Abstract
First Review of the Arrangement Under the Three-Year Extended Credit Facility, Financing Assurances Review, and Request for Modification and for Waivers of Nonobservance of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Guinea
The Guinean authorities are thankful to Management and Staff for the constructive discussions they have held last April in Conakry and Washington in the context of the first review under the ECF-supported arrangement.
Guinea experienced a difficult domestic context in the run-up to the local elections held in February 2108. Prevailing social tensions adversely impacted economic activity, putting unforeseen pressures on the budget and slowing progress toward the completion of some program’s targets. In May 2018, a new prime minister was appointed and a new government was formed, including new ministers in charge of economy, finance and budget. Immediately after this move, the authorities took needed corrective measures to bring program implementation back in line with its objectives.
The authorities highly value Fund’s continued support to their efforts to achieve high and broad-based economic growth while preserving macroeconomic stability. Despite a challenging environment and significant capacity constraints, they remain strongly committed to attaining the objectives of their second ECF-supported program, which is considered as a key vehicle to advance their National Social and Economic Development Plan (PNDES) over the period 2016–2020.
I. Recent Economic Developments
The strong growth momentum of the Guinean economy that began in 2016 has continued in 2017, supported by buoyant mining, construction and trade activities as well as by larger capital expenditures. Real growth is estimated to have reached 8.2 percent in 2017 and this growth momentum is expected to be maintained in 2018. However, average inflation picked up slightly to 8.9 percent in 2017 while core inflation remained stable at 2.5 percent.
The basic fiscal balance experienced a deficit of 1.1 percent of GDP in December 2017 due to lower-than-expected tax revenues and larger-than-budgeted expenditures. However, the basic fiscal balance recorded a surplus of 0.9 percent of GDP in the first two months of 2018, reflecting notably efforts to control spending. In addition, a net government repayment to the central bank was recorded; borrowing from commercial banks was contained; and domestic arrears were reduced by 0.5 percent of GDP. The current account deficit narrowed to about 7 percent of GDP in 2017 thanks to strong mining export growth, the elimination of export taxes on gold, and continued inflows of foreign direct investments in the mining sector.
II. Performance under the ECF Arrangement
The authorities’ policy and reform efforts helped meet end-December 2017 performance criteria (PCs) on net international reserves and the non-contraction of new non-concessional external debt. However, the PCs on the basic fiscal balance, net government borrowing from the central bank, and net domestic assets of the central bank and the indicative target on tax revenues and social safety programs were missed partly in the face of capacity weaknesses. On the other hand, most structural benchmarks (SBs) were met. Indeed, as underscored in the staff report, reform implementation advanced significantly, notably those aimed at strengthening tax revenue collection, enhancing fiscal management, fostering private sector development, and promoting good governance.
Mindful of the need to keep the program on track, the authorities have implemented strong corrective measures for the missed performance criteria at end-December 2017. These actions include: (i) better alignment of the use of authorization letters to ensure the execution of public expenditures with legal procedures; (ii) the adoption of a time-bound action plan to rationalize ad hoc tax expenditures; (iii) a revised budgetary framework for 2018 in line with agreed corrective measures to form the basis for a supplementary budget law; (iv) the signature of a memorandum of understanding between the central bank and the ministry of economy and finance limiting the central bank’s lending to the government to the statutory limits as stated in the Central Bank’s Law and another indicating the modalities and timeline for the recapitalization of the central bank; (v) the implementation of electricity tariff increases for industrial and large consumers; and (vi) the signature of a ministerial order increasing the retail price of petroleum products, as of July 1, 2018.
The strong measures taken by the authorities have contributed to strengthening program performance in the first quarter of 2018. The indicative target at end-March 2018 on the basic fiscal balance was met by a large margin and the government secure a net repayment to the central bank.
III. Economic Outlook and Policies and Reforms for 2018 and Beyond
The authorities’ assessment of the near and medium-term economic outlook remains positive, as they are committed to ensuring strong implementation of the policy and reform agenda set under the ECF-supported program, consistent with the country’s economic and social national development plan, PNDES. To this end, they will strive to preserve macroeconomic stability and debt sustainability while scaling up public investments to put the economy on a path to higher and more broad-based growth.
Going forward, real growth is expected to remain strong 2018, supported by continued buoyant mining production, improved agricultural performance and strengthened implementation of infrastructure projects. Medium-term growth is projected to hover around 6 percent, driven by scaling-up of investments in mining and infrastructure, and structural reform implementation. The current account deficit is forecasted to remain large and financed by continued FDI inflows—but expected to narrow gradually over the medium-term. Moreover, prudent fiscal and monetary policies will help strengthen external buffers, maintain moderate inflation, and safeguard financial sector stability.
Fiscal Policy and Reforms
Fiscal policy is aimed at preserving the macroeconomic stability in line with the fiscal targets under the ECF-supported program. In this regard, the basic fiscal balance is projected to achieve a surplus of 0.8 percent of GDP in 2018 and to increase slightly onwards. The adoption in May 2018 of a revised budgetary framework supported the authorities’ consolidation efforts. Going forward, steps will be taken in this direction, including by avoid extrabudgetary expenditures and the accumulation of new domestic arrears, improving cash flow management. Moreover, the tax policy measures embedded in the 2018 Budget Law will contribute to simplifying the tax system and broadening the tax base, thereby further mobilizing non-mining tax revenues.
On the expenditure front, the authorities’ efforts to contain non-priority spending will be focused on reducing untargeted electricity subsidies by implementing their electricity tariff reform and improving the efficiency of the electricity company. Moreover, the authorities plan to take bold measures to counterbalance the impact of the larger-than-programmed salary increases in early 2018, including freezing planned recruitments, delaying the implementation of the status on a number of paramilitary corps and freezing automatic advancements in the public administration. The administration and civil service reform will be accelerated with the biometric census of civil servants and the establishment of an effective system to monitor staff and ensure the enforcement of organizational laws and regulations. To support their poverty reduction efforts and foster inclusion, the authorities plan to strengthen social safety nets.
The authorities will pursue the reform of public financial management (PFM). They will move ahead to finalize the establishment of the Treasury Single Account (TSA) to strengthen transparency, budget monitoring and cash management. They also intend to finalize the new public-private partnership (PPP) framework by publishing the new law by end-June 2018 while ensuring that it is consistent with international best practices. Given the risks and contingent liabilities associated with PPP-financed projects, prudence will be exercised in their use to reduce fiscal risks. Under the reform of state-owned enterprises (SOEs) which aims at strengthening their governance and supporting the mobilization of fiscal revenues, a draft decree to implement the new law on the governance of these entities is scheduled to be adopted by September 2018. The legal status and texts of SOEs will be also updated to consolidate their financial position and establish their Boards of Directors.
Debt Policy and Management
The authorities take good note of the updated debt sustainability analysis (DSA) which suggests that debt dynamics have improved compared with the 2017 exercise owing to higher-than-anticipated growth during 2016–17. The authorities remain committed to preserving medium-term debt sustainability. To this end, they will continue implementing a prudent external borrowing strategy aimed at maximizing the concessionality of new debt and limiting non-concessional loans in line with program commitments. Addressing domestic debt remains a priority, and the authorities are committed to implementing a strategy aimed at gradually clearing domestic arrears vis-à-vis the private sector. They are also determined to further strengthen the debt management framework by closely working with development partners and the Fund in enhancing institutional and human capacities. They highly value TA from the Fund and World Bank in this regard.
Monetary and Exchange Rate Policies
Monetary policy will aim at preserving moderate inflation, and the authorities stand ready to tighten their monetary policy stance as warranted. In parallel, the monetary policy framework will be strengthened notably by improving liquidity management and further enhancing the operational autonomy of the central bank (BCRG).
The authorities are determined to finalize the reform of the foreign exchange market in order to improve the role of market forces and support greater exchange rate flexibility. The central bank plans to issue instructions clarifying the rules for banks’ participation in the MEBD, and strengthening the reporting and analysis of MEBD operations. To make the foreign exchange market more competitive and support greater flexibility of the exchange rate, the limit on auction allocations to a single participant will be gradually eliminated.
Although external reserves were strengthened in 2017, they remain below 3 months of import coverage. To achieve the objective of 3.8 months of imports by 2020, the central bank will adopt an active strategy in coming months to accumulate reserves through regular and small purchases in unilateral and competitive auctions. In this process, the central bank will take advantage of a larger supply of foreign exchange in the economy, move towards greater exchange rate flexibility and prevent disorderly market conditions.
Financial Sector Stability
The authorities are strongly committed to maintaining financial sector stability while working to increase its contribution to the financing of the economy. They will pursue efforts to further strengthen banking supervision. The BCRG has designed an action plan to bring all banks in compliance with the capital regulatory requirement by end 2018 and with IFRS standards. To address the increase in non-performing loans and encourage credit to the private sector, a new credit information system has been established with the support of the World Bank. Moreover, a banking resolution framework will be adopted by end-2018 along with the finalization of the process to set up a deposit guarantee scheme.
The authorities are mindful of the need to further improve financial inclusion. In this regard, a new Financial Inclusion Law was adopted in July 2017 to provide a framework for the activity of microfinance institutions in supporting access to credit for small and medium-sized enterprises (SMEs), women and youth. Implementation decrees of this law are being prepared with the support of the World Bank, and are expected to be adopted soon.
Structural Reforms and Governance
The implementation of reforms needed to foster the development of the private sector and achieve more-broad based growth will be pursued. In this regard, they finalized in recent months an action plan to improve the business climate through measures to ease procedures to start a business, facilitate the public-private dialogue, improve access to credit, ease tax payment, strengthen contract enforcement and facilitate cross-border trade.
The authorities place a premium on increasing transparency and promoting good governance. In this regard, it is worth noting that members of the new government have complied with asset declaration requirements. The decree on the organization and operation of the National Agency for the Fight against Corruption is to be adopted by end-October 2018. This will enhance the enforcement of the rule of law and improve governance. Moreover, the authorities remain committed to further strengthen the AML/CFT regime and move ahead with the implementation of the recommendations made by the Inter-Governmental Action Group Against Money Laundering in West Africa (GIABA).
IV. Conclusion
Despite the dauting challenges facing the country, the Guinean authorities remain strongly determined to successfully implement the ECF-supported program with a view to putting the economy on a path to higher, more sustainable and more broad-based growth. Based on the implementation of bold corrective measures and in view of the progress made in advancing the reform agenda, they request the favorable completion of the first ECF review and waivers of nonobservance of end-December 2017 performance criteria. They look forward to the continued support of the Fund going forward.