Public Information Notice No. 98/32

Press Information Notice: IMF Concludes Article IV Consultation with Guinea

April 29, 1998

The IMF Executive Board on April 3, 1998 concluded the 1998 Article IV consultation¹ with Guinea at the same time it approved the authorities’ request for financial support under the Enhanced Structural Adjustment Facility (see Press Release No.98/11).

Background

Guinea made important progress during 1997 in its efforts to consolidate and advance economic reforms that were launched in the latter part of 1996, and are being supported by the IMF under a three-year ESAF loan approved in early January 1997. Real GDP is estimated to have grown by 4.7 percent, spurred by increased activity in agriculture, trade, and construction. Inflation continued to abate, from an average rate of 3 percent in 1996 to 1.9 percent in 1997. However, inflation picked up at the end of the year to a 12-month rate of 5.2 percent in December, as higher demand associated with the holiday period was accomodated by a stronger-than-progammed expansion in broad money during the year.

The fiscal situation also improved, as total budget revenue increased to 11 percent of GDP from 10 percent in 1996, benefitting in particular from the full-year impact of the value-added tax, and increased collection efforts. The domestic primary budget surplus (revenue minus noninterest domestic expenditure) rose by 1½ points to 2.8 percent of GDP, as domestic primary expenditure was cut back under strict cash management. This improved fiscal position, together with a sizable pick-up in external financing inflows, allowed the authorities to reduce domestic and external payments arrears along with debt to the domestic banking system.

Broad money expanded by 17.3 percent during the year, much more than nominal GDP, reflecting higher-than-expected credit to government and net foreign assets. Nevertheless, bank credit to the private sector fell below its end-1996 level, most likely because of the banks’ reluctance to lend to the private sector in view of the continuing difficulties in enforcing loan contracts before the courts. The reference interest rates for the economy, a minimum deposit rate and a maximum lending rate, remained unchanged during the year.

Guinea’s external current account deficit was unchanged from 1996 at close to 8 percent of GDP despite an improvement in the trade balance of about 1 percent of GDP attributable to a broad-based recovery in exports. Meanwhile, the resumption in program assistance led to an important surplus in the capital account that permitted gross official reserves to rise to the equivalent of three months of imports. During 1997, Guinea reduced its external arrears, benefiting from a debt rescheduling by Paris Club creditors and the conversion of its debt to the former Czechoslovakia.

The structural reform in 1997 was dominated by actions to address the difficulties of several ailing banks, and the closure of one bank (the BIAG) in November 1997. The liquidation of the BIAG has been orderly, and at end-December 1997, most of the small depositors had been reimbursed, while the large ones had received a base amount in cash, with the remainder being repaid with government securities. The rehabilitation of the National Social Security Fund (CNSS) was also prepared through an operational audit.

Executive Board Assessment

Executive Directors commended the Guinean authorities for their continued efforts to advance the economic reforms that were launched in the latter part of 1996 and supported by the Fund under a new three-year ESAF arrangement. Through these efforts Guinea has begun to establish a record of policy implementation that is attracting greater investor interest and increased donor support. However, Directors stressed that steadfast implementation of sound financial policies and structural reforms to strengthen the social, physical, financial, and judicial infrastructure was vital to facilitate productive activity in the private sector, and hence more rapid economic growth.

Directors urged continued efforts to keep fiscal consolidation on a firm footing. They welcomed the recent measures to close remaining loopholes in the application of the value-added tax and customs duties to mining companies, and to improve the verification of compliance. However, they underscored that revenue shortfalls are a matter of concern, and that strengthening the mobilization of non-mining revenue remains at the core of Guinea’s budgetary program. Thus, Directors cautioned the authorities against deviating from the path set for government revenue in the program. Noting the authorities’ reliance in 1997 on a centralized system of cash management, they urged a return to proper budgetary procedures without delay.

Directors commended the Guinean authorities for taking concrete actions aimed at reducing corruption and fraud, including through the tightening of customs administration and reform of the judicial system. Noting that progress in governance is pivotal to the success of financial andstructural adjustment policies, Directors stressed the need to build on improvements in this area and to establish greater transparency in public resource management.

Directors considered that monetary policy in 1997 had been insufficiently tight, and stressed the need to rein in the recent increase in inflation. They urged the authorities to adhere strictly to the monetary program and to reinforce the effectiveness of monetary policy through a more efficient use of indirect instruments, together with a strict limitation of credit to the government.

Directors welcomed the recent removal of a central bank levy on banks’ foreign exchange transactions as an important step toward leveling the playing field between the formal and informal markets for foreign currency. They urged the central bank to limit its interventions to the smoothing of short-term fluctuations in the exchange rate and to the achievement of the target for net foreign assets, but to refrain from targeting a specific level of the rate. Directors agreed that the authorities should continue their efforts to address Guinea’s external debt problem and negotiate debt relief with all bilateral creditors.

Regarding structural reforms, Directors welcomed the authorities’ recent actions to address weaknesses in the financial system, including the closing of one bank and the ongoing restructuring of three others. They strongly supported the authorities’ decision to make limited financial support from the government contingent on clear commitments of the key shareholders to the survival of the respective banks in terms of both financial and managerial resources. Directors encouraged the authorities to pursue the reforms of financial institutions, strengthen prudential control, and improve the health of the banking system. They also urged the authorities to proceed with the needed pension reform.

Directors emphasized that improving the quality and timeliness of economic statistics was essential for monitoring economic developments. Directors welcomed the authorities’ decision to publish the letter of intent and the policy framework paper, as this would help to achieve broader support for the government’s program and enhance the transparency of economic policies.