IMF Executive Board Approves US$75.2 Million PRGF Arrangement and Additional Interim HIPC Assistance for GuineaPress Release No. 07/309
December 21, 2007
The Executive Board of the International Monetary Fund (IMF) today approved a three-year, SDR 48.195 million (about US$75.2 million) arrangement under the Poverty Reduction and Growth Facility (PRGF) for Guinea in support of the government's economic program. The decision allows an immediate disbursement to Guinea of an amount equivalent to SDR 6.885 million (about US$10.7 million).
The Board also approved the disbursement of SDR 4.848 million (about US$7.6 million) in interim assistance under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative.
The PRGF is the IMF's concessional facility for low-income countries. It is intended that PRGF-supported programs are based on country-owned poverty and reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5½-year grace period on principal payments.
Following the Executive Board discussion, Mr. Murilo Portugal, Deputy Managing Director and acting Chairman, said:
"The Guinean government has implemented, since March 2007, an impressive policy shift toward macroeconomic stabilization, reversing the deterioration in economic performance and governance that occurred in 2006. This shift has already contributed to rapid disinflation and the appreciation of the Guinean Franc. Continued solid policy performance will promote economic growth and help improve Guinea's external situation.
"The authorities' program of economic and financial policies aims to further stabilize the economy and strengthen Guinea's external position. This will entail the maintenance of tight fiscal and monetary policies, including no new central bank financing of the budget. Achieving these results and meeting the associated ambitious targets set for non-mining revenues, will depend on improved revenue collection, and a broadening of the tax base. Normal budgetary procedures will be restored, in order to better manage public spending.
"The implementation of monetary policy will be facilitated by the introduction of indirect instruments. A targeted increase in official reserves will help absorb external shocks, smooth daily fluctuations of the volatile exchange rate, and support the launching of a much-needed foreign exchange interbank market. The swift implementation of the central bank's action plan to strengthen internal controls and improve basic record keeping will help address important vulnerabilities in its safeguards framework.
"The authorities have set governance as a key priority. This and other reforms to improve the business environment are crucial to unlock Guinea's growth potential and reach the ambitious poverty reduction goals that have been set. Efforts to align the legal framework for mining activities with international best practices and continued implementation of the Extractive Industries Transparency Initiative are welcome steps in this direction, along with the rehabilitation of public utilities.
"Once Guinea has taken the necessary steps to qualify for the completion point of the HIPC initiative, the delivery of debt relief under the enhanced HIPC initiative and the Multilateral Debt Relief Initiative would bring external debt back to sustainable levels. In parallel, engagement with all external creditors will continue, including on debt relief from non-Paris Club creditors on HIPC terms. Restoring debt sustainability will also depend on reliance on limiting financing to grants and external borrowing on concessional terms," Mr. Portugal said.
Recent economic Developments
Despite a rich endowment of natural resources-the country houses about one third of the world's bauxite reserves and has significant deposits of gold, diamonds, iron ore, and uranium-Guinea remains one of the world's poorest countries. The country's fragility has been exacerbated by governance problems and external factors, including conflicts in neighboring countries.
GDP growth slowed in 2006 and by year-end, inflation reached 39 percent, the second highest in Sub-Saharan Africa. High inflation was accompanied by rapid depreciation of the Guinean franc. Higher import prices widened the external current account deficit despite rising prices for bauxite and alumina. The overall balance is estimated to have deteriorated by almost 2 percent of GDP, reflecting higher external debt obligations and lower disbursements on externally financed investments. The relaxation of fiscal efforts, compounded by a loose monetary policy, was the main cause of the economic deterioration.
The government's new economic program seeks to consolidate macroeconomic stabilization and strengthen institutions and policies to establish the preconditions for sustained higher growth and poverty reduction. Once basic controls have been put in place, the focus of the program will shift towards the deepening of reforms, particularly to improve the quality of public services and policies, and to facilitate the smooth functioning of markets.
The prudent fiscal stance will continue in 2008. The government projects an increase in the basic primary balance to 3.3 percent of GDP, from 1.3 percent in 2006 and 3.0 percent in 2007. Monetary policy will complement this stance by limiting the growth rate of reserve money to be broadly in line with GDP growth. The program will also rapidly strengthen the country's external position through external support and debt relief.
Reaching the ambitious revenue target will require modernizing the tax and customs directorates and broadening the tax base. The authorities will adopt measures to strengthen budget preparation and execution; improve accounting, audit and financial information; and revise the regulatory framework. Building an interbank foreign exchange market and enhancing the central bank's capacity to manage foreign exchange and reserves are also essential. Other structural reforms focus on enhancing management of the mining sector and on the promotion of good governance.