Abstract
Guinea was declared free of the Ebola epidemic at end-2015 and after two years of stagnant activity, growth is expected to rebound this year. Pent-up demand coupled with robust agricultural growth, and improved electricity provision will be the main drivers of activity, lifting growth to around 4 percent. However, given the severity of the shocks that have hit Guinea during 2014-15 and continued depressed commodities prices, the recovery is expected to be gradual and will need to be supported by policies to restore macroeconomic stability and rebuild domestic and external buffers. Structural reforms are also needed to improve the business environment, including in the mining sector, and strengthen the delivery of public service.
I. Introduction
Our Guinean authorities would like to express their appreciation to the Executive Board, Management and for the continuous support Guinea has benefitted in implementing the ECF-supported program. The Guinean authorities highly value the timely assistance they have received from the Fund in their relentless efforts to fight the Ebola epidemic. The Fund‘s support through the RCF, CCR trust and access under the ECF has been instrumental in maintaining macroeconomic stability and mobilizing the assistance of donors and development partners. Guinea has now been declared Ebola free by the World Health Organization, and the authorities will intensify their reform efforts but will need the continuous assitance of development partners.
The population and economy of Guinea have been severely hit by the Ebola epidemic. From its appearance in December 2013 to the last case recorded in November 2015, over 3,300 people were affected by the disease of which 2,083 died and the economic activity slowed considerably. Indeed, the economic slowdown experienced in 2014 continued in 2015 with a growth rate of less than 1 percent. In addition to Ebola and its severe adverse effects, the Guinean economy was also hit by the sharp decline in commodity prices and political uncertainty in the run up to October 2015 presidential elections.
These shocks have negatively impacted the implementation of the ECF-supported program. Indeed, while most of the performance criteria set for end-December 2014 were met, several PCs of the end-June 2015 were missed due mainly to the impact of guarantees issued by the central bank to support the authorities’ efforts to contain the effects of the Ebola crisis and the public investment aimed at maintaining growth. Notwithstanding delays in implementing structural reforms, progress was made with the recruitment of a management partner for the electricity company (EDG) and the civil service biometric census to eliminate ghost workers from the public payroll.
On the non observance of the continuous performance criterion on new medium and long term non concessional external debt, the authorities, in their letter to the Managing Director, explained the circumstances that led to the misreporting and provided information on the corrective actions taken and prevent the reappearance of such a situation. The authorities acknowledged the guaranteeing of the new non concessional external debt and explained that it was mainly due to the failures of coordination of administrative and human resources in the difficult context of the fight against the Ebola epidemic. On the corrective measures, the authorities will further enhance the sharing information with Fund staff notably on external debt matters. The actions taken include: preparing the amendments to the Central Bank law to forbid guarantees to private entities which will be submitted to the National Assembly by April 2016; strengthening the monitoring of new external loans and guarantees; improving the enforcement of the public procurement code and implementing several measures to strengthen debt management to ensure that all new public debt remains consistent with the Public Debt Policy. Moreover, the authorities have restructured, cancelled and transferred to the treasury a portion of the existing guarantees.
Based on the remedial actions taken by the authorities and given that Guinea’s risk of debt remains moderate, our Guinean authorities request a waiver for non observance of the continuous performance criterion on the ceiling on new medium-and long-term non concessional external debt contracted or guaranteed by the central government or by the Central Bank (BCRG).
The Guinean authorities remain committed to the ECF-supported program with a view to continue implementing sound polices and reforms enabling the country to achieve higher and sustained economic growth. In this regard, they are requesting an extension of the ECF arrangement to end-October 2016 to allow time to assess the implementation of the program at end-June 2016 and rephrasing of the remaining disbursement under the arrangement. The authorities also request waivers of nonobservance of performance criteria at end-2014 and at end-June 2015. Their request for waivers is based on the measures they have already taken to achieve the program objectives for 2016 notably the fiscal adjustment planned in the 2016 budget, the reform of the exchange rate determination mechanism and the discontinuation of the gold purchasing program. In addition, they have started the audit of public procurement contracts that benefitted from Central Bank guarantees and the revision of the Central Bank act on the issuance of Central Bank guarantees to the private sector.
II. Recent Economic Developments
Economic developments were dominated in 2014 and 2015 by the Ebola epidemic which in addition to the loss of lives and country isolation has reversed the socioeconomic gains recorded under the implementation of the ECF-supported program started in 2012. In addition, international prices of commodities in particular bauxite, gold, iron ore, coffee declined significantly, and affected all sectors of the economy, such that economic activity slowed down significantly. Despite this difficult context, political tensions eased with the successful organization of the presidential election on October 11, 2015 and a new government was appointed early January 2016.
To address the impact of the shocks Guinea has experienced, the authorities increased public investment and took steps to ease commercial banks’ liquidity. As results the basic fiscal deficit increased to 7.1 percent of GDP in 2015. The foreign exchange reserves fell to 2.3 months of imports at end-2015 from 3.6 months in 2014. However, inflation has continued to fall reaching 7.3 percent at end-December 2015 and the current account improved in 2015 due mainly to a decline in imports reflecting the slowdown in growth. In this situation, the implementation of the ECF-supported program and meeting original objectives fully became difficult. Nevertheless, the authorities have remained committed to its objectives. To this end, they have requested an extension of the ECF arrangement to end-October 2016 and a re-phasing of the remaining disbursements under the arrangement.
III. Policies and Reforms for 2016
The authorities aim at implementing in 2016 appropriate fiscal and monetary policies and step up the implementation of structural reforms. After two years of economic slowdown, growth is projected to rebound to 4 percent in 2016 and increase to about 6 percent over the medium-term. Continued growth of agriculture, thanks to intensified use of fertilizers and irrigation, the return of investors, notably in the mining sector, the full use of the Kaleta hydroelectric dam capacity and the implementation of the post-Ebola recovery plan will help achieve these objectives. Inflation will be kept within single digit figures. The Central Bank international reserves will be increased to cover 3 months of imports of goods and services.
Fiscal Policy
Our Guinean authorities will continue their efforts to reduce significantly the budget deficit while limiting the financing from the banking system. The 2016 budget is fully financed and in line with the revised program. It aims at strengthening priority expenditures, reinforcing the government’s solvency and the Central Bank’s reserves. In particular, the basic fiscal balance will be reduced to -0.4 percent of GDP. On the revenue side, the authorities have adopted a package of revenue-enhancing measures which includes: (i) increasing the VAT rate from 18 to 20 percent; (ii) extending the VAT to flour and edible oils; (iii) raising excise taxes on tobacco, alcohol and vehicles (iv) updating the reference values on imports by land (v) increasing some service costs on registrations and (vi) administrative measures related to taxes.
With regard to expenditures, they will be kept at 25. 7 percent of GDP with a sharp downsizing of domestically financed spending. Measures to reduce the public spending include: (i) across-the-board cuts on all outlays on goods and services; (ii) improved governance at the electricity company and thanks to the impact of lower oil prices save almost 2 percent of GDP; and (iii) the exclusion from the public payroll of all workers non identified in the context of 2015 biometric census. Moreover, the authorities plan to wind down some projects started in 2015; postpone all new projects to after 2016; renegotiate some projects guaranteed by the Central Bank. These measures will lead to lest recourse to commercial banks credit and allow for partial repayment of the 2015 Central Bank advances. The reduction of the fiscal deficit will also facilitate the central bank’s implementation of its monetary policy and provide room for a healthy increase in commercial bank credit to the private sector.
The authorities welcome the recent debt sustainability analysis (DSA) that concludes that Guinea continues to face a moderate risk of debt distress although debt vulnerabilities have increased. They agree that sound macroeconomic policies and prudent debt management will be needed to maintain a sustainable external position. In this regard, the authorities are committed to rely on concessional sources of external financing. They will strengthen debt management by enhancing the capacity to execute a prudent borrowing policy and manage contingent risks. To this end, the national Public Debt Policy statement, a manual of operational procedures in the debt department and a medium-term strategy for 2015–19 will be effectively operational. The coordination and management of debt will be further enforced through the National Committee for Public Debt.
Monetary and Financial Policies
Monetary policy will aim at containing inflation and increasing the central bank’s international reserves while supporting economic activity. The fiscal contraction envisaged for 2016 will help contain inflationary pressures and keep inflation in single digits. The Central Bank introduced in January 2016 a reform in the determination of the foreign exchange rate to modulate bank liquidity in Guinean francs through the use of monetary regulation securities.
The Central Bank plans to strengthen the effectiveness of its monetary instruments by introducing a second refinancing window to enhance the money market. Under the World Bank’s assistance, a Credit Information System will be established to support risks analysis by the banks and improve the distribution of credit. In addition, the Central Bank will continue implementing the reforms recommended by the safeguards assessment and the authorities will adopt by April 2016 a draft revision of its status prohibiting the issuance of guaranties for the private sector.
Structural Reforms
The authorities are determined to step up their efforts to finalize the implementation of their structural reform program with a view to create a more conducive environment for business and investment. Under the public finance management, measures to limit contingent liabilities will be enforced notably the compliance of budgetary and accounting management of public agencies with LORF provisions. A timetable for clearing domestic arrears for the 2005–10 budgets will be approved by April 2016. The authorities also intend to make further progress in the reform of the administration and civil service to contain the wage bill and modernize and enhance the public administration. With regard to the mining sector, the environment to develop large mining projects and ensure effective implementation of the mining code will be further improved with the strengthening of the Interministerial Committee for the Monitoring of Integrated Mining Projects (CISPMI) whose role is to facilitate and accelerate administrative procedures required for a rapid implementation of mining projects. Our authorities are cognizant of the important role of the energy sector in the efforts to boost growth and improve the living standards of the population. In this regard, they have successfully built the Kaleta hydroelectric dam to produce more than 200 megawatt. In addition, they have signed a management contract to improve the electricity company (EDG) technical, commercial and financial performance. The authorities plan also to develop other priority projects while ensuring the sustainability of their financing as well as the external public debt.
IV. Conclusion
In 2014 and 2015, Our Guinean authorities have implemented the ECF-supported program in a difficult environment. This environment has adversely impacted on the program performance. Despite this situation, the authorities remain strongly committed to continue implementing, under the ECF-supported arrangement, the needed policies and reforms to foster higher and sustained growth, alleviate poverty and preserve the macroeconomic stability. They are hopeful that their ongoing efforts will continue to be supported by the Fund and the international community. Therefore, we would greatly appreciate Directors support for our Guinean authorities’ efforts by granting the requested waivers and extension and completing the sixth and seventh reviews under the ECF-arrangement.