by the CNT in April 2013 removed the last remaining obstacle to the effective start of the renegotiating process. To reduce the uncertainty facing companies, the Technical Committee charged with reviewing the mining titles and agreements will publish its work program by mid-2013; it will be supported by four international law firms that combine the necessary legal, technical, and financial skills. To promote transparency, the technical committee published all mining conventions on its web site. An audit of the 18 mining companies whose contracts will be subject to review will be finalized by end-December 2013. The renegotiating process for three priority contracts is scheduled to be finalized by end-2013, together with the adoption of the outcome of the negotiations by the Strategic Committee overseeing the Technical Committee and their immediate implementation. With assistance from the AfDB, the Technical Committee will hire a financial analyst to provide guidance on applying, improving, and maintaining the financial models used to steer the renegotiating process. Renegotiation of all the mining titles to be renegotiated is scheduled to be finalized in 2014.

41. The government’s policies will continue to focus on improving the governance of the sector so as to attract investment. Following the adoption of the new mining code by the CNT, the government will adopt and publish the implementing regulations of the new mining code as well as a model mining contract by end-June (SB). The findings of the audit of the mining cadaster have given rise to increased opportunities for obtaining mining licenses and concessions. The government is, therefore, actively seeking professional partners for purposes of reallocating the 818 inactive permits that were withdrawn following the audit. The reallocation process will be transparent and consistent with the stipulations of the mining code. To facilitate the development of oil and gas potential, with the support of the AfDB, the government has launched the preparation of the petroleum code and its implementing regulations. The new petroleum code is slated to be adopted by the government and submitted to Parliament by September 2013. This will facilitate the development of exploration initiatives along the lines of the Tullow Oil plc deepwater well project on which drilling is scheduled to start by end-June 2013. The government expects to finalize the investment framework for the Simandou South project and specify the financing strategy for the project soonest. The Compagnie de Bauxite de Guinée (CBG), in which the government holds a 49 percent share, recently concluded an agreement requiring a substantial increase in production; the World Bank is assisting the government in the evaluation of CBG’s worth, which should pave the way for continuing discussions on possible financing arrangements for increasing production capacity. Lastly, the government will agree on a timetable with the bauxite company Rusal for bauxite mining in the Dian-Dian concession as well as for the resumption of work at the Friguia alumina factory.

42. The government reaffirms its commitment to reforming the institutional framework of SOGUIPAMI. Efforts to clarify its role are being pursued with World Bank assistance, with the purpose of: (i) limiting its activities to management of the state’s portfolio of mining assets, with the Treasury retaining ownership of state securities and shares; and (ii) defining its relationship with the Ministry of Economy and Finance and the Ministry of Mines. A first request for bids for a consultant in these areas was not successful and a second request is under preparation. Due to the resulting delays, the government is now aiming at adopting and implementing the recommendations of the study by end-December 2013 (SB). In the meantime, a Steering Committee will ensure that all activities undertaken by SOGUIPAMI remain strictly within the limits of the allocations assigned to it by the budget law and are in conformity with the rules governing public entities. By end-June 2013, the Steering Committee will meet to take decisions on SOGUIPAMI’s business plan, including on conditions for the acquisition of geodetic data to streamline the use of resources for mining exploration.

Energy Sector

43. The government will continue to implement the policies and reforms outlined in the Policy Letter on Energy Sector Development, as revised in December 2012. The medium- to long-term objectives are to (i) increase access to electricity for the general population; (ii) improve governance of EDG; and to (iii) reduce dependence on fossil fuels, especially by developing Guinea’s large potential for hydroelectricity. To that end, over time, the government intends to withdraw from commercial activities and open up the sector to competition. With respect to the short- and medium-term, the principal measures of the Letter are included in the recovery plan for the electricity sector.

44. For 2013, the government will give priority to improving the governance of EDG. Despite substantial government support, progress with restoring financial viability to the state-owned power company Electricité de Guinée (EDG) has been slow. To accelerate the process, in March 2013, EDG was placed under the supervision of an oversight board; the board is assisted by a financial controller, who will supervise EDG’s financial management on a daily basis, ensuring that EDG’s expenses remain in line with its revenue and that the government subsidy of a maximum of GNF 250 billion is strictly adhered to. Further, efforts will be made to improve commercial and demand management, including by installing meters (150,000 meters in three years at a cost of $8.3 million) and installing low consumption bulbs (close to two million lamps).

45. The government also recently updated the action plan for the restructuring of the electricity sector, with assistance from the World Bank. Five priority projects were defined based on the revised plan: (i) rehabilitation and strengthening of hydroelectric production; (ii) rehabilitation of the thermal power plants of Tombo III and V in Conakry; (iii) support to the reform of EDG’s governance, in particular the establishment of a management contract with a strategic operator; (iv) restructuring and strengthening of the sector through technical advice to the reform of the electric power sector; review of the electricity law; adoption of a law on public-private partnerships in Guinea; and (v) rehabilitation and strengthening of the electric power transport network. The government presented these five projects at a Donor Round Table on April 19, 2013 in Washington, D.C., to seek external financing in an amount estimated at about $280 million; donors agreed to start preparing their respective support to the priority projects, with the view to making them available in 2014.

Agricultural sector

46. Relaunching the agriculture sector, with the aim of achieving food self-sufficiency by 2014, is an important objective for the government. A key issue in 2012 was to ensure that assistance to the sector remains sustainable over the medium term by raising the loan collection rate and controlling budget subsidies. However, despite strong government support to boost yields, the increase in food crop production (in particular rice) over the past two crop seasons is mainly attributable to an increase in the area under cultivation. To identify the reasons why the expected substantial improvement in yields failed to materialize, the government will carry out an in-depth evaluation, including a technical and financial audit of the last two seasons. The audit is also expected to examine the distribution of subsidies to farmers by income level so as to draw conclusions on the equity of the program and its contribution to poverty reduction. The evaluation, including the findings of a public expenditure review by the World Bank, is expected to be completed by end-June 2013, following which it will be discussed at a national workshop, tentatively planned for end-October 2013. In the context of achieving the objective of food security, the government approved the National Agricultural Investment and Food Security Plan 2012-16 in December 2012. It will prepare a work program for the recently created National Agency for the Development of Agriculture and for Food Security entrusted with policy coordination in the agricultural sector as a whole and with promoting food security, including by building grain stocks to help stabilize grain product prices.

E. External Program Financing

47. The program’s financing requirements in 2013 are expected to be met in part by external assistance in the form of budget support and financing for investment projects. In addition, achieving the HIPC initiative completion point and implementation of the MDRI has released significant resources from debt service in 2013. In this regard, the World Bank and the AfDB cancelled their MDRI-eligible outstanding debt with Guinea.2 A debt reduction operation was agreed with the creditor members of the Paris Club in October 2012; and the government will continue to hold discussions with its other foreign creditors to obtain debt reduction under terms comparable to those of the Paris Club and in line with the HIPC Initiative. In the case of commercial creditors, the government will continue to hold discussions, in line with the IMF’s policy on lending to countries in arrears. In addition, disbursements from the IMF under the ECF arrangement are expected to cover the residual balance of payments financing need.

48. To ensure prudent debt management, the authorities will seek only grants and concessional loans, although this may be difficult owing to the limited availability of concessional resources from lenders. In addition, as discussed above, the loan from Exim Bank of China to finance the Kaléta hydroelectric dam; a loan with the BIDC; and two loans from the OPEC Fund, have a grant element of less than 35 percent. The government’s equity in the project to develop the Simandou iron-ore deposits (blocs 3 and 4) will be financed without any direct loans or government guarantees, and should be fully covered by project revenue. In any event, the government will provide IMF staff with details on the financing for its equity participation. To ensure debt sustainability after the HIPC Initiative completion point, the authorities will adopt a new medium-term debt management strategy and a program to strengthen debt management capacities, in consultation with the Fund. The authorities intend to submit to the newly created public debt monitoring committee all proposals for new loan agreements and loan guarantees to ensure that the terms are concessional. The government also intends to consult with IMF staff on the conditions and concessionality of all new debt agreement proposals before contracting or guaranteeing any external debt. By end-October 2013, the government will prepare a medium-term action plan to strengthen external debt management, with technical assistance from the European Union (SB). In this context, by end September 2013, it will finalize a procedural manual and set up management teams for the National Debt Directorate; and by end-December 2013, it will establish a National Debt Committee that will prepare a National Debt Policy and a medium-term debt strategy, and oversee their implementation. To service the debt owed to the IMF, the BCRG will keep sufficient funds in its SDR account with the Fund to cover all payments falling due over the next quarter.

F. Statistics and Strengthening Program Monitoring Capacities

49. The government will persevere in its efforts to upgrade the statistics system to ensure the steady production and supply of quality statistical data. In line with the National Strategy for the Development of Statistics (NSDS), the government is preparing the draft statistical law and the institutional framework of the National Statistical System. It will also start implementing the capacity-building programs negotiated with the development partners.

50. The government has identified a broad range of technical assistance needs in macroeconomic management. To make a fresh start, the authorities requested technical assistance from the partners, including the IMF and its regional technical assistance center AFRITAC West, the European Union, and the AFD in several areas, including fiscal policy, tax and customs administration, public financial management, the foreign exchange market, monetary policy, bank supervision, debt management, the balance of payments and the national accounts.

51. To monitor implementation of the measures and the attainment of its objectives under its ECF-supported program, between now and end-June 2013, the government will strengthen the monitoring system. The system will consist of a Reform Coordination Committee (CCR) chaired by the Prime Minister, a Technical Support Committee for the CCR, and a Program Monitoring Technical Unit (CTSP) in the Ministry of Economy and Finance. With these mechanisms, the government, the central bank, the international financial institutions, and Guinea’s development partners will receive periodic reports on the progress made, prospects, and the measures envisaged.

52. The program will be reviewed semiannually by the IMF Executive Board on the basis of quantitative monitoring indicators and structural benchmarks (Tables 1, 2 and 3 attached). These indicators are defined in the attached Technical Memorandum of Understanding (TMU) (Attachment II). The second year of the program will finish at end-December 2013. The third (fourth) program review based on the performance criteria at end-June 2013 (December 2013) should be completed no later than October 2013 (April 2014).

Table 2.

Guinea: Prior Actions and Structural Benchmarks Under the ECF-Supported Program, 2012–131

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Throughout Table 2, references made to the MEFP concern the 1st supplement to the MEFP attached to the letter of intent dated September 11, 2012 (IMF Country Report n° 12/301, September 12, 2012).

Rescheduled actions.

Table 3.

Guinea: Prior Actions and Structural Benchmarks January–December 2013

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Readjusted actions.

New actions.

53. During the program period, the government agrees not to introduce or intensify restrictions on the balance of payments or transfers pertaining to current international transactions, introduce multiple currency practices, enter into bilateral payment agreements that are inconsistent with Article VIII of the IMF Articles of Agreement, or impose or intensify import restrictions for balance of payments purposes. Moreover, the authorities agree to adopt, in consultation with IMF staff, any new financial or structural measures that may prove necessary for the program’s success.

Attachment 2. Technical Memorandum of Understanding

May 3, 2013

Introduction

1. This memorandum sets out the understandings between the Guinean authorities and staff of the International Monetary Fund (IMF) regarding the definitions of the quantitative performance criteria and indicative targets for the program supported under the ECF, as well as the related reporting requirements.

2. The quantitative performance criteria, indicative targets, and cut-off dates are detailed in Table 1 of the Supplement to the Memorandum of Economic and Financial Policies of May 3, 2013 (Supplement).

Key Definitions

3. Unless otherwise indicated, the government is defined as the central government of the Republic of Guinea and does not include local governments, the Central Bank of the Republic of Guinea (BCRG), or any other public entity with autonomous legal personality, notably administrative public entities (établissements publics administratifs).

A. Quantitative Performance Criteria

4. The basic fiscal balance is calculated as the difference between government revenue, excluding grants, and basic government expenditure. Definitions of bolded terms above are consistent with the definitions in the government flow of funds table (TOFE), for which the calculation method is described in Section IV below.

5. Net domestic assets (NDA) of the BCRG are, by definition, equal to the difference between reserve money (defined below) and net foreign assets (NFA) of the BCRG. NFA are equal to the difference between the gross foreign assets of the BCRG, including foreign assets that are not part of reserve assets, and foreign liabilities of the BCRG. (In other words, NDA = Reserve Money – NFA, based on the BCRG balance sheet).

6. Domestic bank financing of the government, or net domestic bank credit to the government from banks, comprises: (i) central bank financing of the Treasury, i.e., the change in the net position of the Treasury with the central bank (NTP1), including the HIPC account and accounts for exceptional resources, such as the Special Investment Fund (SIF), but excluding changes in the net position of “satellite” government accounts with the central bank (PNT2); and (ii) commercial bank financing of the Treasury, which includes changes in the stock of Treasury bills held by banks, but excludes changes in the net position of “satellite” government accounts held in commercial banks.

7. Net international reserves (NIR) of the BCRG are, by definition, equal to the difference between the reserve assets of the BCRG (i.e., the external assets readily available to and controlled by the BCRG as per the sixth edition of the IMF’s Balance of Payments Manual) and the foreign exchange liabilities of the BCRG to residents and nonresidents (including the foreign exchange deposits of the local banks with the BCRG and off-balance sheet liabilities). These foreign exchange liabilities, which are used to calculate the NIR, do not include long-term liabilities, such as SDR allocations. In the context of the program, the gold holdings of the BCRG will be valued at the gold price in effect on December 28, 2012 (US$1657.50 per oz.) for the first half of 2013 and at the price in effect on June 28, 2013 for the second half of 2013. For the test dates, the U.S. dollar value of the reserve assets (other than gold) and foreign exchange liabilities will be calculated using the program exchange rates in effect, namely: on December 28, 2012 for the first half of 2013, the exchange rates between U.S. dollar and the Guinean franc (6951.33 GNF/US$), SDR (1.5369 US$/SDR), Euro (1.3183 US$/EUR), and other currencies as published in International Financial Statistics; and for the second half of 2013, the exchange rates in effect on June 28, 2013.

8. Medium- and long-term external debt contracted or guaranteed by the government or the central bank is defined as the amount of external debt (see Subsection C below) contracted by the government or the central bank for a period of one year or more during the period under review. Debt is considered concessional if it has a grant element equivalent to 35 percent or more of the net present value (NPV). The net present value (NPV) of the debt is calculated using the average of the OECD commercial interest reference rates (CIRRs) for the previous 10 years for debts with a maturity of 15 years or more. For debts with a maturity of less than 15 years, the average OECD CIRRs for the previous six months (January 1 to June 30 or July 1 to December 31) are used to calculate the NPV. The same margins for different repayment periods (0.75 point if the repayment period is less than 15 years, 1 point if the repayment period is between 15 and 19 years, 1.15 points if the repayment period is between 20 and 29 years, and 1.25 points if the repayment period is 30 years or more) are added to the two averages (over 10 years and over six months).1 This definition does not apply to financing granted by the IMF.

9. This performance criterion on new nonconcessional medium- or long-term debt includes an allowance for four project loans totaling $362.53 million. The debts, all of which are nonconcessional, are (i) from the Export-Import Bank of China, for a loan of $335 million—dated January 4, 2013—to finance the Guinea Kaleta Hydroelectric Plant Project (Loan Number China Exim Bank PBC No. 49 Total No. 437); (ii) from the from the ECOWAS Investment and Development Bank, for a loan of $10.53 million—dated August 24, 2012—to finance the rehabilitation and extension of th electricity distribution network (Loan Number 67/AP/LA/BIDC/EBID/08/2012); (iii) from the OPEC Fund for International Development, for a loan of $10 million—dated March 7, 2012—to finance the National Program to Support Agricultural Value Chains (Loan Number 1429P); and from the OPEC Fund for International Development, for a loan of $7 million—dated January 29, 2013—to finance the Five Towns Water Supply Project (Loan Number1481P).

10. Short-term external debt contracted or guaranteed by the government or the central bank is defined as the stock as of a specific date of external debt contracted or guaranteed by the government or the central bank with an initial contractual maturity of less than one year. Excluded from this definition are normal import-related suppliers’ credits and foreign currency deposits at the central bank.

11. New external arrears include all debt-service obligations (principal and interest) arising from loans contracted or guaranteed by the government or the BCRG that are due but not paid on the due date, and unpaid penalties or interest charges associated with these loans. For the purposes of this performance criterion, an obligation which has not been paid within 30 days after falling due will be considered a “program” arrear. Arrears not to be considered as arrears for the performance criteria or “non-program” arrears are defined as: (i) arrears accumulated on the service of an external debt for which there is a request for rescheduling or restructuring; and/or (ii) litigious amounts.

12. The float is the flow of expenditures accepted by the Treasury that is not yet paid. The net change in the float is the difference between the accumulation and the payments.

B. Indicative Target and Memorandum Item

13. Expenditure in priority sectors, an indicative target for the program, includes spending under Title 2 (wages and salaries), Title 3 (goods and services), Title 4 (transfers and subsidies), and Title 5 (domestically financed investment) by the Ministries of (i) Justice; (ii) Agriculture; (iii) Fisheries and Aquaculture; (iv) Livestock; (v) Public Works and Transport; (vi) Urban Planning, Housing and Construction; (vii) Health and Public Hygiene; (viii) Social Affairs, Women Promotion and Children; (ix) Pre-University Instruction and Civic Education; (x) Labor, Technical Education and Professional Training; (xi) Higher Education and Scientific Research; (xii) Alphabetization and Promotion of National Languages; and (xiii) Energy and Environment. This expenditure also includes spending under Title 6 (Financial Investment and Capital Transfers) by the Ministry of Public Health as well as utility charges for water, electricity, and telephone (Title 3 of the ministries listed above). However, they exclude spending under Title 4 (transfers and subsidies) of the Ministry of Higher Education and Scientific Research.

14. Reserve money, a memorandum item, comprises local banks’ deposits and other private sector deposits with the BCRG (including bank reserve requirements) denominated both in Guinean francs and in foreign currencies, Guinean francs in circulation, and Guinean francs in the vaults of local banks. The amounts in foreign currencies will be converted to Guinean francs at the program exchange rate (as defined above in the paragraph on net international reserves).

C. External Debt

15. The term “external debt” is understood as specified in point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted by the Executive Board of the IMF on August 31, 2009.2 For purposes of the program, “debt” will be understood to mean current, i.e., not contingent, liabilities, created under a contractual arrangement through theprovision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. External debt can take a number of forms, the primary ones being the following:

  • loans, i.e., advances of money to the obligor by the lender on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans, and buyers’ or suppliers’ credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements, official swap arrangements, swaps, or leases);

  • suppliers’ credits, i.e., contracts where the supplier permits the obligor to defer payments until sometime after the date on which the goods are delivered or services are provided; and

  • leases, i.e., arrangements under which property is provided that the lessee has the right to use for one or more specified periods of time, which are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of this memorandum, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement, excluding those payments that cover the operation, repair, or maintenance of the property.

16. Under this definition of debt, arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

17. The government and the central bank agree not to contract or guarantee any nonconcessional external debt under the conditions defined in paragraph 8 above, with the exception of debt in the form of reschedulings. To this end, the government undertakes to consult with IMF staff on the terms and concessionality of all proposed new loan agreements before contracting or guaranteeing any external debt.

D. Adjustments to program Performance Criteria

18. The quantitative performance targets are calculated on the basis of projected amounts of (1) net external assistance; (2) exceptional revenues of the mining sector (see table below); (3) the net change of “program” arrears; and (4) the net change in the float. For program purposes, net external assistance is defined as the difference between: (a) cumulative budgetary assistance (grants and loans), the impact of debt relief granted by external creditors, and the net change in “non-program” arrears; and (b) cumulative payments of external debt service due after relief, for loans on which debt relief is secured.

Guinea: External Assistance: Exceptional Mining Revenue and the Float, 2012–13

(Billions of Guinean francs, cumulative from the beginning of the fiscal year)

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Sources: Guinean authorities and IMF staff estimates.

19. The floor for NIR, the ceilings on NDA of the BCRG and bank financing of the government, and the floor for the basic fiscal balance will be adjusted if net external assistance, the net change in “program” arrears, exceptional mining revenues and/or the net change in the float differ from the projected amounts.

20. Adjustments for net external assistance:

  • If net external assistance exceeds the program forecasts, the floor for the basic fiscal balance will be adjusted downward by an amount equal to the surplus external assistance (allowing the entire surplus to be used for supplementary expenditures). The floor for NIR and the ceilings on NDA of the BCRG and bank financing of the government will not be adjusted.

  • If net external assistance is below program forecasts, the floor on NIR will be adjusted downward by 80 percent of the shortfall, and the ceilings for NDA of the BCRG and bank financing of the government will be adjusted upward by 80 percent of the shortfall. The floor for the basic fiscal balance will be adjusted upward by 20 percent of the shortfall (requiring a fiscal adjustment equivalent to 20 percent of the shortfall).

21. Adjustment related to the net change in “program” arrears:

  • If the net change in “program” arrears exceeds program projections, the floor for NIR will be adjusted upward by an amount equal to the surplus net change in arrears. The ceilings on NDA of the BCRG and bank financing of the government will be adjusted downward by an amount equal to the surplus net change in arrears. The floor for the basic fiscal balance will not be adjusted.

  • If the net change in “program” arrears is below program projections, the floor on NIR will be adjusted downward by 80 percent of the difference, and the ceilings for NDA of the BCRG and bank financing of the government will be adjusted upward by 80 percent of the difference. The floor for the basic fiscal balance will be adjusted upward by 20 percent of the difference (requiring a fiscal adjustment equivalent to 20 percent of the difference).

22. Adjustments for exceptional mining revenues:

  • In the case of surplus exceptional mining revenues of up to US $125 million, the floor for NIR will be adjusted upward and the ceilings on NDA of the BCRG and bank financing of the government will be adjusted downward by 80 percent of the surplus, while the floor for the basic fiscal balance will be adjusted downward by 20 percent of the surplus (allowing the surplus to be used for supplementary expenditures up to the amount of US $25 million or 0.4 percent of GDP).

  • For surplus exceptional mining revenues in excess of US $125 million, the floor for NIR will be adjusted upward and the ceilings on NDA of the BCRG and bank financing of the government will be adjusted downward by an amount equal to 100 percent of the surplus beyond US $125 million, while the floor for the basic fiscal balance will not be adjusted (resulting in the saving of the surplus beyond US $125 million pending a review of the budget outlook and a cost-benefit and sustainability analysis before these excess revenues are committed). Surplus exceptional mining revenues between US $125 million and US $250 million will be saved in the Special Investment Fund (SIF).

23. Adjustment related to the net change in the float:

  • In case the net change in the float exceeds the projected amounts under the program, the ceilings on NDA of the BCRG and bank financing of the government will be adjusted downward by an amount equal to the excess.

E. Definitions for Purpose of the TOFE

24. Government revenue includes tax and nontax revenue. It does not include external grants, the proceeds of privatizations, or exceptional mining revenues (the latter two being recorded as financing). Tax and nontax revenue are defined in accordance with Section IV.A.1 of the 1986 edition of the IMF’s Government Finance Statistics Manual (GFS), using the following categories. For tax revenue, the main categories are taxes on income, profit, and dividends (Title 1); taxes on property (Title 2); taxes on international trade (Title 3), including import duties, export duties, the surtax on consumption, the liquidation levy (redevance de liquidation), and penalties related to international trade; taxes on goods and services (Title 4), including general sales taxes, value-added taxes on domestic sales and on imports, the single tax on vehicles (TUV), the business tax (TAF), taxes on petroleum products, and export taxes on mining products, including the tax on mining products, taxes on diamonds, and the tax on precious metals. Other tax revenues (Title 5) include stamp taxes and registration fees. Tax receipts also include the taxes borne by the government for the purchase of externally financed capital goods. Nontax revenue consists of royalties and dividends (excluding revenue from the sale of telephone licenses), administrative duties and fees, and fines and forfeitures (Title 6), other nontax revenue (Title 7), including incidental revenues, and capital revenues (Title 8). Capital revenues include the proceeds from the sale of government assets, but exclude privatization proceeds.

25. Government expenditure is measured at the stage of acceptance by the Treasury, regardless of the execution procedure followed. In the case of both the regular procedure and the simplified delegated spending authority procedure, expenditures are accepted by the Treasury immediately after the payment order is issued. In the case of simplified procedures and delegated spending authority or payments without prior issuance of a payment authorization, the Treasury accepts the expenditure at the time that payment is ordered and in such cases no expenditure is measured on the basis of the adjusting payment orders (mandatements de régularisation) when the adjustment to a payment order basis is done. For refunds of VAT credits, acceptance by the Treasury occurs when refund requests are transmitted by the National Tax Directorate to the National Director of the Treasury. Government expenditure includes all expenditure of the central government, including subsidies and transfers to autonomous public entities, and loans granted or on-lent by the government to public enterprises and other sectors of the economy, net of repayments on such loans.

26. Basic expenditure is defined as total fiscal expenditure, less expenditure on interest on the external debt and expenditure financed by external grants or loans or by counterpart funds.

27. External financing comprises: (i) disbursements of external loans; (ii) principal owed on government external debt; (iii) relief and rescheduling of government external debt, net of HIPC assistance obtained from multilateral institutions, which is considered part of grants; and (iv) the net change in external arrears (interest and principal, to be shown separately).

F. Data Reporting for Program Monitoring Purposes

28. The information on implementation and/or execution of the structural benchmarks under the program (as specified in Table 5 of the Supplement) will be reported to the IMF’s African Department within two weeks of the planned date of implementation. The status of the implementation of other structural measures included in the program will be transmitted within 30 days of the end of each month.

29. The authorities will report the information summarized in Table 1 below to the IMF’s African Department by the deadlines set in this table. Barring any indication to the contrary, the data will take the form mutually agreed upon by the authorities and the IMF. The authorities will supply the Fund with any additional information that its staff may request for program monitoring purposes.

Table 1.

Data Reporting Requirements for Program Monitoring

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Appendix II. Update to the Low-Income Country Debt Sustainability Analysis

This annex provides an update to the LIC-DSA attached to the completion point document of September 12, 2012 (IMF Country Report No. 12/295). It includes updated macroeconomic projections and additional information on borrowing, including on four nonconcessional loans contracted in 2012 and early in 2013.

1. Guinea continues to be assessed at a moderate risk of debt distress. As in the previous assessment, the moderate rating is primarily due to Guinea’s vulnerability to adverse shocks to growth, exports, foreign direct investment flows, and fiscal performance. This underscores the need for sustained implementation of sound macroeconomic policies, ensuring public investment in sound projects, while improving implementation capacity and the business climate; the above referenced previous LIC-DSA provides a more elaborate discussion of these issues. In addition, especially with the projected expansion of the export-oriented mining sector, structural reforms aimed at removing bottlenecks and improving productivity in the economy to minimize the effects (Dutch disease) on the competitiveness on other sectors of the economy. Guinea’s vulnerabilities indicate that new borrowings on a large scale should be avoided, especially before the boost to exports and growth from the onset of new mining production. As noted in the previous DSA, the authorities continue to be committed to ensuring that government participation in large-scale infrastructure and mining projects does not involve the use of budgetary resources to meet the associated financing needs.

2. Guinea’s external public debt amounted to $1.3 billion (23 percent of GDP) at end-2012 (Table 1), significantly down following the attainment of the HIPC completion point from $3.2 billion (62 percent of GDP) at end-2011, and slightly above that projected in the previous LIC-DSA ($1.1 million). The underlying macroeconomic framework is consistent with the ECF-supported program, but differs from the previous LIC-DSA (Table 2). First, the government’s public investment program, which was finalized in late 2012, has been incorporated in the budget projections. This has raised the level of public investment, in particular because of the inclusion of a major investment project, the Kaleta hydroelectric dam. Second, delays in investment and exports related to the large Simandou iron ore project have resulted in a (downward) revision in the projections of real GDP growth, exports, and fiscal revenues—a substantial increase in these three variables, which had been projected in 2015, has now been shifted to 2017. In addition, the discount rate used for calculating present values has been reduced from 4 percent to 3 percent, resulting in an increase in the present value of debt. Debt policy thresholds are unchanged.

Table 1.

Guinea: Structure of External Public Debt (end-2012, nominal)

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Sources: Guinean authorities, and World Bank and IMF staff estimates.
Table 2.

Guinea’s LIC DSA Macroeconomic Assumptions: Comparison with the HIPC Completion Point LIC DSA

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Source: Country authorities, IMF and World staffs.

Includes publicly guaranteed external borrowing.

3. The results of the external LIC-DSA confirm that Guinea’s debt dynamics are sustainable. The stress tests reaffirm that Guinea continues to have vulnerabilities primarily from shocks to growth, exports, foreign direct investment flows, and fiscal performance. These vulnerabilities to the alternative scenarios and stress tests highlight the dependence of the projected improvement in macroeconomic prospects under the baseline on the projected large inflow of foreign direct investments in the mining sector and the related jump in mining exports. The main changes to the baseline compared to the previous LIC-DSA reflects a lower grant element of new borrowing in the latter part of the projection period, the higher present value (PV) of debt, lower debt service payments in 2013–16, and the delayed start-up of operations related to the Simandou mining project and its impact on real GDP growth, exports and fiscal revenue (Figure 1). The lower grant element of new borrowing is primarily because, compared with the last LIC-DSA, the current one allows for some financing from commercial creditors beginning 2027, the introduction of specific terms of four new nonconcessional loans, in particular that for the Kaleta hydroelectric dam, and the increase in the discount rate used to calculate the grant element. The higher upfront PV of debt stems from the higher assumed borrowing (and corresponding government disbursements) to finance the revised investment budget, which is associated with an increase in external borrowing during 2013–16 (Figures 1 and 2, Tables 3 and 4). The bulk of the increased borrowing is accounted for by a loan from the Export-Import Bank of China to finance the construction of the Kaleta hydroelectric dam; the loan amount is $335 million (5.3 percent of 2013 GDP) and has a grant element of 33.3 percent. This loan and the three other nonconcessional loans are projected to be disbursed during 2013–16. The changes in the debt service ratios reflect the higher borrowing, and in the short-term a change in the assumed profile of debt service payments on French ODA claims that have been converted into debt-for-development swaps (C2D); these payments are assumed in the present LIC-DSA to be stretched out over 2013–20 rather than over 2013–15 as projected in the last LIC-DSA.1 The average interest rate on new borrowing is relatively low (similar to the last LIC-DSA), reflecting the presence of several long-standing lenders, from whom further lending is expected, where the loan terms have a zero interest rate, and for others (even for the four new nonconcessional loans) interest rates charged have been low. While similar terms are projected for this group of creditors, there is a risk that interest rates will rise as the global economy recovers from the recent economic and financial crisis. The delay in the Simandou mining project results in a shift of about two years in the peaks in the debt and debt service ratios; this is highlighted in the most extreme shock stress test.2 All other baseline assumptions are broadly similar to the last LIC-DSA.

Figure 1.
Figure 1.

Guinea’s External LIC DSA Comparison with the HIPC Completion Point LIC DSA

Citation: IMF Staff Country Reports 2013, 192; 10.5089/9781484390375.002.A001

Figure 2.
Figure 2.

Guinea: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2013–33 1

Citation: IMF Staff Country Reports 2013, 192; 10.5089/9781484390375.002.A001

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2023. In figure b. it corresponds to a Combination shock; in c. to a Combination shock; in d. to a Combination shock; in e. to a Combination shock and in figure f. to a Combination shock
Table 3.

Guinea: External Debt Sustainability Framework, Baseline Scenario, 2010–33 1

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Table 4.

Guinea: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2013–33

(In percent)

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Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

4. The inclusion of domestic debt in the LIC-DSA worsens the debt burden indicators, although the domestic debt burden is expected to decrease over time (Figure 3, Tables 5 and 6). Following the large increase in borrowing from the domestic banking system in 2009–10, the authorities, in line with their policies to restore macroeconomic stability, have sharply curtailed new borrowing, and net repayments of domestic debt are expected to resume.3 As in the last LIC-DSA, the public debt position is vulnerable notably with respect to policy reversals in maintaining fiscal discipline and shocks to growth. The impact of an unchanged primary balance is much weaker than in the previous LIC-DSA because the reference year changed from 2012 to 2013 and the projected 2013 primary deficit is smaller than the 2012 deficit projected at the time of the last LIC-DSA.

Figure 3.
Figure 3.

Guinea: Indicators of Public Debt Under Alternative Scenarios, 2013–33 1

Citation: IMF Staff Country Reports 2013, 192; 10.5089/9781484390375.002.A001

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2023.2/ Revenues are defined inclusive of grants.
Table 5.

Guinea: Public Sector Debt Sustainability Framework, Baseline Scenarios, 2010–33

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Public sector covers central government; net debt is used.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Table 6.

Guinea: Sensivity Analysis for Key Indicators of Public Debt, 2013–33

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Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

5. The Guinean authorities broadly concurred with the assumptions and conclusions, including identified vulnerabilities, of this update of the LIC-DSA.

Appendix III. Risk Assessment Matrix

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1

IMF Country Report n° 12/301, September 12, 2012.

2

The program includes an adjustor allowing for the full pass-through of additional net external assistance.

3

The 2012 budget included a provision for the transfer of $250 million from the end-2011 balance of the exceptional mining revenue to the Special Investment Fund (SIF), while the remainder would be used for investment spending on the 2012 budget. Of the latter, $43 million (0.8 percent of GDP) had not yet been committed by end-2012; the corresponding expenditure will be included in a revised budget for 2013, to be prepared later this year.

4

The limited availability of concessional resources partly reflects lenders’ budgetary constraints but also the decline in recent years in the discount rates used to calculate the grant element of loans.

5

As an important step, in February 2013, the technical committee in charge of the review process published on its external website the mining contracts that will be reviewed.

6

The PRSP and a Joint Staff Advisory Note will be sent to the Board shortly.

7

Annex I provides a summary debt sustainability analysis.

1

Developments during the first half of 2012 were described in the September 11, 2012 supplement to the MEFP (IMF Country Report No. 12/301, September 12, 2012).

2

At the time of reaching the HIPC completion point, Guinea did not have any outstanding MDRI-eligible debt to the IMF.

1

A more detailed discussion of the concessionality concept and a calculator to estimate the grant element of a financing package are available at the IMF website at http://www.imf.org/external/np/pdr/conc/index.htm.

2

See “Guidelines on Performance Criteria with Respect to Foreign Debt”—IMF Executive Board Decision No. 12274, as amended by Decision No. 14416-(09/91).

1

Under C2D (Contrats de désendettement et développement) the debt service maturities at the time of the HIPC completion point were consolidated and re-profiled; when they are repaid, they are returned to the country through grants from France for development spending. At the time of staff discussions in the preparation of the HIPC completion point documents, the assumed time period over which the C2D would be implemented was based on preliminary information. As a result of discussion after the completion point between the authorities and the French Development Agency, the agreed re-profiling was longer than previously assumed to take into account the absorptive capacity of Guinea.

2

The most extreme stress test corresponds to the combination shock.

3

In addition, under an agreement between the Ministry of Finance and the central bank, the government will repay past advances through end-2010 from the central bank, over a period of 40 years, starting in 2020. The agreement envisages that the repayments will be made in cash rather than issuance of government debt. However, discussions are to begin in the near future on the recapitalization of the central bank which would likely entail the issuance of new public debt and would offset to some extent the projected decline of the share of domestic debt in total public sector debt.

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Cover IMF Staff Country Reports
Guinea: Second Review Under the Three-Year Arrangement Under the Extended Credit Facility, Requests for Waiver of Nonobservance and Modification of Performance Criterion, and Financing Assurances Review
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2013: Issue 192
Publisher:
International Monetary Fund
ISBN:
9781484390375
ISSN:
1934-7685
Pages:
97
DOI:
https://doi.org/10.5089/9781484390375.002
  • Figure 1.
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    Figure 1.

    Guinea: Recent Economic Developments

  • Figure 2.
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    Figure 2.

    Guinea: Recent Fiscal Developments

  • Figure 3.
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    Figure 3.

    Guinea: Recent Monetary Developments

  • Figure 1.
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    Figure 1.

    Guinea’s External LIC DSA Comparison with the HIPC Completion Point LIC DSA

  • Figure 2.
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    Figure 2.

    Guinea: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2013–33 1

  • Figure 3.
    View in gallery
    Figure 3.

    Guinea: Indicators of Public Debt Under Alternative Scenarios, 2013–33 1

Figure 1.

Guinea: Recent Economic Developments
Figure 2.

Guinea: Recent Fiscal Developments
Figure 3.

Guinea: Recent Monetary Developments
Figure 1.

Guinea’s External LIC DSA Comparison with the HIPC Completion Point LIC DSA
Figure 2.

Guinea: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2013–33 1
Figure 3.

Guinea: Indicators of Public Debt Under Alternative Scenarios, 2013–33 1