Press Release: IMF Approves Three-Year ESAF Loan for Guinea
January 13, 1997
The International Monetary Fund (IMF) today approved a three-year loan for Guinea under the enhanced structural adjustment facility (ESAF)1 for an amount equivalent to SDR 70.8 million (about US$101.4 million), to support the government's economic reform program for 1997-99. The first annual loan, equivalent to SDR 23.6 million (about US$34 million), is available in two equal semiannual installments, the first of which is available immediately.
Since 1985, Guinea has been undertaking a market-based program of financial and structural reforms, although from 1990 progress has been uneven, and was marked by a deterioration in the terms of trade, higher than programmed budget deficits financed by recourse to bank credit, an accumulation of arrears, and a sizable loss of external reserves. Despite this, real GDP growth averaged about 4 percent between 1992-96, and inflation was reduced to less than 4 percent in 1996 from 19 percent in 1990. Structural reforms have been undertaken in a number of areas, including the lifting of price controls, liberalizing the exchange and trade systems, downsizing the public sector, introducing a value-added tax, improving the mining sector efficiency, revising the Central Bank Act and the Banking Law, and introducing indirect instruments of monetary control.
Medium-term Strategy and the 1997 Program
Guinea's objectives over the next three years focus on promoting private sector growth through improving the performance of public administration in the context of a more efficient legal and regulatory environment, and through upgrading the infrastructure. The program for 1997-99 aims at achieving an annual real GDP growth of 5 percent by 1999 and limiting the annual inflation rate to 4 percent, while the external current account deficit (excluding official transfers) will be reduced to 7 percent of GDP by 1999 from 8 percent in 1996-97. To achieve these objectives, fiscal policy will seek to raise government savings by 2 percentage points, to 2.3 percent of GDP by 1999. Over the same period government investment will be raised by 2 percentage points, to 7.4 percent of GDP, concentrating on the critical areas of energy, education, health services, and infrastructure.
Consistent with this medium-term strategy, GDP growth for 1997 is projected to rise to nearly 5 percent under the first annual program, while the annual rate of inflation will be limited to 5 percent, and the external current account deficit contained at 8 percent of GDP. The program targets an increase in official foreign reserves to the equivalent of 2.9 months of imports in 1997. To achieve these objectives, a range of structural and sectoral measures will be implemented. The program aims to achieve a primary budget surplus of 3.1 percent of GDP, stemming from higher revenue and from expenditure restraint in several areas. The revenue increase will result mainly from measures to reduce the scope of customs duty exemptions and to strengthen customs and tax administration. To keep inflation low, monetary policy will seek to limit the expansion of reserve money. Net capital inflows are expected to pick up markedly owing to increased foreign project assistance, resulting in an improvement in the overall balance of payments position.
Under the program, Guinea plans to strengthen fiscal and government management, in particular tax and customs administration including the reduction of exemptions, and restoring financial discipline in the public sector. Other structural measures include improving the judicial environment, reducing government intervention in the foreign exchange markets, reforming the money markets, and restoring the financial health of the banking sector. Through these and other measures the government aims to foster a greater private sector contribution to the development of productive sectors.
Addressing Social Issues
In view of large deficiencies in its social and demographic indicators, Guinea is committed to combating poverty by improving the supply of basic health services and primary education, which are accorded top priority in the government budget. Meanwhile, audits of the national social security fund and of the government pension system will be completed during the first year of the program in preparation for actions to improve the future financial viability of the social security system.
Need for External Assistance
Guinea remains a heavily indebted poor country, despite an improvement in its external debt indicators that followed the Paris Club rescheduling agreement in January 1995. Guinea's 1997-99 program indicates a financing gap for each of the next three years, which the authorities expect to fill through fresh donor assistance and debt relief that they intend to request from bilateral and private creditors.
Guinea joined the IMF on September 28, 1963, and its quota2 is SDR 78.7 million (about US$112 million). Its outstanding use of IMF financing currently totals SDR 57 million (about US$82 million).
Sources: Guinean authorities; and IMF staff estimates and projections.
1 The ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent a year and are repayable over 10 years, with a 5-year grace period.
2 A member's quota in the IMF determines, in particular, its subscription, its voting power, its access to IMF financing, and its allocation of SDRs.