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.
I - Introduction
Our Guinean authorities express their deep appreciation to the Executive Board, Management and Staff for the continued support and policy dialogue they are benefiting in implementing their three-year ECF-supported program. Our authorities remain firmly committed to the program and are implementing the policies aimed at achieving the program’s objectives. All performance criteria set for end-December 2013 and all the program’s indicative targets for March 2014 were met with the exception of the target for priority sector expenditures due to a slow start of investment spending. With regard to structural reforms, progress has been made in a context of capacity constraints and the need to reach a large consensus with stakeholders.
Based on the overall satisfactory program performance, our Guinean authorities request the Board’s support for the completion of the fourth ECF-arrangement review.
The resolute implementation of the ECF program has helped the authorities to strengthen macroeconomic stability through the pursuit of prudent fiscal and monetary policies. Indeed, inflation has been kept on a downward trend to reach a single digit, international reserves have increased to cover more than 3 months of imports and the exchange rate has remained stable. The economy, however, grew by 2.3 percent only, due to the lower than expected production in the mining and electricity sectors, the Ebola epidemic and socio-political turmoil.
To address the socio-political turmoil which was adversely affecting the economy, the Guinean authorities in July 2013 started a dialogue with all the main stakeholders. This led to the holding of peaceful and transparent legislative elections in September 2013. The results were accepted by all parties. A newly elected National Assembly was inaugurated in January 2014 followed by the appointment of a new government.
The domestic environment was also marked by the eruption in early 2014 of the Ebola epidemic virus in the south-east of the country. This epidemic virus has claimed hundreds of lives and placed a severe toll on economic activity and trans-border trade. The Guinean authorities are grateful to the international community for the assistance they have benefited in their efforts to fight this unprecedented epidemic. They are working in a well coordinated manner with the whole sub-region in order to find a solution to this epidemic.
Our authorities are cognizant of the challenges ahead and the crucial need to preserve macroeconomic stability, accelerate structural reforms in order to boost growth, enhance competitiveness and improve the living standard of the population. In this regard, they have enhanced the coordination and monitoring of their reform program with the establishment at the ministerial level of the Council for Economic Coordination and Reform (CCER) and the strengthening of the Technical Support Committee and the Technical Program Monitoring (CTSP).
II - Recent Economic Developments
In 2013, the Guinean economy grew by 2.3 percent against 3.8 percent in 2012, as explained above. The difficult situation experienced in 2013 has continued in early 2014 in addition to the spread of the Ebola epidemic.
In the fiscal area, the authorities maintained a prudent policy stance which has resulted in a basic fiscal balance of -2.8 percent of GDP less than the program’s objective. The budget implementation in the early months of 2014 was affected by lower-than-expected revenues notably from the non-mining sector. Expenditures were kept under control and remained within target. Petroleum prices were increased by 5 percent in February under the implementation of the automatic petroleum price adjustment, and the newly established medium-sized tax payer unit (MTU) within the National Tax Directory became effective in March in collecting tax arrears.
With regard to the monetary sector, good progress has been made in implementing policies to reduce inflation and stabilize the exchange rate. Inflation downtrend has continued and was at 9.6 percent in June 2014. In 2013, the central bank lowered its policy rate and the reserve requirement to boost the credit to the private sector. As a result, the credit to the economy rose by 35 percent but mainly to the trade activities. In addition, significant progress was also made in the financial sector’s governance and in implementing reforms recommended by the Fund’s safeguards assessments. The Central Bank approved the financial sector development plan in April 2014 and four banks have met the minimum capital requirement which will be mandatory in 2016. The new Charter of the central Bank was also approved by the National Assembly in June 2014.
As regards structural reforms, the authorities took bold measures which have led to significant progress in this area. The framework for a better coordination and monitoring of reforms was revitalized with the creation under the authority of the Prime Minister of a Council for Economic and Reform Coordination (CCER) made up of ministers in charge of economic portfolios and the Central Bank Governor. Most of the 2013 measures postponed to 2014 were implemented in the first half of 2014. This reflects the authorities’ determination to steadfastly implement their reform agenda. In this context, the draft law revising the investment code and implementing regulations (textes d’ application) of the law and public procurement code were approved. In addition, the authorities approved in March 2014 a medium-term action plan and established a National Debt committee to further strengthen the external debt management in terms of policy and capacity. After resuming its participation in the Extractive Industries Transparency Initiative (EITI), Guinea became in July 2014, the 28th country to achieve “compliant” status for the EITI.
III - Policies and Reforms for 2014
The Guinean authorities are fully committed to the implementation of the ECF-supported program to sustain macroeconomic stability and pursue their reform agenda. Given the challenges they face, the authorities aim at increasing fiscal revenue, further reducing inflation, achieving a real growth rate of at least 3.5 percent and keeping the coverage of imports by gross reserves well above three months of imports.
The authorities will focus their efforts on mobilizing revenue and enhancing public expenditure management. Based on the fiscal developments in the first half of 2014, additional expenditure needs and new financing resources, the authorities intend to submit to the parliament a draft supplementary budget for 2014 with a basic balance deficit of 4 percent. In this context, the objective to finance the budget without recourse to net domestic bank financing will be maintained as well as the management of expenditure on a cash basis. The authorities will also strengthen the implementation of tax administration reform and closely monitor revenue developments to avoid shortfalls and facilitate timely adjustment. The revision of the General Tax Code, the Customs Code and the Customs Tariff will be finalized as well as the reform of the property tax. Further efforts will be focused on implementing the Public Finance Reform Plan (PREFIP) adopted in May 2014.
Monetary and Exchange Rate Policy
Based on developments in inflation and international reserves, the authorities will prudently continue easing their monetary policy. They intend to reduce the policy rate in order to foster banks’ lending to the private sector. The ceilings of interest rate on Treasury bills will be removed. With the IMF technical assistance, the central bank will develop appropriate instruments to better assess liquidity conditions in the economy and establish a second refinancing window. The creation of a domestic currency interbank market is also envisaged to deepen the money market. The issuance of Treasury bills and bonds is under consideration with a view to encourage the public financing of government expenditures and investments. The exchange rate will remain market-determined. Moreover, to improve the role of market mechanisms, the authorities intend, if conditions are favorable, to widen the exchange rate band.
Structural Reforms and Competitiveness
The Guinean authorities are mindful that the implementation of structural reforms is a prerequisite for higher growth and poverty reduction. They will further intensify their efforts to make substantial progress in improving the business climate, encouraging investments in the mining, agricultural and energy sectors.
To improve the business climate, ongoing efforts will be maintained. In addition to the approval in July of a new investment code, the authorities will create by end-2014 a framework for Private Sector Development and Public-Private Dialogue to coordinate reforms in the sector. The draft judiciary reform prepared with technical assistance from the European Union has been finalized. This program enhances the respect of property titles and commercial contracts. It also includes a timetable for the creation of an Economic Chamber. A project to establish a Commercial Court is also under consideration.
In order to improve productivity in the public administration and contain the wage bill, the authorities intend to finalize the biometric survey by end-September 2014. They will adopt a civil service reform plan, based on the results of the biometric survey as well as the State Reform and Modernization Program (PREMA) by end-December 2014.
The authorities are determined to develop a dynamic mining sector. In this regard, their efforts will be focused on strictly enforcing the regulations under the new Mining Code adopted in 2012 to increase investment and transparency in the sector. The authorities intend also to finalize by December 2014 their mining policy declaration. The recently signed investment framework for the Simandou iron ore project augurs well for the economy with the resumption of investment in the mining sector. In order to address capacity issues which this project as well as others could pose, the authorities have initiated discussions with development partners to strengthen human and institutional capacity.
To address the difficulties experienced in the electricity production and boost growth, the authorities will pursue the needed investments and improve the governance and financial situation of Electricité de Guineé (EDG). With the support of the World Bank and AFD (Agence Française de Developpement), the authorities are drafting a new law on electricity and a law on public-private partnerships which will be available at end-December 2014. In their efforts to rehabilitate and modernize the electric grid of the EDG, the authorities are seeking Fund’s approval for a nonconcessional loan to finance this project, for which they have not been able to secure a loan at concessional terms. This project will help to reduce the large electricity shortfall and support higher growth. It will have a high economic return and is not expected to worsen Guinea’s debt sustainability.
Achieving food self-sufficiency in 2017 remains the primary objective of the authorities’ policy in the agricultural sector. In this regard, key actions in the reform of the sector will be undertaken in 2014 by accelerating the preparation of irrigation and water management projects, strengthening the market information system and monitoring of food imports. A draft agricultural framework law is expected by end-2014 with a view to ensure notably the protection of property rights for private investors.
IV - Conclusion
Under the ECF-supported program Guinea has made significant progress in establishing the conditions that will lead to higher growth and poverty reduction. They remain fully committed to the objectives of the program. On their behalf, we would appreciate the Board’s support for the completion of the fourth review under the ECF-supported program and the financing assurances review.