Statement by Daouda Sembene, Executive Director for Guinea and Marcellin Alle Senor Advisor to Executive Director December 11, 2017

Request For A Three-Year Arrangement Under The Extended Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Guinea

Abstract

Request For A Three-Year Arrangement Under The Extended Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Guinea

The Guinean authorities are thankful to the Board, Management and Staff for enabling the Fund’s invaluable support under the recent ECF arrangement. This arrangement—the first-ever to be brought to a successful end by Guinea—was instrumental in helping the country advance key macroeconomic and structural reforms and strengthening the recovery from the Ebola pandemic. The authorities appreciate the constructive policy dialogue held with staff during the course of program negotiations and they broadly share the thrust of staff assessment and recommendations.

Guinea’s new program aims to provide a framework for supporting the authorities’ efforts to consolidate the important gains achieved under the first ECF arrangement, facilitate structural transformation and diversification of the economy, and promote good governance, foster higher and more inclusive growth and reduce poverty in line with the new National Social and Economic Development Plan (PNDES) for 2016–20. On November 16–17, the authorities convened a Consultative Group to mobilize public and private financing for the implementation of the PNDES. The favorable outcome of the event bodes well for the successful execution of the authorities’ development agenda.

Recent Developments and Outlook

The Guinean economy has performed well in recent years. After being hit by a series of shocks that constrained average GDP growth below 2 percent during 2012–15, the economy rebounded and growth is estimated to pick up at 6.6 percent in 2016. The main drivers of this strong growth performance were mining production, construction, agriculture, paired with an improved electricity provision to the whole economy.

Thanks to the authorities’ prudent macroeconomic policies and tax reforms, the country has continued to post positive fiscal balances since 2016, recording an estimated 0.9 percent surplus in the first half of 2017. The dynamism in economic activity was also accompanied by a broadly stable environment, with inflation contained at 8.2 percent (y-o-y) on average in 2016. The external position was characterized by a widening of the current account deficit resulting from a strong pick-up in investment-related imports, mainly in the mining sector. International reserves stood at 2.5 months of imports at end-September 2017. The financial sector needs further improvements and the authorities are committed to stepping up efforts in this regard. Subscription to government bonds compounded by rising NPLs has thus far crowed out credit to private sector.

The authorities share staff positive assessment of the economic outlook. Growth is projected to remain strong, reaching 6.7 percent in 2017 and average 6 percent over the medium term. A combination of the large FDI flows in the mining sector and the scaling-up of infrastructure investment with the authorities’ planned reforms should back the growth momentum. External imbalances are expected to gradually narrow as stronger mining, agricultural exports and increased repatriated profits help balance FDI-related imports. Yet, the authorities are fully aware of the downside risks and stand ready to take the appropriate measures should they materialize. In particular, they will endeavor to maintain sociopolitical stability through democratic and peaceful elections in 2018 onward.

Program Objectives and Key Policies

To achieve the program objectives mentioned above, Staff and the authorities have agreed on a set of key policies for the period. These policies aim to help sustain macroeconomic stability, scale up growth-enhancing public investment while preserving debt sustainability and step up structural reforms to promote broad-based growth.

Enhancing macroeconomic stability

Maintaining macroeconomic stability ranks high on the authorities’ agenda. They are determined to preserve the hard-won results of the previous ECF arrangement, create fiscal space for investment and ensure debt sustainability going forward. To this end, fiscal policy will be geared on increasing domestic revenue mobilization while containing non-priority spending. The fiscal anchor will be a basic fiscal surplus of 0.6 percent in 2017 and an average basic surplus of 0.9 percent over 2018–20. To further the continuous improvement in revenue performance, tax policy and administration reforms coupled with sustained growth and buoyant mining activity are expected to increase tax revenue by about 3 percent under the program. With IMF technical assistance, an action plan for a targeted tax policy and administration reform will be adopted with the aim at widening the tax base, simplifying the tax regime, and strengthening tax collection and controls.

Specific tax policy measures envisaged include rationalizing tax exemptions, reviewing corporate income taxes, facilitating electronic payments, and streamlining excises. The tax administration will also be improved through a number of measures, including the separation of management and operations within the National Directorate for Taxes, stricter controls over the tax base, improved taxpayers’ identification, introduction of on-line tax declarations and payments; and modernization of tax administration.

The authorities will take additional revenue-enhancing measures. In this vein, the automatic price adjustment mechanism for petroleum products is scheduled to be implemented by March 2018. The authorities have previously conducted missions in peer countries to garner experience, and they intend to precede the reform with communication campaigns, consensus building with social partners, and measures to protect vulnerable households. Likewise, the authorities will take steps to enforce the new mining code and the new legislation on state-owned enterprises.

On the spending side, many reform measures aim to phase out untargeted electricity subsidies and contain the wage bill. Untargeted electricity subsidies will be reduced by bringing electricity tariffs closer to cost recovery on the one hand and improving the electricity company, EDG’s efficiency on the other.

The authorities’ fiscal strategy also emphasizes the importance of strengthening public financial management. In this regard, key actions are planned to strengthen the medium-term budget framework (MBT) for a better monitoring of public expenditure, especially public investment. They include “(i) implementing the new budget nomenclature for the execution of the 2018 budget; (ii) establishing a top-down budgetary approach by setting MBT targets in line with the program targets; and (iii) modernizing the information system for the preparation and execution of the budget.”

As regards monetary and exchange rate policies, they will aim at preserving moderate inflation while ensuring private sector credit growth and at building comfortable external buffers respectively. The central bank, BCRG, has planned a set of measures to boost liquidity and ensure that activity is well supported by bank lending. More specifically, it will address impediments to the well-functioning interbank market. As well, the authorities are committed to work on a comprehensive approach to address the high concentration of credit. In particular, the establishment by end-2017 of a new credit information system aimed at providing better data on the creditworthiness of costumers is expected to enlarge the lending base and boost credit.

The authorities will step up their effort to ensure greater exchange rate flexibility. Following the recent gains from the reform of the exchange rate mechanism, further steps are envisaged with the support from Fund TA. Measures are also underway to further strengthen the BCRG’s autonomy, transparency and accountability. Following the recent publication of the amended BCRG law, next steps include the signing of a memorandum of understanding between the BCRG and the Ministry of Economy and Finance, specifying the modalities and timetable for recapitalizing the BCRG. These are important steps to strengthen the BCRG’s capacity for further improving monetary and exchange rate policies and banking supervision.

Scaling up growth-enhancing investment while preserving debt sustainability

Scaling up public investment especially in infrastructure to lay the ground for broad-based growth is of the utmost importance for our authorities. The infrastructure gap, from electricity to roads, has been for long a binding constraint to growth and the authorities are committed to address it as a prerequisite of their development agenda. Yet, they are mindful of the potential impact of such scaling up of infrastructure investment on debt, and they are committed to prioritize financing options which preserve medium-term debt sustainability.

The authorities are committed to taking the necessary measures needed to strengthen public investment management and ensure the value for money. In this regard, they will pursue their efforts to complete feasibility studies for the priority infrastructure projects. The management framework will be strengthened for ensuring transparency through competitive bidding for public investment projects, and for better monitoring and coordination. The authorities will also explore Fund TA for conducting a Public Investment Management Assessment (PIMA). A new PPP law has also been adopted in early July with the view to seek the private sector’s contribution in implementing projects envisaged in the PNDES. In completing the legal framework, the authorities will emulate best practices, especially for monitoring and minimizing potential contingent liabilities.

The authorities have set a priority on maintaining debt sustainability in their public investment strategy. In this vein, their borrowing strategy emphasizes concessional resources. The current envelope of non-concessional loans to finance key growth-enhancing investments has factored in the need to preserve Guinea’s moderate risk of debt distress. Going forward, the authorities are committed to further improving debt sustainability including by tapping Fund TA to enhance their debt management capacity.

Stepping up other structural reforms

The authorities have planned to advance structural reforms in other areas to support private sector-led and inclusive growth. Improving the business climate with non-infrastructure measures is important in that regard. An action plan will be developed accordingly, by March 2018, with key measures aiming at: (i) easing procedures to start a business; (ii) introducing a business identification number and online tax declarations to facilitate paying taxes; (iii) strengthening the credit information system to improve access to credit for SMEs; (iv) establishing a one-stop-shop to facilitate trade; and (v) developing a framework for the dialogue between the private sector and the government.

Strengthening governance is of utmost importance to the authorities’ strategy to boost private sector-led growth. Among their actions in this regard, they intend to strengthen the enforcement of the rule of law, the judicial system and the overall anti-corruption framework. They have adopted a new anti-corruption law which will be supplemented with measures aimed criminalizing all acts of corruption and publicizing asset declarations by high-officials. The AML/CFT regime is also being further strengthened.

Promoting financial inclusion to improve access to credit is also on the authorities’ agenda. They have adopted a new Financial Inclusion Act in July 2017 aimed at providing a framework for microfinance institutions and improving access to credit for SMEs, women and the youth. Furthermore, the authorities have emphasized using savings from cutting non-priority spending to strengthen social safety nets programs and invest in poverty reduction.

Conclusion

Guinea has demonstrated strong resilience in successfully implementing the first ECF-supported program amid daunting challenges. The economy has rebounded strongly on the back of the dynamism in traditional sectors, mainly mining and agriculture, and the authorities’ reform efforts in many areas. Going forward, sustaining the growth momentum will require keeping the pace of macroeconomic and structural reforms. The policy package agreed upon by Staff and the authorities form an adequate program aimed at enhancing macroeconomic resilience, scaling up public investment while preserving debt sustainability, and strengthening social safety nets for fostering sustained and inclusive growth.

A successor ECF arrangement will provide the appropriate anchor to help achieve the authorities’ policy objectives. It will also be instrumental in mobilizing the external partners for a successful implementation of the authorities’ PNDES for 2016–20. In view of the strong reform agenda and the authorities’ strong commitment to the objectives of the program, we would appreciate Directors’ support to their requests for an ECF arrangement.