Mission Concluding Statements
Guinea and the IMF
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INTERNATIONAL MONETARY FUND
GUINEA—2004 Article IV Consultation, Concluding Statement, Discussion of the Government Program for 2004 and the Medium Term, Assessment of the Progress Report on the Poverty Reduction Strategy
Conakry, May 22, 2004
An IMF mission, headed by Mr. Pierre van den Boogaerde, visited Conakry May 11-23, 2004 for the Article IV consultation for 2004, to discuss the government's economic program for 2004 and the medium term, and assess the progress report for the poverty reduction strategy (PRS). A World Bank team led by Mr. Ezzeddine Larbi, and a representative from the African Development Bank, also took part in the discussions. In addition, the IMF mission participated in the workshop to validate the World Bank's public expenditure review.
The mission discussed the macroeconomic situation and the structural reforms for 2003 as well as the outlook for 2004 and the medium term with the government team led by Mr. Madi Kaba Camara, Minister of Economy and Finance, and with the participation of the Governor of the Central Bank of the Republic of Guinea (BCRG), Mr. Mohammed Daffé, as well as the government ministers responsible for economic issues, Mr. Eugène Camara, Minister of Planning, Mr. Charles Zogbélémou, Minister of Economic and Financial Control, Mr. El Hadj Thierno Habid Diallo, Minister of Cooperation. The mission also held sectoral discussions with Mr. Jean-Paul Sarr, Minister of Agriculture, Water, and Forestry, Ms. Djéné Saran Camara, Minister of Commerce, Industry, and Small- and Medium-Scale Enterprises, Mr. Cellou Diallo, Minister of Fisheries and Aquaculture, Mr. Alpha Mady Soumah, Minister of Mining and Geology, Mr. Alpha Ibrahima Keira, Minister of the Civil Service, and other ministers in charge of priority sectors, regarding implementation of the structural reforms and of the PRS. Poverty reduction efforts in Guinea were also reviewed. The mission wishes to express its warmest thanks to the authorities for their supportiveness as well as for the candor and high quality of the discussions. Moreover, the mission held useful meetings with representatives of the private sector, the banking sector, civil society, international donors and lenders, and also met with the national and international media at the end of its visit.
II. Economic Situation and Implementation of Structural Reforms in 2003
The economic situation in Guinea in 2003 was characterized by sluggish economic growth, with a significant decline in savings and investment exerting a downward pull. Overall, real GDP growth was1.2 percent, compared to 4.2 percent in 2002. This decline was attributable to inadequate macroeconomic management, which aggravated an already unfavorable context, marked by an uncertain political situation due to the presidential election held in December 2003, the continuing tensions in neighboring countries, unsatisfactory rainfall, recurrent electric power and water outages, and breakdowns in the supply of cement. With a sharp increase in the money supply (largely reflecting bank financing for the public deficit), inflation rose considerably and averaged 12.9 percent. The external current account deficit (excluding grants) improved from 5.6 percent of GDP in 2002 to 4 percent of GDP in 2003, largely as a result of lower imports of capital goods due the fall in investment. The overall external deficit was financed through the utilization of reserves and an accumulation of arrears.
Government finances worsened substantially in 2003, with a sizable deficit and a massive increase in the government's domestic debt. The fiscal policy context was especially difficult, with shortfalls in the contribution from mining companies, a low level of revenues, absence of external budgetary assistance, and unforeseen expenditures in the areas of defense and security. Budget execution was lax and resulted in a budget deficit (commitment basis, excluding grants) close to 8 percent of GDP. Revenues amounted to 10.5 percent of GDP, including 9.0 percent and 1.5 percent for nonmining and mining revenues, respectively. Current expenditures attained 12.5 percent of GDP, notwithstanding a decline in domestically financed investment outlays and social expenditure falling short of the objectives set forth in the poverty reduction strategy. These fiscal imbalances led to a sharp increase in bank indebtedness-already sizable-and in the accumulation of substantial domestic and external arrears.
As the substantial government deficit was financed primarily by the banking system, monetary trends in 2003 were very worrying. Reserve money rose by 27.4 percent on a year-on-year basis, flooding the economy with liquidity and accounting for the upsurge in consumer prices. The net foreign assets of the central bank declined and were negative at end-December 2003, at USD -10.4 million. Furthermore, the monetary authorities failed to make sufficient use of T-bills to finance the government deficit, nor did they issue an adequate amount of monetary regulation securities to control bank liquidity. Commercial banks' credit to the private sector grew by 21 percent in line with liquidity trends. As a result of these developments, broad money recorded a very substantial increase, exceeding 35 percent.
The official exchange rate of the Guinean franc against the U.S. dollar remained largely unchanged because of a de facto control of the rate. Furthermore, the Central Bank relied on rationing to allocate foreign exchange for imports. Disintermediation increased, with a large volume of imports financed by means of deposits held abroad or through the parallel market. The spread between the official market rate and the parallel market rate has remained in excess of 20 percent since July 2003, compared to 2 percent at end-2002.
External debt management was adversely affected by the significant buildup of payments arrears in 2003 and in the first quarter of 2004. This led to a number of cases in which donors suspended their assistance and interrupted development projects. The mission urges the authorities to settle these arrears as soon as possible, and to remain current to the extent feasible, in order to restore the confidence of development partners and facilitate the resumption of assistance.
Structural reforms slowed down considerably in 2003. In the fiscal area, the closure of the Treasury's extra budgetary accounts is contingent upon the survey of all project-related accounts. At the monetary level, the banking law and the law on microfinance-prepared in early 2003-have still to be discussed by the Council of Ministers and adopted by Parliament. No public enterprises have been privatized or liquidated. The reforms of the judiciary are in abeyance. Finally, the campaign against corruption has been at a standstill.
III. Economic Outlook for 2004 and for the Medium Term
The mission is concerned that the difficult situation could deteriorate further in 2004 in the absence of radical measures to rehabilitate the economy. The government has embarked upon a rigorous recovery program, but the mission believes that the envisaged measures are insufficient to tackle the major macroeconomic imbalances and allow for economic stability and a return to growth in the medium term.
Outlook for 2004
The mission is deeply concerned by the outlook for the economy in 2004 unless drastic measures are taken. The poor economic performance during the first quarter of the year, high inflation, and the shortage of foreign exchange, coupled with the difficulties in managing the main gold mine and delays in the granting of a mining operations license, could result in a contraction of the mining sector and trigger a loss of confidence that could depress the performance of the manufacturing sector, commerce, and transportation. This could result ina further decline in growth. A deterioration in the fiscal deficit, financed by bank credit in the absence of external budgetary assistance, would drive up inflation, possibly up to 27 percent on a year-on-year basis at end-2004. Furthermore, the decline in exports would worsen the external current account while paving the way for a further accumulation of external arrears.
Faced with this situation, the government adopted an emergency recovery program in March 2004. This program encompasses in particular the strengthening of the tax administration, the recovery of outstanding payments, a curtailment of exemptions, a reduction in public services to a strict minimum, and rigorous compliance with budgetary procedures for expenditure commitment. At the monetary level, government financing needs are to be covered through the issuance of T-bills, and sterilization bills would be actively used to reduce money growth.
The government projects real GDP growth to remain at low levels in 2004, at 2.6 percent, in view of the considerable constraints facing economic recovery, in particular the poor economic performance during the first quarter of the year in the absence of reform efforts, and the legacy of 2003-in particular, the stock of payments arrears and the volume of government indebtedness. Because of the excess liquidity in the economy, inflation is expected to average13.3 percent.
The mission believes that the measures envisaged by the authorities do not represent a fundamental break with the past and are not sufficient to restore macroeconomic equilibrium and put the economy back onto a growth trajectory. To bring inflation down below 10 percent on a year-on-year basis at end-2004, the growth in the base money should not exceed 10 percent, resulting in a bank financing of the budget deficit not exceeding GNF 100 billion.1 Reflecting the low levels of revenue mobilized in the first quarter, revenues are projected at around 11 percent of GDP in 2004, i.e., 1 percent short of initial projections. Coupled with the larger-than-anticipated defense requirements, the primary surplus would turn out at 1.7 percent of GDP (compared to an initial projection of 2.2 percent of GDP). The overall deficit (cash basis) is estimated at 2.8 percent of GDP: after cautious bank financing in the amount of GNF 100 billion (1.2 percent of GDP) plus nonbank and external financing, there is a residual financing gap amounting to approximately GNF 107 billion (1.3 percent of GDP). Bank financing on such a scale would lead to accelerating inflation. The mission suggested ways to bridge the gap, in particular, sales of assets, as well as earmarking any better-than-envisaged revenues. In addition, in order to improve the transparency and management of the BCRG's accounts, it is vitally important to undertake the three core recommendations of the safeguard assessment mission.
The mission indicated that the government program must also include a liberalization of the exchange rate management system. The existing policy distorts the allocation of resources within the economy, encourages disintermediation in economic activity, and adversely affects the official foreign reserves. The lack of a mechanism to prevent rates in the official and parallel markets from diverging by more than 2 percent, as well as the rationing of foreign exchange allocations and allowing the banks to finance priority imports at negotiated exchange rates in between the official and parallel rates, constitute exchange restrictions and multiple currency practices subject to IMF jurisdiction under Article VIII. The exchange system should be liberalized as rapidly as possible so that the official rate can reflect market conditions, and bring a sizable volume of foreign exchange into the official sphere. The authorities have expressed their concern that this liberalization might be accompanied by an uncontrolled depreciation of the exchange rate. The mission indicated that the credibility of government policies would safeguard transactors' confidence in the national currency.
Outlook for the medium term
Unless credible, far-reaching reforms are implemented, the current situation will continue to deteriorate. Economic growth will be well below population growth, inflation will surpass 20 percent, and government debt will become unsustainable. Conversely, provided the government perseveres in the implementation of a sound program of economic policies, the Guinean economy could achieve its potential, supported by a sizable increase in national saving and investment that could usher in sustained growth over the medium term while bringing about a substantial reduction in poverty. Guinea growth potential is strong, as the country is endowed with substantial mining resources and abundant agricultural, forestry, fishing and tourism potential, which-once harnessed-could facilitate efforts to achieve, after a transition period in 2004-2005, an annual growth track of 5 percent from 2006 onward, in line with the projections of the poverty reduction strategy.
The mission held numerous discussions, particularly with private sector representatives, regarding the measures needed to speed up the rate of growth in a sustainable manner, including restoring sound economic and financial framework, intensifying agriculture, promoting industry and commerce with the aim of boosting national value added, improving basic infrastructures (in particular water, electricity, and transportation), strengthening the institutional, legal, regulatory, and judicial environment, enhancing bank intermediation, particularly through the development of the microfinance sector, and pursuing structural reforms. To bolster the competitiveness of the Guinean economy, special efforts must be made to invest in infrastructure, promote the export sector-particularly by simplifying customs tariffs and procedures-and implementing an exchange rate mechanism that reflects market forces. Finally, the fight against corruption will need to be a key component of this program.
Fiscal policy must focus on the twofold problem of low revenues and excessive expenditures, so as to bring down the overall deficit and the government's indebtedness to the banking system. Revenues in recent years averaged around 12 percent of GDP, well below the target of 20 percent of GDP included in the convergence criteria for the ECOWAS' second monetary zone. By reining in exemptions, strengthening the institutional capacities of the tax and customs administrations,2 and combating evasion, which are the main causes of the low revenue levels, the mission projects that revenues could tend toward 13 percent of GDP by 2007. The introduction of WAEMU's common external tariff (CET), scheduled for January 2005, is an important step in these reforms. Additional efforts must be made to control expenditure, notwithstanding the progress achieved recently-in particular, the more systematic use of the computerized expenditure system as well as decentralized budget management. In particular, it will be necessary to eliminate all extra budgetary outlays, and to enhance the efficiency of government expenditure, notably by following the many recommendations contained in the public expenditure review conducted by the World Bank in 2003 and validated by the May 2004 workshop.
Monetary policy should promote the stability of monetary aggregates in order to control consumer price levels. This is to be achieved through gradual reductions in the government's debts to the banking system as well as active liquidity management, based on recommendations made by IMF technical assistance missions. For this to occur, the Central Bank should pursue sound financing of the government's liquidity requirements through the use of T-bills, and not allow financing by means of central bank credit as in the past. The Central Bank must also actively use its primary monetary policy instrument, sterilization bills, to regulate liquidity. A sizable portion of money creation results in currency in circulation, thereby limiting the room for maneuver of monetary policy. To enhance its effectiveness and promote growth, the Central Bank should foster a higher degree of bank intermediation and explore the possibility of having the nonbank sector subscribe to the securities issued. To strengthen the stability of the Guinean financial system, the Central Bank should also ensure the rapid adoption of the new banking law and the law on microfinance, as well as strengthen its bank supervision capacities. The anti-money laundering mechanism should also be reinforced, in particular by reducing the volume of transactions on the parallel foreign exchange market. Finally, the authorities should take all necessary steps forthwith to enable the recapitalization of the only bank still in difficulty.
The outlook for the external accounts will largely depend on government policy in the mining sector and developments linked to debt service. Additional red tape that hampers mining operations and delays the issuance of mining operations licenses would lead to a loss of confidence in Guinea, curtail mining exports, and adversely affect the external current account. Conversely, a swift reversal of such policies, coupled with the implementation of the alumina processing project, would facilitate a resurgence of exports over the medium term. This would allow for an improvement in the current account balance (excluding official transfers) to around 2 percent of GDP by 2007. Trends in the overall balance and its financing will largely depend on debt service. A pursuit of existing policies would steadily curtail the debt relief and push back the completion point under the Enhanced HIPC Initiative, making debt service unsustainable. Only a radical change in policies would bring about the debt relief expected under the Initiative and lead to debt sustainability in the medium term.
In 2003, the Guinean economy suffered from major structural problems which profoundly affected the production capacities as well as the competitiveness of the private sector. In particular, the numerous water and power outages, and recurrent problems in the telecommunications sector, point to the urgent need to restructure and privatize public enterprises, strengthen regulatory frameworks, and improve the collection of utility charges. The government must strive to improve the productivity of these sectors with the aim of eventually entrusting their management to private transactors. Furthermore, the mission deplores the latest delays in the privatization or liquidation of other enterprises, and urges the authorities to redouble efforts in this area.
In regard to the judicial system, the mission notes the delays in the adoption of the reforms initiated in 2002 and 2003, specifically, the effective implementation of legislation pertaining to the reorganization of the judiciary, including the regulation governing the special statute for magistrates. Furthermore, the mission takes note of the change in the reporting channels for the National Anti-Corruption Committee (CNLC). At a time when an exhaustive survey has highlighted the impact of corruption in Guinea and shown the need for a national strategy in this area, the mission hopes that the all-important safeguards of independence, which the CNLC needs in order to continue its efforts, will be maintained after its reorganization. Accordingly, the authorities must rapidly demonstrate their commitment to stepping up the campaign against corruption, in particular by completing the investigations that have already been conducted and which have been delayed for too long.
IV. Ex Post Assessment of Longer-Term Program Engagement
The mission discussed with the authorities the content of the ex post assessment of Guinea's programs with the IMF. The main findings of the study are that program implementation has had mixed results as a result of a lack of will and ownership, capacity constraints, and the Guinean economy's vulnerability to external shocks. Moreover, some of the program objectives have proven to be overly ambitious, and the ex ante adjustment plans for meeting the shocks have been inadequate. The lessons for future programs are, in particular: the need to ensure a strong political will to succeed, particularly through the adoption of bold measures in structural areas such as combating corruption, reforming the judiciary, and public utilities (water and electric power); paying more attention to poor governance; the need to incorporate adjustment plans ex ante in order to address exogenous shocks; and the effective establishment of decentralization policies.
The authorities indicated that this assessment was timely, given the absence of a program at this juncture. They were in agreement with the main findings and conclusions of the study. The authorities recognize that Guinea must change its behavior and persevere in its adjustment efforts. However, the government expressed a degree of frustration reflecting their perception that Guinea has received less favorable treatment than other Fund member countries, and further insisted that the IMF must take account of the particular characteristics of each country. Furthermore, the authorities noted that: (i) the rate of tax pressure can be raised only gradually on account of the low level of industrialization and the preponderant role of the informal sector; and that (ii) the slow pace of structural reforms under the second PRGF (2001-04) was partly due to limited progress in terms of increased production and employment generation from the first wave of reforms, particularly in the area of privatizing public enterprises. Moreover, a period of one year under a staff monitored program, before a country can gain access to Fund resources, was seen as rather long. Such a time-frame might allow domestic critics to turn against the reforms, and would accordingly slow down efforts to obtain external assistance, in light of the catalytic role played by the Fund.
V. Assessment of the First Progress report and review of the Poverty Reduction Strategy Paper
In 2004, Guinea submitted its first annual progress report on implementing the PRS, which describes the substantial progress achieved in improving the living conditions of the Guinean people. In a particularly challenging economic environment, the PRS has safeguarded the government's efforts in favor of priority sectors, while continuing the decentralized management of budget allocations. In the context of the review of the strategy, the mission considers that the progress report could have been strengthened in the following three areas: (i) a better analysis of the sources of growth; (ii) taking account of recent poverty indicators; and (iii) a list of measures to correct the strategy in areas where goals were not achieved in the past.
The mission encourages the authorities in their efforts to strengthen the participatory process associated with the PRS. In this regard, the holding of regional consultations should facilitate the coordination of strategies at the national and regional levels.
1 Also taking account of a sharp increase in other items (net) of the Central Bank.
2 Particularly by taking account of the recommendations made by the recent IMF Fiscal Affairs Department technical assistance mission.
IMF EXTERNAL RELATIONS DEPARTMENT