Guinea:Fourth Review Under the Three-Year Arrangement Under the Extended Credit Facility, and Financing Assurances Review—Informational Annex

EXECUTIVE SUMMARYEconomic activity remained weak in early 2014. Activity was impacted by an outbreak ofthe Ebola virus since late 2013, but lagging structural reforms, energy shortages, and political uncertainty may also be at play. Economic growth is estimated to have been 2.3 percent in 2013, and is projected at 3.5 percent in 2014, supported by higher public investment and assuming a gradual start-up of new mining sector investment. Inflation fell to below10 percent year-on-year in May 2014, international reserves covered 3.6 months of imports by end-2013, and the exchange rate has remained stable.Performance under the ECF-supported program remains broadly satisfactory, although progress with structural reform has been slow. All performance criteria for end-2013 were met as were all but one (the floor on priority sector spending) of the program’s indicative targets for March 2014. However, the structural benchmarks for the second half of 2013 and early-2014 could not be completed as planned.The policy discussions focused on (i) the growth outlook for 2014; (ii) a supplementary budget for 2014 in light of a shortfall in revenues and new spending needs; (iii) progress in implementing structural reforms; and (iv) debt management.Risks to the program largely stem from domestic factors. New cases of Ebola have surged and spread more widely in recent months, which could affect growth in the second half of the year. The recent approval of the investment framework for the large Simandou iron ore project augurs well for a gradual pick-up in mining activity. However, renewed political tensions and uncertainty in the run-up to presidential elections, due in the second half of 2015, could risk delaying new investment.Staff supports completing the fourth review under the ECF arrangement and the financing assurances review. Completion of the review will result in a disbursement of anamount equivalent to SDR 18.36 million under the ECF arrangement.

Abstract

EXECUTIVE SUMMARYEconomic activity remained weak in early 2014. Activity was impacted by an outbreak ofthe Ebola virus since late 2013, but lagging structural reforms, energy shortages, and political uncertainty may also be at play. Economic growth is estimated to have been 2.3 percent in 2013, and is projected at 3.5 percent in 2014, supported by higher public investment and assuming a gradual start-up of new mining sector investment. Inflation fell to below10 percent year-on-year in May 2014, international reserves covered 3.6 months of imports by end-2013, and the exchange rate has remained stable.Performance under the ECF-supported program remains broadly satisfactory, although progress with structural reform has been slow. All performance criteria for end-2013 were met as were all but one (the floor on priority sector spending) of the program’s indicative targets for March 2014. However, the structural benchmarks for the second half of 2013 and early-2014 could not be completed as planned.The policy discussions focused on (i) the growth outlook for 2014; (ii) a supplementary budget for 2014 in light of a shortfall in revenues and new spending needs; (iii) progress in implementing structural reforms; and (iv) debt management.Risks to the program largely stem from domestic factors. New cases of Ebola have surged and spread more widely in recent months, which could affect growth in the second half of the year. The recent approval of the investment framework for the large Simandou iron ore project augurs well for a gradual pick-up in mining activity. However, renewed political tensions and uncertainty in the run-up to presidential elections, due in the second half of 2015, could risk delaying new investment.Staff supports completing the fourth review under the ECF arrangement and the financing assurances review. Completion of the review will result in a disbursement of anamount equivalent to SDR 18.36 million under the ECF arrangement.

Relations with the Fund

As of May, 2014

Membership Status: Joined: September 28, 1963 Article VIII

General Resources Account:

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SDR Department:

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Outstanding Purchases and Loans:

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Latest Financial Arrangements:

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Projected Payments to Fund 2/

(SDR Million; based on existing use of resources and present holdings of SDRs):

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Implementation of HIPC Initiative:

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Formerly PRGF.

When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section.

Assistance committed under the original framework is expressed in net present value (NPV) terms at the completion point, and assistance committed under the enhanced framework is expressed in NPV terms at the decision point. Hence these two amounts cannot be added.

Under the enhanced framework, an additional disbursement is made at the completion point corresponding to interest income earned on the amount committed at the decision point but not disbursed during the interim period.

Implementation of Multilateral Debt Relief Initiative (MDRI): Not Applicable

Implementation of Post-Catastrophe Debt Relief (PCDR): Not Applicable

Decision point: Point at which the IMF and the World Bank determine whether a country qualifies for assistance under the HIPC Initiative and decide on the amount of assistance to be committed.

Interim assistance: Amount disbursed to a country during the period between decision and completion points, up to 20 percent annually and 60 percent in total of the assistance committed at the decision point (or 25 percent and 75 percent, respectively, in exceptional circumstances).

Completion point: Point at which a country receives the remaining balance of its assistance committed at the decision point, together with an additional disbursement of interest income as defined in footnote 2 above. The timing of the completion point is linked to the implementation of pre-agreed key structural reforms (i.e., floating completion point).

Safeguards Assessment

An update of the 2007 Safeguards Assessment of the Central Bank of the Republic of Guinea (BCRG) was completed in April 2012. It found that risks of misuse and misreporting remain high, but are somewhat improved since the 2007 assessment. To mitigate risks to the prospective program, staff proposed, inter alia, that: (i) the Board of the BCRG approve an investment policy and guidelines for the management of international reserves (approved on June 13, 2014 as a Prior Action for the 4th Review of the ECF); (ii) external auditors continue to verify monetary data; (iii) the BCRG publish audited annual financial statements within statutory deadlines; and, (iv) the BCRG adopt and implement internationally-recognized financial reporting standards. These measures are needed in the short run, but equally important are steps to exercise better oversight on controls and to strengthen the autonomy of the central bank. The BCRG is working towards the implementation of these and other Safeguards Assessment recommendations.

Exchange Rate Arrangement

Guinea’s exchange rate arrangement is classified as a managed float system with no predetermined path, after an interruption of the system during 2009–10; the de facto arrangement is classified as “other managed arrangement”. The system includes a multiple currency practice as the value of the official rate lags the weighted average commercial bank rate on which it is based by one day. A technical assistance mission from the Fund (MCM) visited Conakry in 2011 and made suggestions on the exchange rate system, including on the lag between the official and commercial banks rate. A resident advisor financed by the IMF is assisting the BCRG in implementing the recommendations. Guinea has accepted the obligations under Article VIII, sections 2, 3 and 4 of the IMF’s Articles of Agreement.

Article IV Consultation

The last Article IV consultation was concluded by the Executive Board on February 24, 2012.

Technical Assistance 2011–14

Calendar Year 2011

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Source: IMF staff.

Calendar Year 2012

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Source: IMF staff.

Calendar Year 2013

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Source: IMF staff.

Calendar Year 2014

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Source: IMF Staff

Planned.

Joint World Bank-Fund Matrix

(As of June 2014)

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Relations with the African Development Bank, 2011–13

(As of June 2014)

1. The Bank’s Country Strategy Paper (CSP) 2012–2016, approved by the Board on st March 1, 2012, focuses on two pillars: (i) economic and financial governance, and (ii) infrastructure for development. Under the first pillar, the Bank will assist in building public financial management capacity, improving governance in the extractive sector and strengthening the central government’s budget. Under the second pillar, the Bank will contribute to reducing the power generation gap and further developing transport infrastructure. The mid-term review of the CSP will be undertaken during the second semester of 2014. This will provide an opportunity for dialogue on the Bank’s support to Guinea through the implementation of the PRSP and outcomes of the Abu Dhabi Conference for the period 2014 to 2016.

2. Lending Operations: During the donor and investment conference in Abu Dhabi, AfDB announced UA 163 million ($250 million) in targeted support to the country’s development program during the 2014–16 period.

3. In the governance sector, the Bank has already approved a budget support allocation of UA20 million in 2011 and support of UA 2.5 million through the Fragile State Facility (FSF). In addition, the Bank restructured some non-performing projects and reallocated UA 7.5 million to an economic governance project in 2011. This was to improve the country’s public finance management while supporting the reforms aimed at enhancing governance, especially in the extractive sector. The FSF support also covers public administration capacity building, particularly in statistics and strategic planning. At the end of 2013 the Bank approved an institutional support project of UA 11.4 million focused on improving governance in mining contract management and on enhancing public investment and project management. A budget support operation targeting the private sector environment and PPPs frameworks, governance (mining, PFM, and public investment management) will be submitted for board approval by end-June 2014.

4. In the energy sub-sector, two projects were signed at the end of 2013 and will begin implementation in 2014. The first project is the second Conakry Electrical Networks Rehabilitation and Extension Project (PREREC.2) for UA 11 million. The second project is the Côte d’Ivoire-Liberia-Sierra Leone-Guinea power regional interconnection project for UA 40.2 million that will see the construction of 1,360 km of 225 kV transmission lines and 12 sub-stations. In 2014, the Bank will contribute to financing the interconnection project of the Gambia River Basin Development Organization (OMVG) involving the construction of a dam and a 240 MW hydro-power plant at Kaleta already financed by the government with a loan from China. Implementation of these three projects will result in: (i) an increase in the average electricity access rate; (ii) a reduction in the kWh generating cost; (iii) a reduction in the number of power outages; (iv) the creation of temporary and permanent jobs; and (v) a reduction in greenhouse gas emissions.

5. In the transport sub-sector, the Bank intends to finance the road Danané (Côte d’Ivoire)-Frontier of Guinea and from the frontier to N’zoo-Lola (Guinea). This road is part of a regional project including these key roads: Zantiébougou-Kolondiéba-Kadiana-Frontier of Côte d’Ivoire (140 km) linking Bamako to Abidjan and San-Pédro through the axe Tengréla-Boundiali-Séguéla-Daloa; and Duekoué-Guiglo-Bloléquin-Toulepleu-Frontier of Liberia. These roads are part of the Transafrican Dakar-Abidjan-Lagos road. The Bank intends also to finance Boké (Guinea)-Quebo (Guinea-Bissau) Road, which is part of the ECOWAS Regional Transport Programme. Because of their integrative role, construction of these roads is in line with the New Partnership for Africa’s Development (NEPAD) Short-Term Action Plan, whose core objective is to have interstate roads without any impediment to the free movement of goods and persons. The Bank has begun discussion to support the restructuring and extension of the Port of Conakry activities.

6. Non-Lending Operations: To deepen the analysis and understanding of the country’s main challenges and fuel strategic reflexion, the Bank will finalize in 2014 in collaboration with UNDP, and under the first FSF programme, an economic and sector works (ESWs on the following themes: (i) study on financial sector reforms; (ii) private sector profile; (iii) studies relating to the management of the Port of Conakry. The Bank will enhance its dialogue and provide specific technical assistance on PPP (PPP law and PPP Unit) and on mining sector governance. The Bank will also continue to support implementation of PRSP (direct support to CTSP and SP-SRP in charge of coordinating the monitoring of the implementation of economic reforms programs and the PRSP), post-Abu Dhabi commitments implementation, and the link between macroeconomic/budget framework sector policies and the public investment plan. The Bank will continue its support trough the FSF programme to the National Statistics Development Strategy (NSDS) and the conduct of the Third General Population and Housing Census (RGPH-III).

7. Trust Funds: In addition to the ADF and FSF allocations, the Bank could mobilize supplementary resources from the ADB private sector window (including enclave operations in the mining sector infrastructure), and the Trust Fund resources to finance complementary operations in the sectors covered in the 2012–16 Country Strategy Paper (CSP) and that are important for the country’s development. For example, through the Rural Water Supply and Sanitation Initiative, a strategy could be prepared in that area. Other instruments also available are the Partial Risk Guarantee Instrument, the Global Environment Fund, and the Africa Carbon Facility and Green Fund.

8. African Development Bank and Fund staff collaboration: sharing of information on the ECF-supported program, the macroeconomic situation, the budget, progress in structural reform, planned missions, and mission reports.

Table 1.

ADF 13 (2011–16) and FSF Operations Programming

(UA million)

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Millennium Development Goals1

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Sources: World Development Indicators database, June 2014, and Guinean authorities (Third Poverty Reduction Strategy Paper, March 2013).

Figures in italics refer to periods other than those specified.

Statistical Issues

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