Abstract
EXECUTIVE SUMMARYGuinea is suffering from an outbreak of Ebola, which has become a humanitarian crisis with a significant economic impact. Preliminary estimates suggest a negative impact on 2014 growth, which will be markedly lower. Government revenue is showing a substantial shortfall and the response to the Ebola outbreak entails additional critical spending needs. The exchange rate has started to depreciate. The authorities intend to adopt a tighter monetary policy to address the transitory balance of payments shock.Performance under the ECF-supported program has remained satisfactory. Preliminary data indicate that all performance criteria (PCs) under the program for end-June 2014 were met. There has also been further progress with structural reform.The authorities have requested additional IMF financial assistance to meet urgent fiscal and balance of payments needs not anticipated at the time of the recent program review. Such assistance cannot be provided in the form of an augmentation of access under the ECF arrangement at this time since a review associated with the most recent availability date has not yet been completed because of delays in program implementation associated with the 2013 parliamentary elections. The authorities have requested a disbursement under the Rapid Credit Facility (RCF) because the urgent balance of payments need is characterized by a financing gap that, if not addressed, would result in an immediate and severe economic disruption. Moreover, Guinea�s balance of payments difficulties are caused primarily by a sudden exogenous shock and not by a withdrawal of financial support by donors, and its balance of payments need is expected to be resolved within one year with no major policy adjustments being necessary. As such polices remain guided by the objectives of the ECF-supported program.Staff supports the authorities� request for a disbursement under the RCF of25 percent of quota (SDR 26.775 million). It also supports the authorities� request for a modification of the end-September indicative targets and end-December 2014 PCs underthe ECF arrangement, including program adjustors.
I. Introduction
On behalf of our Guinean authorities, we would like to thank Staff, Management and the Executive Board for their support in the current challenging situation facing Guinea with the spread of the Ebola Virus Disease. The Fund support will help the authorities to address the impact of this unprecedented epidemic on the balance of payments and the economy while continuing implementing the ECF-supported program.
The Guinean authorities would like to take this opportunity to express their appreciation to France and the United States for their strong support and assistance to deal with this epidemic. They would also like to express their appreciation to the timely assistance provided by the World Health Organization, the international Red Cross and Doctors without Borders for their quick response to the disease by providing financial and technical assistance as well as policy advice.
The Ebola Virus Disease (EVD) erupted in the south-east area of the country in March 2014 and spread out to neighboring countries, Liberia and Sierra Leone, given the close socio and economic relations shared by the populations in this zone. In a context of limited institutional and human capacities notably in the health sector, the Guinean authorities establish a health and security plan to contain the epidemic’s expansion and take care of the patients and develop a widely disseminated campaign of awareness and protection about the EVD. This response-plan which includes the launch of state of health emergency is implemented in coordination with external partners engaged in addressing the epidemic. The initial cost of this plan is estimated at USD 85 million or 1.3 percent of GDP.
However, the financing of this plan requires additional budgetary resources, and, our Guinean authorities are requesting the support of the IMF under the Rapid Credit Facility to help mitigate the severe economic and financial impact of the Ebola epidemic. The disbursement of the Fund’s support under the RCF will be made to the Treasury account at the Central Bank to provide immediate budget support. The authorities are hopeful that the Fund’s support will lead to an increase in donors’ assistance as this epidemic is a global threat besides the dire impact it is having on population and economies of countries that have already been touched by it.
II. Impact of Ebola Virus Epidemic
The outbreak of the deadly Ebola virus is having a heavy human, economic and fiscal toll on Guinea. Over the past months, thousands people have been infected and more than five hundred have lost their lives including tens of health workers. With the wide spread of the epidemic, economic activities have been disrupted with a heavy toll on agriculture, artisanal diamond and gold mining, trade and transportation. With the departure of foreign workers, mining projects have been halted. In addition, the closing of borders with five out of six neighboring countries has also adversely impacted on cross border trade and transportation. Presently only three international airline companies are serving the country and mostly for the shipment of international aid.
With the heavy toll on agriculture, trade, transportation and artisanal diamond and gold extraction, the 2014 real GDP growth is estimated at 2.4 percent, against a projected growth rate of 4.5 percent at the beginning of the year. Poverty indicators are expected to worsen as the Ebola epidemic affects mostly rural areas and vulnerable groups. In addition, inflation is projected to be higher than projected under the ECF-program due to the disruptions in agricultural and transportation activities.
In the fiscal sector, the effects of the Ebola disease are resulting in lower revenue collections by 0.7 percent of GDP and higher and unforeseen expenditure to contain the epidemic under the implementation of the emergency response plan. Therefore, the fiscal deficit is set to widen to 5.5 percent of GDP against a target of 4 percent of GDP under the ECF-supported program. The 2014 budget has been revised accordingly and submitted to the parliament for adoption with a financing gap of 1.9 percent of GDP. The World Bank, the African Development Bank and the European Union have indicated their contribution to the financing of this gap.
Monetary policy and the exchange rate have also been adversely affected by the Ebola outbreak. The spread between the official and market exchange rates has widened to reach more than 3 percent. Projections reflecting the widening of the external current account due to large private sector capital out flows, lower export receipts and increase in demand for food and other imports indicate that the gross official reserves would likely decline from the equivalent of 3.7 months of imports targeted under the program to 3.2 months in the absence of adjustment or external financing. To address this situation, the authorities are committed to maintain a tighter monetary stance and liquidity management to reduce capital outflows and external financial needs. In the same vein, they will increase the sales in the weekly foreign exchange auctions to contain pressures on the exchange rate and upward pressure on inflation.
In addition to its adverse impact on economic activities, the Ebola epidemic will also have heavy social effects. The disruptions of trade and transportation have significantly restrained the labor mobility and movements of goods and services. The opening of the new school year has been postponed and the rapid expansion of the epidemic in a context of limited capacities has led to an overwhelming demand for health services.
III. Implementation of the ECF-Supported Program
In spite of the difficult situation due to the Ebola crisis, our Guinean authorities remain fully committed to the implementation of their reform agenda and meet the objectives of the ECF-supported program. The end-June 2014 performance criteria under the program have been met and good progress has been made with regard to the structural reform and policies coordination. In August, the government held a retreat to monitor the program’s implementation and reassess the policy priorities. In early September, a 2014 revised budget taking into account the impact of the Ebola crisis was submitted to the National Assembly for consideration and approval.
Taking into account the fiscal and monetary implications of the Ebola crisis and mindful of a successful implementation of the ECF-supported program, our Guinean authorities are requesting modifications of indicative targets for end-September and performance criteria set for end-December 2014. These modifications include in addition, modifications of the ECF-program adjustors to allow the use of domestic financing for the authorities’ emergency plan in the event external financing falls short.
IV. Conclusion
Our Guinean authorities are determined to pursue their efforts to meet the objectives of the ECF-supported program despite the challenging situation created by the EVD. The request for additional financial support from the IMF under the RCF will help them to mitigate the adverse impacts of the epidemic. We would, therefore, greatly appreciate Directors’ support for the RCF request by Guinea.