IMF Executive Board Concludes 2011 Article IV Consultation with Guinea

Public Information Notice (PIN) No. 12/23
March 12, 2012

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On February 24, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the 2011 Article IV consultation with Guinea.1

Background

Guinea is emerging from a prolonged period of social unrest, and from military rule during 2009–10. Following presidential elections in December 2010, the new government adopted an economic stabilization program for 2011 that was monitored by Fund staff. The government implemented structural reforms aimed at creating an environment conducive to development of the country’s abundant natural resources. It adopted a new mining code aimed at attracting foreign investment, and launched a reform of the justice sector and of the security services. Guinea also began normalizing financial relations with its development partners, by clearing arrears to multilateral financial institutions, leading to a resumption of budgetary assistance. The government extended the 2007–10 Poverty Reduction Strategy Paper (PRSP) to 2011–12, which provides the policy framework for growth and poverty reduction.

Reflecting the improved political situation and an increase in agricultural production, growth picked up in 2011 to 3.6 percent, after a near-stagnation during 2009–10. The basic fiscal deficit is estimated to have been reduced from 12.6 percent of gross domestic product (GDP) in 2010 to 2.5 percent in 2011. Central bank financing of the government was stopped, and monetary policy tightened. As a result, inflation stabilized, with a slight decline by year-end. Following a sizeable depreciation early in the year, the exchange rate stabilized and the gap between the official and market exchange rate narrowed substantially. Following a large inflow of exceptional mining revenue, the external position consolidated, and gross available international reserves increased to the equivalent of 4.5 months of imports at end-2011, from less than one month of imports a year earlier.

The authorities’ medium-term priorities are to reduce inflation and develop Guinea’s abundant natural resources as the main source of growth, employment, and poverty reduction. In addition to ensuring fiscal and debt sustainability, the main areas of focus are improving the business and investment climate, strengthening public financial management, including the cost-effective and sustainable management of exceptional mining revenue. These objectives are in line with the PRSP, which the government intends to update during 2012, and form the basis of the program supported by a new three-year Extended Credit Facility (ECF) arrangement approved by the IMF Executive Board at its February 24, 2012 meeting (see Press Release No. 12/57 http://www.imf.org/external/np/sec/pr/2012/pr1257.htm.The ECF-supported program will also help the authorities advance toward the completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. A key challenge for the authorities is to prepare for the expected rapid growth in investment and production in the mining sector over the coming years.

Executive Board Assessment

Executive Directors commended the Guinean authorities for the good performance under their staff-monitored program, in particular their decisive actions to bring the fiscal situation under control. Growth has accelerated, inflation has been contained, and international reserves have increased. The outlook remains favorable, underpinned by prospective large investments in the mining sector and the improving political and governance environment. Important challenges nevertheless remain. Policies going forward should focus on consolidating the progress thus far, preparing the economy for the expected increase in mining activity and revenues, and ensuring that the natural resource wealth translates into sustained and inclusive growth and poverty reduction.

Directors saw continued efforts to reduce still high inflation as a near-term priority. Close coordination of monetary and fiscal policies should help to improve liquidity management, and monetary policy should remain sufficiently tight by containing bank financing of the budget. Directors underscored the importance of a market-determined exchange rate and eliminating the multiple currency practice. They encouraged the central bank to further enhance its supervisory capacity and to strengthen its governance and safeguards framework. Over the medium term, development of a strong financial sector will contribute significantly to diversified economic growth.

Directors underscored that fiscal policy should continue to aim at containing the budget deficit, to support the reduction in inflation and ensure debt sustainability, while generating fiscal space for priority investments and social spending. Key measures should include improved tax policy and tax administration, stronger public financial management, and streamlined expenditures, particularly eliminating subsidies.

Directors stressed the need to ensure that windfall mining revenues are used in a cost-effective and sustainable manner. They welcomed the establishment of a special investment fund to strengthen oversight over large investment projects, while noting the need for an effective institutional structure to support strong project appraisal and implementation.

Directors commended the authorities for the progress with structural reforms. Removing existing bottlenecks to the development of non-mining activities, through investment in basic infrastructure, efficient and financially sustainable public utilities, and an improved business environment, will play an important role in fostering broad-based growth and poverty reduction.

Directors supported the steps taken by the authorities to reach the completion point under the HIPC Initiative as soon as possible. They noted that Guinea would remain vulnerable even after debt relief, and urged the authorities to avoid non-concessional borrowing and give high priority to strengthening debt management capacity. They cautioned that direct state participation in large new mining and related infrastructure projects would create large financing needs, and called for close consultation with the Fund and the World Bank in this area.


Guinea: Selected Economic Indicators, 2008–12
 
  2008 2009 2010 2011
Est.
2012
Proj.
 
  (Annual percentage change, unless otherwise indicated)

National accounts and prices

GDP at constant prices

4.9 -0.3 1.9 3.6 4.7

Consumer prices

         

End of Period

13.5 7.9 20.8 19.0 12.0

External sector

Exports, f.o.b. (in US$ terms)

28.2 -21.3 15.3 11.7 11.4

Imports, f.o.b. (in US$ terms)

12.2 -19.8 28.2 18.3 72.3

Money and credit

Net claims on government 1/

20.8 28.7 67.9 -30.1 5.4

Reserve money

13.8 81.7 73.0 4.4 -7.5

Broad money (M2)

39.0 25.9 74.4 15.5 6.1

Interest rate (short term T-bill)

21.5 15.0 13.0 13.0 ...
 
  (Percent of GDP)

Central government finances

Total revenue and grants

16.1 16.5 15.7 21.1 22.0

Revenue

15.6 16.2 15.3 17.7 18.8

Total expenditure and net lending

17.5 23.7 29.7 24.1 28.7

Current expenditure

13.4 16.5 20.5 16.0 16.8

Capital expenditure and net lending

4.0 7.2 9.1 8.1 11.9

Overall budget balance 2/

         

Including grants (commitment)

-1.3 -7.1 -14.0 -2.9 -6.7

Basic fiscal balance

1.6 -5.6 -12.6 -2.5 -3.8

Current account balance

Including official transfers

-10.3 -9.9 -12.4 -6.6 -34.9

Overall balance of payments

-0.9 5.3 -3.6 9.5 -5.9

Memorandum Items:

Gross available reserves (months of imports) 3/

0.6 0.8 0.8 4.5 3.3

External debt stock (percent of GNFS exports)

197.6 261.2 225.0 200.1 169.8

Nominal GDP (GNF billions)

20,780 22,133 27,118 33,973 39,944
 

Sources: Guinean authorities; and IMF staff estimates and projections.

1/ In percent of the broad money stock at the beginning of the period.

2/ One-off mining revenue received in 2011 (US$ 700 million) is included under non-bank financing.

3/ In months of imports excluding imports for large foreign-financed mining projects.


1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.



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